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«A Critical Assessment of Microfinance Afghanistan Public Policy Research Organization Policy Paper March 2008 Acknowledgements Lead author: Saeed ...»

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A Critical Assessment of Microfinance

Afghanistan Public Policy Research Organization

Policy Paper

March 2008


Lead author: Saeed Parto

Co-author: Akshay Regmi

We acknowledge Anna Paterson’s earlier and much valued input into this paper.

About Authors

Saeed Parto is Director of Research at Afghanistan Public Policy Research Organization (APPRO) based in Kabul,

Afghanistan. He is also lecturer at the Faculty of Arts and Social Sciences, Maastricht University (The Netherlands).

Akshay Regmi was research intern at the time of the research for this paper.

About APPRO The Afghanistan Public Policy Research Organization (APPRO) is an independent social research organization promoting social and policy learning to benefit development and reconstruction efforts in Afghanistan. APPRO is registered with the Ministry of Economy (Registration Number: 1212) as a non-for-profit organization and headquartered in Kabul, Afghanistan.

APPRO’s mission is to measure development progress against strategic reconstruction objectives and provide insights on how to improve performance against the milestones set by the government of Afghanistan and the international donors. APPRO is staffed by personnel with many years of collective experience in various facets of development and scientific research.



1. Introduction 1

2. Microcredit in Afghanistan 3

3. Objectives 4

4. Methodology 4

5. Description of the Context: The Rural Financial Landscape 8

6. Analysis 10

6.1. Institutional and Organizational Mapping 16 6.1.1. Institutions of Microcredit 16 6.1.2. Organizations of Microcredit 19

6.1. Discussion 22

7. Conclusions 24

8. Recommendations 25

8.1. Policy recommendations 25

8.2. Operational recommendations 26 References 27 End Notes 29 Appendix A: The Microfinance Institutions (MFIs) of Afghanistan 30 Appendix B: Datasets for institutional and organizational maps in Figures 6 and 7 32 Appendix C: Descriptions of and Assumptions about Institutions of Credit Transaction 34


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Afghanistan has come out of a decades-long intermittent period of armed conflict which has severely limited the capacity and the ability of the state to provide services to meet even the most basic needs of the population. With an average per capita GDP of less than US $200 Afghanistan was in 2001 one of the poorest countries in the world, with its formal institutions and infrastructure virtually destroyed. An estimated 80 percent of the population lives in rural areas with agriculture and agriculture-based employment providing income for 67 percent of the labor force. The amount of useable farmland comprises as little as 12 percent of the total land area, and land ownership is highly skewed with great regional differences. A significant portion of rural households possesses little or no land for sustenance.

Afghan households need access to credit as a coping strategy - for consumption smoothing, crises and life cycle events such as marriages and funerals. Access to credit is also purported to be key in expanding income-generating activities, investment in productive assets and improvement of livelihoods, thereby adding to local economic growth. Small, medium and large scale entrepreneurs need access to credit for capital accumulation in setting up or expanding businesses. This need has attracted new attention in a time of economic reconstruction, promotion of economic growth in the formal sector, and development of rural markets. Access to credit is considered by donors and Afghan policymakers as an important service for promoting socio-economic inclusion, countering poverty and promoting growth in rural Afghanistan. The continued commitment to microfinance at the highest levels is reflected in the Interim Afghanistan National Development Strategy (I-ANDS) which contains a rural development benchmark relating to

rural credit and financial services:

To promote livelihoods and economic growth, the Government will expand access to quality financial services—especially for women and the poor—by further developing informal financial markets through the Microfinance Investment Support Facility in Afghanistan (MISFA), creating a legally independent yet regulated sector, and mobilizing resources and private institutions that will provide financial products for investment in small and medium-sized enterprises.

Comprehensive rural financial services will also provide special products such as insurance that will encourage private sector investments in rural farm and non-farm enterprises. (I-ANDS 2005:148) MISFA was established in August 2003 as the apex organization for “Microfinance Institutions” (MFIs) in Afghanistan. The number of MFIs has since grown to 15 (See Appendix A for a list and descriptions). The MISFA website recorded a total of US$252.8m in loans disbursed to 314,208 active borrowers by May 2007. This commitment to microfinance is based on the assumption of a large unmet demand for credit in rural communities. At its inception, MISFA estimated that as many as 2 million households were in need of credit. In December 2007, the World Bank official website reported that, The World Bank, CGAP (the Consultative Group to Assist the Poor), and the donors that followed, seized the opportunity [in 2002] to establish a model microfinance industry in this virgin territory

- doing things right, from day one. Four years later, microfinance in Afghanistan is thriving despite deteriorating security in the country, and a new impact survey has found that the benefits to clients are real. …Interviews with more than 1,000 households across five regions of the country in the spring of 2007 revealed that 700,000 employment opportunities have been created for women…1 (emphasis added) 1 However, research has shown that a variety of informal credit mechanisms are commonly used across Afghanistan, pointing to the presence of highly evolved, albeit not always fair and equitable, credit markets throughout rural Afghanistan. Village level case studies of informal credit conducted in Herat, Kapisa and Ghor provinces and a pilot study in Balkh in 2006-2007 (Klijn and Pain 2007) raised a number of challenges to such assumptions on the unavailability of credit, finding that an array of credit options were available to rural households. The authors also questioned the understanding of credit mechanisms based on

a preoccupation with ‘formality’ (Klijn and Pain, 2007, p.2):

If we look at informal credit through the lens of formal systems where money exchange is treated as simply as a commodity exchange, does this not rather ignore the context of social relations in which most Afghans lead their lives and the meaning and role that informal credit plays within these relations?

To further investigate the inconsistencies in perceptions by the international donors of the positive role of microcredit in improving rural livelihoods this research examined the interrelations between microcredit and traditional credit. Village level in-depth interviews were held with households, loan officers and key informants in villages where microfinance is being offered. Data collected from Kabul, Bamiyan, and Balkh provinces were supplemented with data from a series of shorter and less in-depth key informant interviews and focus group meetings conducted in Herat. The interviews and focus group meetings in the four provinces took place between February and August 2007.

This paper examines the interface between MFIs as introduced organizations with anticipated institutional roles in facilitating desirable socio-economic change and the preexisting rural institutions that have traditionally governed credit transactions for generations of rural Afghans. An institutionalist framework is applied to primary and secondary data to assess the outcome to date of introducing microcredit in Afghanistan. This paper concludes with a series of recommendations for integrated policy and operational interventions to improve rural livelihoods in post-2001 Afghanistan. The remainder of this paper is organized as follows.

The next section provides a brief history of formal microcredit in Afghanistan. Section 3 outlines the objectives of this research while section 4 describes the methodology used in the analysis of the data from primary and secondary sources. Section 5 provides a detailed description of the context including a review of some of the relevant literature. Section 6 analyzes the data from primary and secondary sources, followed by Section 7 to conclude on the main findings. The paper concludes with Section 8 which outlines a series of policy and operational recommendations.


In this study, microcredit refers to small amounts of money borrowed by clients from MFIs as part of the set of services described as Microfinance.2 Loans can be delivered to individuals and groups with or without collateral and may or may not contain a savings requirement. In Afghanistan, there are variations in the microfinance system across different MFIs, although they operate under the general policy guidelines as prescribed by MISFA (Microfinance Investment Support Facility in Afghanistan). These variations occur in terms of targeted groups, nature of financial services provided, and the presence of capacity building components built into the loans. For instance, PARWAZ only offers loans to urban women, while FINCA cooperates with donor organizations such as USAID to contribute to nationwide programs such as ARIES (Agriculture, Rural Investment and Enterprise Strengthening) and has established FAMA (FINCA Afghanistan Microfinance Academy) to train its employees in training its clients.3 There is an array of different regulations that govern formal credit provision through the 15 MFIs operating under MISFA. For instance, loan repayment cycle can start from 2 weeks after borrowing, such as in the case of OXUS, or 10 months, as is the case with ARMP. Each MFI has different loan cycles, with different amounts that can be borrowed after the end of a repayment cycle. Most MFIs require that savings be made before loans can be accessed.

Some MFIs only give group loans, whereas others provide loans to individuals and groups.

The Murahaba credit system utilized by FINCA is the world’s first Sharia law compliant microcredit system. Under Sharia law, interest on loans is considered as sinful. To avoid this label, the Murahaba system charges ”administrative costs” for its loans, which include interest calculated annually and payable by the borrowers as the service cost of their loan.

In traditional lending the mechanisms are rooted within local family, community, and Islamic notions and norms of social assistance and responsibility, linked in many ways to the practice of giving alms to the poor or to benefit from donating to the needy based on the Table 1. Inventory of Traditional Credit Practices and Terms

–  –  –

Source: Klijn and Pain (2007); Maimbo (2003) 3 Islamic notion of sawab (Table 1). They can also be bound up with local hierarchies and patronage arrangements as well as other social networks and may have a role in sustaining exploitative power relationships (Klijn and Pain 2007). An inventory of the traditional forms through which credit is transacted is listed in Table 1. Excluded from this inventory are voluntary donations such a Khairat (voluntary alms), Zakat (obligatory alms), and Hawala services (to transfer funds).


In this paper we examine the interface between the newly introduced MFIs and pre-existing (traditional) sources of lending and borrowing in rural areas. We pay particular attention to MFIs as organizations with intended institutional roles in relation to pre-existing institutions with key governance roles in rural livelihoods. A key assumption in our analysis is that the introduced organizations (the MFIs) with intended institutional roles can improve rural livelihoods, given the “right” interface between the new organization (the MFIs) and the preexisting and mostly traditional institutions such as those described in Table 1. In the analysis we drew on information from secondary sources as well as primary data collected from research in 2007 in the four provinces of Balkh, Kabul, and Bamiyan, and Herat. The

research was guided by the following objectives:

- Identify and inventory the traditional institutions that govern lending and borrowing credit

- Investigate the role of microcredit in rural communities

- Assess the interface between MFIs and the traditional forms of lending and borrowing

- Take stock of the changes in rural socio-economic conditions due to introduction of Microcredit An institutionalist framework based on Hayden’s (Hayden 1982a, 1982b, 1982c) “Social Fabric Matrix” (SFM) and Parto’s (2005a, 2005b, 2008) “Typology of Institutions” is employed to analyze the data from primary and secondary sources. The next section provides a description of these two approaches to institutional analysis and the methods utilized in the collection and analysis of the data.


Our analysis is informed by Hayden’s “Social Fabric Matrix” (SFM) and the concept of delivery and process. Hayden (1982b) uses as examples the “components” of electric companies delivering electricity, novels delivering myths, and values delivering belief criteria. Components may deliver more than one “element”. For example, some industries can deliver goods and services as well as carcinogenic substances. Designing an SFM requires first defining the matrix components and their elements. In Table 2 the range “1…n” denotes the elements for each component.

4 The flows of goods, services, information, funds, and people collectively structure and maintain community relationships. Depending on the subject of study, the SFM that emerges from linking these elements may attribute more or less weight to each element.

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