Introduction

On April the 9th and the 10^th, 2005, the Italian Cooperation in Cairo organized an international seminar with the title "sorting out poverty: a chance from microcredit".

The seminar aimed at presenting the experience of the Italian-Egyptian Program called PAP (Poverty Alleviation Program) whose microcredit scheme successfully reached thousands of beneficiaries. This scheme was compared to similar international practices and, at the same time, a debate on the evolution of microfinance as a tool against poverty, especially in Egypt, was enhanced.

The event, that took place under the auspices of H.E. Suzanne Mubarak, saw the participation of over 250 people and of a good number of international speakers. Among them, in the opening session, Dr Loche from the "Comitato Italiano 2005 Anno del Microcredito", Dr Antonio Vigilante, UN Country Representative, Governors of Giza and Minia, Gen. Hasan Hemada and Dr Sa’ad, Ministers Abuelnaga and El-Guindi and the Italian Ambassador to Egypt, H.E. Antonio Badini.

The first day session opened with a ceremony during which some of the beneficiaries were awarded for their work and with the opening of the exhibition of the beneficiaries’ products. Throughout the whole event, following the principle that beneficiaries are and have to be the main actors of their own development, the objectives, that some of them have reached through the small loans received, were highly stressed and underlined. Producers of sweets, handicrafts and tailors, all gathered together to show the results of their hard work.

On the second day PAP`s process and methodology were explained by Dr Amjad Yaaqba, former director of the Program, whose speech was followed by an international panel composed by Dr Loche, Dr Vitali (Giordano Dell’Amore Foundation, Italy), Mr El Ashmawi from Sanabel and by Professor Corsi from Università di Roma and Fondazione Risorsa Donna. This panel focused on the framework constituted by the International Year of Microcredit, on the current situation of microfinance in Arab countries and on gender programs, introducing the four workshops that were the core of the event.

The workshops focused on:

community participation
gender
the Social Loan Tracking System
the shift from microcredit to microfinance.

In each workshop the moderators tried to follow the scheme of the whole seminar, comparing PAP`s experiences with similar international projects: Grameen, PlaNet Finance, MFIs belonging to the Sanabel network, and so on.

The outputs coming from the workshops and which were discussed in the plenary session at the end of the seminar, revealed some fundamental and very interesting key-points that will surely contribute to the current debate on the future of microfinance.

The Book

This book contains the proceedings of the International Seminar on Microcredit organized on April, 2005, in Cairo by the Italian Cooperation in Egypt.

The Seminar marked an important step for the Poverty Alleviation Program, a microcredit scheme which, for seven years, was jointly handled by the Italian Cooperation and the Egyptian Ministry of Insurance and Social Affairs but, most of all, by the people living in the communities of Giza and Minia, who are now autonomously carrying out the activities of the Program.

The event also marked the handing over of the Program from the jointly management to a local management and aimed at underlying the excellent results of PAP and at presenting it as a best practice scheme for all microcredit practitioners in the Region.

This book is our contribution to the present debate on microcredit and microfinance. While thanking all those who participated and worked for its realization, we hope that our contribution will be useful and interesting for everyone who is involved, or simply interested, in fighting poverty through microfinance schemes.

Microfinance is a field that combines banking with developmental social goals (CGAP) and refers to small-scale financial services (primarily small loans and usually savings) which are provided to people who are usually considered "non bankable" because they do not have enough assets to be considered interesting or even acceptable clients for the traditional banking system. They are people involved in activities like farming, fishing or herding; they are people who operate small enterprises or microenterprises where goods are produced, recycled, repaired, or sold; they are people who provide services or who work for wages or commissions; they are people who gain income from renting out small amounts of land, vehicles, draft animals, or mechanical equipments and tools to other individuals and groups. They belong to the local and grass root scale of developing countries or of western countries both in rural and urban areas; mainly they belong to the groups of the socially or financially excluded.

Saving services allow savers to store money for future use and to obtain returns on its investments, while credit services enable the use of anticipated income for present investments or consumption. In any case, such services are rarely accessible through the formal financial system. Credit is widely available from informal moneylenders but generally at very high, unbearable cost for the borrowers.

It is widely believed, without any specific reason, that the cost of delivering small-scale financial services at the local level is too high for non-subsidized institutions and that the informal financial market can really satisfy the demand. NGOs and other non-banking financial institutions have led the way in developing appropriate credit methodologies for low-income borrowers. But with few exceptions, these institutions are able to operate only on a very low scale.

The availability microfinance services and the level of demands for these services vary in countries and in regions. Common to nearly all parts of the developing and developed world is however the lack of commercial microfinance institutions interested and seriously involved in this kind of initiatives.

This pattern seems to be changing now: the large-scale "microfinance revolution", the profitable provision of microfinance services for economically active poor people on the part sustainable financial institutions, is emerging in many countries all over the world.

2005: The International Year of Microcredit

On December 2003 the UN General Assembly passed a resolution (A/Res/53/198) in support of the Action Program for the International Year of Microcredit 2005 (A/Res/58/221). The Year aims at providing an occasion to raise awareness on the importance of microcredit and microfinance in the eradication of poverty, to share good practices and further to enhance a financial sector development that supports sustainable pro-poor services in all countries.

On the significance of the resolution, the UN Secretary-General Kofi Annan said: "The International Year of Microcredit 2005 underscores the importance of microfinance as an integral part of our collective effort to meet the Millennium Development Goals (MDG). Sustainable access to microfinance helps alleviate poverty by generating income, creating jobs, allowing children to go to school, enabling families to obtain health care, and empowering people to make the choices that best meet their needs. The stark reality is that most poor people in the world still lack access to sustainable financial services, whether they are savings, credit or insurance. The great challenge for the future is to fight the constraints that exclude people from fully participating in the financial sector.

The International Year of Microcredit offers a pivotal opportunity for the international community to engage in a shared commitment to meet this challenge. Together, we can and must build inclusive financial sectors that help people improve their lives."

The resolution designates the United Nations Capital Development Fund (UNCDF) and the UN Department of Economic and Social Affairs (DESA) as focal points to coordinate the activities of the United Nations system for the preparations and the observance of the International Year of Microcredit, 2005.

Recent studies show that the number of poor people in the whole world who benefited from microcredit have more than quadrupled between 1997 and 2001. With the so rapidly growing demand for financial services, the Year of Microcredit is intended to highlight ways to expand the reaching of financial services on sustainable bases.

According to the Action Program, the United Nations have joined together with Member States, NGOs, the private sector and civil society to raise public awareness, to build sustainability in the microcredit and microfinance sectors, and have promoted innovative partnerships. Although microcredit and microfinance have already had a positive impact on household budgets and the quality of life of millions of poor people, many are still denied access to financial services that could raise their standards of living and could protect them against economic setbacks. The Action Program recognizes that a range of financial products and services can enhance the poor’s ability to increase their incomes, to build assets and to mitigate their vulnerability in times of economic crisis.

The International Year of Microcredit, 2005 will encourage and support the growth of microcredit and microfinance sectors to best meet the needs of a wide range of poor people.

The impact of more inclusive financial services is not merely limited to loans, credit, savings, insurance, and other economic tools, but evidences show that it contributes to raise the health, nutrition, food supply and educational level of the recipients’ families and this has made those people able to face unforeseen income fluctuations with more awareness. Microcredit and microfinance programs not only elevate personal assets, but also help strengthen the texture of local economies by investing in the productive capacities of communities, by stimulating consumers’ activities and by creating new jobs.

The Action Program was based on the input coming from Member States as well as from UN technical agencies and encompasses a wide range of vantage points. It also takes into account the conclusions and the recommendations from recent UN conferences and summits related to the financial sector and development.

The Year of Microcredit has helped promote a series of activities in the field of microcredit and microfinance:

The Blue Book Project is aiming at developing a common understanding of the constraints on building up inclusive financial sectors in different country settings and on the opportunities for action but is also aiming at building up also an analysis, a "Blue Book on Building up Inclusive Financial Sectors" that will provide information, analysis and guidance on the subject matter
The Data Project
The Global Microentrepreneurship Awards (GMA), that aims at celebrating the entrepreneurial spirit in the micro-business owners by highlighting their innovativeness, their business acumen, and perseverance, as well as the deep effects their enterprises have had on their families and communities. The initiative also aims at attracting further investment and recognition from donors, governments and private business sector for the initiatives and was launched in Afghanistan, Rwanda, Mexico, Indonesia, Afghanistan, Cambodia, the Dominican Republic, Mozambique and Pakistan. The long-term goal is to replicate the Global Microentrepreneurship Awards in poor countries throughout the world.
Shop Micro
The year of microcredit web site
The newsletter on Microfinance Matters
Public Service Announcements & other
Special Events

The Year was officially launched on November 18^th 2004 by opening stock exchanges around the world. At the opening celebrations at UN Headquarters in New York and elsewhere throughout the world, experts launched the challenge of expanding the microfinance scheme by identifying the best practices and the hurdles to wider availability.

Another primary aim of the Year is to increase public awareness about the reliability of microfinance clients, especially women, in repaying loans, in managing household incomes, in building assets and enterprises and in contributing to the expansion of the economy of local communities.

In Italy, the opening was made in Milano, with the participation of ABI, CGAP, Opportunity Bank (Serbia and Montenegro), Cespi, Dexia Microcredit Fund (Belgium), ICICI Bank (India), Federcasse (Italy), Rabobank (Holland), Banco Solidario (Ecuador), K-Rep Bank (Kenya), ACBA Bank (Armenia), Finvera (Finland), First Step (Ireland), ADIE (France), Microfinanza srl and Giordano Dell’Amore Foundation (Italy).

General Assembly Resolution 58/221 encourages Member States to establish national coordinating committees or focal points to lead the preparations and implementation of national activities related to the Year.

An Italian National Committee for the 2005 Year of Microcredit (INCYM) was launched on the 29th of October 2004, and has since been holding regular sessions. This body was generated by the Italian Directorate General for Development Cooperation within the Ministry of Foreign Affairs and is composed of academics and researchers as well as professionals from the public and the private sectors alike (ministries, banks, micro-credit institutes and foundations, NGOs). The INCYM will promote a new role for donor countries to facilitate rather than directly supply financial services.

The INCYM agenda for the upcoming months includes a number of national and international events such as a conference that will gather all national committees for the 2005 Year of Micro-credit from the EU Member States, and an Euro-Mediterranean conference to be held in Rome in October 2005.

The Italian Directorate General for Development Cooperation has already pledged €1.5 Million for the activities of the INCYM and more resources are going to be disbursed to the International Fund for Agricultural Development (IFAD) for funding projects related to microcredit.

The Committee is divided into specific working groups:

Promotion of microcredit, a group that will analyze microcredit experiences and elaborate an "Italian way for microfinance", with the main objective of meeting the Millennium Goals.
Microcredit and the Private sector, a group that will organize events and initiatives such as conferences, workshops, seminars and meetings to promote microfinance.

The whole idea includes the creation of fruitful partnerships with NGOs, Ministries, the private sector, international organizations, in order to strengthen and enhance the choice of microfinance as a development tool.

Further information are available on the Committee web site www.annodelmicrocredito.org , which includes researches and documents produced during the International Year in Italy.

Microfinance in Egypt

Microfinance has started in Egypt since the early 1970s. There, it has counted almost 66% of the Middle East region’s active microfinance borrowers and has accounted for 57% of the outstanding loan portfolio. These kinds of services are generally provided for two main overlapping goals: poverty alleviation and small enterprise support which are greatly sustained by governments and donors, first of all by USAID, and then by the Swiss Fund and UNDP.

Most of the microfinance institutions operating in Egypt belong to the Sanabel network which includes: microfinance institutions, people, resources and ideas connected across the Arab countries. Sanabel’s mission is to maximize outreach of microentrepreneurs in the Arab world by providing microfinance institutions with a forum for mutual learning and exchange, with capacity building services, and with advocacy for best practice in microfinance sector.

Its objectives are:

Enhance the capacity of microfinance service providers by giving support in areas such as training and the translation into Arabic and the distribution of microfinance literature.
Promote and facilitate the exchange of information on the subject metter by means of an annual conference, the Sanabel website and newsletter, the Arab Microfinance Gateway and work for the development of best practice in microfinance sector in countries where it is not well spread.
Improve transparency and standards of practice by encouraging participation in the Microfinance Information eXchange (MIX) and by utilizing external audits, standard reporting, and rating services.
Promote public awareness and regular education to facilitate the spreading of best practice in microfinance sector.

The round table on Building a new National Strategy for Microfinance in Egypt constitutes a project coordinated by the United Nations Capital Development Fund, Special Unit for Microfinance (UNCDF/SUM) and aims at creating a consensus around the reforms that will help integrate microfinance into the formal financial sector so to ensure the poor’s sustainable access to finance. To reach this goal, the project is arranging panel discussions of important stakeholders to analyze problems and suggest possible solutions for the sector. Each panel discussion is guided by a written paper where the subject area under discussion is analyzed.

The supply of microfinance in Egypt is generally limited to several traditional categories of micro lending. Potential markets for savings, insurance, and alternative credit products such as leasing and agricultural lending remain largely unreachable.

The Round Tables usually take place at the Egyptian Banking Institute (EBI) in Nasr City, Cairo, and tend to discuss problems and new perspectives for the development of a sound microfinance enterprise in Egypt.

With the technical support of EQI and UNDP, seven round tables have already taken place:

Roundtable 1: How To Best Utilize Banks In Microfinance

Roundtable 2: The New Small Enterprise Development Law

Roundtable 3: Collaterals, Guarantee And Recourse

Roundtable 4: Non-Prudential Regulation And Performance Standards

Roundtable 5: The Potential For New Products And Services Of Microfinance In Egypt

Roundtable 6: Guidelines For Donor Support To Microfinance In Egypt

Roundtable 7: Strategies For Effective Capacity Building In The Microfinance Sector

So far, the discussion has led to the identification of the factors that constrain the rapid growth of the MF enterprise in Egypt, such as:

1. no uniform legal definition of microenterprise, which constitutes a prerequisite for developing effective policies

2. no uniform set of regulations that apply to MF financial providers

3. the borrowers’ difficulties in meeting the required collateral to guarantee loan repayment (one important point: most real estate assets are not registered, due to relatively high costs and to the complexity of procedures, and therefore these are actually ruled out as collateral).

4. non bank credit institutions are not allowed in Egypt (except leasing companies)², even though they have the potential to serve many MF clients at competitive costs while commercial banks suffer from weak institutional capacities because of their lack of interest in handling small MF transactions and of inadequate expertise in effectively pursuing MF business

5. Banks and, most of all, NGOs, rely almost entirely on donor funds. There is also a problem of lack of coordination between the huge amount of activities carried out by different donors in the field of small and micro enterprise development

6. The role of the Social Fund for Development

7. Lack of a database to map out the MF operations of the key players, their focus area and their geographic coverage

Even if only 5% of the total finance demand of small and micro business is met, Egypt is the leading country in the Arab states in the field of microfinance (220.000 clients for the year 2002)³.

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2. The minimum capital requirement for banks, which is estimated as 100 million EGP, exceeds by far the financial requirement for a commercially viable MF oriented financial institution.

3. Bransdma J., Burjorjee D. "Microfinance in the Arab States. Building Inclusive Financial Services" UNCDF, 2004

Acronyms

ABI: Associazione Bancaria Italiana

CDAs: Community Development Associations

CGAP: The Consultative Group of Member Donors

CGC: Credit Guarantee Company

EGP, LE: Egyptian Pound, local currency

EQI: Environmental Quality International

GMA: Global Microentrepreneurship Awards

INCYM: Italian National Committee for the 2005 International Year of Microcredit

MDG: Millennium Development Goals

MFI: Microfinance institution

MISA: Ministry of Insurance and Social Affairs

NGO: Non Governmental Organization

PAP: Poverty Alleviation Program

SECDA: Small Enterprises & Community Development Association

SEDO: Small Enterprise Development Organization

SFD: Social Fund for Development

SME: Small and medium enterprise

UN: United Nations

UNCDF: United Nations Capital Development Fund

UNDESA: United Nations Department of Economic and Social Affairs

USAID: United States Agency for International Development