Lebanon: Microfinance Sector Suffers from Lack of Regulation
Beirut, Lebanon, December, 24 2010 -
The United Nations Economic and Social Commission for Western Asia (ESCWA) indicated that the microfinance sector in Lebanon has seen substantial growth in recent years and is expected to continue to expand.
It said, however, that the industry remains underdeveloped and suffers from a lack of regulation, measurement problems and a lack of reliable data, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.
It noted that donor money is in short supply due to the global economic downturn, making it increasingly difficult for microfinance institutions (MFIs), which depend on donations, to get money. It added that, rather than create new MFIs, it would be more appropriate to upgrade and improve existing ones. The International Finance Corporation estimated the microfinance market in Lebanon at $286 million, with only 11.5 percent of demand met by existing financing sources. The UN agency noted that the Lebanese government has adopted a laissez-faire attitude about microfinance, as there are no laws regulating the industry and the government has no clear role in the sector. It added that micro-lending is not explicitly regulated by any authoritative legal text, with the Interior & Municipalities Ministry, rather than the Finance Ministry or the Central Bank, currently supervising all MFIs that work in the sector. It said the only form of government support has come from the Central Bank , which issued a directive allowing local banks to use 5 percent of their required reserves for microfinance initiatives. However, the Central Bank has been unresponsive to requests to use this liquidity.
It added that MFIs have inherent weaknesses in terms of micro-credit provision. They are bound by the legal provisions and restrictions to charitable organizations and, consequently, have limited access to funds since Lebanese charities are not allowed to take deposits. Further, their legal structure makes it difficult to access funds from the financial sector in the form of loans. As such, MFIs depend greatly on donor funds, which translate into a lack of stability in access to credit. They also face a greater financial risk in case of default due to the absence of regulations. These factors greatly contribute to limit their growth potential.
It specified that the government should develop a proper legal environment through appropriate and enforceable credit laws as well as appropriate institutional regulations. It said proper laws would facilitate collection and increase accountability of the client, and must allow for cost-effective enforcement through the courts and on the ground.
It noted that another important role for the government is information sharing through the development of an adequate credit bureau or Centrale des Risques to allow for the sharing of information between various organizations on delinquent clients. It also encouraged promoting best practices within the context of information sharing that include the lifting of subsidies on interest rates; implementing policies that encourage small loans with short maturities; the delivery of services in a market-oriented manner; promoting partnerships between donors and the private sector; and having long-term action plans.
It noted that there is an urgent need for human resource development in the sector, specifically in advisory services and training on best practice in credit methodology and marketing. It stressed the need for additional funding to help providers expand their product portfolios and reach in the regions, therefore increasing access to finance.