Paper Published Challenges and Opportunities of Microfinance in ...

OPEN JOURNAL OF FINANCE Volume 1, Number 1, August 2014

OPEN JOURNAL OF FINANCE

Challenges and Opportunities of Microfinance in Oman – Case of Dhofar Region Muawya Ahmed Hussein* College of Commerce and Business Administration, Dhofar University, Department of Accounting and Finance, Salalah 211, P.O.Box:2509, Oman *Corresponding author: [email protected]

Abstract: The core purpose of this paper is to explore the challenges and opportunities of microfinance in Oman. Since last decade microfinance sector rapidly has been grown in the world and particularly in developing countries. Many challenges are in front of this sector like improper regulations, innovative and diversified products, profitability, stability, limited management capacity of the borrowers and especially in Oman youth prefer government jobs. This paper investigates the case of microfinance in one of the biggest regions in Oman that is Dhofar Region. The target population of this study comprised a total of 500 loan borrowers and Sanad which is one of the biggest micro finance institutions (MFIs) in Oman. Out of which a sample of 51 was picked using simple random sampling for each stratum, which enable every member of the population have an equal and independent chance of being selected as respondents and also simplest, most convenient and bias free selection method. The data was collected by use of structured questionnaire. The data was analyzed from questionnaires using both quantitative and qualitative techniques and tabulated by use of frequency tables. The study found out that loan repayment default was as result of non management capacity of borrowers as a result of inadequate training of borrowers on utilization of loan funds before they received loans and also because of dependency of youth on government jobs. Keywords: Microfinance; Challenges and Opportunities; Dhofar Region; Utilization of Loans

1. INTRODUCTION Microfinance refer to the supply of financial services to clients of low-income, including consumers and those who run their own business (self-employed), who usually lack access to banking and related services. In a broad sense, it is a movement with the objective of creating an opportunity of permanent access to an appropriate range of high quality financial services as possible to many poor and near-poor households, including not just credit but also savings, insurance, and fund transfers. Those who support microfinance generally believe that such access will help poor people by providing new and additional financial resources. 49


The microfinance vision is to create smooth change in financial systems all over the world. Instead of the special financial systems that have for decades benefited and protected the wealthy, microfinance tries to serve the impoverished majorities, help lift them out of poverty, and make them full participants in their country’s social and economic development. The microfinance revolution began when Muhammad Yunus a Bangladeshi professor in economics in 1974 when first handed over a few dollars to an impoverished basket weaver. Since that, the movement toward microfinance has directed. The granting of very small loans to the poorest people in the world to enable them to run small businesses that will help them too much in running new business and become welloff. The proven microfinance lending model has been replicated in many developing countries, and more people in Bangladesh have become financially included over time. But people with disabilities simply did not get access to the leading lending sources in Bangladesh because of discrimination and accessibility barriers [1]. The microfinance sector faces many problems and challenges in Oman since it is new. The thought behind the microfinance services is to provide financial help to the poor persons and people at their doorstep at very easy terms and conditions [2–4]. At this juncture microfinance has drawn special attention not only at the academic level but also in the area of policy designing [5]. While the future of MFIs in Oman holds much promise, there have been problems and criticisms of MFIs in other countries. One problem faced in other countries is the difficulty of providing microfinance services to customers living outside of urban areas, as the low population density makes it difficult to meet the costs of a retail branch. Oman will face similar challenges, as some of the greatest beneficiaries of microfinance would be those living in the interior where population density is low and retail branch costs would be high. Another issue is how Omani law will be applied to MFIs. Currently, it is likely that MFIs will be treated the same as other financial institutions in Oman and be subject to the same laws and the oversight of the Capital Market Authority and the Ministry of Commerce and Industry. It is also possible, however, that laws could be tailored to make it easier for MFIs to operate in Oman, and to respond to the unique needs and problems of these institutions and their clients. Another problem that has emerged in other markets is how to evaluate potential borrowers’ credit in an environment where traditional metrics are not easily applied. Luckily, the first credit bureau in Oman was recently introduced, which should make it easier for MFIs to evaluate borrowers’ credit. The Omani market presents unique issues for MFIs, though the untapped market of the interior as well as the recent introduction of credit bureaus provide encouraging evidence that they have the potential to succeed. Therefore, many in Oman are justifiably excited for new business opportunities on the horizon.

2. MICROFINANCE IN OMAN Microfinance is a new concept in Oman and still there are no more researches in this area. Oman is a developing country with population of almost 3.3 million according to 2010 census. Gross domestic product (GDP) growth rate was 4.7 % in 2011 which is far less than 12.8 0% in 2008. Unemployment rate of Oman is 4%. In Oman the micro financing was started in 2001. The first inclusive microfinance institute in Oman is Sanad Program. After that other small institutions are created by the government and big Oil Companies and started their operations in microfinance sector across the country. In this year 2013 the government has merged all these funds in one program called Rafd Fund to provide microfinance facilities all over 50

Challenges and Opportunities of Microfinance in Oman – Case of Dhofar Region

the country especially for youth who are seeking jobs in order to reduce the pressure on the recruitment in the public sector, where the youth prefers to work. In Oman (2001 to 2013) the government has launched many programs to encourage youth to go for self-employment through establishing their own business and enhanced and supports micro finance network all across the country. In Oman there are problems such as default rates that, in some instances, are too high, especially in Dhofar region although the conditions and terms of loans are very easy. Also there is lack of information regarding loan performance and credit risk, which microfinance organizations face in this country. Our focus is elsewhere, however; we want to see to what extent microfinance can contribute more broadly to financial development in Oman. Basel II, the new accord of capital, is not adopted in microfinance sector in Oman yet. The main pillar of Basel II is the capital adequacy requirement for internal rating based (IRB) risk. According to IRB, the banks are required to have the capital against the estimated risk of credit (BCCB 2003). Our main concern in this paper is to evaluate one of the biggest institutions of microfinance in Oman. Five years after an enthusiastic take off, the Ministry of Manpower has come a long way — helping build more than 8,000 commercial activities and providing more than 17,000 job opportunities across the country. It was an intrepid initiative, aimed at changing the destiny of the Omani youth. Since its inception in October 2001, Sanad - program has been established to encourage entrepreneurship among young Omanis (Table 1, Table 2 and Table 3). Table 1 indicates the total number of those have benefited from Sanad out of them only 748 in Dhofar region. This represent only 9%, which in itself a challenge for the program. Table 1. Number of activities per region that have benefited from Sanad program. Region

No. of activities

Muscat

1,363

Dhofar

748

Al Sharquiya

802

Al Batinah

2,340

Al Dhahirah

845

Al Dakhliya

1,874

Al Wusta

109

Total

8,081

Source: Ministry of Man Power (2012)

Given the regional distribution of project financed by Sanad, is observed from table two only 25% of these projects are located in Dhofar region, which support the idea that people in Dhofar prefer government jobs. We also observe the number of female is less compare to other regions; this may be due to cultural aspects. Table 3 shows the total number of those who got trained before opening their business represent only 27%, which seem to be very less compare to the total clients. Also this one of the big challenges facing this program. The implementation of microfinance programs to Oman could mean that entrepreneurs and small businesses will find access to new fundraising opportunities at relatively affordable rates and better conditions, because all these programs are introduced by the government. If successful at supporting new enterprises, this effort could spur economic growth and job creation in Oman, which is the main concern of the government, because no more vacancies in the public sector. Oman is home to a wide array of small businesses (Table 4) that could serve as potential clients for microfinance institutions (MFIs). Particularly, makers of textiles and handicrafts stand to benefit, as do fishermen and those making a living 51


Table 2. Regional distribution of projects per gender. Region

Gender Male

Female

Total

Muscat

131

93

Al Batinah

136

116

224 252

Al Dakhliya

81

86

167

Al Sharquiya

138

106

244

Al Dhahirah

33

41

64

Dhofar

185

144

329

Musandum

3

5

8

Al Wusta

12

5

17

Total

719

596

1,305


Table 3. Number of trainees per activity. Activities

Number of trainees

Sale of food stuff

147

Tailoring & embroidery of ladies ware

1,117

Sale & repair of mobile phones

205

Information technology and Sanad centers

610

Sales of fruits & vegetables

20

Ladies beauty salons

91

Total

2,190


in agriculture. Oman’s strong tourism sector also gives rise to numerous entrepreneurial opportunities that may be taken advantage of through the financial support microfinance provides. A further potential market for microfinance in Oman is women entrepreneurs. In other countries, women have generally been the main focus of MFI because studies have shown they are less likely to default on their loans than men. Table 4. Microenterprises constitute the vast majority of enterprises in MENA. Country

Size Breakdown (% of all MSMEs) Micro

Small

Medium

Bahrain

78.3

13.0

8.7

Egypt

98.1

1.7

0.1

Israel

85.4

12.9

1.7

Jordan

89.1

9.2

1.6

Lebanon

97.5

2.3

0.2

Morocco

97.8

1.9

0.3

Oman

81.4

12.6

6.1

Saudi Arabia

20.6

48.5

30.9

UAE

59.1

37.5

3.4

Yemen

96.4

3.4

0.2

Source: WB 2011, Nasr and Pearce, SME Finance in the Middle East 52


3. REVIEW OF RELATED LITERATURE Microcredit has evolved over the years and does not only provide credit to the poor, but also now spans a myriad of other services including savings, insurance, remittances and non-financial services such as financial literacy training and skills development programmes; microcredit is now referred to as microfinance [6, 7]. Despite the apparent success and popularity of microfinance, no clear evidence yet exists that microfinance program have positive impacts ([6, 7] and many others). Because of the growth of the microfinance industry and the attention the sector has received from policy makers, donors and private investors in recent years, existing microfinance impact evaluations need to be re-investigated; the robustness of claims that microfinance successfully alleviates poverty and empowers women must be scrutinized more carefully. Hence, this review revisits the evidence of microfinance evaluations focusing on the technical challenges of conducting rigorous microfinance impact evaluations. For history, microfinance is derived from the concept of micro-lending which has been around for long time before. Klepikova, Brandt, and Epifanova, claim that records of loans given out to the poor people have been founded in Europe since the 18th century [8]. These authors present many examples, like Jonathan Swift made a fund to finance “poor industrious tradesmen” money “in small amounts between five to ten pounds, to be repaid weekly, at two to four shillings, without interest” [8]. Another example was the Irish Reproductive Loan Fund Institution which began in 1822 for assistance of the poor by giving them small amount of money equivalent to 10 Euros in modern terms. Besides that, another example of microfinance was German credit cooperatives in 19th century which acted as the modern micro-credit self-help group to make loan for the whole cooperative units and they have to repay back these loans [8]. Also, Wolcott [9] provides another example of microfinance in which small loans were made to the needy people without the requirement of collateral in colonial India. Therefore, micro-credit is not a new trend. The breakthrough of microfinance was in 70s where it became modern concept which is often championed by Muhammad Yunus, a Bangladeshi native who established Grameen Bank which has garnered a lot of international attention. Since that Microfinance Institutions (MFIs) start to grow in numbers and provide different kinds of loans to the poor. These institutions assure that they are supplying individuals with enough capital at low interest rates, unlike loans given by informal institutions which charge high interest rates within these developing nations. The poor people in developing nations seem to have limited access to financial services from formal financial institutions because of (1) lack of supply of loans in rural areas compare to urban biased banking networks and credit allocations; (2) the lack of physical collateral; and (3) the wearisome procedure to start bargains or dealing with formal financial institutions (banks), which would discouraging those with less or without education from approaching the banks [10]. It seems there is a lack of access to credit (capital) for poor people in developing countries, so microfinance claims to be assisting in solving this problem. However, “while some stories. . . purported to show that microfinance can make a real difference in the lives of those served, rigorous quantitative evidence on the nature, magnitude and balance of microfinance impact is still scarce and inconclusive” [11]. Also it is important to observe that microfinance began by giving only micro-credit to individuals. Since that, the financial mechanism of microfinance institutions has expanded. A 2012 systematic review, funded by UK’s Department for International Development (DFID), analyzed these expansions by not only studying micro-credit, but micro-savings and micro-leasing [12]. In addition to these microfinance instruments, some institutions also provide micro-insurance and non-financial programs that assist in social development such as business and financial literacy training [11]. Both these studies claim to have assessed all relevant research on microfinance up to that date. The review of 2011 concluded, however, that there was no evidence for a beneficial impact on women 53


and the studies that did find such positive impacts were weak in their research design [11]. The 2012 systematic review, also reviewed articles for their richness and measured impacts on clients particularly regarding micro-leasing, micro-credit, and micro-savings. Stewart et al. [12] tried to identify whether or not clients engaged in economic opportunities and whether there were impacts on the clients in terms of returns to capital, effects on capital stock, effects on profit and fixed asset investment, effects on income, expenditure and accumulation of assets. Overall, this survey does not find any evidence that suggests microfinance has a large impact on either poverty or women’s empowerment. This 2012 systematic review concludes, “There is less risk if services are targeted at those who already have some financial security, such as savings. . . which will allow them to make loan repayments even if their businesses do not generate a profit immediately”. The only positive result that these reviewers found was that micro-savings had a relatively positive result on clients without causing greater harm to them. In terms of whether or not there are benefits for women in microfinance, there was no evidence found that concluded whether institutions solely targeting women was beneficial or not. This review also concluded that more research of the effects of microfinance should be conducted. To overcome the challenges of microfinance, the infrastructure organizations and their key supporters, together with MFIs, networks and investors, must be willing to take a fresh look at these needs and search without preconceptions for the most economical and efficient ways for information to flow, for standards to develop, for viable business models to emerge for data collection, on-site evaluations and other core functions. Participants in such a dialogue will need to be open to the possibility that the organizational structures that exist today may have to evolve [13].

4. STATEMENT OF THE PROBLEM It has been accepted that credit used for productive purposes, results in good returns. But credit supply is a risky business and it may also involve fraudulent and opportunistic behavior. Sand program in Oman attempts to contribute to tackling the phenomenon of increase dependent among citizens on government jobs. Government of Oman claim that it has to work hard to achieve the main goal of sanad program which is to encourage the youth to establish their own small business (self-employment) and to reduce the burden on the public sector as the main employer in the country since the private sector is still infant. So the question need to be investigated is that, what are the opportunities that can be provided by this program beside the challenges that it may face since most of Omani youth prefer government jobs?

5. OBJECTIVES OF THE STUDY This paper aims to encourage the role of Sanad program and see its impact on employment and income in Dhofar Region as well as explore the weaknesses of Sanad program. The general objective of the study is to find out the challenges and opportunities within micro finance institutions in Oman particularly Sanad program in Dhofar Region and to what extend youth can accept the idea of establishing their own business. Also to encourage the role of Sanad program in providing employment opportunities in Dhofar Region as well as explore the weaknesses of Sanad program. Specific Objectives The following were research objectives; 54


i) To investigate the how non-Supervision of borrowers influences the loan repayment financed by Sanad. ii) To find out the effects of shrinking economic growth experienced by borrowers on loan repayment to MFIs in Dhofar Region. iii) To establish how diversion of loan funds by borrowers leads to default in loan repayment to MFIs in Dhofar.

6. SIGNIFICANCE OF THE STUDY The study sought to determine and analyze the socio-economic factors that affect loan repayment in Oman County to fill the knowledge gap by providing useful current-state insights into the factors that influence loan repayment and the performance of Micro Finance Organizations performance particularly in Dhofar Region . It will also assist private and public sector to develop policies which support the development of Micro Finance Organizations and help in relaxing the pressure on the public sector in the issue of being the main employer for the youth in Oman.

7. SCOPE OF THE STUDY The study was limited to potential and existing clients accessing and beneficiaries of loans from the microfinance institutions existing in Dhofar Region in Oman. The Region was chosen because of its rural set-up and the socio-cultural practices undermining loan access and development in addition to the fact that most of the youth prefer government jobs and they don’t want to take the risk of starting new business.

8. THE RESEARCH METHODOLOGY In this part we outline the research methodology adopted in the analysis. Needless to mention, such a methodology has two main components. The first relates to the data and information used in the analysis, while the second relates to the statistical, regression, or other methods adopted in analyzing the data. With regard to the data, we begin with the identification of the population from which the study sample is withdrawn and the evidence is collected. For our purposes, the population under study consists of clients of Sanad program in Dhofar Region which is a southern part of Oman These clients constitute the sampling units. From this population of clients , a random sample has been selected using the cluster sampling technique. Subsequently, data were collected on the relevant variables and statistical and regression methods were adopted to analyze the data. This study attempt to examine the challenges and opportunities of sanad Program in Dhofar region in Oman . Oman is comprised of eight regions , namely Muscat, Al Batinah, Al Dakhliya, Al Sharquiya, Al Dhahirah, Dhofar, Musandum and Al Wusta as it is shown in Table 1 which are similar in terms of demographic characteristics and economic activities. The rationale behind this choice may be summarized as follows: 55


1. According to the distribution of the projects by region, as given in Table 1 below, we observe that 25% of the projects are placed in this region. 2. The location of the Region is far away from the capital and other regions since the northern area is desert. 3. Considerations related to the development of the region and the importance of microfinance in balance development. The sampling units that are used consist of some clients of Sanad programs in Dhofar rejoin. Out of total clients of 748 clients, 75 was chosen who represents 10% of the total population, but those who respond to the questionnaires that we distributed are 51 clients only. This made the sample size of the total population represent only 7% which is one of the limits of this study. But the homogeneity of the population make it representative sample. Questionnaire have been distributed to the clients consists of 11 questions to investigate the challenges and opportunities of Sanad program, in addition to interview of Sanad staff in Dhofar region. Frequency distribution is applied to available primary client’s data to examine challenges and opportunities of Sanad program in Dhofar region in Oman. The Statistical Package for Social Sciences (SPSS) software computer programs is used for data analysis. In what follows we outline in more details the particular the results and interpretations.

9. CHALLENGES 9.1 Internal Challenges Internal challenges are derived from the frequency distribution of the respondents to the statements in the questionnaire distributed to them (Table 5) The first group of the challenges is about the key internal challenges faced by Sanad. The first and it seems the most important challenge is about the education level of clients where more than 88% of the respondents are secondary school graduate. This indicates that they lack some technical and administrative skills to manage their projects. They lack accounting and marketing skills also which may reduce the profitability of the projects. The second challenge is about sufficient loan to run the business. 65% of the respondents say that loan is not sufficient and the availability of other cheaper financial resources is not possible. So the availability of other cheaper source of finance is a great challenge for them, and 35% responded say loans are sufficient. This indicates the fact that the cost of borrowing is high for small borrowers. Effort should be done to make small loans available at some competitive cost in comparison to other financial products. The third challenge is about the income from the project compare to income from the government job, 70% of respondents say income from the project is less than salary from a job in the public sector. This reveals the gap for policy makers that the limited income from the project may be the major cause of low performance and growth of MFI sector. This has a very serious implication on employment, in the sense that most of the youth will think of getting a government job. The forth challenge is about the ability of MFIs to provide non-financial services (training). We may say that there is a great need for training by clients in order to adopt the standard practices of management of their projects. Only 15% of the respondent has been given training before starting their business. The fifth challenge is about the building ownership; 89% of respondents are on the bases of rent contracts while 11% own the building. Therefore, we may say most of the clients have no incentive in expanding the project. The second last challenge of this section is about the type of 56


the project; 80% of the respondents get finance for constitutive projects because sanad program give it priority to expansion and partnership projects. This shows the limitation of finance to a certain types of projects. Final challenge is about the beneficiary of the project whether individual or family; 78% of the projects are individually owned because most of the people prefer this type to avoid problems in case of collapse of the project. Table 5. Frequency distribution of the respondents to the statements in the questionnaire. Item

Sub-group

Frequency

Percent

Gender

Male Female No Response

15 33 3

29 65 6

Age(Years)

18 -