A New Loan Program Helps West Bank Small Business

Posted by: Stacy Perman on November 6, 2009

There is a growing faction that views disparity in income and a dearth of economic opportunities in the Middle East as much of a factor that fuels extremism and volatility as violence — and one that has just as much gravitas to push the seemingly intractable Israeli-Palestinian peace process forever off its shaky hinges. In tandem with the political process, this group sees bolstering economic progress as an important strategy to secure a viable, sustainable path to peace. And that road they contend is trod with entrepreneurship. Moreover, unlike the unpredictable peace process, this is an approach with both measurable and tangible results.

Israeli industrialist Stef Wertheimer, the founder of Iscar Industries has devoted much of his time and resources to establishing industrial parks that help Israeli and Arab entrepreneurs in some of the lowest income, underdeveloped areas in Israel. Last year, when I wrote about Wertheimer, his handful of industrial parks had helped 175 companies develop, employed 5,000 people, and in 2007 had produced collective sales of $750 million. When I spoke with him, his sixth park established outside of Istanbul, Turkey in 2003 had grown to 70 companies that employed 300 people.

The Middle East Investment Initiative (MEII), a Washington D.C.-based non-profit group is another strong proponent of using businesses to create sustainability and peace. Established in 2005, MEII was formed specifically to stimulate the region’s fragile economies. And for the past two years, MEII (along with its partners, OPIC, the Palestinian Investment Fund, and CHF International) has been the quiet force behind a $228 million loan guarantee program helping small and medium-sized business ventures in the West Bank.

That is the reason why Berl Bernhard, the organization’s chairman and James Pickup, its president, swung by BusinessWeek’s New York office today. On their way to the Middle East, the pair came in to discuss this program that has helped a number of Palestinian businesses get off the ground for the first time.

To date, MEII along with its local Palestinian bank partners, have approved 124 loans for a spectrum of business. For instance one loan has enabled an olive oil business to buy a new distillery that makes it more competitive with similar European companies. Another firm that cuts granite and limestone was able to buy new equipment. The average MEII-backed loan is about $200,000, although MEII has also backed larger ventures. They include a $4 million loan to build a five-star hotel in Ramallah and $15 million went to the first competitive cell phone system in the West Bank. In the latter instance, the cell phone company is expected to generate a number of new jobs including 60 small cell phone distribution businesses.

However, outside of broad strokes, Bernhard and Pickup explained that MEII has not really discussed its work out of concern it might trigger a “moral hazard.” That is to say, there was much apprehension on the ground that many in the region would not cotton to the idea that it was “America” that was supporting these local banks and fledgling businesses. A sentiment that was born in part by long-time distrust of America’s intentions and actions in the region as well as widespread cynicism when it comes to promised funds that never quite make it to their targeted destination. As a result, MEII has not previously disclosed MEII’s association with Palestinian banks. As well, those ventures that received their loans have had no idea that they were guaranteed through MEII. But now Bernhard said: “We have to tell this story.”

It is a story he says that cuts through the hopeless narrative of the region. “When you mention the Israel-Palestinian conflict, people shy away, they don’t want to be involved,” Bernhard said. “We are not part of the political operation. We are about stimulating the economy for better food, lives, and homes -- and it is working.”

In fact, Bernhard says it was prodding from Palestinians including Prime Minister Salam Fayyad and President Mahmoud Abbas that convinced him it was time to openly discuss their work. “They said to us ‘why aren’t you talking about this. This is measureable.’ But it’s like a flower in the desert. No one knows what we are doing.” Moreover, he added. “It’s important for the Palestinians to know that concrete things are happening here to change lives. And this is the way to go.”

Any prospective business must first pass a set of criteria that MEII has devised for approval. For instance, the outfits must be sustainable, create jobs, and be geographically diverse. They are also looking to firms that will train women entrepreneurs. MEII guarantees 70% of the loan with a 40% collateral ceiling. The process of vetting the loans is heavily scrutinized and carefully monitored not only for viability but to ensure the money is not going to finance terrorist groups, money laundering, or weapons purchases.

Since 2007, MEII has reviewed 166 loan applications and rejected 40. By the end of last month, MEII’s portfolio consisted of 159 loans totaling $38,324,100. An additional 50 loans worth $8,742,000 is in various stages of processing. While there have been some late repayments, according to Bernhard and Pickup, to date there have been no defaults.

Eventually, MEII hopes to leverage this project as a way to support and generate more business to local Palestinian banks. In the meantime, the success born out so far is a story of Middle East success in a region where there are too few such tales. As Bernhard said: “I always say, a people without hope are a people who have nothing to lose.”

Reader Comments

Geri Stengel

November 7, 2009 4:20 PM

I just spent two days at a conference on social enterprise put on by NYU. I wish this was one of presentations. This is a fabulous story and I want to know so many more details. How many jobs are being created through companies with MEII backed loans, how much have wages improved, how are you tracking impact on violence in the area, are there any unintended consequences? I hope you'll continue telling this story.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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