How OPIC Helped Hundreds of Small Businesses in the West Bank

Small businesses create jobs. It’s a widely accepted economic truth, but it’s not the whole story. The fact is, small businesses need money to grow, but they often struggle to obtain credit. This is especially true in developing countries.

One of the key ways Overseas Private Investment Corporation (OPIC) supports development is by providing guaranties for lending to small businesses that a traditional bank might turn away. At first blush, these businesses may not look like good credit risks. They may lack a CFO, or good system for keeping records, and because they’ve never obtained a bank loan, they probably don’t have a formal track record for borrowing and repaying. But OPIC’s SME lending facilities, from Jordan to Liberia, have established again and again that even the smallest business owners operating in challenging markets can be highly innovative and entrepreneurial, committed to providing a product or service that is needed in their community, and to repaying their loans.

Small business borrowers prove to be good credit risks

Last month, I traveled to the West Bank, where I saw the impact of small business lending by the Middle East Investment Initiative, an OPIC partner that has used an OPIC loan guarantee to support lending to the small and medium enterprises that make up about 90 percent of the Palestinian economy. Since 2007, OPIC’s $110 million guaranty has supported more than 750 small business loans in sectors from agriculture to manufacturing to retail, totaling over $132 million. These loans, to small businesses that would not otherwise have been able to obtain financing, have led to the creation of an estimated 10,000 jobs, many that are employing women. And the vast majority are being repaid: The loan facility has a default rate of just 2.3 percent.

MEII loan recipients are often very small businesses with just a handful of employees. But despite the challenges of operating in an environment marked by political instability and significant red tape, they’ve been able to make good use of the capital provided.

From 'mom-and-pop' to job creator

A water bottling company in Ramallah that we visited has grown from 11 employees to 20 since receiving a loan three years ago, while providing a very much sought after source of safe drinking water in a region where water stored on rooftop tanks frequently becomes contaminated with microbes. Another loan recipient was a small printing and publishing shop, which has been able to purchase more modern printing equipment to meet growing demand. That business has more than doubled its employee base.

It is difficult to overstate the benefits of this program in a region that has a staggering unemployment rate of about 25 percent. But job creation is not the only benefit. As this eight-year facility draws to a close, it’s clear its success has also advanced the underlying goal of encouraging small business lending by traditional banks in the region. Today, banks are recognizing the opportunities of lending to small businesses and those banks that are participating in a second $100 million MEII Guaranty Facility to launch in late 2015 have even asked to amend the terms so that they can assume a higher level of risk. This is a phenomenal outcome for a project that was initially considered high risk. I consider that a homerun.

The banks in the region have learned that lending to small businesses is less risky than they thought. Many of the businesses in the region are led by highly entrepreneurial and hardworking people. If given the opportunity through the provision of financing they’ve shown they are able to climb this business development learning curve and be very successful.

About the Author: James Polan serves as OPIC's Vice President for Small and Medium Enterprise Finance.

OPIC Officials Visit a Water Bottling Facility in Ramallah
Posted by James C. Polan
December 6, 2014

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