CAIRO: The microfinance industry in Egypt has grown rapidly in the last several years and faces a potential eight-fold increase in the number of clients, according to figures compiled by Paris-based Planet Finance. Planet Finance, an international NGO based in Paris, France, does not provide loans or direct aid to the poor, but provides know-how, training and financial support to microfinance institutions operating in the field. In effect, it microfinances the microfinanciers. Microfinance is a relatively new development model, whereby microfinance institutions (MFIs) provide small loans to the poor so that they can establish a small business. Poor people are frequently unable to secure such loans from the banking sector because of a lack of valuable collateral and the very small amounts of money generally requested. Paradoxically, it costs a bank more to provide a small loan than a larger one because of the increased risk of default and the expense of processing small loans through a system of middle management designed to move larger sums. According to Planet Finance, there are currently between 450,000 and 500,000 people in Egypt who have begun small enterprises thanks to these modest loans. The group estimates that, with a third of the Egyptian population living in some form of need, there is a market here for upwards of 4 million microfinance clients. Mohammed Maarouf, the Middle East and North Africa Director for Planet Finance, credits the success of microfinance to the sustainability of the model and the strong relationships that MFIs develop with their clients. The institutions review the feasibility of an applicant's business plan, and then after the loan is granted will check up on their progress several times. "With a bank, clients go to the institution. says Maarouf, with a smile, "But with MFIs, we go to the clients. These are both part of the reason, he says, why banks have an average default rate of 15 to 20 percent on their loans, while MFIs typically have a default rate of one to two percent. "Microfinance is all about sustainability, he continues. "Our clients don't need one loan, they need multiple loans. Poor people need microfinance institutions because they cannot access banks, so they are carefully not to have problems with them. The challenge is sustainability, to be present near the poor for a long time. The number of microfinance clients has quintupled since 1999; a surge attributed to the development of new types of loans, in particular solidarity group loans. These allow a group of people to take out a loan as a group without putting down any physical collateral - the main motivation for not defaulting is the peer pressure exerted by other group members. If someone defaults on their share of a solidarity loan, they are not defaulting on the MFI, but on their friends and neighbours. An individual version of this model has been developed as well, which allows an individual to take out a loan for themselves with other people as co-signatories. If the person receiving the loan defaults, they pass the responsibility of repayment on to his friends who co-signed for them. Despite the great potential for growth in the sector, significant challenges remain. Planet Finance attributes the sector's underdevelopment to several factors, in particular a lack of product diversification among clients and a lack of clear government policy compounded by harmful practices such as subsidized credit, client targeting and the existence of interest rate ceilings. Planet Finance maintains that these obstacles can be overcome, and has a list of policy recommendations for doing just that. Chief among them are the creation of new funding opportunities through partnerships with commercial funding sources; the centralization of information and training resources; and increasing transparency and efficiency. These proposals are closely related to the general trend of economic liberalization that the Egyptian government has increasingly adopted under the tenure of business-friendly Prime Minister Ahmed Nazif. As such, Planet Finance is hopeful for the future of the sector in Egypt, both because of the possibilities for industry expansion and for the good work that can be done. "If a man gets a loan to sell bread, says Carole Serviere, providing an example, "Maybe with the second loan he takes, he can buy an oven. And then with the third loan he takes out, he can build a shop.
