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Microfinance in Afghanistan

Afghanistan Rural Microcredit Programme
Loans have allowed some farmers to repurchase land sold during civil strife to poppy farming landlords and warlords, replant the fields with wheat and potatoes and acquire livestock.In Afghanistan, which remains one of the most challenging countries, AKAM oversees two separate but complementary financial institutions that are making genuine contributions to improving the economic environment. The First MicroFinanceBank Afghanistan (FMFB-A) provides financial services to micro, small and medium-sized entrepreneurs living in urban areas. Its suite of products includes loans for fixed assets and working capital, housing microfinance, deposit and savings accounts, and money transfer and payment services. The Afghanistan Rural Microcredit Program (ARMP) focuses on increasing access to credit for rural households and farmers and works closely with other AKF rural development programmes. Over the medium term, AKAM may seek to merge these two institutions into a single entity that will be able to provide Afghanistan’s poor with a full range of financial services, regardless of where they live.

First MicroFinanceBank Afghanistan (FMFB-A)
FMFB-A currently leads among the MFIs in Afghanistan in terms of outstanding portfolio, which was valued at over US$ 26 million at the end of 2007, and disbursed over US$ 45 million for the year. In addition to its 23,000 current loan clients, FMFB-A also had close to 10,000 voluntary deposit accounts, nearly four times as many as at the end of 2006. The recent surge in opening of voluntary deposit accounts indicates that Afghans are becoming increasingly aware of, and comfortable with the use of, formal financial services. FMFB-A opened six new branches during 2007 and now has 13 branches spread throughout eight provinces, including four branches in Kabul. The bank has also maintained full operational and fi nancial sustainability during the year and generated a modest surplus which will be used to fund further growth and open several new branches in 2008 and 2009.

The bank made significant strides on the product development front during the year, successfully launching its group lending product for women in several regions of Afghanistan. This new product is a departure from the bank’s traditional focus on individual lending, and will enhance access for clients who may not have been able to qualify for a loan as an individual. The bank also completed the pilot phase of an initiative to introduce mobile-phone banking to Afghanistan in partnership with the country’s largest mobile phone provider, Roshan, an AKFED company. This innovative service, known as MPaisa, is currently being used to facilitate loan repayments and can be used by clients to transfer funds to other users of the system. The system is modelled after a highly successful system currently operational in Kenya and uses the same underlying architecture which was developed by the global telecom giant Vodafone. The partnership with Roshan greatly increases the number of financial outlets available to FMFB-A clients throughout the country. Eventually, FMFB-A hopes to be able to use this system for a range of loan disbursement, payment and savings mobilisation activities.

In the latter part of 2007, FMFB-A also engaged in another new initiative to develop a robust housing microfinance product designed to meet the needs of the growing urban populations of Kabul and Herat. Afghanistan is undergoing dramatic population growth and rapid urbanisation against the backdrop of a housing stock which is insufficient in both quantity and quality. Much of the existing housing suffers from years of neglect, damage from the war, or poor construction standards. Many families also suffer from overcrowding caused by the lack of available housing to accommodate the growing population. Upgrades such as an extra room would improve the quality of life and could also provide space for developing an income-generating activity. The quality of rural housing stock is also inadequate and is characterized by limited access to infrastructure, poor insulation and ventilation, and vulnerability to the frequent earthquakes that strike the region. Housing microfinance is extremely limited in Afghanistan and the lack of access to finance is a significant
barrier to improving housing infrastructure.

By early 2008 a pilot project had been launched in cooperation with the Aga Khan Trust for Culture (AKTC) with the objective of providing more than 700 loans for the refurbishment and repair of urban housing. Many loans will be used to add additional rooms and improve the roofing, insulation and sanitation facilities within the household. Following this pilot project, FMFB-A will seek additional grant and debt financing to expand. It hopes to provide several thousand housing microfinance loans in urban and rural areas over the next five years. FMFB-A will also look to develop innovative and low-cost housing upgrades that will improve household living standards and mitigate the risk from earthquakes and other disasters.

FMFB-A has continued to attract interest from new partners, and a US$ 9 million investment package was recently finalised with the Dutch national development bank, FMO, comprised of a subordinated loan and a long-term credit facility. The FMO deal was particularly important because the loans and lines of credit were provided in local currency which helps the bank to reduce its foreign exchange risk. In addition to the FMO investment, a US$ 5.5 million credit facility agreement was signed with Agence Française de Développement (AFD), and several credit facility agreements amounting to US$ 5 million were signed with the Microfinance Investment Support Facility for Afghanistan (MISFA). All of these investments reflect the growing confidence in
FMFB-A, and are a recognition of both its financial performance and its contribution to poverty alleviation in Afghanistan.

This year FMFB-A plans to continue its rapid pace of expansion, and will open branches in four new provinces. The bank will also begin to increase its services in the peri-urban areas surrounding the main cities by opening a number of sub-offices. This growth is expected to result in the bank having over 50,000 clients by the end of 2008, with an outstanding loan portfolio of approximately US$ 50 million. The deposit portfolio is also expected to continue to grow, particularly if the partnership with Roshan catches on with the many local merchants who
view the MPaisa system as an effective way to limit the amount of physical cash they need to keep on their premises. To support this growth, FMFB-A expects to add nearly 300 new staff during the year, more than half of whom will be new loan officers. The growing staff has also necessitated an increased focus on the development of human resources capacity, which has led FMFB-A to strengthen its training department.

Afghanistan Rural Microcredit Program (ARMP)

The AKAM rural programme also experienced growth and expansion during the course of 2007. There exists a largely unmet demand in the rural areas of the country, which are home to a majority of the population. It is in these areas that the more traditional ways of life dominate. The focus is much more on agriculture, animal husbandry and very small-scale production. The ARMP group lending approach is different from that of
FMFB-A, but a high level of cooperation between the two institutions has led to critical steps towards integration. This merger would significantly increase the range of financial services that can be offered to rural clients as the existing programme is not licensed to accept deposits.

During 2007, ARMP disbursed US$ 29 million in loans, an increase of 29% over the amount disbursed in 2006. The program had just over 30,000 clients at year-end and a portfolio worth US$ 20.3 million. Six new branches were opened during the year along with two new regional offices in Bamyan and Kunduz. This expansion occurred despite an increasingly tenuous security situation in a number of rural areas, which restricted staff movements in a small number of sub-districts. Activities were also curbed due to extremely heavy snowfalls and flash flooding in some of the northern provinces, and areas around Herat.

One area where ARMP saw significant internal development during the year was in the management of human resources. Rural skill sets and education were quite limited and the growth of the institution necessitated a review of staff competencies. In addition to the skill-building initiatives and programs already underway, a full-time training department was also established to enhance the practical and professional knowledge of the staff and strengthen their understanding of microfinance best practices.

ARMP has also been providing a specially designed loan to help indebted farmers to recover ownership of their land. During the years of conflict that have beset Afghanistan, many rural families were forced to “mortgage” their land to local money lenders, many of whom were involved in the drug trade. In many cases, these lenders would charge upwards of 100% interest a year, effectively plunging families into unrecoverable debt. Some of
the most indebted were subsequently forced to convert their land to the production of opium poppy for the benefit of the money lenders. Responding to this ARMP has developed a product which will allow the farmers to pay off their debts to the money lenders and reclaim full control over their land and their harvests.

Going forward, ARMP expects to maintain steady growth and revenues though it will also incur increased costs as it strengthens its human resources capacity and introduces a new more robust MIS designed to enhance controls and efficiency. Expansion of ARMP into new areas will cease as the bank begins to develop its rural portfolio and opens outlets in new areas.