Kiva Stories from the Field

By Mohammed Al-Shawaf, KF9 Palestine

Before proceeding, let me first state that this is not a political blog.  I neither have the expertise nor desire to engage in the complex web of conflict–latent or otherwise–that surrounds the major events of the last decade in Palestine.  I will attempt to reference and explain only the events that help me tell the story of the resiliency of the Palestinian microfinance sector and in particular, of Ryada.  I implore those interested in learning more to do just that.  Although it requires a bit of fiddling around, the Google News Timeline is a fine tool that allows you to view major news headlines filtered by keywords and timeframes.

When I was 3, Hurricane Hugo wreaked havoc throughout the Southeast region, enveloping my hometown of Charlotte, NC in its wake.  I can even recall a picture of myself standing next to the shriveled stump of what was once a broad, formidable tree that overlooked my grandma’s house.

Lately, I’ve been thinking about contingency planning. I can’t remember what my family did in anticipation of that storm, but I’m sure it was something.  For homes chronically threatened by hurricane season, preparatory measures are often taken: supply kits are filled, windows are reinforced and sandbags are at the ready.  But what would happen if these homes were just as likely to succumb to blazing fires as they were to hurricane flooding? What if it instead of a natural disaster, a plague swept through the region?  What about a war?

Welcome to Palestinian microfinance where contingency plans are made for crises unimagined.

The disaster preparedness metaphor stems from a talk I had with Izz Tawil, Operations Manager of Ryada.  Izz has worked in microfinance for over 14 years and started in the industry as a loan officer.  During one of our many eye-opening talks, he spoke about the difficulty in planning for a “worst case scenario” because it would presume that he (or anyone else in the industry for that matter) knew what that scenario would look like.

“There’s always a different crisis that arises here and each time it’s new, so you can’t plan for it.  [Over the last decade it's been the] crisis of intifada, then of a new government, then of the salary crisis [as a result of the new government], then Hamas’ takeover in Gaza, then the Gaza war…”

Sector-specific data is hard to come by for this entire period.  But in 2005, the Palestinian Network for Small and Microfinance (Sharakeh) began publishing industry-wide figures that show the extraordinary effect one of these crises–the salary freeze across Palestinian Authority (PA) employees–had on the industry and economy as a whole. 

Following Hamas’ win in parliamentary elections across the West Bank and Gaza in January 2006, western aid to the PA was largely halted.  The freezing of these revenues streams, which previously flowed from the PA’s coffers to the salaries of its 165,000 employees meant that roughly 30% of Palestinians were no longer receiving paychecks.

Although that number in itself is shocking, it is only tells part of the story.  To make the effect of the crisis clear to me, Izz sketched a rudimentary diagram of the Palestinian economy (reproduced below).

"Closed Cash Circle" During Salary Freeze ('06-'07)

Izz refers to the economy as a “closed cash circle” where sectors rely on each other’s transactions for survival.  Although outside revenue streams exist, they are few and very specific.  Traditional revenue generators like tourism and exports are non-factors. Instead, it’s aid and to a lesser extent, remittances from Palestinians living abroad and sending money back to their families.

When the new government was elected, the “aid” spigot went dry.  But political pressure was also placed on banks to stop transferring money into the country.  So turn off the “remittances” stream as well.  The Palestinian economy was now truly a “closed cash circle.”

But as gloomy as this scenario sounds, shouldn’t microfinance, a sector that touts private enterprise and “bottom-up” development, be the one bright spot in this economic malaise?

Recall that if you worked in the government– nearly 1 in 3 Palestinians–you no longer had an income.  The effect on the microfinance sector from this vantage point is direct and unmistakable.  If you had a home improvement loan (from Ryada or any other MFI), monthly payments weren’t anywhere near the top of your priorities.

The indirect effect is less obvious, but no less significant.  Family bonds play an important role in Palestinian life.  So if you could count yourself as fortunate enough to still be receiving an income–in the form of a private salary or as a small business owner–you were obliged to help your brother or your sister or your cousin or any family member less fortunate than you get through the crisis.

To illustrate this case, let’s say you owned a retail store that sold cosmetic products. You took out a loan to diversify your product offerings and purchased higher-priced imports.  Once the freeze hit, your brother lost his salary so your disposable income went to support him and his family.  From a business perspective, you also lost 1/3 of your market.  And as for the remainder–those still earning an income from the private sector–they’re facing the same economic conundrum you are.  So what about that loan?

PAR value, or Portfolio at Risk, is one of  the most popular statistics in judging the portfolio quality and performance of microfinance institutions.  The microfinance policy center at the World Bank, CGAP, states that a PAR 30 (meaning the portion of the MFI’s portfolio whose payments are more than 30 days past due) “above 5 or 10% is a sign of trouble…[because] high delinquency makes financial sustainability impossible for an institution.  

In 2006, the Palestinian microfinance sector’s PAR 30 was 47%.

How did it rebound?  And what planning, if any, is being done to mitigate the next crisis?  Stay tuned.

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Mohammed Al-Shawaf is serving as a Kiva Fellow with Ryada and FATEN, two new field partners based in Ramallah (West Bank).