Wednesday, June 24, 2009

Hot Topic: Microfinance

Visitors to Oman frequently remark about the hardworking and resourceful nature of their Omani hosts. The dedication and energy of the Omani people – Omani entrepreneurs and small businesses, in particular – may find new outlets thanks to the recent creation of the country’s first microfinance initiative (MFI).

The term ‘microfinance’ refers to financial services provided to low-income clients and may include savings, fund transfers and insurance. The best known form of microfinance is ‘microcredit,’ the practice of lending small amounts of capital to individual entrepreneurs and small businesses not served by traditional mechanisms of mainstream finance. While the loans are modest – sometimes as small as RO 80 – they can have a large impact, as banks do not typically lend to those with little or no cash income and few assets to serve as collateral.

Microfinance has been embraced by the international development finance community as a powerful tool for promoting entrepreneurialism and a key driver of economic growth. While microfinance has been popularized by the high-profile success of MFIs such as Grameen Bank in Bangladesh, the practice has gained only minimal traction in the Middle East. According to some estimates, only 15 percent of the demand for microfinance in the Middle East is currently being met.

The introduction of microfinance to Oman could mean that entrepreneurs and small businesses will find access to new fundraising opportunities at relatively affordable rates. If successful at supporting new enterprises, this effort could spur economic growth and job creation in Oman.

Oman is home to a wide array of small businesses that could serve as potential clients for MFIs. Particularly, makers of textiles and handicrafts stand to benefit, as do fishermen and those making a living in agriculture. Oman’s strong tourism sector also gives rise to numerous entrepreneurial opportunities that may be taken advantage of through the financial support microfinance provides. A further potential market for microfinance in Oman is women entrepreneurs. In other countries, women have generally been the main focus of MFI because studies have shown they are less likely to default on their loans than men.

But while the future of MFIs in Oman holds much promise, there have been problems and criticisms of MFIs in other countries. One problem faced in other countries is the difficulty of providing microfinance services to customers living outside of urban areas, as the low population density makes it difficult to meet the costs of a retail branch. Oman will face similar challenges, as some of the greatest beneficiaries of microfinance would be those living in the interior where population density is low and retail branch costs would be high.

Another issue is how Omani law will be applied to MFIs. Currently, it is likely that MFIs will be treated the same as other financial institutions in Oman and be subject to the same laws and the oversight of the Capital Market Authority and the Ministry of Commerce and Industry. It is also possible, however, that laws could be tailored to make it easier for MFIs to operate in Oman, and to respond to the unique needs and problems of these institutions and their clients.

Another problem that has emerged in other markets is how to evaluate potential borrowers’ credit in an environment where traditional metrics are not easily applied. Luckily, the first credit bureau in Oman was recently introduced, which should make it easier for MFIs to evaluate borrowers’ credit.

The Omani market presents unique issues for MFIs, though the untapped market of the interior as well as the recent introduction of credit bureaus provide encouraging evidence that they have the potential to succeed. Therefore, many in Oman are justifiably excited for new business opportunities on the horizon.