Hypothetical MFI: First MicroFinanceBank Afghanistan

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Created as a final project for a Johns Hopkins School for Advanced International Studies (SAIS) course on Microfinance and Development. Task was to create a new microfinance institution. Summer 2008.

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  • We’re representing the case for expansion of the First MicroFinanceBank Ltd. Pakistan into Afghanistan, where we will incorporate as the First MicroFinance Bank Afghanistan.
  • A brief history of our organization to start: FMFB-P began as a project of the Aga Khan Development Network ; grew out of previous lending operations that began in 1982 First private-sector microfinance bank formed under the Microfinance Institution’s Ordinance 2001. Currently we have 65 nation-wide, fully automated branch providing services to over 150,000 clients We received CGAP’s Financial Transparency Award for two consecutive years, 2005 and 2006 In the last four years, we have disbursed over US $30M in loans and mobilized over $13M in savings from over 70,000 clients. 1/3 of our borrowers and staff are woman.
  • Similar to our mission in Pakistan, the Bank’s mission in Afghanistan is to reach out those who are currently not able to receive adequate financial services, in rural as well as urban areas. The target audience is the poor and underprivileged of Afghanistan, especially farmers and women. Objectives: To offer the transient and chronic poor of Afghanistan an array of financial services To offer these services in a manner consistent with Islamic beliefs and tenets To help break the cycle of poppy farming in Afghanistan through the provision of microcredit
  • A word on Islamic banking: Islam prohibits riba, or charging a markup – considered exploitative Also gharar – gambling 4 basic principles: risk-sharing among parties to the contract materiality – real economic transaction no exploitation no financing of haram (sinful/forbidden) activities Ex: interest-based debt project: if borrower has to service his debt irrespective of the performance of the project he engages in, even if it’s not his fault Islamic financial products emphasize concern for risk sharing between user and provider of funds Mudaraba – owner of funds finances entire project. Entrepreneur contributes only labor, time, & expertise. Profits are shared at a pre-determined ratio. Losses accrue to financier only. Musharaka – financier and partners jointly finance a project and participate in its management. Profits shared based on contributions to capital. Murabaha – Provider of funds purchases commodity and resells it with markup to user against installments
  • Much like we did in Pakistan, we intend to partner with the Afghan Post to be their service provider. Currently they do not have financial operations. In Pakistan, we did this to expand our distribution network through the 4000 sub office network of the Pakistan Post as well as leverage the 82 regular branch outlets This network is expected to facilitate the disbursement of PKR 15M to over 1M clients in the next 3-5 years. Afghan Post is undertaking a large expansion of 850 post offices, and will be partnering with FMFB-A to provide financial services Mutually beneficial – we reach more people more easily, they have something else to draw people in with. We’ll also partner with the Asian Development Bank for assistance with our mobile banking operations Aga Khan Development Network will remain closely involved and help facilitate acquiring capital.
  • Hypothetical MFI: First MicroFinanceBank Afghanistan

    1. 1. First MicroFinanceBank Afghanistan: The Case for Expansion July 2008 Replacing despair with hope and confidence in a better future
    2. 2. First MicroFinanceBank Ltd. Pakistan (FMFB-L) <ul><li>Project of the Aga Khan Development Network (AKDN) </li></ul><ul><li>Incorporated Nov. 2001, operational March 2002 </li></ul><ul><li>65 branches across Pakistan </li></ul><ul><li>Full array of services: Loans, insurance, savings, etc. </li></ul><ul><li>Islamic banking models </li></ul>
    3. 3. First MicroFinanceBank Afghanistan (FMFB-A) <ul><li>Mission </li></ul><ul><li>To reach out the poorest of the poor who currently do not receive adequate financial services. FMFB-A is dedicated to serving the urban and rural poor of Afghanistan, especially farmers and women. </li></ul><ul><li>Vision </li></ul><ul><li>FMFB-A envisions an Afghanistan in which all low-income people have reliable access to the full range of financial services. </li></ul>
    4. 4. FMFB-A Objectives <ul><ul><li>To offer the transient and chronic poor of Afghanistan an array of financial services </li></ul></ul><ul><ul><li>To offer these services in a manner consistent with Islamic beliefs and tenets </li></ul></ul><ul><ul><li>To help break the cycle of poppy farming in Afghanistan through the provision of microcredit </li></ul></ul>
    5. 5. Islamic Banking and Microfinance <ul><li>Islam prohibits riba (interest) and gharar (gambling) </li></ul><ul><li>Four basic principles must be met: </li></ul><ul><ul><li>Risk-sharing among parties to the contract </li></ul></ul><ul><ul><li>Materiality – real economic transaction </li></ul></ul><ul><ul><li>No exploitation </li></ul></ul><ul><ul><li>No financing of haram (sinful/forbidden) activities </li></ul></ul><ul><li>Islamic financial products emphasize concern for risk sharing between user and provider of funds </li></ul>
    6. 6. Afghan Post: A Unique Partnership <ul><ul><li>Pakistan experience </li></ul></ul><ul><ul><ul><li>This network is expected to facilitate the disbursement of PKR 15M to over 1M clients in the next 3-5 years. </li></ul></ul></ul><ul><ul><li>Afghan Post is expanding rapidly </li></ul></ul><ul><ul><li>Mutually beneficial partnership arrangement </li></ul></ul><ul><ul><ul><li>Will allow rapid scaling up of microfinance operations </li></ul></ul></ul><ul><ul><ul><li>Afghan Post will benefit from optimum utilization and development of its resources </li></ul></ul></ul>
    7. 7. Social, Demographic, and Cultural Issues <ul><li>Population estimated at 30 million </li></ul><ul><li>Largely rural; agriculture approximately 52% of GDP </li></ul><ul><li>Number of different ethnic groups make for cultural differences </li></ul><ul><li>Social development low </li></ul><ul><li>Afghan society is largely based on kinship groups </li></ul><ul><li>Role of women in society is very restrictive </li></ul>
    8. 8. Macroeconomic and Political Situation in Afghanistan <ul><li>Reforms since 2002 have laid the foundation for a market-based economy </li></ul><ul><li>Economy has been expanding; ~12% in 2007 </li></ul><ul><li>Inflation rates have been dropping; ~20% in 2007 </li></ul><ul><li>Resources are still inadequate, particularly skilled manpower </li></ul><ul><li>Corruption affects reform efforts </li></ul><ul><li>Narcotics problem continues to grow </li></ul><ul><li>Insecurity is on the rise </li></ul>
    9. 9. Infrastructure <ul><li>Country is undergoing a large physical reconstruction program with international assistance </li></ul><ul><li>Physical infrastructure, communications, and services are currently lacking but situation is gradually improving </li></ul>
    10. 10. Market Size <ul><li>Market appears ample and largely untapped </li></ul><ul><li>However, market is fragmented </li></ul>
    11. 11. Legal and Regulatory Issues <ul><li>Banking Law of Afghanistan written in 2004 </li></ul><ul><li>MFIs appear to be operating, without trouble or hindrance, but in a regulatory enforcement vacuum </li></ul><ul><li>World Bank program aims to introduce “state of the art” regulation and practices </li></ul>
    12. 12. Competition <ul><li>MISFA: apex institution created under the auspices of the World Bank </li></ul><ul><li>15 MFIs established (some have introduced Islamic banking) </li></ul><ul><li>Informal Actors: Opium traders frequently act as narco-usurers (money lenders) </li></ul>
    13. 13. Challenges <ul><li>Lack of local capacity </li></ul><ul><li>Security </li></ul><ul><li>Social and cultural structure </li></ul><ul><li>Operating costs are generally higher than in other neighboring countries </li></ul><ul><li>The absence of a comprehensive legal framework for microfinance activity </li></ul>
    14. 14. Opportunities <ul><li>Economy is growing </li></ul><ul><li>Afghanistan is supported by public and private donors </li></ul><ul><li>Still room for growth in the microfinance sector </li></ul><ul><li>Government is promoting private sector development </li></ul>
    15. 15. Products and Services: Loans <ul><li>Agricultural Loans </li></ul><ul><ul><li>Commodity </li></ul></ul><ul><ul><li>Poppy Eradication </li></ul></ul><ul><ul><li>Livestock </li></ul></ul><ul><li>Health & Lifecycle Loans </li></ul><ul><li>Small & Medium Size Enterprises </li></ul><ul><ul><li>Individual lending </li></ul></ul><ul><ul><li>Cash Flow-based lending </li></ul></ul>
    16. 16. Products and Services: Other <ul><li>Savings Deposits </li></ul><ul><ul><li>Security </li></ul></ul><ul><ul><li>Ease of Access </li></ul></ul><ul><ul><li>Voluntary </li></ul></ul><ul><ul><li>Positive Rate of Return </li></ul></ul><ul><li>Insurance (third-party provider) </li></ul><ul><ul><li>Lifecycle – death or illness </li></ul></ul><ul><ul><li>Crop failure </li></ul></ul><ul><li>Fund Transfer Services </li></ul>
    17. 17. Product Delivery <ul><li>Branch Network </li></ul><ul><ul><li>Urban focus </li></ul></ul><ul><ul><li>NATO-controlled areas </li></ul></ul><ul><li>Mobile Banking </li></ul><ul><ul><li>Increase frequency of client contact </li></ul></ul><ul><ul><li>Provides easy access to services and funds for clients </li></ul></ul><ul><ul><li>Savings mobilization </li></ul></ul><ul><li>Afghanistan Post Office </li></ul><ul><ul><li>Expansion of Post Office network </li></ul></ul><ul><ul><ul><li>Provincial capitols: ~ 130 offices </li></ul></ul></ul><ul><ul><ul><li>Smaller towns: ~ 375 offices </li></ul></ul></ul>
    18. 18. Infrastructure and Staffing <ul><li>Staffing </li></ul><ul><ul><li>Extensive training </li></ul></ul><ul><ul><li>Promotion from within </li></ul></ul><ul><ul><li>Regular evaluations </li></ul></ul><ul><ul><li>Compensation structure </li></ul></ul><ul><li>Management Information Systems (MIS) </li></ul><ul><ul><li>eRapid </li></ul></ul><ul><ul><li>Idirect </li></ul></ul>

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