NON-PAYMENT OF PA SALARIES IMPERILS MICROFINANCE

UNCLAS JERUSALEM 003987 SIPDIS SENSITIVE SIPDIS NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS/MAHER/STEINGER; NSC FOR ABRAMS/DORAN/WATERS; TREASURY FOR SZUBIN/LOEFFLER/NUGENT/HIRSON; PLEASE PASS TO USAID FOR KUNDER/MCCLOUD/BORODIN E.O. 12958: N/A TAGS: ECON EFIN EAID KWBG IS SUBJECT: NON-PAYMENT OF PA SALARIES IMPERILS MICROFINANCE PROGRAMS ¶1. (SBU) Summary: Non-payment of PA employee salaries is threatening the viability of microfinance programs operating in the West Bank and Gaza, according to lending agencies. In Gaza, where the local economy is extremely dependent on PA salaries, loans with payments more than 30 days overdue have increased to over 70 percent of some program portfolios. In recent years, microfinancing institutions' (MFIs) increased reliance on salary guarantees as collateral for loans has exacerbated the problem. In an effort to sustain the industry, MFIs have severely curtailed lending and, when extending loans, are focusing increasingly on groups and less risky microenterprises instead of poor individuals. End Summary. -------------- Repayment Rates Plummet -------------- ¶2. (SBU) After six months of non-payment of PA salaries, beneficiaries of microfinance programs are failing to make loan payments at an alarming rate, according to representatives of the major microfinancing institutions (MFIs) operating in Gaza and the West Bank. Palestine for Credit and Development (FATEN) reported in July 2006 that the number of outstanding loans in Gaza for which payments have not been received for over 30 days had increased to over 70 percent of the its loan portfolio. In December 2005 the same "portfolio at risk" rate was 2 percent. CHF's Access to Credit Program's portfolio at risk rate for the West Bank and Gaza, just 2 percent in December 2005, rose to an average of 47 percent in July 2006. CHF Country Director Lana Abu Hijleh told Econoff August 29 that the portfolio at risk rate for CHF housing rehabilitation loans in Gaza was about 70 percent and climbing. UNRWA Microfinance and Micro-enterprise Program (MMP) Director Alex Pollack told Econoff August 29 that, from January to June 2006, MMP's portfolio at risk rate in Gaza rose from 26 percent to 60 percent. (Note: FATEN and CHF receive USG funding. UNRWA is the largest microfinance lender in the West Bank and Gaza. The USG is the single largest contributor to UNRWA. End Note.) -------------- Lending Curtailed -------------- ¶3. (SBU) Pollack described the status of microfinancing in the West Bank and Gaza as "desperate." He said that in the past six months the MMP program had cut lending by 85 percent, equivalent to a USD 1 million drop in the value of loans disbursed monthly. Abu Hijleh advised that CHF stopped lending entirely in July 2006. FATEN lending in Gaza dropped 81 percent from December 2005 to May 2006, according to data compiled by the Palestinian Microfinance Network (PMN),an association of local MFIs. -------------- Gaza Hit Hardest -------------- ¶4. (SBU) The repayment situation in Gaza is particularly dire due to its greater dependency on income from PA employment. Pollack stated that regular and sustained closures of the Karni/al-Mintar crossing, which stifle trade and deprive factories of raw materials, have also been a factor in undermining Palestinians' ability to repay their loans. Faced with rising unemployment and increased poverty, Gazans have to focus on meeting their basic household needs and lack sufficient cash to repay loans. -------------- MFIs Vulnerable -------------- ¶5. (SBU) As a consequence of actions taken after the September 2000 intifada, Palestinian MFIs were particularly ill-prepared for the current crisis, according to MFI sources. Intifada coping strategies included reduced lending, decreased exposure and the introduction of tighter collateral requirements, such as salary guarantees. The industry recovered and even experienced rapid growth in 2004-2005. However, according to one estimate, by the end of 2005 approximately 40 percent of all active loans were guaranteed by salaries. With the end of PA salary payments in March 2006, therefore, MFIs have found their viability increasingly threatened by rising non-payment rates and defaults. -------------- Seeking to Survive -------------- ¶6. (SBU) MFIs are now struggling to preserve their programs in order to maintain their lending capabilities for when the current crisis ends. Abu Hijleh said that, as a "matter of survival," CHF is aggressively reviewing each of its 4,000 loans, contacting all of its active clients to determine who can pay. Pollack stated that UNRWA, although for years adamantly opposed to loan rescheduling, is now looking at the possibility of extending a three-month grace period to clients similar to that provided by local commercial banks. MFIs may also seek grant funding to sustain their programs until the end of the year. Pollack and Abu Hijleh said that MFIs are also redirecting their lending from individuals to groups and microenterprises as a means of reducing risk and preserving capital. Both expressed concern that, in doing so, MFIs are reducing the effectiveness of microfinancing as a tool to alleviate poverty by ignoring the poorest of the poor. WALLES