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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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- Ultimately, there needs to be recognition that, alongside a conceptual shift away from the negative perception of the traditional sector as something that should be replaced by formalized structures, microfinance alone will not achieve the poverty reduction and economic growth aims that it is intended to help deliver. Microfinance will need to be regarded as one component of the strategy to improve local services, employment creation, infrastructure, and market function.


- The pervasiveness of microcredit (and finance) from traditional sources should be taken into account when assessing the demand for MFI-originated loans so as to avoid duplication of services that are already available locally, and sometimes equitably, and to ensure that microcredit targets the households where it can make a difference.

- The engagement of mullahs and other influential community actors needs to be sought and sustained to avoid resistance to and backlashes against MFIs and their services.

- To take root and become institutionalized, MFIs have to successfully compete with the traditional terms of lending and borrowing. Interest rates or service charges have to remain lower than those in the traditional sector.

- The size of MFI loans and repayment arrangements (commencement of repayment of installments and the lifecycle of the loan) need to be re-thought so as to minimize undue pressure on the borrowers and discourage decapitalization through selling assets or additional borrowing to meet strict repayment deadlines.

- MFIs should fully assess and monitor levels of existing indebtedness in communities where they plan to operate so as to minimize contributing to cycles of indebtedness prevalent in many of the poorer rural areas.

- MFIs should standardize their methods of recording and responding to non-payment, involving the creation of mechanisms for assessing reasons for non-payment and for protecting households who may be going through decapitalization as a result of repayment pressures.

- MFIs should adopt a standardized system of evaluating the livelihoods impact of their loans so that a general picture can be built of the types of loans and repayment schedules most appropriate in different Afghan contexts.

–  –  –

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27 Senlis Council. 2007 Poppy for Medicine. Available at: http://www.senliscouncil.net/ documents/poppy_medicine_technical_dossier, accessed December 5, 2008.

Synovitz, R. 2007 Could Islamic Banks Do More To Help The Poor? Available at: http:// www.rferl.org/featuresarticle/2007/03/73f320d2-d89a-477c 8130-04a3e29c45bb.html, accessed March 30, 2007 Uphoff, N. and Buck. L. 2006 Strengthening Rural Local Institution Capabilities for Sustainable Livelihoods and Equitable Development. Paper for Social Development Department, World Bank. Washington D.C.: The World Bank.

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34582-AF), Volume I: Main Report. Washington D.C.: The World Bank

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1 From: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:

21590188~pagePK:64257043~piPK:437376~theSitePK:4607,00.html, accessed December 31, 2007.

2 CGAP defines Microfinance as “the supply of loans, savings, and other basic financial services to the poor … to run their businesses, build assets, stabilize consumption, and shield themselves against risks. Financial services needed by the poor include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services.” For more information see: http://cgap.org/portal/site/CGAP/ menuitem.b0c88fe7e81ddb5067808010591010a0 3 See Appendix A for a list and descriptions of MFIs under the MISFA umbrella.

4 For an elaborate discussion of levels, scales, and systems see Parto (2005a). See, also, Philo and Parr (2000) for a discussion of scale and institutions.

5 This typology and the subsequent discussion are based on Parto (2005b).

6 We acknowledge access to data collected by teams of researchers from Afghanistan Research and Evaluation Unit (AREU) for an ongoing project on microfinance. We are also grateful for valuable comments from Erna Andersen, Floortje Klijn, Asta Olesen, and Amit Brar. All errors and omissions remain our responsibility.

7 See, in particular, Klijn and Pain (2007). This point was also brought up by interviewees in a number of cases during fieldwork in the Kabul, Balkh, Bamyian, and Herat provinces.

8 This section is based on the official website for MISFA, available at: http:// www.misfa.org.af 9 For more information see: http://www.misfa.org.af 10 From MISFA’s website, available at: http://www.misfa.org.af/index.php?page_id=4 accessed September 6, 2007.

11 The Focus Note is titled “Beyond Good Intentions: Measuring the Social Performance of Micro Finance Insitutions” and can be accessed in the world wide web at http:// www.cgap.org/portal/binary/ com.epicentric.contentmanagement.servlet.ContentDeliveryServlet/Documents/ FocusNote_41.pdf.

12 It is worth noting that in Figure 5, “Opium Economy” is off to one side as not being a key institution in microfinance. This is because the transaction sizes are far larger in opium dealings than transactions in microfinance. Figure 5 suggests that, at least initially, Opium Economy is a marginal though potentially important institution in lending and borrowing.

13 See, for example, Lister (2005, 2006), The World Bank (2005a, 2005b), and Asia Foundation (2007).

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AFSG: The Ariana Financial Services Group (AFSG) was established by Mercycorps in April

2003. AFSG uses the group lending methodology to provide credit to predominantly female clients in Kabul City who are active in a wide range of small businesses. The organization has also started an individual loan product targeted at repeat cycle clients (both males and females).

AMFI: CHF International's Afghanistan Microfinance Initiative (AMFI) offers credit and working capital to low-income households in Bamiyan and Ghazni provinces. The program uses solidarity group method to offer credit to business owners.

ARMP: The Afghanistan Rural Microcredit program (ARMP) was set up in 2003 by the Aga Khan Foundation (AKF). The organization offers a variety of loan services to individuals to improve their business activities or remedy cash flow problems.

BRAC: Set up by BRAC (Bangladesh) in 2003, it is the leading MFI in Afghanistan. BRAC offers individual loans to business owners in both urban and rural areas of the country.

CFA: Child Fund Afghanistan (CFA) was started by the international NGO, Christian Children’s Fund (CCF) and currently (2007) operates in 3 provinces. CFA follows a solidarity group lending methodology and has already financial sustainability.

FINCA: FINCA Afghanistan was set up in 2004 by the International NGO, FINCA International. The organization has pioneered the development of shari’a law compliant lending (murabaha) in Afghanistan. FINCA operates in city and surrounding areas of Kabul, Jalalabad, Herat and Mazar-e-Sharif.

FMFB-A: The First MicroFinance Bank – Afghanistan was established in 2003 to lend in order to “reduce poverty, diminish the vulnerability of poor populations and alleviate economic and social exclusion.” It has operations in 7 provinces.

Hope For Life: Affiliated with HOPE International, is a global, faith-based, non-profit organization focused on poverty alleviation through microenterprise development.

MADRAC: Established in June 2005 by the Danish NGO, DACAAR, with the main goal of providing microfinance services to low-income households in rural areas of Afghanistan.

MADRAC uses a solidarity group lending method for its operation with group sizes of 10-20 members. MADRAC works in the Herat, Ghazni and Laghman provinces.

MOFAD: The Micro Finance Agency for Development (MoFAD) is a savings-based microfinance program established in Kabul by CARE Afghanistan. MoFAD uses CARE's wellknown savings and credit group (SCG) methodology to set up groups of women who rotate their savings and borrow from the MFI.

30 OXUS: Part of the OXUS Development Network (ODN), a global network of MFIs affiliated to ACTED, the French international development NGO. OXUS Afghanistan is currently providing loans to solidarity groups of women and men for income-generating activities. The organization works in Kabul, Parwan, Balkh and Faryab provinces.

PARWAZ: The first woman-led Microfinance institution for Afghans by Afghans in Afghanistan, established 2002, to provide mircocredit to male and female households in Kabul and Ghazni and the surrounding areas.

SUNDUQ: Setup by MADERA, a French NGO, in 2005. The organisation uses the village banking methodology to provide credit to rural households. MFI operations are spread across the Eastern part of the country.

WWI: Women for Women International (WWI) started a microfinance program in 2004 in Afghanistan to offer financial services to the poor and socially excluded women in rural and urban areas.

WOCCU: The apex organization of the international credit union system. Only ownermembers have access to the savings and loan services provided by each credit union.

WOCCU has established two credit unions in Balkh and Jowzjan.

–  –  –


Legislation refers to laws that govern the transfer of money from the Donors to MISFA.

Legislation has a direct, strong effect on the policy of the MFIs. The laws regarding the distribution, use, availability and intended effect of funds form the basis for the policies enacted by MISFA for the operation of MFIs. Legislation also has a moderate effect on the rules and selection criteria of MFIs. The laws determine the policies of MISFA, which in turn forms the basis for the rules, selection criteria, punitive measures and other operational parameters of MFIs. As such, legislation is a constitutive institution (according to the typology in Figure 3) in the introduced system because it sets the ultimate boundaries of action for MISFA and, consequently, for MFIs and their clients.


Availability of Funds to MISFA from the Donors for the operation of microfinance programs has a moderate effect on the opium economy if MFI loans replace finance available to borrowers from participation in the opium economy. However, Klijn and Pain (2007) demonstrate that traditional credit arrangements are weakly affected by the availability of funds from the formal sector. Moreover, there is some evidence of borrowers borrowing from traditional sources to pay off their formal loans. From a livelihoods perspective, this points to a conflictive, detrimental relationship between traditional forms of borrowing and finance arrangements with MFIs.

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