SANA'A, 21 March 2013 (IRIN) - Afrah Ahmed, 23, an entrepreneur based in Yemen's capital Sana'a, is no stranger to micro-credit: she is preparing to take out her third loan.
But when asked if previous borrowing had helped improve her life, she gave a lukewarm reply.
"Only to a certain extent, honestly, because life is very hard, there's no money in the house, no-one works. I am looking for a solution to improve life," she told IRIN.
Whether micro-credit "works" for lifting people about of poverty is a question that has been debated not just in Yemen but around the world.
"I wouldn't describe it as a great way to tackle poverty; it does modest good at a modest cost," David Roodman, a senior fellow at the Center for Global Development in Washington, and the author of a recent book on micro-finance, Due Diligence.
"I think it's something that enriches the economic fabric of a society and contributes to the process of economic transformation in a modest but useful way, which in a sense is what development is."
Micro-finance includes financial services such as micro-credit (small loans) and micro-savings (making it easy to put small amounts of money aside).
Five randomized control studies carried out in Morocco, the Philippines, Mongolia, India and Bosnia-Herzegovina seem to show that micro-loans can improve business profitability, but do not seem to improve poverty indicators like household spending and the numbers of children in school.
With 15 years of experience and a legal framework in place, Yemen, the Middle East's poorest nation, has been something of a regional pioneer in terms of micro-credit, and the broader micro-finance sector (which, as well as small loans, also includes products such as savings accounts for those usually excluded from mainstream banking).
Despite widespread unrest across the country over the last two years, the sector has expanded considerably, though it is still far from achieving its potential.
Adel Mansour, the author of a 2011 Social Fund for Development (SFD) report, says micro-finance institutions managed to reach 439,000 people between 1998 and the end of 2011 in a country of 25 million with a poverty rate exceeding 40 percent.
"We estimate [we need] a million client[s] for the micro-finance industry just for it to be what we aim it to be for helping the poor. With the current numbers we aren't really satisfied with where the industry is," said Najah al-Mugahed, the executive director of the Yemen Micro-finance Network.
In Yemen, the roots of micro-finance date back to 1997 when the donor-supported and government run SFD was set-up. In 2009, Al-Amal bank was opened, the first dedicated micro-finance bank in the Middle East and North Africa.
Since its founding, Al-Amal bank has dispersed 60,000 loans, with an average size of around $200, and is now the single largest source of micro-financing in Yemen.
Mohammed al-Lai, the founder and head of the bank, said: "We consider ourselves as a bank for the majority of Yemenis."
Loans, he says, are used in a variety of ways, most notably as a way to secure funding for small and medium enterprises, though he added that Al-Amal does give some consumer loans to qualified borrowers as well.
Although such consumer lending does not exceed more than a quarter of the value of loans at Al-Amal, there is concern globally that micro-loans are sometimes being diverted to short-term needs like health bills and food, rather than providing capital for small businesses.
To adapt to the Yemeni market, the majority of micro-credit borrowers opt for those schemes applying the principles of Islamic finance.
Repayments becoming more of a concern
Regardless of the model employed, micro-credit repayment rates in Yemen have been extremely high, often exceeding 99 percent.
In 2010, according to the SFD report, the percentage of loans at risk (defined as the sum of accounts where a payment is more than 30 days overdue) was 1.6 percent, with ultimate default rates even lower.
"Our loans are highly correlated with the health of our clients. If, for example, the client's son gets sick, the loan might not [be paid back]," said Lai.
Over the last two years, repayment has become more of a concern. The micro-credit industry was not immune from the nationwide instability caused by Yemen's "Arab Spring" uprising.
In 2011, the percentage of loans at risk more than quintupled, loan dispersal slowed drastically, and at least one office, in the restive southern province of Abyan, was looted and forced to close.
As the industry attempts to recover from the turmoil, many challenges lie ahead in lending to the poor, including whether those without a formal education can grasp how the services function.
Understanding how loans work can be problematical for those with limited knowledge of financial affairs, said Mugahed.
Donors and institutions have been trying to combat this problem through institutions such as the Small and Medium Enterprise Promotion Service (SMEPS), which provides subsidized management training to entrepreneurs.
But small-scale entrepreneurs using micro-credit are in a minority on such courses.
A broader question that both Mugahed asks about the micro-finance industry in Yemen - as others have done elsewhere - is whether it is really serving the poor.
"There hasn't been a real impact assessment for the micro-finance industry ever since it started in 1997," said Mugahed.
The SFD report, which itself uses very few measures of economic impact, concludes that the ultra-poor - frequently in rural areas - have been under-served by financial services in Yemen despite several efforts to reach out to them.
Experiences lending to the extremely poor in Yemen were relatively unsuccessful, says the report, because "the basic needs for survival were more important than managing a micro activity requiring constant effort and dedication."
Interest rates - or the Islamic equivalent - that start at 18 percent also make borrowing difficult for the ultra-poor and those wishing to start new businesses.
Rates are high in part because inflation rates in Yemen tend to be well above 10 percent and the currency is relatively volatile.
Mobile banking, door-to-door campaigns, and a push to increase the number of savings accounts and ultra-poor borrowers through SFD partnerships with the Yemeni postal authority and the Social Welfare Fund could all help increase the utilization of financial institutions.
But Ali al-Waafi, an economist and former Member of Parliament, believes much of the responsibility for growing the financial sector rests with the government.
Though the Yemeni government adopted a micro-credit strategy in 2005 and instituted a micro-credit law in 2009, Waafi does not believe it has taken an active enough role.
"Maybe the government is busy with other topics, but it must give attention to the financial sector because it is very vital for the economic situation in Yemen."
Mugahed believes Yemen needs "more advocacy [and] more attention to the micro-credit industry. This is a tool for [fighting] poverty, not just charity."