Building Inclusive Financial Sectors Not only has the new player in the sector helped to fuel growth, it has also introduced a new model of microfinance in the region: a financial services company, which services microloan portfolios for commercial banks on a fee-for-service basis (see Box 7).
4.3.2 Recent European Union Initiative Until recently, Lebanon was the only country in the region where lack of (donor) funds for onlending was cited as a constraint to growth. This has changed with the introduction of an EU-funded agency, the Economic and Social Fund for Development (ESFD), which was set up to contribute to employment creation and poverty alleviation in the country. Unlike many other Social Funds globally, this fund has resisted the temptation to promote subsidized lending to meet job creation and poverty reduction goals and has tried a very different approach to stimulate outreach among Lebanese MFIs. ESFD had reason to believe that some of the MFIs working in the sector were quite inefficient and were passing on these inefficiencies in the form of high operating costs and therefore high interest rates for the final borrower. Annual percentage rates (APR) of some MFIs in Lebanon were above 40%, which seemed to have become the accepted standard. ESFD invited eligible MFIs to bid for a substantial amount of funds for onlending (∈1.2 million). Those MFIs that bid with the lowest interest rate to the final borrower—while showing at the same time that the rate would cover all operational and financial costs—would win access to the EU funds to be used for onlending in certain parts of Lebanon (notably the North and the South). ESFD expected that many MFIs would offer an interest rate below the 40% APR, but was taken by surprise when one institution offered an interest rate that was less than half the going rate. The bidding story described above raises some interesting questions: •
Were interest rates too high to begin with and if so what was driving this: profit maximization or programme inefficiency?
•
Is the winning bid truly based on a sustainable cost structure or will the desire to have access to a new source of funds lead to losses in the future?
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How will the “winner” explain the substantially lower interest rates to its current borrowers, who are clients in the regions where the new lower rates will be offered?
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What impact will the provision of microcredit at substantially lower interest rates have on the industry as a whole?
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