By T. Keyzom Ngodup, co-founder and Executive Director at Ideas sYnergy, an Iraq based private sector development consulting company.

A New Iraq or Perspective Updated: First Mover Advantage?

Sipping my iced coffee at Costa, a coffee shop in Erbil, I (and everyone else at the coffee house) noticed with insouciance a group of young American soldiers walk in for some caffeine and presumably an outing.  The sighting of American soldiers (dressed in uniform) is rare in Northern Iraq, and especially in Erbil, putatively safe and referred to as the gateway to Iraq.  I pondered on this seemingly mundane event and it occurred to me that this may be my first ‘encounter’ with Americans in Erbil since Ideas sYnergy’s establishment in early 2011.

Through my last couple months in this city as an independent expatriate (as in not living within a walled community/compound with security protocols), I have come across a range of foreign entrepreneurs who have gone ‘local’: Lebanese, Turkish, Italians, Germans, French and British, some restaurateurs, others event managers, traders, company owners etc however I have yet to meet an American who lives and conducts business outside the walls of compounds.  This is not to say there aren’t any, but rather to point to its’ low probability.  In the same vein, recent article pointed out that U.S. companies have been slow to get in on the investment opportunities in Iraq, even lagging behind countries that opposed the war in 2003, such as France. According to the article, U.S. companies tend to be more risk averse than their European counterparts, despite continuous urgings by the U.S. Chamber of Commerce.  The media in the U.S. contributes to this quagmire.  An Iraqi friend living in the U.S. expressed his surprise at a recent National Public Radio (NPR) feature on Iraq’s Kurdistan, to the extent he felt the region under discussion was perhaps wrongly referred to as KRG.

U.S. businesses are asked to shed their heterodox ideas of Iraq and capitalize on the investment opportunities created through its’ government’s blood and treasure. Iraq Insights’ June Issue reported that U.S. commercial activity is touted to increase after the conclusion of the Business Forum: Promoting Economic Opportunities in Iraq held in Washington, D.C. And indeed U.S. commercial interest is growing: Iraq’s commercial attaché office in Washington received 2,251 applications to do business in Iraq in the first half of this year, compared with 1,369 in the same period last year.  Although U.S. commercial activity in Iraq ranked fifth at $1,997 million in 2010 (compared to Turkey’s $14,883 and France’s $4,243) as per a report by Dunia Frontiers, independent American expatriates conducting business in Iraq complain of their government’s lack of support, even of the simplest nature such as business introductions and linkages.  For U.S. businesses to capitalize on opportunities in Iraq, and partake in Iraq’s economic growth as a business partner, its government will have to do much more (the upcoming August issue of Iraq Insights, a flagship monthly publication of Ideas sYnergy, will compare investment promotion strategies of foreign governments in Iraq) .  The recent opening of U.S. Chamber of Commerce in Basra, and soon in Erbil is a welcome respite.

T. Keyzom Ngodup is co-founder and Executive Director at Ideas sYnergy, an Iraq based development consulting company committed to economic and social development through market-based solutions that help build and scale innovative businesses for sustainable and inclusive private sector development.

By T. Keyzom Ngodup, co-founder and Executive Director at Ideas sYnergy, an Iraq based private sector development consulting company.

IRAQ INSIGHTS, published by Ideas sYnergy, aims to consolidate and build intellectual capital on private sector development, empowering stakeholders to address issues of access and structural reforms on a diverse range of topics impacting inclusive economic development in Iraq.  

IRAQ INSIGHTS                 July 2011, Private Sector in Iraq: Creating Jobs and Enhancing Sustainable Development?

• Status of Iraq’s Unemployment & Underemployment: An Overview of the Public and Private Sector in Iraq
• Are Iraqis’ Fears of Private Sector Jobs Justified?
• Reading Beyond the Rank: Examining the Measurements of World Bank Doing Business in Iraq 2011 Report
• Micro, Small and Medium Enterprises: Hurdles to their potential to lead private sector development and employment generation

Iraq Insights by Ideas sYnergy_July 2011 Issue 2

T. Keyzom Ngodup is co-founder and Executive Director at Ideas sYnergy, an Iraq based development consulting company committed to economic and social development through market-based solutions that help build and scale innovative businesses for sustainable and inclusive private sector development.

 By T. Keyzom Ngodup, co-founder and Executive Director at Ideas sYnergy, an Iraq based private sector development consulting company.

IRAQ INSIGHTS, published by Ideas sYnergy, aims to consolidate and build intellectual capital on private sector development, empowering stakeholders to address issues of access and structural reforms on a diverse range of topics impacting inclusive economic development in Iraq.                            

IRAQ INSIGHTS                 June 2011, Birds Eye View: Iraq’s Performance 

•  “Sowing the Oil”: Positive Trends in Economic Diversification
• 2011 “better” or “worse”?
• Access to Finance: Are Banks Bankable to Scale-up Intermediation?
• Transparency, Corruption & Media Freedom: A Deteriorating Trend
•  Foreign Commercial Activity in Iraq: 2010 Year in Review by Dunia Frontier Consultants 

 Iraq Insights by Ideas sYnergy_June 2011 Issue I

T. Keyzom Ngodup is co-founder and Executive Director at Ideas sYnergy, an Iraq based development consulting company committed to economic and social development through market-based solutions that help build and scale innovative businesses for sustainable and inclusive private sector development.

By T. Keyzom Ngodup, co-founder and Executive Director at Ideas sYnergy, an Iraq based private sector development consulting company.

Most development agendas for Iraq putatively support entrepreneurship and the need to support private sector development through its focus on the growing number of unemployed youth in the country. UK’s Department for International Development (DFID) recently released its Iraq operational plan for 2011-2012, and it was welcoming to note that DFID will emphasize the centrality of women through “empowerment of women and girls by identifying and addressing the constraints that female entrepreneurs face” as well as DFID’s plans, through the British Council, to build partnerships between Iraqi universities and global knowledge centers abroad. Yet, how will these plans and those of well-meaning donors, translate from mandate to action, to achieve the unfortunately not so inevitable results.

Certainly, Iraq is different in that security presents unique circumstances and constraints. I refer not only to the high security costs but also in development practitioners’ inability to entrench themselves firmly on the ground across Iraq, operating mainly through implementers’ implementers and finally Iraqi locals who by then are rarely meaningfully included in the feedback system necessary to re-adjust policy-level strategies to achieve not just optimal results (in terms of numbers) but also sustainable and inclusive results. Having spoken to different expatriate development practitioners in Iraq, the sense of waning commitment, a finitude feeling, is high. And thereafter, the opportunity to earn high incomes often becomes the only motivator.

I plan to write about this perplexing ‘condition’ in my next couple posts, where donors and implementers congratulate each other on their ‘alleged’ successes while much of Iraq still remains barren and its people unskilled. And for some initial successes achieved the inability of donors to innovative and re-adjust remains an avoidable challenge. Most critical to this quagmire is the lack of strong and committed national platforms through which local practitioners and stakeholders can voice their concerns and redirect efforts. This is particularly important because donors are inherently willing to listen and achieve value for money, as pointed out by DFID’s operational plan.

Coming back to DFID’s 2011/2012 plans, I applaud them. I also present some thoughts that Ideas sYnergy and our partner Development Iraq are jointly working on. Entrepreneurship is best supported through venture capital financing and investors targeting women in conservative communities can achieve it better through Shari’a compliant Musharaka venture funds. Grants, as the only financing scheme, are detrimental to the entrepreneurial spirit – almost a tempting devil to fail. Standalone loans are mainly short-term in nature when entrepreneurs need long-term financing. What venture capital financing brings in is not just the seed capital that enterprises needs with a long gestation period, but also committed and efficient involvement from investors on operational, strategy and networking support that will ultimately define the success of enterprises.

I also congratulate DFID on being one of the few donors focused on addressing Iraq’s skilled labor shortages through linking Iraqi universities to universities abroad in order to facilitate knowledge and skills transfer. Iraq is already seeing a tremendous influx of private sector companies into the country, be it Basra, Baghdad or Erbil. Ideas sYnergy is working on an initiative to launch regional job fairs connecting upcoming graduates to companies focused on Iraq, with a gamut of services to graduates on resume building, interviewing tips among others.

There is nothing unique in my ideas, except that it may be unique in Iraq. The novelty is not that we are addressing market asymmetries in Iraq but in our belief that Iraq needs market based approach in donors’ implementation of their mandates.

T. Keyzom Ngodup is co-founder and Executive Director at Ideas sYnergy, an Iraq based development consulting company committed to economic and social development through market-based solutions that help build and scale innovative businesses for sustainable and inclusive private sector development.

By T. Keyzom Ngodup, co-founder and Executive Director at Ideas sYnergy, an Iraq based private sector development consulting company.

For a long time now, the discussion continues within different circles and corridors in Iraq, on whether microfinance institutions (MFIs) can operate as NGOs and continue providing micro-loans to low-income entrepreneurs who lack access to finance for their ideas and enterprises.  The NGO Directorate and the Central Bank of Iraq, both of whom recognize the importance of financial intermediation for micro, small and medium enterprises (MSMEs) applaud the work of MFIs with a few reservations on ownership of the fast growing assets of the lending NGOs, on interest rates (which is the lowest among MENA microfinance industries and globally), and on the transformation of NGO-MFIs to Non Bank Financial Institutions.

There are 12 microfinance institutions, operating as NGOs, providing access to finance for those living in poverty and those without access to banks, namely the un-banked.  As of December 2010, these MFIs, operating in all 18 governorates of Iraq, boosted an outstanding loan portfolio of $106.4 million and 75,182 active clients, growing by 28.4% and 27.7% respectively since 2009.  The support of USAID has been instrumental in the sustainability of these NGO-MFIs, and USAID-Tijara continues to provide technical assistance and lead the sector’s development.  However, in order for NGO-MFIs to scale-up, institutional transformation to NBFIs is recognized as one of the most effective strategies for achieving a significant scale by offering a wider range of services, accessing commercial sources of capital and improving operational efficiency through enhanced systems, controls and transparency in reporting that would result from links to the Central Bank and other banking expertise.

The banking system, comprising of state, private and foreign banks, is highly liquid with total deposits amounting to $33 billion in 2009. Bank liquid reserves to bank asset ratio increased from 98% in 2004 to 156.6% in 2009, compared to 14% for Saudi Arabia and 12.32% for UAE in 2009.  According to CBI, total bank loans amounted to $5.8 billion as of June 2010. This compares to around $22.4 billion for Syria and approximately $250 billion for Saudi Arabia.  While there is a steady rise in credit to private sector as a percentage of GDP, at 6% in 2009, Saudi Arabia and UAE record above 50%, and even  low success economies such as Libya and Syria record 16% and 21% respectively. Although the banking sector is the main component of the Iraqi financial system, the banks offers few credit facilities, and the credit culture is poor.  USAID, through the recently incepted Iraq Financial Development Project (IFDP), in partnership with CBI, is working to address the infrastructure of the financial sector through targeted reforms, credit information systems such as credit bureau, and enhancement to the national payment systems to enable cost-effective financial intermediation.

Success achieved by the NGO-MFIs need to be accordingly considered within the Central Bank’s reform priorities, and clear guidelines need to be issued for NGO-MFIs that are considering transformation in order to access mainstream commercial capital for their target clients: the poor and the un-banked.  NGO-MFIs CHF and Amalkom have demonstrated not just commitment, but also the capability to ‘mainstream’ towards a regulation institution and access the $90 million line of credit from OPIC, however unclear guidance from CBI and correspondence with the NGO Directorate has stalled the process, or in other words, delayed the deployment of enterprise financing that the young entrepreneurs in Iraq need.

Read www.microfinancegateway.org, www.sanabelnetwork.org for more information on microfinance and MSME financing.

T. Keyzom Ngodup is co-founder and Executive Director at Ideas sYnergy, an Iraq based development consulting company committed to economic and social development through market-based solutions that help build and scale innovative businesses for sustainable and inclusive private sector development.

By T. Keyzom Ngodup, co-founder and Executive Director at Ideas sYnergy, an Iraq based private sector development consulting company.

Six NGO-microfinance institutions (MFIs) provide Islamic micro-financing Al-Murabaha to over 7,000 micro-enterprises, 14% of them women-owned small businesses across Anbar, Kirkuk, Ninewa, and Tikrit. Al-Takadum in Al-Anbar pioneered micro-financing based on Islamic principles in 2007 and has branches in all major cities of the governorate. Islamic microfinance represents a confluence of two rapidly growing domains in Iraq: microfinance and Islamic finance. There are seven banks providing Islamic finance in Iraq, however both banks and non-banks such as the NGO-MFIs face difficulties in expanding their services in the absence of distinct regulatory frameworks for Islamic finance and a national Shari’a Board.

In Iraq, Islamic finance is still in its infancy, and business models are just emerging. The range of Islamic finance products available and their outreach is influenced by a variety of factors, with regulatory environment surrounding Islamic finance as critical point of constraint. Shari’a-compliant microfinance 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 in Iraq is the key to providing financial access to the Muslim poor who currently reject microfinance products that do not comply with Islamic law or those who use conventional products but prefer Islamic ones.

The introduction of Murabaha lending in the Iraqi microfinance sector (Iraqi microfinance industry includes 14 MFIs and 70,000 clients from the low-income population segment) has enabled MFIs to reach out to a larger number of clients traditionally excluded from the financial sector. Given the young history of the industry against the backdrop of insecurity, microfinance is increasingly recognized as the only channel through which people without tangible collateral can access financing. It is imperative for the Iraqi microfinance sector to continue providing religiously acceptable loan products to achieve the overall objective of poverty reduction and entrepreneurship. The need to conform to certain religious principles affects the structure and development of Islamic MFIs. It is essential, therefore, to seek approval from qualified Islamic scholars particularly before developing new financial instruments.

While each Islamic bank has its own Shari’a boards, there is tremendous information asymmetry on Shari’a compliance across banks as well as the missing regulatory frameworks for deepening Shari’a products and investments in the country. In the absence of Central Bank laws pertaining to Islamic finance and Islamic microfinance, Islamic MFIs rely on Fatwas issued by religious leaders of a province. Consequently, Islamic MFIs and others offering Islamic microfinance Murabaha products often face challenges in understanding what constitutes Shari’a compliance. Since Shari’a law is not a single codified body of law and is open to interpretation, the opinions of Shari’a scholars may differ on the same question of Shari’a law depending on the school of thought to which particular scholars belong.

Experience in Al Takadum MFI demonstrates the time consuming process the MFI had to undergo in order meet with different local sheikhs in different cities of the same province in order to discuss what constitutes Murabaha transaction. They face the unique challenge of Shari’a compliance in their operations and accounting/MIS practices, with the added complexity from the breadth of a Murabaha transaction. In the absence of a national Shari’a board, Islamic finance is defined by a broad spectrum of religious leaders and can create significant challenges leading to misinterpretation and malpractice.

Despite regulatory gaps, MFIs offering Islamic microfinance Al-Murabaha have prospered due to increased demand for Shari’a compliant products in Iraq. Islamic microfinance Murabaha portfolio grew at a rate of 68% compared to the average microfinance industry growth rate of 36%. Despite high growth rate, at only 10% of total industry portfolio, scale is vital to driving down cost-income ratios for Islamic MFIs so that they may in turn serve a greater number of small businesses at affordable market-based price.

Note: The Iraqi microfinance industry is supported by a range of donors with USAID playing a pivotal role in sector development. USAID-Tijara continues to provide technical assistance to the microfinance industry (read more at www.tijara-iraq.com). 

T. Keyzom Ngodup is co-founder and Executive Director at Ideas sYnergy (www.ideas-sYnergy.net), an Iraq based development consulting company committed to economic and social development through market-based solutions that help build and scale innovative businesses for sustainable and inclusive private sector development.

By T. Keyzom Ngodup, co-founder and Executive Director at Ideas sYnergy, an Iraq based private sector development consulting company.

First, at the basic level, MSMEs need sustainable access to finance
MSMEs don’t borrow once, but more than once, for initial investment, for working capital, and for business expansion. Delivering one-time credit through government agencies is not only counter intuitive but also counter productive to the work of Iraqi microfinance institutions and banks alike. GoI needs to facilitate financial intermediation through the intermediary infrastructures available, as well as focus on those regulatory initiatives that help scale-up intermediation capability of both banks and non-banks.

MSMEs needs long-term financing
MSMEs, specifically those that are capital intensive and predict breakeven after 2-3 years, need access to longer-term financing, not the typical one-year loan period.

By T. Keyzom Ngodup, co-founder and Executive Director at Ideas sYnergy, an Iraq based private sector development consulting company.

I was pleasantly ‘perplexed’ to learn that Prime Minister Nuri al-Maliki, approved (on February 7, 2011) an agricultural project for developing biofuel from rotting dates. The ‘dates-to-biofuel’ project implemented by an unnamed company based in UAE, is seen as a way to encourage growth in Iraq’s crumbling farm sector, which has suffered from decades of sanctions, isolation and war, further confounded by severe droughts and dust storms, attributed mainly to climate change. Ironically, the farming sector is Iraq’s leading employer but contributes less than 3% to state revenues and gets little investments from the Government. According to United Nations Environment Programme (UNEP), Iraq is among the hardest-hit countries (reference to climate change).

There is nothing new in this analysis; in fact it has been repeatedly appearing as an introduction to Iraq. Instead, I want to focus on how we can convert the challenges of climate change and agriculture into opportunities to develop Iraq’s clean energy market, and the important role of MSMEs – micro-, small- an medium-sized enterprises – in facilitating local and indigenous insights to develop world-class solutions that support access to clean, modern energy services. ‘Clean energy’ refers to products and services that produce energy from renewable resources and emit fewer greenhouse gas emissions than does energy from conventional fuel sources. The lack of a reliable supply of power from the electricity grid and the availability of free and inexpensive fuels, such as wood and kerosene, are key influences on this market. Imagine a samoan (traditional Iraqi bread) shop at every street corner or one of the 1.2 million poor woman leaning over her mud-oven: they represent a huge segment of the clean energy market for MSMEs.

There are two areas of the clean energy market that are high-potential and represent high-growth for MSMEs: clean energy electricity systems and clean energy cooking and light products. Iraq needs MSMEs enabling access to solar lanterns, solar home systems, energy-efficient cookstoves, and electricity generated from decentralized sources, including small hydro power plants and biomass gasifier systems. Working either as ‘developers’ of new products (may not be necessary to re-invent the wheel if ‘right’ product is already present in the global market) or as ‘enablers’, Iraqi MSMEs can, for example, help install solar panels and provide Iraq’s rural population with access to clean electricity.

The Government of Iraq, donors and stakeholders have an important role to play here, to support MSMEs in meeting local energy demand, and contribute to a cleaner Iraq. They can operate focused lending schemes for promoting investment in clean production and energy efficient technologies and production processes, through lines of credit from donors/international development financiers such as OPIC and IFC. In addition, Iraqi MSMEs suffer from a dearth of knowledge on emerging best practices and technologies in this space: the government and donors can support a nation-wide ‘clean energy and MSME conference’, with a focus on partnership models that MSMEs can undertake to develop local capabilities and their impact.

At Ideas sYnergy, we believe that the first necessary step is to understand the energy-related consumption and expenditure habits of Iraq’s poor, un-banked, and ‘under-energy served’ population segments, as well as GoI’s (future?) policies and initiatives in how they interact and facilitate the clean energy industry in the country. Reading through, you may understand why I am ‘perplexed’ with Iraq’s prime-minister: did the (premature?) approval of dates-to-biofuel programme implemented by non-Iraqis set-up Iraqis at an unfair disadvantage? That, and in general the economic decisions taken by people in politics, is a question Iraqis should ponder.

T. Keyzom Ngodup is co-founder and Executive Director at Ideas sYnergy, an Iraq based development consulting company committed to economic and social development through market-based solutions that help build and scale innovative businesses for sustainable and inclusive private sector development.