J.11_-_LIM_Microfinance_Sector_Assessment_Report-_Dec_2015.pdf

i

Lebanon Investment in Microfinance

LIM Program

Lebanon Microfinance Sector Assessment 2014

Joseph Kotun

December 23, 2014 ii

Contents List of Acronyms ............................................................................................................................................................... iii

I. Executive Summary

Background

II. MFI Institutional Capacity

Key Recommendations to Support Capacity Building

III. Financial Performance and Sustainability

Key Recommendations to Support MFI Sustainability

IV. MFI Services and Support

Key Recommendations for USAID Support to Enhance MFI Services

V. Entrepreneurship Needs of MFI Clients

Key Recommendations to Support Client Capacity Development in Entrepreneurship

VI. Lebanon Microfinance Association

Key Recommendations to Support Microfinance Association Development

VII. Conclusions and Summary of Recommendations iii

List of Acronyms ADR Association d’Aide au Developpement Rural (Association for the Development of

Rural Capacities) AECID Agencia Española de Cooperación Internacional Para el Desarrollo AEP Association d’Entrade Professionnelle AGFUND Arab Gulf Programme for Development BDL Banque de Liban CGAP Consultative Group to Assist the Poor CLD Cooperative Libanaise pour le Developpement DCA (USAID) Development Credit Authority EDF Entrepreneurial Development Foundation IESC International Executive Service Corps ICT Information Communication Technology IGP (USAID) Implementation Grants Program LIM Lebanon Investment in Microfinance MENA (USAID) Middle East North Africa Bureau MIX Microfinance Information eXchange MFI Microfinance Institution NGO Non-Governmental Organization PAR Portfolio at Risk RFA Request for Applications USAID U.S. Agency for International Development WWB Women’s World Banking

I. Executive Summary USAID/Lebanon requested that the International Executive Service Corps (IESC) prepare a microfinance sector assessment at the end of the Lebanon Investment in Microfinance (LIM) program. The purpose of the assessment is to provide an overview of the state of the sector and inform USAID in its planning process for potential follow-on programming.

This sector assessment report focuses on the five topic areas that are specified in the scope of work document: microfinance institute (MFI) institutional capacity; 2) finance and sustainability; 3) MFI services and support; 4) client entrepreneurship needs; and 5) the Lebanon Microfinance Association. Information relevant to each topic was captured from the relevant project documents, other reports, and on-site interviews with LIM and MFI staff. The assessment report includes a section for each of the five topics with topic-based recommendations and caveats at the end of each section. In addition, the report provides a summary discussion of recommendations listed in approximate order of impact potential.

Compared with the LIM program in when it was first launched, the 2014 assessment reflects a microfinance sector that is much larger, more diverse, and largely sustainable. In addition, Lebanon’s Microfinance Association has been launched as a valuable resource that will be instrumental in the future growth and maturity of the sector. USAID has been invaluable to sector development through LIM. There are clear opportunities for the Mission to make high impact investments in microfinance in any or all of the topic areas.

MFI Institutional Capacity: This section discusses technical and management competencies at both the executive/senior level and loan officer/mid-level staff levels. In general, the MFI executives have a high-level knowledge of formal finance. However, their experience and knowledge is more limited with respect to microfinance-specific technical expertise including risk management, or sector specific knowledge such as finance for agriculture. In addition, senior staff could benefit from soft skills and human resources-related training in order to better address staff-management challenges and the critical problem of recruiting and retaining mid-level staff. The LIM program has provided valuable training to loan officers in a number of core technical areas. Mid-level training such as leadership development and core management skills would be useful as well, targeted to loan officers moving into managerial positions. Continued USAID support for MFI training would have a significant impact on institutional capacity.

Finance and Sustainability: With one exception, all the MFIs have achieved operational sustainability. LIM’s sub-grant funding has enabled several of them to reduce the time to reach a sustainable scale, as well as incentivizing them to focus on target groups and economic sectors. In general, access to donor capital is no longer a key constraint to continued growth. Nearly all the MFIs are experiencing consolidation and slower growth due to a combination of having achieved a sustainable scale along with Lebanon’s stagnating economy and increased security concerns.

MFI Services and Support: This section includes discussion of current MFI priorities for support and possible USAID support for the sector, including a loan guarantee fund through the DCA mechanism in order to mitigate risk for increased lending to target groups. This would be useful to some of the NGO-based MFIs who are able to meet the required financial conditions. The bank-based licensed MFIs would not likely participate in the DCA as they already have access to the government-based Kafalat program that offers guarantees at more favorable terms than the DCA.

This section also includes discussion of support for introducing tablets into the field in order to improve efficiency and loan officer access to client data. Several MFIs have initiated this on their own, and all MFIs are interested, but most do not have the investment funds for implementation.

Finally, the section discusses the integration of MFIs into the existing bank-based credit bureau. A countrywide study by CGAP and the Microfinance Centre is currently underway to document cross-lending and client debt, sponsored with Sanad and Sanabel. As the study is not yet completed, it is unclear whether it is a significant problem at this time. However, the credit bureau will eventually be necessary as market penetration increases, and USAID could provide technical assistance and influence to make the needed regulatory changes to enable credit information sharing by the NGO-based MFIs.

Client Entrepreneurship Needs: Given the wide diversity of MFI clients, it is difficult to generalize the needs for support in developing entrepreneurship skills. Many clients either think training would not be valuable for them or would be significantly inconvenient to participate in.

However, some clients expressed a need for entrepreneurship training in topics such as accounting, marketing, and client satisfaction. Sector specific training would benefit new entrepreneurs, as well.

USAID’s support for client training would best be channeled through the Microfinance Association in order to help position the Association as an on-going support and to develop sector sustainability and institutional knowledge that benefits the entire sector. Client preferences and challenges should be taken into account when designing entrepreneurship training; classroom-based training is not always accessible or appropriate for all clients, especially women with household responsibilities and transportation limitations.

Lebanon Microfinance Association: The Association has become the keystone of the microfinance sector and can continue to serve as a resource for training, advocacy, research, regulatory reform, and credit information sharing. The sector would best be served if support in all areas were to be channeled through the Association as much as is appropriate. Sustainability is a key challenge for the Association, which can only be partially supported through MFI fees. Direct donor support will be required in order to retain a Director and small staff as outlined in the draft Association Business Plan. Indirect support for the Association could include funding for a training center that could be used to generate some revenue and serve as a venue for MFI training events.

Key Recommendations: The assessment report concludes with a list of potential USAID investments. High priority areas include support for the Microfinance Association, professional training for loan officers in core skills areas and for MFI executives in soft skills, and support for tablet deployment for loan officers. Support in other areas such as the DCA loan guarantee fund, client vocational and entrepreneurship training may be quite beneficial for some, but not all, MFIs.

Background LIM Program Background: In May 2009, United States Agency for International Development (USAID), awarded Volunteers for Economic Growth Alliance (VEGA) and IESC the LIM Program. LIM was designed to assist Lebanese micro and small enterprises increase sales, create jobs, and advance economic growth through improved access to finance and to strengthen microfinance institutions’ capacity for providing access to finance/microfinance services to Lebanese micro and small enterprises. The program assists micro and small enterprises by maximizing the availability of loans for borrowers in sectors and areas that have traditionally had difficulty accessing business finance. The LIM Program is funded by USAID the through Leader with Associate Cooperative Agreement number: EEM-A-00-04-00002-00 to the Volunteers for Economic Growth Alliance (VEGA), and is implemented through Associate Award number: 268-A- 00-09-0003 by the International Executive Service Corps (IESC).

Assessment Methodology: The assessment is based on a desk review of relevant program documents, eight days of interviews and focus groups with LIM and MFIs, and meetings with USAID/Lebanon staff.

The following documents were included in the desk review:

• 2014 IESC MFI sub-grant application documents, financial statements and analysis

• 4th Quarter 2014 LIM Report

• 2014 MFI Client Survey (as much as is available, the survey is still in progress)

• Lebanon Microfinance Association Draft Business Plan

• 2014 LIM Mid-Term Program Evaluation (conducted by Social Impact)

• MixMarket report for Lebanon, including self-reported MFI financials

• 2010 Microfinance Sector Assessment report prepared by IESC

• 2014 Microfinance Sector Assessment Scope of Work

Information from the above documents was supplemented by on-site semi-structured interviews and focus group discussions with the following sets of interview subjects:

• CEOs/Executive Directors of all LIM partner MFIs (9)

• Client Focus groups (Makhzoumi Foundation, AEP, Al Majmoua,)

• Loan Officers, Vocational Trainers, Area Supervisors (several MFIs)

• President of the Lebanon Microfinance Association

• Technical Advisor for PlaNet Finance/Lebanon

• Technical team from CGAP engaged in a sector-wide case study of cross-lending

• USAID/Lebanon staff

II. MFI Institutional Capacity This section discusses several aspects of institutional capacity including competencies at the senior and mid-staff levels, and building staff capacity through training.

Executive and senior-level capacity: Several themes regarding institutional capacity emerged from interviews with the MFI executives. Discussions were framed around competencies at the executive/senior management level, as well as middle management/loan officer levels. At the senior level, nearly all the MFIs self-assessed a high level of technical competence in finance and operations, mostly gained through educational and professional backgrounds in the formal financial sector. However, based on information gathered for this report, even at the senior staff level, additional exposure to and training on micro-finance specific skills and competencies would be useful.

This would be beneficial to the sector as a whole to better pursue their stated poverty-oriented missions. Examples of useful topics include development of better pro-poor financial products, better-informed and nuanced approaches to poor loan applicants, and tracking social performance.

In addition, training in sector-specific products such as agriculture would be beneficial, as well as developing better market research capabilities.

MFI executives all cited management “soft skills” as a potential area to focus on for their own professional development. The executives also discussed the challenges of recruiting, training, and retaining good quality staff at the middle management and field level as key constraints to their growth. The LIM program has provided some opportunities for training senior staff in areas such as leadership development, staff recruitment and interviewing, effective communication, and other human resources-related competencies. Nearly all the executives interviewed expressed a recognition that additional training in staff management and soft skills would be quite valuable to address critical human resources challenges as the MFI sector matures and continues to expand. Training in risk assessment and management would also be beneficial.

Loan officer and mid-level staff capacity: Capacity development at the middle management and loan officer/field staff level is a key constraint that was discussed in interviews with the MFI executives as well as with the loan officers themselves. All the MFIs have depended heavily on the loan officer training provided by the LIM program; this contribution will be missed as the program ends. Developing capacity at the middle management and loan officer level will continue to be one of the most significant challenges to the future growth and maturity of Lebanon’s microfinance sector. Specific loan officer competencies that were discussed at the operational level include managing delinquencies, client relations, and, in some MFIs, basic computer skills such as Excel.

Another important mid-level competency that was discussed was training-of-trainers skills development to enable field staff to better coach their clients on financial literacy and other entrepreneurship skills. In addition, while microfinance-specific technical capacity at the senior management level is generally good, improved sector knowledge is lacking at the mid-level for several of the MFIs. Specific examples include the need for better understanding of key financial indicators and ratios, improved risk assessment, and portfolio analysis.

Capacity development of mid-level and field staff will be especially critical to those MFIs that have adopted or will eventually adopt a decentralized business model to expand, better serve their clients, and improve operational efficiencies. Despite the universal recognition that mid-level training is of the highest priority, the MFIs are challenged by the considerable investment in cost and time needed to develop a high caliber cadre of loan officers and other key mid-level professional staff. USAID’s support for training was discussed in nearly every MFI interview as having been a critical investment for the sector as a whole.

Training modes: Approaches to training for new loan officers vary among the MFIs. They include a mix of internal training plus supervisor or peer shadowing and classroom training provided by LIM for basic competencies such as loan applications and tracking. Several MFIs, including Al Majmoua and IBDAA have well-developed internal training programs for their loan officers, while others have relied almost entirely upon LIM for staff training. Several MFIs stated a preference for their own internal training and orientation for new loan officers, which sometimes includes a performance probation period. However, they also found it valuable to supplement their internal training and also sent loan officers to participate with LIM’s training.

When asked in interviews, MFI staff generally indicated a preference for training outside their MFIs as they found value in the opportunity for sharing their ideas and experiences among peers from other institutions. This was particularly true for some loan officers who work in relatively isolated communities and do not have much opportunity for engaging with peers. There was also a general consensus among the MFI executives that they would like to see Lebanon’s Microfinance Association play a facilitator role in providing training opportunities for sector capacity development

Training at the executive/senior level for most topic areas (e.g., such as soft skills and human resources training) offers the most value when done in a setting where ideas can be discussed among peers and counterparts at other MFIs. However, several MFI executives discussed the possibility of using consultant technical advisors or mentors to address challenges unique to their institutions such as development of tailored loan products, troubleshooting portfolio quality issues, developing staff incentive schemes, or developing technical capacity among their boards of directors.

MFI network resources: Sanabel1 is a network of Arab country MFIs that has provided high quality, Arab-language trainers through LIM that have been well received. Sanabel’s curriculum is best suited for mid-level staff and management. Topics include financial, institutional, strategic, and fundamental support topics; a list of courses is available on Sanabel’s website.2 Sanabel has relationships with all the MFIs, and the Microfinance Association is developing a long-term relationship with Sanabel for training and networking within the region. The SEEP network also offers technical assistance and networking opportunities, including assistance to help nascent microfinance associations.

Some individual MFIs also have additional partnerships with a number of international non-governmental organizations (NGOs) and networks. The following list of key partners includes those reported to the MixMarket and those mentioned in interviews with the MFI executives; it is not meant to be exhaustive. These relationships may include donor funding, technical assistance, training, and/or social marketing.

1 www.sanabelnetwork.org , Arab region microfinance network http://www.sanabelnetwork.org/

• Al Majmoua: AECID,3 Grameen Foundation,4 Kiva,5 MFN,6 PlaNIS,7 Save the Children,8

WWB9

• IBDAA: AGFUND,10 Arab Open University11

• VITAS SAL: Global Communities,12 Kiva

Key Recommendations to Support Capacity Building Based on a review of LIM’s mid-term performance evaluation, IESC’s 2014 sub-grant application analysis and MFI interview notes, several key areas were identified as having potential for high impact from future USAID investment. As discussed above, support for executive and senior staff training in high-level personnel management, human resources and other soft skills would improve the MFIs capacities to recruit and retain loan officers and critical mid-level staff. MFIs in Lebanon face a striking disadvantage in the labor market for mid-level professionals who are also qualified for more lucrative positions in the banks or other businesses, often in safer and more secure communities than those where MFI clients live. As a result, MFIs need to be equal or superior in HR-related capacity in order to compete for qualified loan officers and other mid-level staff. USAID could provide support for seminars and classroom training, exposure trips to other MFIs outside Lebanon, or consultants with specialist skills in key management areas. In addition, specialized training in certain sector-specific financial products such as agriculture finance would be useful to encourage lending in those areas. Most MFIs involved in agricultural lending have only one or two general agriculture products such as production or cattle. Training in market research for specific value chains would enable MFIs to tailor products to key agriculture sectors. Other important training areas include measuring and managing social performance, and developing better products and pro-poor policies.

Continued USAID support for loan officer and mid-level staff training would also have high impact on improved capacity. Limited numbers of potential qualified mid-level personnel, as well as limitations in skills and experience are among the most critical limiting factors to the future expansion and maturity of Lebanon’s microfinance sector. Staff training is expensive, and donor funding would help build a cadre of microfinance professionals that can meet the current and future staffing needs. LIM’s training events for new and existing loan officers have been very successful in building this capacity. Support for continued mid-level technical training could be facilitated by the Microfinance Association using the Sanabel network’s curriculum and trainers, as well as local and international consultants where appropriate. The Arab Open University is another potential local training resource. It is a current partner with IBDAA that offers management courses and could

3 Agencia Española de Cooperación Internacional Para el Desarrollo (AECID; The Spanish Agency for International

Development Cooperation): www.aecid.es/EN/aedid 4 Grameen Foundation (USA NGO): www.grameenfoundation.org USA NGO 5 Kiva (international NGO): www.kiva.org 6 Microfinance Centre (international NGO in Poland): www.mfc.org.pl/ 7 Investment advisory business unit of PlaNet Finance: www.planetfinancegroup.org 8 Save the Children (USA-based international NGO): www.savethechildren.org 9 Women’s World Banking (WWB – international NGO): www.womensworldbanking.org 10 Arab Gulf Programme for Development (AGFUND - Arab states international NGO): www.agfund.org 11 Arab Open University- Lebanon branch: www.aou.edu.lb 12 Global Communities (international NGO, formerly CHF): www.globalcommunities.org http://www.aecid.es/EN/aedid http://www.grameenfoundation.org/ http://www.kiva.org/ http://www.planetfinancegroup.org/ http://www.savethechildren.org/ http://www.womensworldbanking.org/ http://www.agfund.org/ http://www.aou.edu.lb/ http://www.globalcommunities.org/ provide trainers or specialized curriculum development. Other potential training resources include Grameen Jameel,13 CGAP,14 and the Higher Institute for Banking Studies (ISEB).15

III. Financial Performance and Sustainability The diversity among the institutions in size, institution type, and market niche is illustrated in Table

1. The table is intended to be illustrative of the overall sector. Please note that the data have been taken from several sources including the MFIs’ self-reported data for LIM’s 2014 RFA, MIX Market16, and LIM’s 2013 final quarterly report to USAID. Some data may not be precisely reconciled between sources. The majority of the MFI partners are operationally sustainable; they are able to cover all their operating costs and actual costs of funds through interest revenue. Of the MFIs below 100 per cent operational sustainability, only Association d’Entrade Professionelle (AEP) is of concern and is further discussed below.

13 Grameen Jameel (Research, consulting, and training resource in the MENA region associated with the Grameen network of MFIs): www.grameen-jameel.com 14 Consultative Group to Assist the Poor (CGAP): http://www.cgap.org/ 15 ISEB is a training program of the Association of Banks in Lebanon. http://www.abl.org.lb 16 MixMarket: www.mixmarket.org/mfi/country/Lebanon http://www.grameen-jameel.com/ http://www.cgap.org/ http://www.abl.org.lb/ http://www.mixmarket.org/mfi/country/Lebanon

Table 1. Sector Overview of Finance and Sustainability

ADR

(Association d’Aide au Developpeme nt Rural)

AEP

(Association d’Entrade

Professionell e)

Al Majmoua

CLD

(Cooperative

Libanaise pour le

Developpemen t)

EDF

(Entrepreneuri al Development Foundation)

EMKAN IBDAA Makhzou mi

Foundatio n

VITAS

SAL

Total number clients

1,854 353 47,206 96 530 14,000 3,110 400 15,592 (2012)

Total Loan Volume $USD

$3,279,647 $2,566,632 $34,785,67

$2,713,281 $1,535,914 $22,239,37

$5,199,00

$1,049,098 $20,115,59

Operational Sustainability

99% 91% (2nd quarter

2013 estimate)

94% 106% n/a 114% 46% 130% (2011)

118% (2012)

PAR> 30 days (by volume)

0% 17% (no write-off policy)

0.50% 13% 12% 3.30% 0.60% 7.2% (2011)

5.1% (2012)

Institution Type/oversig ht

NGO

(Ministry of

Interior)

NGO

(Ministry of

Interior)

NGO

(Ministry of Interior)

Cooperative (Ministry of Agriculture)

Licensed Financial

Institution (Banque du

Liban [BDL])

Licensed Financial

Institution

(BDL)

NGO

(Ministry of Interior)

NGO

(Ministry of

Interior)

Licensed Financial

Institution

(BDL)

Agricultural Lending yes yes yes yes no yes yes no yes

Access to reserve fund finance no no no no yes yes no no yes

Access to capital cited as "major constraint" no yes no yes no no no no no

* n/a not available

In addition to USAID’s sub-grant funding through the LIM program, sources of capital include local charities and international NGO donors and commercial bank loans at market or near-market rates.

In addition, BDL permits commercial banks to loan up to five percent of their mandatory reserves for small loans or as institutional loans to MFIs, most often at concessional interest rates varying between two to four percent. With some exceptions, most MFIs did not consider access to capital as being one of their major constraints to growth or offering additional services. While USAID’s sub-grants under LIM have been instrumental to reaching targeted people and business sectors, the microfinance sector has significantly matured, and most MFIs have diversified their sources of capital funding. In addition, Lebanon’s economy has stagnated and security is also a great concern, and these realities are causing MFIs to scale back plans for expansion into new communities and take a more risk-adverse approach to lending.

Portfolio quality across the sector is mixed. The 30-day Portfolio at Risk (PAR) is a concern with several MFIs. Contributing factors may include issues at the loan officer level such as lack of oversight, need for additional training, or misplaced performance incentives. Other potential causes may include client over-indebtedness. Many MFI clients actively participated in Lebanon’s large consumer credit market through banks, credit cards and vendors. In addition, MFI loan products are in some cases passed along to family members for purposes other than the business that was stated in the loan agreement. The paragraphs below summarize the financial situations of the MFIs based on information from interviews with senior executives and LIM’s notes from the 2014 RFA and MixMarket data.

ADR (Association d’Aide au Developpement Rural) has been growing slowly for the past several years and will continue to exercise caution in their plans for the future. They have adequate sources of capital for their anticipated growth plans for next year. ADR’s PAR>30 is excellent at less than one percent, with an efficient turnover of on-lending capital. ADR is interested in exploring some loan products for agriculture and fishermen if the risk could be mitigated through continued USAID support, including a possible loan guarantee fund.

AEP (Association d’Entrade Professionelle) depends on volunteers for much of its field staff and has remained small and dependent on USAID and other donor sources for working capital.

However, it has recently demonstrated its commitment to achieving sustainability through agreeing to increase the low interest rates charged to clients. AEP’s 17% PAR>30 is largely a result of a past policy to not write off long-delinquent loans. However, AEP’s Board of Directors has recently agreed to implement a write-off policy for the first time. These measures will greatly improve the financial picture. AEP is Lebanon’s oldest MFI, and it occupies a critical and unique market niche in exclusively serving the very poor, with much to offer the sector in its commitment to social performance.

Al Majmoua is Lebanon’s largest MFI by far. It maintains its operational sustainability at or near 100 percent in order to minimize interest rates while allowing for modest growth. Al Majmoua does not currently have access to concessional loan reserve funds through a bank partnership, and most of its capital is raised through commercial loans at six to eight percent interest. Portfolio quality is reflected in a PAR>30 of less than one percent. While access to capital is not a major constraint to growth, Al Majmoua indicated that they would benefit from financial support in the form of mitigated risk for outreach to clients of particular interest to USAID. These clients include start-up entrepreneurs, vulnerable clients or communities in insecure areas, including a possible loan loss guarantee fund that assumes fifty percent or more of these higher risk loans.

CLD (Cooperative Libanaise pour le Developpement) is Lebanon’s smallest MFI. CLD provides larger (typically $20,000), mostly agricultural loans to a few of the cooperative’s members. CLD’s capital comes from equity and commercial loans. While their PAR>30 is reported at 13 percent, the repayment rate is more than 97 percent on their portfolio, which is entirely backed by mortgages.

CLD will require additional sources of capital and leverage in order to grow significantly.

EDF (Entrepreneurial Development Foundation) is an MFI that acts as an agent for two commercial banks, Credit Libanais, and FNB. Until recently, these two commercial banks have accepted all the credit risk for EDF’s clients and provided all the capital, while sharing interest revenue with EDF. The unusual financial arrangement between EDF and the banks make for opaque financial analyses of the microfinance portfolio. Owing to the ample reserve funds available from EDF’s partner banks, working capital is not a constraint. A loan guarantee agreement between EDF and USAID to encourage targeted expansion could be difficult to put together as it would also require approval from the banks.

EMKAN SAL was first founded as an NGO and was purchased by BankMed in 2012 to become a regulated financial institution that is a subsidiary of BankMed, which is in turn part of Lebanon’s Hariri Group of companies. As a result of the merger, some current financial ratios, including the operational sustainability ratio, are not straightforward to determine; however Emkan reported a profit at the end of 2012. Emkan’s PAR>30 reflects high portfolio quality. Given the size of Emkan’s $22 million portfolio, USAID’s $1.2 million has been critical for working capital. Emkan’s CEO expressed concerns over market distortions that may result from a possible USAID guarantee fund used to encourage higher risk in their portfolio, pointing to Kafalat as a poor example, a Lebanese state-owned financial company that is providing a seventy-five percent risk share to encourage banks to move down-market to SME lending.

IBDAA was established in 2012 by AGFUND, Saudi Prince Talal’s Arab Gulf Fund for Development, which has since provided more than $9 million in start-up capital, enabling rapid growth and market prominence. The forty-six percent Operational Sustainability figure reported for IBDAA reflects the high startup costs. Conservative projections show that IBDAA is likely to become operationally sustainable in 2014 as marginal costs decrease and its portfolio continues to expand. PAR>30 below one percent reflects excellent portfolio quality despite the rapid growth.

Now that IBDAA is firmly established, growth is expected to slow, especially given Lebanon’s recent economic downturn. However, IBDAA has expressed interest in leveraging a loan guarantee scheme for higher risk youth and start-up loans, going as far as making inquiries to USAID’s MENA Regional Bureau as to the possibility.

Makhzoumi Foundation has a small portfolio of just 400 clients. Mahkzoumi co-mingles its accounting between its microfinance operations and non-financial charitable activities. As a result, it is difficult to ascertain key financial ratios including operational sustainability, self-reported at 130 percent, due in part to its lack of debt, as the founder heavily subsidizes operations through personal contributions. Portfolio quality is of some concern, with PAR>30 at more than seven percent.

Makhzoumi’s primary activities include vocational training, with loans offered to some program graduates.

VITAS SAL is a licensed financial institution with an outstanding portfolio of more than $20 million, with strong financials and portfolio quality, and no need for further USAID support for on-lending capital.

Key Recommendations to Support MFI Sustainability With the exception of AEP, all LIM partner MFIs have achieved operational sustainability, or are on track to achieve operational sustainability soon. In general, USAID could provide support to encourage the MFIs to reach down-market and increase lending to key target groups. Support could come in the form of competitive innovation grants for new pro-poor product development.

AEP’s poverty focus results in greater challenges given that they focus on smaller loan amounts and longer terms and have lower revenues as compared with other MFIs in Lebanon. A case can be made that additional USAID grant funding for AEP would be a sound investment in order to support the commitment that they have already made to USAID to achieve operational sustainability. This could be contingent upon a well-documented business plan that includes a combination of key elements such as increased interest rates, more effective collections, and modest growth to a sustainable scale. Ample evidence that supports the provision of additional grant funding beyond the $700,000 investment that USAID has already made (including $150,000 in recent proposed Feed the Future funding) can be found in numerous success stories from USAID’s Implementation Grants Program (IGP),17 providing the additional critical mass in capital that is often needed to grow poverty-focused MFIs to a sustainable scale.

IV. MFI Services and Support Interviews with MFI staff included discussions of several key tools and strategies to increase client outreach and improve services. These include the use of a guarantee fund to mitigate the risk of moving down market, technology tools to improve efficiency and reduce costs, and development of a credit information bureau to improve portfolio quality and prevent client over-indebtedness.

Credit Guarantee Fund: Section IV above includes some details of how receptive the MFIs may be to the idea of USAID providing a way to limit risk for moving down market, including additional loans for start-up businesses through the provision of a credit guarantee fund. In general, most MFI executives expressed cautious optimism for the idea, with some potential caveats, including possible compliance issues with lending guidelines established with their boards of directors. In particular, concerns were raised regarding the possibility of increased exposure resulting from additional start-up loans or moving into certain communities with high security risk, even when the portfolio risk were to be mitigated by the guarantee fund. However, there are clear differences between the MFIs on this issue, with several expressing agreement that a guarantee fund would enable them to share the risk in providing additional loans to, for instance, youth and start-up entrepreneurs.

The 2010 Microfinance Sector Assessment and Mid-term Evaluation both include a brief explanation of the USAID Development Credit Authority (DCA). USAID’s DCA is a tool to encourage the expansion of financial services to underserved markets through sharing the risk of loan loss by up to fifty percent. This allows MFIs to leverage private capital, move down-market or

17 https://www.microlinks.org/studying-past-looking-future-let-thousand-flowers-bloom-implementation-grant-program https://www.microlinks.org/studying-past-looking-future-let-thousand-flowers-bloom-implementation-grant-program https://www.microlinks.org/studying-past-looking-future-let-thousand-flowers-bloom-implementation-grant-program demonstrate the viability of innovative financial products. Several financial instruments may be used under the DCA including:

• Loan guarantees for larger, single institutional loans to MFIs.

• Loan portfolio guarantees that provide partial coverage to an MFI’s portfolio, or part of a portfolio.

• Portable guarantee that provides a commitment through which the borrower may use to secure more advantageous terms from a lender.

The potential of using the DCA mechanism for the MFI sector in Lebanon was discussed in the 2010 Sector Assessment. The MFIs that are regulated by the Central Bank, including EDF, EMKAN and VITAS, expressed little interest in the DCA because they have access to Kafalat, a Lebanese government program that already provides loan guarantees under terms likely to be more favorable than the DCA. One executive expressed concerns about “market distortion” resulting from a DCA-type intervention. On the other hand, however, the NGO-based MFIs that are not under bank supervision cannot accept loans or guarantees from Kafalat, and they expressed interest in DCA support, assuming they are able to meet the conditions commonly required. The DCA criteria include conditions of profitability, liquidity, audited financials, and assessments. Some of the smaller MFIs may be unable to meet these conditions. However, for the others the DCA may be a particularly useful tool to promote agricultural lending and outreach to higher risk communities. It should be noted that several MFI executives indicated that a loan guarantee such as the DCA may not, by itself, be enough incentive for significantly increasing loans for start-up businesses without additional interventions such as providing for entrepreneurship training.

Technology Tools: There is a consensus that the current technology infrastructure in Lebanon is insufficient to support mobile banking for MFIs in the way that mobile banking is implemented in other countries. In addition, there are regulatory constraints in Lebanon that prevent mobile banking even for Lebanon’s commercial banks. While the situation is improving, the MFI executives all indicated that any mobile banking initiatives are not a current possibility, although this may be a possibility in the future. The IFC produced a feasibility assessment for Lebanon in 2012 that describes the current situation18. The MFIs are monitoring any changes in Lebanon’s technology environment and some are beginning to use Cash United, a limited cash payment system, for loan payments.

However, there is great interest in adopting the use of tablet computers such as I-Pads for use in the field in order to increase efficiencies in loan applications, track payment histories and access client data. Al Majmoua has already implemented a cell phone application that, while it does not allow uploading data from the field, does allow field staff to access payment histories and client information. The application has been developed as a feature of Al Majmoua’s Mifos management information system, open-sourced through the Grameen Foundation. Their experience with mobile data access is a good indication of the potential value of other similar tools for other MFIs. Al http://www.ifc.org/wps/wcm/connect/12ea758043efb70295dabd869243d457/Lebanon+Scoping+Report+Public.pdf

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Majmoua’s loan officers find it invaluable and universally use it on a voluntary basis, accessing it through their own personal phones.

The use of tablet-based tools that are capable of both uploading and downloading data does face some challenges, however. Electronic signatures do not have legal acceptance in Lebanon, so loan applications still need to be signed on paper. Some areas in rural or mountainous areas also have limited phone connectivity, although this is a technical issue that can be worked around if the loan officer is able to connect and update data from the office on a regular basis. IBDAA has already deployed I-Pad technology in the field on a pilot basis and is planning for expansion. Other MFIs have also begun planning for tablet technology. The key constraint is available funding necessary for the initial investment in equipment, application development and support, and training.

Credit Information Bureau: Some MFIs have concerns about clients accessing multiple loans from different providers (including other MFIs, banks and moneylenders) leading to repayment problems for the MFI and over-indebtedness by the clients. At this time, these concerns are based on anecdotal information from field-based staff. NGO-based MFIs (see the list in Table 1 above) do not have access to the client database that is maintained and shared by the banks and regulated MFIs. The Microfinance Centre, in partnership with CGAP and the Sanabel network, has recently initiated a research study of cross-lending and client debt in Lebanon. During a presentation of the research plan, they estimated an approximate ten percent market penetration for microfinance in Lebanon. Based on similar studies in other countries, they estimate that the microfinance sector in Lebanon has reached a point where cross-lending may start to become an issue. The case study is estimated to be complete in the first quarter of 2015. Results will include estimates of the scope of cross-lending, including granular data on specific communities, and some insights as to the issues behind the problem.

As the microfinance sector continues to grow, this is sure to become an issue at some point in the future. Solutions will need to include a means of credit information sharing between all the MFIs and between the MFIs, banks and other lenders. This is a key focus area for the Microfinance Association to lead efforts to develop a credit sharing system (or to be integrated into the existing system) and promote regulatory reforms needed to allow the microfinance sector to responsibly share client information. Results from the research study will provide insight as to necessary next steps.

Key Recommendations for USAID Support to Enhance MFI Services Post-LIM, the individual MFIs face diverse challenges to funding for on-lending capital; most do not consider access to capital to be a major constraint at all. However, most are also reluctant to accept the increased portfolio risk of significant increases in loans for start-ups, youth, and the very poor. Support through a loan guarantee fund such as the DCA mechanism that shares risk may be enough of an incentive to increase lending to these client groups for some MFIs, possibly including ADR, AEP, Al Majmoua, IBDAA, and Makhzoumi Foundation, who indicated cautious optimism.

Other MFIs either would not be interested or could not accept the terms because of constraints of their commercial bank partners. As noted above, some MFIs would be unable or unwilling to increase their exposure from start-up loans even with DCA risk mitigation. Indeed, a key finding of the mid-term LIM evaluation was that USAID sub-grants intended to increase the number of start-up loans had only modest results, with some MFIs simply shifting their existing start-ups over to

LIM funding in order to meet grant targets. On the other hand, the DCA could be used in order to catalyze the growth of some MFIs’ overall portfolio at a time when expansion is slowing for the sector as a whole. The value of USAID’s credit guarantee support would vary widely on a case by case basis depending on the MFI.

USAID’s support for field deployment of tablet technology or the wider use and integration of mobile banking applications would be well received by most of the MFIs, and would result in improved efficiencies for field staff who work long hours, as well as faster loan process times and improved client data quality. Lack of investment funding is the key constraint for most MFIs looking to use tablets in the field.

USAID could also provide support to further the eventual development of a credit-sharing bureau for MFIs. Initial opportunities for investment could include targeted follow-on studies based on the initial results by the ongoing cross-lending case study. Other opportunities for later investment could include legal and regulatory research to enable regulatory changes that allow for credit sharing, study tour exchanges to countries that have developed MFI credit bureaus, and high level technical assistance in planning an information system for the Microfinance Association.

V. Entrepreneurship Needs of MFI Clients Information and recommendations for this section are based primarily on a limited number of client interviews and focus groups from AEP, Mahkzoumi Foundation and Al Moujmoua. A more in-depth survey is currently in progress that includes several questions regarding clients’ self-reported needs for entrepreneurship skills development. However, at this time (December, 2014) approximately half the data from four MFIs has been collected, and there has not been analysis of that data beyond a basic frequency compilation. However, the survey only includes current clients, most of whom already have well-established businesses. The scope of the survey does not include questions regarding sector-specific needs for training and technical assistance. Underserved groups such as women and youth are constrained by the lack of business knowledge or experience, although the specific needs are not fully understood without further investigation.

Given the diversity of Lebanon’s MFI business clients in different economic sectors and levels of business expertise and income, it is difficult to generalize the needs for support in developing entrepreneurship competencies. Information from the mid-term evaluation for the LIM program and interviews with MFI senior and field staff makes it clear that MFIs face significant challenges both real and perceived in supporting start-up businesses. While MFIs would like to increase the number of loans for start-ups in principal, in practice most limit themselves to providing start-up loans only under mitigating conditions. These conditions include clients with significant experience and employment history with a given type of enterprise, who have family working with her with the necessary experience, or have received significant training outside the MFI that provides evidence of a likelihood to succeed. Indeed, these issues are not unique to Lebanon; providing loans to start-up businesses is risky everywhere. Most MFIs do not have the resources to offer technical or vocational training, at least enough to enable a potential inexperienced entrepreneur to have a reasonable chance of starting a viable business. MFIs that do offer training services are heavily subsidized through donor funds, including Mahkzoumi Foundation, which provides comprehensive vocational training and certification for ICT, salon services, and dental hygiene technicians. Some successful graduates of these courses are eligible to receive loans to start their own businesses. ADR also provides some vocational training and start-up loans in agriculture and fishing. However, these are exceptions.

In addition to the high cost of training potential entrepreneurs to start businesses, field staff and vocational trainers from several MFIs discussed the challenge they often faced - a perceived lack of motivation by potential or new entrepreneurs to participate in training. Clients report difficulty in attending training events because of such issues as time conflicts or transportation constraints. In addition, some clients do not perceive value in entrepreneurship training, either because they already have established successful businesses or their lack of experience does not allow for recognition of the importance of certain key business skills. Based on anecdotal responses from client focus groups, it appears that clients from MFIs with well-established vocational programs such as Makhzoumi Foundation generally were more receptive to the idea of entrepreneurship training than other MFIs without such a strong training component. However, there is insufficient data to support or refute this hypothesis. In fact, the limited data from the (currently incomplete) client survey, including clients from both Makhzoumi Foundation and ADR, representing the agribusiness, ICT and tourism sectors shows a nearly unanimous negative response to a perceived need for entrepreneurial training. This observation may reflect what is to be expected from the entire data set once complete, or may be due to an issue with how the survey subjects interpreted the questions. In any case, it is clear that access to entrepreneurship training is not a universally perceived need by the MFI clients. However, it is difficult to say much more than that with the available data.

Based on interviews and focus groups with clients and MFI field staff, it is clear that there are some who would welcome, and benefit from, access to entrepreneurship training. Skill areas that were discussed include business promotion and marketing, use of social media, accounting, making business plans, and ensuring customer satisfaction. In addition, targeted skills training may be useful for particular sectors.

Key Recommendations to Support Client Capacity Development in Entrepreneurship Several MFIs indicated that providing vocational or entrepreneurship training is outside the scope of their mission or interest. In addition, there is a broad diversity in clients’ knowledge and business experience. For this reason, any support for client training in entrepreneurship would need to be designed for the unique needs of a given MFI’s clientele. When designing training events or programs, careful attention will need to be made to ensure that training meets client needs and limitations, including specifically taking into account training topics, learning styles (e.g., classroom

vs. experiential), culture and gender concerns, and timing and logistics needs of different target clients.