Swapnil Dissertation

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My research work on the microfinance sector in Afghanistan, and its application in the current post-conflict scenario.

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Swapnil Dissertation

  1. 1. LEEDS UNIVERSITY BUSINESS SCHOOLDepartment of International BusinessMaster‘s ThesisSeptember, 2010 Microfinance and Poverty Reduction in Afghanistan An analysis of current microfinance scenario in Afghanistan and the scope of its improvement AbstractThe aim of this study is to analyze the microfinance sector present in Afghanistan,from the perspective of an international NGO (Hand in Hand) operating in thecountry. This analysis is done with the help of the underlying theoretic models usedin the microfinance sector, and by taking the economic, social and political realitiesof Afghanistan into account. The results reveal that the outreach of MFIs and NGOsin Afghanistan is still very limited, with very less focus on the traditional practices likeIslamic microfinance. Author: Swapnil Srivastava* Supervisor: Prof. P. J. BuckleyCorrespondence to swapnil.srivastava4DELETE_THIS@gmail.com . The above email addresses have been modified in orderto avoid unsolicited email. Before using the addresses, please remove the DELETE_THIS part in the address.
  2. 2. TABLE OF CONTENTSACKNOWLEDGEMENT ..................................................................................................................... 4ACRONYMS…………………………………………………………………………………………5GLOSSARY……………………………………………………………………………………………6CHAPTER 1……………………………………………………………………………………………7 1.1 INTRODUCTION……….……………………………………………………………………..6 1.2 DEFINITIONS….………………………………………………………………………………8 1.2.1 Afghanistan…………………………………………………………………8 1.2.2 Microfinance……………………………………………………………….9 1.2.3 Islamic Microfinance……………………………………………………..10 1.2.4 Microfinance Institution (MFI)…………………………………………..10 1.2.5 Depository Microfinance Institution (DMFI)………………………….11 1.2.6 Self Help Groups (SHGs)…………………………………………………11 1.2.7 Repayment and Loan Utilization……………………………………...11 1.3 Background: Microfinance Sector in Afghanistan………………………………..12 1.4 Hand in Hand……………………………………………………………………………..14 1.5 Hand in Hand Afghanistan……………………………………………………………..14 1.6 Purpose of Study………………………………………………………………………….15CHAPTER 2 2.1 LITERATURE REVIEW………………………………………………………………………16 2.1.1 Group Lending…………………………………………………………….16 2.1.2 Case of Cambodia……………………………………………………….17 2.1.3 Islamic Microfinance……………………………………………………..18 2.1.4 Case of Yemen……………………………………………………………20 2.1.5 DMFI…………………………………………………………………………20 2.1.6 DMFIs in Uganda………………………………………………………….21 2.1.7 Security Issues……………………………………………………………..24CHAPTER 3 -2-
  3. 3. 3.1 METHOD………………………………………………………………………………..26 3.1.1 Research Questions………………………………………………….26 3.1.2 Assumptions……………………………………………………………26 3.1.3 Limitations……………………………………………………………..26 3.2 DATA COLLECTION METHODS……………………………………………………26 3.2.1 Qualitative Method…………………………………………………26CHAPTER 4 4.1 RESEARCH FINDINGS AND ANALYSIS…………………………………………..28 4.1.1 Outreach of the MFIs……………………………………………….28 4.1.2 Islamic Microfinance……………………………………………….28 4.1.3 Importance of the SHGs…………………………………………..28 4.1.4 Capacity Building………………………………………………….29 4.1.5 Demand of the DMFIs……………………………………………..30CHAPTER 5 5.1 CONCLUSIONS AND RECOMMENDATIONS…………………………………31 5.2 IMPORTANCE OF CAPACITY BULIDING……………………………………….31 5.3 TACKLING THE SECURITY ISSUES…………………………………………………32REFERENCES…………………………………………………………………………………….33APPENDIX 1…………………………………………………………………………………….36 -3-
  4. 4. ACKNOWLEDMENTSI would like to extend my warm regards to all the people who helped us during thecourse of this project.I would like to thank Usha Somasundaram, Executive Director of Hand in HandAfghanistan, without whom working on this thesis would not have been possible. Herknowledge and dedication towards her work is commendable, and she provided uswith some great insights of the microfinance sector in Afghanistan. Also, I would liketo thank my supervisor Prof. P. J. Buckley, who helped me a lot to decide the projectand the research methodology.The friendly nature of all the Hand in Hand staff and their willingness to help usanytime has definitely added to the value of my work. -4-
  5. 5. ACRONYMSMFIs Microfinance InstitutionsMISFA Microfinance Investment Support Facility for AfghanistanCGAP Consultative Group to Assist the PoorDAB Da Afghanistan BankAIB Afghanistan International BankBRAC Bangladesh Rural Advancement CommitteeSHG Self Help GroupAREDP Afghanistan Rural Enterprise Development ProgramMEDA Mennonite Economic Development AssociatesAISA Afghan Investment Support Agency -5-
  6. 6. GLOSSARYQu’ran holy book of Islamharam unlawfulpurdah veil (for women)Qarz-e-hasna credit with no interestsudh credit with interestriba usurySharia related to Islamic Laws -6-
  7. 7. Chapter 11.1 IntroductionAs discussed by Boyle (1998), microfinance is a multi-purpose tool when used in thepost-conflict context. Besides boosting and reviving the local economic developmentby providing access to financial services, it also helps in the immediate post-conflictrehabilitation assistance (cited in Marino 2006:8). This paper is an attempt tounderstand the complex nature of the microfinance industry in Afghanistan, a countrywhich has been crippled by almost three decades of war. For the purpose, an NGOHand in Hand (HIH), which is operational in India, Afghanistan, Brazil, Sweden, US,UK and South Africa, is taken for study. According to a report released in Geneva bythe U.N. High Commissioner for Human Rights, ―9 million Afghans or 36 percent ofthe population are believed to live in absolute poverty, and a further 37 percent liveonly slightly above the poverty line" despite about $35 billion of outside aid sent tothe country between 2002 and 2009 (U.N. report on poverty in Afghanistan, 2010).According to Maley (2009), Afghanistan is an extremely complex country, and themost important challenge faced by the researchers is to find ways of conveyingAfghan culture, politics and societies in a way which is comprehensible to thereaders. In a study conducted by MEDA Microfinance from May 24-June 10, 2009, itwas recommended that the Afghan microfinance sector ―still needs strong technicalsupport in loan product development, management, governance, credit delivery, MISsystems, internal audits and controls. The study also highlighted the opportunity forlending to the SME agri-business sector, particularly for processors, storage facilitiesand export or growers associations‖ (AGRICULTURAL MARKET RESEARCH FORMICROFINANCE AND SME INTERVENTIONS, 2009).―On March 27, 2009, United States President Barack Obama unveiled a "stronger,smarter and more comprehensive strategy" for dealing with Afghanistan. At issuewas a new foreign policy approach toward dealing with the threat posed by al-Qaidaterrorists operating in the area from Afghanistan to Pakistan‖. He also gave clearindications of an "exit strategy" with regard to the United States policy in Afghanistanby 2012 (CountryWatch, 2010). The withdrawal of armed forces will give anopportunity to the Afghan government to restructure and stabilize the economicscenario of the country without any form of foreign intervention. The economicactivities within Afghanistan in the next two years will certainly lay down thefoundation stones of the next decade. Providing micro-credits to the people in ruralareas will help them to start a venture for generating income for their families. Also,the consulting department in the MFI will guide the borrowers on how to use themoney, and will provide them training for any specific skill-set which is required forthat particular business. -7-
  8. 8. 1.2 Definitions1.2.1 AfghanistanThe Islamic Republic of Afghanistan (commonly known as Afghanistan) is one of thepoorest nations in the world. After the Soviet Union supported the AfghanCommunist regime between 1979 and 1989, and a series of civil wars, Kabul wasfinally occupied by the Taliban in 1996.“Never has any group been more controversial then the Taliban of Afghanistan.Patrolling the streets in the pickup trucks, the Taliban members, under the GeneralDepartment for the Preservation of Virtue and Prevention of Vice (Amr-bil Maroof WaNahi Anil Munkar), search houses and destroy any television sets, radios, cassettes,and photographs. The bands of Taliban thugs roam the streets beating those theydeem to be violators of the Shariah (Islamic code of Law) [2]” (Hazara.net).The September 11, 2001 terrorist attacks in the United States of America broughtback Afghanistan again at the centre of world politics. The United Nations sponsoredBonn Conference in 2001, which aimed at the political reconstruction of Afghanistanby introduction of a new constitution, a presidential election in 2004, and NationalAssembly elections in 2005 (cia.gov). Hamid KARZAI became the firstdemocratically elected president of Afghanistan in 2004, and was re-elected inNovember 2009 for a second term (CIA reports).Population28,395,716Age Structure0-14 years: 43.6% (male 6,343,611/female 6,036,673)15-64 years: 54% (male 7,864,422/female 7,470,617)65 years and over: 2.4% (male 326,873/female 353,520) (2010 est.)Life expectancy at birthMale: 44.19 yearsFemale: 44.61 years (2010 est.)Ethnic groupsPashtun 42%, Tajik 27%, Hazara 9%, Uzbek 9%, Aimak 4%, Turkmen 3%, Baloch2%, other 4%ReligionsSunni Muslim 80%, Shia Muslim 19%, other 1% -8-
  9. 9. GDP (PPP)$27.01 billion (2009 est.)GDP (composition by sector, excluding opium production)Agriculture: 31%Industry: 26%Services: 43%Labor Force (by occupation)Agriculture: 78.6%Industry: 5.7%Services: 15.7% (FY08/09 est.)(Note: The source of all the data stated above is CIA website www.cia.gov)1.2.2 MicrofinanceAccording to Barr (2005), ―Microfinance is a form of financial development that isprimarily focused on alleviating poverty through providing financial services to thepoor. Most people think of microfinance, if at all, as being about microcredit, lendingsmall amounts of money to the poor. Microfinance is that, but it is also broader,including insurance, transactional services, and importantly, savings‖.Microfinance was a result of various kinds of experiments on micro-credits in LatinAmerica and South Asia. However, it was best applied by Muhammad Yunus whenhe started the Grameen Bank in Bangladesh (1976), following the wide-spreadfamine of 1974 in the country. The Grameen Bank of Bangladesh has been in thevanguard of the microfinance movement, showing the potential to alleviate povertyby providing credit to poor households (Morduch (1999)). The basic idea ofmicrofinance is to reduce poverty by helping entrepreneurs to generate and expandtheir enterprises. Now microfinance is a wide-spread phenomenon which has notonly helped people in developing economies like Africa, Latin America, Asia, andEastern Europe, but also those in the richer economies like Norway, the UnitedStates, and England. The MFIs, banks and NGOs can act as financial institution forthe disbursement of small loans the recipients that are normally micro entrepreneursand the poor, depending on the laws of a country. This loan is expected to be utilizedfor the purpose of new income generating project or business expansion. The loan isgenerally given in to a group and not an individual, in order to take advantage ofsocial collateral. This is an important aspect of microfinance as the loans do notrequire any form of collateral from the clients which makes it different from normalbanking and more accessible to the less privileged section of the society. The terms -9-
  10. 10. and conditions of the loan are normally easy to understand and flexible and asubsequent loan to a group is given only after the full settlement of the previous loan(Rahim, 2007).Key terminologies in Microfinance Active Loan Portfolio: It is the total amount loaned out less the total amount of repaid loans (accion.org). Operational Self-Sufficiency (OSS): It is a measure of financial efficiency of an MFI or financial institution dealing in microfinance. For the calculation of OSS, the operating revenue of the organization is divided by the total administrative and financial expenses. If the resultant figure is greater than 100, the organization is considered to be operationally self-sufficient and able to cover administrative costs with client revenues (accion.org). Portfolio at Risk: It is the measurement of the total outstanding balance of loans past due divided by the active portfolio. It does not include late payments or payments not yet due (accion.org). Write-off: Write offs are done in order to document the loss on loans given to clients. An MFI writes off loans not expecting to collect them, while continuing to attempt collection (accion.org).1.2.3 Islamic MicrofinanceSegrado (2005) has discussed that ―whether the economic behavior can beinfluenced by the predominant religious belief, the role of Islamic finance in Muslimsocieties nowadays but most of all its potential to fight poverty in those countriesbelonging to the so called developing world, when related with important economicdevelopment tools such as microfinance‖. Islamic microfinance (or any other form ofIslamic finance) is based on the principle of prohibition of riba (usury). There aremany alternative ways (which will be discussed later) through which the clients ofIslamic Microfinance are not subjected to repayment with interest.1.2.4 Microfinance Institution (MFI)According to CGAP, a microfinance institution (MFI) is a body that provides financialservices to the poor and less privileged members of the society. They differ in theirlegal structure, mission, and methodology; however, all share the commoncharacteristic of ―providing financial services to clients who are poorer and morevulnerable than traditional bank clients‖. - 10 -
  11. 11. 1.2.5 Depository Microfinance Institution (DMFI)DMFI is a particular kind of MFI which is allowed to collect savings from the clientsbesides giving them micro-credits. It requires strict regulations from the governmentand not every country has an existing legal framework for this. In Afghanistan, theDepository Microfinance Institution Regulation (DMFI Regulation) was established in2006; however, no MFI is allowed to collect savings in the country.1.2.6 Self Help Group (SHGs)A Self Help Group consists of approximately 10-12 members who take the jointliability for the micro-credit. The members must be women between 18 and 60 years,and should preferably be married. The group should be formed by women residing inthe same neighborhood and the members should have a homogenous background.This helps the financial institution to take benefit from the local knowledge anddecrease the default rate. According to Jones (2004), ―sectors of microfinanceindustry are focused on helping women feed, house and cloth their families; educatetheir children; attend to their familys basic health care needs; increase and diversifyincomes; build social, human, and economic assets that contribute to freedom fromrisk; and enhance the quality of life for their families and communities‖. This is one ofthe prime reasons that the MFIs and NGOs only allow women to be a part of SHGs.The SHGs are led by the Animator and the Representative, who are themselvesmembers of the self help groups. The role of the Animator is to conduct the groupmeetings and to maintain group records/accounts books properly. The Animator isalso acting as a bridge between the group and banks, Government officials etc. Theresponsibility of the Representative is to assist the Animator in her work, and tomaintain a joint account in a bank for the group. She also collects the group moneyand deposits it in the bank.In order to be able to take up a loan, the SHG has to be functioning for more thanthree months, and meetings need to be held regularly. Two training modules forSHG members, as well as training for the group‘s Animators and Representativeshave to be completed. Savings and repayments of internal and other loans also needto be regular and books of accounts for the latest month should be available. TheBranch Managers will make a final on-site credit risk rating based on the abovecriteria before the loan is ultimately disbursed (Hand in Hand (2010), Material onGroup Formation and Loan Utilization).1.2.7 Repayment and loan utilizationWhen the client is given a Hand in Hand loan, there are two prerequisites: 1) The loan has to be repaid, and 2) The loan has to be used for enterprise creation. - 11 -
  12. 12. Generally, 5-6 members in one SHG group are given a loan, which has to be repaidin full. The possibilities for obtaining subsequent loans are dependent on therepayment of these loans, and peer pressure from other group members is exerted.Commonly, Micro Finance Institutions are mostly concerned with the repayment ofloans. As long as the loan is repaid, the purpose for which the loan has actually beenused for is of less relevance. At Hand in Hand repayment of loan is also aprerequisite, however, Hand in Hand is not a pure Micro Finance Institution, but aseed NGO with a mandate to work for social development and create sustainableeconomic empowerment. Hence, also the utilization of the loan becomes of greatimportance, as using the loan for consumption purposes would not fulfill the aim ofcreating sustainable income generating activities (Hand in Hand (2010), Material onGroup Formation and Loan Utilization).1.3 Background: Microfinance Sector in AfghanistanWith the help of Afghanistan government and international support, the microfinancesector in Afghanistan has been continuously growing in the past few years. TheMicrofinance Investment Support Facility for Afghanistan (MISFA) was set up in2003 with the support of the Afghan government and international donors. Theobjective of its establishment was to provide assistance and funding to buildAfghanistan‘s microfinance sector, and to streamline the process of developmentusing microcredit. As of 31 March 2010, the 16 implementing partners (15 MFIs and1 bank) of MISFA have served 429,846 savings and loan clients for an outstandingportfolio of US$102 million. Since inception in 2003, the program has disbursed morethan 1.5 million loans across Afghanistan worth over $765 million (MISFA Report,March 2010). MISFA is supported by donors, international development agenciesand the Government of Afghanistan through the Afghanistan Reconstruction TrustFund (ARTF). Consultative Group to Assist the Poor (CGAP) is its key advisor. Key Indicators As of March 31, 2010Active clients 429,846Percentage of women 60%Gross Loan Portfolio (US$) 102Loan outstanding per borrower (US$) 351Cumulative repayment rate 93%Operational self-sufficiency (OSS) 73% (Source: MISFA report, March 2010) - 12 -
  13. 13. Partners of MISFAAfghanistan International BankAfghanistan International Bank (AIB) is a local Bank with strong Internationalshareholders headquartered at Kabul, Wazir Akber Khan, behind Lasay Amani HighSchool, Afghanistan. AIB was established in March 2004 and after three years of itsoperations; the bank has established a branch network in major cities of Afghanistanthat includes; three branches in Kabul (Wazir Akbar Khan Head Office, Microroyan &Shahr-e-Naw) and one each in Maza-e-Sharif, Kandahar, Herat and Jalalabad(misfa.org.af).BRAC Afghanistan BankBRAC Afghanistan Bank (BAB) is a full-fledged Commercial Bank with institutionalshareholdings by BRAC, ShoreCap International Ltd. (SCI), USA, InternationalFinance Corporation (IFC) - an investment wing of the World Bank and Triodos Bankof Netherlands. BRAC Afghanistan Bank‘s Head Office is loacated in Kabul was dulylicensed by the Da Afghanistan Bank (Central Bank) and started its operation inOctober 2006. Since inception, the Banks footprint has grown from a single branchto 4 Fully Functional branches, 11 SME unit offices and 1 Limited Service Booth inKabul and 3 SME unit offices in three provinces, namely, Mazar-e-Sharif,Herat andJalalabad. In the years ahead, BRAC Afghanistan Bank expects to add a widernetwork of SME unit offices, Full Function Branches and ATMs across the country(misfa.org.af).Bank Alfalah LimitedBank Alfalah Limited (BAL) was incorporated on June 21st, 1997 as a public limitedcompany under the Companies Ordinance 1984. Its banking operations commencedfrom November 1, 1997. The bank is engaged in commercial banking and relatedservices as defined in the Banking companies ordinance, 1962. The Bank iscurrently operating through 282 branches in 115 cities of 04 Countries, with theregistered office in Karachi (misfa.org.af).FMFB AfghanistanThe First MicroFinanceBank, Afghanistan (FMFB Afghanistan) on September 18,2003 received the first license from Da Afghanistan Bank (DAB) the Central Bank inAfghanistan after which on November 22, 2003 it was registered with AfghanInvestment Support Agency (AISA) as a limited liability company.On March 18, 2004 received formal banking license to operate nationwide from theDa Afghanistan Bank. The operations commenced from May 1, 2004 (misfa.org.af). - 13 -
  14. 14. 1.4 Hand in HandThe NGO Hand in Hand started in its current form in 2004 in Tamil Nadu, with theobjective of eliminating poverty by creating enterprises and jobs. To achieve this aimHand in Hand adopted an integrated five pillar approach that tackles issues that areof most relevance to poor communities. The five pillars focus on 1) job creation, 2)education, 3) health, 4) environment, and 5) citizens centres, where access toinformation and basic IT skills are provided. The five-pillar model has proved to besuccessful on a large scale, and has now also been introduced in South Africa,Brazil and Afghanistan. Job creation is promoted through Hand in Hand‘s SHGmodel, where marginalized rural women are trained in entrepreneurship andvocational skills development, facilitating access to microfinance products through asavings-driven approach, and helping them build sustainable livelihoods forthemselves and their families. Hand in Hand also provides hand-holding for marketlinkages, business expansion etc. In India, the SHG and Microfinance Program iscurrently operational in 23 districts in the states of Tamil Nadu, Karnataka, andMadhya Pradesh in India. It has reached more than 500,000 women and hassupported/strengthened over 390,000 family-based enterprises (FBE) and nearly5,500 medium scale enterprises (MSE) (hihseed.org).1.5 Hand in Hand AfghanistanHand in Hand Afghanistan was started in Mazar-e-Sharif with a liaison office inKabul, following a request from the President Hamid Karzai to Percy Barnevik (majordonor and advisor of HIH) in 2006. The aim was to create pilot projects and supplytechnical assistance to AREDP (Afghanistan Rural Enterprise DevelopmentProgram). ARDPE was launched by the president Hamid Karzai in 2007, and it aimsto create more than two million jobs in at least 70% of villages in 10 years. The Handin Hand executives in Afghanistan hire locals as far as possible, and its exit strategyis to create cluster associations of community groups, and link them and the micro-entrepreneurs to banks, private investors and service providers (hihseed,org).In 2007, Hand in Hand Afghanistan started a pilot in Balkh, and 3,000 beneficiariesin two districts have been mobilised into community groups and trained in groupdynamics, bookkeeping, savings, and business basics. The microfinance methodsthat are used are Sharia-compliant. The target is 7,500 beneficiaries by end-2009,and 10,000 jobs by end-2011 (hihseed.org).In Badakshan, an existing self-help group project is being fine-tuned with the supportof AfghanAid. The aim is to create 750 new jobs by June 2009. Hand in Hand alsoheads a consortium working to develop small/medium enterprises here. With thehelp of the World Bank, a Horticulture and Livestock Programme has been started toimprove the quality and output of farmers across the country. So far, 40 farmers‘groups have been mobilised, and 400 training sessions held (hihseed.org). - 14 -
  15. 15. ―The main purpose of the pilots is to help lay the foundation and get experience forthe big AREDP programme‖. (hihseed.org)1.6 Purpose of StudyThere are three aims of this study:The first aim is to understand the complex microfinance sector operational in a post-conflict region like Afghanistan. It will provide an opportunity to take a closer look atthe current scenario in Afghanistan and what is being done to rebuild the nation.The second aim is to analyze the opinions of people who are actually working inAfghanistan microfinance sector (employees of Hand in Hand Afghanistan). Theseinsights and opinions will be valuable for the study as only these people can suggestfeasible ways for the improvement of microcredit scenario in Afghanistan.The third aim is to analyze the cases of Cambodia, Yemen and Uganda, thecountries in which microfinance acted as an excellent tool for development. Thereare various dissimilarities between these two countries and Afghanistan, however,the basic idea of development remains the same. - 15 -
  16. 16. CHAPTER 22.1 Literature Review2.1.1 Group Lending―To argue that banking cannot be done with the poor because they do not havecollateral is the same as arguing that men cannot fly because they do not havewings‖. — Muhammad Yunus (cited in Ghatak and Guinnane (1999))One of the most important features which enable microfinance to work withoutcollateral is the group lending process. It has been studied by many researches whodescribed the process and its implications to maximize the efficiency of MFIs.Theoretical research on group lending have been very helpful in providingexplanations as to why group lending schemes and joint liability may provideadvantages over other types of financial arrangements in microfinance. According toGhatak (1999), borrowers who cannot offer any collateral are asked to form smallgroups. The borrowers are allowed to select their group members, an approachwhich provides the lending institution an opportunity to exploit local information.These Group members are held jointly liable for the debts of each other so that anysingle borrower‘s terms of repayment conditional on the repayment performance ofother borrowers in a pre-specified and self-selected group of borrowers. In case oneof the group members defaults in repayment, the others are denied subsequentloans in the future. This creates peer pressure on every individual in a group andthus compensates to a certain extent for the absence of collateral. Moore (1994) hasalso stressed on the possibilities of finding efficient outcomes in environments wherethe agents are well informed about each other.Tassel (1999) analyzed the type of optimal loan contracts that emerge when lendershave less information than borrowers. He demonstrated that lenders can utilize jointliability as part of a screening mechanism that serves two purposes. Firstly it induceslow risk borrowers to group with one another and select group loans at low interestrates and secondly, it induces high risk borrowers to select individual loans at highinterest rates. His findings prove that ―the agents will always form groups with agentsof the same type‖ and ―agent types can be distinguished according to the rate atwhich they are willing to trade increased (joint) liability commitments for lowerinterest rates‖. Ghatak (1999) further proves these points by stating that ―aninteresting implication of the assortative matching property proved in the paper isthat risky borrowers who will end up with risky partners will be less willing to acceptan increase in the extent of joint liability than safe borrowers for the same reductionin the interest rate‖. It was also emphasized by Ghatak (1999) that ―becauseborrowers are shown to end up with partners of the same type, for the same jointliability contract offered to all borrowers, safer borrowers face lower expectedborrowing costs conditional on success‖. - 16 -
  17. 17. 2.1.2 The Case of CambodiaMicroenterprise Best Practices (MBP) carried out an extensive study and published aseries of Technical Briefs on post-conflict microfinance. This series discusses onhow to use microfinance effectively in the post-conflict settings. The Brief #2 of thisseries (Developing a Post-Conflict Microfinance Industry: The Case of Cambodia)focuses on the case of Cambodia which demonstrates that ―when institutions arewell-designed and well-operated, a microfinance industry can flourish and reach thepoor in a viable manner even in a society and economy wracked by decades ofconflict‖ (MBP Microfinance Following Conflict, Brief No. 2). The report states thatafter almost 30 years of internal conflict, the financial system in Cambodia wasvirtually non-existent as a result first of the Khmer Rouge policies and of those of theVietnamese occupying government in mid-1990s. Despite of the lack of policies andlegal framework for microfinance, the Group de Recherché et D‘EchangesTechnologiques (GRET), World Relief, and the Association of Cambodian LocalEnterprise Development Agencies (ACLEDA) and Catholic Relief Services (CRS)started their operations in 1991, 1992 and 1993 respectively. However, these weresmall projects instead of full-fledged microfinance operations, and met only a fractionof the demand for microfinance services.Looking at the prospects of social welfare and economic development, ACLEDAchanged its strategy of targeting groups and instead implemented a broader-basedapproach of serving whole communities in 1995. In the next two years, ACLEDAincreased its operational self-sufficiency from 23 percent to 110 percent and itsnumber of active clients from 6,500 to 44,500 (MBP Microfinance Following Conflict,Brief No. 2). As the environment became more liberalized, more and more MFIs inCambodia raced forward to establish themselves as permanent institutions. As perthe reports, the MFIs in Cambodia were serving more than 214,000 clients with a$15.3 million loan portfolio in 1998, and the National Bank of Cambodia developed aframework that incorporated microfinance into the country‘s Financial InstitutionsLaw (MBP Microfinance Following Conflict, Brief No. 2). A legal basis was alsoimplemented by the government which allowed the MFIs to act as deposit-takinginstitutions. Owing to all these factors, the Cambodian microfinance industry enjoys arobust growth and healthy environment today.Out of the nine important lessons to be learned by Cambodia, as delineated in theTechnical Brief, two relate the country close to Afghanistan in the post-conflictcontext:―Internal conflict can be reduced by developing strong internal controls and byconducting training in the areas of governance and management. MFIs in Cambodiaexperienced a host of internal problems as they grew. However, many of these mighthave been averted if sufficient attention had been devoted to internal controls and totraining staff in the basics of NGO governance‖ (MBP Microfinance FollowingConflict, Brief No. 2). - 17 -
  18. 18. “Where human resources are limited, it may be wise to invest in external technicalassistance and in extensive staff development programs. Every MFI contacted forthis study cited limited human resource capacity as one of their greatest constraints,which is a common theme in post-conflict settings. At their peak, each of theCambodian organizations had between three and twelve expatriate staff, significantlyhigher than the global norm. However, this level of support was required not only forinitial operations but, more importantly, for training Cambodians for the long-term.Human resource development activities included in-country training and studyprograms and workshops, seminars, exchange visits, and courses abroad‖ (MBPMicrofinance Following Conflict, Brief No. 2).Hence, the report clearly states that microfinance can be used as a powerful tool inthe post-conflict situation by meeting standard microfinance industry goals of scale,sustainability and depth of outreach. The case of Afghanistan is half-way through thewhole process as it needs more time on implementing a legal framework for DMFIsand providing a more secured environment for MFI operations.2.1.3 Islamic MicrofinanceJohnson and Rogaly (1997) argue that in order to design relevant and usefulservices for poor people, NGOs should understand the local social and economicstructures in addition to the macro-level trends. Hence, it is very crucial for the MFIs,which want to operate in the rural areas of Afghanistan, to understand and cater tothe needs of local people. As Afghanistan is predominantly an Islamic country, it willbe very difficult for the conventional banking systems to make a mark. The conceptsof Islamic banking are thoroughly practiced in Afghanistan, which can be extended toIslamic Microfinance. One of the fundamental principles of such banking system isthe prohibition of any kind of interest on the loans. The financial institutions undersuch system make money by taking a share of profit which the borrowers make. Forcarrying out this project on a realistic scale, it will be necessary to closely fabricatethe Islamic practices with the functionality of MFIs.According to Rahim (2007), ―Conventional microfinance had also been questionedon its overall desired impact since the poor are subjected very high interest ratesome up to 30%. Some even argued that disbursing credit to the poor to makefinancial gains out of the same cannot be the aim of microfinance institutions.Interest charged is rather oppressive for their poor receivers, and thus fails toachieve the noble objective of microfinance. According to various studies, a notablenumber of the recipients were also found to be well above the poor category‖. On theother hand, he says, the Islamic Microfinance model is based on the PLS (profit andloss sharing) scheme, which means that the financial institution is responsible for theprofit as well as loss of the enterprise created by its client. If the enterprise issuccessful, the client pays back a share of profit, else the lender has to bear the lossin case the enterprise is facing the same. - 18 -
  19. 19. Segrado (2005) discussed the need and interest on Islamic Microfinance andbrought forward various reasons for it. According to him, microfinance is a flexibletool which can be replicated and tailored according to the local needs of a region.This will definitely be helpful in catering to the potential demand for microfinanceservices which is still largely unmet in countries where majority of the population isconstituted by Muslims. He also indicated some surveys which proved that there is ahigh demand for Islamic banking especially in low and middle income predominantlyMuslim societies, which could be catered by the commercial banks interested inreaching market niches. According to him, ―Islamic finance, microfinance and sociallyresponsible finance share most of their principles, such as: prohibition of all forms ofeconomic activity which are morally or socially injurious, egalitarian approach (norestriction to any category of clientele), focus on the well being of the community asa whole (concentrating on the poor, destitute or deprived sections of the society),aim at social justice, advocacy of entrepreneurship, advocacy for financial inclusionthrough partnership finance, participatory approach and risk sharing‖. Hence, heclearly mentions the benefits of applying Islamic laws in the context of microfinance.These suggestions are very much applicable when we consider a country likeAfghanistan in which majority of the population is Muslim and living under poorconditions.As discussed by both Rahim (2007) and Segrado (2005), there are two instrumentsof Islamic finance which can be used as tools for Sharia compliant microfinance. Mudarabah In the case of Mudarabah, the lender (capital provider) and the borrower (entrepreneur) enter into a partnership agreement. The lender provides the capital whereas the borrower provides the labor for a certain project. The profit from such project is shared between capital provider and entrepreneur, however, the financial loss is be borne entirely by the capital provider. In case of negligence and breach of the terms of mudarabah contract, the borrower becomes liable for the amount of capital. ―The profit-sharing ratio on mudarabah is pre-determined only as a percentage of the business profit and not a lump sum payment. The profit allocation ratio must be clearly stated and must be on the basis of an agreed percentage. Profit can only be claimed when the mudarabah operations make a profit. Any losses must be compensated by profits of future operations. After full settlement has been made, the business entity will be owned by the entrepreneur. The entrepreneur will exercise full control over the business without interference from the Islamic bank but of course with monitoring (Rahim, 2007). There are a series of difficulties in this model as the microentrepreneurs usually do not keep accurate accountability which makes it more difficult to establish the exact share of profit. Because of its complication, the mudaraba model might be more straightforward for businesses with a longer profit cycle (Segrado, 2005). - 19 -
  20. 20. Murabahah In this model, the financial institution procures the asset or business equipment and then sells it to entrepreneur at mark-up price for administrative costs. Repayments are generally made on equal installment basis and until the full settlement, the financial institution remains the owner of the asset. Murabahah is considered to be the most suitable scheme for Islamic microfinance as the buy- resell model with repayments in equal installment is easier to administer and monitor. Nevertheless, there are credit risks involved as in case of any financial transaction. ―Murabahah could be easily implemented for microfinance purposes and can be further exemplified by the used of deferred payment sale (bai’ al- muajal). Murabahah, however, may expose Islamic bank as in the case conventional lending to credit risk. This, however, can be mitigated by requesting for an urboun, a third party financial guarantee, or pledge of assets‖ (Rahim, 2007). This mode of financing was successfully introduced in Yemen in 1997.2.1.4 Case of YemenSegrado (2005) also discussed an interesting case of the successful implementationof Islamic Microfinance in Yemen. The Hodeidah Microfinance Programme (HMFP)was implemented in 1997, in Hodeidah, Yemen, in order to cater to the needs ofpeople who have been reluctant to take micro-credit based on conventional bankingmodel. An initial research was carried out which showed clear preference for themethodologies of Islamic banking in terms of receiving credit in this region. It had1770 active clients as of June 2000, 23 percent of whom were women and $350,000in outstanding loans. The average loan size is 38,000 Yemeni Rial (YR) ($240 USdollars). There is a cycle of loans the clients go through but each level has a widescope. The first loan can be up to 50000 YR ($300 US). The maximum loan for thefinal level is 250,000 YR ($1500 US) (UNCDF website). The small loans were mostlyutilized for trading, fishing, food production, small industries, handicrafts andtransportation.On receiving the loan application, the credit officer performed the initial research andfeasibility study for the loan. After his approval, it was the responsibility of the clientto identify items (commodities/equipment) needed from the wholesaler and negotiatea price. The credit officer then purchased those items from that source and resoldthem immediately at that price to the client. For the repayment, a mark-up price wasadded to this cost and monthly installments were decided by the organization.2.1.5 DMFIsA thorough analysis of the legal and regulatory framework of DMFIs in Afghanistanwas done by Artega and Tajeda in 2009. At present no MFI in Afghanistan is allowedto collect savings from its clients although a legal window for this activity wasestablished in 2006. Artega and Tajeda (2009) justify this step by arguing that―regulators supervise banks and other non‐bank financial institutions, such as - 20 -
  21. 21. DMFIs, to protect the general public from undue losses and safeguard the integrity ofthe financial system. The rules that protect customers from unwarranted risks (thatmay result in undue losses) are called prudential regulations. In other words,prudential regulations pertain to the safeguard of the deposits of the general publicand the soundness of the financial system‖. Nevertheless, as mentioned in the casestudy of Uganda in the next section, DMFIs prove to be an important source ofdevelopment for the MFIs, clents as well the government. However, as argued byArteg and Tajeda (2009), countries like Bolivia, Uganda, and Pakistan have beensuccessful in the implementation of a new licensing windows for MFIs because acritical mass of profitable credit‐only MFIs existed before the opening of thewindow. The report also indicates the laws which govern the activities of DMFIs: Law of Da Bank of Afghanistan, 2003 Law of Banking in Afghanistan, December 14, 2003 Anti‐Money Laundering and Proceeds of Crime Law, November 04, 2004 Law on Combating the Financing of Terrorism, September 1, 2005 Corporations and Limited Liability Companies Law, 1953 Microfinance Regulation –Article Twelve, July 1, 2006Arteaga (2009) also carried out a study to access the demand of saving serviesamongst the microfinance clients in Afghanistan. According to the report, ―14% ofMFI clients save formally and, if given the opportunity, more (almost 33%) of themwould save. About 80% of the clients produce enough income to cover theirexpenses and have a surplus that they either put aside (save) or reinvest in theirbusiness‖. The report also says that visiting Mecca for Hajj ranked one as the reasonfor saving of these clients. A very close second is to build a home, whereas the thirdand fourth places were occupied by son(s) education and daughter‘s marriage. Asindicated in these reports, the MFIs definitely stand a good chance for serving theseclients by taking deposits. The prime reason being the fact that MFIs reach morenumber of clients than commercial banks.2.1.6 DMFIs in UgandaUganda presents a classic example of the successful implementation of the DMFIsunder a legal framework known as Microfinance Deposit-taking Institutions (MDIs).The research paper ‗Uganda‘s Experience in Regulating Microfinance Deposit-takingInstitutions‘ presented at the International conference on Microfinance Regulationsdiscussed various benefits of regulating microfinance in Uganda. According to thispaper, ―Deposit-taking microfinance business in Uganda in the 21st Century is analmost entirely different concept from the microfinance of the 1980s. Not only is thecapacity of the poor to save presumed obvious, but sustainability of microfinance as - 21 -
  22. 22. a business is well proven and appreciated. Even what would be considered theremaining challenge (suitability of microfinance products) is beginning to pale in theface of innovation and improvements in other sectors, particularly informationtechnology‖.As a response to the appeal of larger MFIs, Bank of Uganda (BoU) issued a PolicyStatement on Microfinance Regulation on July 12, 1999. This statement provided afour tier regulated framework for the financial institutions operating in Uganda.Tier-wise features and service range of financial institutions(Source: Paper presented at the International Conference on MicrofinanceRegulation)As discussed in the 3rd African Microfinance Conference held in Kampla (2007), theMDI Act was structured as follows: 1) Basic definition of microfinance (clarification of basic terminologies,). 2) Licensing (provisions relating to requirements for obtaining a license to carry out microfinance business). 3) Restrictions on certain transactions dealings by micro deposit taking institutions (e.g. credit facilities limits, payment of dividends and foreign exchange transactions). 4) Ownership and corporate governance structures of institutions (e.g. requirement for Bank of Uganda approval to hold shares in an MDI, responsibilities of the board, role of external auditors). 5) Supervision by the Bank of Uganda (i.e. responsibilities and powers of supervisors). - 22 -
  23. 23. 6) Receivership, liquidation and exit of a failed MFI.FINCA Uganda Ltd MDI (initiated by FINCA International), Uganda Finance Trust LtdMDI (a women‘s movement project was largely support by SNV1), Pride Uganda LtdMDI (by Government of Uganda with support from NORAD) and the UgandaMicrofinance Limited MDI (now Equity Bank) were the first four MFIs to be licensedas Microfinance Deposit-taking Institutions (MDIs).As discussed further in the paper presented at the International Conference onMicrofinance Regulations, there were various benefits for the government, thecentral bank, clients and the MFIs, after the successful implementation of theMicrofinance Deposit-taking Institutions (MDI) Act.GovernmentWith the implementation of the MDI Act and emergence of a number of institutionsdemonstrating capacity to attain financial sustainability, the focus of Ugandagovernment shifted towards supporting sustainable, market-based microfinance.This helped the government to outreach the ultra-poor section of the society andstreamline the process of microfinance in such areas.The Central BankAs discussed in the paper, ―including MFIs in the banking legal framework hasimproved central bank supervisors‘ appreciation of the peculiarities of microfinancesupervision. And as some MDIs begin to transform into NBFIs and banks, thespecialized skills for analyzing microfinance operations (particularly group lendingmethodologies) and portfolio quality performance, are being shared amongcommercial bank and MDI supervisors‖. This also helped in the transfer of skillsbetween bank and MDI supervisors.MDI ClientAs reported in the paper, the total loan portfolio of the four MDIs increased by Shs65.7 billion to Shs 139.9 billion between December 2005 and September 2008. TheMDI clients were benefited from the methodologies used by MIDs, and there wasalso evidence of repeat borrowing, business expansion and diversification, increasein frequency and volumes of savings.Microfinance Deposit Taking Institutions (MDIs)According to the paper, MDIs asset quality consistently improved from 2005 to 2009.Starting with a Portfolio at Risk (PAR) rate of 5.5% in 2005, the overall PAR had, bythe end of December 2009, reduced to 2.4%. - 23 -
  24. 24. 2.1.7 Security issuesThe Microenterprise Best Practices (MBP) also studied the security issues faced bythe MFIs in the post-conflict environment, and published the report under itsTechnical Brief 6 (main author: Kenneth Graber, Director of the MicroenterpriseDevelopment). The report gives the example of the attack on the MFI employees inCambodia, the Philippines, Kenya, Kosovo and Rwanda, while stating the reasonsfor the cause of insecurity. The MFIs working in such environment withinmarginalized and insecure communities face risks to their staff, clients, and assets.Besides providing general security guidelines, the report also suggest security stepswhich can be taken when commercial banks do or do not exist. As commercial banksdo exist in Afghanistan, we can shift our focus to the former. Following precautionssuggested by this report can be taken in order to minimize the risk of such attacks: Cash loan disbursement puts the loan officers security at risk. The other viable option is to carry individual client checks which shifts security risk to clients who have more knowledge and flexibility about the safest time to convert the checks to cash, or may individually choose to use banks as a way to store their loan capital. A group treasurer or another member of the group is given responsibility to collect repayments and then deposit them into a commercial account. Clients make payments to the group treasurer outside of group meetings. Other members go to the bank with the person responsible for depositing the money. Repayments are broken down into smaller, less tempting amounts by dividing large groups into smaller sub-groups. These sub-groups can then designate a member to collect and deposit members‘ payments. Groups vary the days of the week and locations for repayment meetings. Changing the pattern in this way is similar to guidelines for personal security in areas subject to terrorism. On the day of repayment, groups randomly choose the member who carries payments to the bank. This helps prevent ―inside jobs,‖ in which a member would collude in advance with an outsider to stage a theft. MFIs develop special arrangements with commercial banks to facilitate client payments. This is often necessary because of the small size and high frequency of the deposits. Deposit slip copies may physically be sent to or collected directly by the MFI, or provided in electronic format. For a fee, local commercial banks can come to group meetings to pick up or deliver cash. - 24 -
  25. 25. The report states that these precautions are essential for the smooth running of anyMFI in a post-conflict scenario. However, it also says that there is a trade-offbetween reducing security risks and increasing costs of operations and certain areasare not economically serviceable until policies are implemented to reduce theincreased costs needed for security. - 25 -
  26. 26. CHAPTER 33.1 Method3.1.1 Research Question 1) What are the features of the current microfinance industry in Afghanistan? 2) How can the current microfinance industry in Afghanistan be improved?3.1.2 AssumptionsIt is assumed that the perspectives of the interviewed people do not necessarilyreflect the exact picture of the requirements in the microfinance sector inAfghanistan. However, it is also admitted that there may be many similaritiesbetween the general outlook and the specific outlook identified in this thesis. Underthe given set of conditions prevalent in Afghanistan, all the local and internationalNGOs and MFIs operating there face more or less the same problems.3.1.3 LimitationsAs all the interviews were collected over the phone from the employees of oneorganization, it is very much possible that the answers of one respondent wereaffected from the answers of another. This poses a limitation while analyzing theresponses. Also, the number of interviews is too less for providing substantialrecommendations from using only the data collected through the interviews. It wasimportant to compare the responses from the background study. The less number ofinterviews was primarily because of the reason that not many employees working inthe microfinance sector were willing to talk.3.2 Data Collection Methods3.2.1 Qualitative MethodPatton (2002) in his book Qualitative Research & Evaluation Methods describes thethree types of data collection. According to him the qualitative data can be collectedand analyzed through following three ways: Interviews: Open-ended questions and probes which help in gathering in- depth responses about people‘s experience in a certain domain. They are also considered to be the most flexible tool for data collection. Observations: Description of the activities as observed during field visits. These observations may include activities, behaviours, conversations, etc., amongst the people present in the field. Documents: Written material, records, official publications and other documents help to gather information in a specific context. This information - 26 -
  27. 27. when combined with the above methods can prove to be very helpful during the analysis of data.All the three ways were used for the data collection process for this thesis. Data wasanonymously collected by means of five telephonic interviews with the employees ofHand in Hand Afghanistan. Originally a visit to Afghanistan was intended to gatherand analyze more data, however, due to the political instability in the region andfinancial constraints, the visit was not possible. A feasible alternative was to work inthe Hand in Hand India office and simultaneously conduct interviews with theemployees in Afghanistan. This provided an opportunity to understand thefunctionalities of an MFI and look into the loopholes in the microfinance sector inAfghanistan.Observations were made in India to understand the aspects of microfinance and usethem in the thesis. Also, many documents and reports were analyzed in order tomake a firm background for this study. - 27 -
  28. 28. CHAPTER 44.1 RESEARCH FINDINGS AND ANALYSIS4.1.1 Outreach of the MFIsAll the respondents said that, the outreach of MFIs is quite limited. MISFA reportssupport the argument as it says, ―Today, microfinance remains heavily entrenched inurban and peri-urban areas—only 27 percent of the more than 400,000 total clientsare in rural communities. However, the rural population makes up 74 percent of thetotal population (estimated at 25 million) of Afghanistan‖.Security issue related to thepresence of the Taliban groups present in many regions is the most prominent factorthat prohibits such large scale catering of clients. The southern provinces ofAfghanistan are considered to be extremely risky for any MFI (or organization) tooperate. These include the provinces of Helmand, Quandhar, Ghazni, Nimruz, Zabol,Patkia, etc. Even in the north, the reach of MFIs and NGOs is limited to the urbanand semi-urban areas.4.1.2 Islamic MicrofinanceFour out of the five respondents said that many prospective clients in Afghanistanabstain from taking loans if the MFI does not comply with the Sharia laws. Thisposes a big problem for the institutions providing micro-credits because in order toserve these clients, it will have to buy the assets on their behalf (Murabahah). As thisprocurement requires an employee of the organization, this increases the operationalcost for the lender.As suggested by Rahim (2007), there is also a credit risk involved in this model.Suppose the MFI buys 20 cows for 20 households in a region and a widespread cowdisease hits the region before the full repayments have been made, the entireportfolio will be at risk. As the cows will be the property of lender till the amount hasbeen repaid in full, he will not be able to claim any money from the borrower. For thesmooth functioning of such model, the presence of insurance agent is of utmostimportance.4.1.3 Importance of SHGsLooking at the successful implementation of the SHG (Self Help Group) model inmany parts of the world, all the respondents felt the need of promoting it on a largerscale in Afghanistan. In most of the cases around the world, SHGs are the onlywomen groups considering the lesser risk involved in lending to women. It alsosupports the fact that women‘s repayment rates are typically far superior to those ofmen. Three of them said that the SHG model will be very useful in mobilizing thewomen in rural areas, whereas, two of them felt that it mobilization will depend onthe geographical region. According the latter two, the implementation of SHGs in therural areas will be much more difficult for the MFIs as it will require huge amount oftraining expenditure and human resource in order to train the women and bring them - 28 -
  29. 29. up to certain level where they can be included in the documentation process as theanimator or representatives.4.1.4 Capacity BuildingAccording to the respondents, MISFA and the Afghan government are nowamplifying their focus on the capacity building process in the Afghanistanmicrofinance sector. By capacity building we mean the assistance which is providedto people in order to help them to develop a certain skill or competence. Therespondents said that if the clients receive training on a certain kind of enterprisebefore the loan is disbursed, it will help them to utilize the loan for the intendedpurpose rather than diverting the amount towards consumption.The respondents discussed about the carpet industry in particular and according tothem capacity building in this domain will be very effective and useful for thehouseholds which have the skills of carpet-making through generations. If the clientsare given more training on these skills and then provided with loans to build up theirown home-based enterprise, it is very much possible that they can increase theirincome and come out of poverty. The responses align with the report published byAISA on Investing in Afghanistan: Business Opportunities in the Carpet Industrywhich says that ―the importance of the carpet sector is well understood by thegovernment, NGOs and international actors, particularly since it is an importantsource of income for the rural population, particularly for women, and has a largepotential for employment creation and poverty alleviation. Government‘s policy andinternational support are increasingly directed to the benefit of the industry‖.The respondents also suggested for the capacity building in the agriculture sector.Proper training on the agriculture based products and marketing can substantiallyincrease the profit margin for the farmers, and hence help them to make repaymentsin time. A study conducted on AGRICULTURAL MARKET RESEARCH FORMICROFINANCE AND SME INTERVENTIONS conducted by MEDA in 2009 furthersupports this point. According to the report, ―there is a strong need for MFIs todevelop appropriate loan products -- tenure, service fees and repayment frequenciesthat make sense for the farm business and its cash flows. Without them, the farmbusiness will be unable to cover the loan expectations, and poorly designed creditproducts will actually lead to defaults in agricultural and livestock portfolios inmicrofinance and SME lending institutions. Building capacity in all areas of MFImanagement, including credit management and developing market-led services –particularly for agriculture -- is an important investment‖. The report also suggestsMISFA to provide support and capacity building (directly or indirectly) to partner MFIson product development for agricultural finance. The respondents also discussedabout a common problem which existed for clients applying for loans for investmentin agriculture. Sometimes the application process takes a long time which in turnleads to a typical situation in which clients get the loan after the season of theseasonal agricultural product they wanted to plant. Such amount is hence utilized for - 29 -
  30. 30. consumption and clients default on repayments as assets are never created in thefirst place.4.1.5 Demand of the DMFIsThe respondents were not very sure about the demand of DMFIs, however, theconfirmed the formal saving habits of the clients as discussed by Arteaga (2009).They further discussed the purpose of such savings and agreed to the potentialmarket for providing such services. However, they were skeptical about the ability ofthe NGOs and MFIs to provide the facility of saving for clients under suchcircumstances. One of them suggested that the concept of internal savings within anSHG is also a viable solution to encourage savings amongst the clients withoutinvolving an MFI through a legal framework. - 30 -
  31. 31. CHAPTER 55.1 CONCLUSION AND RECOMMENDATIONSSo far we have tried to understand the various aspects of microfinance in generaland the same in Afghanistan. We have also seen some successful stories likeCambodia (microfinance in the post-conflict scenario), Uganda (implementation ofDMFIs) and Yemen (implementation of Islamic microfinance). All these three casesrelate to the present situation and requirements of Afghanistan. Lessons from Cambodia Cambodia presents an interesting case study for Afghanistan in the post-conflict scenario. As the Cambodian government restructured its microfinance operations by implementing a broader-based approach of serving whole communities in mid 90s, the government of Afghanistan can also take steps on similar lines in order to make the microfinance sector more efficient. As mentioned in the technical brief before, support from the government will be required for training people and human resource development activities including in-country training and study programs and workshops, seminars, exchange visits, and courses abroad. Lessons from Uganda Uganda has presented a successful case for the implementation of DMFIs and sustainable microfinance business model. The country‘s highly regulated four tier framework for the financial institutions (banks, credit institutions, MDIs and Moneylenders Association Groups) is an effective way to implement the procedures allowing the MFIs to take deposits from clients. As Afghanistan already has a legal framework for DMFIs, it can further learn from the case of Uganda in order to implement the regulations and allow the MFIs to take deposits. Lessons from Yemen The Hodeidah Microfinance Programme (HMFP) in Yemen was successful in implementing the Islamic microfinance model as it catered to the masses. As suggested by the respondents in the interview, the MFIs and NGOs in Afghanistan can reach out more clients if they focus on Sharia compliant loans. These financial institutions can definitely learn from the operational strategies followed by HMFP, in order to make the Islamic model more efficient and profitable.5.2 Importance of Capacity BuildingIt was also seen that the respondents indicated the importance of capacity buildingbefore the disbursement of loans to clients. For the purpose, they suggested to focuson training sessions for the carpet industry and the agriculture sector. Such sessions - 31 -
  32. 32. will definitely boost the confidence of clients and help them to increase theproductivity from their enterprise.5.3 Tackling the Security IssuesSecurity issues are one of the prime concerns in Afghanistan. Besides the attackswhich target the civilians or army, there have also been cases when these attacksare targeted specifically on the people carrying cash. As indicated by therespondents, it is one of the prime reasons which restrict the outreach of MFIs. Asdiscussed before in the Technical Brief 6 of the The Microenterprise Best Practices(MBP), Carrying individual client checks which shifts security risk to clients who have more knowledge and flexibility about the safest time to convert the checks to cash, or may individually choose to use banks as a way to store their loan capital. A group treasurer or another member of the group is given responsibility to collect repayments and then deposit them into a commercial account. Repayments are broken down into smaller, less tempting amounts by dividing large groups into smaller sub-groups. These sub-groups can then designate a member to collect and deposit members‘ payments. Groups vary the days of the week and locations for repayment meetings. Changing the pattern in this way is similar to guidelines for personal security in areas subject to terrorism like Afghanistan. On the day of repayment, groups randomly choose the member who carries payments to the bank. This helps prevent ―inside jobs,‖ in which a member would collude in advance with an outsider to stage a theft. MFIs develop special arrangements with commercial banks to facilitate client payments. This is often necessary because of the small size and high frequency of the deposits. Deposit slip copies may physically be sent to or collected directly by the MFI, or provided in electronic format. For a fee, local commercial banks can come to group meetings to pick up or deliver cash.Hence we can see that there are huge possibilities for improvement in theAfghanistan Microfinance sector. All the case studies and reports stated above candefinitely help in the reconstruction of the nation by providing the poor ability to beindependent. - 32 -
  33. 33. REFERENCESAGRICULTURAL MARKET RESEARCH FOR MICROFINANCE AND SMEINTERVENTIONS [Online][Accessed on: March 6, 2010] Available at:www.misfa.org.af/file.php?id=37U.N. report on poverty in Afghanistan, 2010 [Online] [Accessed on May 8, 2010]Available at:http://www.upi.com/Top_News/International/2010/03/31/UN-report-on-poverty-in-Afghanistan/UPI-38721270011610/The World Factbook: Afghanistan [Online] [Accessed on May 8, 2010] Available at:https://www.cia.gov/library/publications/the-world-factbook/geos/af.htmlIslamic Banking Principles Applied to Microfinance, Case Study: HodeidahMicrofinance Programme, Yemen, January, 2002http://www.uncdf.org/english/microfinance/uploads/thematic/Islamic%20Banking%20Principles%20Applied%20to%20Microfinance.pdfJones, Susan R. 2004: A Legal Guide to Microenterprise Development. Chicago:American Bar AssociationGhatak, M. 1999: Group lending, local information and peer selection, Journal ofDevelopment Economics Vol. 60, pp. 27–50Besley, T. 1995: Nonmarket Institutions for Credit and Risk Sharing in Low-IncomeCountries, The Journal of Economic Perspectives, Vol. 9, No. 3, pp. 115-127Tassel, E. V. 1999: Group lending under asymmetric information, Journal ofDevelopment Economics Vol. 60, pp. 3–25Morduch, J. 1999: The role of subsidies in microfinance: evidence from the GrameenBank, Journal of Development Economics Vol. 60, pp. 229–248Segrado, C. 2005: ―Islamic microfinance and socially responsible investments‖,Microfinance at the University University of Torino [Online][Accessed on: August 1,2010] Available at: www.gdrc.org/icm/islamic-microfinance.pdfRahim, A. 2007: Islamic Microfinance: A Missing Component in Islamic Banking,Kyoto Bulletin of Islamic Area Studies, 1-2(2007), pp. 38-53Arteaga, X., Tejada, G. 2009: Legal and Regulatory Analysis for DepositoryMicrofinance Institutions – DMFIs Analysis and Recommendations, MicrofinanceInvestment Facility of Afghanistan ‐ MISFA [Online][Accessed on: August 15, 2010]Available at: www.misfa.org.af/pdf/DMFI%20Analysis.pdf - 33 -
  34. 34. Security Issues for Microfinance Following Conflict Technical Brief # 6[Online][Accessed on: August 5, 2010] Available at:www.gdrc.org/icm/disasters/Following_Conflict_Brief_6f.pdfDeveloping Post-Conflict Microfinance Institutions: The Experiences of Liberia andKosovo Technical Brief # 3 [Online][Accessed on: August 6, 2010] Available at:www.gdrc.org/icm/disasters/Developing2.pdfDeveloping a Post-Conflict Microfinance Industry: The Case of Cambodia TechnicalBrief # 2 [Online][Accessed on: August 8, 2010] Available at:www.gdrc.org/icm/disasters/Developing.pdfRegulation and Supervision of MDIs (2007), 3rd African Microfinance Conference,Kampala [Online][Accessed on: August 12, 2010] Available at:http://www.fsdu.or.ug/pdfs/3AMC%20Conference%20Presentations/Day%202/Sub%20theme%203%20-%20National%20Microfinance%20Policies/Regulation%20and%20Supervision%20of%20MDIs.pdfIrfan, Q. 2008: Murabaha Financing VS Lending on Interest A thin line making bigdifference in the understanding of Riba [Online][Accessed on: August 16, 2010]Available at: www.hazariba.com/Murabaha_Financing_VS_Lending_on_Interest.pdfAFGHANISTAN‘S MICROFINANCE SECTOR: GEARING UP TO EXPAND ITSRURAL OUTREACH, Microfinance Times (April, 2010) [Online][Accessed on: June12, 2010] Available at: www.misfa.org.afMISFA Report (March, 2010) [Online][Accessed on: June 15, 2010] Available at:www.misfa.org.afArteaga, X. 2009, Roadmap to Transformation: A practical guide to thetransformation to a Depository Microfinance Institution (DMFI) in Afghanistan[Online][Accessed on: July 15, 2010] Available at:www.misfa.org.af/index.php?page=en_ReportsAGRICULTURAL MARKET RESEARCH FOR MICROFINANCE AND SMEINTERVENTIONS (August 20, 2009): Mennonite Economic Development Associates[Online][Accessed on: July 15, 2010] Available at: www.misfa.org.afInvesting in Afghanistan Business opportunities in the carpet industry[Online][Accessed on: July 15, 2010] Available at:www.rugandcarpets.com/pdfs/carpet-afghania.pdfMarino, P. Beyond Economic Benefits: The Contribution of Microfinance to Post-Conflict Recovery in Asia and the Pacific [Online][Accessed on: March 6, 2010]Available at: http://books.google.co.uk/books?hl=enlr=id=FTpO-WW_Ou4Coi=fndpg=PA107dq=afghanistan+microfinanceots=vdrRGDJf6nsi - 34 -
  35. 35. g=4Va3OUm53p8PdC_8snZHYAaZwa0#v=onepageq=afghanistan%20microfinancef=falseWhat is a Microfinance Institution (MFI) [Online] [Accessed on May 8, 2010]Available at: http://www.cgap.org/p/site/c/template.rc/1.26.1308/Hand in Hand [Online] [Accessed on May 8, 2010] Available at: www.hihseed.orgHand in Hand (2010), Power Point on Eligibility Criteria; SHG Training Material:Module 1-2; Material on Group Formation and Loan Utilization.Hand in Hand (2010), Material on Group Formation and Loan Utilization.Patton, M. Q. 2002: Qualitative Research Evaluation Methods [Online] [Accessedon May 28, 2010] Available at:http://books.google.co.in/books?id=FjBw2oi8El4Cprintsec=frontcoverdq=Qualitative+Research+%26+Evaluation+Methodssource=blots=btt2bEFAuHsig=_bs-1BjcJM7ODM4xVD3s55lZQ10hl=enei=ZdWZTPngDoyovQOz4ZyIDQsa=Xoi=book_resultct=resultresnum=1ved=0CB0Q6AEwAA#v=onepageqf=false - 35 -
  36. 36. Appendix AInterview QuestionsIntroductionHello Sir / Ma‘amMy name is Swapnil Srivastava and I am a post graduate student in the departmentof International Business of Leeds University Business School. I am calling to ask ifyou could spare a few minutes for an interview with me on my research topic,―Microfinance and Poverty Reduction in Afghanistan‖. This research intends toanalyze the complex nature of the microfinance industry in Afghanistan.This interview will be for approximately 15 minutes and will be highly confidential andanonymous. After the interview, you will be provided with the transcript for yourcomment and feedback. If possible, I would be grateful if you could suggest apossible time to call you back.Questions:1) What are the major challenges for MFIs in Afghanistan?2) According to you, what can be done in the domain of microfinance to improve the situationof this country?3) (a) According to you, what is the future of DMFIs in Afghanistan (b) which businessmodel they will be following?4) Which are the most important regions in Afghanistan where more investment is requiredin microfinance sector?5) How far the concept of Self Help Groups (SHGs) implemented in Afghanistan?6) How important it is for the loans to be Sharia compliant?7) As the government is investing on the capacity building process in Afghanistan,which sectors require it the most? - 36 -

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