Microfinancing is an untapped field in Iran’s financial industry. But regardless of the industry’s long term challenges like high amount of toxic debt circulating within the banking system and the defiance of the central bank’s authority, microfinance has had its own set of stoppages.
Iran’s financial sector not only has barriers for foreign entry but also impediments that curtail development of such institutions from within.
“Many microfinance providers have failed to establish themselves in the Middle East,” says James King, the Middle East editor of The Banker magazine – a banking industry publication that includes coverage of retail finance, investment, and technology issues. But why?
“Growth in microfinance has to follow institution building,” Rupert Scofield, president and CEO of FIMCA, a non-profit microfinance organization, told The Banker; something that Middle Eastern countries like Iran are behind on.
The Foundation for International Community Assistance, sometimes referred to as the “World Bank for the Poor” and a “poverty vaccine for the planet”. FINCA is the innovator of the village banking methodology in microcredit and is widely regarded as one of the pioneers of modern day microfinance.
The regulatory environment is also weak; exemplified in Iran by the central bank’s weak hand in supervising the money market which has led to the creation of over 7,000 unauthorized credit institutions, and deteriorating control over monetary policy.
You see that countries in Africa have created a regulatory ladder whereby a credit NGO can move up to becoming a bank if it matches the criteria, said FINCA’s CEO.
But here in Iran, the central bank is lagging in regulatory reform and control over finance; though efforts are being made in this regard.
Middle Eastern economies have been built around their oil industries. This has overshadowed finance in general and microfinance in particular. “In the Middle East the big headline is oil,” said Scofield, “there isn’t a culture of supporting small businesses.”
Obstacles like huge minimum capital needed to establish a financial institution are also holding back development. The minimum capital for a financial institution is $220 million in Jordan and $70 million in Egypt. This is well beyond what a microfinancing institution could hope to muster, Scofield added. Iran shares this hurdle.
For foreign firms, there is also the issue of offering Sharia’ compliant financing – providing loans according to the Islamic law. This creates a new aspect in financing in Middle Eastern economies.
One of the big difficulties in creating and offering Sharia compliant loans is that “you are supposed to have a dedicated bank or financial institution that does only [Sharia’ compliant financing],” says Scofield. This is not something a microfinancing institution can afford to do, he argues.
So, microfinancing institutions have to train a select group of their staff in Sharia’ compliant financing, in markets with such demands, Scofield suggests. These staff can go on to explain the financial products to customers and provide technical support to other staff. FINCA has done this successfully in Afghanistan.
However, there is a growing trend of reforming financing in the Middle East. Egypt and Pakistan have recently passed laws supporting microfinancing. But Georgia is the most progressive in developing the financial industry, says the CEO.
Will Iran join the club? Though it is isolated from global finance by western economic sanctions, the new minister of economics and central bank governor seem to be trying to reform the system, as seen by their recent support of e-banking and their endeavors to regulate the banking system more smartly.
