The Arab Spring: Risks and opportunities for microfinance in the MENA region

by Nadine Chehade : Thursday, December 8, 2011

The Arab Spring took everyone by surprise. There was a series of underlying factors, among them being  a young and growing population, improved education levels for men and women, and decreasing fertility rates, all leading to a vast number of people seeking better economic and social opportunities and questioning traditional patriarchal structures. In addition, unemployment, corruption, and increasing inequalities or concentration of economic power in the hands of a few, led to simmering frustration. As access to new technologies (e.g., mobile, Internet) facilitated the organization of a civil movement, massive uprisings started across the MENA region, now referred to as the Arab Spring, in regard to hopes of a brighter future.

For decades MFIs in the region had been tackling issues linked to poverty and economic development. Although Tunisia and Egypt counted hundreds of small unsustainable microfinance programs, all MENA countries boasted top-performing MFIs that reached excellence at various levels. Yet, over the years, governance and risk management remained relatively weaker areas for those same MFIs.¹  The fact that the vast majority operate as NGOs²  indeed made it difficult to create an adequate balance of power, with sufficient involvement and professionalism from all board members. Besides, MFIs have had difficulty attracting and retaining staff with advanced technical skills due to higher compensation offered abroad. The combination of those factors has weakened risk mitigation, which is the boards’ ultimate responsibility, but that should also involve all the hierarchy chain. More specifically, political risk was never envisioned except for chronically unstable countries such as Lebanon or Palestine. In fact, there was a common belief that stable regimes, regardless of their shortcomings, translated into low political risk. After the Arab Spring, all stakeholders should revise their country risk assessments and scrutinize more common risks as well as their management (credit, operational, institutional, liquidity, and solvency risks). From now on, political risk anticipation and readiness to manage crisis will need to be taken into account, along with coordination at industry level, hence the likelihood of a common response in case of need. In the context of this article and of the Arab Spring, “crisis” will refer to a political risk that has materialized (e.g. drastic political changes, outbreak of violent events, massive demonstrations, and war).

A crisis timeline is typically divided into three main phases (before, during, and after). Before the crisis, a single word sums up all risk mitigation techniques, and that is: preparation. Preparation, for an MFI, means building a strong institution (i.e. sustainable, with appropriate policies, good compliance, diversified portfolio, etc.) that has a business plan with several scenarios or stress tests (e.g. devaluation risk). Preparation also includes anticipating a sudden rise of risk levels by putting in place participative and regularly updated contingency plans: a business continuity plan; succession plan for key positions; substitution plan for all staff with a supervisory role; insurance covering cases of war, strife, or civil unrest; and minimum cash reserves covering at least three months of operating costs to cater for sufficient time to leverage new funds. Last but not least, governance-related matters are of utmost importance, such as avoiding political affiliation, having detailed rules to prevent conflicts of interest, and having capable board members who are able to bring in reliable information on the economic and political trends, and who get along well with top managers. While there is no standard or easy way to address it, crisis usually emphasizes institutional weaknesses as people and systems are put under tremendous pressure. Resilient MFIs have proven to be those who enjoyed, prior to the crisis, a good institutional, financial, and social performance.

During the early stages of a crisis, it is particularly important to avoid emotional decisions, such as the typical granting to all clients a grace period. Some businesses might actually excel during political turmoil. For instance, grocery shops usually witness a peak of activity as people tend to buy and stock up on higher quantities of basic food items. It is also crucial to deliver strong support messages and maintain communications, first with staff, then with clients. In turn, this requires reliable and rapidly available information (e.g. staff and client details), as well as robust systems (e.g. flexibility to reschedule loans) and backups (e.g. to overcome Internet or power disruptions). As soon as it is safe to do so, operations should resume, starting by an assessment of the current situation (e.g. answer potential rumors, assess impact on credit risk, operating costs, and savings withdrawal). Instructions regarding disbursements (e.g. stopped or maintained, for whom, etc.) should be clarified, and clients’ situation, regardless of their number, examined on a case by case basis. Maintaining high internal audit standards is also key (e.g. client visits) as temptation for fraud might be high at both client and staff levels. Another factor is the MFI’s capacity to seek support and mobilize donations to assist clients, which comes with the prerequisite of having built solid relations with various funders. As is the case of staff and clients, fast and transparent communication with lenders, donors, or technical partners remains essential, especially if covenants are breached.

As no anticipation can match reality, plans will of course need to be refined and updated after a crisis, with best practices documented (e.g. crisis committee in place with clear responsibilities, safety procedures in place, and staff trained on them, adapted incentive schemes).

Similarly to all changes, the Arab Spring comes with a mix of hopes and fears. After several years of efforts to overcome risks linked to client protection, a new reputation risk lies ahead as high expectations are put into microfinance as a tool to fight unemployment. In Tunisia and Egypt, officials have already shown a renewed interest in the industry. But while microfinance may indeed contribute to fight unemployment, it will need time to reach the estimated 19 million remaining borrowers in the MENA region.³  This figure compares with 60 to 90 million jobs needed by 2020, making microfinance a partial solution. This is especially so as the region counts 40% to 60% of informal businesses, potentially difficult to scale up, and as impact studies show only 10% to 20% of clients actually graduating out of poverty. Moreover, some markets, large or small, have reached saturation in their urban or semi-urban areas. As a result, bridging the gap will require deepening outreach, which remains as much of a challenge as agricultural lending. But if more enabling operating environments are the opportunity of the Arab Spring, let’s bet practitioners will deploy innovative ways to offer financial access to those who need it most.

¹ Between 2006 and 2010, Planet Rating has granted 7 “A” ratings in the regions, all of which scored “b” on either governance or risk management, while among 17 investment-grade ratings, none scored “a” on those two domains.
² Except for Jordan where MFIs are not-for-profit companies.
³ Arab Microfinance Regional Report: An Industry Update, Sanabel, December 2010.

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.