VZCZCXYZ0000
OO RUEHWEB

DE RUEHJM #3987/01 2481502
ZNR UUUUU ZZH
O 051502Z SEP 06
FM AMCONSUL JERUSALEM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4719
INFO RUEHXK/ARAB ISRAELI COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHBS/USEU BRUSSELS PRIORITY

UNCLAS JERUSALEM 003987 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS/MAHER/STEINGER; 
NSC FOR ABRAMS/DORAN/WATERS; TREASURY FOR 
SZUBIN/LOEFFLER/NUGENT/HIRSON; PLEASE PASS TO USAID FOR 
KUNDER/MCCLOUD/BORODIN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID KWBG IS
SUBJECT: NON-PAYMENT OF PA SALARIES IMPERILS MICROFINANCE 
PROGRAMS 
 
 
¶1.  (SBU) Summary:  Non-payment of PA employee salaries is 
threatening the viability of microfinance programs operating 
in the West Bank and Gaza, according to lending agencies.  In 
Gaza, where the local economy is extremely dependent on PA 
salaries, loans with payments more than 30 days overdue have 
increased to over 70 percent of some program portfolios.  In 
recent years, microfinancing institutions' (MFIs) increased 
reliance on salary guarantees as collateral for loans has 
exacerbated the problem.  In an effort to sustain the 
industry, MFIs have severely curtailed lending and, when 
extending loans, are focusing increasingly on groups and less 
risky microenterprises instead of poor individuals.  End 
Summary. 
 
----------------------- 
Repayment Rates Plummet 
----------------------- 
 
¶2.  (SBU) After six months of non-payment of PA salaries, 
beneficiaries of microfinance programs are failing to make 
loan payments at an alarming rate, according to 
representatives of the major microfinancing institutions 
(MFIs) operating in Gaza and the West Bank.  Palestine for 
Credit and Development (FATEN) reported in July 2006 that the 
number of outstanding loans in Gaza for which payments have 
not been received for over 30 days had increased to over 70 
percent of the its loan portfolio.  In December 2005 the same 
"portfolio at risk" rate was 2 percent.  CHF's Access to 
Credit Program's portfolio at risk rate for the West Bank and 
Gaza, just 2 percent in December 2005, rose to an average of 
47 percent in July 2006.  CHF Country Director Lana Abu 
Hijleh told Econoff August 29 that the portfolio at risk rate 
for CHF housing rehabilitation loans in Gaza was about 70 
percent and climbing.  UNRWA Microfinance and 
Micro-enterprise Program (MMP) Director Alex Pollack told 
Econoff August 29 that, from January to June 2006, MMP's 
portfolio at risk rate in Gaza rose from 26 percent to 60 
percent. (Note:  FATEN and CHF receive USG funding.  UNRWA is 
the largest microfinance lender in the West Bank and Gaza. 
The USG is the single largest contributor to UNRWA.  End 
Note.) 
 
----------------- 
Lending Curtailed 
----------------- 
 
¶3.  (SBU) Pollack described the status of microfinancing in 
the West Bank and Gaza as "desperate."  He said that in the 
past six months the MMP program had cut lending by 85 
percent, equivalent to a USD 1 million drop in the value of 
loans disbursed monthly.  Abu Hijleh advised that CHF stopped 
lending entirely in July 2006.  FATEN lending in Gaza dropped 
81 percent from December 2005 to May 2006, according to data 
compiled by the Palestinian Microfinance Network (PMN), an 
association of local MFIs. 
 
---------------- 
Gaza Hit Hardest 
---------------- 
 
¶4.  (SBU)  The repayment situation in Gaza is particularly 
dire due to its greater dependency on income from PA 
employment.  Pollack stated that regular and sustained 
closures of the Karni/al-Mintar crossing, which stifle trade 
and deprive factories of raw materials, have also been a 
factor in undermining Palestinians' ability to repay their 
loans.  Faced with rising unemployment and increased poverty, 
Gazans have to focus on meeting their basic household needs 
and lack sufficient cash to repay loans. 
 
--------------- 
MFIs Vulnerable 
--------------- 
 
¶5.  (SBU) As a consequence of actions taken after the 
September 2000 intifada, Palestinian MFIs were particularly 
ill-prepared for the current crisis, according to MFI 
sources.  Intifada coping strategies included reduced 
lending, decreased exposure and the introduction of tighter 
collateral requirements, such as salary guarantees.  The 
industry recovered and even experienced rapid growth in 
2004-2005.  However, according to one estimate, by the end of 
2005 approximately 40 percent of all active loans were 
 
guaranteed by salaries.  With the end of PA salary payments 
in March 2006, therefore, MFIs have found their viability 
increasingly threatened by rising non-payment rates and 
defaults. 
 
------------------ 
Seeking to Survive 
------------------ 
 
¶6.  (SBU) MFIs are now struggling to preserve their programs 
in order to maintain their lending capabilities for when the 
current crisis ends.  Abu Hijleh said that, as a "matter of 
survival," CHF is aggressively reviewing each of its 4,000 
loans, contacting all of its active clients to determine who 
can pay.  Pollack stated that UNRWA, although for years 
adamantly opposed to loan rescheduling, is now looking at the 
possibility of extending a three-month grace period to 
clients similar to that provided by local commercial banks. 
MFIs may also seek grant funding to sustain their programs 
until the end of the year.  Pollack and Abu Hijleh said that 
MFIs are also redirecting their lending from individuals to 
groups and microenterprises as a means of reducing risk and 
preserving capital.  Both expressed concern that, in doing 
so, MFIs are reducing the effectiveness of microfinancing as 
a tool to alleviate poverty by ignoring the poorest of the 
poor. 
 
WALLES