Microfinance is empowering underserved communities in the GCC

Integrating the 1.4 billion people around the world with no access to a bank account into the financial system is a top priority for governments around the world. Not only would it drive economic growth at the macro level, but it would also encourage the economic empowerment of traditionally underserved communities, providing them with secure conditions to thrive.

Countries in the Gulf Cooperation Council (GCC) — Saudi Arabia, Qatar, the UAE, Bahrain, Oman and Kuwait — are now putting financial inclusion at the heart of their economic policy.

They have already made strong progress — and microfinance, with its low barriers to entry and convenient accessibility, has been and remains integral to their strategy.

Microfinance is a type of financial service that opens the door to full-fledged banking services for individuals and small businesses who may not have access to traditional banks. This encompasses a wide range of people, from early-career entrepreneurs and students to traditionally underserved communities such as people with low incomes.

By lowering the entry barriers and giving such groups access to a range of services like financing, credit cards, savings accounts, financial literacy training and remittances empower people to improve their economic well-being.

It’s no wonder, then, that the sector has taken off around the world. BBVA Microfinance Foundation, stands out. It has provided more than $17 billion in finance, enabling 70% of its customers living in poverty to rise above the poverty line after five years. By 2025, the BBVA Microfinance Foundation aims to provide a further $7.5 billion in financing.

Microfinance institutions have promoted financial inclusion through their user-friendly mobile applications that ensure convenience and accessibility. They have also eliminated barriers by offering low or no fees for their services, allowing individuals who were previously excluded from traditional financial systems due to high fees to access their services and save money on transaction costs. Features such as budgeting tools and real-time notifications support individuals to make informed decisions and manage their money effectively.

The potential for such services in GCC countries is significant: for people looking to become financially independent and start their own businesses; for humble workers looking to send money back home; and for low-income families without access to traditional financing.

The microfinance landscape in GCC countries has evolved significantly in recent years, thanks to several key trends.

In recent years, internet penetration has reached 98% across the GCC. So too has smartphone penetration — it is 96% in the UAE and 97% in Bahrain. The region also has a young, educated population, who tend to prefer digital financial services available on their mobile phones to the traditional banking experience of heading to a bank branch. This combination of accessibility and a young demographic has led to higher adoption rates for digital microfinancing services.

Most customers in the GCC also have a preference for Sharia-compliant financial products and services. As a result, Central Banks in the region have taken a proactive approach that has empowered Islamic financial institutions to cater to the needs of the Sharia-conscious communities. They have been instrumental in developing a robust regulatory framework for Islamic microfinance, ensuring compliance with both Sharia principles and international standards.

Government policy has had an important influence in other areas as well, creating an enabling environment for the growth and effectiveness of microfinance initiatives. This forms part of ongoing economic diversification efforts across the region to reduce dependence on oil exports. Regulatory bodies like the Central Bank of Bahrain set the policies and regulations that govern microfinance companies’ activities. These measures have provided a level playing field for microfinance providers to compete, and improved confidence in the market among investors, lenders and borrowers.

Now, an emerging microfinance sector is harnessing these developments to drive financial inclusion in the Gulf region. A new generation of microfinance companies has sprung up across the region. From Bede in Bahrain — which embraces Sharia-compliant microfinancing — to Tamam in Saudi Arabia or Bedayti in Kuwait, these emerging players are making finance accessible to communities that have long been shut out.

In many societies, people face challenges in accessing traditional banking services due to factors such as limited collateral, lack of financial literacy and cultural norms.

By providing people with access to financial services such as credit, savings and insurance, microfinance institutions can help them overcome barriers to economic participation and achieve greater financial independence. For entrepreneurs in the GCC, tailored microfinance services have provided them with the necessary support and resources to start or expand businesses, make autonomous financial decisions and even earn higher incomes.

In Bahrain, Ebdaa was the first microfinance bank with the primary goals of supporting low-income families and of contributing to socio-economic empowerment by providing microcredit opportunities to low-income Bahrainis. It serves as a lending resort for families in need, to improve their overall quality of life and focuses on assisting Bahraini women and youth to turn ideas into successful projects. Ebdaa has also set its sights on regional expansion, having announced plans to launch operations in Saudi Arabia’s Eastern Province.

By tailoring services to underserved groups, microfinance has played a key role in raising financial inclusion in the GCC. It has enabled countries like Saudi Arabia and the UAE to raise their account ownership rates from 46% and 60% in 2011 to 74% and 85% in 2021, respectively.

Microfinance is a great enabler. It reaches out to those who have traditionally been excluded from the financial sector and meets their needs directly, allowing them to share the benefits of the modern, digital economy. As regional markets mature and digital financial services become even more sophisticated, more and more people will have the tools they need to become economically independent.

This process is not without challenges. GCC countries need stronger infrastructure to support their nascent fintech companies and promote digitalization in the financial sector. Providers themselves will also need to embrace emerging technologies like Artificial Intelligence, blockchain and data analytics to improve their customer experience, attract more users and ultimately drive widespread adoption.

The GCC is embracing a new era of economic diversification and, by expanding finance to previously excluded groups, microfinance is enabling every community to be at the heart of the process.