The challenges of civil-military cooperation in Iraq
This Microfinance Gateway article was developed in collaboration with Lene M. P. Hansen and Mayada El-Zogbhi. Hansen is an independent financial services consultant specialized in microfinance, and has been working in Iraq since 2006. El-Zogbhi is managing partner of Banyan Global, a private sector development enterprise firm. She has worked in conflict environments including Iraq, Afghanistan, and the Balkans and led a USAID-funded research project on microfinance amid conflict.
In Iraq, 12 microfinance institutions (MFIs) reach over 38,000 clients. Most experts would have assessed this active military zone as too insecure for microfinance organizations to operate. Yet these MFIs continue to receive both donor and military funding and are seen as important actors by the military. In fact, economic development is now part and parcel of the Army’s counterinsurgency manual.
Take a patient, long-term perspective and design flexible, longer-term funding mechanisms;
Select experienced partners and have sufficient, qualified in-house staff;
Avoid targeting client groups or geographic areas without market research;
Avoid disbursement pressures;
Collaborate for coherence; locally, with government and with other funders.
However, in Iraq, this advice is difficult to follow. The reality of microfinance funding there is:
The US political need to demonstrate short-term impact makes it difficult to put a long-term perspective in place.
There is a lack of experienced partners and qualified local staff.
Security issues, combined with the short time-frame of US military-led projects, makes market research almost impossible.
The US government’s need to show impact results in strong disbursement pressure on MFIs.
Suspicion of US intervention makes broad collaboration difficult.
The US military brings significant resources to the microfinance field in Iraq, but its influence also creates a host of questions and concerns for the microfinance industry. This Highlight provides a glance at the sector's development in Iraq, the key players, and the myriad challenges facing civil-military cooperation in such a fragile and dynamic environment.
A snapshot of the industry
Microfinance in Iraq is new. Prior to 2003, state-owned banks were the only formally recognized financial institutions. Private sector development was repressed in favor of state-run enterprises. Five years after the US-led invasion of Iraq, a microfinance industry has developed and now over 38,000 low-income people have access to microcredit. Delinquency remains surprisingly low for such a difficult climate, and financial viability is increasing. On the other hand, institutional sustainability is weak. Most institutions rely heavily on international assistance and have not established sound governance or local management structures. In fact, these MFIs would unlikely survive without significant donor and military assistance to finance security costs or provide protection in the areas where they operate.
Overview of Iraq Microfinance Sector (as of September 2008)
9 Local MFIs
3 Int'l NGOs
Total Industry
Average age of MFI
13 months
3.9 years
1.8 years
Loans outstanding
6,967
29,913
36,880
% Loans to females
12.6%
14.8%
14.4%
Loans disbursed to date
8,240
90,850
99,090
Average loan size
1647
1355
1469
Average loan officer caseload
119
206
150
Average PAR (>30 days)
4.6%
0.1%
3.2%
Average Operational Self-Sufficiency
110.8%
175.5%
143.1%
Key supply side market players
The US military is directly involved in microfinance in Iraq, working primarily through Provincial Reconstruction Teams (PRTs). These small civil-military units, composed of up to 70 people including US military and civilian personnel and local Iraqi staff, serve as intermediaries with local MFIs. Since the security situation prevents MFIs from easily meeting clients to verify businesses or follow up on loan repayments, PRTs assist with these functions. PRTs also help to promote microfinance services within local communities. In 2007, Embedded PRTs (ePRTs), made of even smaller groups of US civilian government officers and experts, were created to operate more freely. They are located at military bases and integrated within US Army brigades or Marine Corps regiments. PRTs are funded by the US Department of Defense (USDOD) and the US Department of State (USDOS). The operational requirements of these agencies create a need to demonstrate quick impact on economic recovery funds. The development outlook is therefore short-term to be able to report high numbers of loan volumes.
USAID, the main donor agency supporting microfinance in Iraq, has committed US$55 million to private sector development, including microfinance programs. USAID works closely with the US military to provide funding, training and technical assistance to establish local MFIs. USAID's expected result of microfinance support is impact in terms of client outreach and sustainable Iraqi MFIs. The operational requirements include quick disbursements of funds and intensive documentation of progress and impact.
Three international NGOs operate lending programs in different areas of Iraq. CHF International is the largest provider with over US$100 million in loans disbursed since 2003. ACDI/VOCA, with USDOS funding, has supported SME lending in Iraq for almost five years. Relief International joined their ranks in August 2006.
The implementation minefield
The Baghdad Embedded PRT 6 is one of nine ePRTs embedded with a Brigade Combat Team in Baghdad Province. It is a 14-person team composed of staff from the USDOS, USDOD, and contractors. This ePRT organizes weekly meetings with local government officials and businessmen to introduce the services of local MFI Al Bashaer. A loan officer and supervisor from the MFI explain how Al-Bashaer works and invite the businessmen to contact them.
The ePRT has a close working relationship with the loan officers at Al Bashaer. The team frequently stops by the MFI offices to monitor the loan portfolio and understand the development of small businesses in the community. This information forms the basis for future economic recovery projects.
It is a tall order in itself to develop a microfinance industry in an environment with high security threats, scarce human resources, limited financial infrastructure, and significant aversion to self-employment due to the formerly state-run economy. Added to this challenge is the military’s agenda for short-term high-impact success, which is perceived to help neutralize the insurgency.
It is interesting to note that other quick impact reconstruction efforts have not become the main tool to win hearts and minds in Iraq. Is this a result of the microfinance industry’s success at self-promotion - that it has captured the hearts and minds of donors and the military instead? Perhaps the industry should be more cautious and expand its vocabulary to better communicate to the military and other new and would-be entrants.
While microfinance industries have flourished in many post-conflict countries, the drive to leverage microfinance as part of stabilization efforts in Iraq probably over-estimates the ability of microfinance to function in extremely volatile environments.
Can MFIs provide a valued community service when the linkages to clients cannot (or only with military protection) be established? Would reconstruction of physical infrastructure, local community projects, utility maintenance and training have achieved higher local approval, greater beneficiaries and longer-lasting impact for the dollars invested than microfinance at this moment in Iraq? The industry continues to struggles with these questions.
Despite the extreme challenges, a nascent microfinance sector has emerged in Iraq. The hope is that over time, with greater stability and reduced security concerns, the opportunity for a broader, more long-term development approach that adheres more closely to good practice microfinance principles will grow.
I agree with the authors that the Provincial Reconstruction Teams (PRTs) in Iraq have not for the most part followed the best microfinance practices. That said, it is important to distinguish between the type and level of MFIs we are talking about as many MFIs are performing well there.
PRTs often are concerned with immediate post-conflict stabilization, such as providing loans so residents can reconstruct their homes and restart their businesses, rather than long-term development objectives. Moreover, many MFIs are new (1 to 4 years) or young (5 to 8 years as defined by MicroBanking Bulletin), making self-sufficiency less achievable.
In fact, as of June 2009, seven of a total of 13 MFIs – including indigenous - are operationally self-sufficient; some even financially self-sufficient. This is no minor achievement anywhere, especially in Iraq.
The three largest MFIs, established by U.S. NGOs, account for three-fourths of nearly $72 million in portfolio outstanding in Iraq, and over the years have extended loans to some 117,980 borrowers. These MFIs have continued to operate despite the difficult security and regulatory environment, without U.S. military assistance. It is worth noting that some of these MFIs also have been approached by international investors impressed with their financial performance.
Nadia Namken
Chief of Party
Access to Credit in Northern Governorates of Iraq
ACDI/VOCA (www.acdivoca.org)
