Microfinance Reaching the Rural Afghanistan

Editor’s Note: MISFA (Microfinance Investment Support Facility for Afghanistan) commissioned a study in 2009 to look at the agricultural market of Afghanistan and identify gaps and opportunities for microfinance and SME interventions and has published its findings in its bi-annual newsletter, Microfinance Times. The article presents excerpts from the newsletter.

Courtesy : MIFSA

Microfinance Focus, May 12, 2010: Sitting at the counter of his restaurant located in the heart of Jalabad, 56 year-old Mr. Sayed Burhan-u-Din is busy counting money from one of his departing customers. “Thank God, my customers are increasing day by day and I don’t know what to do with them,” grinned Mr. Burhanu- Din adding “May be, I should hire more workers.” A few years ago, Mr. Burhan-u-Din did not believe that one day his dream will come true and his small restaurant will change into one of the famous restaurants in the city. “You can eat chickens everywhere, but the test of our chickens is different!” says Mr. Burhan-u-Din, while holding a crispy baked fried chicken in hand.

Mr. Burhan-u-Din is one of some 450,000 Afghans who are currently benefiting from one of the largest multi-million national flagship program providing microfinance services to the underserved and poorer households of Afghanistan. Supervised and funded by the Microfinance Investment Support Facility for Afghanistan (MISFA), the microfinance sector of Afghanistan is comprised of 15 Microfinance Institutions operating in 26 out of 34 provinces across the country.

Microfinance came to Afghanistan in early 1990’s and within two decades of its operations, it has become a vital part of the country’s financial sector. The budget for microfinance is reflected in the Government’s budget and it is the second largest program in the country in terms of scope and resources. MISFA was established in 2003 to act as a vehicle through which the Afghan government and international donors could channel technical assistance and funding to build and strengthen Afghanistan’s microfinance sector, as well as the lower ranges of Small and Medium Enterprise (SME) lending. It offers competitive, transparent and effective services, and ensures financial discipline and efficiency in the sector.

So far microfinance in Afghanistan remains heavily entrenched in urban and semi-urban areas with only 27 percent of the more than 400,000 clients from rural communities. A lack of understanding of agricultural market value chains and financing demands in the context of rural Afghanistan are the major causes of this urban bias. But in a country where rural population makes 74% of the total population and 59% of the employed population is engaged in agriculture or livestock, microfinance institutions are now turning their focus to serve rural poor.

MISFA commissioned a study in 2009 to look at the agricultural market of Afghanistan and identify gaps and opportunities for microfinance and SME interventions. The study recommends products and services that cater to the specific needs of farmers, livestock owners and other actors through the agricultural market chain. Some of the insights that emerged from the study about the Afghan’s microfinance sector are discussed in the following paragraphs.

Not without Challenges

It was identified that the real challenge in expanding to the rural areas is in establishing an efficient delivery channel. Proper training of loan officers is crucial as they need to learn the local environment, the practices and activities therein, and have a more in-depth understanding of client households.

For example, wheat cultivators typically have a grace period of up to 8 months, while rice growers may require a longer period, around 11 months. Livestock owners usually have between six to eight months, again depending on the animal and certain conditions. Loan officers, who know their clients well, will take into careful consideration how much time they need to maximize their earnings. This means granting a grace period that includes time for certain growers to store their crops to wait for the most opportune time to bring them to the market.

Development Aid Focus

At the moment, agriculture and livestock lending makes up 15-20 percent of most of the country’s MFIs’ loan portfolio. However, with the focus shifting towards rural livelihood activities, the demand for agriculture and livestock lending is steadily on the rise. In the next few years, and is expected increase its share of the total portfolio to 25-30 percent. Given the rural focus of the key donors to Afghanistan, it is safe to expect more resources being poured into infrastructure, technical training and inputs towards overall rural development. In this scenario, success will be more attainable for a greater number of rural farmers and livestock owners.

The two largest providers of national aid to Afghanistan — the U.S. and UK, respectively, have both pledged significant support to improve the country’s agricultural sector and to provide farmers alternatives to poppy cultivation. The Obama administration, in particular, is expected to spend at least US$300 million on agricultural development alone to establish economic stability in rural Afghanistan. In addition, the U.S. has tripled the number of civilians deployed to Afghanistan from only 320 in early 2009 to nearly 1,000 this year—sending many of them outside of Kabul to work in agricultural projects, mainly in the Eastern and Southern regions, or as advisers in government ministries.

Consolidations of MFIs

Microfinance sector of Afghanistan has also witnessed many mergers and consolidations in the recent past. While those serving the sector view this as an imminent threat to the sector, industry experts find it to be a part of natural progression towards maturity. Post consolidation the number of MFIs will reduce but the total number of clients is expected to remain stable. The sector is expected to become stronger because the MFIs that will remain have better systems and strategies in place and the potential to innovate.

There was a consensus reached by the exiting MFIs and MISFA that it would take many years and an enormous amount of resources to get the struggling MFIs back on track. And even after these, there is no guarantee that they would make it. Diverting limited resources even to a few ailing MFIs would deprive the more successful ones of the resources to improve their products and services, as well as their outreach. On the other hand, with fewer institutions, efforts and resources can be targeted to build their capacity. MISFA is making sure that clients with good standing continue receiving the kind of services they seek and efforts are being made to retain quality staff within the sector, particularly at this critical juncture. It is facilitating the orderly transfer of good clients and quality staff to its more viable partners.

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