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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 Availability of Funds from MFIs is a regulative institution (Figure 3) in the introduced sector since it determines the immediate boundaries of action by MFIs.

POLICY Actions by MFIs are structured through Policy as determined by MISFA. The Rules and client Selection Criteria (see below) for the MFIs are a direct result of the Policy of MISFA for the operational parameters of MFIs. Policy, therefore, is a regulative institution (Figure 3) within the introduced sector.


The borrowing Rules and Selection Criteria used by MFIs regulate credit transactions in the introduced credit sector by setting the immediate boundaries on who receives the loans and what punitive measures may be taken against non-payment. As such, the Rules and the Selection Criteria have a direct, facilitative impact on the Dynamics of a Loan Group (see below).

Rules and Selection Criteria also affect Attitudes to Credit strongly. Traditional attitudes to credit are based on negotiable and flexible repayment arrangements while finance from MFIs tends to be more strict. The observed behaviour of borrowing from traditional sources to pay back MFI-originated loans is arguably an outcome of this relationship between Rules and Selection Criteria and the Attitude to Credit. Also, the interplay between the flexible traditional attitude to credit and the restrictive mode of behaviour imposed on the borrowers by MFIs can result in a conflictive relationship.



The loan group is one of the principal forms through which MFI-originated loans are dispersed to individual borrowers. The Loan Group Dynamics represent regulative as well as associative institutions in transactions involving MFIs. An individual’s relationship with the loan group and the ability to pay determine the individual’s eligibility for future loans. Loan groups simultaneously serve as a means for individuals to secure MFI loans and a mechanism to exert peer pressure on borrowers (to repay) and thus shaping repayment behavioural patterns.

Loan Group Dynamics have a moderate effect on deeply ingrained social norms and values manifest as standardized habits of groups and individuals in social situations. The presence of a loan group can result in a realignment of social values associated with credit repayment and also have moderate effects on social and kinship ties. The presence of a loan group whose options to access credit are determined partly by individual action, also affects the attitude that the individual has towards credit repayment. Group Loan Dynamics can come into conflict with traditional social norms and values and attitudes to credit repayment.

However, their longer term impact can be facilitative if group and individual-in-group attitudes toward credit are changed without undermining the traditional norms embedded in social, kinship and familial ties.

FAVORITISM Loan group officers can exercise favoritism toward certain borrowers. Being (largely) based on familial, kinship and social ties, Favoritism is an associative institution (Figure 3) in traditional and in introduced forms of borrowing. Evidence from interviews with borrowers in the four provinces suggests that the Rules and Selection Criteria used by MFIs can be undermined by favoritism. A weak relationship is assumed between Favoritism and MFI Rules and Selection Criteria since rules and selection criteria are not always clear to the borrowers.


Traditionally, mullahs are interpreters of Islamic notions concerning behaviour in the community, including individual economic behaviour. The perception of sudh as being sinful is a cognitive institution (Figure 3) or a mental model promoted by mullahs and expected to be complied with by believers. Wealthier mullahs can also act as money lenders based on terms that could be benevolent or draconic, depending on the mullah and his scruples.

Since mullahs usually act as watchdogs in enforcing social norms and values, their influence on perceptions within the community about introduced forms of credit is likely to be significant. Some MFIs have responded to the instrumental role of mullahs by modifying their interest system based on consultation with or buy-in from the mullahs in some cases.

A moderate effect from Religious Sanctions on borrowing behaviour is assumed because the power of mullahs concerning sudh is not conclusive to attitude change, as has been reported in this research and other literature. Depending on the role assumed by the mullah in a given context, the relationship between Religious Sanctions and the Rules and Selection Criteria of MFIs can be conflictive or facilitative.



Social norms and values are behavioural institutions (Figure 3) manifest as deeply ingrained, standardized patterns of behaviour. To a large extent, but not exclusively, Attitudes to Credit are manifest as social norms and values which in turn structure familial, kinship and social relations as well as forming a key component part of the Moral Eonomy (see below).


According to Klijn and Pain (2007), “environment of risk” is the institutional expression of inequality, inequitable class relations, exploitation, social exclusion and unaccountable power within rural Afghan society. These features cause the poor to seek protection through relations of patronage with the powerful actors and reinforce the dependency of the poor on the powerful. This relationship has a strong effect in defining traditional credit arrangements. The Environment of Risk is a constitutive institution (Figure 3) since it sets the ultimate boundaries of action by individuals entering traditional credit relations.

The Environment of Risk has a weak effect on the Availability of Funds from Donors to MISFA and a strong effect on Attitudes to Credit. An element in consideration to provide funds is the perceived scale of success in terms of improved socio-economic and political security. Higher risk areas are less likely to receive microfinance, making the relationship between Environment of Risk and Availability of Funds conflictive.


The opium economy has proven to be a resilient agricultural activity and by all accounts has been a constitutive institution (Figure 3) in the Afghan rural landscape for a number of generations. The salaam system of advance payment is a widespread credit arrangement in the opium economy. The practice is far less evident in rural economic activity. A weak effect is assumed of the Opium Economy on Traditional Credit Arrangements.

Availability of Funds from donors is highly dependent on the state of the opium economy in an area. A high level of opium production generally implies low availability of funds for the area. The Opium Economy, due to the security risk element attached with opium cultivation, acts as a facilitator to the Environment of Risk in rural Afghanistan. This effect is assumed as moderate because the Environment of Risk is a pervasive aspect of rural Afghanistan, regardless of the role of the opium economy.


Traditional Credit Arrangements, such as Qarz-e-hasana and Qarz-e-Khudad (Figure 1), usually arranged as advance loan on crops, play a regulative role (Figure 3) in the flow of credit from lender to borrower. These arrangements have a strong influence on Familial/ Kinship/Social Ties (see below) because they facilitate the creation and reinforcement of existing ties within the community. The form of credit arrangement often corresponds to the structure of social power relations.

Traditional Credit Arrangements have a moderate influence on Attitudes to Credit. Klijn and Pain (2007) note a confidence among borrowers about their ability to access credit and repay loans, attributing this to the flexibility and negotiability of Traditional Credit Arrangements. The structures of these arrangements themselves contribute to the shaping of Attitudes to Credit.



This associative institution (Figure 3) facilitates the major interaction among the lenders and borrowers within the traditional system of credit. Familial, social and kinship ties have a strong and direct effect on Favoritism. The stronger the ties, the higher the possibility of rule-bending by the lenders and the expectation of preferential treatment by the borrowers.

Moreover, traditional credit arrangements are negotiated on the basis of these ties. The Moral Economy (described below) also operates on the basis of familial, kinship and social ties.


The set of expectations and choices concerning credit relations, with the aspect of morality that legitimizes the parameters of these relations, form the basis of the Moral Economy as a cognitive institution (Figure 3) in informal credit practices. Traditional Credit Arrangements are affected strongly by the Moral Economy. Klijn and Pain (2007) refer to leniency in many cases in repayment arrangements as a product of the Moral Economy. The Moral Economy is affected by the Attitudes to Credit and reinforces Traditional Credit Arrangements.


Attitudes to Credit (Klijn and Pain 2007), refers to high confidence among the potential borrowers in finding loans and in repaying them. This behavioral institution (Figure 3) is a key feature in Traditional Credit Arrangements, the Moral Economy and the Familial/Kinship/ Social Ties. Since rural individuals have been reported to have a high confidence in accessing as well as repaying loans, they enter into traditional credit arrangements more readily. They also utilize their familial and kinship ties frequently to access credit, thus reinforcing these ties.


Islamic Notions of Credit are both cognitive and constitutive institutions (Figure 3) which at once guide actions of individuals and set the ultimate boundaries for socio-economic activity. Islamic Notions of Credit have a weak impact on the Rules and Selection Criteria formulated by MFIs concerning microfinance. MFIs have changed their rules to better accommodate Islamic notions, but this has been the direct result of the actions of Mullahs, the purveyors of the Islamic notions of credit.


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