Zero Interest Microfinance

Civilian vs. Military Views on Post-Conflict Microfinance in Iraq

By Long Le

In order for Iraqi citizens to weather an on-going crisis, the need for microfinance in Iraq is more urgently now than ever, according to The Consultative Group to Assist the Poor (CGAP).

By many accounts, the battle against the so-called Islamic State in mid-2014 has suppressed the emergence of microfinance sector in Iraq, of which has provided credible financing for nearly 100,000 low-income Iraqi entrepreneurs. During Saddam Hussein’s rule, there were no microfinance institutions in Iraq, and that the country’s culture of credit loans as practiced by savvy merchants were undermined by Saddam’s attempt to establish a statist economy. In the post-Saddam era, the US-led coalition had expended more than $50 million to establish and maintain microfinance institutions in Iraq.  Thus, since 2003, there has been 12 credit-focused microfinance institutions operating across Iraq’s 18 provinces, and in which repayment rate has been as high as 98 percent.

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Source: A World Bank-CGAP Report on “The legal and regulatory framework for microfinance in Iraq” (2016).

However, as Iraqi authorities continue to battle ISIS, at least four microfinance institutions operating in IS-controlled territory have stopped their lending operations – eliminating more than 20,000 active clients and resulting in 42,000 lost job opportunities. According to a 2014 survey, only 11 percent of Iraq’s adult population has an account at a formal institution, and an overwhelming majority borrowed informally (70 percent) compared to only 4 percent who borrowed formally. Therefore, CGAP has advocated that, in the midst of a recurring conflict and fragility, the resume growth of microfinance institutions should be a priority – helping people manage economic setbacks and support their economic resilience. To ramp up support to Iraq’s microfinance sector, CGAP has recommended technical assistance in credit lending methodology to gain access to clients in conflict zones. In addition, the sector’s regulatory and legal framework needs to become much more conducive to long-term growth and sustainability.

The Military as Providers of Iraq’s Microfinance

Interestingly, what’s being overlooked is that Iraq’s emerging microfinance industry has directly been shaped by the military goals of Government of Iraq and US-led coalition.

That is, while there is no consensus among civilian and international organizations that microfinance is a conflict resolution tool, the US-led coalition and Government of Iraq have accepted that economic development via microfinance is often a crucial aspect in completing the military mission. In contrast to the conventional microfinance industry, Government of Iraq and US-led coalition were willing to establish microfinance institutions in non-secure environment. According to some reports, because US military ground commanders in Iraq and Afghanistan each received about five thousand dollars a month to address economic inclusion, more are using microfinance to optimize fund dispersal to strengthen communities in conflict areas.

Importantly, however, the willingness to accept risk in non-secure locations is not about explicitly reducing poverty. Rather microfinance intervention is about creating quality employment for young men (and even former combatants) in order to reduce support for the insurgency. For example, through the Provincial Reconstruction Teams, the US-led coalition utilized microfinance to help the Iraqi authorities (right after shooting stops) in establishing vocational training programs across Iraq for the unskilled population with focus on the young male population.

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Source: “Microfinance during conflict: Iraq, 2003–2007” by Frank Gunter (2009).

The above explains, why despite not having degree of political stability and sufficient economic activity along with a stable client population from 2003-2007, microfinance institutions in Iraq emerged and with them a degree of local and regional security. In addition, the Government of Iraq has been able to facilitate the new microfinance sector in adapting Sharia compliant loans in several provinces. This included working with religious leaders to issue fatwas — asserting USAID-supported microfinance institutions were religiously acceptable. Therefore not surprisingly, the many successes of Iraq’s microfinance sector aided by the military’s grants do not mirror conventional results of civilian or NGO-based microfinance.

For instance, less than 18 percent of the loans in Iraq were made to female clients of which were significantly lower than in other countries in the region (about 65 percent); the average loan size in Iraq was about $1,350 of which was substantially larger than other countries in the region (about $360); close to 80 percent of Iraqi microfinance loans are individual loans rather solidary groups that are more prevalent in the region; and, despite higher cost structures than other developing countries, the nominal interest rate of 16 percent of which is half the global average of 35 percent.

At the same time, however, the Government of Iraq and US-led coalition’s emphasis on utilizing microfinance to counter and manage insurgency might not be conducive for transitioning the new microfinance institutions to become part of the country’s financial industry. That is, prior to the ISIS conflict, there have been concerns that with funds from oil exports, the Government of Iraq could further erode the credit culture through its large-scale low interest loans or zero interest grants. Moreover, while the emergence of Islamic microfinance has been robust, Sharia-compliant products often mimic and/or are more costly than conventional microfinance loans.

In turn, international NGOs and domestic microfinance institutions are struggling to reconcile their programs, developing professional and financially stable organizations where none have reached sustainability.

Assessing Iraq’s Post-conflict Settings and its Microfinance Intervention Approach

A recent research found mixed results in terms of the success or (the lack thereof) of specific microfinance institutions in post-conflict environments. In part, the success is linked by the types of interventions utilized in particular environmental factors of each conflict situation — characterized by social, political, religious and economic issues. Thus, in order to draw lessons from specific cases, there is a need to examine the success of microfinance by environment type and/or correlate the relations between environmental types and the success of microfinance interventions.

In the case of Iraq, we can explore and assess the external environment conditions such as intensity of conflict, reopening of markets, displacement and social capital. For each condition, we can categorize whether the factor is economic, political, and/or religious. In addition, we can assess whether the characteristics of the post-conflict situation will remain correlated with the nature of the conflict and its intensity. And importantly, whether microfinance could decrease the intensity of the conflict through lending group mechanisms; for example, providing incentives for in-groups/out-groups people to work together.

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Source: “The Role of Microfinance Institutions in Post-Conflict Settings” by Mitch Casselman et al. (2014)

Using hindsight, we can see that Iraq’s post-conflict environment can be characterized by cycles of warfare, a growing refugee crisis, crippling sectarianism, and the violent spread of extremist movement. Despite these on-going political instabilities, Government of Iraq and the US-led coalition have been able to resume basic economic activities and have provided a degree of local and regional security amidst hardline Islamist fighters’ movement. By some accounts, US-led coalition and the Government of Iraq have utilized microfinance intervention to provide relief in order to counter and manage insurgency, rather than to promote development. Because of uncertainty due to recurring conflicts, the tasks and policies to clearly define the concept and role of microfinance in Iraq appear to be lacking.

Moreover, the traditional social mechanisms used for mutual obligations, contracts, and transactions are increasingly that of Islamic finance principles, of which were not explicitly at the fore during Saddam’s rule. This implies that conventional or mainstream microfinance will have a limited role because interest-bearing loans are considered haram, particularly in Sunni or Shia dominated provinces. Yet, even with Sharia-compliant microfinance loans, some clients have noticed that the mark up of murabaha can be higher than the interest rates charged by non-Islamic microfinance institutions. Presently, Sharia scholars in Iraq do not have the same rulings on what is acceptable with regards to Islamic finance products, and the credibility of particular microfinance institutions can be underpinned — but also can be undermined — by religious sheikhs. In general, if Islamic microfinance institutions can play a stronger role in economic development and social capital, it will likely be incremental and depended on the decision-making of the Government of Iraq and the country’s Sharia scholars.

The above assessments suggest that, in today’s conflict settings of the battle against ISIS, there is probably not enough stability and security to transfer financial responsibilities of the microfinance sector to indigenous NGOs and/or international NGOs. It also appears that the environment needed for such a transition is depended on the Government of Iraq to not only weather from the noted crises, but also to strengthen good governance that can also reduce Iraq’s fragmentation. Overall, given the military voice of the Government of Iraq and US-led coalition, defeating the insurgency is a priority — above that of reducing poverty and social capital.

Notwithstanding, the question that still needs to be explored and examined is whether the current microfinance intervention — as utilized by the Government of Iraq and US-led coalition – can bring advancement for both the military and microfinance communities? Or whether the time to develop an environment for sustainable microfinance institutions (as a means to an end for a better life for the Iraqi people) will run out?


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