Zero Interest Microfinance

Microfinance for Refugees: The Untapped Potential

By Omar Kachkar

According to the latest UNHCR report issued in June 2015, the number of forcibly displaced people has reached 60 million, the highest since World War II. During the first half of 2015, UNHCR offices reported at least five million people were displaced, including about 839, 000 refugees who were forced to cross borders to other countries. By some accounts, the total number of refugees around the world far exceeds 20 million individuals, where the majority of these refugees spend many years in exile before they return home.  Moreover, it is estimated that three quarters of these refugees are considered in a protracted situation — staying in exile for at least five years. In other words, what is supposed to be a temporal accommodation turns out to be the home for many years and may be for decades. In fact, UNHCR has estimated the average stay of refugees in exile will reach to about 17 years in which full generations are borne and raised up in refugee camps.


During their stay in exile, refugees suffer all types of deprivation and poverty and are exposed to a wide range of dangers and violations of their basic rights. In particular, UNHCR notes that refugees have experienced three dimensions of poverty: 1) lack of income and assets; 2) voicelessness and powerlessness in the institutions of the state and society; and 3) the inability to cope with unexpected shocks such as sudden changes in currency values or market forces.

Microfinance Schemes and Challenges in Refugee Camps

By many accounts, microfinance is a key instrument for poverty alleviation and for socio-economic development. Here, microfinance is much more appreciated for refugees in protracted situations. A common characteristic of protracted situations is a progressive decline in international humanitarian aid, high economic insecurity for refugees, many restrictions on their movement and business and ownership rights, and almost no access to formal employment. In such situations microfinance can make a great difference in the lives of millions of refugees. Through the provisions of microcredit and start-up capital, refugees can start their own microenterprises and improve their income inside the camps or outside. According to Karen Jacobsen, by going beyond the traditional relief-based culture of hand-outs, microfinance programs can offer a more dignified way to support refugees. Additionally, microfinance represents a more sustainable way to support refugees away from the donor cycles.

In 2001, The Alchemy Project began as a research program to explore whether microcredit and other income support interventions were viable approaches for supporting the livelihoods of forcibly displaced people. In 2004, the Ugandan Women’s Effort to Save the Orphans became an Alchemy partner and began implementing a microfinance program in two IDP camps near the town of Lira, one of the worst affected regions of the northern Uganda conflict zone. The research concluded that there are three ways in which microfinance programmes can affect livelihood of refugees. This consists of the household, the individual client, and the wider camp community:

At the household level, if a microcredit program leads to increased economic security, this can in turn enable household members to pursue a wider range of livelihood options, including education, new investments, more viable repatriation options and so forth. At the individual client level, even if the client’s financial security does not increase, participating in the program can potentially increase her human and social capital by boosting self-confidence, augmenting skills through training, enhancing social standing in the community and strengthening economic networks. At the camp level, a microcredit program can potentially affect the economic context or risk environment in which everyone pursues livelihoods.

Nonetheless, providing microfinance for refugees has remained a very challenging business for many specialized microfinance institutions and humanitarian agencies alike.  In addition to the risks inherent in microfinance business in normal situations such as the lack of collateral and securities, refugees in general are considered by microfinance institutions as bad credit risks. For instance, the social pressure or social capital that is normally used by microfinance institutions as an alternative to financial collateral is useless with refugees to which individuals hardly know each other.

Moreover, the continuous mobility of refugees constitutes a real challenge to microfinance institutions as it increases the default risk. In particular, although refugees in protracted situations look ‘stuck’, many of them always aspire to leave either to go home or to a third country or in some case refugees are forcibly relocated.  Meanwhile, the presence of relief agencies over time creates a culture of “free services” among refugees of which also constitutes a real challenge. Not to be overlooked, many refugees normally have little entrepreneurial experience and a deficiency of connections with the community around them, of which may reflect on their business performance. Indeed, a study reveals that:

“These characteristics place refugees in risk categories that are unsuitable for traditional microfinance lending and/or make the implementation of group guarantees, client assessment and step lending principles difficult. At the same time, the uncertain future of refugees in camps or in the country of return makes a refugee-based sustainability strategy difficult to achieve. Finally, refugees are situated in a relief environment where implementing organizations’ staff members are often hesitant to fully require repayment, are unwilling to charge interest, and/or do not have the technical capacity to implement finance programs.”

Innovating Microfinance for Refugees: A Case Study of the American Refugee Committee

Despite all these challenges, a number of NGOs have been involved in microfinance projects and many of success stories can be cited. Due to the limitation of this article, the following discussion will highlight one successful experiment of providing microfinance for refugees — illustrating how innovative strategies and the will to assist can significantly improve the lives of underprivileged and unfortunate populations. This experiment was undertaken by the American Refugee Committee (ARC) in Guinea in 1997. ARC started its microfinance program — Micro-Enterprise Development Programs — to support Sierra Leonean and Liberian refugees in Guinea. The model was comprised of three targets aimed at gradually empowering the most vulnerable refugees. The first focused on mostly women, providing them with free grants of $25 so as to enable them to start up micro-businesses quickly. The next target was on the less vulnerable refugees, allowing them to access ARC’s micro-credit services of $50; for entrepreneurs who already have running business, they had to repay over six months. The last target was on clients who wanted to grow and develop their existing micro businesses with minimal-interest-bearing loan of $75.

Beneficiaries of such programs reached 4,000 refugees in 2001-2002. Interestingly, the default rate was only 3% due, in part, to a very innovative strategy employed through ARC’s Refuge to Return certificate system. This certificate was designed to enable refugees to transfer their credit history and to have the prevailed receiving loan upon their return in their countries. Accordingly, clients were receiving a grading of ‘A’, ‘B’ or ‘C’ certificates according to their credibility. During 2001-2002, over 25% of ARC microfinance clients in Sierra Leone were former ARC refugee client-returnees. Remarkably, by the end of 2003, the repayment rate for the program in the Kissidougou region reached 98%, even though refugees were repatriated to Sierra Leone in the first half of 2003.

In the assessment of its microenterprises programs, ARC found that, when beneficiaries were asked to indicate their three main sources of income, about 81% of start-up grant clients mentioned business as a main source of income and that they did not need to apply for further loans; and all of the start-up grant clients who applied for further loans mentioned business as main source of income. Furthermore, 91% of the clients, who took out basic loans without first receiving grants, indicated that business as a main source of income. On social indicators:

  • 55% of basic loan clients indicated that their social status had increased;
  • 60% of them said that they had gained pride;
  • 60% were able to buy better clothes;
  • 45% said they had more food and 24% reported a better variety of food;
  • 47% said they had become more self-reliant;
  • 33% said they were healthier;
  • and 38% no longer had to borrow money.

Given the number of refugees around the globe and the unprecedented number of protracted situations, the above microfinance initiative model would need to be scaled up as efficiently and effectively as possible. Overall, microfinance programs should be given a serious consideration by humanitarian organizations, as well as microfinance institutions to assist in improving the lives of millions of refugees. Especially, because refugees do have the potential and the skills, but who are in fact waiting for someone to help them help themselves.



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