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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 rationale for the Government of Afghanistan and its international donors to promote microcredit is based on an assessment of the post-2001 period as having “a huge unmet demand” for microfinance. In December 2001, according to MISFA,...the picture looked bleak with a non-functioning financial sector, a total absence of commercial players willing to serve the poor, and lack of delivery capacity among existing Microfinance Institutions (MFIs). [F]oreign donors were asked to step in. The issue facing everyone – foreign donors and Afghans alike - was how to meet that demand and energize the development of an entire microfinance sector that will serve the Afghan people beyond tomorrow.10 11 Previous research (Maimbo 2003, Hanifi 2004, Lyby 2006) suggests that the situation as described in the above quote from MISFA was not, and has not been, the case since 2001.

Informal commercial financial services and credit have been operating in Afghanistan for hundreds of years. A study of cash, credit, debt and state-society relations in nineteenth century Afghanistan found that a number of social groups and financial institutions and instruments were associated with cash, credit and debt (Hanifi 2004). One of the informal financial services that has attracted most attention is the hawala system. The same historical study found that “In terms of credit, the key fiscal instruments were bills of exchange known in Afghanistan as hawalas …that circulated widely within and moved regularly through the country” (Hanifi 2004: 200). A World Bank (Maimbo 2003: 8-9) study

of hawaladars in Kabul in 2003 notes that:

Local money exchange dealers can be found in almost every community in Afghanistan.

Traditionally, these dealers provide the community with numerous financial services in addition to funds transfers, for which they have attracted much attention. They also provide deposit-taking facilities for those who want to save, microfinance for informal entrepreneurs, trade and finance for wholesalers and retailers; and currency exchange services for international business and personal transactions.

There has been an assumption that credit from traditional sources is more expensive than credit from MFIs. Derogatory phrases like “money lender” and “loan shark” have been used to describe some traditional lenders. But these terms do not explain the full range of credit services available to Afghans from traditional sources or the costs involved in borrowing on traditional terms. Reportedly, the interest rates charged for formalized microcredit loans are much lower compared to the rates offered by money-lenders. In Bangladesh, where Grameen Bank charges between 15 to 35 percent on the average loan, one author described these loans as “the only alternative for the poor to local moneylenders who regularly charge 10 times that amount” (Synovitz, RFERL, March 30 2007). However, there are no estimates provided by MISFA of the average cost of MISFA loans relative to the average cost of traditional credit in the regions where MISFA partners operate. This is a significant omission since some forms of traditional credit carry no interest or time limits on repayment (see Table 1).

It is often the case that hawaladars, and other sources of credit for business and trade purposes charge effectively more interest than MFIs. But, there are also indications that even in the case of hawaladars, this may not always be the case. Maimbo (2003) notes that the degree of competition in the market may have been bringing down charges for all hawala services, including loans. He also cites one hawaladar serving mostly large organisations claiming not to charge interest on loans at all, owing to “the Islamic

prohibition against charging or receiving interest on loans and deposits” (Maimbo, 2003:

p11). In any case, there is little evidence on the cost of lending in the informal commercial sector in Afghanistan. There is, however, evidence presented by Klijn and Pain (2007) on informal credit suggesting that rural households have access to loans from family, friends and community trust networks on better terms than microcredit loans or, in the case of qarz-e-hasana, with no charges at all.

Although microfinance continues to be discussed as a tool to fight poverty through acting as a mechanism to include the rural poor in mainstream economic activity, it is generally not targeted at the poorest groups. A World Bank study of microfinance and gender roles in 12 Afghanistan in 2006 noted that loans were not reaching the “ultra poor”. The report goes on to explain that fighting “abject poverty” is not the aim of microfinance worldwide, noting that the Consultative Group for Assistance to the Poor (CGAP) changed the last word in its name from “Poorest” to “Poor” in recognition of this fact (Lyby, 2006: p 21). This is confirmed by Klijn and Pain (2007:51), who point out that whereas informal alms are accessible to the very poor, “both informal credit systems and formal micro credit will exclude the effectively destitute.” Thus, while “the village moral economy clearly provides assistance to such people; micro credit does not address this group, nor does it aim to.” Primary data used in this research suggest that even the middle and higher income families targeted by microcredit are not necessarily drawing the intended benefits from these loans, with noted exceptions in Herat (see Klijn 2006). Knowledge of MFIs’ borrowing rules and eligibility criteria appears to be a factor in how effectively a borrower uses the money and assesses the ability to repay. A general lack of understanding of the rules by borrowers was noted during the interviews. The Bamiyan case indicates that a significant portion of the borrowers and potential borrowers are unclear about the rules on borrowing. In part, this is due to variation in the form of guarantee required to secure MFI loans as each MFI operating in Bamiyan has its own set of rules based on loan size.

MFIs in Afghanistan, as in other countries worldwide, often concentrate on loans to women as a means to increase women’s participation in economic activity beyond the household


In the implementation of micro-credit schemes, the Government will continue to pay particular attention to women, aiming to expand the number of female beneficiaries relative to men and encourage mechanisms for group savings. (I-ANDS 2005:94) Some 70 percent of loans distributed in Afghanistan so far have been given to women.

Women’s loans are distributed in groups of women with the aim to enhance women’s social mobility and participation in the economy. However, as we report later in this paper and as pointed out in other research, such aggregated statistics used outside their social and family contexts can exaggerate the positive impact of microcredit on women. Lyby (2006:1)


…Although most loans are given to women, the limitations faced by women with regard to gender roles in most regions ensures that the men continue to be actively involved when it comes to buying or selling goods in the market, even if the credit is received in the name of the woman.

This has led to concerns as to whether the women merely serve as fronts or conduits of resources that effectively go to the men.

Lyby (2006) nuances this observation by suggesting that there may be, nevertheless, indirect benefits accruing to women from microfinance in terms of joining other women in borrowers’ groups and training. Benefits to women may also be a by-product of a family’s increased economic productive capacity facilitated through microcredit. Lyby (2006:36) also reports that while men more commonly made the decision on how to spend the loans distributed to the women in their families, the number of women making this decision was significant. According to this report, a high number of women reported that the decision on how to spend the loan was discussed in the family. Women interviewed by Lyby (2006)

–  –  –

Part of the rationale for introducing microcredit is that loan sizes can be larger and thus more likely to have an impact on economic productivity. A large number of borrowers in the Kabul, Herat and Balkh provinces, however, complained that microcredit loans were too small to invest in significant productive assets, especially given the frequency of repayments. In Bamiyan it was reported that some MFIs offer larger loans with a longer grace period before repayment. Lyby (2006:35) also reports that: ”[M]any men and women said the loans were too small to really make a difference, and additional money was frequently needed from other sources in order to start a project”. Some interviewees reported that small-sized loans had a corrupting effect on powerful individuals who had become loan group leaders. Some of these leaders reportedly borrow from MFIs on behalf of the group but hoard the loan for their own personal use. These findings may indicate a failure of MFIs to effectively identify and respond to the needs of the different income groups they are intended to serve.

More generally, MFIs have not displayed significant changes to their programs based on the feedback they have received from their clients or the limited research on microfinance in Afghanistan. There is incongruence between client needs and program structures, evident in client behaviour of bypassing program rules by borrowing through more than one borrowing book, as well as the seemingly high percentage of non-returnee clients, mostly due to the non-fulfillment of initial expectations from taking a loan or disqualification to borrow due to inability to repay previous MFI loans. Also, in the Bamiyan case it was reported that a number of borrowers get around borrowing rules by, for example, forming groups so that one individual secures access to a large loan. This illustrates the continued importance of social networking arrangements in credit transactions.

Research in the four provinces points to the need for a client-led approach to service delivery in credit provision. The only example that comes close to a client-led approach is the MFI in Bamiyan which developed a lending system that follows the natural cash flow of the community, based on economically active summer and non-active winter months.

Another example of systemic planning from the Bamiyan case is the MFI that offers larger loans and enjoys greater client satisfaction due to its transparent program characteristics. It has to be noted, however, that the generally higher level of satisfaction with MFIs operating in Bamiyan is likely accentuated by a less severe environment of risk (see Section 6, below).

The key observation in the Bamiyan and other cases is that MFIs in general have not yet taken steps to monitor and evaluate the impact of their products, which must precede steps taken towards an adaptation of programs to local context. Indeed, a focus note published by CGAP11 emphasizes the importance social performance indicators to measure microfinance success. The conceptualization of the idea is still in its infancy and actual changes in the day to day operation of MFIs may be a while in coming.

One of the main claims in promoting MFIs in rural economies is to lessen the negative livelihood impact of high interest (monetary or in kind) charged on credit from traditional 14 sources. While this is certainly true in some cases, and compounded by ecological factors such as droughts, a challenge faced by MFIs is the public perception that the sudh (interest) payable on loans is viewed as haram (sinful) in the Koran, even if the sudh is lower compared to the interest paid on loans from traditional sources. A meeting with a Mullah in Bamiyan confirmed the sinful perception of MFI loans, with the Mullah declaring that any loan over a fixed period with an interest charge was sudh and therefore disallowed by the Koran. Similar instances were reported in Herat. During the field visit for this research in Herat an MFI was said to have had to withdraw entirely from one village after the local Mullah posted the following message around the village condemning sudh charged on loans

dispersed by MFIs as haram:

We, the ulema and elders, declare that MFI loans are haram because of sudh. We request that people refrain from taking out MFI loans. Those who already have loans are asked not to take out further loans. (Sign posted in the Pashtun Zargun District, a similar sign was sighted in the Guzara District) This announcement was said to have been made after borrowers had reported difficulty in making their MFI loan installments, some having resorted to selling assets to make payments.

There are a variety of possible interpretations of what constitutes sudh according to Koranic law, and therefore what kind of credit is forbidden, and what kinds permitted. This often

depends on the interpretation by individual Mullahs, rather than a locally specific feature:

some Mullahs view interest on loans as haram while others are more tolerant of it. There is, at the same time, evidence to suggest that some MFIs have made significant attempts to come to terms with the negative public perception of MFI-originated loans. In the face of opposition from Mullahs, for example, some MFIs operating in Bamiyan and Balkh have obtained fatwas from Islamic scholars declaring their operations as being consistent with Islamic law. Also, in recognition of religious prohibitions of charging interest, some MFIs provide murhaba style loans whereby the MFI buys products for its clients but adds a prearranged mark up based on the accumulated interest that would have been accrued for the duration of the loan. In the case of other MFIs, however, many non-borrowing respondents identified the issue of sudh as the determinant for their decision not to take interest bearing loans.

MFIs frequently rely on traditional mechanisms to launch a new operation in new villages.

Many loan officers reported organizing introductory meetings in local mosques to spread awareness of the MFI being introduced in their communities. Local authority figures such as the Maliks and village elders have also been noted to facilitate the establishment of MFIs.

These processes can sometimes affect the flow of information to women, who are not involved in these initial meetings but who are deemed as a main group of target clients by the MFIs.


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