Great oaks from acorns grow

Um Youssef lives in Hindawiya, one of the poorest areas of Jeddah, Saudi Arabia, and is married to a husband of limited financial means. Operating from her home with the help of her neighbours, she began a small gift wrapping business in 1998 to supplement the family income. As one of the first clients of the Abdul Latif Jameel "productive families programme", Um Youssef received 1,000 Saudi riyals (Dh979) to improve the quality of her products and expand her distribution to surrounding neighbourhoods. Today, her monthly income is more than 400 riyals. Um Youssef's story is one of thousands highlighting that Saudi Arabia, one of the region's richest countries, is home to the most rapidly growing market for microfinance, where Grameen-Jameel - a partnership between Muhammad Yunus's concept for the Grameen Foundation, which was born in Bangladesh, and the Abdul Latif Jameel Group based in Jeddah - has 10 branches operating through an affiliate. "Microfinance is always growing. Now, across the MENA region, only 10 per cent of demand is being reached," says Heather Henyon, the regional general manager of Grameen-Jameel. "High growth rates for the industry make it comparable with wireless or technology companies that traditionally enjoy 40 per cent year-on-year growth." The reason a Grameen-Jameel hub was set up five years ago in the UAE - where there is less demand for loans to the poor than in other countries in the Arab world - is because of its proximity to markets such as Saudi Arabia, and for the relative ease of the country's regulatory framework in providing a favourable environment for microfinance firms to operate in, according to Ms Henyon. The presence of the Grameen-Jameel office in Dubai addresses the misconception that the region is a place of riches, while catering to the thousands in need of such loans and providing an investment route for those choosing to put their money into a basic asset class at a time of financial turmoil. "People associate loan risks with subprime mortgage problems, but microfinance is not in the same situation as the banks globally these days because this asset is basic," says Ms Henyon. "It's a loan with basic terms and set repayment rates, so when compared with complex products that no one understood, the beauty of it is clear - it works, it is scalable and it gives people a chance to invest in what they know." The success rate is hard to ignore. Grameen-Jameel, the first social enterprise business in the Arab world of its kind, claims it has had 100 per cent of its loans repaid, an amazing result when loan defaults in the West have been soaring. Although criticised for high interest rates, in the range of 16 to 20 per cent, the loans offer options for those who would have otherwise been denied credit. They are administered on character-based collateral. Women, who have proven more creditworthy than men, typically take out loans of a few hundred dollars to start small businesses and employ family members. Although many are sceptical about the repayment rate claims on loans to the poor, James Wolfensohn, the former president of the World Bank, emphasises that peer pressure is the key. "A group of people employ peer pressure to repay loans and results have been, to date, extremely positive," he says. "I think the methodology will continue to be approved [in the region]." Although performing relatively well, microfinance has not been completely immune to the effects of the liquidity crunch and general concerns over lending risks. "Microfinance tends to be counter-cyclical and stronger during weak economic times, going up when conventional capital markets are volatile as seen in the 1990s during the Asian financial crisis," Ms Henyon says. "It has been different this time around because now there is so much fear that people don't want to enter into loans, whether micro or 'macro'." She adds that tightening liquidity presents another challenge as microfinance institutions depend on commercial banks for lending, which creates a funding issue. Nevertheless, regional banks are impressed by return on equity rates of 60 per cent and high repayment rates on loans, making for an attractive alternative to traditional corporate clients, according to Ms Henyon. She says Grameen-Jameel receives support from the Mohammed bin Rashid Al Maktoum Foundation, Forsa and global banks with a base in the region. There is a partnership between Noor Islamic Bank and Emirates Post for microfinance in the UAE. Indeed, Ms Henyon finds that the "Arab world" - which she loosely defines as the MENA region - is virtually untapped and in great need of small loans. In Egypt, the Grameen affiliate caters for about one million clients, although an estimated 20 million more continue to live below the poverty line. Half the population of Yemen live on less that US$2 (Dh7.34) a day, creating a market of nine million potential customers in a country where only 30,000 are being ­serviced. Syria has made the most progress in microfinance so far, according to Ms Henyon, having approved the region's first fully licensed microfinance institution to be formally regulated by the country's central bank. It is estimated that only between 7 per cent and 14 per cent of the region's potential microfinance market of up to 14 million borrowers are served by microfinance, indicating the great need, according to data provided by Grameen-Jameel. With 75 million people in the region living on less than $2 a day, the initiative plans to help reach one million new borrowers by 2011. "Next year, there will be a big window for investments in microfinance as legal structures change," says Ms Henyon, who traded a position with Standard & Poor's as a corporate bond ratings analyst for rural villages four years ago. She finds that the current economic crisis could highlight the benefits for others of working in microfinance, rather than dampen them. "This crisis is a wake-up call that there are other options out there, ways to transfer skills of making money," she says. Wall Street has shed tens of thousands of jobs in the past few months amid a massive restructuring of the financial industry. While not making millions, the microfinance industry may be an option for those seeking banking jobs who are also looking to do a little good for the world, as well as helping those who need a loan. [e-mail]