When Hameida Abbas Shanto lost her husband in a car accident in 1995, she had no education, no capital and little prospects for success in the business world. Today, she is an accomplished businesswoman closing deals worth thousands of pounds. The veiled widow, once written off by bank loan officers as non-financially viable, manages a small grocery store next to her home in Mansoura, a fodder-trading business and a small duck farm. Her mobile rings endlessly with clients placing orders.
Shanto's entrepreneurial success began in 1998 with a loan of E 1,000 from a USAID-sponsored microcredit program administered by the Dakahliya Businessmen's Association for Community Development (DBACD), one of 7,000 microfinance institutions (MFIs) worldwide. The program is modeled on a highly successful group-lending scheme pioneered by Bangladesh's Grameen Bank in the early 1980s in which tiny loans are given to individuals too poor to qualify for traditional bank loans so that they may start up businesses or boost their existing projects. No collateral is required. Instead, friends and neighbors of the loan recipient act as guarantors for the loan, taking on the responsibility for repayment if the recipient defaults.
According to Grameen Bank statistics, that rarely happens. The bank, which lends $30 million a month to 1.8 million needy individuals, boasts a repayment rate of 98 percent. The program is effective because it is self-policed, say bank officials, who attribute the low default rate to the support and peer pressure of the loan recipients' guarantors.
Grameen's microcredit model has been adopted in over 40 countries, serving 16 million of the poorest of the poor. The United Nations Capital Development Fund (UNCDF), which has declared 2005 as "International Year of Microcredit," claims global use of microcredit has grown by over 25 percent per annum over the past five years. It estimates the total cash turnover of microfinance institutions worldwide at $2.5 billion.
In Egypt, there were 250,000 active clients of microcredit programs by the end of 2003, a UNCDF study titled "Microfinance in the Arab States: Building Inclusive Financial Sectors" said. Seven fully sustainable MFIs issued more than 80 percent of the loans, which amounted to over $55 million, the study said.
Ghada Waly, assistant resident representative of the United Nations Development Program (UNDP), claims microcredit schemes in Egypt have successfully pumped capital into needy communities. More importantly, the projects have proven to be sustainable. "When you have people coming again and again for a loan that means they must feel the benefits of taking out a loan," she told Business Monthly.
When clients not only repay their loan, but ask for another loan, it is a sign that the project is working. Sustainability is the key to microcredit programs, not only in terms of continuous demand for loans, but also a renewable source of capital for the MFI to provide the loans without the need for additional aid from donor organizations.
Aga Khan Cultural Services (AKCS), a Geneva-based non-profit organization operating in Egypt, provides microcredit to residents of Darb Al-Ahmar, one of Cairo's poorest neighborhoods. The organization has already pumped E 716,000 into the tight-knit community, funding everything from shoemakers to food vendors. "Close monitoring of the clients and their businesses by credit officers is the main measure to ensure the repayment of loans," says program manager Ashraf Nassif.
"Penalty payments of E 5 for each day of delay are used to guarantee timely repayment."
AKCS' microcredit program, which began in May 2004, has a 100-percent repayment rate to date, though Nassif cautions it's really too soon to judge. "After a year or so, there are defaults as you can't guarantee the standard," he says. "We're dealing with microloans and small loans, which are vulnerable to the market and easily affected by it, so we're expecting some defaults."
Interest rates on the loans help to cover the costs of the program. "We take a 1.25 percent a month or a 15 percent yearly flat rate," explains Nassif. "We expect to break even to cover all our costs through interest [payments] within a year and a half."
The interest may seem high when compared to the bank rate of 13.5 percent, but Nassif insists it's "calculated upon detailed financial projections to insure the coverage of operation costs of the program and reach financial self-sufficiency."
For some, however, it is a real challenge. Mohamed Saad Eddin, who opened a shoe workshop with a E 3,000 microloan from the AKCS program, complains that the payment terms are too demanding. "Traders in the market to whom I sell my shoes pay me in instalments, but I have to repay around E 400 a month," he says. "They must either give me a larger loan to start out with, or let me pay a lump sum every six months."
But that is exactly what MFIs are hoping to avoid. Experience has shown that the programs least likely to succeed are those that "lend to clients who sell their products to traders who pay on an instalment basis," says Ayman Mahmoud, executive director of Al-Mobadara Community Development and Small Enterprise Association, a microfinance institution operating in Giza, Manshiyet Nasser and Boulak Al-Dakrour.
An additional challenge to most microcredit programs is that many of the loans granted are for projects in the informal sector, where workers have no access to social or medical insurance. As such, many of these micro-entrepreneurs run a high risk of bankruptcy should they suffer any personal setbacks such as illness. Al-Mobadara is lobbying the parliament to activate Article 112 in Social Insurance Law No. 79/75, which would make the informal sector eligible to receive a portion of social insurance funds.
DBACD executive director Hassan Farid says Egypt's legal system does not adequately recognize MFIs and their work. "There is no clear set of rules governing us as MFIs, and so currently we can only extend loans to clients," he notes. "If we had a broader legal definition, as in Bangladesh for example, we would be able to give out loans, handle insurance and distribute pensions for our clients." Currently, MFIs are registered as NGOs with the right to give out microloans to clients, but no other financial services.
The government has attempted to fill in the legal gaps by passing the Small Enterprise Development Law of June 2004. The legislation, which awkwardly groups together micro and small enterprises, makes the Social Fund for Development (SFD) the de facto authority for the sector as it is responsible for all planning and coordination matters.
There is, however, greater cooperation between MFIs and the government to regulate the sector.
The SFD is working with the UNDP, USAID, Kreditanstalt fuer Wiederaufbau (KFW) and other stakeholders to develop a national strategy for microfinance. "A national strategy for microfinance will take into account all the views and concerns of microcredit stakeholders, including lenders and borrowers, to help the sector grow," says the UNDP's Waly. "It will also address donors and what kind of capacity-building and support is needed from them, and will look into increasing the role of banks in microfinance to develop inclusive financial sectors to serve the poor."
Flexibility is one of microcredit's strengths, maintains Trevor Parfitt, head of the Professional Development Program at the American University in Cairo (AUC) and a lecturer on microcredit. "Microcredit is a very adaptable modus operandi for reaching people you otherwise cannot reach," he says. "Over the years, a number of different models for microcredit facilities have been developed which have enhanced its effectiveness."
Lately, there has been a push to get the private sector involved. "A simple way in which larger entrepreneurs can help out is to give funds to, for example, set up a small fuul (fava bean) stand close to their factories where their employees can buy lunch and the micro-entrepreneur can increase his clientele," he explains.
There is a catch, however, cautions Farid. As most microcredit projects have no business licenses, it is technically illegal for private businesses to use their products. "If they like the quality of the product, they can help [microcredit project owners] to change their legal status to the formal sector," he says.
A similar scenario was played out in China, with microcredit projects contributing inputs to the large factories that are driving the Asian country's incredible growth. "It's a bit early to talk about this kind of coordination in Egypt, but given time I think this could be a viable strategy for Egypt to follow," says Farid.
THE STARS OF MICROCREDIT
l Ahmed Ibrahim was granted a E 600 micro-loan to carry out improvements on his small sandwich stand near his home in Darb Al-Ahmar, Cairo. He used the loan over the course of several months to purchase meat for the sandwiches and is one month short of paying it all off. Now, he's thinking about taking out a larger loan to purchase a refrigerator, which would allow him to stock more products.
l Hameida Abbas Shanto turned to the Dakahliya Businessmen's Association for Community Development after her husband was killed in a car accident. The widow was granted a E 1,000 micro-loan, which she used to open a small grocery store. After repaying the loan within six months, she was granted an additional E 7,000 in loans to start a small fodder-trading business and a duck farm. Her entrepreneurial success was recognized by Mrs. Suzanne Mubarak, who awarded her a certificate of merit during a regional microfinance conference last December.
l Hassan Mahmoud has owned his own fawanees (lanterns) workshop for over 20 years. Five years ago, he was granted a E 2,000 micro-loan to expand his business, helping him to draw new customers from Germany, Yugoslavia and Spain. Last year, he took out an additional loan for E 7,000, which he plans to use to stock up on raw materials to ensure he always has enough stock to meet demand during the winter high season.
Maha El Dahan
© Business Monthly 2005
