Sfax 2nd International Forum on Islamic Finance June, 27-29, Sfax (Tunisia)

A proposal for Jobs Creation based on

Islamic Microfinance and Cooperatives

Mahmoud Sami Nabi, IRTI & Rami Abdelkafi, IDB

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Any views expressed in this presentation are only ours

and do not necessarily represent those of

IRTI or IDB

Outline

1. Introduction

2. Unemployment in Tunisia

3. Employment policies adopted in Tunisia

4. Best practices in tackling Unemployment

5. Microfinance

6. Islamic Microfinance

7. Role of microfinance in creating job opportunities

8. Conclusion and Policy Recommendations

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1. Introduction

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Alg

eria

Bahra

in

Egypt

Isla

mic

Repu

blic

of

Iran

Jord

an

Kuw

ait

Mo

rocco

Saud

i A

rabia

Suda

n

Tun

isia

Unemployment rate in the MENA Region in 2012 (Source: WEO 2013)

2010 2012

- High unemployment rates with

some differences at the national

level

- However, similarities are important

with regards to youth

unemployment

- In 2011, the International Labour

Organization (ILO) estimated that

12.6 percent of youth in the global

labor force are unemployed—

about 74.6 million youth. Youth

unemployment rates are

everywhere considerably higher

than adult rates.

- The ILO forecasts that

unemployment among young

people in the Middle East will rise

by 2% over the next five years as

the euro crisis hits emerging

economies. The Middle East will

see the rate rise to 28.4% by 2017

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Youth unemployment: Comparing OECD and MENA (Source: Eurostat and ILO)

Main causes of youth unemployment in the MENA Region

Demographic factors (Demographic transition, high growth of the labor force)

Low economic growth and weak economic diversification (weak role of the

private sector and large public sector, weak business climate)

Ill-adapted education system (skill mismatches)

Institutional factors (weak labor market reforms and inefficient macroeconomic

strategies – Labor market rigidities, high reservation wages)

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2. Unemployment in Tunisia

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80 thousands additional demands yearly

Structural Unemployment between 12%-13%

Increase of the unemployment after the revolution to around 19%

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11

12

13

14

15

16

17

18

19

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May-05 May-06 May-07 May-08 May-09 May-10 May-11 Nov-11 Dec-12 May-13

Unemployment rate in Tunisia 2005-13 (Source: INS)

2. Unemployment in Tunisia (continued)

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Unemployment is even higher for youth and highly educated

Unemployment by Age Group -2010-2013 (Source: INS Enquête Nationale sur la Population et l'Emploi)

Age 2010 2011 2012 2013

15 - 19 28.7 43.6 35.2 31.5

20 - 24 29.7 41.8 38.7 37.3

25 - 29 24.2 34.5 32.7 32.2

30 - 34 12.9 19.0 18.0 17.0

35 - 39 6.1 8.8 8.8 8.6

40 - 44 3.7 4.3 4.7 5.0

45 - 49 3.2 2.8 3.5 3.1

50 - 54 2.8 2.4 2.4 3.2

55 - 59 2.8 2.6 2.5 2.1

60 - 64 3.5 1.5 2.1 2.1

65 - 69 2.8 2.4 1.4 1.7

70 - above 3.2 0.6 0.8 0.3

Total 13.0 18.3 17.6 16.5

2. Unemployment in Tunisia (continued)

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Unemployment is higher specially in the center west and south of the country

revis

ing

th

e i

nce

nti

ve

po

licie

s,

esp

ecia

lly w

ith

re

ga

rds t

o i

nve

stm

en

t

Demand side Inefficiencies of the

labor market environment

Supply side

N

ee

d to

revis

e th

e e

du

ca

tion

syste

m

• Weak impact of the active employment policies on the private sector

• Low value added of the job opportunities

• Lack of private investment in the labor intensive sectors

• Lack of private initiatives owing to pessimistic prospects (corruption, weak infrastructure, lack of financing, financial crisis, fierce competition facing the SMEs)

Lack of follow up and support to the

beneficiaries of the active employment

policies

• Skill mismatches

• A public sector more attractive for diploma holders than the private sector

• High reservation wage

• Lack of soft skills

• Low entrepreneurial culture

• Lack of trust in the social and economic environment

Deviation of some financial structures

form their goals

Rigidities of the labor market

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Main causes of unemployment in Tunisia

3. Employment policies adopted in Tunisia

Before the revolution the following active policies to create jobs (with an

annual cost of 1.5% of GDP) were adopted:

o Active programs incenting firms to recruit diploma holders (financial

incentives mainly)

o Creating new financing structures to promote investment (BTS, Fund for

Guaranties, SMEs Fund…)

o Involving the civil society in the financing of SMEs through NGOs and

Development Agencies

o Creation of structures (incubators, etc.) to support new entrepreneurs.

After the revolution the following active policies to create jobs (with an

annual cost of 1.5% of GDP) were adopted:

o Adoption of the « Amal » Program (Financial and training support)

o Evaluation studies of the active programs in place

o Consolidation of the financing system for new investments and

restructuring of the financing bodies (the Tunisian Solidarity Bank (BTS) in

particular)

o Involvement of the civil society in the follow up and monitoring 10

4. Best practices in tackling unemployment

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Labor market and education reforms are essential but require long time to be

designed and implemented

Some quick-wins and short-run policies could be adopted :

o Helping the young find better jobs through active labor market policies (job

search assistance, employability training, public support for apprenticeship and

internship programs, and on-the-job training subsidies)

o Public actions to develop entrepreneurship initiatives among the youth

o Building relevant skills through more market-oriented approach to training

o Reform of subsidies policy (use of smart subsidies)

o Different models of public works (short + long term safety nets, public works

plus)

In general, for the policies to be efficient there is a need for:

o Coordination among stakeholders

o Alignment of the types and objectives of the programs

o Targeting

o Signaling

o Monitoring and evaluation

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5. Microfinance

“Microfinance” initiated in the mid-1970s appears to be the ‘new paradigm’ to

eradicate poverty. It encompasses not only “micro-credit” but also “micro-

saving” and “micro-insurance”.

CGAP: "Microfinance is the supply of loans, savings, and other basic financial

services to the poor. People living in poverty, like everyone else, need a

diverse range of financial instruments to run their businesses, build assets,

stabilize consumption, and shield themselves against risks. Financial services

needed by the poor include working capital loans, consumer credit, savings,

pensions, insurance, and money transfer services."

Successful innovations of microfinance is “group lending” and the ability to

use group-based incentives to disburse credit to the poor, who would not

obtain credit otherwise (since they lack collateral).

The idea of group solidarity to provide credit and enhance wellbeing, were

known in the context of “traditional” cooperatives. (Vakulabharanam and

Motiram, 2007)

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5. Microfinance (continued)

The Microfinance Institutions (MFIs) are target-oriented (poverty-focused)

financial institutions with focus on group—micro and small enterprises (MSEs)

Target Graduation from poverty :

“Virtuous circle”

INCOME

CREDIT INVEST-MENT

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Features of MFIs services:

o Small amount of funds given for microenterprises for 3months -1year

o Capital and interest paid back in small weekly installments

o Forced savings and insurance programs

o Social Development Programs:

behavioral,

ethical,

and social development

Sustainability of MFIs depends on :

o Mitigating Credit Risk : ensure repayment in the absence of acceptable physical collateral

o Solving the Moral Hazard problem : ensure funds not diverted and used for intended activity

o Economic viability: keep (operating & financing) costs to a minimum relative to income

5. Microfinance (continued)

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Source: Economics of Microfinance (2005)

GROWTH IN GRAMEEN BANK MEMBERSHIP, 1976–2001

5. Microfinance (continued)

Success story:

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Source: Alpay (2011) “Enhancing Employability in OIC countries”

SHARE OF ACTIVE BORROWERS, 2009

5. Microfinance (continued)

In OIC: microfinance still concentrated in few countries :

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5. Microfinance (continued)

In Tunisia:

o In the last few years, particularly following the revolution, Tunisia has been

working on a national strategy to develop its microfinance sector. A study

done in 2010 estimates the potential new clients of micro-credit to 1 million.

o Microfinance services are confined to micro-credit, which is provided by the

Tunisian Bank of Solidarity (TBS) and by Enda-Inter Arabe.

o TBS was established in 1997 with 60 agencies covering the entire territory.

It services 160,000 active clients with 79 million TND ($ 50.8 million) of

outstanding credit as of March 2011.

o Around 266,000 clients have benefited from the total amount of 482 million

TND ($ 309.8 million) that have been disbursed since TBS started operations,

to March 2011.

o Enda-Inter Arabe: second major provider of micro-credit, an NGO established

in the country since 1995 and endowed with a network of 59 agencies.

o In January 2013: ENDA counts 201.638 active clients with an outstanding

credit of 132.867 million dinars

o From its inception to January 2013: 1,204,261 loans to 395,007 clients

with a total amount of 855 million TND.

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6. Islamic Microfinance

CGAP (2008): “ Islamic microfinance represents the confluence of the two

rapidly growing industries: Microfinance and Islamic finance. It has the

potential to not only respond to unmet demand but also to combine the Islamic

social principle of caring for the less fortunate with microfinance’s power to

provide financial access to the poor. Unlocking this potential could be the

key to providing financial access to millions of Muslim poor who currently

reject microfinance products that do not comply with Islamic law.”

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6. Islamic Microfinance (continued)

Source: Ahmed (2002) “Financing microenterprises: an analytical study of

Islamic microfinance institutions”

DIFFERENCES BETWEEN CONVENTIONAL AND ISLAMIC MFIS

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6. Islamic Microfinance (continued)

CGAP (2013): Approximately 255 financial service providers offering Sharia-

compliant microfinance products around the world. 92% of these providers are

concentrated in East Asia and Pacific (164 providers) and MENA (72)

providers.

Poor clients using Sharia-compliant products estimated at 1.28 million

TYPES OF IMFIs NUMBER OF ACTIVE CLIENTS, BY TYPE

OF PRODUCT

Source: CGAP (2013) “Trends in Sharia-Compliant Financial Inclusion”

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7. Role of Microfinance in jobs creation

Limited access to finance is key constraint to private sector growth and

particularly to Micro and Small Enterprises (MSEs).

The MSEs do not qualify to get funds from institutional sources (banks)

o lack of collateral

o too much risk

o too costly

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7. Role of Microfinance in jobs creation (continued)

Typical Islamic Model of Microfinance

Client desires to start a business and approaches Islamic Microfinance

Institution (IMFI) or vice versa IMFI buys the goods and provides it to the

client using Islamic mode of Finance. Profit calculation is based on the mode

used which depends on the requirements.

Client obtains the required goods subsequently repays the financing to the

IMFI. Alternatively client will be financed via Ijarah, Istisna or Salam.

Greater amount of involvement in the Client’s business & risk sharing +

IMFI undertakes study to determine which SME business can be feasible and

requires higher amounts of capital

Clients and IMFI share in the profits + IMFI subsequently “sells” various parts to

partners (clients) using Islamic modes

Intensive involvement in the Client’s business, full partnership, risk sharing ,

forward and backward linkages developed to assist entrepreneurs

Source: Omar (2013) “Innovative Islamic Structures: IDB Group’s Experience in Financing SMEs”

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7. Role of Microfinance in jobs creation (continued)

Examples of Latest Islamic Model of Partnership with the poor

Source: Omar (2013) “Innovative Islamic Structures: IDB Group’s Experience in Financing SMEs”

Indonesia: Rice growing, harvesting and local marketing

Pakistan:

o Cotton and rice growing, harvesting and marketing support to farmers.

o Livestock (Cows and goats)

Sudan:

o Herbal tea growing, harvesting, packaging and marketing, local marketing

and export.

o Exotic vegetables and fruits growing in greenhouses, harvesting, local

marketing and export

Palestine: Olive orchards to oil mill

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7. Role of Microfinance in jobs creation (continued)

Jobs creations from Full-Fledged Microfinance Projects financed by IDB

Source: Omar (2013) “Innovative Islamic Structures: IDB Group’s Experience in Financing SMEs”

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7. Role of Microfinance in jobs creation (continued)

Jobs creations : Thinking of innovative ideas to unlock the potential

of young people

CHF International (2011) :"A New Middle East: Investing Where it Matters

Most“: “Microenterprises on average only employ a few people – but they

create job opportunities where very few exist.”

The UN declared 2012 the international year of cooperatives. “Cooperatives

are business enterprises owned and controlled by the very members that they

serve. Their member-driven nature is one of the most clearly differentiating

factors of cooperative enterprises. This fact means that decisions made in

cooperatives are balanced by the pursuit of profit, and the needs and

interests of members and their communities.” Source: http://social.un.org

Example of cooperative in Tunisia: “Nomad 08”

created by 8 unemployed young people from

Rdeyef in 2013 using recycled electronics components

to create translation materials. Equipped 50 rooms

during the World Social Forum in Tunisia (2013)

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7. Role of Microfinance in jobs creation (continued)

Jobs creations in Tunisia

In 2012 TBS was put in charge of implementing an IDB financed project

(75 million TND over 15 years) in support of the low-income and young

unemployed people.

In February 2013 ENDA received a 4 million TND financing line from the

French Development Agency with the objective of developing its micro-credit

services for agriculture in the rural regions.

ENDA: "Bidaya": start-up businesses for unemployed youth financed through

a grant of 4.5 millions TND from the Swiss confederation

Source: Ben Hamida (2013) "Financing youth Start-ups: Achievements & Challenges - ENDA Inter-Arabe"

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7. Role of Microfinance in jobs creation (continued)

Jobs creations in Tunisia

In 2012: idea of creation a shared

fund for employment in favor of

investment in the development

regions of Tunisia

Partnership between public and private

sectors, civil society, professional from

different sectors

Benefiting from the specificities of the

regions

Exit strategy of the initial investors (public

and private) after a certain period of years

in favor of the entrepreneurs or new

investors via the alternative capital market

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7. Role of Microfinance in jobs creation (continued)

Our proposal (presented during the IMF-World Bank Workshop. “Employment Policies in MENA

Countries”, Kuwait, April 2012)

Revising the Program Amal and linking it to Islamic Microfinance

financing by the Tunisian Bank of Solidarity

Objectives:

• Developing entrepreneurial initiatives among the youth

• Reducing the Moral Hazard problems

• Targeting the graduated youth in poor areas

• Filling the gap in sectors with labor force deficit

• Create an economic dynamism in the remote areas

• Reducing poverty

• Reducing regional disparities

• Preparing for long term programs

Creating cooperatives

based on Musharakah

Linking the Program Amal to economic entities based on Musharakah

To tap the skills available in the regions and the investment opportunities

Using new technologies in the production and marketing process

Developing jobs in the handicrafts sector

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Objectives

Grouping of available skills

Diagnosis of the economic

characteristics and identify

potentials for development

Agriculture

Accounting,

Finance and

Economics

Humanitaria

n sciences

Science and

Technology

ICT

Tourism

Handicrafts

Creating cooperatives

based on Musharakah

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Neighboring

professions

Services

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Example of Diagnostics done by the Sudanese Development Initiative

Source: UNDP (2010) “Youth Labor Market Survey - South Kordofan State Report”

Practical Steps towards the training and creation of cooperatives

A group of youth graduated in

different fields

Training based on program

“Amal”

Cooperative

Demand derived

by the needs of

the region and

other created

cooperatives

Private sector

firms Government

Islamic Finance modes

based on decreasing

Musharakah

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Training

structures

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8. Conclusion and policy recommendations

Reducing unemployment in Tunisia is one of the priorities specially for

the young people in the inner regions of the country where the poverty

and unemployment are much higher than the national average.

Need for urgent and quick-wins generating economic policies while

thinking about the a long term strategy to tackle the root causes of the

structural high unemployment which needs structural adjustment of the

economic development model of Tunisia and restructuring the education

policy of the country.

Short-term economic policies to reduce unemployment could benefit

from the potential of microfinance and cooperatives.

The program Amal targeting young people holder of university diploma

could be more effective if coupled with training, creation of cooperatives

financed through private-public partnership through Diminishing

Partnership.

The Diminishing Partnership (Mushrakah Mutanakisah) at the individual

level of each member of the cooperative could take the form of a

microfinance service from the Tunisian Solidarity Bank.

Thank you

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