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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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The system continues to function as long as there is delivery among its elements consistent with natural principles and social rules. A “sustainable” system has continuous delivery and receipt among its many elements. Absence of delivery-receipt relationship among elements undermines the continuance of relationships and can lead to a reconfiguration of the matrix.

One main purpose of the SFM is to organize what we know as the basis to identify the key nodes or points in a given system and investigate possibilities for intervention through policy or other means toward more desirable outcomes.

Table 2. Social Fabric Matrix

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Source: After Hayden (1993) The completion of the SFM for a research problem should also result in discovering linkages among the components/elements and the identification of weak and strong linkages. Placing a notation of “1” or zero in any cell in Table 2 denotes the existence or absence of a delivery / receipt relationship. If more than one relationship are of interest, each relationship can be accounted for in this binary fashion. The number of cells in the SFM depends on the research or policy problem being addressed, i.e., it is scope-dependent. The boundary for the system represented by a constructed network is thus subjective and delineated by the researcher. Links or relationships between deliveries and receipts are established on the basis of reciprocity, and/or redistribution, and/or exchange.

The central nodes are entities or phenomena that are involved in more overlaps, have more reachability to other entities, and generate greater levels of deliveries, in terms of flows, than other entities or phenomena. Using the SFM, it is possible to identify the relevant set of influences that shape the behaviour of a system (Hayden 1998:94). As a means to model action processes, the SFM can be used to select the most important components, or 5 regulatory factors, through highlighting the delivery and receipt relationships. Depending on the number and importance of the most central node(s), one might speculate about the resilience of the network or the stability of a particular institutional arrangement as a whole, were one or more of the central nodes to be eliminated or diminish in importance.

Consistent with Uphoff and Buck (2006) and Parto (2005a, 2008) this research also employed a notion of institutions as formal and informal structures which collectively organize a community. As such, institutions have relative permanency and longevity (Hodgson 1988, Parto 2005a, Uphoff and Buck 2006) and are manifest as a continuous spectrum consisting of formal, tangible entities (e.g., banks, government agencies, courts) at one end and less formal, intangible phenomena (e.g., customs, norms, and beliefs) at the other. The full spectrum may be depicted as in Figure 1.

Figure 1. Characteristics and Manifestations of Institutions

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Source: Adapted from Parto (2008) In this conception, institutions are viewed as reflections of learning in the broadest societal sense (Voeten and Parto 2006, Parto 2005b, 2008). However, once established, institutions structure (constrain and facilitate) further learning in a continuous and interactive autocatalytic process (Parto et al. 2005). Institutions are thus structuring phenomena and manifest at different levels of inter-relation, scales of governance, and in different spheres of the political economy.4 Applying the levels-scales-spheres perspective to institutions yields a loose but necessary typology of institutions (Figure 1).5 In our analysis we use the typology in Figure 1 in conjunction with Hayden’s SFM to identify and map the formal and informal institutions as the components (and their elements) that collectively structure credit transactions in the four provinces of Balkh, Bamiyan, Herat, and Kabul. A full inventory is presented of the constitutive, regulative, and associative institutions based on reviews of secondary data and interviews with key informants. The information on the cognitive and behavioural institutions comes from the interviews recognizing, however, that more accurate data on these two latter institution types can only come from household surveys of representative household samples, a task which was beyond the scope of this research.

It is important to distinguish between each institution type and its catalyst(s). For example, the introduction of a new regulation on borrowing is not an institution but a catalyst. The 6 catalyst may, or may not, result in the emergence of an institution which plays a significant role in structuring transactions and has relative permanency. If the regulation on borrowing is not enforced or complied with widely, it is not, for all intents and purposes, “instituted”. In a similar vein, an association which comprises a group of organizations or individuals determined to protect and promote common interests may or may not emerge as an associative institution. If the association persists, actively lobbies on behalf of its members, and succeeds in changing the operating environment for its members, it can be said to have become an associative institution. Sustained lobbying by the association can result in the elimination of old or the formation new regulations (in the broadest sense) to benefit the members and thus the formation and persistence of the regulative institution.





The use of this typology in analysis elsewhere has illustrated that intervention through policy succeeds only if it resonates with the pre-existing behavioural and cognitive institutions within the area of focus for the policy. An important implication of this proposition is that governing to effect systemic change, as intended through the introduction of microfinance in rural Afghanistan, requires a continuum of measures to be pursued jointly through local arrangements and supported by territorially defined levels of government. In the case of microfinance, local arrangements have included the introduction of MFIs in villages while the government and the international donors have provided structural support including funds, expertise, and regulation. The focus of this research has been to assess the compatibility of introduced change with pre-existing conditions.

A total of 32 households were interviewed in the four provinces in addition to a number of “chit-chats” on the streets with random individuals. 33 focus group meetings were organized and 19 key informant interviews conducted with shopkeepers, local government officials, farmers, teachers, mullahs, eldermen, widows, and MFI staff.6 The MFIs active in the 4 provinces studied for this research are listed in Table 3.

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Using this data, as well as other literature, we look at the formal credit systems alongside existing local and traditional understandings of credit, assistance, repayment, and interest and notions of community/social responsibility. We examine formal and informal credit institutions that collectively structure microcredit transactions in rural Afghanistan. The spectrum of institutions examined include Government measures and organizations which organize or oversee microfinance, banks and other organizations that disburse microfinance, and the customs and norms that govern community behaviour in relation to credit from traditional sources as well as Islamic notions of money lending.

Figure 2. Traditional Rural Financial Landscape

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To varying degrees, these traditional transactions can be formal and agreed upon in strict business terms or they could be highly informal and arranged based on kinship and/or social relations.

The introduction of MFIs fits into several of the Afghan Government’s key priorities and commitments from the international donors. It is seen as a means for poverty reduction, fostering economic growth and productivity, and the formalization of legitimate economic activities and financial services. Microfinance programs are bound up with the Government’s commitment to gender mainstreaming through increasing the participation of women in economic life – many microfinance loans are targeted at women.

According to I-ANDS (2005:44-45):

The Afghan economy is dominated by the informal sector (as it is the case in many neighboring countries, such as India), running across all areas of production, but particularly the small holder economy…. Exchange of services and products between rural households is widespread, and women perform a major part of this work.

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Credit from traditional sources spans all of the categories in Table 4. Traditional loans may often take the form of in-kind transactions between households, placing them in the category of “in kind activities”, but credit linked with the opium economy and the salaam system is also a well known form of traditional advance on a crop. Klijn and Pain (2007) point out that it is partly the informality of transactions in the opium economy that has led to a condemnatory attitude toward the traditional financial sector as a whole. This attitude is based on a lack of transparency in the hawala transaction system as well as the use of this system as a means for money laundering, largely from illicit activities centered around the opium economy. Nevertheless, a condemnatory attitude toward traditional means of transactions runs the risk of overlooking the need to work through and change the preexisting institutional forms prevalent in rural economies and through which credit giving and borrowing have traditionally been conducted.

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6. ANALYSIS Traditional lending is by far the most common way of acquiring credit for rural Afghan borrowers. Many of these forms of credit are given in kind. The National Risk and Vulnerability Assessment (NRVA) 2005 which surveyed over 30,000 households found that traditional (informal) credit was an important source of income allowing households to cope with unforeseen circumstances or opportunities. Thirty-eight percent of all households interviewed reported having taken a loan from traditional sources in the year prior to the survey. Moreover, the assessment found that informal loans were more commonly taken on by rural (42 percent) than by urban (25 percent) households, concluding that “these figures are indicators of a strong social network in rural areas in comparison to urban areas” (NRVA 2005:40).

The survey also asked households to report the use to which their largest informal loan had been put. The largest portion of loans was used for food purchases, indicating the role of credit in consumption smoothing and the possible impact of food insecurity on demand for credit. The impact of food security and agricultural productivity on demand for credit was further suggested by the fact that of rural areas, households in the Paktika province had the largest number of loans (96 percent) used for purchasing food, whereas the Kunduz province, an area of agricultural surpluses, showed the lowest occurrence of loans (27 percent) used for food purchases. In the urban areas, the use of loans to purchase food was less prevalent, and more households used their loans for business purposes.

10 MISFA was set up in 2003 at the invitation of the Government of Afghanistan to pool diverse donor funding mechanisms and to convert funds into streamlined and flexible support to MFIs in Afghanistan.8 MISFA serves as the means for the Ministry of Rural Rehabilitation and Development (MRRD) to build up the lower end of the financial sector through programs to formalize at least a significant portion of microfinance, including microcredit, in rural Afghanistan. Specifically MISFA was set up to

- Coordinate donor funding so that the conflicting donor priorities endemic in postconflict situations do not end up duplicating effort and distorting markets,

- Help young microfinance institutions scale up rapidly, offering performance-based funding for operations and technical assistance, and

- Build systems for transparent reporting and instill a culture of accountability.

In addition, MISFA’s mandate is to provide technical support to MFIs and to monitor performance against the three main goals of scaling up as rapidly as possible to serve poor people throughout Afghanistan, especially women; to use public funding to invest in institutions (MFIs) that would become sustainable and able to grow further without requiring more subsidies; and to make a transition from international organizations with microfinance expertise to Afghan organizations with local expertise. MISFA receives its funds from the Canadian Government, the British Department for International Development (DFID), the Consultative Group to Assist the Poor (CGAP) of the World Bank, the Swedish International Development Cooperation Agency (Sida), USAID, and the Dutch Oxfam N(o)vib.

As of September 2007, MFIs were active in 23 provinces (106 Districts) and had active clients totaling 405,099. The number of women clients stood at 269,743 (70% of the total).

A total of 882,103 loans had been disbursed for a cumulative value of $317,226,364. The outstanding loans total $94,572,179, distributed as follows: Trade and Services ($56,876,378), Household consumption – food, medical, house repair, education, etc.

($2,629,229), Handicrafts and Manufacturing ($12,848,158), Agriculture ($7,846,699), Livestock ($12,887,654), and Other ($1,484,061).9 The performance of MFIs (and MISFA) has been evaluated as favourable by the World Bank, albeit inconclusively. A synthesis of performance by MFIs in different provinces based on a survey is expected from MISFA in late 2008. It has to be noted that performance surveys to date have focused on the financial sustainability of MISFA and its MFIs and not the livelihood impacts of MFI-originated loans in rural Afghanistan.



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