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Ellis Margot - Chairperson Deputy Commissioner-General

Alex PollockSecretary - Director Microfinance Department

VacantMember - Local Microfinance Expert

Bernard LaufenbergMember - Director of Finance

John GingMember - Director of UNRWA Operations, Gaza

Barbara ShenstoneMember - Director of UNRWA Operations, West Bank

Richard CookMember - Director of UNRWA Operations, Jordan

Henry JackelenMember - International Microfinance Expert

Beth KuttabMember - Director of Relief and Social Services

Roger HearnMember - Director of UNRWA Affairs, Syrian Arab Republic

Jane GiacamanNon-voting Member - Chief Microfinance Operations

ADVISORY BOARD

Alex PollockDirector Microfinance Department

May BandakPersonal Assistant to the Director

Jane GiacamanChief Microfinance Operations

Wissam SaidChief of Finance

Munther KalotiAccounts and Finance Officer

Khalil NaqaAccounts and Finance Officer, Gaza

Ayed Al-ZeghariVerification Officer

Ahmed HussainActing Verification Officer, Gaza

Naila HazbounQuality Control & Assurance Officer

Ayman AbdullahMIS Consultant

Salim MusallamMonitoring and Evaluation Officer

Ansam BarhamStatistician

Maher MatarBusiness Economist, Gaza

Nabil DarwishMarketing Officer

CENTRAL OFFICE STAFF

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In 2009, as UNRWA commemorated the sixtieth anniversary of its founding, our Microfinance Department marked another year of steady growth and continued organizational development in the Gaza Strip and West Bank, Jordan, and Syria. Over the course of the year, the department invested USD 37.13 million in 28,373 loans, increasing its annual disbursements by an additional USD 5.4 million and extending its outreach by 16 percent. This new milestone was matched by positive growth in net income which closed the year at USD 1.49 million, up 155 percent on 2008. While it is heartening to report such improved performance, it is disquieting to note that this year was also framed by extraordinary tragedy and hardship for many of UNRWA’s beneficiaries. Erupting just before the New Year, intensive armed conflict wrought suffering and hardship in the Gaza Strip unprecedented since 1967. The subsequent continuation of Israel’s blockade of the enclave greatly hampered the task of rebuilding shattered homes, and livelihoods, a task in which the department would normally play an important role. Yet throughout this period the department also continued to demonstrate both perseverance and a forward-thinking approach.

Though it was impossible under prevailing conditions to sustain the modest outreach growth achieved in the Gaza Strip in 2008, the department’s operations there continued to evince resilience and resourcefulness. It maintained a 97 percent self-sufficiency rate under the most adverse conditions, and set the stage for renewed expansion in 2010, not least with the introduction of larger, longer-term microenterprise “credit plus” loans. Growth also tapered-off in a maturing West Bank environment, where the department switched gears to expand retailing of its microenterprise credit plus product and to introduce the women’s household credit product. In Jordan and Syria, meanwhile, the department reaffirmed its growing importance to the aspirations of Palestine refugees across the wider Middle East, and the communities which host them. Outreach grew by 30 percent and 45 percent respectively in these markets. By year’s end a total of 16,672 loans valued at USD 17.42 million had been extended in Jordan and Syria, both new records.

MESSAGE FROM THE COMMISSIONER-GENERAL

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The department’s overall expansion of outreach in 2009 was owed in considerable part to continued support from the OPEC Fund for International Development (OFID), which in July 2009 committed USD 3 million to the PalFund Trust Fund, taking its cumulative investment in the department’s operations in the oPt to USD 10 million. Fittingly, the agreement signalling this landmark was signed by my predecessor, Karen Koning AbuZayd. During her time as UNRWA’s Commissioner-General, Karen saw the department grapple with some of the most difficult conditions faced by any microfinance provider in the world. In this, and many other respects, she leaves behind an extraordinary legacy of commitment to Palestine refugees, and their quest for a better future.

As has become increasingly clear over past years, access to broader sources of finance will be required if the department is to deliver fully on the promise of microfinance in a region with so much potential still waiting to be tapped. This would entail far-ranging organizational transformation. In 2009, a business restructuring study was commissioned. Its recommendations are being carefully studied, bearing in mind the desirability of reforms to strengthen microfinance operations and ensure their sustainability, while safeguarding the essence of the Agency’s mission alongside the interests of Palestine refugees. By bolstering economic security, self-reliance, and enabling households to make investments in education and health, microfinance remains a central means of sustaining our clients’ hopes for a better tomorrow. In the coming year we hope that the department will be able fully resume this work in Gaza, where we long to see an end to its longstanding confinement and impoverishment.

Looking further ahead, we see the department sustaining more hopeful horizons for Palestine refugees and their communities.

Filippo Grandi

Commissioner-GeneralUnited Nations Relief and Works Agency

for Palestine Refugees in the Near East

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UNRWA’s Microfinance Department endeavours to improve the quality of life of small business owners, microentrepreneurs and poor households through the provision of credit and other financial services that sustain jobs, decrease unemployment, reduce poverty, economically empower women and youth and provide income-generating and asset-building opportunities to Palestine refugees and other proximate poor and marginal groups. The department also seeks to provide safe-saving services to poor clients to help them save for the future and provide a financial safety net to help them cope with personal and family emergencies and crises. The department strives to provide scalable interventions with measurable macroeconomic impact by concentrating its financial services in poorer urban areas where there is a high density of Palestine refugees.

Today Palestine refugees in the Middle East number over 4.7 million. The task of UNRWA’S Microfinance Department (MD) is to extend credit and complimentary financial services to them, as well as other poor or marginal groups who live and work in close proximity to them. Targeting business owners, microentrepreneurs and households, this lending is guided in part by economic objectives: to sustain and create jobs, reduce poverty and boost economic security. However, its aim is also to support human development more broadly, by sustaining household consumption and family investments in housing, education and health. Ultimately, we seek to empower our clients, and in this respect particularly target women and youth, as well as other economically and socially vulnerable groups.

The department conceives of its mission within the context of the United Nation’s vision of building inclusive financial services for the poor. Many of its clients operate small, often informal businesses on the margins of the economy. They include vegetable stall-holders, at-home seamstresses, garage owners and fishermen. Many run businesses that are not registered with the government, let alone municipal or tax authorities. The vast majority are unable to secure credit from commercial banks. Yet if provided with such loans they do have the ability to repay them, while generating sustainable incomes for themselves, as well as their families and employees, many of whom are drawn from the poorest segments of society. The services of the department help to close the virtuous circle of opportunity and self-reliance.

The department carries out its mission in accordance with those standards and best practices that have been developed within the global microfinance industry. At the core of its service model is the understanding that microcredit and related financial services must be sustainable. This means that it aims to recoup its operating expenses, while charging rates of interest that are not only affordable to clients but also competitive vis-à-vis other microfinance providers. In this context, it strives to make its outreach operations as cost-effective as possible. Accordingly it focuses its work in poor urban areas, which are both centres of commercial and industrial activity and host a high concentration of Palestine refugees.

OUR MISSION

Human DevelopmentThe Microfinance Department supports UNRWA’s human development goal of: “A Decent Standard of Living” by programming its microfinance activities under the strategic objective of providing: “Inclusive financial services and increased access to credit and saving facilities”. Its business plan integrates its mission statement and builds upon and integrates UNRWA’s Medium Term Strategy, the MD’s Headquarter Implementation Plan and the MD components of the Field Implementation Plans in a broad corporate and field strategy for the department.

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I did something that challenged the banking world. Conventional banks look for the rich; we look for the absolutely poor. All people are entrepreneurs, but many don’t have the opportunity to find that out.

Muhammad Yunus

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The department has grown out of one of the most difficult microfinance environments in the world, beset by unique restrictions on enterprise and trade. It first began operations in Gaza, in 1991, and worked initially to provide credit to small and medium-scale businesses, working with an initial capital fund of just USD 300,000. Since then the department has become not only the largest microcredit institution in the West Bank and Gaza, but also a uniquely positioned regional microfinance organization. In 2003, it began working in Jordan and Syria, currently home to 2.4 million Palestine refugees, and is expanding rapidly in these markets, which are expected to outstrip its Palestinian operations in 2010-2011. As of 2009, the department has extended almost 195,000 loans valued ay USD 218.50 million across all our countries of operation.

Cumulative Outreach

West Bank52,132 Loans (27%)USD71.77m

Syria28,987 Loans (15%)USD20.10m

Jordan21,925 Loans (11%)USD29.72m

Gaza91,292 Loans (47%)USD96.80m

HISTORICAL BACKGROUND

Since 1997, the department has been independent from UNRWA’s budget, and runs its operations on a self-sustaining basis, capitalized with funds directly deposited with us by a number of stakeholders. By 2009 these included the governments of Norway, the Netherlands, Germany, Italy, Canada, Australia, Japan, New Zealand, Luxembourg, and the United States, as well as the Arab Gulf Programme for United Nations Development Organisations (AGFUND), the Arab Authority for Agricultural Investment and Development (AAAID), and the US-based Academy for Educational Development (AED). Of special significance to the programme is the support of the OPEC Fund for International Development (OFID), which, through its PalFund Trust Fund, has made USD 10 million available to the programme since 2004. With the help of its partners, the department has recovered from large write-offs immediately following the outbreak of the second intifada. By the end of 2009, it managed an outstanding portfolio of USD 19.25 million.

FUNDING AND EVALUATION

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Annual Lending Portfolio 1994-2009

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

-

5,000

10,000

15,000

20,000

25,000

30,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

US$

No.

of l

oans

Year

Number of Loans Value (US$)

The department’s operations and financial statements are subject to an independent annual external audit, as well as biennial financial ratings. It shares its performance indicators with the Microfinance Information Exchange (MIX), the Microfinance Network of Arab Countries (Sanabel), and the Palestine Network for Small and Micro Finance (Sharakeh). It also benchmarks its activities with global, regional and local MFIs. In the Middle East, it strives to lead in the adoption and development of microfinance best practices. One example of this is its social performance management system, through which it continuously tracks and evaluates the broader impact of its lending. This system has been under particularly intensive development since 2008, winning in 2009 the gold category award certificate for reporting its social performance indicators to the MIX. Such improvement is done in the context of the Department’s continued institutional development, which also encompasses integrated financial and staff management systems. In the long run, the Department aims to move its organizational and operational model closer to that of commercial banking operations, allowing it to be more responsive to local market demands through service excellence and expanding operations.

Where once the poor were commonly seen as passive victims, microfinance recognizes

that poor people are remarkable reservoirs of energy and knowledge. And while the lack of

financial services is a sign of poverty, today it is also understood as an untapped opportunity

to create markets, bring people in from the margins and give them the tools with

which to help themselves.

Kofi Annan

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BRANCH NETWORKThe Microfinance Department is headquartered in Jerusalem and currently operates 17 branch offices in the Gaza Strip, the West Bank, Jordan and Syria, as well as four national and regional field offices. Each of its branches is required to cover its own direct costs, and support the overall overhead costs of the MD. The cost of opening new branches is covered by retained earning and only occasionally by project funds. Over the course of the next five years, the current branch office network will be doubled.

Jordan

Wehdat

Al-Balad

Al-Bayader

Zarqa

Nablus

Jenin

Tulkarem

Rimal-Gaza

Nusseirat

Khan Yunis

Yarmouk

Al-Amin

Saida Zeynab

Ramallah

Bethlehem

Hebron

Qalqiliya

West Bank Gaza Syria

MD Headquarters

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Since 1991, the MD has considerably diversified its services in order to address the diverse, interlocking needs of its clients and to help them cope with persistent economic volatility, particularly in its Palestinian markets. This imperative drove an early broadening of its lending base, from small and medium sized businesses, to microenterprises employing less than five workers. Most of these are informal in nature. In the West Bank and Gaza they compose some 90 percent of all enterprises, and have further proliferated with the progressive deterioration of the Palestinian economy under the impact of trade restrictions, obstacles to movement, and other conflict-related impositions. In 1994, it accordingly began extending micro-credit through a Solidarity Group Lending (SGL) product to women entrepreneurs in Gaza. In 1997, it also launched non-gender-specific Microenterprise Credit (MEC) loans in Gaza, extending this second product to the West Bank in 1998.

In line with the evolution of microfinance practices in other parts of the world, the MD has also introduced financial intermediation at the household level. In early 2002, it piloted small-scale lending in Gaza to help distressed working-class families to cover basic consumption, education and health costs. Among more recent innovations are housing loans to refugee families with no access to mortgage facilities, and small loans targeted at home-based women entrepreneurs. Empowering women, who face additional difficulties as entrepreneurs, has been an integral part of the mission. With considerable expansion of the women’s household credit to women with home-based income-generating activities, the share of loans that are given to women and women microentrepreneurs stood at 26 percent by the end of 2009.

In order to help successful clients to grow their businesses, in 2008, the MD also introduced a microenterprise credit plus (MEC+) product. Originally launched in the West Bank, it has since been rolled out in Gaza and Jordan, in which markets it has enabled expansion of MD financing. It provides a high-impact means of fostering local job creation, as such it is filling a role formerly played by the MD’s older SSE loan. Over the coming years, it is expected that the MEC+ product will become a major contributor to portfolio growth, particularly in more mature markets. Meanwhile, however, the department will continue to improve and broaden its outreach to smaller borrowers. As part of the broader effort to provide comprehensive financial intermediation to the poor, the MD, in 2008, began planning for the eventual introduction of savings facilities targeted at low-income families.

Outreach 2009

West Bank9,302 (33%)USD716.03m

Syria10,341 (37%)USD7.26m

Jordan6,331 (22%)USD10.16m

Gaza2,399 (8%)USD3.69m

DEVELOPMENT OF OUTREACH

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Microenterprise Credit (MEC) Targets the overwhelming majority of regional businesses which employ fewer than five workers, most of whom enjoy no access to formal credit and are vulnerable to political shocks and economic stress. The loans range from USD 300 to USD 8,500, and are designed to help such businesses build up and maintain reserves of working capital.

Microenterprise Credit Plus (MEC+) Allows mature microenterprises that seek to expand capital and grow to access a more extended repayment horizon. Eligible clients include formal enterprises and borrowers who have demonstrated repayment ability over several loan cycles.

Small Scale Enterprise Lending (SSE) Nearly phased out in 2009, the MD’s oldest type of loan is directly aimed at furthering economic development and creating jobs. The loans are relatively large, ranging from USD 3,000 to USD 75,000, and typically support capital investment, modernization, and market expansion.

Solidarity Group Lending (SGL) Designed for groups of marginal women microentrepreneurs, who are collectively responsible for each others repayment. Starting at USD 400, with a maximum ceiling of USD 5,000, the SGL product sustains microenterprise, as well household expenditures on education, health, and basic needs.

PRODUCTS AND SERVICES

Women’s Household Credit (WHC) An adaptation of the SGL product, first piloted in Syria to finance substantial home-based enterprise by women that allows them to build up business and household assets. Unlike the SGL product, it does not work on a group lending model. In 2009, average disbursements were in the range of USD 500 to USD 800.

Consumer Loan Product (CLP) A personal loan to working-class and low-income families with no access to bank credit, this loan is intended to help constitute household assets or pay for education, ill health, or one-off social outlays, like weddings and funerals. The loan ceiling is three times the client’s monthly salary.

Housing Loan Product (HLP) Aims to help families with no access to mortgage facilities to improve, expand or acquire housing. Financing ranges in size from USD 3,000 to USD 15,000. The HLP was successfully piloted in Gaza in 2006, and extended to the West Bank in 2009.

Small and Medium Enterprise Business Training (SMET) The MD runs a small training programme in Gaza for business people, enterprise support organisations and people wanting to start their own business, by offering them customized training in subjects such as contracting, preparing bids, bookkeeping, taxation, computing and e-commerce. Participants pay a fee to ensure the cost of each course is met, with donor grants covering administrative overheads. Since its establishment in March 1995, the programme has conducted 644 training courses for 13,747 participants.

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Outreach and Financing2009 saw significant overall growth in lending, with disbursements growing by USD 5.4 million, to USD 37.14 million, with the number of loans extended rising from 24,486 to 28,373, both records for the department. Proportionally, this represented nearly 16 percent growth in outreach, and a 17 percent expansion of financing. While falling short of the heady expansion produced in 2008, when the MD expanded outreach by over 33 percent and financing by 53 percent. Despite this slow down in the rate of growth, the MD’s underlying outstanding portfolio has grown from USD 16.5 million in 2008, to USD 19.3 million in 2009. Cumulatively, this took the MD’s historical investments over the past 19 years to 194,400 loans, valued at USD 218.51 million. Underlying these figures were significant divergences in performance among the MD’s four markets. Lending in the Gaza Strip was set back by Israel’s devastating attack on the Strip; this tragedy, and the subsequent continuation of Israel’s Gaza blockade, cut short the modest rebuilding of the Gaza portfolio that began in 2008, forcing a 27 percent retrenchment in disbursements. In the West Bank, macroeconomic conditions were much more favourable, but the scope for significant outreach expansion was curtailed by plateauing market demand, particularly for the MD’s mainstay MEC loans. There was limited room for expansion into additional sub-markets, due to vigorous competition with other well-established microfinance providers. Re-aligning its portfolio, the department sustained a 15 percent expansion of lending through accelerated retailing of the larger Microenterprise Credit Plus (MEC+) and housing (HLP) loans, but registered a more modest four percent growth in outreach. As in 2008, this performance pivoted on generous capitalization of the department’s Palestinian operations by OFID.

As in recent years, the pace of outreach growth in 2009 was accordingly set by the MD’s national offices in Jordan and Syria. Despite a slow-down of overall macroeconomic growth in both countries, total financing grew by 30 percent in Jordan and a full 45 percent in Syria, which remains the MD’s fastest growing market. Growth was driven by continued extension of MEC loans, and a very significant ramping up of consumer loans (CLP), a product introduced to Jordan and Syria in 2008. The MD’s Women’s Household Credit (WHC) product, first piloted in Syria in 2007, also continued to enjoy run-away success, with total financing extended through this instrument more than doubling. These performances were all the more noteworthy because no new field offices were opened in Jordan and Syria in 2009; the planned establishment of additional branches in 2010 should accordingly provide additional impetus to the department’s outreach there.

With MD field offices in its newer and more stable markets continuing to outperform operations in the oPt, the department’s portfolio also evinced ever more pronounced regionalization. In 2008, total outreach in Jordan and Syria for the first time outmatched lending in Gaza and the West Bank, and in 2009, this gap widened further, with the MD’s non-Palestinian markets accounting for 59 percent of all loans extended in 2009, compared to 52 percent in the previous year. Jordan and Syria’s share of total disbursements also grew significantly, from 40 to 47 percent. While reflecting positively on the MD’s ability to support a growing number of microentrepreneurs and households in the wider Middle East region, this trend was unfortunately mitigated by the continued, forced contraction of MD lending in the Gaza Strip. While there were signs by the end of 2009 that a resumption of more Gaza outreach could be sustained into 2010, it is also clear that a larger-scale reactivation of the department’s operations in the Strip requires a comprehensive lifting of Israel’s current blockade there.

OVERVIEW OF DEVELOPMENTS IN 2009

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The key to ending extreme poverty is to enable the poorest of the poor to get their foot on the ladder of development. The ladder of development hovers overhead, and the poorest of the poor are stuck beneath it. They lack the minimum amount of capital necessary to get a foothold, and therefore need a boost up to the first rung.

Jeffrey D. Sachs

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OFID COMMITS ADDITIONAL USD 3 MILLION TO PALFUND TRUST FUNDSupport extended to UNRWA’s Microfinance Department by the OPEC Fund for International Development (OFID) passed a new milestone in 2009. On July 2 of this year, OFID committed USD 3 million to the MD-administered PalFund Trust Fund, established in 2004 with an initial OFID endowment of USD 2.375 million to finance MD lending in Gaza and the West Bank. Following on OFID’s investment of USD 4.5 million investment in the Fund in 2008, this generous new investment took the organization’s cumulative stake in the MD’s Palestinian operations to USD 10 million.

The agreement was signed at OFID’s Vienna headquarters by the organization’s Director-General, Mr. Suleiman J. Al-Herbish, and UNRWA’s then-serving Commissioner-General, Ms. Karen Koning AbuZayd. According to Mr. Al Herbish’s, it affirmed OFID’s belief that the MD has “unlocked the door” for many Palestinians, helping them build a “sense of security and well-being” for themselves and their communities.

A transfer of USD 2 million from the additional USD 3 million was made to the Fund in 2009, enabling financing of 7,027 new MEC, MEC+ and SGL loans valued at USD 12.98 million during the financial year. This meant that by the end of 2009, the MD had successfully extended a total of 25,095 such loans from the PalFund, valued USD 36.46 million. In total, these loans have accounted for 39 percent of the MD’s cumulative lending in the Palestinian territory since 2004, confirming OFID as the single largest sponsor of UNRWA’s microfinance activities, and a key supporter of the MD’s continued efforts to support hard-beset Palestinian refugee communities in the West Bank and particularly the Gaza Strip.

Financial PerformanceSteady expansion of overall lending in 2009 was accompanied by strong financial performance, in many instances far ahead of regional standards. In 2009, the MD generated a total income of USD 7.10 million, less a loan loss provision of USD 328,535 and operating expenses of USD 5.27 million. This resulted in a record profit of USD 1.49 million. Overall, operating revenues have now increased by 43 percent over the past two years, expenses by 10 percent, and profits by 155 percent.

Strong and improving operational self-sufficiency in all MD’s offices underpinned these results, with OSS for the MD as a whole ending the year on 124 percent, roughly on par with the Department’s own target. Even in the Gaza Strip, OSS rose by two percent over the same period. In 2009, most of the MD’s financial ratios also improved, with the return on equity (ROE) rising from 2.88 percent to 5.79 percent, well clear of the MENA regional average of 3.50 percent. Return on assets (ROA) rose from 2.73 percent to 5.33 percent, comparably ahead of the MENA average of 2.4 percent. And although the MD’s overall operating expense ratio (OER) of 29 percent remains higher than the regional benchmark of 22 percent, the trend is positive, marking a significant decline from an OER of 35 percent in 2008.

This improved financial performance was partially built on the back of better staff performance. With the average number of active loans per loan officer at 182 in 2009, it still lagged the MENA average of 211, as well as the MD’s own target of 250, but evinced a strong 36 percent increase in average loan officer caseloads, compared to 2008. Loan officer portfolio management is best in Syria with 219 active loans per loan officer, followed by Jordan with 180, and the West Bank with 175. At 132, Gaza’s caseload was significantly below par, but this reflected an enforced idling of lending for much of 2009, coupled with a reluctance to

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further cut Gaza’s already skeletal staff, lest the MD be unable to quickly ramp up lending again in this underserved and beleaguered market. On the basis of outreach growth in the last quarter of 2009, it is expected that Gaza’s portfolio figures will improve significantly in 2010.

The Department’s portfolio quality and risk exposure has improved dramatically over the past two years but continues to fall short of regional benchmarks, with its portfolio-at-risk (PAR) of 30 days or more ending on 8 percent in 2009, considerably higher than the MENA average of 2.4 percent. Portfolio risk is particularly high in Jordan, at 13 percent, up from 5.1 percent in 2008, and the West Bank at 9.0 percent, though it is more contained in Syria, at 5 percent. Continuing a trend evidenced over the past couple of years, the department’s credit risk was lowest in the depressed and high-risk Gaza market, whose regional office ended 2009 with a PAR of just 2.0 percent – the result of several years of aggressive risk-containment, and the fact that a relatively high proportion of the MD Gaza’s portfolio is vested in salary collateralized housing (HLP) and consumer (CLP) loans. In its efforts to improve its risk management over the coming years, the MD expects that it will benefit from its new membership in the Palestinian National Credit bureau – having become the first microfinance institution in the oPt to join this facility in 2009.

JOINING THE PALESTINIAN NATIONAL CREDIT BUREAUIn 2009, the Palestinian Monetary Authority (PMA) became the first regulator in the MENA region to incorporate non-bank microfinance institutions into its national credit database – the Palestinian National Credit Bureau (NCB). UNRWA’s Microfinance Department was proud to be the first microfinance provider in the occupied Palestinian territory to join this facility earlier in the year, through a memorandum of understanding with the PMA signed on April 16, followed by a formal inauguration of the MD-NCB data-link at the Department’s Ramallah Branch Office, on August 11.

The PMA’s new initiative marks a pioneering development not only for the MD but also the Palestinian financial services industry. Participation in the NCB enables microfinance institutions to reduce the risk of lending through online investigation into the credit history of old, new and prospective clients, whose credit histories are recorded on the NCB register. It also benefits small borrowers and consumers, allowing those with positive ratings to access a wider range of credit options. The fact that this facility was previously only available to commercial banks had given them an advantage over microfinance institutions that had no access to such an important risk assessment instrument.

Prior to joining the NCB, the Microfinance Department data entered more than 55,000 individual MD clients’ credit histories into the Bureau’s database, which have since been updated each month. As of the end of 2009, the MD’s operations accounted for 10-15 percent of all new credit facilities opened each month by some 20 banks and three microfinance institutions, but accounting for less than two percent of the value of these credits. This figure illustrates both how critical microfinance is in sustaining widespread access to credit in the oPt, against the backdrop of crisis-proscribed and highly conservative bank lending practices, and the leading role played by the department within this national microfinance arena.

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Within the regional microfinance industry, the department has for some time been a pioneer in the implementation of social performance management (SPM) methodologies, and is one of 200 worldwide microfinance institutions currently participating in the global Microfinance Information Exchange (MIX). In recognition of its reporting on its social indicators to the MIX, the department was granted a Gold Category Award by the Consultative Group to Assist the Poor (CGAP), the Michael and Susan Dell Foundation and the Ford Foundation at the November 2009 Annual Small Enterprise Education and Promotion (SEEP) Network conference in Washington DC.

In addition to this honour, 2009 was a significant year in the continued mainstreaming of SPM, enabling the department to measure and delineate the extent of its microfinance outreach to different categories of clients. As part of its SPM objective to provide inclusive microfinance that targets women, youth, refugees, informals and the poor whose human development can benefit significantly from microfinance services, the department has segmented these categories in its database to monitor and evaluate its capacity to outreach to these more marginal groups. The department already has baseline social indicators for its outreach to refugees, youth, women and informals, and has set targets to expand its outreach to these clusters in its business and work plans over the next five years through developing specialized marketing strategies and products to channel microfinance services to these groups.

Outreach by Social Indicator - 2009

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Informal

Refugee

Women

Youth

84%

44%

26%

9%

As part of an EC reporting compact, UNRWA has agreed to identify and measure a number of key performance indicators as part of a multi-year grant agreement. Although receiving no financing from this source, the MD is providing data on its outreach to informal enterprise as a proxy measure of its depth of outreach to poor and low-income clients. In 2009, across the region, 84 percent of all business loans went to informal enterprises that had no company or tax registration with the central state authorities, while many were registered by the municipalities, often operating small shops or workshops, others worked from home or in open markets.

SOCIAL PERFORMANCE

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Another key social indicator is the department’s outreach to Palestine refugees who accounted for 44 percent of clients overall, but were preponderant clients in Gaza and Jordan where they constitute a significant part of the national or regional populations. Working towards women’s economic and financial inclusion is another human development objective of the department and women clients accounted for 26 percent of clients. But although the number of women clients is growing their ratio has declined, partly due to the closure of Gaza and the growth of other less women-focused products. This will be somewhat rectified in the coming period by the extension and mainstreaming of the WHC product in the West Bank and Jordan where outreach to women is lower due to the lack of women-centred loan products. With high levels of youth unemployment, a critical economic problem, the economic empowerment of youth through self-employment is seen by most regional governments as a significant development challenge. UNRWA is supporting the mitigation of this problem by offering financial services to youth for business, education and housing, but with just nine percent of its portfolio reaching youth between 18 to 24 years of age it will bring a much stronger focus to this issue in the future.

While the measurement of women, youth, refugees and informals is straightforward as these are discrete entities that can be captured categorically, the measurement of poverty and determining who is poor is much more complex as poverty is a dynamic process subject to macroeconomic, political and social forces that change over time; often dramatically over very short times. Moreover, the rigorous measurement of poverty by NGOs and MFIs can be prohibitively expensive, and when done by them, it often does not meet national or international standards of measurement. Recently, the global microfinance industry has been trying to develop low-cost tools to measure the poverty levels of clients that will enable comparison with national and international standards. This has become more intensive as an increasing number of MFIs and stakeholders want to bring a more systematic focus to the social value of microfinance, rather than just focusing on self-sufficiency and profitability. Like many other microfinance institutions, UNRWA wants to be able to identify which of its clients are poor and trace their poverty levels through various lending cycles to help design products and financial services that are more attuned to their needs.

UNRWA’s microfinance department has looked at a number of these tools, and in late 2009 contracted a microfinance service company to develop three separate Simple Poverty Scorecards (SPS) for Palestine, Jordan and Syria with which it will create baselines on client poverty and low income in 2010. The scorecard is a standardized methodology that is identical to the Grameen Foundation’s progress out of poverty index (PPITM) that is now used in 34 countries.

Thus, the development of the scorecard will fill a gap in the department’s social performance management by augmenting its reporting and developing its monitoring and evaluation capability. With poverty alleviation and outreach to the poor a significant component of the department’s mission, the concentration on developing poverty indicators that measure outreach to poor and low-income clients is a crucial step towards achieving this objective and translating its mission into practice.

Organizational Development In terms of organizational development, 2009 was a productive year for the Microfinance Department, achieving continued progress in improving the efficiency and flexibility of its credit operations, while also laying the groundwork for far-reaching organizational transformation. On a technical level, generous support from the Grand Duchy of Luxembourg allowed the MD to contract a savings module for installation in a new loan management information software, scheduled to be running in all branch offices by June 2011, and permitted the MD’ new Social Performance Management Unit to finalize terms of reference for systematic incorporation of a

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poverty scorecard methodology into the MD’s credit operations, allowing each branch and national office to assess the economic standing of its clients, and track their progress out of poverty.

Additional improvement can clearly be made in the MD’s financial performance, however, as highlighted by an independent, comprehensive evaluation of the Department’s operations conducted by Planet Rating and submitted in June, 2009, but based on 2008 financials. Set against industry best-practices, the evaluation noted particular room for improvement with respect to the MD’s products and services activities, and in the area of efficiency and profitability. As noted above, end-of-year results for 2009 already show progress in some of these regards, and on-going and planned in-house development is likely to produce further improvements in the coming year. These processes will be boosted by the finalization of a Headquarter Implementation Plan (HIP) in March 2009, which sets out a strategic design for the Department’s headquarters, including its management, support and the services it will provide to department field offices.

Among other considerations, the HIP reflects awareness that for the purpose of sustaining improvements in areas like service provision – including the long-planned piloting of savings facilities, as well-as governance, daily management, fund-raising, and concomitant outreach

LATEST COMPREHENSIVE RATINGIn March 2009, Planet Rating began a review of the Microfinance Department’s financial operations, the results of which were submitted in June 2009. Benchmarking the MD’s performance in the areas of governance, information management, risk exposure, products and services activities, funding, and efficiency, the report provided an up-to-date assessment of the Department’s relative standing within regional and international microfinance arenas, highlighting its achievements in some of the industry’s most difficult operating environments, while also pointing out the challenges confronting the Department as it looks to consolidate and grow its regionally diversified operations over the longer term. Observing that “Gaza and West Bank continue to pose a challenging operating environment due to political risk as well as subsidized lending by its [the MD’s] competitors,” the report notes among its highlights that “UNRWA MD has been able to significantly improve its profitability levels, noting a positive ROA [Return on Assets] for the first time in its history in 2008 [and that this] profitability is backed by increasing portfolio yield as UNRWA MD has been able to significantly reduce its yield gap through improved credit risk levels.” On a cautionary note, however, the report also observes that “Further challenges remain in planning – most notably in developing financial projections – as well as a continued struggle to operate within UNRWA’s bureaucratic environment.” Notwithstanding “the presence of a strong management team,” the report observes that “Governance continues to prove a challenge to UNRWA MD given its status as a department within UNRWA which limits a proper balance in decision making.”

In light of the MD’s acknowledged constraints, the Department welcomed a final investment grading of C++ with a positive trend, which anticipates that “the MD will continue to improve profitability, lower credit and concentration risk in the portfolio and is further solidifying its operating systems.” More broadly, the Department takes heart from Planet Rating’s overall endorsement of the strategy put in place by its management in 2009, while also being cognizant that more specific targets and processes will have to be elaborated over the coming year. Looking further ahead, the MD sees the report’s underlying analysis as a validation of its plans for organizational transformation. This overhaul, and concomitant administrative improvements made in the coming years will not only allow successive improvement in subsequent evaluations, but allow the MD to extend more and better services to its rapidly growing number of clients.

18

For the MD and UNRWA, Operation Cast Lead, Israel’s 22-day war on the Gaza Strip, which concluded on January 19, 2009, cast a long and tragic shadow over 2009. By the end of the war, over 1,400 people had been killed and injured and some 100,000 rendered homeless, in violence unseen in Gaza since 1967. The continuation of Israel’s blockade on the Strip after the war prevented UNRWA and other aid organizations from rebuilding the material and economic damage it had wrought, and did not allow Gaza to resume all but negligible exports, enforcing its continued aid dependency. Yet, augmented inflows of donor assistance and the progressive ramping up of Gaza’s smuggling industry allowed for economic stabilization, including a resumption of modest domestic manufacturing and production for the local market, the signs of which were beginning to be seen by the end of the year. According to various estimates, the Gaza economy grew by 14 percent in the last quarter of 2009, which was insufficient to prevent per capita incomes from declining over the year, yet marking an end to the economic freefall witnessed in 2007 and 2008. With unemployment rates continuing to hover around 40 percent, a figure which would be much worse if public sector employment did not absorb nearly half of Gaza’s remaining workforce. With 80 percent of the population dependent to varying degrees on food aid and cash assistance, the overall economic picture remained bleak, however.

Against this backdrop, the Microfinance Department was unable to sustain the modest rebuilding of its Gaza portfolio achieved in 2008. The erosion of Gaza’s private sector, and consequent credit risk is underscored by the fact that a full 98 percent of the MD’s business loans in Gaza are held by informal, non-registered clients, compared to 66 percent in the West Bank. Mindful to minimize credit risk exposure and sustain operational viability following significant write-offs in 2006 and 2007, the department accordingly continued to observe a conservative lending posture in the Gaza Strip, which allowed it to improve its operating cost recovery rate, from 95 to 97 percent, and sustain the lowest PAR-ratio among all MD markets, well below regional benchmarks. However, when coupled with a forced suspension of lending in January 2009 due to Operation Cast Lead, the upshot of this strategy was that Gaza outreach retrenched by 15 percent and total financing by 27 percent. By the end of the year, there were a total of 2,399 loans outstanding in Gaza, valued at USD 3,693,600, representing a 64 percent decline in overall lending since 2005, when the MD retailed USD 10.38 million worth of credit in the Strip.

growth – the Department has outgrown its present administrative model. Indeed, following from several years of deliberations and preparatory work, an expert team from the consultancy firm ShoreBank International accordingly arrived in Jerusalem in December 2009, to begin work on a business plan that will guide the MD’s transformation from an UNRWA department into an independent business entity, as discussed further in the “Future Outlook” section of this report.

THE GAzA STRIP

19

…What does UNRWA have to offer a world that many believe is on the cusp of genuine progress in the Middle East peace process? Our answer is clear and simple: stability and dignity, a sense of hope for the next generation and a belief that the future lies in peace. This message is breathtaking in its ambition, but humbling in its simplicity if we adhere to the message that “peace starts with people.

Karen Koning-AbuZayd, UNRWA Commissioner

General, 2004-2009

20

Outreach in Gaza

-

2,000,000.00

4,000,000.00

6,000,000.00

8,000,000.00

10,000,000.00

12,000,000.00

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Valu

e U

S$

No.

of l

oans

Year

Number of Loans Value (US$)

On the positive side, however, the sound financial and operational standing of MD’s Gaza office means that it remains well-positioned to rapidly scale-up lending if macroeconomic conditions improve. Indeed, in the fourth quarter of the year, the MD successfully introduced larger-scale MEC+ loans, and anticipates that this product will allow a significant rebound of overall financing in 2010, though outreach growth may continue to be sluggish in the absence of a significant lifting of Israel’s blockade. If Gaza’s economy is to enjoy a meaningful rebound, as its inhabitants so desperately need, this lifting will also have to entail a continuation not only of large-scale aid inflows, but also a reactivation of the Strip’s productive sectors, including export-oriented manufacturing, agriculture, and private construction, which has been effectively frozen since late 2006. Under such conditions, the MD could soon be financing USD 1 million each month in Gaza. A key challenge will be to assist the 6,000 clients with USD 2.39 in million in bad debts, who, in 2009, were bankrupt or idle. A combination of job creation and loan refinancing could be deployed in such a scenario.

Social Indicators Gaza

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Informal

Refugee

Women

Youth

98%

83%

38%

4%

21

The social profile of outreach to more marginal and vulnerable clients is deepest in Gaza, with 98 percent of business loans going to informal enterprises and 83 percent going to Palestine refugees, which is the highest breadth of outreach within these two categories in any region. Moreover, it has the second highest ratio of outreach to women, with women clients accounting for 38 percent of clients. However, it has the poorest outreach to youth, at just four percent, of any field, which suggests that the local management’s low tolerance of risk, combined with the inability to use collateralisation procedures used elsewhere, is significantly inhibiting potential outreach to youth.

MICROFINANCE AWARD RECOGNIzES MD GAzA MANAGERAs the Chief of the Microfinance Department’s Gaza operations, Mr. Naser Jaber has one of the hardest jobs in the global microfinance industry. After taking up his position in 2004, he oversaw a rebuilding of the Department’s lending in the Strip following the outbreak of the second Intifada in September 2000, and the economic crisis provoked by the Israeli government’s response to the uprising. By his second year as regional manager, MD Gaza had succeeded in surpassing its outreach prior to 2000. Since then, however, Mr. Jaber has also been forced to steer his team through the deep economic crisis that beset Gaza in 2006; the enduring economic blockade first imposed on the enclave in June 2007; and Israel’s 2008-2009 military assault on the Strip, which compounded the ravages of this siege. On May 12, 2009, his performance was deservedly recognized by the Microfinance Network for Arab countries (Sanabel) which during its annual conference this past year named him as a “Best Manager in the Middle East and North Africa region.”

For the MD and its clients in Gaza, these have certainly been the most trying years in memory. Amidst a virtual shut-down of Gaza’s formal economy in 2007 and 2008, the challenge for the MD was to continue extending loans even as other credit institutions abandoned the Gaza market altogether. By reducing costs and overheads, Mr. Jaber ensured the continued viability of its operations, and laid the groundwork for a rebuilding of its portfolio. To date, it has remained a Sisyphean task, with modest but encouraging growth in 2008 being rapidly undone by Operation Cast Lead and its aftermath.

Mr Jaber, however, also knows the importance of sustaining long-term commitment. Having joined the MD in 1993, merely two years after its establishment, he has seen how the MD turned one credit product and initial capital of less than USD 300,000, into a diversified portfolio that has since 1991 invested over USD 96 million in Gaza, supporting almost 97,000 new and repeated borrowers. A new MEC+ loan introduced in 2009 is the sixth loan product launched in the Gaza market since 1991. Mr. Jaber is emphatic in giving credit for these achievements: “Special thanks must go to MD staff in Gaza for their commitment and dedication to serving the department’s clients under the most trying of conditions,” he notes. “We have weathered one of the most difficult situations facing any microfinance institution in the world, and will continue to serve the needs of Gaza in the future.”

22

Client Name Ibrahim Omar Abu Al Mea’zahDate of Birth 1977Location Beach Camp, Gaza Strip Dependents 8 Type of Business Manufacture and installation of curtains Type of Loan Microenterprise Credit Plus (MEC+)

Curtain Manufacturing in Beach Camp

Ibrahim Al Mea’zah lives in Gaza’s crowded Beach Camp with his wife and seven children. Like tens of thousands of other Gazans he used to work in Israel prior to the outbreak of the second Intifada, in 2000, employed in a sewing factory which specialized in clothing manufacture. When the Israeli government drastically limited the issuance of work permits to Gazans in 2000, Ibrahim had to look for work locally to support his family, and found temporary employment at a Gaza curtain factory. While working in Israel, however, he had also built up some savings, and that same year decided to strike out on his own. With an initial capital of USD 2,000 he set up his own curtain shop in a 16 square metre room in his

house, equipped it with one sewing machine and purchased textiles and accessories needed to manufacture curtails. With a knack for marketing, Ibrahim steadily built-up his business, gaining the confidence of a growing number of clients across Gaza city, acquiring more customers through word-of-mouth, and eventually securing contracts with municipalities, government offices and NGOs. To cope with his increasing sales, he incorporated the remaining ground floor space of his house into his shop and built two other floors to house his family. Though unable to leave Gaza, he used the internet to stay in touch with industry developments, and come up with new designs for his products. “Good quality is the key to my success,” he says. In 2007, Ibrahim secured his first MEC+ loan, for an amount of USD 4,000, and with the help of this capital sustained his businesses through the hard times that followed in the wake of the tightened Israeli blockade of the Strip. As of 2009, he was employing three workers, and had accumulated a capital investment of USD 52,000, while punctually servicing a third MEC+ loan valued at USD 15,000, and enjoying a strong working relationship with the MD team.

Client History ProfileLoan No. Loan Amount ($) Loan Start Date Loan Closing Date1 $4,000 06/05/2007 15/07/20082 $7,000 15/07/2008 15/10/20093 $15,000 15/10/2009 Still active

23

Economic conditions in the West Bank - which has since 2006 been the largest MD market, accounting for 33 percent of outreach and a full 43 percent of financing in 2009 - improved significantly in 2009, as GDP growth accelerated from two percent in 2008 to 8.5 percent, producing the West Bank’s first real appreciation of per capita incomes since 2005. The removal of some Israeli checkpoints between major Palestinian cities, and growing investor confidence following on a period of relative political calm, facilitated this rebound. Private sector deposits and credit rose by five and 23 percent respectively, and household purchasing power was further boosted by a decrease in inflation compared to 2008. However, growth continued to be driven by strong donor support, which accounted for some 28 percent of the West Bank’s GDP in 2009. The underlying weakness of the domestic economy continued to be reflected in a disproportionate share of economic growth being driven by the construction and services sectors, while the share of manufacturing in the West Bank’s GDP remained stagnant, and agriculture declined. By year’s end unemployment in the West Bank had fallen only modestly, from 20 to 18 percent, illustrating continued need for increased private sector investment for local job creation.

Outreach in the West Bank

-

2,000,000.00

4,000,000.00

6,000,000.00

8,000,000.00

10,000,000.00

12,000,000.00

14,000,000.00

16,000,000.00

18,000,000.00

- 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

10,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Valu

e U

S$

No.

of L

oans

Year

Number of Loans Value (US$)

In the context of the relative economic stability enjoyed in the West Bank, the MD was able to continue growing its lending in this market in 2009, but a number of factors limited its ability to replicate the record expansion witnessed in 2008, when outreach grew by 35 percent, and financing by a full 66 percent. In 2008, this performance was enabled by a USD 4.5 million recapitalisation of the Department’s Palestine operations through the OFID-financed PalFund Trust Fund. While OFID generously disbursed another USD 2 million to the PalFund in 2009, with an additional USD 1 million committed for 2010, the MD’s inability to secure additional financing from other donors in 2009 meant that growth in the Department’s underlying capital base was less marked this year. With an extensive branch office network already covering most of the West Bank, increased competition from other microfinance providers, and plateauing demand for its key MEC loan, the Department’s room for outreach growth was limited.

During 2009, however, the MD also undertook a considerable realignment and diversification of its West Bank portfolio. Even as MEC lending contracted by 5.7 percent, while yielding a small, one percent increase in overall financing, outreach of larger MEC+ loans, which are geared towards medium-to-large scale businesses with a potential to support significant job-creation, increased by 48 percent, producing a 74 percent rise in financing through this product. In 2009, the department introduced housing loans to the West Bank at the end of the first quarter, investing USD 489,407 in the local market through these products, with considerable scope for growth in 2010. Also,

THE WEST BANK

24

Client Name Fahmi Mahmoud Shana’aYear of Birth 1955 Location Qalqilya, Dependents 5Type of loan Housing Loan Product (HLP)

Dalal and Fahmi Shana’a are a semi-retired couple who until recently lived in a small, one-story house in the Al-Naqqar neighbourhood of Qalqilya, a town on the western edge of the West Bank entirely encircled by Israel’s separation barrier and a welter of steadily expanding Israel settlements. Behind the barbed wire and concrete wall which rings their city, the Shana’as had long hoped to make some more space for themselves, and the families of their adult children.

Initially, they thought to renovate their house, adding two floors to it, but discovered that the existing foundations would not support these additions, and that it would be cheaper to destroy and rebuild the house from scratch. Doing so, however, would still cost them about USD 100,000, they estimated. With commercial bank credit in Qalqilya being both difficult to obtain and costly, they looked for other ways of financing the work

An enterprising family, the Shana’as already knew UNRWA’s Microfinance Department well. With the help of MEC loans extended by the department, Dalal runs a small business with one of her sons, renting out sound system equipment for local weddings and other special events, which they sometimes also organize. In early 2009, they learned that the Department was introducing housing loans in the West Bank, and submitted an application for a loan to purchase initial construction materials and cover some of the labour costs for the new house. In the month of May 2009, they were granted a credit of JD 9,000, approximately USD 12,712, to be repaid over a three year period.

Dalal and Fahmi began construction in June 2009, using their loan money to lay the foundations of the new house, erect concrete pillars, and begin preparing for the rebuilding of the first floor. By the end of September, the floor was finished, and they were able to move into their new home, which now also included a storage room for the sound equipment used by the family business. By this time, the structural frame of the second and third floors was also done, but required additional interior finishing work, including tiling, and the installation of electricity wiring, as well as water and drainage pipes.

As they look to complete this work, the Shana’as are grateful for UNRWA’s support to them, both as entrepreneurs and homemakers. “We are still busy with the finishing work for our family home and having a source of income through renting our sound system is helping us to pay for it,” say Dalal and Fahmi. “It is great that the UNRWA microfinance department has a variety of credit services. After participating in those schemes we have been able to meet both our business and housing needs”.

Micro-Entrepreneurs Become Homebuilders

25

toward the end of 2009, women’s household credit (WHC) was introduced, but producing just 51 loans worth USD 42,373 at the end of the period it is expected to produce significant outreach in 2010 as it penetrates completely new markets for the department. Over the course of 2009, the number of loans extended in the West Bank had grown by 4 percent, and total financing by 15 percent. By year’s end, there were a total of 9,302 loans financed in the West Bank, valued at USD 16.03 million.

Social Indicators West Bank

0% 10% 20% 30% 40% 50% 60% 70%

Informal

Refugee

Women

Youth

67%

32%

12%

11%

Looking forward to 2010, the MD anticipates that outreach growth can be further augmented on the back of accelerated retailing of its CLP and HLP loans, while the MEC+ product will be able to drive significant expansion of overall financing. With operational cost recovery improving from a healthy 128 percent in 2008, to a full 145 in 2009, the Department’s operational fundamentals in this market are only growing stronger, though efforts will have to be made to contain further risk exposure, particularly as relatively riskier CLP loans begin to account for a greater share of the local portfolio. The opening of a new branch office in Jericho in 2010 will provide the impetus for some additional growth, though this region’s small population means that the impact will be limited. Overall, the main constraint on expansion of outreach and financing in 2010 will be the availability of new capitalization for the longer term housing and MEC+ products. This will particularly be the case if an improvement in the situation in the Gaza Strip permits the MD to invest a substantial share of the PalFund there in the coming year.

The social outreach profile of clients in the West Bank is quite mixed with a higher ratio of formal enterprise than any other regional or national operation, although still financing a preponderance of informal enterprise with 67 percent of businesses financed being informal enterprises operating with the absence of company or tax registration. At 32 percent of clients, the ratio of Palestine refugees in the portfolio is relatively low, although significantly higher than their portion in the general population. The department’s outreach to women, at just 12 percent of the portfolio, is the lowest of any field, but as the WHC product – which was introduced into the Tulkarm and Nablus branches in the last quarter of 2009 – is mainstreamed in all branches in 2010 then the ratio is expected to grow quite significantly in the next period. At 11 percent, the youth profile in the portfolio is better than elsewhere but this can also be improved by sharper targeting by branch managers.

26

Home to the largest population of registered Palestine refugees in the world, numbering two million in 2009, Jordan’s economy averaged 5-6 percent growth between 2004 and 2008, but was in 2009 significantly buffeted by the aftershocks of the global financial crisis, amplified by a slowdown of the Arab Gulf economies, which together with Western countries hosting Jordanian and Palestinian diaspora communities provide significant remittance incomes to the country. According to the IMF, real GDP growth fell from 7.5 percent in 2008 to 2.5 percent in 2009, though the impact of this slow-down on household spending was tempered by price increases less dramatic than those evinced in 2008, when the government rescinded subsidies for oil, gas and other consumer items. Unemployment, however, rose slightly on 2008, from about 12 percent to 13 percent. These numbers moreover do not account for significant underemployment, by some sources estimated to be as high as 15-20 percent.

In its efforts to provide economic opportunities for the most vulnerable segments of its population, Jordan has since the 1990’s played host to an increasingly best-practice oriented and competitive microfinance industry, which was strongly supported in the past by international donors, in particular USAID. In addition to the MD, which began operations in Jordan in 2003, and, in terms of financing, is currently the sixth biggest microfinance provider in the country. Numerous other best-practice MFIs currently operate in the Hashemite Kingdom, supplemented by 200 local schemes and a dozen organizations providing microfinance as part of broader development activities. Between 2005 and 2009, the number of microfinance borrowers in Jordan grew from 51,000 to 195,000, with total financing rising from USD 18 million to USD 152 million over the same period, according to MIX and private consultancy data. While the market for microfinance business credit, particularly targeting women, is among the best served in the MENA region, there is nevertheless scope for growth in more diversified lending to support education and housing, as well as larger-scale businesses. By some estimates, a microfinance market also factoring in demand for such products could be as big as 500,000-600,000 borrowers.

Outreach in Jordan

-

2,000,000.00

4,000,000.00

6,000,000.00

8,000,000.00

10,000,000.00

12,000,000.00

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2003 2004 2005 2006 2007 2008 2009

Valu

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S$

No.

of L

oans

Year

Number of Loans Value (US$)

For the MD, 2009 marked a significant slow-down of portfolio growth on 2008, when the Department registered a record 56 percent growth in outreach and an 85 percent increase in disbursements. By comparison, 14 percent more loans were extended in 2009, growing total financing by 31 percent. By the end of the year, there were a total of 6,331 loans, valued at USD 10.14 million financed in Jordan, making it the MD’s second largest market in terms of financing, accounting for 27 percent of all disbursements in 2009, and 22 percent of all loans, placing it third in terms of outreach, after the West Bank and Syria. The more moderate expansion evinced

JORDAN

27

in 2009 was driven chiefly by retailing larger MEC loans, which produced a 20 percent increase in total financing through this instrument, even as the number of borrowers fell slightly, by one percent.

In part, the proportional, overall slowdown in outreach was inevitable, given the MD was growing a vastly larger portfolio in 2009, yet it also reflected a number of increasingly biting constraints. Notwithstanding a healthy improvement in operational self-sufficiency, from 100 percent in 2008 to 109 in 2009, the MD’s management capacity and staff performance in Jordan, where it opened a new branch office in 2008, remains a concern, with the Department encountering problems recruiting skilled staff to meet its growth plans, and management needing to contain credit risk accruing from rapid expansion of lending in 2008. Jordan’s political stability, when contrasted to the humanitarian crisis prevailing in Gaza and business uncertainty in the West Bank, also means that the MD has found it relatively difficult to secure donor funding for expanding its operations in the country. Contingent on some improvement in this situation, a progressive diversification of the department’s local portfolio in 2009, including accelerating roll-out of MEC+ and CLP loans, which latter instrument financed USD 676, 837 of credit in 2009, up from just USD 15,960 in the previous year, growth will again accelerate in 2010, additionally boosted by the introduction of the WHC product.

Social Indicators Jordan

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Informal

Refugee

Women

Youth

92%

80%

14%

9%

The social profile of clients in Jordan is punctuated by high and low points, with 92 percent of business loans financing the owners of informal enterprises it has the highest outreach to the informal sector after Gaza, and with Palestine refuges accounting for 80 percent of clients it is also next to Gaza in the density of its Palestine refugee portfolio. With a nine percent ratio of youth in the portfolio, it is lower than West Bank and Syria, but better than Gaza in targeting youth clients. It also has relatively low outreach to women clients, with women accounting for just 14 percent of the portfolio. However, this will be improved in the next period with the extension of the women-only WHC product into Jordan in 2010.

28

Microfinance helps unlock the productive capacities of millions around the world by giving them the means to turn a good idea into a job. It’s especially effective for women, who make up the majority of the world’s poor

H.M. Queen Rania Al Abdullah

29

From Repairing to Building: Micro-Innovation in Amman

Client Name Houfanse Daued AkajianDate of Birth 1959Location Amman Dependents 4 Type of Business Electronics workshop Type of Loan Microenterprise Credit (MEC)

Houfanse Akajian was born in 1959 and lives in Jordan’s capital Amman. A qualified electronic engineer, he had for most of his life worked to mend broken things, repairing electronic devices, household appliances, and office equipment in a workshop in Amman’s al-Abdali area.

Approaching his 50th birthday, however, he also nurtured a longstanding ambition to build his own machines, drawing on a keen creative spirit and decades of experience. After some consideration to the market potential, Houfanse decided to design his own beverage vending machine, mainly one that would dispense hot beverages like coffee, tea, and hot chocolate, manufacturing samples of it in his workshop and then piloting the design around Amman with the consent of local businesses offices, schools and universities.

To embark on his new venture, however, he needed some start-up capital. While searching for sources of financing, he struggled to get his idea off the ground. The turning point came in 2007, when he applied for and was granted, in August of that year, a USD 1,130 (equivalent) MEC loan by UNRWA’s Microfinance Department. With his new capital, Houfanse was able to buy the components needed to manufacture his first vending machine, and was soon able to produce a second and third version.

By assiduously marketing his vending machines, paying for the electricity used by them and conscientiously refilling them, he was able to expand his business, and was soon recognized as something of a local industry pioneer. Two and half years and three MD loans after first launching his business, Houfanse has built a small hot drinks empire in Amman, having manufactured and positioned 23 vending machines across the Jordanian capital. Currently in his fourth MD loan cycle, servicing a loan of USD 4,096.

Client History ProfileLoan No. Loan Amount ($) Loan Start Date Loan Closing Date1 $1,130 16/07/2007 17/02/20082 $2,260 20/02/2008 15/10/20093 $3,531 11/01/2009 14/12/20094 $4,096 15/12/2009 Still active

30

Though the reverberations of the global financial crisis were felt in the Middle East in 2009, the Syrian economy slowed down only slightly over the course of the year, with real GDP growth falling from 5 percent in 2008, to 4 percent in 2009, reflecting the economy’s low level of integration with global financial markets, as well prudential regulation of the country’s five-year old private financial sector. This performance ensured a continuation of growth driven as in past years by financial liberalization and privatization of a heavily state-dominated economy. However, there is evidence to suggest that these advances have yet to make sufficient inroads into significant unemployment, which according to official numbers reached 11 percent in 2009, but is unofficially estimated at about 20 percent, not counting significant under-employment. As in many other regional economies, youth unemployment is particularly high; some 60 per cent of Syrians are younger than 25, and about 60 per cent of these were out of work by 2009. As of two years prior, a full 33 percent of Syria’s 20 million inhabitants lived under the poverty line, with 2.2 million in extreme poverty.

Outreach in Syria

-

1,000,000.00

2,000,000.00

3,000,000.00

4,000,000.00

5,000,000.00

6,000,000.00

7,000,000.00

8,000,000.00

-

2,000

4,000

6,000

8,000

10,000

12,000

2003 2004 2005 2006 2007 2008 2009

Valu

e U

S$

No.

of L

oans

Year

Number of Loans Value (US$)

Syria’s microfinance industry, meanwhile, is underdeveloped by regional standards and, historically, heavily focused on lending to rural constituencies. According to the MIX, there were only 21,000 active micro-borrowers in the country as of 2009, with outstanding credit not exceeding USD 18 million. As a result, at least one million microentrepreneurs, most of them concentrated in urban areas, lack access to financial services. These include substantial numbers of Palestinian refugees, some 400,000 of whom are currently registered in Syria, and heavily concentrated around Damascus. The Syrian government, however, has led the MENA region in progressive microfinance legislation since 2007, when it became the first Arab government to license national Social Financial Banking Institutions through a General Microfinance Decree. As such, Syria arguably has the greatest growth potential of any microfinance market in the MENA region, and, with less than a handful of best-practice microfinance institutions currently operating in the country, also evinces particular promise for recent market entrants.

SYRIAN ARAB REPUBLIC

31

Having begun lending in Syria in 2003, the MD’s performance in the Arab Republic has amply validated this assessment, and in no year more so than 2009, when Syria was the MD’s best-performing market, with outreach growing by 44 percent and financing by 45 percent. Although the bulk of Syrian lending continued to be through the core MEC product, but retailing of Women’s Household Credit (WHC) – a product designed for the specificities of women’s economic activities in Syria – continued to accelerate with total disbursements more than doubling, from USD 618,899 in 2008, to USD 1.32 million in 2009. Consumer loans first introduced to Syria in 2008 also enjoyed runaway success, with CLP disbursement increasing from USD 6,048 to USD 663,706. By the end of 2009, 10,341 loans were financed, valued at USD 7.26 million.

By this date, Syria had accordingly also become the MD’s largest market, in terms of the number of borrowers served, accounting for 36 percent of total outreach. Driven by this growth, UNRWA’s MD has in turn become the second largest non-state microfinance institution in Syria. This performance was all the more notable because it has been increasingly financially sustainable; in 2008, the MD became the first microfinance provider in Syria to attain full operationally self-sufficiency and profitability, and bettered this performance in 2009, with operational self-sufficiency increasing from 108 percent to 124 percent. In 2009, the 30-day Portfolio-At-Risk (PAR) for Syria stood at 5 percent, the lowest of all the MD’s portfolios barring Gaza. On the basis of this performance, the MD is aiming for continued rapid expansion in Syria in 2010, planning the opening of three new branch offices in different regions of the country, combined with further product diversification.

Small loans can transform lives, especially the lives of women and children. The poor can become empowered instead of disenfranchised. Homes can be built, jobs can be created, businesses can be launched, and individuals can feel a sense of worth again.

Natalie Portman

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Client Name Bushra Abdallah Al-Jazri Date of Birth 1971 Location Yarmouk Camp, DamascusDependents 4 Type of Business Beadwork handicrafts Type of Loan Women’s Household Credit (WHC)Living in Damascus’ Yarmouk Refugee Camp with her husband and four children, Bushra Al-Jazri had long been used to making do with little. An artisan by aspiration, her husband had for years struggled to find steady employment, most months managing to obtain no more than a few days of contract work. Bushra herself has a B.A in Arabic and after graduating eventually began looking for teaching jobs to help support their family, but with no success. Public school jobs are scarce in Damascus, and competition for those that are available is fierce. Bushra, however, is fond of arts, particularly beadwork, and had for a long time been producing small accessories, paintings and handicraft objects at home as a hobby. For lack of other options to support her family, she finally decided that she would try to parlay her skills into a small, home-based business.

A Creative Woman’s Labour in Yarmouk Camp

With a modest capital of about USD 170, Bushra bought herself a supply of beads, threads, glue, cardboard, and other raw materials, and began producing small pieces which she sold inside the camp, initially to her neighbours. Encouraged by her initial success, she, in late 2008, applied to the Microfinance Department for a women’s household credit (WHC) loan, a type of credit specifically tailored for entrepreneurial women with household-based income generating activities, and was granted an initial loan in Syrian pounds that was equal to USD 329. With this money she expanded her production, and had after two years become well-known in Yarmouk camp for her work, now taking frequent orders from local wholesalers.

With the help of a second WHC loan of almost USD 660, which Bushra is still servicing, she established a small store outside her home to allow her to exhibit her products, and hopes, by such means, to boost her sales even more, eventually also to borrow larger amounts from the MD. “Our household income has increased after I set up my venture,” Bushra says. “It also provided a stable employment opportunity for my husband, who manages my exhibition. Now my ambition is to further develop my business, increase my production and sales to improve my family’s conditions”.

Client History ProfileLoan No. Loan Amount ($) Loan Start Date Loan Closing Date1 $329 22/12/2008 21/06/20092 $658 07/07/2009 Still active

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Social Indicators Syria

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Informal

Refugee

Women

Youth

88%

25%

43%

11%

Like the other regions, Syria has been successful in achieving broad outreach to the informal sector through its business lending, where 88 percent of clients own informal microenterprises. Compared to the other fields, Syria has been much more successful in including women on its loan book, where women account for 43 percent of clients. This has been made possible by the early introduction of WHC in Syria and the high density market of women’s household enterprises that is unlike any other economic sector in the region, with highly developed putting-out system linking women’s households in home-manufacture for commercial traders and merchants. With 11 percent of loans financing youth, though relatively low, Syria together with the West Bank has performed best in outreach to youth. With the lowest density of Palestine refugee population in the region, with the exception of Lebanon, only a minority (25 percent) of clients are Palestine refugees. As the programme expands into other regions of Syria, Palestine refugee participation rates are unlikely to grow; although the absolute number of refugee clients will continue to increase they are likely to assume a declining ratio of the portfolio.

If you ever think you’re too small to be effective, you’ve never been in bed with a mosquito!

Wendy Lesko

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As outlined in the 2010-2011 Headquarter Implementation Plan (HIP) and its Business Plan, the department has set a number of ambitious, interlocking goals for the next two years, and the longer-term future. These goals reflect the need to consolidate the effectiveness of Department’s headquarters and field office operations, safeguarding the foundations for very rapid but also sustainable growth in outreach and disbursements, and thereby also demonstrating the effectiveness of the MD-model of financial inclusion to donors and potential future investors. This model is also set to begin dramatic expansion and transformation over this period, entailing changes both to the kind of financial intermediation provided by the department, and to the organizational underpinnings of the MD itself, which will in the coming years look to commence a migration of its operations structure, from an UNRWA department, to an independent business-entity.

On an operational level, the department will in 2010 look to maintain operational self-sufficiency rates of 115-125 percent across its areas of operations, reducing portfolio risk through continued administrative development, including improvements in its integrated in-house loan management system, and increased in-house training, which lagged in 2009 due to unfilled vacancies. This will be consolidated through further growth of the branch office network and increased product development and diversification in 2010. To improve productivity and efficiency among its branches, the MD in 2009 pushed through final approval of a new results-based incentive scheme for its branch managers. The scheme, which will launch on a pilot basis in 2010, is a unique innovation within UNRWA and reflects the department’s progressive migration towards a business-model increasingly resembling that of a private-sector financial intermediary. Under the new provisions, branch managers will be financially rewarded for growing the scope, scale and efficiency of their office operations while reducing credit risk, as reflected in outreach, profitability, operational self-sufficiency and portfolio-at-risk, among other criteria. In addition to encouraging more efficient and productive use of human resources, the scheme will increase delegation of decision-making and enhance management accountability and responsibility.

These, and other operational improvements, will be critical in driving and ensuring the financial sustainability of a very ambitious outreach agenda. By the end of 2015, the MD aims to grow outreach to 100,000 loans worth USD 149 million annually, enabled by an expansion of its branch office network from 17 to 34 offices, primarily in Jordan and Syria, and a diversification of the range of credit products offered, from seven to ten. Conditional on official regulatory approval, this product diversification will ideally be accompanied by new saving products targeting the poor, for which the department began operational preparations in 2008; such services would most likely be piloted first in the West Bank and Gaza.

In order to realize these goals, however, the department will have to overcome significant challenges. To meet its development plans, the Department needs to grow its loan capital from USD 22 million, in 2009, to at least USD 50-60 million by 2015. Amidst the implementation of austerity measures across UNRWA’s departments, the department is still likely to be able to attract some finance, but donor investments in Syria and Jordan have lagged support for activities in the West Bank and Gaza. This is of particular concern, since Jordan and, particularly, Syria are critical to the department’s growth plans, with it targeting outreach of 14,000 loans worth USD 20.35 million in Jordan by 2011, and 25,000 loans worth USD 17.41 million in Syria. In the absence of new capitalization, the MD would continue extending some 33,000 loans worth just over USD 40 million each year from its current capital base of USD 22.80 million.

OUTLOOK

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A defining theme of UNRWA’s operational identity is the Agency’s focus on creating opportunities for refugees and strengthening their ability to seize them.… At the heart of our mandate is the imperative of investing in refugees as people – investing in ways that enable them to develop their potential in spite of the constraints imposed by exile and conflict. This approach is at the core of what “human development” means for UNRWA.

Filippo Grandi, UNRWACommissioner General

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The MD’s difficulties in raising new capital in Jordan and Syria from scarce donor funding, has over the past years led to continual delays in the expansion of branch infrastructure and outreach growth. This underscores the importance of the broader organizational transformation on which the Department also embarked in 2009. Following on several years of deliberations and preparatory work, an expert team from the consultancy firm ShoreBank International arrived in Jerusalem in December to begin work on a business plan that will help guide the MD’s transformation from an UNRWA department into an independent business entity. The results of the study will be presented to the MD’s Advisory Board and UNRWA’s Management Committee in early 2010.

Such a change in direction promises, inter alia, to open up significant new financing opportunities for the department, allowing it to seek partners to invest in the new entity, and to increase its outreach through paid-in capital. Concomitantly, it would be able to refinance its portfolio through different credit instruments, including social investment funds, specialised microfinance investments funds and through bank loans. Encouragingly, news of this potential transformation has spread quickly through the MENA microfinance community and the department has been independently approached by a number of potential strategic stakeholders willing to participate in such a transformation, as well as providing technical assistance to guide the transformation process. In years to come, it is accordingly hoped that 2009, the 60th anniversary of UNRWA’s establishment, will also be seen as a watershed year for its 19-year venture into microfinance.

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FINANCIALSTATEMENTS31 December 2009

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financialstatements 31 December 2009

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financialstatements 31 December 2009

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financialstatements 31 December 2009

Table of Contents Balance Sheet 45Statement of Profit and Loss 46Small Micro Enterprise Training Program 47Statement of Changes in Net Assets 48Statement of Cash Flows 49Notes to Financial Statements 50 - 77

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Assets Note 2009 USD 2008 USD

Non-Current Assets

Property, Plant and Equipment 5 882,469 966,544

Loans Receivable, Net 4 1,261,519 1,119,475

2,143,988 2,086,019

Current Assets

Loans Receivable, Net 4 16,860,267 14,761,106

Pledges Receivable 8.1 270,956 192,865

Prepayments and Other Receivables 183,422 131,214

Cash and Cash Equivalents 3 9,289,724 8,226,807

26,604,370 23,311,992

Total Assets 28,748,358 25,398,011

Equity

Retained Earning (5,288,209) (6,732,765)

Fund Held For Training 121,219 74,823

Board Designated Fund/MIS System 20,209 23,428

Temporary Restricted - -

Loan Revolving Fund 9 22,862,698 22,815,665

Total Equity (Statement-C) 17,715,919 16,181,151

Non-Current Liabilities:

Retirement Staff Benefit Obligations 10 1,051,105 915,704

2.5.b,c 1,051,105 915,704

Current Liabilities:

Payables and Accruals 658,017 572,223

Bills Payable to UNRWA 6 448,318 853,933

Liability - OFID Pal Fund Trust Fund 7 8,875,000 6,875,000

Total Current Liabilities 9,981,335 8,301,156

Total Liabilities 11,032,440 9,216,860

Total Equity and Liabilities 12.1 28,748,358 25,398,011

Statement A - Balance Sheet as of 31 December 2009

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financialstatements 31 December 2009

Note

Financial Services -

Note 1.a

Training Service -Note 1.b

Total

2009 USD 2009 USD 2009 USD 2008 USDInterest and Other Operating Income:

Interest on Loans 4.5.2 6,584,317 6,584,317 4,520,965

Accrued Interest Revenue 117,818 117,818 70,943

Interest on bank deposits and other revenues 15,858 15,858 111,107

Grants Funds for Operations 11 153,779 153,779 133,021

Other Income 88,951 88,951 93,624

Training Income - 139,069 139,069 40,736

Total Operating Revenues 6,960,723 139,069 7,099,792 4,970,396Impairment Losses On Loans

Provision Expenses for Impaired Loans (834,466) (834,466) (410,694)

Recoveries from Written Loans 4.5.2 505,930 505,930 844,533

Net Impairment Losses on Loans (328,535) (328,535) 433,839

Operating Expense:Salaries and Related Expenses 3,371,591 45,903 3,417,494 3,318,848

Special Service Contracts 269,633 28,839 298,472 278,963

Occupancy 325,616 - 325,616 277,897

Communication 146,385 898 147,283 105,379

Stationary and Supplies 313,449 7,255 320,704 182,245

Minor Equipment and Maintenance 64,088 - 64,088 15,166

Travel and Transportation 267,712 - 267,712 201,076

Depreciation 240,915 - 240,915 219,592

Program Support Cost 76,907 - 76,907 84,535

Training 84,559 9,778 94,338 111,000

Other Cost 18,179 - 18,179 16,858

Total Operating Expense (5,179,033) 92,674 (5,271,706) (4,811,559)Operating Income (Loss) for

the Year 1,453,155 46,395 1,499,550 592,676

Gain (Loss) on Difference of Currency (8,599) (8,599) (8,487)

Net Year Income (Loss) / Year (Statement – C) 12.2 1,444,555 46,395 1,490,950 584,189

Statement B - Statement of Profit & Loss For The Ended 31 December 2009

See Notes to Financial Statem

ents

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NoteTraining Service

2009 USD 2008 USD

Interest and Other Operating Income:

Training Income 139,069 40,736

Total Operating Revenues 139,069 40,736

Operating Expense:

Salaries and Related Expenses 45,903 28,109

Special Service Contracts 28,839 20,461

Stationary and Supplies 898 -

Communication 7,255 4,365

Minor Equipment and Maintenance - -

Training 9,778 6,323

Other Cost - -

Total Operating Expense (92,674) (59,258)

Operating Gain (Loss) for the Year 1.b 46,396 (18,522)

Statement B1- Small Microenterprise Training Programme For The Year Ended 31 December 2009

See Notes to Financial Statem

ents

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Retained Earning

USD

Board Designated Fund

Fund Held for Training

USD

MIS SystemUSD

Temporary Restricted

FundUSD

RevolvingLoan Fund

USD

TotalUSD

Net Assets as at 1st January 2008 (7,257,088) 93,345 30,202 404,748 21,382,070 14,653,278

Operating Loss for Year 2008 602,711 (18,522) 584,189

Adjustments to Prior Years (78,388) (78,388)

Additional Fund for the Period (6,774) 1,028,847 1,022,072

Releases to Revolving Loan Fund

(1,433,595) 1,433,595 -

Net Assets at Beginning of Year

2009(6,732,765) 74,823 23,428 - 22,815,665 16,181,151

Operating Loss for Year 2009 (Statement - B)

1,444,557 46,395 1,490,952

Additional Fund for the Period (3,219) 47,033 43,814

Releases to Revolving Loan Fund

(47,033) 47,033 -

Net assets at end of year

(Statement -A)(5,288,882) 121,219 20,209 - 22,862,698 17,715,919

See Notes to Financial Statem

entsStatement C - Statement of Changes in Net Assets For The Ended 31 December 2009

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See Notes to Financial Statem

ents

Statement D - Statement of Cash Flows For The Year Ended 31 December 2009

2009 USD 2008 USD

Cash Flows from Operating Activities:

Contribution Received 27,386 1,500,890

Interest on Loans and Other Revenues 7,152,499 5,517,340

Loans Issued net of Collections (3,080,578) (6,246,319)

Cash Paid to Employees and Suppliers (4,878,940) (4,046,247)

Net cash Provided by operating activities (779,633) (3,274,336)

Cash Flows from Investing Activities:

Procurement of Fixed Assets (157,450) (384,048)

(157,450) (384,048)

Cash Flows from Financing Activities:

Liability to - OFID Pal Fund Trust Fund 2,000,000 4,500,000

2,000,000 4,500,000

Restricted Cash and Banks during the period 1,826,458 2,852,075

Increase in Cash and Banks During the Period (763,541) (2,010,459)

Cash at Beginning of the Year 8,226,807 7,385,191

Cash on Hand and Deposits With Banks at the end of Year 9,289,724 8,226,807

Adjustments to Reconcile Changes in Net Assets to Net Cash Provided by Operating Activities:

Change in Net Assets 1,526,168 1,519,385

Currency Exchange 8,599 8,487

Written Off Loans 392,734 258,245

Change in General Provisions 446,639 158,851

Depreciation 241,525 219,592

Loans Extended (37,136,846) (31,732,037)

Loans Collection 34,056,268 25,485,718

Decrease (Increase) in Pledges receivable (78,091) 280,976

Decrease (Increase) in Prepaid Expenses (52,208) (58,299)

(Decrease) Increase in Payables and Accruals 85,794 330,411

(Decrease) Increase in Bills Payable to UNRWA (377,998) 38,917

(Decrease) Increase in Termination Benefits Obligations 135,401 215,418

(779,633) (3,274,336)

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1. BackgroundA- Microfinance Department

The Microfinance Department is a department of the United Nations Relief and Works Agency for Palestine in the Near East (UNRWA). UNRWA was established by General Assembly resolution 302 (IV) of 8 December 1949 as a separate entity within the United Nations System and it began operations on 1 May 1950. The mandate of UNRWA has been renewed repeatedly, most recently by the General Assembly in its resolution A/RES/62/102 17 December 2007, when it was extended until 30 June 2011.

UNRWA reports directly to the General Assembly to which the Commissioner-General submits an annual report. A general review of UNRWA programmes and activities is undertaken on an annual basis by the ten-member Advisory Commission, which includes representatives of the Agencies donors and host authorities. The Advisory Commission has a working relationship with the Palestine Liberation Organisation.

The headquarters of the Microfinance Department is located in East Jerusalem in UNRWA’s West Bank Field Office, while its credit operations are located in field offices in the West Bank, Gaza, Jordan and Syria and in 17 branches offices throughout the region. The principal place of business of the department is:

Microfinance DepartmentUNRWA

Ammunition HillZalman Sharagi Street

P.O. Box 19149Sheikh Jarrah

East Jerusalem

Notes to Financial Statements

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The Microfinance Department prepares and presents separate financial statements certified by UNRWA’s Director of Finance.

Since June 1991, in the West Bank and Gaza, UNRWA’s Microfinance Department (MD) has helped promote small business development, create employment, improve the income of microenterprises and reduce poverty through the establishment of a number of targeted credit products aimed at small businesses, microenterprises, women, youth, consumers and householders. Since 2003 the department has also expanded its microfinance operations to Jordan and Syria. The MD organizes its lending activities through a revolving loan fund that serves the operations in all fields. The department supports businesses varying in size from micro-vendors, employing just one or two individuals to small industrial firms and aims to satisfy a variety of needs such as capital funding and working capital financing. It also provides non-business financial services to working class consumers and poor households. As a United Nations agency it is exempt from taxes.

The department’s credit finances customers through seven credit products. These are: Microenterprise Credit (MEC); Microenterprise Credit Plus (MEC+); Solidarity Group Lending (SGL); Women’s Household Credit (WHC); Small-Scale Enterprise (SSE); Consumer Lending Product (CLP); and Housing Loan Product (HLP).

The Microenterprise Credit (MEC) product is the core financial instrument of the department. This was introduced in Gaza in 1996, in the West Bank in 1998 and in Jordan and Syria in 2003. This product is designed to meet the working capital needs of the microenterprise sector that is unable to secure credit from banks and other formal financial institutions due primarily to lack of collateral. This product is retailed to both formal and informal enterprises.

The Microenterprise Credit Plus (MEC+) product is for microenterprises that have matured or developed. The owners of such

enterprises often need extra financial resources with longer repayment tenors to make business investments or secure a larger pool of working capital. To meet theses enterprise needs, in 2008 the department designed a new microenterprise credit plus (MEC+) product in the West Bank to provide longer term financing of older clients that had passed through three microenterprise loan cycles and for more formal enterprises that needed larger loans. This product is now retailed in West Bank, Gaza and Jordan, and will be introduced in Syria in 2010.

The Solidarity-Group Lending (SGL) product was introduced in Gaza in 1994 to enable Palestinian women to participate in the local economy. This product focuses primarily on women-based informal enterprises. The product was introduced into Syria in 2007.

The Women’s Household Credit (WHC) product was developed after introducing solidarity group lending in Syria in 2007. The department redesigned and re-launched this product in mid-2008 as women’s household credit (WHC). The new product is more suited to the market of women’s household-based income-generating activity, which is the foremost form of women’s informal microenterprise in Syria. There women’s microentrepreneurship is much more domesticated and on a much smaller scale than the street-based women microentrepreneurs of Gaza. In Syria many women microentrepreneurs work on piece-work or on a putting-out basis that generates a small revenue streams that compliment other household income sources. By redesigning the product to the market need and potential of the Syrian urban market, the department was able to significantly increase its outreach to women, who use these loans to build business and household assets.

The Small-Scale Enterprise (SSE) product was the original credit instrument that the department developed in 1991. Its objective is to provide loans to new and existing small-scale enterprises. This product has been restricted in

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recent years due the critical economic situation facing most medium and small-scale enterprise in the occupied Palestinian territory (oPt) and very few loans are now financed at present.The Consumer Lending Product (CLP) was established in 2002 in Gaza. This product aims to help workers and low-paid employees to purchase household assets and provide financing for education, health and family emergencies. This product was also introduced in the West Bank in 2007 and in Jordan and Syria in December 2008. The target clientele for this product are people who have a fixed or variable monthly income.

The Housing Lending Product (HLP) was introduced in Gaza in 2006 with the aim to provide financial resources to Palestine refuges to build, to improve and/or to develop their housing and living conditions. The product was launched in the West Bank in 2009.

These financial services are retailed through a network of 17 branch offices, of which seven are located in the West Bank, three in Gaza, three in Syria and four in Jordan. No new branch offices were opened in 2009, although contractual negotiations are under way to rent two new premises that will be opened in Aleppo and Damascus in early 2010.

B- Small Microenterprise Training Programme (SMET)

UNRWA’s MD also provides business training through its Small and Microenterprise Training (SMET) programme in Gaza. The main goal of the training programme is to contribute to the economic development of the Gaza Strip, through supporting small businesses and encouraging entrepreneurship. The programme’s outreach grew in 2009. The programme has its own separated expenses and budget. The programme income is generated from trainee’s fees and donor contributions as indicated in statement B1 and related notes.

To achieve this goal, the training programme aims:

îî To provide a wide range of business training courses to the business community in Gaza;îî To promote an entrepreneurial spirit with requisite business skills;îî To develop a local training capacity through a team of trainers able to deliver courses using participatory, non-formal adult-education training techniques and technologies with up-to-date subject matter;îî To develop a business curriculum that is relevant to the state of the local microenterprise economy and to make training material and resources more readily available;îî To encourage trainers who have developed training skills in the programme to transfer their experience in both teaching methodology and curriculum development to the universities and vocational training institutions where they teach;îî To promote co-operation and co-ordination among institutions engaged in small and microenterprise development, through contact groups and workshops;îî To enable small businesses in the Gaza Strip to compete in regional and global markets.

To achieve these objectives, the programme includes the following activities:

1. Business Training: This is the core activity of the SMET programme. It provides a range of business training courses that meet the practical training needs of the small business community in Gaza. The business service model adopted pursues a demand-led approach that is relevant to the business needs of clients. The training style is participatory and based on adult learning techniques and methodologies.

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2. Start up Your Own Business: This training programme aims to encourage new business start-ups amongst women and new graduates from technical and vocational colleges and from universities. The encouragement of entrepreneurship and self-employment is an important tool for business development and for both economic and social development.

3. Curriculum Development: In order to meet the goal of establishing best practice in the training process, the programme strives to incorporate relevance and participation in developing training manuals and curricula. The use of participatory and adult education techniques in developing curricula leads to the development of training courses that are most attractive to clients.

4. Building Local Training Capacity: The SMET programme works with a pool of more than 40 trainers who deliver almost 100 training courses. Twenty of these trainers form the core trainer pool that conducts the bulk of the courses offered. The programme continues to build a training team capable of delivering courses through participatory, non-formal adult education training techniques and technologies, with up-to-date subject matter.

The financial activities of the programme comprising training fees charged and direct costs of the programme, are presented in the separate Profit and Loss Statement for the year ended 31 December 2008.

2. Summary of Significant Accounting Policies and Preparation2.1 The MD prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) using the historical cost except for the revaluation of certain financial instruments. The MD works in three countries where four different currencies are legal tender. It uses three functional currencies. In Syria it uses Syrian pounds (SYP), in Jordan it uses Jordanian dinar (JOD), in West Bank it uses Jordanian dinar and in Gaza it uses US dollars (USD). The presentational currency is in US dollars. The presentation of figures in the financial statements is in numerically exact units, with no rounding except for decimals.

2.2 Funds of MD and changes therein are classified and reported as follows:

îî Retained Earnings – Utilization of net assets by MD is not subject to donor-imposed restrictions. It includes earnings or losses from operations.îî Temporary restricted net assets - Net assets whose use by MD is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and released by actions of MD pursuant to those donor-imposed stipulations. îî Revolving Loan Fund - Restricted contributions received for on lending purposes, which were expended in term of loans are included in the Revolving Loan Fund once repayments are received.îî Grants and Donations – Grants are not recognised until there is reasonable assurance that the MD will comply with the conditions attached to them and that the grants will be received.îî Grants whose primary condition is that the MD should purchase, construct or otherwise acquire non-current assets are recognised as deferred revenue

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in the statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.îî Other grants are recognized as revenue over the periods necessary to match them with the costs for which they are intended to compensate, on a systematic basis. Grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the MD with no future related costs are recognized in profit or loss in the period in which they become receivable.

2.3 Loans Receivable and Allowance for Loan Losses

2.3.1. Allowance for loan losses

As the Department moved its accounting approach to the full accrual method during year 2006, management adjusted FTI No. 42 in order that the provision for bad debts is based of a new “aged portfolio at risk report” (see below) that makes the provision for bad debt on the total amount outstanding on the loan. Based upon empirical experience, historical record and market knowledge, it was determined that the following general provision is required for delinquent and defaulting loans.

Loan Status Allowance (percent)

Current 1 % General Provision

1 – 30 days overdue 5 % General Provision

31 – 60 days overdue 10 % General Provision

61 – 90 days overdue 25 % General Provision

91 – 120 days overdue 50 % General Provision

121 – 180 days overdue 75 % General Provision

181 – 360 days overdue 100% General Provision

Based upon the above percentages, if a loan is not serviced an increasing reserve should

be provided for. This provision will be shown in the income statement for the period. On a monthly basis, adjustment is made to reflect the changes in the General Provision. After a loan is in arrears for 360 or more and has been fully provisioned in the general provision and accrued interest in suspense, a write-off will take place. Write-offs are only an accounting entry; they do not mean that the department has relinquished the legal claim to recover those loans. Recovery of written-off loans will continue to be pursued through the collection and compliance section of the Microfinance Department.

2.3.2. Impairment Loan Losses

Each quarter the department assesses whether a loan asset or group of loan assets is impaired. A group of loan assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred (“loss event”) after the initial recognition of the asset and that loss event (or events) had an impact on the estimated future cash flows of the loan asset or group of loan assets that can be reliably estimated.

Criteria used to determine that there is objective evidence of an impairment loss may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, breach of loan covenants or conditions, deterioration in the value of collateral, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

The department first assesses whether impairment exists through determining all loans with a principal outstanding balance of more than or equal to USD 3,000 that are late by more than ninety days within the period.

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Each of these loans is then assessed separately to determine if there is objective evidence of impairment loss. If there is then the whole amount of the principal loan outstanding balance is impaired. The remaining balance of the asset shall be reduced through use of an allowance account. The amount of the loss shall be recognized in the income statement.

If, in the subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account.

2.3.3. Related-Party (“insider”) Loans

The MD recently started to provide loans to staff, but not to the executive director or advisory board members, effective 2007. The conditions and interest charged to staff-clients are the same as those for other customers. Loans are provided for consumption and housing.

2.3.4. Accrued Interest on loans

Effective year 2006, the interest income on loans financed is accounted for on the accrual basis in compliance with IAS 18. This is done by accruing interest up to 90 days by debiting accrual receivables and crediting interest revenue. After 90 days all uncollected accrual receivables are transferred to Interest in Suspense by debiting the interest revenue and crediting interest in suspense. After 360 days all bad debts that have past due will be written off.

2.3.5 Recoveries

Any recoveries of previously written of loans are taken to the statement of profit and loss in the period they are received.

2.3.6 Cash and Cash Equivalents

Cash and Cash Equivalents comprise cash balances on-hand and short-term highly liquid investments with maturities of three months or less when purchased.

2.4 Property Plant and Equipment:

A - Fixed assets are stated at cost net of accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful live of the respective assets, based on historical experience management maintained the policy for fixed assets as follows:

Years Furniture and Equipment 10Computers and Printers 3Vehicles 7Leasehold Improvements 5

B - No in-kind donations were received during the financial year 2009.

2.5 Employee Separation Benefits

a- Provident Fund

All area staff members of MD/UNRWA participate in the UNRWA provident fund (PF) contributory scheme. Staffs’ monthly contributions into the scheme are set at 7.5 percent of base salaries and the UNRWA contribution is set at 15 percent. Under the PF rules, staff members are allowed to make additional voluntary contributions up to a maximum of 50 percent of monthly payroll. All participants receive the lower of book or market value return on the fund for the period of membership in the PF. The PF is administered by the Provident Fund Secretariat (PFS) jointly with the supervision and guidance provided by two committees, the Provident Fund Committee and the Investment Advisory Committee.

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financialstatements 31 December 2009

b- Retirement Benefit Obligation

Starting in 2005, the department started booking provisions for “Retirement Benefits Obligations”. UNRWA staffs are categorized under “A” and “X” staff: “A” category: Staff contracted before the year 1990“X” category: Staff contracted after1990

Effective January 1, 2007 UNRWA’s Commissioner-General has approved the equalization of Termination Indemnity between category A and X to ensure parity between area staff members by which both categories are entitled to the termination indemnity benefits .

For termination indemnity staff is classified into three groups:

Group 1:Less than 10 years of service or less than 46 years of age; Group 2:More than or equal to 10 years of service and aged between 46 and 55; Group 3:Early voluntary Retirement

The indemnity for each group is as follow:

Group 1:If Total Service = 1 --> 1 * Base SalaryIf Total Service between 1.01 and 8.99 --> (Total Service - 1) * Base SalaryIf Total Service >= 9 --> 8 * Base Salary Group 2:If Age = 46 --> 8.25 * Base SalaryIf Age = 47 --> 8.50 * Base SalaryIf Age = 48 --> 8.75 * Base SalaryIf Age = 49 --> 9.00 * Base SalaryIf Age = 50 --> 9.25 * Base SalaryIf Age = 51 --> 9.50 * Base SalaryIf Age = 52 --> 9.75 * Base SalaryIf Age = 53 --> 10.00 * Base SalaryIf Age = 54 --> 10.25 * Base SalaryIf Age = 55 --> 10.50 * Base Salary

Group 3:0.085 * Total Years in Service * Annual Base Salary

c- Staff Leave Balance Obligation

As per UNRWA staff rule 105.1 concerning annual leave, staff are entitled to carry forward up to 10 working days for duty stations with a 5-day working week, and 12 working days for duty stations with a 6-day working week for unutilised leave. Accrued annual leave may be accumulated and carried forward from one calendar year to the next on or after the first day of January of the following year, to a maximum of 37.5 working days for duty stations with 5-day working week, and 45 working days for duty stations with 6-day working week. As all MD staff are working five working days a week the accrued annual leave shall be calculated on the base salary by using UNRWA equation to calculate the accrued leave on termination which is: base salary /( 4.3333*5)*Number of days due .

57

2.6 Foreign Currency Transactions:

The books of account are maintained in U.S. Dollar. Transactions in other currencies are translated to USD at UN exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in other currencies at the balance sheet date are translated to USD at the exchange rate ruling at that date. Exchange differences arising on translation are recognized in the statement of operating activities. All other assets and liabilities are presented in USD equivalent at their historical values.

2.7 Recognition:

Held-to-maturity assets, originated loans and receivables are recognised on the day they are transferred to the department.

2.8 De-recognition:

A financial asset is de-recognised when the department loses control over the contractual rights that comprise the asset. This occurs when the rights are realised, expire or are surrendered. A financial liability is de-recognised when it is extinguished.

Held-to-maturity instruments, originated loans and receivables are de-recognised on the day they are transferred by the department.

2.9 Measurement:

Financial instruments are measured initially at cost. All non-trading financial liabilities, originated loans and receivables and held-to-maturity assets are measured at amortised cost less impairment losses. Amortised cost is calculated on the effective interest rate method.

2.10 Income and Expense

Income and expense is recognised in the income statement as it accrues, taking into account the effective yield of the asset.

58

financialstatements 31 December 2009

3. Cash and Cash EquivalentsThe currency exchange rates at year-end were as:

2009 USD 2008 USD Change %

One Jordanian Dinar 0.708 0.708 0.00 %

One Israeli Shekel 3.760 3.800 -1.06 %

One Syrian Pound 45.600 46.300 -1.52 %

The composition of cash at year-end was:

31 December

2009 USD 2008 USD

Unrestricted Cash

Banks and Cash in Jordanian Dinar 2,771,760 1,946,444

Banks and Cash in New Israeli Shekel 66,798 192,867

Banks and Cash in US Dollar 4,101,080 2,943,863

Banks and Cash in Syrian Pound 523,528 291,558

Total Unrestricted Cash and Cash Equivalents 7,463,166 5,374,732

Restricted Cash

OFID Pal Fund Trust 1,796,458 2,852,075

Palestinian Monetary Authority (PMA) 30,000 -

Total Restricted Cash and Cash Equivalents 1,826,458 2,852,075

Total Cash 9,289,624 8,226,807

59

4. Loans Receivable, Net:Loans receivable include loans outstanding from funds disbursed through both initial donor contribution (first time loans) and from revolving loan funds.

Field Functional currency Presentational currencyUSD

Gaza USD 3,038,307 3,038,307West Bank JOD5,780,592 8,164,678Jordan JOD3,532,941 4,990,030Syria SYP 139,529,696 3,059,862Total 19,252,877

The composition of loans receivable net of allowance for bad debts by maturity as at 31 December is as follows:

2009 Net Loans - USD 2008 Net Loans - USD

Maturities less than 1 year 16,860,267 14,761,106

Maturities over than 1 year 1,261,519 1,119,475

Total 18,121,787 15,880,581

Loan receivable outstanding as 31 December 2009 as per the functional and presentational currencies was:

60

financialstatements 31 December 2009

4.1 Net Loans Receivable is as Follows:

31 December 2009 31 December 2008

Loans USD

Allowance USD

NET USD

Loans USD

Allowance USD

NET USD

SSE Loans 82,304 (5,981) 76,323 230,548 (65,262) 165,286

MEC Loans 11,498,939 (847,837) 10,651,102 10,188,788 (464,149) 9,724,639

MEC+ 1,528,907 (37,305) 1,491,602 837,759 (11,708) 826,051

SGL Loans 266,093 (13,500) 252,593 233,025 (13,511) 219,514

WHC 585,174 (11,178) 573,996 270,999 (2,841) 268,158

CLP Loans 3,243,979 (188,675) 3,055,304 2,414,129 (90,664) 2,323,464

HLP Loans 2,047,482 (26,614) 2,020,868 2,389,785 (36,316) 2,353,469

Total 19,252,877 (1,131,090) 18,121,787 16,565,033 (684,452) 15,880,581

Net loans receivable represent outstanding balance as of December 31, 2009 and 2008 less the calculated provision for un-collectable loans as of the same date. Net loans receivable is the net realizable value of loans disbursed.

61

4.2 Changes in Loan Balances during year 2009 are as follows:

BeginningUSD

IssuedUSD

RepaidUSD

Written OffUSD

TotalUSD

Gaza

SSE Loans 230,548 46,000 141,821 52,423 82,304

MEC Loans 532,786 1,211,200 1,183,029 29,120 531,837

MEC+ Loans - 65,200 9,466 - 55,734

SGL Loans 233,025 627,000 586,331 7,601 266,093

CLP Loans 456,677 914,700 933,467 6,032 431,878

HLP Loans 2,389,785 829,500 1,548,823 - 1,670,462

Sub Total 3,842,821 3,693,600 4,402,937 95,176 3,038,308

West Bank

MEC Loans 4,300,496 9,451,554 9,339,685 98,318 4,314,047

MEC+ Loans 778,437 1,950,282 1,389,560 - 1,339,159

CLP Loans 1,935,952 4,133,898 3,954,164 21,637 2,094,050

HLP Loans - 447,034 70,014 - 377,020

HLP Loans - 42,373 1,972 - 40,401

Sub Total 7,014,885 16,025,141 14,755,394 119,955 8,164,677

Jordan

MEC Loans 3,565,567 9,256,215 8,235,535 134,875 4,451,372

MEC+ Loans 59,322 223,870 149,179 - 134,013

CLP Loans 15,452 676,836 287,643 - 404,645

Sub Total 3,640,341 10,156,921 8,672,357 134,875 4,990,030

Syria

MEC Loans 1,789,939 5,273,465 4,819,267 42,454 2,201,683

CLP Loans 6,048 663,706 356,348 - 313,407

WHC Loans 270,999 1,324,013 1,049,966 274 544,772

Sub Total 2,066,986 7,261,184 6,225,580 42,728 3,059,862

Grand Total 16,565,033 37,136,846 34,056,268 392,734 19,252,877

Percentage of Loans Receivable by Area:

31 December 2009 31 December 2008

USD % USD %

Gaza 3,038,308 16 % 3,842,821 23 %

West Bank 8,164,677 42 % 7,014,885 42 %

Jordan 4,990,030 26 % 3,640,341 22 %

Syria 3,059,862 16 % 2,066,986 13 %

19,252,877 100 % 16,565,033 100 %

62

financialstatements 31 December 2009

Percentage of Loans Receivable by Type:

31 December 2009 31 December 2008

USD % USD %

SSE Loans 82,304 0.4 % 230,548 1 %

MEC Loans 11,498,939 59.6 % 10,188,788 62 %

MEC+ Loans 1,528,907 8 % 837,759 5 %

SGL Loans 266,093 1 % 233,025 1 %

WHC Loans 585,174 3 % 270,999 2 %

CLP Loans 3,243,979 17 % 2,414,129 15 %

HLP Loans 2,047,482 11 % 2,389,785 14 %

19,252,877 100 % 16,565,033 100 %

4.3 Changes in the General Loan losses Reserve during year 2009 are as follows:

Beginning USD

Additions( Releases )

USD

Total USD

Gaza

SSE Loans 65,262 (59,281) 5,981

MEC Loans 28,354 7,258 35,612

MEC + Loans - 557 557

SGL Loans 13,511 (11) 13,500

CLP Loans 11,371 (3,745) 7,626

HLP Loans 36,316 (14,529) 21,787

Sub Total 154,814 (69,751) 85,063

West Bank

MEC Loans 233,995 34,247 268,243

MEC+ Loans 11,115 22,826 33,941

CLP Loans 79,078 72,520 151,598

HLP Loans - 4,828 4,828

WHC Loans - 404 404

Sub Total 324,189 134,824 459,013

Jordan

MEC Loans 144,456 299,733 444,189

MEC+ Loans 593 2,214 2,807

CLP Loans 155 19,853 20,008

Sub Total 145,204 321,800 467,004

Syria

MEC Loans 57,344 42,450 99,794

CLP Loans 60 9,382 9,442

WHC 2,841 7,932 10,774

Sub Total 60,245 59,764 120,010

Grand Total 684,452 446,639 1,131,090

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Percentage of Written Off Loans

31 December 2009 31 December 2008

USD % USD %

SSE Loans 52,423 13 % 4,044 2 %

MEC Loans 304,767 78 % 229,109 89 %

MEC+ Loans - - - -

SGL Loans 7,601 2 % 14,846 6 %

WHC Loans 274 - - -

CLP Loans 27,669 7 % 5,737 2 %

HLP Loans - 4,509 1 %

392,734 100 % 258,245 100 %

4.4 Loans Receivable, as at 31 December 2009, Distributed by Sector are as follows:

Agriculture USD

Commerce USD

Industry USD

Service USD

Consumer USD

Housing USD

Total USDGaza

SSE 333 25,995 20,977 34,999 - - 82,304

MEC 46,836 280,107 30,877 174,017 - - 531,837

MEC+ - 26,432 14,994 14,308 - - 55,734

SGL 63,956 139,983 40,164 21,990 - - 266,093

HLP - - - - - 1,670,462 1,670,462

CLP - - - - 431,878 - 431,878

Sub-Total 111,125 472,517 107,012 245,314 431,878 1,670,462 3,038,308

West Bank

MEC 234,167 1,520,055 473,828 2,085,997 - - 4,314,047

MEC+ 31,141 587,918 186,794 533,306 - - 1,339,159

CLP - - - - 2,094,050 - 2,094,050

HLP - - - - - 377,020 377,020

WHC 3,955 6,497 13,802 5,277 10,870 - 40,401

Sub Total 269,263 2,114,470 674,424 2,624,581 2,104,920 377,020 8,164,677

Jordan

MEC 4,456 2,130,734 528,246 1,787,935 - - 4,451,372

MEC+ - 64,946 17,655 51,412 - - 134,013

CLP - - - - 404,645 - 404,645

Sub Total 4,456 2,195,680 545,901 1,839,348 404,645 - 4,990,030

Syria

MEC 877 1,020,421 288,384 892,000 - - 2,201,683

CLP - - - - 313,407 - 313,407

WHC 592 83,713 72,776 26,540 361,151 - 544,772

Sub Total 1,469 1,104,135 361,160 918,540 674,557 - 3,059,862

Grand Total 386,313 5,886,801 1,688,498 5,627,783 3,616,000 2,047,482 19,252,877

64

financialstatements 31 December 2009

Percentage of Loans Receivables Distributed by Sector is as follows:

31 December 2009 31 December 2008 USD % USD %

Agriculture 386,313 2 % 232,948 2 %

Commerce 5,886,801 30 % 5,174,773 31 %

Industry 1,688,498 9 % 1,453,974 9 %

Service 5,627,783 29 % 4,826,895 29 %

Consumer 3,616,000 19 % 2,486,658 15 %

Housing 2,047,482 11 % 2,389,785 14 %

Total 19,252,877 100 % 16,565,033 100 %

*CLP and HLP loans are disbursed to individuals for household improvements and development and are not distributed among any enterprise sector.

4.5.1 Loans Receivable, as at 31 December 2009 distributed by Geographical Area are as follows:

SSE USD

MEC USD

MEC+ USD

WHCUSD

SGLUSD

CLP USD

HLP USD

Total USDGaza

Gaza Area 63,954 202,314 41,734 - 101,025 208,416 903,035 1,520,478

Middle Area 7,146 99,075 - - 74,202 115,994 407,342 703,759

SouthernArea 11,204 230,447 14,000 - 90,866 107,468 360,086 814,071

Total Gaza 82,304 531,836 55,734 - 266,093 431,878 1,670,463 3,038,308

West Bank

Nablus - 859,143 289,305 13,801 - 339,693 53,433 1,555,375

Tulkarm - 539,879 85,845 26,600 - 235,550 29,709 917,583

Jenin - 572,021 13,613 - - 196,550 13,694 795,877

Qalqilia - 187,438 125,179 - - 129,080 29,220 470,917

Ramallah - 743,854 375,561 - - 345,211 - 1,464,626

Bethlehem - 746,573 236,722 - - 418,416 88,433 1,490,145

Hebron - 665,138 212,936 - - 429,550 162,532 1,470,155

Total W.B 4,314,047 1,339,159 40,401 - 2,094,050 377,020 8,164,677

Jordan

Wehdat - 1,385,115 61,017 - - 104,637 - 1,550,769

Al-Balad - 1,270,580 18,225 - - 180,566 - 1,469,372

Bayader - 965,560 54,771 - - 99,956 - 1,120,287

Al-Zarqa - 830,116 - - - 19,486 - 849,602

Total Jordan 4,451,372 134,013 - - 404,645 - 4,990,030

Syria

Yarmouk - 848,079 - 309,045 - 122,906 - 1,280,030

Al-Ameen - 1,033,686 - 43,707 - 132,150 - 1,209,542

Saida Zeynab - 319,918 - 192,020 - 58,350 - 570,289

Total Syria 2,201,683 - 544,772 - 313,407 - 3,059,862

Grand Total 82,304 11,498,938 1,528,907 585,174 266,093 3,243,979 2,047,483 19,252,877

65

4.5.2 MD internal reports, decisions, and performance assessments include interest income and recovery income from different loan products based on geographical segments as follows:

SSE USD

MEC USD

MEC+ USD

WHCUSD

SGLUSD

CLP USD

HLP USD

Total USD Ratio

Interest on Loans

Gaza 26,615 213,135 3,119 - 100,432 195,939 328,374 867,615 13 %

West Bank 1,841,586 353,153 540 - 856,833 18,719 3,070,831 47 %

Jordan - 1,496,775 33,563 - - 63,709 - 1,594,047 24 %

Syria - 813,194 - 167,950 - 70,680 - 1,051,824 16 %

Total 26,615 4,364,690 389,835 168,490 100,432 1,187,161 347,093 6,584,317 100 %

ProductRatio % 0.5 % 66 6 % % 2.5 % 2 % 18 % 5 % 100

Recoveries from Written loans

Gaza 65,657 32,242 - - 13,679 5,583 - 117,161 23 %

West Bank 18,147 318,312 - - - 5,295 - 341,755 68 %

Jordan - 42,461 42,461 8 %

Syria 4,553 4,553 1 %

Total 83,804 397,569 - - 13,679 10,878 - 505,930 100 %

ProductRatio % 17 % 78 % 3 % 2 % 100

4.6 Related Parties: during 2009 seven loans were lent to the MD staff in Gaza in the form of consumer loans with a value of US$16,600 the position of these loans at the end of the year was:

2009 USD 2008 USD

Loans Disbursed 16,600 11,000

Repayments (5,698) (4,654)

End Of Year Outstanding Balance 10,902 6,346

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financialstatements 31 December 2009

4.7 MD’s loan collateral is determined according to the loan product, loan size and the legal requirements in each area of operations.

Product Min-Max loan amount Collateral

Gaza

SGL $200 - $4,000 Loan contract plus notarial deed

CLP 3 times monthly salary Loan contract plus post-dated cheques

HLP USD $2,500 - USD$15,000 Guarantor (UNRWA employee) plus loan contract and post-dated cheques

MEC USD $400 - USD $8000 loan contract plus post-dated cheques

MEC+ USD $5,000 - USD $21,000

Loan contract plus post-dated cheques (non-blank cheques “in value of loan and date” or blank cheques) and plus guarantor(UNRWA Staff)

SSE $3,000 – $70,000 Guarantor (UNRWA employee) plus loan contract plus loan contract plus post-dated cheques

West Bank

MEC JOD 200 - JOD 8,000Loan contract plus post-dated cheques (non-blank cheques “in value of loan and date” or blank cheques) and promissory note plus social guarantor

CLP 3 times monthly salaryLoan contract plus post-dated cheques (non-blank cheques “in value of loan and date” or blank cheques) and promissory note plus social guarantor

MEC+ JOD 6,100 - JOD 15,000Loan contract plus post-dated cheques (non-blank cheques “in value of loan and date” or blank cheques) and promissory note plus social guarantor

HLP JOD 4,000 - JOD 12,000Loan contract plus post-dated cheques (non-blank cheques “in value of loan and date” or blank cheques) and promissory note plus social guarantor

WHC JOD 200 - JOD 1,500 Loan Contract plus promissory note and social guarantor.

Jordan

MEC JOD 200 - JOD 6,000 Loan contract plus post-dated cheques (non-blank cheques “in value of loan and date” or blank cheques)

CLP 3 times monthly salary loan contract plus post-dated cheques (non-blank cheques “in value of loan and date” or blank cheques)

MEC+ JOD 6,100 - JOD15,000 Loan contract plus post-dated cheques (non-blank cheques “in value of loan and date” or blank cheques plus notarial deed (for new clients)

Syria

WHC SYP 10,000 - SYP150,000 Loan contract plus notarial deed. Post-dated for loans above SYP 100,000

CLP SYP10,000 - SYP150,000 Loan contract plus notarial deed. Post-dated for loans above SYP 100,000

MEC SYP10,000 - SYP300,000 Loan contract plus notarial deed. Post-dated cheques for loans above SYP100,000

67

5. Property, Plant and EquipmentComposition for year 2008:

Furniture And

Equipment USD

ComputersAnd Hardware

USD

Vehicles USD

LeaseholdImprovements

USD

Total USD

Cost :

Balance Jan. 1 372,792 312,100 502,153 227,279 1,414,324

Additions 145,963 59,638 77,914 100,533 384,048

Disposals - - 38,050 - 38,050

Balance Dec. 31 518,755 371,738 542,017 327,812 1,760,322

Accumulated Depreciation

Balance Jan. 1 134,008 214,993 139,100 124,136 612,236

2006 Dep. 39,545 67,769 65,673 46,604 219,592

Disposals - - 38,050 - 38,050

Balance Dec. 31 173,553 282,762 166,723 170,740 793,778

Net Book Value 345,202 88,976 375,294 157,072 966,544

Composition for year 2009:

Furniture And

Equipment USD

ComputersAnd Hardware

USD

Vehicles USD

LeaseholdImprovements

USD

Total USD

Cost :

Balance Jan. 1 518,755 371,738 542,017 327,812 1,760,322

Additions 73,873 47,082 9,619 26,876 157,450

Disposals - (42,911) - - (42,911)

Balance Dec. 31 592,628 375,909 551,636 354,688 1,874,861

Accumulated Depreciation

Balance Jan. 1 173,553 282,762 166,723 170,740 793,778

2009 Dep. 50,259 60,186 74,731 56,348 241,524

Disposals - (42,911) - - (42,911)

Balance Dec. 31 223,812 300,037 241,454 227,088 992,391

Net Book Value 368,816 75,872 310,182 127,600 882,469

6. Bills Payable to UNRWA:Represents expenses paid by UNRWA on behalf of the MD in respect of the operating expenses incurred by MD, which are billed on a monthly basis. Beginning in November 2009 the MD began to directly settle its accounts payable

through the MD bank accounts. This includes all expenses except staff salaries and procurement which continues to paid by UNRWA field offices and charged to the MD on a monthly basis. Also excluded are donations which are also settled by UNRWA and not the MD.

68

financialstatements 31 December 2009

2009 USD 2008 USD

Expenses Paid on Behalf of MD 448,318 853,933

Total amount due to UNRWA 448,318 853,933

7. Liability - OFID PalFund Trust FundOn June 15, 2004, UNRWA signed an “Administration Agreement” with the OPEC Fund for International Development (OFID) to administer the PalFund Trust Fund. Funds were provided to UNRWA, as an administrator, in the sum of USD 2,500,000 to be used exclusively for the promotion of microenterprise through loans for the Palestinians in the occupied Palestinian territory. The PalFund Trust Fund is held in a non-interest bearing current bank account according to the conditions of the agreement.

In consideration of the Administrator performing the services, the agreement specified that the Administrator may deduct programme support costs of up to 5 percent from the original fund only. The Administrator may also charge such reasonable fees or other charges under the client loan agreements to cover such costs to the Administrator as directly and reasonably incurred in connection with the conclusion of borrower loan agreements. UNRWA transferred responsibility for the administration of the trust fund activities to the MD.

By December 31, 2004, one instalment in the amount of USD 500,000 was received by UNRWA. Programme support costs of USD 25,000 were deducted by UNRWA and the balance of USD 475,000 financed loans through the MD.

In 2005, UNRWA received a second instalment of USD 2,000,000. An amount of USD 500,000 was received by the department in Gaza, and

another USD 1,500,000 was received by the department in the West Bank. An amount of USD 100,000 was collected by UNRWA as Programme Support Cost (PSC) calculated at 5 percent of the amount received. The balance of USD 1,900,000 represents the net liability to UNRWA under the second instalment bringing the total accumulated liability to USD 2,375,000 as of 31 December 2007.

During 2007 a letter of agreement was signed with OFID, which increased the PalFund Trust Fund by a further sum of USD 4.50 million, with no PSC deducted from this amount. It was agreed with OFID that the funds will be paid in two separate instalments of USD 2.00 million and USD 2.50 million, upon submission and approval of a list of proposed Pal Fund Projects submitted by MD to OFID. No proposed PalFund Projects were submitted to OFID during year 2007, although the MD submitted the list in February for projects that were financed in the last quarter of 2007.

During 2008 the department have received the USD 4,500,000, which added the total Liability to USD 6,875,000 as end of 2008.

In 2009 UNRWA signed a new letter of agreement with OFID for a further pledge of USD 3.00 million to the PalFund trust Fund. By the end of 2009 the department has received USD 2.00 million, raising the total liability to OFID to USD $8,875,000 as end of 2009, with a pledge of USD 1.00 million outstanding. The position of OFID Loans Receivable, Net at end year was as the following:

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8. Grants and Donations

8.1 Grand Duchy of Luxembourg

During 2008 an agreement was signed between UNRWA and the Grand Duchy of Luxembourg for a project for “Microfinance Development and Capacity Building: Supporting Economic

USD

Fund Agreement 1,479,290

Less : HQ-P.S.C (96,777)

Net For the Following Use : 1,382,513

a. Loan Capital 1,029,258

- Spent By Gaza (213,800 )

- Spent by West Bank (815,458)

Fund Balance 31/12/2009 0

b. Establishment of Qalqilya Branch 257,396

- Spent for Running Cost and Fixed Assets (2008,2009) (235,424)

Fund Balance 31/12/2009 21,972

c. Procurement of Saving Module 35,503

-Spent during 2008 and 2009 35,503

Fund Balance 31/12/2009 0

d. Business Plan 30,178

-Spent during 2008 and 2009 30,178

Fund Balance 31/12/2009 0

e. Impact assessment Study 30,178

-Spent during 2008 and 2009 (30,178)

Fund Balance 31/12/2009 0

Total Fund for Establishment 21,972

Recovery and Rehabilitation through Microenterprise and Consumer Lending”. The MD was funded to undertake the following activities:

The position of OFID Loans Receivable, Net at end year was as the following:

2009 2008Loans Receivable 6,474,750 5,003,301

Allowance (323,528) (244,338)

OFID Loans Receivable, Net 6,151,222 4,758,963

70

financialstatements 31 December 2009

In 2009, additional financing of US$365,973 was received from the Duchy of Luxemburg

USD

a. Gaza SMET 101,423

- Transferred from West Bank 15,695

- Spent during 2009 (97,039)

Gaza Fund Balance 31/12/2009 20,079

b. MD Studies

-Transformation Plan and Feasibility Study 132,275

- Product Development 52,910

- Social Performance Management 79,365

- Spent during 2009 (19,950)

- Transferred to Gaza (15,695)

West Bank Fund Balance 31/12/2009 228,905

Total Fund Balance from Duchy of Luxemburg 31/12/2009 270,956

to support the SMET programme in Gaza and capacity-building activities. These included the following activities:

9. Revolving Loan Fund:Revolving Loan Fund - Restricted contributions received for on-lending purposes, which were expended in term of loans are included in the Revolving Loan Fund.

Composition of this fund by funding source as at December 31, 2009 is as follows:

Gaza USD West Bank USD Syria USD 2009 USD 2008 USD

Australia 619,272 - - 619,272 619,272

Canada 200,370 170,220 - 370,590 370,590

Germany 1,682,252 1,276,323 - 2,958,575 2,958,575

Italy 725,750 218,500 - 944,250 944,250

Japan 357,142 223,199 - 580,341 580,341

New Zealand 122,822 - - 122,822 122,822

Norway 2,794,013 340,968 - 3,134,981 3,134,981

UNRWA 80,000 - - 80,000 80,000

AGFUND 131,400 - 53,571 184,971 184,971

CIDA 943,350 - - 943,350 943,350

Netherlands 2,626,405 1,676,748 - 4,303,153 4,303,153

USAID 4,237,197 - - 4,237,197 4,237,197

AAAID 1,207,391 1,150,848 - 2,358,239 2,358,239

SMART 949,011 - 949,011 949,011

Luxemburg 213,800 862,147 - 1,075,947 1,028,913

Grand Total 15,941,164 6,867,964 53,571 22,862,698 22,815,665

71

10. Staff Retirement Benefit Obligation:

2009 2008End of Year Services 797,329 714,382Accrued Staff Leave 253,776 201,322

Total 1,051,105 915,704

11. Grant Funds for OperationsThe total expenditure for grant funds for operation expenses for the years 2009 and 2008 are as follows:

Donor 2009 USD 2008 USDDuchy of Luxemburg 153,779 97,678AED/SMART - 35,343

Total 153,779 133,021

12. Geographical SegmentsMD operates out of four principal field offices located in the West Bank, Gaza, Jordan, and Syria. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of borrowers. Segment assets are based on the geographical location of assets.

72

financialstatements 31 December 2009

12.1

Sta

tem

ent o

f Bal

ance

She

et b

y G

eogr

aphi

cal S

egm

ent

Gaz

aW

est B

ank

Jord

anSy

ria

Tota

l

2009

USD

2008

USD

2009

USD

2008

USD

2009

USD

2008

USD

2009

USD

2008

USD

2009

USD

2008

USD

Ass

ets

Non

-Cur

rent

Ass

ets:

Prop

erty

, Pla

nt a

nd E

quip

men

t 11

6,93

512

3,36

537

4,66

137

6,61

619

3,84

324

0,32

319

7,02

922

6,23

988

2,46

996

6,54

4

Loan

s Re

ceiv

able

, Net

735,

601

1,11

9,47

550

9,67

5-

16,2

43-

--

1,26

1,51

91,

119,

475

852,

536

1,24

2,84

088

4,33

637

6,61

621

0,08

624

0,32

319

7,02

922

6,23

92,

143,

988

2,08

6,01

9

Curr

ent A

sset

s :

Loan

Rec

eiva

ble

, Net

2,21

7,64

32,

568,

532

7,19

5,98

96,

690,

697

4,50

6,78

33,

495,

137

2,93

9,85

22,

006,

740

16,8

60,2

6714

,761

,106

Pled

ges

Rece

ivab

le20

,079

-25

0,87

719

2,83

2-

33-

-27

0,95

619

2,86

5

Prep

aym

ent a

nd o

ther

Rec

eiva

bles

3,59

46,

084

118,

119

98,5

0245

,777

18,4

1715

,932

8,21

118

3,42

213

1,21

4

Cash

and

Cas

h Eq

uiva

lent

s3,

996,

725

4,48

5,04

43,

412,

120

2,62

3,76

21,

069,

063

573,

348

811,

816

544,

652

9,28

9,72

48,

226,

807

6,23

8,04

27,

059,

661

10,9

77,1

059,

605,

793

5,62

1,62

34,

086,

936

3,76

7,60

02,

559,

603

26,6

04,3

7023

,311

,992

Tota

l Ass

ets

7,09

0,57

88,

302,

501

11,8

61,4

419,

982,

408

5,83

1,71

04,

327,

259

3,96

4,62

92,

785,

842

28,7

48,3

5825

,398

,011

Equi

ty

Gen

eral

Und

esig

nate

d(3

,906

,756

)(3

,875

,669

)(1

,627

,086

)(2

,752

,345

)61

,574

(74,

752)

184,

060

(30,

000)

(5,2

88,2

09)

(6,7

32,7

65)

Fund

Hel

d fo

r Tra

inin

g12

1,21

974

,824

--

--

121,

219

74,8

23

Boar

d D

esig

nate

d Fu

nd/M

IS S

yste

m

20,2

0923

,428

--

--

20,2

0923

,428

Tem

pora

ry R

estr

icte

d Fu

nd-

--

--

--

-

Revo

lvin

g Lo

an F

und

15,9

41,2

1715

,941

,217

6,86

7,91

06,

820,

877

-53

,571

53,5

7122

,862

,698

22,8

15,6

65

Tota

l Equ

ity12

,175

,889

12,1

63,8

005,

240,

824

4,06

8,53

261

,574

(74,

752)

237,

631

23,5

7117

,715

,918

16,1

81,1

51

Non

-Cur

rent

Lia

bilit

ies

Retir

emen

t Ben

efit

Obl

igat

ions

501,

629

490,

445

422,

011

326,

825

70,9

6354

,358

56,5

0144

,076

1,05

1,10

591

5,70

4

501,

629

490,

445

422,

011

326,

825

70,9

6354

,358

56,5

0144

,076

1,05

1,10

591

5,70

4

Curr

ent L

iabi

litie

s :

Paya

bles

and

Acc

rual

s91

,172

55,7

7940

8,38

247

1,17

731

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27,1

0326

,522

18,1

6465

8,01

757

2,22

3

Inte

r-O

ffice

Acc

ount

s(8

,677

,103

)(8

,071

,404

)(4

98,4

45)

1,26

8,69

95,

584,

701

4,19

1,68

13,

590,

848

2,61

1,02

4-

-

Bills

Pay

able

to U

NRW

A

84,9

2918

0,70

822

7,73

145

5,34

982

,530

128,

870

53,1

2789

,006

448,

318

853,

933

Liab

ility

to U

NRW

A-O

FID

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st F

und

2,91

4,06

23,

483,

175

5,96

0,93

83,

391,

825

--

--

8,87

5,00

06,

875,

000

Tota

l Cur

rent

Lia

bilit

ies

(5,5

86,9

40)

(4,3

51,7

43)

6,19

8,60

65,

587,

050

5,69

9,17

24,

347,

654

3,67

0,49

62,

718,

195

9,98

1,33

58,

301,

156

Tota

l Lia

bilit

ies

(5,0

85,3

10)

(3,8

61,2

98)

6,62

0,61

75,

913,

875

5,77

0,13

64,

402,

012

3,72

6,99

82,

762,

271

11,0

32,4

409,

216,

860

Tota

l Equ

ity a

nd L

iabi

litie

s 7,

090,

578

8,30

2,50

111

,861

,441

9,98

2,40

85,

831,

710

4,32

7,25

93,

964,

629

2,78

5,84

228

,748

,358

25,3

98,0

11

73

12.2

Sta

tem

ent o

f Pro

fit a

nd L

oss

by g

eogr

aphi

cal S

egm

ent

G

aza

Wes

t Ban

kJo

rdan

Syri

aCe

ntra

l Off

ice

Tota

l

2009

USD

2008

USD

2009

USD

2008

USD

2009

USD

2008

USD

2009

USD

2008

USD

2009

USD

2008

USD

2009

USD

2008

USD

Inte

rest

and

Oth

er O

pera

ting

Inco

me

:

Inte

rest

on

Loan

s86

7,61

579

2,22

33,

070,

831

2,07

7,16

71,

594,

047

981,

754

1,05

1,82

466

9,82

16,

584,

317

4,52

0,96

5

Acc

rued

Inte

rest

Rev

enue

3,50

16,

036

58,0

0040

,818

45,7

7718

,417

10,5

405,

672

117,

818

70,9

43

Inte

rest

On

Bank

s D

epos

its1,

477

86,5

948,

295

14,9

786,

086

8,50

4-

1,03

115

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111,

107

Gra

nt F

unds

for O

pera

tions

--

153,

779

133,

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--

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153,

779

133,

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Oth

er re

venu

es23

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11,5

4210

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32,8

121,

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2,27

254

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46,9

9888

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93,6

24

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l Ope

ratin

g Re

venu

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6,13

289

6,39

53,

301,

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2,29

8,79

61,

647,

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0,94

71,

116,

547

723,

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6,96

0,72

34,

929,

660

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ent L

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s O

n Lo

ans

Pr

ovis

ion

Expe

nses

for I

mpa

ired

Loan

s(2

5,42

5)(3

8,47

6)(2

54,8

05)

(202

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)(4

56,6

76)

(131

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)(9

7,55

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8,04

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34,4

66)

(410

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)

Re

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ries

from

Writ

ten

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s11

7,16

132

0,75

634

1,75

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8,68

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s O

n Lo

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91,7

3628

2,28

086

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265,

945

(414

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)(9

1,62

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3,00

6)(2

2,76

1)(3

28,5

35)

433,

838

Ope

ratin

g Ex

pens

e

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ries

and

Rela

ted

Exp.

620,

772

825,

917

1,26

0,06

41,

200,

322

495,

793

460,

724

370,

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299,

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624,

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504,

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3,37

1,59

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739

Spec

ial

Serv

ice

Cont

ract

s25

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26,0

5741

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85,3

2125

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8,65

122

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17,4

9515

4,66

212

0,97

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9,63

319

5,21

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60,1

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110

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451

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44,9

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4,09

332

5,61

627

7,89

7

Com

mun

icat

ion

13,9

6821

,263

70,6

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35,1

7327

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21,1

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5,45

61,

935

146,

385

105,

379

Stat

iona

ry a

nd S

uppl

ies

18,8

0620

,241

67,8

2369

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68,0

4547

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33,1

3723

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125,

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17,2

4831

3,44

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1,16

9

Min

or E

quip

men

t & M

aint

enan

ce16

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5,15

81,

123

593

18,2

757,

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9,33

51,

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64,0

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Trav

el a

nd T

rans

port

atio

n19

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36,1

6411

6,05

660

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49,3

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17,7

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64,7

4448

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267,

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201,

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reci

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n34

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34,4

7267

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48,3

1352

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49,0

3750

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50,7

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37,0

4924

0,91

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9,59

2

Loss

on

Exch

ange

Diff

eren

ce8,

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1,27

72,

634

18,7

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2-

(3,7

75)

(11,

576)

--

8,59

98,

487

Prog

ram

Sup

port

Cos

t10

,199

15,7

3221

,197

27,4

5113

,248

15,1

2811

,786

14,5

7320

,477

11.6

5176

,907

84,5

35

Trai

ning

21,6

506,

392

12,9

6351

,579

2,47

312

,291

13,3

9317

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34,0

8117

,226

84,5

5910

4,67

7

Oth

ers

1,70

081

38,

948

8,09

21,

915

1,37

43,

333

5,43

42,

283

1,14

618

,179

16,8

58

T

otal

Ope

ratin

g Ex

pens

es(8

42,0

27)

(1,0

53,6

74)

(1,8

07,1

45)

(1,7

13,4

88)

(813

,978

)(7

10,7

26)

(630

,367

)(5

18,6

00)

1,09

4,11

576

4,30

1(5

,187

,632

)(4

,760

,788

)

Allo

catio

n of

Cen

tral

Offi

ce O

pera

ting

Expe

nses

(176

,930

)(1

93,7

61)

(518

,678

)(3

16,4

46)

(244

,631

)(1

56,5

89)

(153

,876

)(9

7,50

6)(1

,094

,115

)(7

64,3

01)

-

Allo

catio

n of

Jeru

sale

m O

ffice

63,0

9578

,339

(37,

857)

(49,

979)

(25,

238)

(28,

360)

-

Net

Inco

me

( Los

s )

for t

he P

erio

d(3

1,08

8)(6

8,76

0)1,

125,

256

613,

146

136,

327

2,02

821

4,06

156

,295

-1,

444,

555

602,

711

74

financialstatements 31 December 2009

13. Risk:Risk is inherent in the microfinance industry. Effective risk management is seen as the primary means for microfinance institutions to keep functioning. Ultimate responsibility for effective management of risks rests with the Director of the Microfinance Department. Several types of Risks apply to the MD, these are:îî Credit Risk is the risk that counterparty will

not settle its obligations in accordance with the agreed terms. The credit risk management process, includes:îî Formulating credit policies by product covering collateral requirements, credit compliance with regulatory requirements.îî Establishing the authorization structure for the approval and renewal of credit facilities.îî Reviewing and assessing credit risk in excess of designated limits prior to facilities being committed to customers. Renewals of facilities are subject to the same process.îî Developing and maintaining risk grading system in order to categorize exposure according when impairment provisions are required against specific credit exposures.îî Provide guidance and training to improve skills of staff to promote best practices in the management of credit risk.

îî Country Risk is the risks that counterparty is unable to meet its contractual obligations as a result of adverse economic conditions or actions taken by government in the relevant country.îî Market Risk is the risks that the fair value

or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates.îî Liquidity Risk is the risk that funds will not

be available to meet liabilities as they fall due.îî Operational and Other Risks is the risk

of direct and indirect loss due to an event or action causing the risks having operational risk impact.îî Political Risk is the risk that an existing

political situation makes it difficult for microfinance institutions to function, for

example, in war and situations of humanitarian crisis and emergency.îî Currency Risk is the risk that an

unfavourable change in the value of currency will result in an unpredictable decrease in earning, cash flow or value.

In occupied Palestinian territory, because of the present circumstances, political risk, country risk and credit risk are very high, while country and political risk remains low in both Jordan and Syria. To mitigate the risk in the oPt, management did the following;

a. SSE loans have been significantly reduced since 2001. In this category the amount of loans is relatively high, which bears a high risk factor because of the present situation. Management decided to significantly reduce its activities under this programme in both Gaza and West Bank and has currently ceased all SSE lending in the West Bank.

b. Management concentrated on expanding short-term lending activities under MEC, WHC and SGL products categories. These loans, range between USD 1,000-8,000 and USD 200-4,000 respectively, and aim at distributing the risk to a larger number of borrowers. However, even here management has to reduce lending in Gaza in 2009 due to increasing risk there.

c. Management introduced a new housing loan product in Gaza with very tight collateral conditions that mitigated the political and country risk. Demand for this product was constrained due to the boycott on construction materials entering Gaza in 2009. Despite the low outreach of the product, it still has minimal risk.

d. In 2007 management introduced the CLP product into the West Bank, where the economic situation had improved due a lessening of previous fiscal crisis as the international community stepped up its financial contribution to the PA under the President. It further extended this product

75

into Jordan and Syria at the end of 2008.e. The current effective internal control system

and procedures were further tightened up. Constant follow-up and loan-monitoring procedures were introduced to reduce Credit Risk of borrowers. However, the department now has to operate in a market where policing and the enforcement of contract law through the courts are highly dysfunctional and barely operating, especially in Gaza.

f. To reduce general portfolio risk, management is rapidly expanding the portfolio in West Bank, Jordan and Syria where portfolio quality remains high and can offset risk in Gaza. As a result each of these three regions produced record outreach in 2009, which is expected to continue in 2010.

Currency risk is a significant factor in the MD operations as the department lends in different currencies in each field, with the United States Dollar (USD) used in Gaza, the Jordanian Dinar (JOD) used in Jordan and the West Bank and the Syrian Pound (SYP) used in Syria. Exchange rate losses/gains are reported in the financial statement and MD management attempts to mitigate potential losses by maintaining cash that is not required for operations in USD, and maintaining JOD and SYP required for loan financing with a low threshold in banks.

The carrying amount of the MD’s foreign currency denominated monetary assets and monetary liabilities at the end of the reporting period are as follows:

Liabilities Assets2009 USD 2008 USD 2009 USD 2008 USD

Jordanian Dinar 549,476 425,259 15,926,467 12,601,670Syrian Pound - - 3,583,390 2,358,544

Total 549,476 425,259 19,509,857 14,960,214

The main currency exposure is with JOD and SYP. The following table details the MD’s sensitivity to a 10 percent increase and decrease in the US dollar (reporting currency) against the relevant foreign currencies. 10 percent is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items

and adjusts their translation at the period end for a 10 percent change in foreign currency rates. The sensitivity analysis includes loans. A positive number below indicates an increase in profit where the US Dollar strengthens 10 percent against the relevant currency. For a 10 percent weakening of the US Dollar against the relevant currency, there would be a comparable impact on the profit, and the balances below would be negative.

A 10 percent sensitivity analysis at the end of the reporting period produces a profit/loss variant as follows:

Jordanian Dinar Syrian Pounds2009 USD 2008 USD 2009 USD 2008 USD

Profit or loss 1,647,594 1,302,692 358,339 235,854

76

financialstatements 31 December 2009

14. Portfolio Quality: a. Portfolio at Risk Ratio:

Portfolio at risk ratio (balance of loans in arrears / value of loans outstanding) measures amount

of default risk in portfolio. An increasing portfolio at risk is negative.

Portfolio at Risk

2009 2008

Principal Outstanding

USD

Portfolio at Risk Ratio

Principal Outstanding

USD

Portfolio at Risk Ratio

Current 15,713,234 13,601,231

1 to 30 1,927,030 1,944,930

31 to 60 443,417 2.30 % 392,173 2.37 %

61 to 90 251,956 1.31 % 165,237 1.00 %

91 to 120 187,240 .97 % 108,121 0.65 %

121 to 180 239,683 1.24 % 146,866 0.89 %

181 to 360 490,316 2.55 % 206,475 1.25 %

19,252,877 16,565,033

Portfolio at Risk 30 Days 8.37 % 6.16 %

b. Portfolio in Arrears Ratio:

Portfolio in arrears ratio (Value of Payments in Arrears / Value of Loans Outstanding), the ratio indicates amount of loan payments past due. An increasing portfolio in arrears is negative.

Value of loans in arrears equals the value of payments due (unpaid loan instalments).

Portfolio in Arrears

2009 2008

Payments in Arrears

USD

Portfolio in Arrears Ratio

Percent

Payments in Arrears

USD

Portfolio in Arrears Ratio

Percent

1 to 30 376,351 1.95 % 294,369 1.78 %

31 to 60 193,407 1.00 % 120,359 0.73 %

61 to 90 138,940 .72 % 78,385 0.47 %

91 to 120 117,523 .61 % 60,726 0.37 %

121 to 180 188,070 .98 % 82,955 0.50 %

181 to 360 265,004 1.38 % 97,389 0.59 %

1,279,295 6.64 % 734,181 4.43 %

77

c. Operational Self- Sufficiency Ratio:

The Operating Self Sufficiency ratio (Interest and Recovery / Operating expenses and additional provision for loan losses) measures how well the MD covers its cost through its operating activities. An increasing operating self-sufficiency ratio is positive.

2009 USD 2008 USD

Interest and recovery 7,466,653 5,774,193

Operating expenses 6,022,771 5,171,482

Operating Self-Sufficiency Ratio 124 % 112 %

The Operational Self-Sufficiency rate for each field for the years 2009 and 2008 were as follows:

Field 2009 2008

Gaza 97 % 95 %

West Bank 145 % 128 %

Jordan 109 % 100 %

Syria 124 % 108 %

d. Loan Officer Productivity:

Loan Officer Productivity (Number of Active Borrowers / Number of Loan Officers), the ratio measures the average caseload of each loan officer. An increasing Loan Officer Productivity ratio is positive.

2009 2008

Number of active borrowers 21,604 17,493

Number of loans officers 119 131

Loan Officer Productivity 182 134

Loan officer productivity have been improved in 2009 as a result of the improvement in the economic situation in the West Bank and through management efforts to improve staff productivity.

78

79

FIELD & BRANCH STAFF LIST

West Bank

Voltaire KharoufehChief Field Microfinance Programme

Ibrahim JaberCredit Operations Manager - North

VacantBranch Manager / Nablus

Abdallah Al-OmariBranch Manager / Jenin

Shatha IkbariehBranch Manager / Tulkarem

Muwaffaq NoufalBranch Manager / Hebron Branch

Yousef JubranBranch Manager / Ramallah Branch

Zaidoun DarwishBranch Manager / Bethlehem Branch

Mo’ath EnayehBranch Manager / Qalqilia Branch

GazaNasser JabrChief Field Microfinance Programme

Taghreed Al-MasriLoan Management System Officer

Bahjat EidCredit Operations Manager

Khaled HamadBranch Manager / Khan Yunis

Imad MadhounBranch Manager / Gaza

Ahmed Abu MarshoudBranch Manager / Nuseirat

JordanVictor SiryaniChief Field Microfinance Programme

Mohammad JawabrehCredit Operations Manager

Ibrahim AqrabawiBranch Manager / Wehdat

Hassan HassanBranch Manager / Al-Balad

Lina LateefArea Loan Supervisor / Al-Bayader

Fadi Al-AhmadBranch Manager / Zarqa

Syrian Arab RepublicMohammed Al-KhatibField Microfinance and Microenterprise Officer

Amani AliCredit Operations Manager

Dema NijemBranch Manager / Yarmouk

Mahmoud AbdulRazzaqBranch Manager / Al-Amin

Wasim Rateb ShihabBranch Manager / Saida Zeynab

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West BankMD Headquarter21 Zalman Sharagi StreetP.O.Box 19149Sheikh Jarrah, Jerusalem Tel: (972) 2 5890221Fax: (972) 2 5890230

West Bank Field Office21 Zalman Sharagi StreetP.O.Box 19149Sheikh Jarrah, Jerusalem Tel: (972) 2 5890455Fax: (972) 2 5890737

Nablus BranchAl-Shohadaa Circle- Toukan Building Above Cairo- Amman BankTel: 09-2387871/2Fax: 09-2387870

Jenin BranchCity Center- Nafa Mall Near Al-Awqaf Building Beside Cairo Amman BankTel: 04-2433430Fax: 04-2433431

Tulkarem Branch Bisan Mall – Nablus StreetOpposite Bank of Palestine Ltd. Tel: 09-2670252Fax: 09-2676730

Hebron Branch Ain Sarah Street Al-Amal B Allah Building- First floor - Beside HebronMunicipality – Opposite the UNRWA storages Tel: 02-2290026/7Fax: 02-2290028

Ramallah Branch Al-Ahlieh College StreetBeside Cairo Amman Bank Tel: 02-2984831/2Fax: 02-2984830

Bethlehem Branch Bab Zqaq- Beside UNRWA building- BethlehemTel: 02-2748184/6Fax: 02-2748188

Qalqilia Branch Abu Ali Square, Western Street.Azzam Jammous Building, Above Arab BankTel: 09-2942683/4Fax: 09-2942685

Gaza StripField Office and Gaza BranchHasouna Building Ramla-Lid Street Rimal, GazaTel: (972) 8 2820001/2Fax: (972) 8 2824949

Khan Younes Branch Fares Building – Jalal Street Khan YunisTel: 08-2061288Fax: 08-2050540

Nusseirat BranchAbu Arabian Building Al-Bahar Street Al-Nusseirat Tel: 08-2552003Fax: 08-2554099

Jordan Jordan Field Office Kalboneh Building Al-Mahata Street Above Cairo Amman Bank AmmanTel: (962) 6 4652395/7Fax: (962) 6 4652394

Al-Balad Branch Al-Mahata Street- Kalboneh Building , Above Cairo Amman Bank AmmanTel: 06-4652392/3Fax: 06-4652394

Wehdat Branch Al-Hudhud Building Madaba Street- After Middle East Circle Opposite Gulf Hotel Amman Tel: 06-4780076 / 4780062Fax: 06-4779113

Al-Bayader Branch Industry Street – Al-Quda compound Beside Jamil Anez Company Tel: 06-5853202/ 5852101Fax: 06-5852105

Zarqa Branch Prince Mohammad Street, Alhaouz Area, Opposite of Directorate of Education Tel: 05-3996615/6Fax: 05-3996617

Syria Syria Field Office & Yarmouk Branch Farhoud Building Adnan Ghanem Street (Al-Thaltheen Street)Al-Yarmouk Camp, Damascus Telfax: (963) 11 6363445/6/7/8

Ameen BranchAl-Ameen Street Opposite Al-Ameen Fire brigade Damascus Telfax: 011-5429839/ 5428261

Saida Zeynab Branch Above Muna Saleh PharmacyThe general road to Saida Zeynab Damascus Telfax: 011-6477081/2

CONTACT LIST