Breaking Barriers to Financial Access: Resources and Beyond

Iraq was facing a combination of acute economic shocks, which the country needed to prepare to manage. The pre-COVID-19 economic shock marked a negative outlook in terms of macroeconomics. GDP contracted at an estimated 12.1 percent in 2020 - the lowest performance since 2003. Oil production decreased rapidly as oil prices fell from an average of 4.5 million barrels per day to 3.65 million per day as of August 2020. Only to increase marginally to 3.86 million by the end of the year.

Lower oil revenues, which account for more than 90 percent of export income, weighed on the current account balance, ending at a deficit of USD 22.5 billion, against a surplus of USD 2.6 billion a year earlier. At the same time, general government gross debt rose rapidly to 68.3 percent from 46.9 percent a year earlier. Part of the increase is the result of the late 2020 devaluation of the currency. Inflation rose to 0.8 percent in 2020, contrasting with a slight deflation of 0.2 percent a year earlier amid growing food and transportation costs.

The unemployment rate is nearly 15 percent, which does not account for a loss of income of those employed in the informal private sector – a source of income for 65 percent of people in the labor force.

Iraq's Private Sector Challenges

Iraq continues to face structural challenges and needs more financial intermediation, constraining micro, small, and medium enterprises (MSMEs) access to finance. Like many oil-exporting countries, the Iraqi economy needs to be more diversified and not hydrocarbon-centric. The traditional banking sector needs to be faster in providing financing support to the private sector. The lockdown necessary measures to contain the COVID-19 pandemic in 2020 deepened the already slowing economy, particularly in the services sectors.

As a frontier market, Iraq has yet to exploit the potential of the MSME sector. Iraq’s unfavorable business environment constrains private sector activity and drives the concentration of firms towards low-productivity sectors. The private sector has a poor gender balance. The nascent entrepreneurship ecosystem requires systematic support

from intermediary organizations, business enablers, and other business development services (BDS) providers, including business coaches, business consultancy firms, and technical advisors. Access to financial services among households in Iraq is shallow. Microenterprises suffer disproportionately from low financial intermediation and are offered limited financial products. The microfinance sector requires major regulatory and institutional reforms. In the face of the COVID-19 pandemic, and as borrowers struggle to make ends meet and repay loans, micro finance institutions (MFIs) need access to liquidity to help reschedule loans and maintain their operations so that they continue playing a vital role now and in the recovery phase. The development of the private sector with a focus on innovation and entrepreneurship in Iraq has been an increasing priority for the Government of Iraq.

What Is CARP?

COVID-19 Adaptation and Recovery Pilot (CARP) is a development cooperation initiative financed by the International Bank for Reconstruction and Development (World Bank Group). GIZ implements it on behalf of the Iraqi Ministry of Finance. CARP is directly supporting the Central Bank of Iraq to strengthen the institutional framework of the microfinance sector, while working with micro-finance institutions, MSMEs and startups.

CARP´s approach tackles the immediate recovery of the private sector and leverages Iraqi MSMEs by focusing on the added value that can be brought to enterprises through digitalization. In doing so, CARP aims to lay the foundations for a much larger growth program based on financial inclusion and SME-support measures.

CARP Objectives

CARP’s efforts focus on supporting the resilience of viable micro, small and medium enterprises (MSMEs) and the sustainability of their intermediaries through capacity enhancement and access to finance in Iraq. The project aims to build a more compelling growth program around Financial Inclusion and MSME-Support Measures in Iraq.

More specifically, the project objective is to test the effectiveness of selected financial and firm-level interventions in providing liquidity, building capacity for targeted small and growing businesses (SGBs), and mobilizing private investment.

CARP activities strengthen the resilience of viable MSMEs and achieve business continuity through; the provision of financial support to MSMEs and innovative local private solutions during the recovery phase and the implementation of mitigation measures at the firm-level supporting SBGs.

Target Beneficiaries

CARP is expected to limit firms’ closures, protect employment, help firms recover their revenues, and stimulate innovation in COVID-19-affected sectors. CARP is increasing participating firms’ and entrepreneurs’ resilience and access to liquidity (grants, microfinance, investment) and digitization opportunities (fintech, tech adoption, consumer internet access, digital enterprise solutions) to avoid the persistent adverse effects of COVID-19 on the private sector.

The key beneficiaries to receive financial and non-financial support will be MSMEs that do not have access to the traditional banking sector. These include informal firms, micro, small, and medium formal firms, as well as small and growing businesses (SGBs); a subset of SMEs that are small businesses with innovative, scalable business models and significant potential for growth.

Critical MSME intermediaries will also benefit from CARP activities such as MFIs, Business Solution Providers (BSP), and early-stage investment programs. These categories include angel networks and seed/early-stage funds managers, who traditionally have minimal access to finance. CARP can leverage its expertise and capital to achieve the project development objective.

CARP Approach

CARP works hand in hand with national stakeholders of the Iraqi private sector and offers a twofold approach.

1. Financial Inclusion:

Supporting immediate relief of the microfinance sector in Iraq, including the most affected small business owners, by providing:

▪ Liquidity support and technical assistance for eligible MFIs – mainly to give

flexibility and immediate relief for the most affected borrowers while helping

remaining MFIs stabilize their operations.

▪ Technical Assistance to strengthen the legal and institutional framework for

MSME finance in Iraq. This will be achieved through the creation and

strengthening of an MSME or Non-Banking Financial Institutions (NBFI) Unit

under the Central Bank of Iraq (CBI) to serve as the basis for the sustained

growth of MSMEs. A non-bank financial institution (NBFI) refers to a financial

institution that does not have a full banking license and cannot accept deposits

from the public. However, NBFIs facilitate alternative financial services, such as

investment (both collective and individual), risk pooling, financial consulting,

brokering, money transmission, and check cashing. NBFIs are a source of consumer credit (along with licensed banks).

2. Access2Growth

Supporting Iraqi MSMEs to enhance their capabilities, focusing on digitalization and resilience through blended learning methods and financial aid in vouchers and matching grants.

Developing a grant ecosystem to catalyze private investment into Iraqi startups and serving as a foundational program to establish Iraq’s nascent SGB investment ecosystem with complementary interventions.

Types of Support?

CARP offers different types of support depending on the needs of the firms. This has been divided into:

1. Growth: aiming at unlocking the potential of Iraqi Micro, Small and Medium-sized Enterprises (MSMEs) by improving their operations through expert business advisory, targeted training, digital solutions, and grants. The initiative includes:

- Vouchers are a financial incentive for Iraqi Micro, Small, and Medium-sized

Enterprises (MSMEs) to enhance their ability to grow and become more resilient.

A qualified MSME can apply for funding up to a maximum of 4,000 USD to

upgrade their business by acquiring in-depth sectoral or functional knowledge or

digital solutions from business service providers selected by the project. Female

business owners are encouraged to apply.

Following initial application screening, a successful applicant will be introduced to a third-party Business Advisor to further identify their business development needs. The selection of a successful applicant will be based on the selected solution's suitability and value-added potential.

For more information or the application process:

- Matching Grants: The matching grant is a financial incentive for Iraqi Micro, Small

and Medium-sized Enterprises (MSMEs) to enhance their ability to grow and

become more resilient. A qualified MSME can apply for funding up to a maximum

value of 20,000 USD to upgrade their business. The grant fund helps to acquire

tailored capacity-building support and access to digital technologies and upskill

and reskill staff to transition to new technologies. Female business owners are

encouraged to apply.

Following initial application screening, a successful applicant will be introduced to a third-party business advisor to identify their needs further. The selection of a successful applicant will be based on how solid their action plan is, with explicit activities, clear milestones, and specific targets that the firm will achieve using it. The successful applicants are expected to be willing to invest at least 20 percent of the total project cost.

For more information on the application process:

2. Investment: Catalysing private investment into SGBs through Ecosystem support grants. The individual purposes of these schemes are to strengthen deal flow, de-risk early-stage investors, and build local investment program capacity, respectively. It is a part of a package to build the foundations of the early-stage Iraqi SGB investment ecosystem.

The initiatives include:

a) Pre-investment grants: Provide funding to eligible SGBs administered through a facility

managed by CARP. Pre-investment grants consist of grant funding to Iraqi SGBs that

show business and investment promise but are not considered “investment ready” by

investors. These grants are designed to help entrepreneurs address product/service and

business shortcomings that could improve the prospects for subsequent investment

within a short time frame (targeting 6-9 months). Pre-investment grants are available for

up to US$35,000 and will not require matching funding. The principal success measure

for a pre-investment grant is whether the beneficiary can subsequently secure private or

commercial financing.

For more information or the application process:

b) Co-investment grants: Provide supplementary funding to startups and SGBs that can

raise two-thirds of an investment round from private investors such as angel investors or

VCs, as well as to new Iraqi ventures that investors and entrepreneurs teams set up.

These grants provide additional funding beyond what investors are willing to make, i.e.,

one-third, that helps early-stage enterprises develop while stimulating private

investment. Co-investment grants are available for up to US$250,000 and require

matching funding.

For more information or the application process:

C) Capacity development grants: provide funding for emerging seed/early-stage investment

programs in Iraq, such as new and prospective early-stage funds, angel networks, or other investment approaches that aim to mobilize private investment (including from business angels, diaspora investors, institutional investors, and local institutions) into startups and small and growing businesses (SGBs). CDGs support these programs' set-up costs, initial operations, technical training, and capacity-building assistance. The capacity development grants are available for up to a maximum of US$400,000.

For more information or the application process:

Conclusion

CARP offers an opportunity to expand on the emerging entrepreneurship ecosystem in Iraq, through a collaborative effort with the Iraqi private sector and employs a dual-pronged strategy. It focuses on both financial inclusion and access to growth opportunities, aiming to foster the recovery and advancement of micro, small, and medium-sized enterprises (MSMEs) in Iraq. Under the banner of financial inclusion, CARP provides essential aid to the microfinance sector in Iraq. This assistance encompasses liquidity support and technical guidance to eligible Microfinance Institutions (MFIs), thereby offering immediate relief to severely impacted small business proprietors.

Moreover, CARP endeavors to fortify the legal and institutional framework for MSME finance in Iraq. This initiative involves establishing an MSME or Non-Banking Financial Institutions (NBFI) Unit within the Central Bank of Iraq, which serves as a foundation for the sustained development of MSMEs, thereby promoting economic growth. Non-Banking Financial Institutions (NBFIs), as sources of consumer credit, contribute to alternative financial services, investment, risk management, and more.

CARP operates as a multifaceted program that collaborates with Iraqi stakeholders to promote financial inclusion, digitalization, and resilience among MSMEs. CARP contributes to Iraq's economic recovery and the development of a thriving entrepreneurial ecosystem by focusing on both immediate relief and long-term growth.