Published on Arab Voices

Microfinance needed in Iraq more urgently now than ever

Najaf, Iraq - Shutterstock l photo storyHow can development practitioners promote economic development for parts of the Arab world affected by conflict and fragility? The Consultative Group to Assist the Poor (CGAP) has featured various solutions in a recent blog series on financial inclusion during crises. These blogs highlight the fact that although conflict, violence, and uncertainty make development difficult, solid financial infrastructure for small-scale lending can help people weather a crisis or, in other words, support their economic resilience.
This is particularly true of Iraq today, where the government is trying to push through important political reforms at the same time as continuing to battle the so-called Islamic State (IS) group. This is where microfinance—in the broadest sense of providing credit, savings, payments, and insurance to low-income households and small businesses—becomes the type of intervention that can promote local economic activity and help people manage the economic setbacks, or shocks, they are facing because of the country’s difficult situation.
In 2014, a Findex survey found that only 11% of Iraq’s adult population held an account at a formal financial institution . This was the second lowest percentage in the countries surveyed in the Middle East, and was significantly below the average 70% of adults from upper middle income groups elsewhere in the region who held at least some of their money in accounts.
The survey also revealed a significant gap between Iraqi citizens who borrowed formally (4%) and those who did so informally (65%), hinting at a much higher demand for credit than that then being served by Iraq’s mainstream financial sector. As the World Bank’s 2011 Financial Sector Review also shows, Iraq’s financial system is seriously underdeveloped , with total domestic credit to the private sector amounting to 6.2% of the country’s GDP, lower than every country in the region except for Yemen.
Prior to the start of the Islamic State conflict in mid-2014, the microfinance sector in Iraq had emerged as a source of credible financing for close to 100,000 low-income Iraqi entrepreneurs. Although this represented a tiny share of Iraq’s banking sector’s assets (0.25%)—with about US$150 million (IQD175 billion) in outstanding portfolio—it included 12 credit-focused Micro-Finance Institutions (MFIs) operating across Iraq’s 18 provinces.
In the recent past, however, four MFIs operating in IS-controlled territory have stopped their lending operations, eliminating an estimated 15% of Iraq’s current microfinance market, and representing (in tangible form) more than 20,000 active clients, US$22 million in outstanding credit, and 42,000 lost job opportunities, according to the World Bank’s Economic and Social Impact Assessment of the Syrian conflict and ISIS in Iraqi’s Kurdistan.
Despite this, Iraqi MFIs that are still in operation continue to report high demand for credit and financial services, particularly as clients seek practical strategies to manage their needs, generate income, and keep up ordinary consumption in a general economic environment of declining activity and investor uncertainty. This situation has been reinforced by liquidity issues and weaknesses in the country’s banking sector’s lending activity.
Historical Evolution of the Microfinance Sector

The microfinance sector has the potential to play a stronger role in addressing the financing gap in Iraq at this time of crisis, but its overall growth and development is hindered by a combination of operational and regulatory challenges. A recent World Bank-CGAP report, providing an analysis of the sector, outlines key challenges to its legal and regulatory framework, which form the largest constraints to its growth.
All Iraqi MFIs were established as Non-Governmental Organizations (NGOs); historically, this means they relied on grants, which since September 2012, have all but dried up. Moreover, as NGOs, they are unable to raise equity or accept deposits and, given the difficulty of finding affordable local or international lenders, the result has been a decrease in credit activity, threatening the operational sustainability of certain MFIs.
The wider crisis in Iraq has also exacerbated the institutional weaknesses of some of the MFIs , which have also reported an increase in cases of non-repayment and of fraud, revealing governance and risk management issues. The number of non-performing loans more than 30 days old has increased to an estimated 6%–7% for the sector, although they remain below 2% for the best performing MFIs—an impressive result when put in the context of the sort of news headlines that appear on Iraq in the international press.
To overcome this deadlock and resume the growth of MFIs, immediate technical assistance is needed to help MFIs establish internal controls, as well as in credit lending methodology and gaining access to clients in conflict zones. And, for Iraqi microfinance to realize its full potential, the sector’s regulatory and legal framework needs to become much more conducive to long-term growth and sustainability.
This means changing the way MFIs are managed by the state’s infrastructure:
  • MFIs are currently supervised by the country’s NGO Directorate, which lacks the specialized knowledge of microfinance needed to provide the appropriate oversight of the sector. The Central Bank of Iraq, which has skills related to financial services, could play a role in monitoring and supervising the sector.
  • More clarity is needed in how an NGO could transfer its assets in order to become a finance company, which would help it attract funding and allow it to offer a more diverse range of products.
  • Finally, the playing field needs to be levelled between small loans issued by MFIs and by Small and Micro-Enterprise (SMEs) finance companies. No new SMES have been created since a dedicated ordinance was passed in 2010.
Ramping up support to Iraq’s microfinance sector is more important now than ever . The Central Bank of Iraq’s recent interest in financial inclusion and in promoting small businesses is more than welcome in this regard. It could represent an opportunity for a long-awaited change, not only for microfinance professionals but, also, for the countless Iraqis currently under-served by their financial institutions.


Nadine Chehade

Financial Inclusion Specialist

Peter McConaghy

Junior Professional Associate

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