Financial Services Volunteer Corps Inc

The Financial Services Volunteer Corps (FSVC) is a not-for-profit organization that helps strengthen financial sectors in developing countries. It does so with the ultimate aim of promoting job creation and access to financial services. FSVC's work strengthens the financial, economic and trade infrastructure of developing countries, thus promoting a competitive business environment. In Iraq, this funding application centers FSVC's commitment to empowering women in agricultural cooperatives. The program focuses on innovative technical and entrepreneurial strategies to address climate change, enhance profitability, and tackle food insecurity. Specifically, the program aims to: 1) enh... read more The Financial Services Volunteer Corps (FSVC) is a not-for-profit organization that helps strengthen financial sectors in developing countries. It does so with the ultimate aim of promoting job creation and access to financial services. FSVC's work strengthens the financial, economic and trade infrastructure of developing countries, thus promoting a competitive business environment. In Iraq, this funding application centers FSVC's commitment to empowering women in agricultural cooperatives. The program focuses on innovative technical and entrepreneurial strategies to address climate change, enhance profitability, and tackle food insecurity. Specifically, the program aims to: 1) enhance the legal and regulatory framework for Micro-, Small, and Medium-sized Enterprises (MSMEs); 2) improve financial access for MSMEs, with a special emphasis on women-led cooperatives; and 3) strengthen the business support ecosystem for MSMEs. For the purpose of this program, MSMEs are defined as non-subsidiary, independent firms which employ fewer than 250 employees. FSVC will aim to support a wide range of private sector MSMEs in terms of size and business focus, with a focus on micro- and small-sized enterprises (fewer than 10 and 50 employees, respectively). Furthermore, FSVC will target in priority MSMEs owned by women, youth, and religious and ethnic minorities. To implement this proposed program, FSVC has partnered with Takween, a local business accelerator located at the American University of Iraq in Slemani (AUIS). FSVC's program will tackle the following key challenges facing MSMEs in Iraq: Key Issue # 1: Complex Legal and Regulatory Framework - Starting a business in Iraq is a long and complex process. It takes an average of 8.5 steps and 26.5 days to start a business in Baghdad. Once established, businesses have to comply with a complex set of legal requirements. Larger businesses hire lawyers and brokers to help them navigate the legal and regulatory environment. Such services are costly, however, and MSMEs usually cannot afford them. Furthermore, even for specialized professionals, it is difficult to ensure that a business complies with all rules and regulations. There are multiple ministries and agencies (e.g., the Office of Company Registration (OCR), the Ministry of Trade, the Ministry of Finance) involved in business registration and/or supervision, with different interpretations of the requirements for starting, maintaining and growing a business. In an interview, a lawyer who has been operating for 12 years in Iraq shared that he still struggles to understand legal requirements for businesses. He stated that most laws and regulations date back decades, and that newer laws follow civil law at times and common law at others, making the overall framework complex and sometimes contradictory. This situation is compounded by the fact that the GoI does not have a good set of data on MSMEs to support policy design. The business classification system is not in line with international standards, and therefore businesses are often classified under the wrong category when registering. For example, an e-commerce business will be classified as retail shop and be required to rent a commercial space prior to launching operations even if the business does not need it. This inaccurate classification system adds additional administrative and regulatory burdens for businesses, and limits the ability of the GoI to design data-based policy. Furthermore, this difficult regulatory framework directly impacts businesses, particularly MSMEs, in their everyday operations. The GoI has taken action to start addressing these challenges. In 2020, the GoI, with support from donors, launched its first online one-stop-shop (OSS) to register new companies in Baghdad. The OSS is designed to enable entrepreneurs to choose a company name, register, and receive a tax and social security number. The initiative is timely and simplifies the traditionally lengthy registration process. However, its rollout seems to have stalled and the OSS is no longer operational. This OSS, while a first in Baghdad, needs to be updated and maintained, and its staff trained. Furthermore, more advertising is required so that new entrepreneurs use this tool. Key Issue # 2: Weak Access to Financing - Access to financing for MSMEs in Iraq is dire. According to the World Bank, Iraq ranks 185 out of 190 countries in businesses' access to credit.5 The financial system in Iraq is dominated by the banking sector, which accounts for 75% of the Iraq's financial assets. Non-bank financial institutions (i.e., insurance, leasing, factoring and FinTech) represent a small share of the financial system. The banking sector is mostly represented by state-owned banks such as Rafidain Bank and Rasheed bank, which are responsible for 54% of bank credits. In an interview with FSVC, the Iraqi Private Banking League (IPBL), the main Iraqi banking association, stated that there is little interest in MSME financing among both state-owned and private banks. This is due to 1) inadequate MSME lending processes, procedures and guidelines; 2) a lack of understanding of business models and risks of MSMEs; and 3) the inability of MSMEs to meet collateral requirements. International investors are also reluctant to engage in Iraq given its challenging business environment. On the MSME side, there is a lack of understanding of how to prepare a business for a loan request. For example, Takween explained that Iraqi MSMEs, in particular startups, need technical assistance to become investment ready, understand investment requirements, and present their financials to investors and pitch their ideas for growth. Some international donors are providing financial assistance to help address the funding gap. For example, the International Finance Corporation (IFC) recently provided a US$10 million loan to the National Bank of Iraq to encourage lending to small businesses. This type of programs, however, remain sporadic, reliant on international donors and short-term, as banks fail to provide products that specifically target MSMEs. Despite these challenges, there are positive developments. Iraq's GDP per capita has more than quadrupled, from $850 in 2003 to $4,200 in 20208, demonstrating untapped capital potential. Key Issue # 3: Low Business Management Capacities of MSMEs - The MSME sector employs approximately two thirds of the private sector workforce, yet it suffers from low levels of entrepreneurship skills and financial literacy. This has been reflected in the MSME sector's lack of resilience to the economic shock of the COVID-19 pandemic. The International Organization for Migration (IOM) conducted a survey across 15 Iraqi provinces in 2020, and found that MSMEs experienced a 65% decrease in monthly revenues on average, and that 63% of MSMEs surveyed reported that they are at risk of shutting down permanently. The IFC states that MSMEs in Iraq have a higher probability of closing within five years of opening than of staying in business. This is due to several factors, including weaknesses in financial and business planning, limited access to markets, lack of access to financial lifeline, and insufficient business support services. Furthermore, Takween and other business incubators and accelerators interviewed for this proposal stated that there is a need to better inform MSMEs of the resources available to them. Most business support activities operate in silos, and there needs to be a more coordinated approach to provide comprehensive support services to MSMEs. BSOs also need to strengthen their advocacy to better represent MSMEs' interest in policy design, in particular for women-, youth- and minority-owned MSMEs. Finally, the MSME sector suffers from a substantial gender gap, which results in a large untapped business potential. According to the IOM, the ratio of employed women to employed men reached 1 to 17 in June 2020. In addition, the youth unemployment rate rose to 27.2% in 2020.11 The data for minorities is not available given the lack of recent census. To address these key issues, FSVC has structured practical, demand-driven activities designed to achieve specific results and equip local counterparts to undertake reforms on their own, thereby ensuring sustainability. To prepare this proposal, FSVC consulted with representatives of potential target beneficiaries and partners, including the Executive Director of the IPBL, the Director of the OCR, the Regional Director of the American University of Iraq in Baghdad and the business incubator Five One Labs. Furthermore, FSVC partnered with the business accelerator Takween, which will be FSVC's subgrantee for the program. This innovative partnership will draw from FSVC's international experience in enabling inclusive economic growth, Takween's understanding of and connections within the Iraqi MSME sector, and AUIS's academic research and engagement with youth.