MBA title

Microfinance Institutions Development Challenges and Opportunities

Submitted by: Dler Abdul Jabbar Mustafa Supervised by Mark Deweaver

A thesis submitted in partial fulfilment

Of the requirements of Executive Master in Business Administration

At the American University of Iraq, Sulaimani.

Cohort 11. May. 2018

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Certificate of completion

It is hereby recommended that the thesis submitted by Dler Abdul Jabbar Mustafa

titled “Microfinance Institutions Development Challenges and Opportunities” has

been accepted in the partial fulfilment of the requirements for the degree of Executive

Master of Business of Administration

Supervisor

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Abstract

The purpose of this study is to identify the key factors of the successful microfinance

institutions and unsuccessful MFIs. In absence of banking services, MF industry in Iraq

become a credible source for people to get financing sources. Some of these institutions

grow and expand. While another institution stayed in a narrow circle. Because the

importance of these MFIs from the financial and social perspective, I found, it is

interesting to investigate the reasons that help MFIs to grow and the reasons that prevent

them to grow.

I choose two sample, local MFI one of them able to grow and the other is not. I analyzed

the two company’s profile: type of products, fund sources, lending methodology,

branches distribution, and financial performance. Then I evaluated the weakness points of

the unsuccessful company, I used four Ps analysis for marketing to evaluate the company.

Then, I evaluated key factors of the successful company. I used microfinance best

practice and balanced scorecards to evaluate the successful company. I concluded some

findings such a legal framework, information system management, and capital limitations

were the main reasons that prevent institution’s growth. On the other hand, being first in

the market, portfolio diversity, and trained employees will help institutions to grow and

overcome the problems, challenges, and market volatility.

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Declaration Statement

I declare that no portion of the work referred to in this thesis, as defined by this course,

has been submitted in support of an application for another degree or qualification of this

or any other university or institute of learning. Further, all the work in this thesis is

entirely my own, unless referenced in the text as a specific source and included in the

bibliography/references

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Copyright © 2018

STUDENT’S NAME (Dler Abdul Jabbar Mustafa)

ALL RIGHTS RESERVED

No part of this thesis/case study may be reproduced, stored in, or introduced into a

retrieval system, or transmitted in any form or by any means (electronic, mechanical,

photocopying, recording, or otherwise) without prior permission of the researcher or

relevant department of AUIS.

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Dedication

To all my family members whose love and support have helped turn this once lifelong

dream into a shared reality.

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Acknowledgement

The researcher would like to express sincere gratitude to faculty members, Dr Mark

Deweaver for their invaluable support and guidance in the planning and implementation

of this research project. Appreciation is further offered to the managers and

staff/employees of Althiqa institution, Dr Abbas Abdul Razak, Mr Frank Gilbert

Mekhaiel, Alaman institution, Mr Hussein A Ibrahim for their help in producing this

research study. Without their contribution of time and resources, this study would not

have been possible.

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Table of Contents Certificate of completion .................................................................................................... 1

Abstract .............................................................................................................................. 2

Declaration Statement ......................................................................................................... 3

Copyright ............................................................................................................................ 4

Dedication ........................................................................................................................... 5

Acknowledgement .............................................................................................................. 6

Section 1: Introduction ........................................................................................................ 8

Section 2: Background of the unsuccessful company........................................................ 9

ALAMAN Institution ..................................................................................................................... 9

Loans products ........................................................................................................... 10

Loan term and conditions .......................................................................................... 11

Legal situation ........................................................................................................... 11

Financial performance ............................................................................................... 12

Current situation ........................................................................................................ 13

Section 3: Background of the successful company........................................................... 13

AL-THIQA .................................................................................................................................... 13

Legal situation ........................................................................................................... 15

ALTHIQA Branch Distribution................................................................................. 15

Loans products ........................................................................................................... 16

Loan term and conditions: ......................................................................................... 19

Financial Performance ............................................................................................... 19

ALTHIQA Competitions and Market Share: ............................................................ 20

Section 4: Key Factors of the Unsuccessful Company ..................................................... 22

Legal and regulatory framework: .............................................................................. 22

Information system: ................................................................................................... 25

Capital limitation ....................................................................................................... 27

Section 5: Key factors of the successful company............................................................ 31

Been first in the market ............................................................................................. 31

Portfolio diversification ............................................................................................. 33

Human resources management .................................................................................. 35

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Section 6: Conclusion ....................................................................................................... 41

Section 7: References ........................................................................................................ 43

Microfinance Institutions Development Challenges and Opportunities

Section 1: Introduction

After 2003 war and falls of Saddam Hussein regime. Iraq opened toward the world. Many

things entered to the Iraqi's people live like Mobil phone, satellite, private banks, and

non-government organization. One of the most challenging issue, which was very new in

Iraqi’s life, was Microfinance institution (MFIs).

Microfinance sometimes called microloan, it means providing small loans, insurance,

saving to low- income people, unemployed, and groups, who are not able to access

banking services. The beginning of occurrence of MF back to the 18th century by Irish

loan fund system, by Jonathan Swift, to improve situations of Irish citizens. However, in

modern form, MF became popular through Grameen Bank in 1976 by Mohamad Yunus,

in Bangladesh. (Investopedia website, history of MF), Therefore, I found it is interesting

to study these institutions and discover challenges and growth opportunity that faced

these MFIs.

In this study, I decided to look at two Iraqi MFI that was ALAMAN that facing

challenges and difficulties to growth and ALTHIQA that had successful key factors of

expansion. I wrote a summary of the two company's background. I determined the key

factors that constrained the institution from growth and the factors that help or push the

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institution to growth. I compared these factors with a business theory to find out where

things go right and where things go wrong. For example, I used MF good practice that

issued by the consultative group to assist the poor CGAP and the balanced scorecard to

measure MFIs performance. Finally, I used 4Ps analysis for marketing to evaluate the

unsuccessful company.

This paper organized as follow. Section 2 will look for the background of the

unsuccessful company (loans products, legal situation, loan term and conditions, financial

performance). Section 3 will look for the background of the successful company (in the

same order). Section 4 will look for fail factors of the unsuccessful company that include

(legal and regulatory framework, information system, and capital limitation). Section 5

will look for successful factors of the successful company that include (being first in the

market, portfolio diversity, and HRM). Section 6 will summarize my conclusion.

Section 2: Background of the Unsuccessful Company

ALAMAN Institution

ALAMAN organization established in 2005 and started working in July 2006, starting

from Kirkuk province. The headquarter set in Kirkuk. Alaman institution has 2 branches

and 2 sub-branches, it has the main branch in Kirkuk inside Kirkuk they have 2 sub-

branches in Hawija which are located in the south-west of Kirkuk 30 miles far away from

the city and Taza in the south of Kirkuk far away 7 miles from the city. Alaman at the

beginning of their life funded and supported by USAID ( U.S Independent Agency for

International Development, responsible for managing foreign aid for civilians,

established in 1961 during Jun F. Kennedy presidency). USAID offers fund and technical

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support for training. Another sponsor for the institution is provincial reconstruction team

(PRT) (unit established by US government try to help unstable states to rebuild their

cities, the team include military officers, diplomats, experts, worked between 2002 –

2008 in Iraq and Afghanistan). Initial capital was $250000 when they started lending.

Loans products

The institution offers some types of loans to cover market needs for instance:

• House improvement loans (this type of loan aims to help people to own their own

home, improve old one, expand the small house, or make an adjustment). The

requirement to achieve this kind of loan (national ID, individual ID, ration card,

house ownership document, and government employee guarantee the loan when

the customer becomes unable to pay the instalments). Comprise 22% of the total

loan portfolio.

• Small business loan: targeting all owners of small business and entrepreneurs,

aiming to improve and expand their business. The requirement to achieve this loan

are mostly the same requirement above. Comprise 36% of the total loans portfolio.

• Taxi loans: this type of loans is for all taxi drivers who work on transportations

sectors. The purpose of these loans helps the drivers to improve the quality of their

cars and push them to buy modern cars. Same requirement. Comprise 25% of the

total loans portfolio. Typically, the institution does not use the cars as collaterals.

The common guarantee is government employees.

• Murabaha loans: Murabaha methodology found to meet with clients expectations

who have a commitment to Islamic teachings. The idea of this methodology is

institution will give substance to the client instead of money with determined profit

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margin because Islamic religion does not allow taking profits or interest on lending

money. In Islamic methodology is not lending its look like the business trade

because you sale substance and materials to your client instead of giving him a loan.

Comprise 17% of the total loans portfolio.

• Group loans: this type of loan target very poor business owner who does not have

documentation about their work like legal licensee, book accountant, stable places.

The differences of this loan are (small loan amount, short term, simple requirement,

and no individual guarantee). Comprise 0% of the total loans portfolio because of

stop demand for this product.

Loan term and conditions

The institution charges12 - 18percentage annually interest rate taken in advance.

The interest rate differs from loan product to another. For example, taxi loans 18%,

SME loans 12%. Loans cycle, the quality of the borrowers, and the existence of the

guarantee do not affect the interest rate. Loan amount between $500- $6500 only.

Loan period of 12 months to 18 months. Loan amount pays back by monthly equal

instalment after 30 days of loan life. When customers apply for loans, they must

offer their personal documentation. Personal documentation of guarantee and

property documentation.

Legal situation

Like all of the other Iraqi MFIs, Alaman registered in the department of helping

non – government organization in general secretariat of the council of ministers as

a non- government organization and non-profitable organization. Having

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independent entity after that, institution acquired moral and legal personality to

represent in front of the court and other formal institutions. Each year MFIs must

provide financial reports, staff profile, bank accounts, and branches locations to

renew the license.

Financial performance

During years of 2006 to 2017, the institution’s performance was good except in

2013 and 2014 the institution faced a retreat in their performance indicators like

loans portfolio and the number of active client due to ISIS war and financial crisis

in Kurdistan region. The institution outstanding portfolio report (outstanding

portfolio means the number of loans stay in the customer's balance and not back to

institutions yet), the institution started with $94,976 as the end of Dec 2006 to

become $10,514,794 at the end of Dec 2017. Another indicator related to a number

of active clients started with 49 customers at the end of Dec 2006 and then reach

more than 5000 customers at the end of Dec 2017. The most challenge goal of each

microfinance institution is when you reach operational self-sustainability, which is

mean that the institution can cover their cost from the interests that come from

lending operations, like break-even point. When institution reaches self-

sustainability that is mean, the institution can depend on themselves and they do

not need fund from sponsoring institutions. We can see that the institution reach

operation self-sustainability just after two years work at the end of Dec 2007

operation self –sustainability was 97%. At the end of Dec 2017, this indicator was

267%. The highest level of operation self- sustainability indicator was 328% in

2012 there for the institution awarded by USAID for this great performance.

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Current situation

Know after more than ten years work. The institution has around 45 employees, 20

of them are loans officers. The institution has more than 5000 clients. Portfolio

outstanding more than $10,000,000. Women percentage 23 %( most of sponsoring

institutions encourage microfinance institutions to lending women to push them to

get financial independence due to lots of families in Iraq lost their family supporter

in the terrorism wars during 2003 to 2017, and Iran war before that). Repayment

rate 97%, portfolio at risk 3.5 %,( divide outstanding of total delinquent loans/

outstanding of total loans). Average loan size $2090, total assets ($15,071,993),

Total liabilities ($653816), and total equity ($14,418,177). Numbers of loans

disbursed since inception are more than 37000 loan, the amount of these loans was

more than ($104,000,000). From the first glance, maybe the reader thinks where

the problem is. The indicators above is good. Nevertheless, the main question is

why the institution does not grow or expand horizontally. Why they still work just

in two cities since 2006 among 18 provinces in Iraq. How much opportunities and

chances they lose. How many clients they lose, what about their market share, what

about profit margin.

Section 3: Background of the Successful Company

AL-THIQA

AL-THIQA started in 2004, first branch and headquarter located in Kirkuk province.in

the beginning, AL-THQA was one of ACDI/VOCA program in Iraq (ACDI/VOCA is a

US NGO nonprofit organization work in international development and know is active in

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40 countries over the world). ACDI/VOCA got fund from coalition provisional authority

(CPA) to establish ALTHIQA institution. (CPA) is a temporary transitional government

of Iraq, formed after falling of Saddam Hussein regime in 2003 by the US-led

multinational force. Initial loans capital was around $3,000, 0001. The main idea of CPA

and ACDI/VOCA program offered quick financial sources to enhance business

investment and private sector at the same time create employment. The situations during

Saddam Hussein regime was bad, lucky people just find employment in public sector

with the monthly salary no more than $10. The unemployment rate was more than 30%.

The inflation rate was more than 25%. In such environment CPA, feel the importance of

establishing microfinance industry in Iraq to reduce little bit some of the impacts of the

bad economic situation. The concentration was in conflict area to create a job for jobless

people to prevent them from joying to terrorist groups because of their bad economic

situations. The agreement did to work Althiqa in Bagdad and north of Iraq and

Cooperative Housing Foundation (CHF) to work in Bagdad and south of Iraq. CHF

international organization emphasize to help people improve their lives and livelihoods

for better future. Althiqa started operation in 2004 at the beginning of their journey it got

several funds from US government for loan capital and technical assistance like (training,

experts, international supervisor). Most of the institution funds were from USAID

through different programs like INMMA agribusiness program, the funds were around

3,070,000. IZDIHAR private sector growth and employment generation program, the

funds was around $1,179,000. Another funder was KIVA international nonprofit

1 Source: Althiqa grants reconciliation, CAO, sent by email, I think these numbers consider as total funds got from donors.

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foundation specialist in lending. Finally, the golden funder of the institution was

ACDI/VOCA who was behind establishing the organization, financing, and training.

Legal situation

The institution registered as an Iraqi non-government organization under the Iraqi NGO

low number twelve. The institution considers as a nonprofit organization based on insider

policy. It has the same legal position as Alaman institution.

ALTHIQA Branch Distribution

The institution has eight branches and five Satellite Offices. The branches located in

Baghdad, Ninawa, Deyala, Kirkuk, Sulaymaniya, Erbil, Duhok, Kanaken. The satellite

office located in Koya, Sayed Sadek, Jamjamal, Amadeya, and Kalar. The organization

has 160 employees, 51 of them are loans officers, distributed in these offices. Below the

location distribution of all the branches and satellite offices on the map (Frank G.

Mekhaiel, 2013).

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The source, Frank G. Mekhaiel, Impact of good MIS on high-performance MFI, 2013.

Loans products

Althiqa has 12 type of loans products.

Small enterprise loans: this type of loan target all small business owner to help

them to improve and expand their project whether loan amount uses to increase

project capital or to make improvement in tools and equipment. Comprise 25%

of the total portfolio.

Transportation loans: this type of loan available for all taxicab or driver of the

big vehicle to improve the quality of their cars that use in the work or help them

to buy modern cars. Comprise 36% of the total portfolio.

Home improvement: this type of loan aims to help customers to build their own

house, improve old one, and expand the small house. Comprise 20% of the total

portfolio.

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Murabaha loans: Murabaha methodology found to meet with clients

expectations who have a commitment to Islamic teachings. The idea of this

methodology is institution will give substance to the client instead of money

with determined profit margin because Islamic religion does not allow taking

profits or interest on lending money. In reality, Islamic methodology is not

lending its look like the business trade because you sale substance and

materials to your client instead of giving him a loan. Comprise 3% of the total

portfolio.

Agriculture loans: this type of loan aims to improve agriculture sector by

offering the needs of farmers in their filed, amount of loan can use for purchase

some things like feed and livestock, farm tools, reaper building, farm chemical,

crop. Comprise 6% of the total portfolio.

Group loans: Group loans: this type of loan target very poor business owner who

does not have documentation about their work like legal licensee, book accountant,

and stable places. The differences of this loan are (small loan amount, short term,

simple requirement, and no individual guarantee). Comprise 0% of the total

portfolio because the demand for this type stopped.

Consumer loans: this type of loan can use for personal needs, for instance, buy

a laptop, Mobil, tourism. The amount of this type does not exceed $1200 for a

new customer and $2000 for renewal customer. Comprise 2% of the total

portfolio.

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Startup loans: this type of loan designed to meet jobless people to help them to

start their own business and create job opportunities. Comprise 3% of the total

portfolio.

Healthy Treatment loan: this type of loan designed to meet needs of persons

who have a health problem and the cost of their treatment more than their

income like a cost of surgery, cost of travelling outside country for treatment.

Comprise 2% of the total portfolio.

Study loans: this type of loan designed to meet needs for those who lose the

chance for finishing their education. Therefore, the institution helps them to

pay the cost of study and get their high education. Comprise 1% of the total

portfolio.

Short-term loans: this type of loan designed to meet the needs of those who

need a rapid source of money to make quick business transactions. Usually, the

loan term will be less than one year. Sometimes loan term becomes for two or

three months. This methodology work in cities who locate in the border

between two countries, like Duhok. Comprise 1% of the total portfolio.

Insider loans: this type of loan just for ALTHIQA employee. Zero interest rate.

The loan used as an incentive for the employee. This type of loan exclusive for

ALTHIQA organization only no one of any other microfinance institutions

offers such kind of loan for their employee. It has a positive impact to keep

employee inside the organization because the employee turnover rate in this

industry is so high. Comprise 1% of the total portfolio.

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Loan term and conditions:

In last years, the institution follows a new methodology for the interest rate. It

decided to make it 1% monthly payable in advance. The Interest amount

subtracts from loan amount2. The institution Offers flexibility for the customer

to choose the suitable loan term and suitable interest rate based on loan period,

for instance, loan for ten-month interest rate will be 10%. In another word

interest rate related to loan term. The interest rate, not changes based on the

type of loan product, loan cycle, the existence of collateral or not. Loan

amount ($500 to $25000) this is also considered as a competitive advantage for

the institution because of the other competitors not lend such a loan amount.

Loan term (3 months to 24 months). Application fee $12. The requirement to

apply for loan includes personal documentation for the customer, property

documentation of the project, guarantee (government employee). The guarantee

required whatever was the type of loan, loan amount, and loan cycle.

Financial Performance

Now after fourteen years working in the field. Facing many problems and

challenges, closed branches because of security situations in Deyala and

Ninawa, then recover again after situation improved. In addition to that, the

negative influences of the financial crisis in KRG in last four years that was the

main reason behind increasing PAR percentage in the institution. The

institution has more than 14600 active clients. More than $24,909,228 portfolio

2 If the borrower borrows $1200 for 12 months. The interest rate will be 12%. The institution subtracts

$144 and pays to the customer $1056, and the customer has to pay back $100 each month.

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outstanding. Average loan size around $1705. Women percentage 26%.

Repayment rate 85%. Total liabilities $9,513,7153. Total equity $41,546,022.

Operation self-sustainability 152%. Portfolio at risk 8,120,859. It disburses

since inception more than $455,818,000. Served more than 139, 300 borrowers.

ALTHIQA Competitions and Market Share:

At the beginning of the work, there were just two-microfinance foundations

worked in Iraq, which are ALTHIQA that working in Baghdad and north of

Iraq, CHF that working in Baghdad and south of Iraq. Baghdad was the city

that both institutions compete with each other. Then the market became more

competitive. A lot of institution entered the market for example; Relief

International (RI) worked in Sulaymaniya, Erbil, and Duhok. Bright Future

Foundation (BFF) that is also working in Sulaymaniya, Erbil, and Duhok. Iraqi

Alaman Center (IAAC), which is working in Kirkuk and Erbil. I mentioned

only microfinance institutions that have common areas operations with the

organization. I did not mention other organizations that work in south and west

of Iraq. In addition to MFIs competition, there are other competitors like

informal moneylender, private banks, and government programs. In below list,

we can notice the volume of ALTHIQA portfolio comparing with other

competitors.

3 ALTHIQA got some conditional funds from USAID to the specific purpose, until now they did not make

fund settlement to become unconditional fund so as a policy the institution record these funds as a liability.

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MFI Portfolio Volume Number of Clients Market Share

1- CHF 41,374,196 20,130 29%

2- ALTHIQA 33,643,426 15527 23%

3- ALTAKADUM 11,909,890 11,341 8%

4- RI 10,438,894 10,775 7%

5- IZDIHARUNA 9,225,738 8551 6%

6- ALBASHAER 8,596,164 5667 6%

7- ALAMAN 7,432,894 5007 5%

8- BFF 6,739,256 4594 5%

9- TEDC 5,919,373 5073 4%

10- AMALOKOM 5,002,305 7869 3%

11- ALMOSAND 2,469,296 2739 2%

12- TDMN 1,811,548 1193 1%

Total 144.6m 98465 100%

We can notice from the table that ALTHIQA comes in the second rank overall,

after CHF institution4. It is in the first rank among the microfinance

organizations that have common areas operations or between the organizations

that compete in the same city. By connecting with part one (Background of the

4 Cooperative housing foundation, founded 1952, known as CHF international, help people to develop their lives and livelihoods for better future, 20 million people annuli useful from their services. Start lending operations at the same time with Althiqa focused on Baghdad and south of Iraq.

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Unsuccessful Company), which I talked about ALAMAN Iraqi Center as a case

study. You can notice that it comes in ranked seventh overall.

Section 4: Key Factors of the Unsuccessful Company

When I interviewed Mr Hussein ALAMAN executive manager. I asked them about why

they did not grow and expand during all these years. After long discussions, I found some

reasons prevent them from growth. The key factors behind this crisis were below:

Legal and regulatory framework:

The financial sector in Iraq undergoes many lows and supervision from many

parties that have the right to check and audit their activities. For example, we have

Iraqi central bank low that regulates activities of governments and private sector

banks. We have NGO Low issued in Iraq in 2010 define MFI as institutions that

practice nonprofit activities and regulating organizations issues in general. We

have NGO Low issued in KRG 2011, different little bit from Iraqi NGO low.

In the other hand, we have several lows and regulations issued to support micro

and small business. For instance, Iraqi parliament issued low in 2012 to support

micro and small business offering giving those business loans without interest. In

addition to tax exemption. Which mean that the government became the biggest

competitors for MFIs and influencing their growth.

Finally, we have regulations for Microfinance Company. Which allow

establishing company practice lending small and micro business.

Through this mess legal environment, MFIs suffering from misunderstanding to

nature of MFIs, and miss explanation to lows. For example, NGO low did not

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mention anything about customer protection rules. Although MFIs signed,

something looks like a code of ethics but it is non-binding. While banks have such

rules and subject to privacy and confidentiality.

NGO low did not mention anything about having the right for creating customers

credit information database while central bank have such database and banks can

use it to get information about customers liability and exchange the information

between banks. This database so important especially when we know there are

twelve MFIs work in Iraq. Sometimes there are more than five institutions work

in the same city. The customer can borrow from more than one institution without

other institutions know about that. This led to debt accumulation, in the end; the

customer cannot pay for any institution. The only available source for MFIs to

get information about customer liabilities and borrowers defaulters was blacklist

database and it stops now because the institutions were not serious about giving

information about its blacklist.

There is no fast way for recovering delinquency loans. NGO low did not treat this

part. You must go back to civil low and follow tradition court process to solve

delinquency loans that take more than one year and this not match with nature of

the MFIs.

As I mentioned before NGO low issued in 2010 before that time there were more

than 2400 organizations working in several sectors in Iraq including MFIs. New

low asked all these organizations for enrollment again and get a new license based

on the new low. For enrollment, the low was asking long, boring process. MFIs to

get a license from NGO Office, must offer financial reports, activities reports,

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finance sources, describe their activities, banks accounts, name and full

information of its employee, name and address of general manager, insider policy

and so on.

Until now, it is not clear that the NGO low allows MFIs to transfer their assets to

financial company or limited liability company (LLC). NGO Office does not

allow MFIs to transfer their assets based on miss understanding for low’s articles.

NGO Office excuse for that, it believes that the transformation changes MFIs

goals and make them focus on private interests more than public interests.

Moreover, many states like Tunis, Palestine, Morocco allow this transformation5.

In fact, miss understanding NGO Office to explain many articles of NGO low

creates a lot of problem to MFIs. NGO Office succeeds in many opportunities to

impose its wrong explanation on MFIs. For instance, prevent MFIs from

transferring money outside the country to debt repayment, NGO office impose on

MFIs maximum interest rate, in fact determining maximum interest rate depend

on demand and supply theory and NGO office not expert in this issues. Prevent

MFIs from sale their assets as loans portfolio to profit company. NGO office

asked MFIs about having a board of director in each branch. Asking MFIs to pay

tax because they practice profit activities. However, practising profit activities not

mean that the organizations are profit organizations because profit description

depends on whether there is profit distribution or not.

5 Legal and Regulatory Framework of Microfinance in Iraq, 2014, World Bank and CGAP team, P22.

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Best practice in microfinance industry make MFIs under CBI supervision like

Sudan, Yamen, Egypt, and Kenya. Because it has a better understanding of MFIs

nature. MFIs will get benefit from credit register, sufficient interest rate based on

demand and supply. Ability to borrow money.

Such environment was not encouraged ALAMAN institution to grow and expand

in other cities. Because of your future is not clear. It seems that these problems

effect on new institutions more than old institutions because the old institutions

like Althiqa and CHF, started operations in 2004, during this time until 2010 the

date of issuing NGO low. The institutions started operations and opening

branches during these six years. Therefore, they became had loans portfolio,

numbers of the active client, branches before issuing NGO low. An institution

will not take a risk by opening new branches and increase your cost by hiring new

staff, rent location, purchasing furniture. Unless there are a friendly legal

environment, support and enhance MFIs growth and expansion.

Information system:

Another key factor that prevents the institution from growth was information

system. In financial sector and particularly MFIs, information system plays grate

rule to enhance organization performance. It provides an institution with valuable

information help in a decision-making process, regulating the relationship

between organization and customers. It offers good quality information about

your product, customer, geographic distribution, financial transactions, and

monthly matching and auditing, loan tracking system, and risk management.

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(Frank G. Mekhaiel, 2013) mentioned in his thesis that CGAP foundation (the

consultative group to assist the poor) made an assessment in 20096; it found that

many MFIs use poor quality information system that prevents them from

expansion into active institutions. Many MFIs managers believe that having

information system to track their portfolio on time and get accurate information is

more important than staff development, lending methodology, even liquidity for

growth and expansion. MIS helps institutions to get sustainability by providing

kind of information support achieving sustainability.

The problem with information system is the high cost of this department. Starting

from a high price of software and hardware, High cost of maintenance contracts,

the difficulty of finding qualified and trained employee to work on the system.

Because Iraq was new in the microfinance industry, many institutions trend to

outsourcing information system department because of scarcity to find trained

employee which mean extra cost that mostly unaffordable by small and middle

MFIs. Some MFIs got information system as a grant from donors like Althiqa.

Furthermore, bad Iraq's services sector makes the problem worst. Bad quality

electricity power one of these problems, government electricity power available

just for six hours per day, and the rest of the day you must have your own electric

power generation. This is an extra cost for the institution because you need a

guard for the generator, an employee for maintains, in addition to the cost of fuel

6 Same source, Frank G. Mekhaiel, the impact of high MIS on microfinance performance, 2013.

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and cost of purchasing a generator. Some institutions make special department for

generator in the organization structure.

We can say the same thing about internet quality service, most of the institutions

suffering from internet service quality. If you are a large institution and you have

branches in deferent areas, you need good quality internet service to share

information online, upload and download information and reports, which is

difficult in this situation.

All of these problems were the key factors that prevent an institution from taking

risk and growth. All of the reasons that prevent an institution from growth have a

correlation. For example, gathering legal environment, information system’s

problems, capital limitation, cultural diversity all together create risk verse

climate in the institution, resulting lack of growth.

The extra cost of information system maybe affordable for big institutions but it

is really challenging for middle and small institutions. Because of these reasons,

most of the small organizations use Microsoft Excel or use poor quality

information system. Which not support growth and opening new branches.

Capital limitation

Capital limitation or liquidity is another challenge or fail factors of MFIs. When

you do not have enough cash, you cannot open new branches or service new

areas. In general, you will be not able to practice any activities led to increasing

the cost even if these activities result to increase income in long-term.

As I mentioned before MFIs rely on funds from donors to finance its operations.

Unfortunately, since 2012 MFI sector not seen any type of funds. In addition,

28

NGO low prevents MFIs from borrowing money or get deposits to solve liquidity

problem. This will be main challenge to MFIs future that prevents them from

continues growing.

We can see the impact of stopping fund in the institution portfolio during 2013

and 2014. The number of active clients decreases from 4840 at end of 2012 to

3972 at end of 2013 to 4134 at end of 2014. Same impact in the outstanding

portfolio, which decrease from $7,577,624 at end of 2013 to $7,498,827 at end of

2014. It is true that is a small decline in portfolio outstanding. At least we can say

stop funds mean to stop the growth of MFIs.

Based on the organization’s life cycle, we can say that source of finance

connected with MFI level of evolution. At the beginning of MFI life cycle, maybe

the funds are the best options for financing institution. When MFI become more

mature, the private debt will be the best option might be with strong grantees and

obligations. In the last stage of MFI development traditional equity financing

become the best options for MFIs.

The best practice in Iraqi microfinance industry is to allow to MFIs to transfer its

assets to financial company or LLC. In this way, MFIs can borrow money from

commercial banks, get deposits, or even get cash from company’s owner.

MFIs evaluate based on many categories like social performance (numbers of

poor people they served, level of poverty that the institution tries to reduce).

Another measurement is a financial performance that means (quality portfolio,

29

number of active clients, and portfolio volume, and repayment rate, portfolio at

risk, operation self-sufficiency, and financial sustainability).

I made my analysis based on four Ps analysis of marketing. Because I believe,

the institution fails to market its products during lots of constraints and challenges

based on our explanation above. Four Ps marketing coined by Neil Borden, are

“the ingredients that combine to capture and promote products or brand unique

selling point, those that differentiate it from its competitors” (purely branded,

2015). Recently because of strong competition, marketing consider so important

for MFIs. Institutions must choose the best way to find clients and make sure that

the customers are satisfied with institution services. The way that MFIs choose to

market products directly affect organization performance and led to succeed or

fail. Four Ps analysis is measurement tool for company’s performance. It based

on four categories (product, price, place, promotion).

A product is the first category of four Ps analysis of marketing. The main point in

this category is the MFIs must have clear idea about making its products unique

and different from competitor’s product especially when you entered the market

after many institutions that exist in the market before you. This is not happening

with ALAMAN. The institution entered the market with just four-tradition type of

loan product (SME loan. Home improvement loan, taxi loan, group loans, and

lately designed Murabaha) none of them was new or unique, while competitors

try to cover market needs widely.

Add to that loan amount was around $500 to $5000, maximum loans amount for

a repeat customer is $7000, while competitors offer loan amount up to $25000.

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The same weakness with loan term. The institution offers two determined loan

term, it is 12months and 18 months, however, Althiqa offers loan term up to 24

months, and there is flexibility in between. For instance, you can take a loan for

eight, twelve, fifteen, or twenty-two months, not only two options either 12 or 18

months.

The second measurement is a price. Pricing product is an essential issue in MFIs

because you need to cover your cost as soon as possible in the same time lower

pricing consider as the best strategy to get competitive advantage especially when

you newly entered the market. The interest rate around 12% to 18% based on the

type of product, for example, they charge 12% interest rate on SME loan and 18%

on Taxi loan. While recently most of Iraqi MFIs do not recognize the interest rate

based on the type of the loans or the purpose of the loan. For example, Althiqa

charges 12% interest rate on all the type of its loan products.

Third category place, always in business literature, we hear marketer saying that

marketing is about putting the right product, at the right price, at the right place.

MFIs must choose the place carefully to convert potential customer to actual

customer. At the beginning of the institution life cycle, its location was in the

governorate building. This location had high-security level because of the security

situation and visited by politician and high post persons in the state. So visiting

branch was so hard for ordinary people. They choose this place because it was

free rent office due to it is a government office, another advantage of the place

was having electrical power all the time free. In the marketing perspective, it was

worst location.

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The fourth element is promotion, which means an advertisement, public

relationship, and social media. I do not see weakness in the institution

performance related to this element. They run social media (Facebook, google

engine, running a modest campaign for advertising like putting posters,

distribution brochures).

Section 5: Key factors of the Successful Company

ALTHIQA successful key factors comprise:

Been first in the market

Althiqa started operation since 2004. It was first organization practising MF activities in

Baghdad and north of Iraq. The institution got many advantages from been first in the

market. First mover advantage mean advantage that gained by the firm who offer product

or service before other institutions. In this case, the firm establishes a strong brand and

product loyalty for other organizations.

Professors Marvin Lieberman and David Montgomery in their 1988 winning paper "First

Mover Disadvantage: Retrospective and Link with a Resource-Based View", mentioned

three advantages of being the first mover. 1) Technology leadership: which mean the firm

make their product hard to replicate from other entrants. That what happened exactly with

ALTHIQA. All of the institutions who entered the market after ALTHIQA like (Alaman,

BFF, Ezdharuna, and Amalukom) was unable to imitate ALTHIQA's product diversity,

interest rate flexibility, loan term, and loan amount. 2) Control of resources, the first

mover can get an advantage of the ability to manage their strategic resources. For

instance, the institution opened some branches in the small town of Jamjamal, Koya,

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Syed Sadek, and Amadeya. Until now, the competitors are unable to work in these small

towns. Although there is good demand for loans and good repayment rate in these places.

Portfolio of these satellite offices around $500,000-$700,000. The number of active

clients around 300-500 active clients. Due to its small town, people know each other and

social relationship is strong. It is difficult that institution exposed to fraud and easily you

can make customer loyalty. 3) Buyer – switching cost, the first mover can get advantage

from buyer switching cost, which means the costs that customers afford because of

changing product or brand. In spite of the cost's nature are monetary, there are also

psychologically, time and effort based switching cost. Buyer switching cost is important

for MFI. For example, when you take a loan from given institution for twice or the third

cycle, you build a credit history with this institution they make many facilities to you

because they know you; you have a good reputation and credit history. When you change

your institution and try to borrow from another institution, you will lose your credit

history and facilities you will start from scratch with the new institution. You will lose

the advantage of borrowing big amount or long-term loan.

In other words, when you are the first mover you make customers switching very

difficult for competitive institutions unless the competitors offer unique product

competitive more than your product.

In addition to these three advantages, I think the first mover can make the high-profit

margin. When you are the first mover and work in a monopoly position, you can charge

high profits for your products or services. For example, before competitors entered

ALTHIQA operations area, its interest rate around 12% to 20%. Then decline gradually

when the market becomes more competitive. You can imagine when the closest

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competitors entered the market and started lending operations that were ALAMAN in

2006 and BFF during 2007, ALTHIQA had six branches in Baghdad, Deyala, Ninawa,

Kirkuk, Sulaymaniya, and Erbil. The total loans portfolio from these branches was $

5,483,312. The number of the active clients was 4140. Women percentage was 20% at

end of 2006. However, at the end of 2007 total loans portfolio was $8,341,706. The

number of the active clients was 5268. Women percentage was 28%. You can imagine

the volume of work and control that made by the institution before entering of

competitors, which made the competition hard for competitors.

Portfolio diversification

Since inception, Althiqa characterized by quick response to customer needs and market

demands. This methodology led to design many types of loans product based on customer

needs and as a part of its social responsibility to reduce poverty, jobless, support young

groups, enabling women in the society.

As a result, to this way of thinking, ALTHIQA own 12 kinds of loans products. So most

of the social categories have a source of finance in ALTHIQA institution, for example,

SME owner, farmer, younger, women, taxi driver, employer, students, and so on. Same

thing with the goal of the loan it is diverse and flexible. ALTHIQA offer loans for home

improvement, agriculture sector, transportations, business, treatment, education,

consumer, and so on.

Portfolio diversification is useful for the institution. It means diverse your investment in

several sectors and does not focus on one investment to avoid market volatility. As

golden rule says, do not put your eggs in one basket. In MF activities, this idea is

34

important for two reasons. 1) Maximize the profits 2) reduce the risk. Diversification: “is

the practice of spreading your investments around so that your exposure to any one type

of asset is limited” (“What Is Portfolio Diversification? - Fidelity”, 2018).

Portfolio diversification led to maximizing profits of the institutions. If we analyze

ALTHIQA portfolio regardless of the common type of loans that are common between

all institutions and focus on the uncommon type of loans. We can see a volume of profits

that gained by these loans products. For instance, start-up loans that help individuals to

start their own business and reduce the unemployment rate, it comprises 3% of total loans

portfolio $ 24,909,228, which is around $747,276. The same thing with short-term loans

comprises 1% of total portfolio, Study loans 1%, treatment loans 2%, and consumer loans

2% of total portfolio. In addition to other advantages like attract several kinds of social

categories, increase market share, and cover market needs.

The second advantage of portfolio diversification is reducing the risks. Portfolio or

investment diversity consider one of risk management technique. Help the institution to

avoid market or portfolio volatility. For example, when the demand for given product

shrink or decline can other products help and gain the institution suitable profits, finally

avoid losing.

Another type of diversity characterized the institution was geographical distribution

diversity. The institution has diversity in branches distribution. For example, the

institution has four branches located in the KRG that are (Sulaymaniya, Erbil, Duhok,

and kanaken) and the rest of branches located in the middle of Iraq that (Baghdad,

Deyala, Ninawa, and Kirkuk). During years of 2006-2009, when the middle of Iraq

branches faced the deterioration of security situation. There were follow conservative

35

policies in lending operations. It was concentrating on employees and customer’s safety

more than financial achievements and growth. At this time, the institution branches that

located in KRG authority that are more secure than the rest of Iraqi’s cities, they were

burst their portfolio volume, increasing numbers of active clients, expand and control the

market as much as they can, increase financial sustainability.

Vice versa, when KRG branches faced IS war and financial crisis related to decrease and

delay employees salary during the year of 2014, these branches follow conservative

policies, putting portfolio at risk indicator in its first priority. Middle of Iraq branches

increased their activities and their performance to compensate financial losses and

increasing of loan loss provision in KRG branches. Therefore, we can realize that in spite

of volatility of security and economy situations, the institution still does a good job and

make sufficient income.

While other institutions who have lack of diversification was suffering from the

volatility of the economic and security situation, led to firing the institution some of their

employees, stop lending operation and focus on collect money from its customers.

Resulting in at the end to lose the institution their portfolio, lose their customer or even

stop working and close the branches.

Human resources management

Human resources consider as the most important asset in the organization. William R.

Tracey, in The Human Resource Glossary, defines Human Resources as "the people that

staff and operate an organization". Human resources are the department that translates all

the company's ideas and goals to facts in the field and real world.

36

The importance of Human Resource Management doubles in the MF industry because of

productivity and turnover. The process of recruitment, hiring, and training employees is a

long process and cost the organization money, it is crucial for the institution that looks for

financial sustainability. The employee's performance influence productivity and financial

performance of the organizations. Based on a survey about “HR Challenges and

Solutions in Microfinance” April 2008, issued by Microfinance Insights India, support

our ideas above, staff issues more challenging than financial and technology issues.

Therefore, I think ALTHIQA human resources has some competitive advantages that are

maybe not available for other institutions or at least not in the same value.

The competitive advantages of ALTHIQA HRM back to two reasons, which are the first

mover and corporate strategies. First, because of ALTHIQA was the first institution

started lending operations in Baghdad and north of Iraq. It became subject to extensive

training program offered by USAID coordinating with CGAP (the consultative group to

assist the poor). ALTHIQA staff got suitable training by the best experts in the MF

industry in Jordan and Lebanon. As USAID, Izdehar program, mentioned in his third

report, in 2010, issued in Iraq about “State of Iraqi’s Microfinance Industry”, Izdehar

program started in 2006 Training of Trainer Program TOT. The program chooses 11

persons to train them to be the leader in the industry, and then those 11 persons will train

local staff. They got extensive training in risk management, product development, HRM,

accountant, financial management. Five of those eleven was from ALTHIQA first

37

generation staff. In addition to other important training like boulder institution of

microfinance7.

Later, this valuable training was not available for other institutions that entered the

market later. Because of when the local staff finished training of trainer program, TOT.

They became the trainer of the local staff. Their training was not valuable as CGAP

training because they were new in training field and they repeated the same topics that

they studied in TOT program. These course’s topics were interesting for MFI managers

but it was not useful for first-line employees like loan officers, which are more need to

training.

The second reason was the corporate strategies. When I interviewed MS Hero Hasan,

ALTHIQA HRM, in Erbil, to talk about company's HRM. She told me that the institution

strongly follows insider promotion policy. In other words, since inception, in spite of

changes in sensitive posts like vice GM, operation manager, and chief of an accountant,

the institution never hired employee outside the institution. All the persons, who running

these posts know, were first-line employees, trained, became more experience, promoted

gradually.

Trained employees and policies that motivate people to work hard do their best all the

time and keep strong loyalty to the institution help the organization to operate in conflict

areas like Deyala, Ninawa, and Kirkuk. The institution was able to achieve good financial

7 Boulder institution of microfinance, located in Italy, train MF leaders toward sustainable microfinance.

38

performance in these conflict areas. For example, loan portfolio in Deyala branch was $

6,580,040. The number of active clients was 3270 at end of 20178.

Although USAID encourages many institutions to operate in conflict areas, just a few

institutions worked in these areas like Talafer Economic Development Center in Ninawa,

Alaman in Kirkuk, and no institutions worked in Deyala except ALTHIQA. These

institutions were neither successful nor big as much as they can compete with ALTHIQA.

Because of MFI inherently established to serve poor people and reduce poverty.

Therefore, we believe that Balanced Scorecard Measurement is useful to measure

ALTHIQA performance. Balanced scorecard as defined in Wikipedia cites "it is strategy

performance management tool". The most important feature of Balanced Scorecard that it

contains financial and non-financial goals. Balanced Scorecard focus on measuring

organization performance from a different perspective like strategic goals, customer

satisfaction, internal process, learning and growth. All of these elements suitable with

MFI nature if we mixed with minimum financial performance indicators for retail

financial institutions that advised by the consultative group to assist the poor CGAP,

2006, “Good Practice Guidelines for Funders of Microfinance”.

We can divide the form into two categories, which are social performance and financial

performance. Therefore, we can analyze as bellow 1) outreach breadth, it means the

numbers of the active client at given point of the period. It is an important indicator for

both the institution and the funders. Because from the social performance perspective,

both are striving to serve, poor people as much as they can. We can see that number of

8 Based on ALTHIQA Outreach Report at end of Dec 2017.

39

active clients at end of Dec 2017 was more than 14600 distributed in different areas

around Iraq comprise conflict areas and stable areas. 2) Outreach depth that means the

level of poverty that the institution tries to serve or try to reduce it.

From the social performance perspective, outreach depth considers as an important

indicator because it shows how much the institutions go deeply to serve the poor. To

measure the level of poverty that the institution tries to financing them, we need to know

Average Loan Size9 of the institution, which is $1705. If we compare Althiqa average

loan size with normal living standards of Iraqi people, we conclude that the average loan

size is small, which is mean that the institution went deeply to serve poor people.

This conclusion is not strange due to that the institution serve in many conflict and hot

areas, it has offices in towns that usually the living standards lower than the city10. 3)

Loans repayment rate and portfolio quality, this the most important indicator among five

indicators. Because good portfolio quality has many meaningful signals about the loan

was valuable for the customer, loans policy works well, information system gives

appropriate and on time reports. Conversely, lower loans repayment rate is a signal of

management weakness, poor of information system quality, and lack of incentive system

for collecting delinquent loans. It influences financial sustainability by increasing loan

loss provision and reduces the income.

If we have a look at the organization's PAR, which is 22% based on MF best practice

this percentage consider high. The main reason behind lower repayment rate is the

9 We get average loan size by divide loan portfolio outstanding /number of active clients(24,909,228/14600=1705) 10 USAID mentioned in its annual third report about state of Iraq's MF industry, 2010, poverty level in Iraq around 23%, especially in Kirkuk, Ninawa, and Deyala around 20%.

40

financial crisis in the KRG. Because of tension relationship between Baghdad and Erbil,

the employees do not get their monthly salary on time in addition to reduce their salary

amount. This means that there is no project fail or weakness in management and policies

or losing the loans. The point is just late payment. Nevertheless, 22% PAR consider high

percentage. 4) Financial self – sufficiency: this is the main common indicator to measure

MFIs performance, especially for MFIs that work as non-government organizations that

depend on funds to finance their operations. This indicator shows how much the

institutions covered their cost based on its income from lending operations or still need

funds to continue its operations.

In Althiqa case, the operation self-sufficiency OSS is 152%. In spite of increases in loan

loss provision because of high PAR percentage, but still, the institution generates enough

income to cover their cost that is a good indicator.

Althiqa financial self – sufficiency FSS is 129% after adding the inflation rate and

commercial borrowing rate. The FSS still above 100% that means the institution still

cover their cost and it is able to dispense the funds and depend on themselves. 5)

Efficiency: another two indicators related to the effectiveness of MFIs performance. The

two indicators are operating expense ratio and cost per client. These two indicators show

how much MFIs can provide financial services at lower cost. The indicators focus on

nonfinancial expense.

To begin with, operating expense ratio OER, ALTHIQA OER is 13%. It is a good

indicator because the average of OER of MFIs is 19%, reporting to MIX MARKET,

2006. Cost per client, it shows how much each loan cost the institution. Althiqa cost per

client is $228. When the MFIs disburse small amount loans more than big amount loans,

41

the cost per client will increase and vice versa. MFIs try to decrease both OER and cost

per client as much as they can to increase their efficiency.

Section 6: Conclusion

During a few years ago, Iraqi MFIs emerged as a reliable source for financing poor

people and low-income households, who cannot borrow from normal banks. Some of

these institutions were suffering from hurdles that prevent them from growth and

expansion.

We can divide the factors that prevent the growth into two categories, external factors

and internal factors. To begin with external factors, we believe the MFIs missing

international supervision. The influence of withdrawing the USAID from sponsoring MF

industry in Iraq that was great.

USAID handle supervision of MFIs to Al – shabaka which is local institution managed

by the managers of Iraqi MFIs. It was not qualified, it had many problems related to its

insider policies and who heads the institution. USAID had a great impact to reduce the

misunderstanding between the MFIs and NGO office that we mentioned in legal

environment section. Another great impact of USAID on the industry was offering

sufficient training. It had a great impact to develop staff performance, continue updating

and communicating with new ideas in the external world. In addition to offering funds for

the MFIs which enhance the firm’s capital and expansion.

The big MFIs was able to overcome the impacts of international sponsoring absence

because with a passage of the time they were able to build loans portfolio, opening new

branches benefiting from free funds and training at that time. However, small and middle

42

MFIs still needed international sponsoring for funding, training, and to be MFIs spoken

with state and absence of such sponsoring result shrinking and staying in a narrow circle.

The second factor is internal factors, the optimal using of four Ps analysis of marketing

theory, advised us that it is better for the institution to develop their products and make it

more competitive than competitors. For example, targeting new customer by offering a

product not offered by the competitors, simplify the process, good customer service.

About the first element: product, it is important for the institution to diverse its loans

portfolio like Althiqa institution, first to compete with competitors, benefiting from

portfolio diversification advantages such maximize the profits and reduce the risk.

The second element is the Price war, it is also important for the institution, offering a

product with a lower price than the competitors do. Lower price product considers as the

best strategy to attract borrowers when you newly enter the market. For instance, it is not

logic you charge 18% interest rate on the particular type of loan product at the same time

your competitor charge 12% for the same loan product.

If you are not able to charge interest rate less than your competitor is. You must charge

at least the same interest rate, and focus on reducing your cost and try to manage your

cost effectively instead of increasing the interest rate.

The third element is placed, even if the institution was not able to open new branches and

chose a suitable place because they do not want to increase the cost. They were able to

apply Loan Officer Mobil, it enables the institution to deliver their products through loan

officers that visit borrowers and fill applications in the customer’s place. Loan Officer

43

Mobil enable the institution to ensure increasing loans portfolio, numbers of active

clients, maximize the profits, and the market share without increasing the cost so much.

On the other hand, Althiqa has competitive advantages, help them to grow and expand.

For example, being first in the market, good HRM, portfolio diversity. These reasons

help the institution to achieve good indicators performance financially and socially. I

compared the institution performance with the best practice of MFIs that issued by

CGAP.

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