PAPER WRAP-UP: Microfinance Market Survey in the West Bank and Gaza Strip

Published by International Finance Corporation (IFC) in cooperation with the Palestinian Network of Small and Micro Finance (PNMSF). Conducted by PlaNet Finance. Copyright 2007, 79 pages, available for download at http://www.microfinancegateway.org/content/article/detail/44378

The goal of this report is to gauge the demand for microfinance among Palestinian micro entrepreneurs. The report finds that, overall, Palestinian entrepreneurs lack access to financial services, and, if given the opportunity, many would utilize microcredit in order to expand existing businesses, generate working capital, launch new businesses and finance assets. The report estimates the likely market potential at approximately USD 157 million, but notes that it could be as high as USD 280 million.

The report surveyed 1,202 micro entrepreneurs chosen at random from six areas within the West Bank and Gaza Strip (WBGS).

In WBGS, micro enterprises make up 95 percent of all businesses. About 186,000 micro and small enterprises (MSEs)* exist in the area. However, 75 percent of micro entrepreneurs do not hold a current bank account and 90 percent have no access to credit services. Only 16.4 percent have applied for credit in the past three years, and, of those, 37 percent were rejected— largely due to lack of collateral. Only a small fraction of those surveyed have borrowed from microfinance providers (4.1 percent) in the past.

There are 11 Palestinian MFIs and two commercial banks in WBGS which offer microfinance services. In December 2006, the nine MFIs grouped within the Palestinian Microfinance Network had an outstanding loan portfolio of USD 37.3 million and 25,000 active clients. Default rates among MFIs are currently soaring due to recent economic crises in WBGS. As of September 2006, MFIs in WBGS had an average default rate of 40.6 percent.

Micro entrepreneurs cite many causes for not seeking credit. The top reason entrepreneurs give for not applying for credit is religious belief** (35 percent of respondents). Risk aversion, or fear of not being able to pay back a loan, was the second most common rationale (33 percent of respondents). Other reasons include lack of need for credit, dissatisfaction with existing products including loan term or loan size, high interest rates and lack of information regarding credit options.

In total, 56 percent of respondents said that they are in need of credit. The estimated market for microlending based on this level of demand is USD 157 million. However, another 27 percent of WB respondents and 19 percent of GS respondents said that they do not currently want credit due to the economic situation, but they could be potential clients in the future.

In order to improve the microfinance sector in WBGS, the report advises that MFIs:

  • expand their outreach, particularly in rural areas
  • increase efficiency through training, better management and improved technology
  • increase the role of the Palestinian Network of Small and Micro Finance to disseminate information and best practices, monitor MFI outreach and hire external auditors
  • adapt existing products to clients needs (loan size, repayment period)
  • develop new products such as money transfers, savings, insurance, leasing, Islamic financial services, debt-consolidation loans, education loans and consumer loans

The report also recommends that donors:

  • adapt interest rates toward market level to promote financial viability and decrease dependence on donor funding
  • avoid grants as a form of funding in order to prevent distorting competition
  • establish a guarantee fund and an emergency fund
  • provide MFIs with technical assistance
  • institute a mechanism to ensure donor coordination

Finally, the report advocates that the Palestinian regulatory authorities develop a microfinance framework which:

  • allows MFIs to operate as financial providers, rather than NGOs
  • permits MFIs to offer savings products and accept deposits
  • encourages MFIs to increase the range of products they offer to meet new demand (insurance, leasing, etc.)

* A “micro enterprise” is defined in this survey as one which employs 0 to 3 employees. A “small enterprise” employs 4 to 6 employees.

** The charging of interest is against Islamic law. However, those MFIs and banks that offer Islamic products have found that due to cumbersome procedures, customers often switch from Islamic microfinance to conventional microfinance services. For more on the topic, please see The American’s article “Islamic Banking: Is it Really Kosher?.”