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.

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Repayment Rates Plummet
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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.)

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Lending Curtailed
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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.

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Gaza Hit Hardest
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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.

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MFIs Vulnerable
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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.

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Seeking to Survive
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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