Financing Entrepreneurs in a Chaotic Region

Financing Entrepreneurs in a Chaotic Region
This article originally appeared in Financial Advisor Magazine
Written by Carol J. Clouse

When impact investors think of microfinance, for the most part they imagine helping a coffee farmer in Bolivia or a shop owner in India. But a tailor and father of four in the Palestinian West Bank?

For obvious reasons, many Western investors tend to steer clear of the Middle East in general, and the microfinance sector—the loans and other financial services that help entrepreneurs and small businesses without access to regular banks—is no exception. With the need for financial inclusion stretching across the globe, social impact investors have plenty of places far less chaotic than the Middle East to choose from. The global microfinance market—largely centered in Asia and Latin America—is expected to grow by 10% to 15% this year, according to the 2016 “Microfinance Market Outlook Report” from Zürich-based asset manager responsAbility Investments AG.
What investors might find surprising is that people like Sobhi Abo Za’roor, the tailor from the town of Nablus in the West Bank, are not any riskier a gamble than microcredit recipients in other parts of the world. Za’roor had only three sewing machines and two full-time employees in 2003, when he received his first loan of $3,250 from Vitas Palestine, a subsidiary of microfinance company Vitas Group. He now employs 15 full-time tailors and has sent all four of his children to university.

Vitas Group is a commercial holding company created by Global Communities, a Silver Spring, Md.-based nonprofit global development organization. The company provides microfinance and small- and medium-enterprise finance, focusing largely on the MENA region. Through a network of lenders in Palestine, Jordan and Lebanon, and an affiliate in Iraq, Vitas has disbursed more than $1.4 billion in loans (averaging $2,000 in size) to more than 535,000 customers in the region over the last 10 years. The average default rate over that same period has been less than 1% annually, according to the company. This compares with average microfinance default rates of 2% to 3% (annual loan losses) globally.

“Obviously there’s been a lot of volatility in the region, and recent events have limited foreign investment,” says Elissa McCarter LaBorde, chief executive officer of Vitas. “But when we look at our customer base, the small business owners, the carpenters or shops, they’re there through good and bad. It’s a customer base that’s very entrepreneurial that has a high degree of ethical responsibility to repay their debt.”

As it looks to expand in the region, Vitas is actively trying to grow its investor base and raise more capital at the holding company level. Global Communities continues to be the largest shareholder in the company, while the Geneva-based Bamboo Financial Inclusion Fund holds a 29% minority share. Vitas’s return on equity over the last three years has averaged 12%, and the company is targeting 15% to 17% over the next five years.
The company sees both a great need and opportunity for growth in the Middle East, LaBorde says. When it comes to banking, the region is the least financially inclusive part of the world, with only 14% of adults with a bank account in 2014, up from 11% in 2011, according to the World Bank’s Global Findex.

“You have a banking tradition that’s very conservative in these countries,” LaBorde says. “Commercial banks haven’t reached down to the low-income customer.”