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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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Definitions of formality and informality, such as those described in Table 4, do not fully capture the full range of institutions through which the giving and receiving of credit is governed, since these transactions are structured by individual as well as collective mental models and rules. Many of the institutions with which MFIs interact are not informal at all, such as the functions of Islamic leaders and maliks, or the hawaladars, for example, but still involve the confrontation of new formalized interventions with more deeply rooted and traditional understandings of the way things are done.

Figure 3 offers a more nuanced typology of the relevant institutions affecting and being affected by credit transactions. This perspective on institutions is used to identify (Figure 4) and map (Figure 5) a fuller range of institutions that collectively govern credit transactions as follows.

Figure 3. Typology of Credit Institutions

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Associative: Mechanisms facilitating prescribed or Community and familial trust networks that privileged interaction among different private and public facilitate interactions and transactions interests – manifest in activities of groups of individuals

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Source: Adapted from Parto (2008) 6.1.1 INSTITUTIONS OF MICROCREDIT Two main sources of credit were identified: Introduced Microcredit System through MFIs and traditional forms of lending, grouped together under Traditional Microcredit System (Figure 4). Secondary data and field research data gathered through interviews and focus group meetings were used to identify the plethora of institutions that collectively govern microcredit transactions.

16Figure 4. Institutions Governing Microcredit Transactions

MFIs-originated credit (on the left) and credit from traditional sources (on the right) are characterized according to the typology presented in Figures 1 and 3. Using Hayden’s SFM method the role(s) of each institution in relation to other institutions is mapped (Figure 5) based on three simple criteria of Strong (3), Moderate (2) or Weak (1) relation (See Table B1, Appendix B).

The main purpose of the map in Figure 5 is to highlight the institutions most instrumental in credit transactions from introduced (MFIs) and traditional sources. 15 institutions were identified and used to generate this map (Appendix C). The blank cells in Table B1 (Appendix B) indicate no relation between the listed institutions. The descriptions of the institutions used to generate Figure 5 and the assumptions underlying the numerical values given to a given relationship with other institutions are explained in Appendix C.

Based on the mapping of institutions in Figure 4 we can make the following observations:

- The behavioural institution, “Attitudes to Credit” (Figure 5) is manifest as a set of recognizable social habits based on deeply ingrained values. Attitutdes to Credit occupies a central place in the institutional landscape of credit transactions. This suggests taking root in rural communities by MFIs depends very much on how they come to terms with, or overcome, the instrumental role played by Attitudes to Credit in structuring the relationship between lenders and borrowers. Deeply embedded social norms and values are at best very difficult to change. Change may be possible through introduction of systemic incentives over a long period of time, possible generations.

17Figure 5. Institutions of Microcredit

- The cognitive institutions, “Religious Sanctions” and “Moral Economy” prescribe in ideal terms “doing the right thing” in lending and borrowing based on long-held traditions. Change in or replacement of these institutions is possible through the introduction (with incentives) of new ways of doing things. Educational and public awareness programs and campaigns can be used to promote new mental models on how things ought to be and what new ways of doing things could be aspired to.

Establishing new mental models takes a long time and can conceivably happen within one generation. It may take generations for a new mental model to become a shared mental model and ultimately a behavioural institution.

- The associative institutions, “Favouritism”, “Familial/Kinship/Social Ties”, and “Loan Group Dynamics” are products of instrumentalism by the actors involved to facilitate prescribed or privileged interactions and pursue common interests.

Because these associations are interest-based and instrumental, it is possible to introduce incentives and disincentives to constrain or enable the actors involved.

Change can be effected relatively easily to discourage favouritsim and redefine loan group dynamics. Changes in familial/kinship/social ties are more difficult to establish.

- The regulative institutions, “Rules and Selection Criteria”, “Policy”, and “Availability of Funds” are prescriptions and proscriptions setting the immediate boundaries in societal relations and are enforced through public sanctions. In microcredit transactions, these institutions are all newly introduced. Changes in these institutions are relatively easy and can happen almost immediately. The regulative

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- The constitutive institutions, “MFIs” and “Legislation” are prescriptions and proscriptions setting the ultimate bounds of societal relations in microcredit. They are promoted and enforced through political structures and measures, ecology, geography, and place-specific mental models. Change in any of these institutions is relatively easy. In contrast, “Opium Economy”, “Islamic Notions of Credit”, and “Environment of Risk” are generations-old fundamental structuring phenomena, established by ecology, religion, and conflict. Change in these latter constitutive institutions is highly dependent on changed material and physical conditions and likely to take generations.

Changing the properties of the network mapped out in Figure 5 requires change in the main nodes such as “Attitudes to Credit”, “Opium Economy”, “Islamic Notions of Credit”, and “Environment of Risk”. But, these institutions are arguably the hardest to change, mainly because change would require a long time, a lot of resources, and long-term commitment by those wishing to effect change, i.e., the Government and its international donors. The introduction of a modern banking sector in opposition to the traditional arrangements can violate traditional norms and values, causing tensions with powerful traditional actors such as Mullahs or opium smugglers. To overcome these tensions, innovative ways of engaging powerful traditional actors need to be devised based on an appreciation of and respect for context-specific values, norms, and local conditions. This is particularly the case with illegal poppy growing as an established and ecologically sustainable economic institution. Despite the strong international stance against poppy growing in Afghanistan, the elimination of the opium economy may simply not be an option, at least in the short term.12 Some have suggested at least part-legitimization of poppy growing as a means to control it and a source of income for reconstruction efforts (Senlis Council 2007).

Understanding institutions of microcredit as outlined in this section also suggests that access to finance by rural Afghans is not “the solution” to rural poverty. Microfinance needs to be viewed as one of many factors including access to basic services such as health and education or adequate infrastructure, necessary to create an enabling environment for the rural communities to help themselves. The main policy lesson here is to appreciate institutional complexity and have low expectations in setting policy objectives, while persisting over the long term and work with and through traditional institutions that govern credit lending and borrowing.


There are some variations among the organizational entities (MFIs) involved in microfinance transactions in the four provinces. At a formal level the legislation and the rules that MFIs operate under are standardized and prescribed by MISFA. In practice, however, how the rules are enforced by individual MFIs and how the borrowers respond to these rules vary and depend on the MFI, MFI personnel, and the operating environment.

19 The following map (Figure 6) displays the relationship between the organizational entities dealing with microfinace in the four provinces. One key difference among the provinces is the make-up of the MFIs active in each province (see Table 3, above).

Figure 6. Organizations of Microcredit The map in Figure 6 ilustrates the linkages between MFIs and other local and extra local organizations and individual actors.

The thickness of the linkages is based on four parameters: existence of relations (0 or 1), information exchange (0 or 1), influence (0 or 1), and resources (0 or 1) among the organizations that have a bearing on microcredit transactions (see Table B2, Appendix B). What the map cannot show is the net impact of influence and information. To illustrate, MFIs routinely make contact with the local shuras, mullahs, district offices, and so forth before starting operation in a new location. There is a connection, a flow of information, and perhaps some influence from a given MFI toward other organizations and actors as far as making a convincing case to start operations. But, as was the case in Herat, if a mullah announces taking MFI loans is against Islamic values, the mullah’s influence on the affected MFI cannot be captured by this map. If there is a clash of influences from the mullah and the MFI, it is impossible to determine who benefits from the net impact.

That said, Figure 6 adequately captures the lack of co-ordination, or indeed any connection between different organizational entities, e.g., different government ministries, that could potentially and positively affect service delivery in the microfinance sector. The Ministry of 20 Agriculture, Animal Husbandry and Food and the Ministry of Commerce and Industries are the two most prominent ministries that should be important government organizations in the operation of MFIs. Since agriculture is the mainstay of the majority of the population that access formal credit, some coordination between these ministries would be desirable.

Similarly, the Ministry of Commerce and Industries, and organizations operating under it for the promotion of business activities, such as the Afghan International Chamber of Commerce (AICC), among others, do not have any form of organizational coordination with MISFA, or any of the individual MFIs operating in the same area. Despite having offices in all of the four provinces studied, the AICC did not appear to have any contact with the MFIs operating in the area.

At the time of writing the governance of MFIs is solely under the Ministry of Rural Rehabilitation and Development (MRRD). The rules and regulations that govern MFIs are a nebulous mix of laws that apply to NGOs as well as commercial enterprises. Currently, the monitoring and evaluation of different MFIs is done via independent monitors and consultants. As commercial enterprises, the governance of MFIs should adequately fall under the Ministry of Commerce and Industries. Da Afghanistan Bank, the central bank of the state and a key implementing partner of the Ministry of Commerce and Industries, is said to be poised to take over the governance of MFIs. However, these steps had not materialized in 2007 when the research for this paper was underway. MISFA remains the premier governing body under MRRD for the operation of microfinance in Afghanistan.

The lack of coordination among line ministries is not limited to microfinance. Numerous studies on post-2001 Afghanistan have underlined a general lack of coordination among line ministries as a major impediment to reconstruction efforts.13 The existence of MISFA as an apex organization and as one that has continual interactions with the ministries and the international donors can and should be used as a platform to effect more cohesion among the ministries. This would require instituting formalized lines of reporting and accountability between MISFA and the ministries.

At a lower level of analysis, the activities of individual MFIs are also largely uncoordinated.

The MFIs operating in the different provinces did not appear to be related to each other in any way. Numerous borrowers claimed that while being approved for a loan, they were asked if they had taken a loan from any other MFI, but were unaware of any follow-up or corroboration of their claims. Many households interviewed in field visits stated that they were able to access loans from more than one MFI operating in their area. This leads to the conclusion that MFIs not only enter a market populated by traditional credit products as just another provider, but are also in competition with one another. This lack of coordination among MFIs is by design, however, and a product of MISFA’s desire to promote open competition among MFIs so as to maximize choice in the range of credit products available to potential clients. The resultant duplication of services, however, does not necessarily result in better service delivery or an adaptive business model that takes clients’ needs into account. Loans from one or more MFIs may be the last resort for a constrained borrower unable to borrow from other sources. Arguments for increasing consumer choice as the way forward must take into account the factors that constrain choice making for the more desperate borrowers.


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