Microfinance in Iraq
BY SAMEEKSHA DESAI
Microfinance, the provision of financial services to people who typically cannot access such services (for example, providing credit to the poor) creates and builds upon the potential to regenerate and reinvest initial funds. However promising its applications and benefits may be, implementing microfinance in Iraq’s post conflict context presents major challenges to methodology. Even so, Iraq is an attractive target for microenterprise and long-term growth.
According to the Microenterprise Best Practices Project1, microfinance institutions (MFIs) cannot operate in post conflict situations lacking political stability, economic activity, and population stability. First, political stability is necessary to create a safe and accessible environment in which MFIs may operate. While urban areas in post conflict countries typically offer safety, urban Iraq offers Baghdad, Mosul, Najaf, and Falluja. These cities are populated by demobilized but armed men with no perceivable purpose. The widespread use of force, suspicion about American interests, and internal political divisions threaten Iraqi political stability. The “absence of chaos”—commonly equated to negative peace—offers security for personnel, resources, and a client, though working around political stability implies a trade-off between limited geographic areas and stronger operational life expected in stable areas.
Second, a region must have some basic economic activity and a demand for financial services. Iraq has this. Iraq’s oil reserves prevented the shutdown of formal local markets, and widespread economic insecurity led to informal black markets. Both markets are evidence of supply and demand networks. Microfinance would build up local markets, as well as help channel and formalize black markets, thereby reestablishing regular market behavior.
Third, population stability is critical to recovering loans and sustaining operations. Iraq does not have a major refugee problem. The 200,000 Iraqis living in Iran are expected to return, and there has been little external migration in recent years. Population stability has not been given enough importance in Iraq because of little external migration in recent years.
In addition to these three factors, several other considerations affect potential success of MFIs. While microfinance offers fairly immediate results, MFIs should build a network from which the economy may grow. An efficient government-regulated banking system is critical in shaping the post conflict economy because formal banking systems increase investment and money flow within an economy. As micro-finance clients succeed, they would graduate to other saving and investment options, thereby supporting new industries in the nonoil private sector.
MFIs, like all external organizations, will face integration problems. Two cultural considerations for the Iraqi context are religion and gender. Proper attention to religious practices may enhance community support of MFIs. One approach involves an awareness of religious differences and establishing or following practitioner guidelines. This, however, is open to subjective interpretation and miscommunication. The other, more relevant approach, is to integrate traditional Islamic banking. This sensitizes lenders and builds community trust. Murabaha is a practical option in postwar Iraq as it serves those without credit history and physical assets. Instead of lending based on collateral and credit, it gives the lender ownership of the end product until the last payment.
Microfinance empowers females, particularly where women have not traditionally been formal breadwinners. Their increased economic capacity not only boosts local economic growth and personal independence, it also enhances community life. Female clients act as community magnets, offering stability and leadership for future generations. If MFIs can permeate areas where migration patterns are largely male, where women have been left at home with children and little else, MFI may teach women to formalize skills. This would simultaneously strengthen local economies and reduce male migration.
Microfinance’s applications and benefits in post conflict Iraq are seemingly endless, but it is essential to maintain a realistic approach in which “spread” complements long-term commitment. Investment is necessary to growth, whereas stagnation and regression only compound conflict. In this respect, microfinance is ideal. Iraq’s oil reserves make the country an attractive target for microenterprise and long-term growth for several reasons. First, Iraq can shoulder its reconstruction costs; second, its development will not depend on imported oil; third, if correctly managed, these oil reserves may support a diversified and export-based economy; and fourth, Iraq will not be easily forgotten by an otherwise flighty international community.
Sameeksha Desai is a PhD student in George Mason University’s School of Public Policy (policy.gmu.edu); she also holds an MS in Conflict Analysis and Resolution. Her policy interests focus on governance, microenterprise, women, and postconflict reconstruction.
ENDNOTES
- A USAID/DAI joint project [↩]
