MICROCAPITAL STORY: Microfinance Loans Help Iraqi Business

According to a report in the Financial Times, fledgling microfinance projects are helping to revive the Iraqi economy after years of public sector dominance, a decade of sanctions, and six years of violence. The US, and specifically its military, is actively involved in these microfinance schemes as part of its war on terrorism. The projects typically involve loans of a few thousand dollars given to people with between one and three employees. By the end of January 2009, the US had made 41,728 loans, totaling USD 59.7 million.

The Iraqi business sector has been held back by a lack of strategic planning, low productivity and efficiency, corruption, and lack of credit. US officials say small businesses, particularly mom and pop stores, make up 90 percent of all businesses in Iraq. According to David Shearer, the United Nations’ resident coordinator for Iraq, encouraging them is crucial for economic development. “Iraq needs to develop the private sector to generate jobs,” Mr. Shearer said. “Our calculation is that 450,000 young people join the workforce every year but the chances of them finding employment are not high, so if this is not dealt with it will create instability.”

One of the US backed microfinance organizations, the Al-Baydaa Center, has given out 700 loans over the last two years funded from USD 1 million plus in start up capital from several arms of the US government. The Al-Baydaa Centre is run by Yousif Abed al-Nabi and Sami Mahdi Saleh, who have combined their experience in running a computer shop with a passion for helping to rebuild their community. The center is located in Balad, a mainly Shia area surrounded overwhelmingly by Sunnis, making it the scene of ferocious clashes in 2006. Once the security situation started to stabilize in 2007, they began to run the centre.

“There was a shopping centre nearby but the people didn’t have enough money to reopen their shops, so we tried to help them,” Mr Nabi says. “We succeeded in reopening all 18 shops – they all went back to the way they were before the fighting.” The USD 2,400 loans are to be repaid, with 12 percent interest, over one year. Mr. Nabi and Mr. Saleh claim to have a 100 percent repayment rate, though sometimes payments have to be rescheduled, and say they have had to take only one errant borrower to court.

Prior to 2003 the only formally recognized financial institutions in Iraq were state-owned banks. Private sector development was restricted in favor of state-run enterprises and there were no microfinance institutions. In the five years since the US-led invasion of Iraq, a microfinance industry has sprung up that serves over 36,000 low-income people, according to a report on Microfinance Gateway. As of September 2008 there were nine local microfinance institutions and three international NGO’s offering microcredit in the country. USAID, through its private-sector development program known as “Izdihar” (“prosperity” in Arabic), is the main donor agency supporting microfinance in Iraq. According to a press release reported on MicroCapital, as of the end of March 2008, USAID had provided over USD 150 million in microloans since 2003. According to USAID’s website as of January 31, 2009, the organization has 41,728 outstanding microfinance loans in Iraq with a total value of 59,679,165 USD. The three international NGOs are CHF International, ACDI/VOCA, and Relief International.

The US military is directly involved in microfinance in Iraq, mostly through Provincial Reconstruction Teams (PRTs) which are small civil-military units funded by the US Department of State (USDOS) and the US Department of Defense (USDOD). One downside to these agencies’ involvement is their relatively short-term perspective due to the political need to demonstrate a quick economic impact. As highlighted in Microfinance Gateway’s article, a long-term perspective is necessary to achieve good funding practices for a microfinance state.

The MIX Market, the microfinance information clearinghouse, does not provide information on the Al-Baydaa microfinance organization or Relief International. For a MIX Market profile on CHF International, click here. For a MIX Market profile on ACDI/VOCA, click here.

By Laura Anderson, Research Associate

Additional Resources:

Financial Times: Small US Loans Are Catalyst for Iraqi Business

Microfinance Gateway: Microfinance in Uniform

USAID: Home

CHF International: Home

ACDI/VOCA: Home

Relief International: Home

MicroCapital Press Release: US Agency for International Development (USAID) Microfinance Program in Iraq Surpasses $150m

MIX Market: ACDI/VOCA Profile, CHF International Profile