The Microfinance Sector in Palestine

This article originally appeared in Palestine Business Focus Magazine.

“Micro and small enterprises play an important role in the Palestinian economy by generating employment and income for a majority of marginalized groups in society.”

This statement by Mr. Alaa Sisalem, General Manager of CHF-Ryada, underlines the importance of how microfinance is helping entrepreneurs develop businesses in all areas of Palestine. Alaa Sisalem, General Manager of CHF-Ryada, explains the importance of the microfinance sector in Palestine Business Focus Magazine.

Mr. Sisalem continues:

Microfinance is considered as the main pillar of the Palestinian economy and one of the key tools to alleviate poverty and encourage job creation. Micro-businesses are normally considered as self-employment projects which help to create thousands of jobs for Palestinians. For example, 42% of each dollar spent on home improvements goes directly into the local labour market – either directly or indirectly.

This sector is therefore a vital and significant source of employment and livelihood. The number of informal Micro and Small Enterprises (MSEs) has been growing in number over time and increased substantially during recent years of political instability and violence.

Mr. Sisalem added, “Enforced business closures and extreme constraints on mobility between cities, villages and camps (checkpoints and road blockades), have forced people to search for a living through informal small and micro-productive activities. Accordingly, more than 90% of the Palestinian economy became fully dependent on informal micro and small businesses. Those businesses are often unlicensed and don’t keep official accounts, which often bars them from borrowing from banks.”

This is the crux of the importance of CHF-Ryada in the microfinance sector – it serves as the foremost lending source for the sector. It helps in developing the Palestinian economy and helps to convert these informal microenterprises into formal registered enterprises. In turn, by becoming registered enterprises, they provide a benefit to the Palestinian economy through the taxes they pay.

Based on its importance, the sector received attention from the Palestinian government and the Palestine Monetary Authority (PMA), prompting them to organize the microfinance sector by adjusting the Banking Act to cover the control and monitoring system, as well as authorizing those enterprises that wish to offer microfinance to enterprises. This law, per se, states that any microfinance enterprise engaged in lending has to be registered either as a for-profit or non-profit company and must own an outstanding portfolio that is not less than $5 million. These are the main conditions to obtaining a license to provide microfinance lending.

When asked about the micro and small enterprises’ contribution to the Palestinian Economy, Mr. Sisalem explained further: “MSEs are considered to be one of the principal driving forces in the Palestinian economy development. They stimulate private ownership and entrepreneurial skills, they are flexible and can adapt quickly to changing market demand and supply situations, they generate employment, help diversify economic activity and make a significant contribution to exports and trade.”

MSEs can make a significant contribution to achieving social and economic objectives such as labour absorption, income distribution, rural development, poverty eradication and balanced economic growth.

Over the past 17 years, West Bank and Gaza have faced different challenges due to the different political and economic situations. However, in Gaza, economic blockade and the daily challenge of choosing the exact small business to open is affected by the scarcity of basic materials. Added to them the daily continuous risk resulting from tensions, military invasions, and raw material scarcity are all basics that are affecting small business loan disbursement in Gaza.

During 2006, West Bank and Gaza faced a salary crisis, during which 95% of the collection process in Gaza was fully crippled for 18 months, which meant 98% of loans defaulted. The military invasions in 2008 and 2012 all played (and still play) a role in the disbursement and collection processes, as well as the effect of the long blockage which played a major role in the prevention of the availability of basic materials to the Gaza strip.

In spite of all the challenges in Gaza, CHF-Ryada was able to survive during these crises and continue supporting the Palestinian economy through the increase in the disbursement of micro and small loans for businesses in Gaza, reaching a repayment rate of almost 100% despite of all the crises and blockades.

“Based on our experience, we believe that the role of microfinance increases during crises. We should continue to provide micro loans for people and maintain the collection process as there will always be those who need loans who are able and willing to pay,” Mr. Sisalem said.