Nearly 2.5 billion people in developing countries have little or no access to formal financial services, according to Mohammed Khaled, IFC head of microfinance advisory services in the Middle East and North Africa.
Khaled said that supporting the transformation of microfinance institutions could help boost access to financial services and allow MFIs to reach more low-income people more efficiently.
A new study by the IFC, a member of the World Bank Group, investigated the potential benefits of transforming microfinance institutions (MFIs) from not-for-profit organisations into for-profit ones.
The study, Transforming Microfinance Institutions in the Arab World, was carried out jointly with the Sanabel Microfinance Network of Arab Countries. It takes a closer look at the challenges and costs of transforming into a for-profit company in the region.
The report elaborated that a wave of regulatory changes in recent years opened the door for the entry of new for-profit players, beginning in Syria in 2008, Yemen in 2009, and Sudan in 2011, and followed by Tunisia in 2011, Palestine in 2011, then Egypt in 2014, and Jordan in 2015. These new regulations brought the sector under the supervision of the central banks in Syria, Yemen, Sudan, Jordan, and Palestine, or under other entities, such as in Tunisia.
The report explained that in Egypt, the new regulations did not give any clear benefits for for-profit companies compared to NGOs. On the contrary—and perhaps unintentionally—disincentives were created through higher income tax, a doubling of supervision fees, and so forth, making operations costlier and placing greater limitations on the product offerings.
The effects of the regulatory environment in dissuading some MFIs from transforming were reflected in the IFC and Sanabel’s survey of 20 MFIs in the Arab world, of which 11 (55%) are currently not-for-profit. Of those, eight MFIs (73%) operate in regulatory environments that allow for transformation.
Only five are planning to transform over the coming five years. This is likely because, despite regulatory changes that now allow MFIs to transform into non-bank financial institutions, in some countries such as Egypt and Jordan, there are no clear incentives for MFIs to transform from NGOs into for-profit companies, as the new regulations remain restricted to credit only, and thus do not allow MFIs to expand their product offerings, according to the report.
The study surveyed 20 MFIs, of which 11 are not-for-profit. Of these, eight operate in regulatory environments that allow for transformation. Several Arab countries, including Syria, Yemen, Sudan, Egypt, Tunisia, Jordan, and Palestine, have made regulatory changes recently that allow for transformation; however, some still have no clear roadmap for how the move can take place.
In fiscal year (FY) 2017, the IFC’s microfinance teams invested $833m in 39 projects globally, including nine in fragile and conflict-affected countries. The portfolio also includes 44 advisory projects across six regions.
The report is the third in a series of papers developed jointly with the Sanabel Microfinance Network of Arab Countries and supported by the IFC’s MENA Transition Fund.
“Transformations in the microfinance industry have been common practice globally since the late 1990s. Currently, transformed MFIs transact the bulk of all microfinance operations, measured by a number of clients, as well as portfolio size. However, the few transformations that have taken place in the Arab world have mostly involved transforming international microcredit programmes into registered institutions, with many of them remaining unregulated,” the report read.
The report pointed out that the primary reasons many MFIs choose to transform are to offer additional products and services to their clients, to gain access to capital in the forms of both debt and equity, and to expand their outreach to more of the under-banked.
The report said that in the Arab world, some regulations not only limit the type of products MFIs can offer to credit only, but also place restrictions on MFIs’ credit offerings.
The report highlighted that these restrictions vary from countries where the loan cap is linked to the total outstanding portfolio (0.2% of total portfolio in Jordan) or to the equity of the MFI/MFB (0.1% in Yemen). In these cases, the MFI can increase the cap by increasing its portfolio or equity respectively. However, this is not the case in countries like Tunisia, where the loan cap is TND 20,000 (about $8,000), or in Egypt, where it is EGP 100,000 ($5,670). Some of these regulations also limit the lending to business activities.