Digging Out

Fast Company
By David Axe
February 2007; Pg.80-85

 Excerpt:

As a strategy for defusing an ongoing conflict and supporting reconstruction, microfinance is nothing if not experimental. It has been only in the past couple of years that the concept has "gotten a level of visibility" as a major development tool, says Shari Berenbach, executive director of the Calvert Foundation, an investment organization in Maryland that funds some micro-finance lenders. And it was only with the awarding of the 2006 Nobel Peace Prize to Muhammad Yunus, founder of the Grameen Bank in Bangladesh, the world's most successful microfinance institution, that the idea became anything like a household word.

Still, microfinance has hardly been a secret in international circles. It has been used in developing countries for decades. And it's a powerful model: Grameen, for example, made its first loan in 1976; 30 years later, it lends upward of $50 million a month to 6.6 million clients—less than $10 a head—and enjoys repayment rates better than 98%. "During an eight-year period, among the poorest in Bangladesh with no credit service of any type, only 4% pulled themselves above the poverty line," according to a report from the Global Development Research Center (GDRC). "But with individuals and families with credit from Grameen Bank, more than 48% rose above the poverty line."

Aside from some halting efforts in Afghanistan, however, microfinance has rarely been tested in places as dangerous as Iraq. Just 2% of all microfinance has been directed toward Iraq and the region, estimates Isobel Coleman, of the Council on Foreign Relations. And as a percentage of the total postwar reconstruction budget—most of it poured into billion-dollar contracts to firms such as Bechtel and Halliburton (NYSE:HAL)—microfinance funds scarcely register. "Microfinance operations are small scale and long term and not particularly exciting," explains Robert Templer, director of the Asia Program at the International Crisis Group, a nonprofit based in Brussels. "They don't involve great returns to foreign companies that want contracts to build things."

The British military certainly deserves some credit for recently bringing microfinance to the vanguard of the coalition's strategy. But CHF International, a Maryland-based nonprofit, launched the first microfinance program in Iraq in the summer of 2003 and has been quietly working at it, often alone, ever since. CHF operates in crowded marketplaces and on sweltering streets lined with struggling small businesses. Taking money from private investors and the United States Agency for International Development (USAID), the federal agency responsible for nonmilitary aid worldwide, its people work at great risk. They reach even lower than the military financiers do, to the foundation of the Iraqi economy—individual butchers, tailors, barbers, and seamstresses. "Iraqis are entrepreneurial people," says Elissa McCarter, a CHF director in the Washington area. "With access to [finance], they are able to generate a stream of income to support themselves and their families, and, to a certain degree, increase employment for others as businesses grow."

Since May 31, 2006, CHF's Access to Credit Services Initiative has lent more than $43 million to more than 16,000 people in south and south-central Iraq. Kadija Al-Salam, a nurse in [a town in which CHF operates], is one them. Neighbors often asked Al-Salam (not her real name) to help deliver their babies, and she decided to open a clinic so she could do more. She received a small loan from ACSI to increase the number of available beds to three and to purchase new equipment.

Acknowledging CHF's success and microfinance's potential, James Baker's Iraq Study Group—the brain trust exploring new options in Iraq—recently consulted with Richard Hill, the firm's director of strategic initiatives and analysis. As a rule, though, microfinance is designed to foster slow, incremental improvement in a relatively stable environment. "Not a day goes by that our operations are not negatively affected by the security situation," McCarter says. "Violence leads to work stoppages both for our clients and for our own operations due to curfews, road closures, destruction of client businesses, deaths, bank closures, etc." CHF now relies almost entirely on locally hired staff in Basra; Westerners are just too vulnerable to murder and kidnapping. Even McCarter concedes that the company's efforts are only "scratching the surface" of the problem.

Indeed, it's possible, given the pace of deterioration in Baghdad, that microfinance is simply too little too late. "It's [best] in that initial period after a conflict where you've got goodwill and general acceptance of new ideas," says the International Crisis Group's Templer, who has studied microfinance in conflict zones such as Afghanistan. "It all diminishes very rapidly. If you don't seize the moment, you miss an opportunity."

But Basra isn't Baghdad. The violence here represents a power struggle between Shiite factions rather than the seeds of a Sunni--Shiite civil war. So while to a pessimist, even the most successful Baswari finance operation is irrelevant as long as Baghdad burns, to an optimist, this is the soil in which microfinance might take root and eventually spread.