With the turbulent Middle East as backdrop, a groundbreaking round of handshakes on the West Bank between U.S. and Palestinian political, financial, and legal leaders probably went unnoticed.  

The July 25, 2007, Ramallah occasion represented an effort to bring change to the unstable region through economic opportunity and sealed the founding of the Middle East Investment Initiative (MEII), which now has the support of the governments of Israel, the United States, and parts of Europe. 

MEII's goal is to provide financial opportunity to Palestinian businesses on the West Bank, with the hope that strengthening the local economy will encourage political stability and peace.  

Present at the historic meeting were Palestinian Authority President Mahmoud Abbas and Prime Minister Salam Fayyad; U.S. Under Secretary of State Karen Hughes; Robert Mosbacher, Jr., president and CEO of the federal Overseas Private Investment Corporation (OPIC); and MEII Chairman Berl Bernhard.  

On July 17, 2007, the day President Bush announced the Annapolis peace summit, he also blessed the public-private partnership between OPIC, MEII, and the Palestinian Investment Fund (PIF), an independent Palestinian investment company, which would attempt to boost West Bank stability by facilitating $228 million in lending to Palestinian businesses.  

Bernhard, a longtime trustee of the Aspen Institute and a partner in the law firm of DLA Piper, in addition to his role at MEII, said at the time that, even with the bleak economic outlook for the region, one demographic remained a tenacious constant: Palestinian small- and medium-sized business entities (SMEs).  

The Origin 
The initiative was sparked by Portland Trust, a British nonprofit dedicated to promoting peace between Palestinians and Israelis, which commissioned an independent study through Palestine's Birzeit University's Center for Development Studies to determine the market conditions in Palestinian territories.  

OPIC saw the study and conceived the idea of supplying a fund that would guarantee loans for SMEs in the West Bank; additional money would come from U.S. and international investors and companies seeking to actively engage the region, while keeping political and legal sensitivities in mind. 

The outgrowth was MEII, which grew out of the Middle East Strategy Group of the Aspen Institute and was created to raise money for the fund to back up bank loans and to oversee its daily operations. 

MEII focuses on the need to make credit available for Palestinian SMEs. Banks operating in the West Bank currently view the lending of money to SME owners as a high-risk affair, due to the lack of security in the region. Loans are typically granted based on collateral—something that most Palestinians do not have and is often as high as 200 percent of the loan amount.  

James Pickup, general counsel and vice president of MEII, helps oversee the organ-ization from its D.C. headquarters. In the 1990s, Pickup worked with Sen. George Mitchell (D-Maine), representing him on the Sharm el-Sheikh Fact-Finding Committee, an international panel made up of the United States, Israel, the Palestinian Authority, Egypt, Jordan, the European Union, and the United Nations, formed to examine relations between Israel and Palestine.  

He recognizes this risk-aversion philosophy as part of the lending culture of the region, but believes that banks have cash to loan. "They don't, for purely business reasons, want to lend it because of the security situation," says Pickup, who, like Bernhard, is also a DLA Piper partner doing his MEII work pro bono.  

 "Our motivation was to figure out how we can actually free up credit and give some of these businesses the ability to start hiring people and putting people to work," Pickup says. 

At press time, MEII had guaranteed more than $4 million in loans, with 18 projects underway. If businesses continue to grow as planned, Bernhard anticipates that MEII will back $40 million in loans for 150 projects by the end of 2008.   

According to Bernhard, the initial goal was 100 businesses, creating jobs for some 1,000 workers. "When we approve loans, we look at the loan amount, [and] capability of the borrower to adhere [to] and comply with the loan terms, and then we also crank into that the direct employment estimates," says Bernhard. "In every sector, we look at the capacity to repay and how much employment will be the result of that loan." 

MEII loan guarantees provide Palestinian entrepreneurs with capital for new or existing enterprises to purchase or repair equipment; remodel facilities; pay employee salaries; cover transportation and shipping costs; and increase product supplies in industries such as agriculture, technology, retail, tourism, and construction.  

MEII's main support comes from a $160-million OPIC guarantee; $50 million comes from PIF; $5 million was secured from the government of Norway; and extra funds came from U.S. and international donors.  

This seed money was enough to start the program, but MEII almost had to shut down operations last summer because of lack of funds, Pickup says.  

For Pickup, the biggest challenge MEII faces is funding. "A few big grants made us viable for two more years, but we need additional money to operate the loan guarantee program beyond that." 

Approvals Sought
There were other obstacles besides financial. 

MEII had to get approval from the United States government to work with OPIC and needed the backing of the Palestinian Monetary Authority—which regulates the economy—to work directly with local banks and receive proper licensing.  

"In order for this to be effective, this has to be taken out of politics entirely," Pickup says. 

It was equally important for MEII to secure a nod of approval from the Israeli government. This would be crucial when courting potential investors, but it was also important to legitimize the project with approval from both sides of the conflict. Pickup says that the support from Israel, while low-key, is definitely there.  

 "They [the Israeli government] have been quiet supporters, but we have always gone to them and said exactly what we're doing, so everyone knows," he says. "One of the early things we sought, mainly for our U.S. Jewish American donors and Aspen board members, was…letters from [Israeli President Shimon] Peres and Efraim Sneh, who was then deputy defense minister, saying 'yes, we totally back this.'" 

Eynat Shlein-Michael, the Israeli counselor for Middle Eastern affairs in Washington, D.C., tells B'nai B'rith Magazine that the government believes that "anything [that] strives to promote the Palestinian economy and well-being is a good step toward the future." 

"It is good that we are trying to build up the foundations of the Palestinian middle class and promote stability," she says. "This is exactly the kind of environment that will enable the Palestinians to build a booming economy that we hope will support a moderate [political climate]. We are very supportive of many different efforts in various sectors of the Palestinian economy." 

To keep operational costs down, and to properly analyze the economic impact of its work, MEII searched for an organization with a presence in the West Bank and secured the help of CHF International, which has experience in working in conflict areas, to work directly with Palestinian banks. "It's hard for businesses to survive here," says William Phelps, MEII managing director and senior financial advisor of CHF International, who has 25 years of experience in international business and is trying to change the culture of the loan market in the West Bank.  

"The loans aren't structured," says Phelps. "We want to provide more volume of credit than before, with better-structured loans, so that businesses can operate optimally. We can make $10,000 to $500,000 available for SMEs who have either no credit or not enough credit." 

Phelps explained that MEII functions within lending models that are Western in practice, which includes adding interest. In the future, MEII plans to create a lending model without interest that would meet the needs of local Sharia, or Islamic law, whose followers cannot participate in interest-earning lending practices.  

Phelps and CHF, through a grant from United States Agency for International Development, are also developing a technical training program with the local bankers' association to help banks better understand the loaner/borrower relationship. The objective is to improve credit analysis and stimulate a sustainable and healthy financial services market, while using modern banking techniques.  

Phelps is encouraged by one aspect of the challenge. "I've been in finance a long time. I've done business in the Philippines, Latin America, Africa, etc., and the people in the West Bank have the strongest credit culture I've encountered," he says.  

BBI Honors Effort
In a Washington, D.C., hotel ballroom last April, B'nai B'rith International (BBI) held its Commitment to Justice Award Dinner to honor the pro bono work of three partners of DLA Piper law firm by highlighting their unique projects. Among them was Bernhard, who was recognized for his work, including his efforts as chairman of MEII.  

BBI President Moishe Smith presented Bernhard with an award that evening and had a chance to listen to him talk about MEII's initiative. Smith later expressed admiration for the effort, but also pointed to years of the Palestinian Authority's mismanagement of internationally donated funds.  

As president of an international Jewish organization, however, Smith says he understands the need to remain hopeful and is cautiously optimistic about MEII's plan. He agrees that, if the Palestinian economy is strong, then people are less likely to turn to terrorist organizations for protection and a false sense of security.  

"I encourage the project. I'm delighted that it's there. I'm happy to know that Israel accepts the concept of this type of project," Smith says. "We have to be hopeful, after so much disappointment in the region, that this will be the beginning of a new way of life for those Palestinian families that want to take advantage of it." 

Bernhard has an answer for potential critics who are concerned about past misdealing. "We have been aware of it, and that's why were so careful about vetting the money properly," he says. "We are avoiding any money-laundering [or unethical lending], etc. If we fail to do that, then we've let a lot of people down. 

"We made it clear to everyone that we, as a U.S. [organization], had to be in full compliance with all U.S. laws and regulations, and we needed to be particularly mindful of any U.S. policy affected by our foreign and economic activities," says Bernhard. "Everyone understood that we had to operate with full and indispensable transparency."  

Bernhard stresses that the project is not about handouts and that MEII has a much bigger and more tangible goal in mind. "We are not engaged in charity," he says. "We are trying to engage in a sustainable program that will revitalize the region and give people hope."