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Microfinance - An Untapped Resource for the Middle East

Author: Isobel Coleman, Senior Fellow and Director of the Civil Society, Markets, and Democracy Initiative; Director of the Women and Foreign Policy Program
December 19, 2004
The Star-Ledger


Among the Middle East’s myriad problems, two are particularly urgent, and connected: the region’s economic stagnation and the lost potential of women. Over the past two decades, growth across the region has been sluggish at best. The Arab world accounts for less than 3% of world trade, and last year captured only half a percent of foreign direct investment (FDI) flowing to developing countries. With one of the youngest and fastest growing populations in the world, the region needs to create 80 million new jobs over the next 15 years just to keep pace with its youth bulge. While increasing trade and FDI must be part of the solution, unleashing the productive energies of individuals, especially women, across the region must also be a driver. Microfinance, a simple but powerful concept, is a good place to start.

Microfinance is the provision of financial services to the poor, mostly in the form of small, non-collateralized loans. The poor (and very poor) use these loans to start small businesses which contribute significantly to family income. Over the past 30 years, the contributions of microfinance borrowers around the world are impressive. From Latin America to Africa to South Asia, microfinance has enabled people to start businesses ranging from home-based crafts to poultry and dairy initiatives and refrigerated push carts. In recent years, microfinance has led to the emergence of “telephone ladies” in South Asia and Africa. These women have used their loans to buy cell phones, which they peddle from village to village on their bicycles, selling time to people who have no other access to modern telecommunications.

Although microfinance is not going to solve the Middle East’s job creation conundrum - microfinance businesses on average only employ a few people - it can help create employment opportunities where few exist. Microfinance also promotes free markets and entrepreneurship, reduces the dependency of poor people, and contributes to the emergence of a middle class, all of which are critical to Middle East reform efforts.

Additionally, microfinance has been shown to support a number of other important development objectives-including improving school enrollments, child nutrition and health, and maternal health - all of which are pressing concerns for the Middle East. Perhaps most importantly for the region, microfinance is an effective mechanism for female empowerment. As the UN Arab Human Development Report of 2002 stressed, the utilization of Arab women’s capabilities through political and economic participation remains the lowest in the world in quantitative terms, despite impressive gains in recent years. The region as a whole has suffered economically due to the stifling of a huge proportion of its productive potential.

Around the world, women comprise the majority of microfinance borrowers. This is true for several reasons: women make up the majority of the poorest citizens of the world and are therefore targeted for poverty alleviation programs; women are more likely to be credit-constrained than men, have restricted access to the wage labor market, and have an inequitable share of power in household decision making. All of these conditions exist for women across the Middle East.

A broad set of studies demonstrates that micro-credit indeed empowers women in terms of their ability to make large and small purchases, involvement in major family decision making, participation in public action, mobility, and political and legal awareness. Some have also observed reduced domestic violence against women borrowers and speculate that this is a consequence of women being regarded as more valuable economic members of the family once they start generating income via their micro-credit loans. Other more specific studies have confirmed these findings: female borrowing increases female control of non-land assets, increases their role in household decision making, and elicits greater acceptance by their husbands of their participation in market-based economic activities.

Moreover, a variety of social benefits are more likely to accrue if microfinance loans are given to women rather than to men. Loans to women are more likely to benefit male consumption than male loans are to benefit female consumption. Other studies have noted that household consumption increases more when women borrow than when men are the borrowers. In these cases children are the prime beneficiaries. Additional income in the hands of mothers is associated with substantially larger improvements in child survival and nutrition than additional income in the hands of fathers: for child survival the marginal effect of female income is nearly 20 times larger than that of male income; and for child nutrition, the effect is four to eight times larger.

Although today more than 70 million households in developing countries have access to microfinance, less than 1% of these are in the Middle East. To boost microfinance initiatives around the globe, the UN General Assembly in 1998 designated the year 2005 as the International Year of Microcredit. Leaders in the Middle East should take note, and commit to expanding microfinance in their countries. Creating a regulatory environment conducive to microfinance is the most critical role for governments to play.

Jordan has taken a lead in the region on microfinance, and its experiences and successes should be widely promoted. Photogenic Queen Rania, who has become an ardent proponent of microfinance, is already an effective champion of the concept across the region. The Arab League should make the expansion of microfinance one of its top priorities by pushing for the creation of a favorable regulatory and supervisory environment. Microfinance had a prominent place in the G8’s Reform Plan for the Middle East announced last June in Sea Island, Georgia. The G8’s pledge to help over two million potential entrepreneurs, especially women, pull themselves out of poverty through microfinance loans over the next five years should create some momentum that can be encouraged and sustained.

The U.S. should seize on this momentum and give microfinance a much more prominent place among its reform initiatives in the Middle East. In Iraq, providing microfinance loans is a way not only to provide much needed economic opportunities, but also give women a greater role in the economic rebuilding of their country. Total U.S. funding for microfinance around the world has held steady at about $150 million over the past decade. Given the cost-effectiveness of microfinance, support should be significantly expanded, particularly in the Middle East where it is an underutilized tool not only for economic development, but also for social change.

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