The Microfinance Sector in Yemen: A Case Study of Al-Amal Microfinance Bank

Over the coming few weeks CGAP’s Microfinance Blog, in partnership with Sanabel and the Arabic Microfinance Gateway, is running a special series on the new challenges and opportunities that were created by the Arab Spring. Featuring voices from various countries including practitioners, donors, and regulators, the series will provide a platform to share lessons learned. We look forward to your comments and discussion.

Some countries in the Arab region are  experiencing security and political unrest due to the successive revolutions  Naturally all sectors of the state are affected, and each sector must take some precautionary steps to get to safety. Since the microfinance sector mainly deals with low-income people who don’t have access to financial services from traditional sources, this sector  is one of the most vulnerable to  damages during periods of security and political unrest.

In Yemen, the microfinance sector in 2010 has made significant progress, with the number of active clients increasing by 100% in one year to reach over 60,000 projects, serving approximately 300,000 citizens. MFIs, including Al-Amal Bank, welcomed this progress, and drew up plans for 2011, in order to reach even more active clients.

In early 2011, massive protests and unrest swept Yemen in the so-called Arab spring revolutions, having significant impact on MFIs where the number of active clients dropped by more than 20% and the microfinance sector suffered  because of armed conflict. A number  of clients were displaced,  businesses were affected by the acute shortage of basic services, many left the labor market, individual savings were wasted to meet consumption needs, and some MFIs stopped offering new loans due to higher risk. In fact, MFIs suffered large losses due to high operational costs, as well as the drop in the number of savers, by as much as 30%.

To address the consequences of this crisis on the poor households, MFIs have replaced outreach plans with those that target  groups with caution-based contingency plans, and tightened procedures for providing financial services, especially since the poor are increasingly in need of funds to meet consumption needs. As a result, operating costs increased inadvertently, which caused confusion to financial institutions, weakened staff loyalty to their institutions, and considerably affected MFIs’ relationship with their customers.

Challenges for Al-Amal Microfinance Bank 
Al-Amal Microfinance Bank was established in order to provide integrated financial services to the economically active poor micro-entrepreneurs and focus on the most deprived groups of financial services, particularly women and young people. The Bank has achieved positive results, making it one of the leading microfinance service providers in less than two years.

In early February, 2011, the Yemeni crisis erupted and has continued with waves of military confrontations and massive protests. This has far-reaching effects on Yemen’s economy in general and the microfinance sector in particular.  The challenges for Al-Amal Microfinance Bank are outlined as follows:

• The security situation in the country is precarious, as areas are being sieged and thus branches, where the Bank operates, are also sealed off. In addition, households refrain from sending members, especially women, to work
• Interruption of electric power, causing the Bank’s computer network to be down, forcing the bank to find costly alternatives to ensure minimum business continuity
• Difficult and high-priced transportation, making it difficult for Bank staff to serve clients, not to mention the collection of installments and renewal for clients
• Many clients lost their businesses, some of which were put on fire and looted
• A number of clients, or members of their households, had been killed or injured
• Many households were displaced by the continuous unrest, and left their houses and businesses in clash-hit areas
• A large number of entrepreneurs abandoned their businesses and took part in sit-ins or moved to villages
• Many microfinance clients were affected by the high prices of basic services, resulting in deteriorated living conditions for them and their families

Internal challenges for the Bank include:

• Deviations in operational and financial business plans
• Delayed repayment, with higher risk portfolio
• High operational costs of administrative processes
• Decline to offer new loans, and high ceilings due to the increasing risk
• Staff spirit and morale were largely affected because of the unrest and lack of clarity about the future
• A large number of staff, especially women, left the Bank

Generally, all of these challenges have fundamentally contributed to a low growth of Yemen’s microfinance sector, where the number of borrowers dropped from 69,596.00 clients in February 2011 to 50,916.00 clients in June 2011. Thus, portfolio at risk increased from 1.4% last February to 5.9% in June 2011. As well, the number of savers dropped from 52,369.00 last February 2011 to 43,367.00 and operational self-sufficiency dropped from 119% to 92% as of June 2011.

Naturally, not only were the Bank’s financial indicators affected because of the conditions experienced by the country and as a reflection of the above challenges, but also was the whole sector in terms of outreach, efficiency, and profitability ratios and portfolio at risk.

How Al-Amal Microfinance Bank Dealt with the Crisis
Microfinance may not be the first player to be affected by political and security unrest. However, it is one of most active players in supporting individuals for creating income-generating business when other sources of income have stopped. During the crisis, Al-Amal Microfinance Bank kept its position in the microfinance sector because of innovative thinking and changing course and rebuilding in order to meet  objectives and obligations at the local and regional levels.

The Bank made a contingency plan for a number of stages that the crisis may undergo. Examples for addressing issues as they arise include:

• Developing a team of senior management members to inspect branches
• Easing up on the pace of outreach and only opening those branches that have more than one employee
• Boosting the morale of Bank staff and arranging for them to visit and check in with customers
• Making multiple back-up files of databases and other data sources
• Emphasizing the independence of the Bank and not taking side with any party of the conflict
• Modifying credit policies, halting some financing processes, and increasing procedures for other funding
• Following up on collection on a daily basis and giving mandates to branch managers to delay certain repayments based on the situation of the clients
• Postponing the disbursement of funds that do not meet certain criteria
• Making adjustments to the withdrawal of savings
• Making adjustments to the cash-in and cash-out in the branches on a daily basis and keeping sundries below US$ 250.

Despite the unrest, Al-Amal Microfinance Bank quickly responded to the surrounding circumstances by developing a number of prudential policies and a contingency plan in order to face the different emergencies experienced by Yemen.

 –Mohamed Saleh Al-Lai,  CEO, Al-Amal Bank