MICROCAPITAL STORY: Islamic Development Bank (IDB) Grants $10m Loan to the Development and Employment Fund (DEF) of Jordan

The Islamic Development Bank (IDB) has extended a USD 10 million soft loan to the Development and Employment Fund (DEF) in Jordan to develop microfinance in the country. The IDB consists of 56 countries that are all members of the Organization of the Islamic Conference and contribute to the bank’s capital. In addition to facilitating trade among member countries, the IDB grants loans and provides funding for social and economic development projects in member countries. Because the financial operations of the IDB are intended to be consistent with Shariah law, the IDB also provides technical assistance and training in Shariah banking practices. For more information on the how Shariah law affects banking practices in general and microfinance in particular, see this MicroCapital Paper Wrap-Up. The IDB was founded at the Conference of Finance Ministers of Muslim Countries in Jeddah in December 1973 and commenced operations in October 1975. The DEF is a public government fund that commenced operations in 1991 with the objective of promoting independent employment and developing the small business sector. Initially under the government’s Industrial Development Bank, the DEF has been independently managed since 1992.

The DEF offers credit as well as insurance, capacity building, and technical training, including accounting and management skills, for entrepreneurs. Loans to microfinance institutions (MFIs) can amount to a maximum of USD 1.4 million. The DEF mandates that 30 percent of this amount go to borrowers in rural areas. Apart from wholesale loans to MFIs, the DEF also provides direct loans. Household loans for those who are not able to establish projects outside of the home amount to a maximum of USD 2100 per borrower while loans for licensed projects amount to a maximum of USD 21,000 per borrower. Group loans can amount to a maximum of USD 141,000 for an individual project. Projects in poverty stricken areas or that employ local resources are given priority. The DEF requires that borrowers provide collateral of at least 160 percent of the loan amount. The maximum term for each loan is 6 years and the annual interest rate is 6.5 percent for new business to 7.5 percent for existing businesses. The MIX, the micofinance information clearinghouse, reports that DEF serves 17,515 active borrowers and holds a gross loan portfolio of USD 50.14 million as of 2008. The MIX also reports the DEF’s total assets as USD 59.46 million as well as a 7.19 percent debt to equity ratio. Although a return on assets was not reported for 2008, the 2007 figure was 3.29 percent. Of all Jordanian MFIs that report to the MIX, the DEF is the largest in terms of loan portfolio. Between 1991 and 1997, the DEF claims to have supported 33,250 projects and created 41,048 seasonal and permanent job opportunities.

Along with the soft loan, the IDB also granted USD 300,000 to a project for supporting small farmers in the Al Mudawara area which will be supervised by the Jordan River Foundation (JRF). JRF was established in 1995 and is headed by Queen Rania Al-Abdullah of Jordan. JRF focuses on providing employment opportunities for women and training women in handicraft skills and entrepreneurship. In addition, the IDB granted USD 350,000 to the Kingdom of Jordan to develop technical support for microfinance programs. The signing of the agreement occurred before the start of the fifth meeting of IDB’s Women’s Advisory Forum. The signators were Ahmad Mohammad Ali, IDB’s president, and Ms. Suhair Al-Ali, Jordan’s Minister of Planning and International Cooperation. Ms. Al-Ali noted in a speech that, the IDB has given about $702 million in soft loans and grants to Jordan for various development programs. She heads the ministry that specifically handles microfinance and formulated the National Strategy for Microfinance.

In Jordan’s National Strategy for Microfinance, the private sector is to handle the majority of microfinance operations.and government lending organizations to eventually withdraw from the market. The role of government institutions is to be restricted to technical training and policy work, including the formulation of an interest rate policy. Because there has been low repayment on government loans in the past, Jordan seeks to differentiate government welfare from private sector microcredit. The Strategy also includes the creation of the National Microfinance Network to standardize and streamline MFIs within the country. As of 2005, Jordan counted 4 major and 12 minor MFIs as well as about 200 local credit schemes. According to the MIX the 7 MFIs listed for Jordan have a cumulative gross loan portfolio of USD 118.4 million and serve 138,000 borrowers. According the MIX’s 2008 Arab Microfinance Benchmarking Report, covered by MicroCapital here, there was a decline in the average loan balance per borrower due to the increasing number of borrowers relative to the loan portfolio. Jordanian MFIs had a financial self sufficiency rate of 111 percent. The CIA World Factbook reports that Jordan faces a growing budget deficit, which stood at USD 1.9 billion in 2008. National GDP grew 5.8 percent in 2008 to USD 30.8 billion. Per capita GDP was USD 5,000 and the unofficial estimated unemployment rate, 30 percent. Approximately 77.4 percent of Jordan’s labor force works in services.

The deal was announced one year after Queen Rania, a microfinance advocate, met with IDB officials in Jeddah. Queen Rania holds a BA in Business Administration from the American University in Cairo. She is member of the board of the Foundation for International Community Assistance International (FINCA International) and was an emissary for the United Nations Year of Microcredit in 2005. She has spoken at the International Finance Corporation’s (IFC) forum on microfinance en titled, “Unlocking the Potential of Microfinance in the Middle East and North Africa” and launched the Women’s Access to Entrepreneurship Development and Training (WAEDAT) project in Jordan.” Of her speech at the IFC forum, Queen Rania writes, “In the presence of microfinance leaders, I put forth the challenge of expanding microfinance services to three million clients in the Arab world.” In an interview with Newsweek International, she has stated “Across the Arab world, we see countries moving toward private-sector growth, but traditionally the reliance has been on the public sector [for jobs]”and indicated her belief that microfinance facilitates private sector growth. Queen Rania’s personal website includes a great deal of her writing on microfinance, especially its impact on women. She writes, “I see it when I visit women entrepreneurs across Jordan—transformed women, whose quiet, determined efforts in micro-enterprise are making a macro difference for their families and communities.” Queen Rania is also facilitating the upcoming International Insurance Society’s annual seminar, which focuses on microfinance and has been covered by MicroCapital here.

In a 2008 report, the IDB reported loans totalling USD 356.1 million that year. Since 1976, its first year of operation, the IDB has recorded USD 4.5 billion in loans. Also for 2008, the IDB reported equity totalling USD 325.8 million and trade financing operations totalling USD 2.8 billion. Total assets were reported as USD 10.3 billion. In 2005, the IDB voted to increase the authorized capital stock of IDB by ID15 billion to ID 30 billion. Simultaneously, subscribed capital was increased by ID 6.9 billion to ID 15 billion. By September 2008, IDB’s total shareholders’ equity was USD 8.5 billion. The IDB does not report to the MIX.

The IDB is a part of the Islamic Development Bank Group. The many and varied activities of the IDB group are all designed to support development in accordance with Shariah law. The IDB Group is comprised of four entities in addition to the IDB: the Islamic Research and Training Institute (IRTI), the Islamic Corporation for the Development of the Private Sector (ICD), Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), and the International Islamic Trade Finance Corporation (ITFC). Other initiatives of the IDB Group include the World Waqf Foundation (WWF), which works with Waqf organization in member countries to consolidate property. Waqf , an Islamic term and practice, refers to property held in charitable public trust. The IDB has also established the Awqaf Properties Investment Fund (APIF) to invest in waqf properties in member countries and in Muslim communities in non-member countries. The IDB Infrastructure Fund (IIF) is a private equity investment fund that supports infrastructure development in member countries. By 2007, IIF hadfunded USD 774 million across 18 projects in 9 countries. Further initiatives inclue the International Center for Biosaline Agriculture (ICBA), research initiative to develop agriculture in arid and semi-arid areas affected by salinity, as well as the Unit Investment Fund (UIF), which supports foreign trade and investment in Islamic countries.

Additional Resources:

IDB: Home
DEF: Home
“IDB Group in Brief”, Published by IDB Group, May 2007
IDB Annual Report 2008
DEF: Lending Programs
“Jordan: $10 Million Soft Loan to Support Microfinance Sector”, Published by Symbiotics, May 2009
Queen Rania Al-Abdullah of Jordan
Jordan River Foundation
CIA World Factbook: Jordan
“National Strategy for Microfinance”, Published by Ministry of Planning and International Cooperation, 2005
MIX Market: Jordan
MIX Market: DEF
“Islamic Microfinance: An Emerging Market Niche, by Nimrah Karim, Michael Tarazi and Xavier Reille”, by Jeffrey Erfe, Published by MicroCapital, October 2008
“International Insurance Society (IIS) to Host Annual Seminar: Patronage of Her Majesty Queen Rania Al Abdullah of Jordan Brings Microfinance Focus”, by Jaclyn Berfond, Published by MicroCapital, April 2009
“Arab Microfinance Analysis and Benchmarking Report, 2008 by the Arab Microfinance Network, Sanabel and the Microfinance Information Exchange, Inc. (MIX)”, by Zoran Stanisljevic, Published by MicroCapital, May 2009