Microfinance struggles to regain footing after staggering blows from 2006 war

Feb 2007
Lebanon , February, 01 2007 - Lebanon's nascent microfinance industry was set back years by the summer 2006 war with Israel and continues to face a constant struggle for financing. The sector, which aims to lift people out of poverty by lending small sums, lost roughly 10 percent of its assets in the war, industry leaders told The Daily Star on Wednesday.

Projections for expanded lending have been erased, and many existing loans have been written off or rescheduled. Microfinance institutions (MFIs) are having little success in finding donors, and Lebanon's extremely liquid commercial banks still hesitate to invest, despite impressive returns.

Microfinance clients, who number about 20,000 in Lebanon, default worldwide on only about 1 percent of loans, which typically carry interest rates of 12-22 percent.

Lebanon's MFIs have a to-tal loan portfolio approaching $20 million.

The country's handful of MFIs halted lending after the war and have rolled out new products, such as loans for home improvement or school fees, to resuscitate their businesses.

The war left some clients with no way to repay loans, as their businesses were eradicated. For example, microfinance NGO Al-Majmoua had about 10 clients who operated the only businesses in a village on the Israeli side of the border, and the village was destroyed.

"We have a series of villages where the business doesn't exist anymore," said Alia Farhat, business development manager at Al-Majmoua. "They have no more source of income. You cannot ask someone to repay a loan if he has no source of income."

Al-Majmoua had to write off some $750,000 - about 10 percent of its pre-war assets - as 50-60 percent of its clients were in the South or in south Beirut, the areas hit hardest during the war.

Delinquency rates soared to more than 40 percent for the country's MFIs, but Al-Majmoua has now brought its share down to 17 percent, Farhat said. Cooperative Housing Foundation International (CHF), Lebanon's largest MFI in assets, saw its default rate rise to about 5 percent after the war, said Youssif Khalil, head of the financial operations department at the Central Bank.

Most microfinance loans have a 12-month term, and many clients have had their terms extended by one to six months.

Al-Majmoua ended the year with about 6,350 clients, the same number as at the start of 2006, despite projections for growth to 7,500 clients. A $1-million bank loan was almost set before the war broke out, but that deal evaporated - negotiations have resumed, but no loan is imminent, said Youssef Fawaz, executive director of Al-Majmoua.

"The business plan that was in effect in June went completely out the window in July," he said. "We're not back to where we were. It hasn't totally crippled us - it has forced us to a slower speed."

MFIs have been searching for grants to cover losses, but they were left mostly in the cold at the Paris III donor conference last week. Many donors feel the industry, given worldwide publicity with the 2005 Nobel peace prize going to Mohammad Yunus and his MFI the Grameen Trust Bank, is mature and no longer needs grants, but should turn to commercial banks for financing.

The Development Innovations Group did help bring a $1-million grant to one local MFI, said Mayada Baydas, senior vice president and managing director of Development Innovations Group who also founded and managed CHF's Lebanon branch until early 2005.

Al-Majmoua secured a 300,000-euro grant from a humanitarian agency connected to France's Foreign Ministry, but that money will go to replacing equipment as relief aid and not as a capital injection to the industry, said Farhat.

The International Finance Corporation (IFC) is weighing investments in the sector and should announce its plans by June, said Julia Brickell, IFC country manager for Lebanon.

The IFC, which places a priority on microfinance, has invested $345 million in 104 projects in 70 countries.

For now, the IFC is pushing commercial banks to get involved with MFIs - the Central Bank has allowed financial institutions to invest up to 5 percent of their required reserves in microfinance.

But commercial banks, despite their high liquidity, have been reluctant to invest, one of the reasons that MFIs, until recently, did little lending after the war. They have given capital infusions to some clients, and have begun exploring new financing options. MFIs are looking at financing start-ups, which the industry typically avoids. With credit tight, Al-Majmoua is focusing more on non-financial services, such as helping its micro-entrepreneurs find new markets because of the displacement caused by the war.


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