This master's thesis examines the microfinance sector in Afghanistan, focusing on the challenges and potential improvements from the perspective of the NGO 'Hand in Hand.' It reveals that the outreach of microfinance institutions is limited, with insufficient attention to Islamic microfinance methods. The study emphasizes the importance of capacity building and addressing security issues to enhance the effectiveness of microfinance in alleviating poverty.

1. LEEDS UNIVERSITY BUSINESS SCHOOL
Department of International Business
Master‘s Thesis
September, 2010
Microfinance and Poverty Reduction in Afghanistan
An analysis of current microfinance scenario in Afghanistan and
the scope of its improvement
Abstract
The 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 the
country. This analysis is done with the help of the underlying theoretic models used
in the microfinance sector, and by taking the economic, social and political realities
of Afghanistan into account. The results reveal that the outreach of MFIs and NGOs
in Afghanistan is still very limited, with very less focus on the traditional practices like
Islamic microfinance.
Author: Swapnil Srivastava*
Supervisor: Prof. P. J. Buckley
Correspondence to swapnil.srivastava4DELETE_THIS@gmail.com . The above email addresses have been modified in order
to avoid unsolicited email. Before using the addresses, please remove the DELETE_THIS part in the address.

2. TABLE OF CONTENTS
ACKNOWLEDGEMENT ..................................................................................................................... 4
ACRONYMS…………………………………………………………………………………………5
GLOSSARY……………………………………………………………………………………………6
CHAPTER 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………………………………………………………………………….15
CHAPTER 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……………………………………………………………..24
CHAPTER 3
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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…………………………………………………26
CHAPTER 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……………………………………………..30
CHAPTER 5
5.1 CONCLUSIONS AND RECOMMENDATIONS…………………………………31
5.2 IMPORTANCE OF CAPACITY BULIDING……………………………………….31
5.3 TACKLING THE SECURITY ISSUES…………………………………………………32
REFERENCES…………………………………………………………………………………….33
APPENDIX 1…………………………………………………………………………………….36
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4. ACKNOWLEDMENTS
I would like to extend my warm regards to all the people who helped us during the
course of this project.
I would like to thank Usha Somasundaram, Executive Director of Hand in Hand
Afghanistan, without whom working on this thesis would not have been possible. Her
knowledge and dedication towards her work is commendable, and she provided us
with some great insights of the microfinance sector in Afghanistan. Also, I would like
to thank my supervisor Prof. P. J. Buckley, who helped me a lot to decide the project
and the research methodology.
The friendly nature of all the Hand in Hand staff and their willingness to help us
anytime has definitely added to the value of my work.
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5. ACRONYMS
MFIs Microfinance Institutions
MISFA Microfinance Investment Support Facility for Afghanistan
CGAP Consultative Group to Assist the Poor
DAB Da Afghanistan Bank
AIB Afghanistan International Bank
BRAC Bangladesh Rural Advancement Committee
SHG Self Help Group
AREDP Afghanistan Rural Enterprise Development Program
MEDA Mennonite Economic Development Associates
AISA Afghan Investment Support Agency
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6. GLOSSARY
Qu’ran holy book of Islam
haram unlawful
purdah veil (for women)
Qarz-e-hasna credit with no interest
sudh credit with interest
riba usury
Sharia related to Islamic Laws
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7. Chapter 1
1.1 Introduction
As discussed by Boyle (1998), microfinance is a multi-purpose tool when used in the
post-conflict context. Besides boosting and reviving the local economic development
by providing access to financial services, it also helps in the immediate post-conflict
rehabilitation assistance (cited in Marino 2006:8). This paper is an attempt to
understand the complex nature of the microfinance industry in Afghanistan, a country
which has been crippled by almost three decades of war. For the purpose, an NGO
Hand 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 by
the U.N. High Commissioner for Human Rights, ―9 million Afghans or 36 percent of
the population are believed to live in absolute poverty, and a further 37 percent live
only slightly above the poverty line" despite about $35 billion of outside aid sent to
the country between 2002 and 2009 (U.N. report on poverty in Afghanistan, 2010).
According to Maley (2009), Afghanistan is an extremely complex country, and the
most important challenge faced by the researchers is to find ways of conveying
Afghan culture, politics and societies in a way which is comprehensible to the
readers. In a study conducted by MEDA Microfinance from May 24-June 10, 2009, it
was recommended that the Afghan microfinance sector ―still needs strong technical
support in loan product development, management, governance, credit delivery, MIS
systems, internal audits and controls. The study also highlighted the opportunity for
lending to the SME agri-business sector, particularly for processors, storage facilities
and export or growers associations‖ (AGRICULTURAL MARKET RESEARCH FOR
MICROFINANCE 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 issue
was a new foreign policy approach toward dealing with the threat posed by al-Qaida
terrorists operating in the area from Afghanistan to Pakistan‖. He also gave clear
indications of an "exit strategy" with regard to the United States policy in Afghanistan
by 2012 (CountryWatch, 2010). The withdrawal of armed forces will give an
opportunity to the Afghan government to restructure and stabilize the economic
scenario of the country without any form of foreign intervention. The economic
activities within Afghanistan in the next two years will certainly lay down the
foundation stones of the next decade. Providing micro-credits to the people in rural
areas 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 the
money, and will provide them training for any specific skill-set which is required for
that particular business.
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8. 1.2 Definitions
1.2.1 Afghanistan
The Islamic Republic of Afghanistan (commonly known as Afghanistan) is one of the
poorest nations in the world. After the Soviet Union supported the Afghan
Communist regime between 1979 and 1989, and a series of civil wars, Kabul was
finally 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 General
Department for the Preservation of Virtue and Prevention of Vice (Amr-bil Maroof Wa
Nahi Anil Munkar), search houses and destroy any television sets, radios, cassettes,
and photographs. The bands of Taliban thugs roam the streets beating those they
deem 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 brought
back Afghanistan again at the centre of world politics. The United Nations sponsored
Bonn Conference in 2001, which aimed at the political reconstruction of Afghanistan
by introduction of a new constitution, a presidential election in 2004, and National
Assembly elections in 2005 (cia.gov). Hamid KARZAI became the first
democratically elected president of Afghanistan in 2004, and was re-elected in
November 2009 for a second term (CIA reports).
Population
28,395,716
Age Structure
0-14 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 birth
Male: 44.19 years
Female: 44.61 years (2010 est.)
Ethnic groups
Pashtun 42%, Tajik 27%, Hazara 9%, Uzbek 9%, Aimak 4%, Turkmen 3%, Baloch
2%, other 4%
Religions
Sunni Muslim 80%, Shia Muslim 19%, other 1%
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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 Microfinance
According to Barr (2005), ―Microfinance is a form of financial development that is
primarily focused on alleviating poverty through providing financial services to the
poor. Most people think of microfinance, if at all, as being about microcredit, lending
small 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 Latin
America and South Asia. However, it was best applied by Muhammad Yunus when
he started the Grameen Bank in Bangladesh (1976), following the wide-spread
famine of 1974 in the country. The Grameen Bank of Bangladesh has been in the
vanguard of the microfinance movement, showing the potential to alleviate poverty
by providing credit to poor households (Morduch (1999)). The basic idea of
microfinance is to reduce poverty by helping entrepreneurs to generate and expand
their enterprises. Now microfinance is a wide-spread phenomenon which has not
only helped people in developing economies like Africa, Latin America, Asia, and
Eastern Europe, but also those in the richer economies like Norway, the United
States, and England. The MFIs, banks and NGOs can act as financial institution for
the disbursement of small loans the recipients that are normally micro entrepreneurs
and the poor, depending on the laws of a country. This loan is expected to be utilized
for the purpose of new income generating project or business expansion. The loan is
generally given in to a group and not an individual, in order to take advantage of
social collateral. This is an important aspect of microfinance as the loans do not
require any form of collateral from the clients which makes it different from normal
banking and more accessible to the less privileged section of the society. The terms
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10. and conditions of the loan are normally easy to understand and flexible and a
subsequent 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 Microfinance
Segrado (2005) has discussed that ―whether the economic behavior can be
influenced by the predominant religious belief, the role of Islamic finance in Muslim
societies nowadays but most of all its potential to fight poverty in those countries
belonging to the so called developing world, when related with important economic
development tools such as microfinance‖. Islamic microfinance (or any other form of
Islamic finance) is based on the principle of prohibition of riba (usury). There are
many alternative ways (which will be discussed later) through which the clients of
Islamic 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 financial
services to the poor and less privileged members of the society. They differ in their
legal structure, mission, and methodology; however, all share the common
characteristic of ―providing financial services to clients who are poorer and more
vulnerable than traditional bank clients‖.
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11. 1.2.5 Depository Microfinance Institution (DMFI)
DMFI is a particular kind of MFI which is allowed to collect savings from the clients
besides giving them micro-credits. It requires strict regulations from the government
and not every country has an existing legal framework for this. In Afghanistan, the
Depository Microfinance Institution Regulation (DMFI Regulation) was established in
2006; 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 joint
liability 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 in
the same neighborhood and the members should have a homogenous background.
This helps the financial institution to take benefit from the local knowledge and
decrease the default rate. According to Jones (2004), ―sectors of microfinance
industry are focused on helping women feed, house and cloth their families; educate
their children; attend to their family's basic health care needs; increase and diversify
incomes; build social, human, and economic assets that contribute to freedom from
risk; and enhance the quality of life for their families and communities‖. This is one of
the 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 themselves
members of the self help groups. The role of the Animator is to conduct the group
meetings and to maintain group records/accounts books properly. The Animator is
also acting as a bridge between the group and banks, Government officials etc. The
responsibility of the Representative is to assist the Animator in her work, and to
maintain a joint account in a bank for the group. She also collects the group money
and deposits it in the bank.
In order to be able to take up a loan, the SHG has to be functioning for more than
three months, and meetings need to be held regularly. Two training modules for
SHG members, as well as training for the group‘s Animators and Representatives
have to be completed. Savings and repayments of internal and other loans also need
to be regular and books of accounts for the latest month should be available. The
Branch Managers will make a final on-site credit risk rating based on the above
criteria before the loan is ultimately disbursed (Hand in Hand (2010), Material on
Group Formation and Loan Utilization).
1.2.7 Repayment and loan utilization
When 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.
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12. Generally, 5-6 members in one SHG group are given a loan, which has to be repaid
in full. The possibilities for obtaining subsequent loans are dependent on the
repayment of these loans, and peer pressure from other group members is exerted.
Commonly, Micro Finance Institutions are mostly concerned with the repayment of
loans. As long as the loan is repaid, the purpose for which the loan has actually been
used for is of less relevance. At Hand in Hand repayment of loan is also a
prerequisite, however, Hand in Hand is not a pure Micro Finance Institution, but a
seed NGO with a mandate to work for social development and create sustainable
economic empowerment. Hence, also the utilization of the loan becomes of great
importance, as using the loan for consumption purposes would not fulfill the aim of
creating sustainable income generating activities (Hand in Hand (2010), Material on
Group Formation and Loan Utilization).
1.3 Background: Microfinance Sector in Afghanistan
With the help of Afghanistan government and international support, the microfinance
sector in Afghanistan has been continuously growing in the past few years. The
Microfinance Investment Support Facility for Afghanistan (MISFA) was set up in
2003 with the support of the Afghan government and international donors. The
objective of its establishment was to provide assistance and funding to build
Afghanistan‘s microfinance sector, and to streamline the process of development
using microcredit. As of 31 March 2010, the 16 implementing partners (15 MFIs and
1 bank) of MISFA have served 429,846 savings and loan clients for an outstanding
portfolio of US$102 million. Since inception in 2003, the program has disbursed more
than 1.5 million loans across Afghanistan worth over $765 million (MISFA Report,
March 2010). MISFA is supported by donors, international development agencies
and the Government of Afghanistan through the Afghanistan Reconstruction Trust
Fund (ARTF). Consultative Group to Assist the Poor (CGAP) is its key advisor.
Key Indicators As of March 31, 2010
Active clients 429,846
Percentage of women 60%
Gross Loan Portfolio (US$) 102
Loan outstanding per borrower (US$) 351
Cumulative repayment rate 93%
Operational self-sufficiency (OSS) 73%
(Source: MISFA report, March 2010)
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13. Partners of MISFA
Afghanistan International Bank
Afghanistan International Bank (AIB) is a local Bank with strong International
shareholders headquartered at Kabul, Wazir Akber Khan, behind Lasay Amani High
School, Afghanistan. AIB was established in March 2004 and after three years of its
operations; the bank has established a branch network in major cities of Afghanistan
that 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 Bank
BRAC Afghanistan Bank (BAB) is a full-fledged Commercial Bank with institutional
shareholdings by BRAC, ShoreCap International Ltd. (SCI), USA, International
Finance Corporation (IFC) - an investment wing of the World Bank and Triodos Bank
of Netherlands. BRAC Afghanistan Bank‘s Head Office is loacated in Kabul was duly
licensed by the Da Afghanistan Bank (Central Bank) and started its operation in
October 2006. Since inception, the Bank's footprint has grown from a single branch
to 4 Fully Functional branches, 11 SME unit offices and 1 Limited Service Booth in
Kabul and 3 SME unit offices in three provinces, namely, Mazar-e-Sharif,Herat and
Jalalabad. In the years ahead, BRAC Afghanistan Bank expects to add a wider
network of SME unit offices, Full Function Branches and ATMs across the country
(misfa.org.af).
Bank Alfalah Limited
Bank Alfalah Limited (BAL) was incorporated on June 21st, 1997 as a public limited
company under the Companies Ordinance 1984. Its banking operations commenced
from November 1, 1997. The bank is engaged in commercial banking and related
services as defined in the Banking companies ordinance, 1962. The Bank is
currently operating through 282 branches in 115 cities of 04 Countries, with the
registered office in Karachi (misfa.org.af).
FMFB Afghanistan
The First MicroFinanceBank, Afghanistan (FMFB Afghanistan) on September 18,
2003 received the first license from Da Afghanistan Bank (DAB) the Central Bank in
Afghanistan after which on November 22, 2003 it was registered with Afghan
Investment Support Agency (AISA) as a limited liability company.
On March 18, 2004 received formal banking license to operate nationwide from the
Da Afghanistan Bank. The operations commenced from May 1, 2004 (misfa.org.af).
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14. 1.4 Hand in Hand
The NGO Hand in Hand started in its current form in 2004 in Tamil Nadu, with the
objective of eliminating poverty by creating enterprises and jobs. To achieve this aim
Hand in Hand adopted an integrated five pillar approach that tackles issues that are
of 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 to
information and basic IT skills are provided. The five-pillar model has proved to be
successful 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 SHG
model, where marginalized rural women are trained in entrepreneurship and
vocational skills development, facilitating access to microfinance products through a
savings-driven approach, and helping them build sustainable livelihoods for
themselves and their families. Hand in Hand also provides hand-holding for market
linkages, business expansion etc. In India, the SHG and Microfinance Program is
currently operational in 23 districts in the states of Tamil Nadu, Karnataka, and
Madhya Pradesh in India. It has reached more than 500,000 women and has
supported/strengthened over 390,000 family-based enterprises (FBE) and nearly
5,500 medium scale enterprises (MSE) (hihseed.org).
1.5 Hand in Hand Afghanistan
Hand in Hand Afghanistan was started in Mazar-e-Sharif with a liaison office in
Kabul, following a request from the President Hamid Karzai to Percy Barnevik (major
donor and advisor of HIH) in 2006. The aim was to create pilot projects and supply
technical assistance to AREDP (Afghanistan Rural Enterprise Development
Program). ARDPE was launched by the president Hamid Karzai in 2007, and it aims
to create more than two million jobs in at least 70% of villages in 10 years. The Hand
in Hand executives in Afghanistan hire locals as far as possible, and its exit strategy
is 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 beneficiaries
in two districts have been mobilised into community groups and trained in group
dynamics, bookkeeping, savings, and business basics. The microfinance methods
that 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 support
of AfghanAid. The aim is to create 750 new jobs by June 2009. Hand in Hand also
heads a consortium working to develop small/medium enterprises here. With the
help of the World Bank, a Horticulture and Livestock Programme has been started to
improve the quality and output of farmers across the country. So far, 40 farmers‘
groups have been mobilised, and 400 training sessions held (hihseed.org).
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15. ―The main purpose of the pilots is to help lay the foundation and get experience for
the big AREDP programme‖. (hihseed.org)
1.6 Purpose of Study
There 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 at
the 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 in
Afghanistan microfinance sector (employees of Hand in Hand Afghanistan). These
insights and opinions will be valuable for the study as only these people can suggest
feasible ways for the improvement of microcredit scenario in Afghanistan.
The third aim is to analyze the cases of Cambodia, Yemen and Uganda, the
countries in which microfinance acted as an excellent tool for development. There
are various dissimilarities between these two countries and Afghanistan, however,
the basic idea of development remains the same.
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16. CHAPTER 2
2.1 Literature Review
2.1.1 Group Lending
―To argue that banking cannot be done with the poor because they do not have
collateral is the same as arguing that men cannot fly because they do not have
wings‖. — Muhammad Yunus (cited in Ghatak and Guinnane (1999))
One of the most important features which enable microfinance to work without
collateral is the group lending process. It has been studied by many researches who
described the process and its implications to maximize the efficiency of MFIs.
Theoretical research on group lending have been very helpful in providing
explanations as to why group lending schemes and joint liability may provide
advantages over other types of financial arrangements in microfinance. According to
Ghatak (1999), borrowers who cannot offer any collateral are asked to form small
groups. The borrowers are allowed to select their group members, an approach
which 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 any
single borrower‘s terms of repayment conditional on the repayment performance of
other borrowers in a pre-specified and self-selected group of borrowers. In case one
of the group members defaults in repayment, the others are denied subsequent
loans in the future. This creates peer pressure on every individual in a group and
thus compensates to a certain extent for the absence of collateral. Moore (1994) has
also stressed on the possibilities of finding efficient outcomes in environments where
the agents are well informed about each other.
Tassel (1999) analyzed the type of optimal loan contracts that emerge when lenders
have less information than borrowers. He demonstrated that lenders can utilize joint
liability as part of a screening mechanism that serves two purposes. Firstly it induces
low risk borrowers to group with one another and select group loans at low interest
rates and secondly, it induces high risk borrowers to select individual loans at high
interest rates. His findings prove that ―the agents will always form groups with agents
of the same type‖ and ―agent types can be distinguished according to the rate at
which they are willing to trade increased (joint) liability commitments for lower
interest rates‖. Ghatak (1999) further proves these points by stating that ―an
interesting implication of the assortative matching property proved in the paper is
that risky borrowers who will end up with risky partners will be less willing to accept
an increase in the extent of joint liability than safe borrowers for the same reduction
in the interest rate‖. It was also emphasized by Ghatak (1999) that ―because
borrowers are shown to end up with partners of the same type, for the same joint
liability contract offered to all borrowers, safer borrowers face lower expected
borrowing costs conditional on success‖.
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17. 2.1.2 The Case of Cambodia
Microenterprise Best Practices (MBP) carried out an extensive study and published a
series of Technical Briefs on post-conflict microfinance. This series discusses on
how to use microfinance effectively in the post-conflict settings. The Brief #2 of this
series (Developing a Post-Conflict Microfinance Industry: The Case of Cambodia)
focuses on the case of Cambodia which demonstrates that ―when institutions are
well-designed and well-operated, a microfinance industry can flourish and reach the
poor in a viable manner even in a society and economy wracked by decades of
conflict‖ (MBP Microfinance Following Conflict, Brief No. 2). The report states that
after almost 30 years of internal conflict, the financial system in Cambodia was
virtually non-existent as a result first of the Khmer Rouge policies and of those of the
Vietnamese occupying government in mid-1990s. Despite of the lack of policies and
legal framework for microfinance, the Group de Recherché et D‘Echanges
Technologiques (GRET), World Relief, and the Association of Cambodian Local
Enterprise Development Agencies (ACLEDA) and Catholic Relief Services (CRS)
started their operations in 1991, 1992 and 1993 respectively. However, these were
small projects instead of full-fledged microfinance operations, and met only a fraction
of the demand for microfinance services.
Looking at the prospects of social welfare and economic development, ACLEDA
changed its strategy of targeting groups and instead implemented a broader-based
approach of serving whole communities in 1995. In the next two years, ACLEDA
increased its operational self-sufficiency from 23 percent to 110 percent and its
number 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 in
Cambodia raced forward to establish themselves as permanent institutions. As per
the 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 a
framework that incorporated microfinance into the country‘s Financial Institutions
Law (MBP Microfinance Following Conflict, Brief No. 2). A legal basis was also
implemented by the government which allowed the MFIs to act as deposit-taking
institutions. Owing to all these factors, the Cambodian microfinance industry enjoys a
robust growth and healthy environment today.
Out of the nine important lessons to be learned by Cambodia, as delineated in the
Technical Brief, two relate the country close to Afghanistan in the post-conflict
context:
―Internal conflict can be reduced by developing strong internal controls and by
conducting training in the areas of governance and management. MFIs in Cambodia
experienced a host of internal problems as they grew. However, many of these might
have been averted if sufficient attention had been devoted to internal controls and to
training staff in the basics of NGO governance‖ (MBP Microfinance Following
Conflict, Brief No. 2).
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18. “Where human resources are limited, it may be wise to invest in external technical
assistance and in extensive staff development programs. Every MFI contacted for
this 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 the
Cambodian organizations had between three and twelve expatriate staff, significantly
higher than the global norm. However, this level of support was required not only for
initial operations but, more importantly, for training Cambodians for the long-term.
Human resource development activities included in-country training and study
programs and workshops, seminars, exchange visits, and courses abroad‖ (MBP
Microfinance Following Conflict, Brief No. 2).
Hence, the report clearly states that microfinance can be used as a powerful tool in
the post-conflict situation by meeting standard microfinance industry goals of scale,
sustainability and depth of outreach. The case of Afghanistan is half-way through the
whole process as it needs more time on implementing a legal framework for DMFIs
and providing a more secured environment for MFI operations.
2.1.3 Islamic Microfinance
Johnson and Rogaly (1997) argue that in order to design relevant and useful
services for poor people, NGOs should understand the local social and economic
structures 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 to
the needs of local people. As Afghanistan is predominantly an Islamic country, it will
be very difficult for the conventional banking systems to make a mark. The concepts
of Islamic banking are thoroughly practiced in Afghanistan, which can be extended to
Islamic Microfinance. One of the fundamental principles of such banking system is
the prohibition of any kind of interest on the loans. The financial institutions under
such system make money by taking a share of profit which the borrowers make. For
carrying out this project on a realistic scale, it will be necessary to closely fabricate
the Islamic practices with the functionality of MFIs.
According to Rahim (2007), ―Conventional microfinance had also been questioned
on its overall desired impact since the poor are subjected very high interest rate
some up to 30%. Some even argued that disbursing credit to the poor to make
financial gains out of the same cannot be the aim of microfinance institutions.
Interest charged is rather oppressive for their poor receivers, and thus fails to
achieve the noble objective of microfinance. According to various studies, a notable
number of the recipients were also found to be well above the poor category‖. On the
other hand, he says, the Islamic Microfinance model is based on the PLS (profit and
loss sharing) scheme, which means that the financial institution is responsible for the
profit as well as loss of the enterprise created by its client. If the enterprise is
successful, the client pays back a share of profit, else the lender has to bear the loss
in case the enterprise is facing the same.
- 18 -

19. Segrado (2005) discussed the need and interest on Islamic Microfinance and
brought forward various reasons for it. According to him, microfinance is a flexible
tool 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 microfinance
services which is still largely unmet in countries where majority of the population is
constituted by Muslims. He also indicated some surveys which proved that there is a
high demand for Islamic banking especially in low and middle income predominantly
Muslim societies, which could be catered by the commercial banks interested in
reaching market niches. According to him, ―Islamic finance, microfinance and socially
responsible finance share most of their principles, such as: prohibition of all forms of
economic activity which are morally or socially injurious, egalitarian approach (no
restriction to any category of clientele), focus on the well being of the community as
a whole (concentrating on the poor, destitute or deprived sections of the society),
aim at social justice, advocacy of entrepreneurship, advocacy for financial inclusion
through partnership finance, participatory approach and risk sharing‖. Hence, he
clearly mentions the benefits of applying Islamic laws in the context of microfinance.
These suggestions are very much applicable when we consider a country like
Afghanistan in which majority of the population is Muslim and living under poor
conditions.
As discussed by both Rahim (2007) and Segrado (2005), there are two instruments
of 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. 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 Yemen
Segrado (2005) also discussed an interesting case of the successful implementation
of Islamic Microfinance in Yemen. The Hodeidah Microfinance Programme (HMFP)
was implemented in 1997, in Hodeidah, Yemen, in order to cater to the needs of
people who have been reluctant to take micro-credit based on conventional banking
model. An initial research was carried out which showed clear preference for the
methodologies of Islamic banking in terms of receiving credit in this region. It had
1770 active clients as of June 2000, 23 percent of whom were women and $350,000
in outstanding loans. The average loan size is 38,000 Yemeni Rial (YR) ($240 US
dollars). There is a cycle of loans the clients go through but each level has a wide
scope. The first loan can be up to 50000 YR ($300 US). The maximum loan for the
final level is 250,000 YR ($1500 US) (UNCDF website). The small loans were mostly
utilized for trading, fishing, food production, small industries, handicrafts and
transportation.
On receiving the loan application, the credit officer performed the initial research and
feasibility study for the loan. After his approval, it was the responsibility of the client
to identify items (commodities/equipment) needed from the wholesaler and negotiate
a price. The credit officer then purchased those items from that source and resold
them immediately at that price to the client. For the repayment, a mark-up price was
added to this cost and monthly installments were decided by the organization.
2.1.5 DMFIs
A thorough analysis of the legal and regulatory framework of DMFIs in Afghanistan
was done by Artega and Tajeda in 2009. At present no MFI in Afghanistan is allowed
to collect savings from its clients although a legal window for this activity was
established 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. DMFIs, to protect the general public from undue losses and safeguard the integrity of
the financial system. The rules that protect customers from unwarranted risks (that
may result in undue losses) are called prudential regulations. In other words,
prudential regulations pertain to the safeguard of the deposits of the general public
and the soundness of the financial system‖. Nevertheless, as mentioned in the case
study of Uganda in the next section, DMFIs prove to be an important source of
development for the MFIs, clents as well the government. However, as argued by
Arteg and Tajeda (2009), countries like Bolivia, Uganda, and Pakistan have been
successful in the implementation of a new licensing windows for MFIs because a
critical mass of profitable credit‐only MFIs existed before the opening of the
window. 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, 2006
Arteaga (2009) also carried out a study to access the demand of saving servies
amongst the microfinance clients in Afghanistan. According to the report, ―14% of
MFI clients save formally and, if given the opportunity, more (almost 33%) of them
would save. About 80% of the clients produce enough income to cover their
expenses and have a surplus that they either put aside (save) or reinvest in their
business‖. The report also says that visiting Mecca for Hajj ranked one as the reason
for saving of these clients. A very close second is to build a home, whereas the third
and fourth places were occupied by son(s) education and daughter‘s marriage. As
indicated in these reports, the MFIs definitely stand a good chance for serving these
clients by taking deposits. The prime reason being the fact that MFIs reach more
number of clients than commercial banks.
2.1.6 DMFIs in Uganda
Uganda presents a classic example of the successful implementation of the DMFIs
under a legal framework known as Microfinance Deposit-taking Institutions (MDIs).
The research paper ‗Uganda‘s Experience in Regulating Microfinance Deposit-taking
Institutions‘ presented at the International conference on Microfinance Regulations
discussed various benefits of regulating microfinance in Uganda. According to this
paper, ―Deposit-taking microfinance business in Uganda in the 21st Century is an
almost entirely different concept from the microfinance of the 1980s. Not only is the
capacity of the poor to save presumed obvious, but sustainability of microfinance as
- 21 -

22. a business is well proven and appreciated. Even what would be considered the
remaining challenge (suitability of microfinance products) is beginning to pale in the
face of innovation and improvements in other sectors, particularly information
technology‖.
As a response to the appeal of larger MFIs, Bank of Uganda (BoU) issued a Policy
Statement on Microfinance Regulation on July 12, 1999. This statement provided a
four 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 Microfinance
Regulation)
As discussed in the 3rd African Microfinance Conference held in Kampla (2007), the
MDI 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. 6) Receivership, liquidation and exit of a failed MFI.
FINCA Uganda Ltd MDI (initiated by FINCA International), Uganda Finance Trust Ltd
MDI (a women‘s movement project was largely support by SNV1), Pride Uganda Ltd
MDI (by Government of Uganda with support from NORAD) and the Uganda
Microfinance Limited MDI (now Equity Bank) were the first four MFIs to be licensed
as Microfinance Deposit-taking Institutions (MDIs).
As discussed further in the paper presented at the International Conference on
Microfinance Regulations, there were various benefits for the government, the
central bank, clients and the MFIs, after the successful implementation of the
Microfinance Deposit-taking Institutions (MDI) Act.
Government
With the implementation of the MDI Act and emergence of a number of institutions
demonstrating capacity to attain financial sustainability, the focus of Uganda
government shifted towards supporting sustainable, market-based microfinance.
This helped the government to outreach the ultra-poor section of the society and
streamline the process of microfinance in such areas.
The Central Bank
As discussed in the paper, ―including MFIs in the banking legal framework has
improved central bank supervisors‘ appreciation of the peculiarities of microfinance
supervision. And as some MDIs begin to transform into NBFIs and banks, the
specialized skills for analyzing microfinance operations (particularly group lending
methodologies) and portfolio quality performance, are being shared among
commercial bank and MDI supervisors‖. This also helped in the transfer of skills
between bank and MDI supervisors.
MDI Client
As reported in the paper, the total loan portfolio of the four MDIs increased by Shs
65.7 billion to Shs 139.9 billion between December 2005 and September 2008. The
MDI clients were benefited from the methodologies used by MIDs, and there was
also evidence of repeat borrowing, business expansion and diversification, increase
in 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, by
the end of December 2009, reduced to 2.4%.
- 23 -

24. 2.1.7 Security issues
The Microenterprise Best Practices (MBP) also studied the security issues faced by
the MFIs in the post-conflict environment, and published the report under its
Technical Brief 6 (main author: Kenneth Graber, Director of the Microenterprise
Development). The report gives the example of the attack on the MFI employees in
Cambodia, the Philippines, Kenya, Kosovo and Rwanda, while stating the reasons
for the cause of insecurity. The MFIs working in such environment within
marginalized and insecure communities face risks to their staff, clients, and assets.
Besides providing general security guidelines, the report also suggest security steps
which can be taken when commercial banks do or do not exist. As commercial banks
do exist in Afghanistan, we can shift our focus to the former. Following precautions
suggested by this report can be taken in order to minimize the risk of such attacks:
Cash loan disbursement puts the loan officer's 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. The report states that these precautions are essential for the smooth running of any
MFI in a post-conflict scenario. However, it also says that there is a trade-off
between reducing security risks and increasing costs of operations and certain areas
are not economically serviceable until policies are implemented to reduce the
increased costs needed for security.
- 25 -

26. CHAPTER 3
3.1 Method
3.1.1 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 Assumptions
It is assumed that the perspectives of the interviewed people do not necessarily
reflect the exact picture of the requirements in the microfinance sector in
Afghanistan. However, it is also admitted that there may be many similarities
between the general outlook and the specific outlook identified in this thesis. Under
the given set of conditions prevalent in Afghanistan, all the local and international
NGOs and MFIs operating there face more or less the same problems.
3.1.3 Limitations
As all the interviews were collected over the phone from the employees of one
organization, it is very much possible that the answers of one respondent were
affected from the answers of another. This poses a limitation while analyzing the
responses. Also, the number of interviews is too less for providing substantial
recommendations from using only the data collected through the interviews. It was
important to compare the responses from the background study. The less number of
interviews was primarily because of the reason that not many employees working in
the microfinance sector were willing to talk.
3.2 Data Collection Methods
3.2.1 Qualitative Method
Patton (2002) in his book Qualitative Research & Evaluation Methods describes the
three types of data collection. According to him the qualitative data can be collected
and 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. 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 was
anonymously collected by means of five telephonic interviews with the employees of
Hand in Hand Afghanistan. Originally a visit to Afghanistan was intended to gather
and analyze more data, however, due to the political instability in the region and
financial constraints, the visit was not possible. A feasible alternative was to work in
the Hand in Hand India office and simultaneously conduct interviews with the
employees in Afghanistan. This provided an opportunity to understand the
functionalities of an MFI and look into the loopholes in the microfinance sector in
Afghanistan.
Observations were made in India to understand the aspects of microfinance and use
them in the thesis. Also, many documents and reports were analyzed in order to
make a firm background for this study.
- 27 -

28. CHAPTER 4
4.1 RESEARCH FINDINGS AND ANALYSIS
4.1.1 Outreach of the MFIs
All the respondents said that, the outreach of MFIs is quite limited. MISFA reports
support the argument as it says, ―Today, microfinance remains heavily entrenched in
urban and peri-urban areas—only 27 percent of the more than 400,000 total clients
are in rural communities. However, the rural population makes up 74 percent of the
total population (estimated at 25 million) of Afghanistan‖.Security issue related to the
presence of the Taliban groups present in many regions is the most prominent factor
that prohibits such large scale catering of clients. The southern provinces of
Afghanistan are considered to be extremely risky for any MFI (or organization) to
operate. 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 urban
and semi-urban areas.
4.1.2 Islamic Microfinance
Four out of the five respondents said that many prospective clients in Afghanistan
abstain from taking loans if the MFI does not comply with the Sharia laws. This
poses a big problem for the institutions providing micro-credits because in order to
serve these clients, it will have to buy the assets on their behalf (Murabahah). As this
procurement requires an employee of the organization, this increases the operational
cost 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 cow
disease hits the region before the full repayments have been made, the entire
portfolio will be at risk. As the cows will be the property of lender till the amount has
been repaid in full, he will not be able to claim any money from the borrower. For the
smooth functioning of such model, the presence of insurance agent is of utmost
importance.
4.1.3 Importance of SHGs
Looking at the successful implementation of the SHG (Self Help Group) model in
many parts of the world, all the respondents felt the need of promoting it on a larger
scale in Afghanistan. In most of the cases around the world, SHGs are the only
women groups considering the lesser risk involved in lending to women. It also
supports the fact that women‘s repayment rates are typically far superior to those of
men. Three of them said that the SHG model will be very useful in mobilizing the
women in rural areas, whereas, two of them felt that it mobilization will depend on
the geographical region. According the latter two, the implementation of SHGs in the
rural areas will be much more difficult for the MFIs as it will require huge amount of
training expenditure and human resource in order to train the women and bring them
- 28 -

29. up to certain level where they can be included in the documentation process as the
animator or representatives.
4.1.4 Capacity Building
According to the respondents, MISFA and the Afghan government are now
amplifying their focus on the capacity building process in the Afghanistan
microfinance sector. By capacity building we mean the assistance which is provided
to people in order to help them to develop a certain skill or competence. The
respondents said that if the clients receive training on a certain kind of enterprise
before the loan is disbursed, it will help them to utilize the loan for the intended
purpose rather than diverting the amount towards consumption.
The respondents discussed about the carpet industry in particular and according to
them capacity building in this domain will be very effective and useful for the
households which have the skills of carpet-making through generations. If the clients
are given more training on these skills and then provided with loans to build up their
own home-based enterprise, it is very much possible that they can increase their
income and come out of poverty. The responses align with the report published by
AISA on Investing in Afghanistan: Business Opportunities in the Carpet Industry
which says that ―the importance of the carpet sector is well understood by the
government, NGOs and international actors, particularly since it is an important
source of income for the rural population, particularly for women, and has a large
potential for employment creation and poverty alleviation. Government‘s policy and
international 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 substantially
increase the profit margin for the farmers, and hence help them to make repayments
in time. A study conducted on AGRICULTURAL MARKET RESEARCH FOR
MICROFINANCE AND SME INTERVENTIONS conducted by MEDA in 2009 further
supports this point. According to the report, ―there is a strong need for MFIs to
develop appropriate loan products -- tenure, service fees and repayment frequencies
that make sense for the farm business and its cash flows. Without them, the farm
business will be unable to cover the loan expectations, and poorly designed credit
products will actually lead to defaults in agricultural and livestock portfolios in
microfinance and SME lending institutions. Building capacity in all areas of MFI
management, including credit management and developing market-led services –
particularly for agriculture -- is an important investment‖. The report also suggests
MISFA to provide support and capacity building (directly or indirectly) to partner MFIs
on product development for agricultural finance. The respondents also discussed
about a common problem which existed for clients applying for loans for investment
in agriculture. Sometimes the application process takes a long time which in turn
leads to a typical situation in which clients get the loan after the season of the
seasonal agricultural product they wanted to plant. Such amount is hence utilized for
- 29 -

30. consumption and clients default on repayments as assets are never created in the
first place.
4.1.5 Demand of the DMFIs
The respondents were not very sure about the demand of DMFIs, however, the
confirmed the formal saving habits of the clients as discussed by Arteaga (2009).
They further discussed the purpose of such savings and agreed to the potential
market for providing such services. However, they were skeptical about the ability of
the NGOs and MFIs to provide the facility of saving for clients under such
circumstances. One of them suggested that the concept of internal savings within an
SHG is also a viable solution to encourage savings amongst the clients without
involving an MFI through a legal framework.
- 30 -

31. CHAPTER 5
5.1 CONCLUSION AND RECOMMENDATIONS
So far we have tried to understand the various aspects of microfinance in general
and the same in Afghanistan. We have also seen some successful stories like
Cambodia (microfinance in the post-conflict scenario), Uganda (implementation of
DMFIs) and Yemen (implementation of Islamic microfinance). All these three cases
relate 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 Building
It was also seen that the respondents indicated the importance of capacity building
before the disbursement of loans to clients. For the purpose, they suggested to focus
on training sessions for the carpet industry and the agriculture sector. Such sessions
- 31 -

32. will definitely boost the confidence of clients and help them to increase the
productivity from their enterprise.
5.3 Tackling the Security Issues
Security issues are one of the prime concerns in Afghanistan. Besides the attacks
which target the civilians or army, there have also been cases when these attacks
are targeted specifically on the people carrying cash. As indicated by the
respondents, it is one of the prime reasons which restrict the outreach of MFIs. As
discussed 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 the
Afghanistan Microfinance sector. All the case studies and reports stated above can
definitely help in the reconstruction of the nation by providing the poor ability to be
independent.
- 32 -

33. REFERENCES
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The World Factbook: Afghanistan [Online] [Accessed on May 8, 2010] Available at:
https://www.cia.gov/library/publications/the-world-factbook/geos/af.html
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Rahim, A. 2007: Islamic Microfinance: A Missing Component in Islamic Banking,
Kyoto Bulletin of Islamic Area Studies, 1-2(2007), pp. 38-53
Arteaga, X., Tejada, G. 2009: Legal and Regulatory Analysis for Depository
Microfinance Institutions – DMFIs Analysis and Recommendations, Microfinance
Investment Facility of Afghanistan ‐ MISFA [Online][Accessed on: August 15, 2010]
Available at: www.misfa.org.af/pdf/DMFI%20Analysis.pdf
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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.pdf
Developing Post-Conflict Microfinance Institutions: The Experiences of Liberia and
Kosovo Technical Brief # 3 [Online][Accessed on: August 6, 2010] Available at:
www.gdrc.org/icm/disasters/Developing2.pdf
Developing a Post-Conflict Microfinance Industry: The Case of Cambodia Technical
Brief # 2 [Online][Accessed on: August 8, 2010] Available at:
www.gdrc.org/icm/disasters/Developing.pdf
Regulation 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.pdf
Irfan, Q. 2008: Murabaha Financing VS Lending on Interest A thin line making big
difference in the understanding of Riba [Online][Accessed on: August 16, 2010]
Available at: www.hazariba.com/Murabaha_Financing_VS_Lending_on_Interest.pdf
AFGHANISTAN‘S MICROFINANCE SECTOR: GEARING UP TO EXPAND ITS
RURAL OUTREACH, Microfinance Times (April, 2010) [Online][Accessed on: June
12, 2010] Available at: www.misfa.org.af
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transformation to a Depository Microfinance Institution (DMFI) in Afghanistan
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INTERVENTIONS (August 20, 2009): Mennonite Economic Development Associates
[Online][Accessed on: July 15, 2010] Available at: www.misfa.org.af
Investing in Afghanistan Business opportunities in the carpet industry
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Conflict Recovery in Asia and the Pacific [Online][Accessed on: March 6, 2010]
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WW_Ou4C&oi=fnd&pg=PA107&dq=afghanistan+microfinance&ots=vdrRGDJf6n&si
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35. g=4Va3OUm53p8PdC_8snZHYAaZwa0#v=onepage&q=afghanistan%20microfinanc
e&f=false
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Available at: http://www.cgap.org/p/site/c/template.rc/1.26.1308/
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Hand 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] [Accessed
on May 28, 2010] Available at:
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ve+Research+%26+Evaluation+Methods&source=bl&ots=btt2bEFAuH&sig=_bs-
1BjcJM7ODM4xVD3s55lZQ10&hl=en&ei=ZdWZTPngDoyovQOz4ZyIDQ&sa=X&oi=
book_result&ct=result&resnum=1&ved=0CB0Q6AEwAA#v=onepage&q&f=false
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36. Appendix A
Interview Questions
Introduction
Hello Sir / Ma‘am
My name is Swapnil Srivastava and I am a post graduate student in the department
of International Business of Leeds University Business School. I am calling to ask if
you could spare a few minutes for an interview with me on my research topic,
―Microfinance and Poverty Reduction in Afghanistan‖. This research intends to
analyze the complex nature of the microfinance industry in Afghanistan.
This interview will be for approximately 15 minutes and will be highly confidential and
anonymous. After the interview, you will be provided with the transcript for your
comment and feedback. If possible, I would be grateful if you could suggest a
possible 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 situation
of this country?
3) (a) According to you, what is the future of DMFIs in Afghanistan (b) which business
model they will be following?
4) Which are the most important regions in Afghanistan where more investment is required
in 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?
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