The term microfinance refers to small loans and other financial services that poor and low income people can access from providers known as “microfinance institutions”, or MFIs.
What is the goal of microfinance?
The fundamental mission of microfinance is to help empower poor people to become self-sufficient and improve the quality of their lives so they and their families escape or avoid poverty. In many cases, borrowers, who benefit from the loans, end up creating jobs for family and community members. Some borrowers have reported feeling more respected in society, compared to before taking the loan, because they are seen to be contributing to increasing household income.
If this kind of success is multiplied and a greater number of borrowers in a certain district or province are able to create jobs and generate earnings, then this means that the microfinance program can have a positive impact not just on one borrower, or one household, but in society as a whole.
In addition, client demand indicates that poor people value microfinance services for the social protection it provides. Many clients say that they would rather borrow money from MFIs than loan sharks, family or strangers. For many clients, borrowing from MFIs also saves them from the social disgrace of not having money and having to take credit.
Is microfinance supported by the government?
Yes. Microfinance is part of the “Islamic Republic of Afghanistan, Afghanistan National Development Strategy (ANDS) 1389-1391” document. Chapter 7 of the ANDS sites microfinance as one of the tools that the government can use to reduce national poverty, but specifically to create opportunities for small rural entrepreneurs, especially those engaged in agricultural activities.
In addition, the Afghan government has been supporting and approving the budgets of MFIs. In fact, historically, microfinance started out as a program within the Ministry of Rural Rehabilitation and Development (MRRD). Today, the microfinance sector, with a quarter of a million clients across the country, is one of the biggest national development programs in Afghanistan and enjoys strong support from MRRD and the Ministry of Finance.
What is an MFI?
MFI stands for microfinance institutions and they are the main providers of microfinance in Afghanistan. They are not-for-profit organizations registered with the Government and mandated to provide financial services to poor Afghans involved in income-generating livelihood activities. MFIs receive financial and technical support from an organization called: Microfinance Investment Support Facility for Afghanistan (MISFA). MISFA is an organization supported by the government of Afghanistan to facilitate the development and growth of a long-term, strong and sustainable microfinance sector in Afghanistan. MFIs are regarded as the implementing partners of the government and MISFA in delivering microfinance services throughout the country.
How do MFIs reach Afghanistan’s poor households?
MFIs reach the poor through more than 240 branches in 23 provinces of Afghanistan. At the time this was written, over 1 millions loans have been issued to micro entrepreneurs in Afghanistan and MFIs have provided services to more than 240,000 current borrowers. The current concentration of clients remains to be in the urban areas, comprising more than 70 percent of the total number of active borrowers.
Is microfinance only practiced in Afghanistan?
No, Microfinance was actually pioneered in Bangladesh, a neighboring country to Afghanistan, where poverty is also prevalent. Microfinance has become a global movement since its inception almost 30 years ago. The founder of microfinance is a Muslim economist from Bangladesh named Muhammad Yunus, who was awarded the Nobel Peace Prize in 2006 for his banking-for-the-poor methodology. Aside from Afghanistan and Bangladesh, microfinance is also practiced in other countries, for example: Pakistan, Indonesia, Egypt and Jordan. In fact, approximately 30 percent of the total 92 million microfinance borrowers around the world are in Muslim-majority countries. Governments tackling poverty, including Afghanistan, has adopted microfinance and incorporated it into their long-term economic development strategies.
Who are microfinance clients?
Microfinance clients include:
Poor, low-income people
Self-employed, household-based entrepreneurs
People, who are entrepreneurs, or with business skills but no access to capital
Afghans in remote/isolated/underserved communities
Those, who do not meet the prerequisites of formal financial institutions, such as banks, and are therefore denied access to financial services
Women: in Afghanistan, the majority of borrowers are women, more than 70 percent. Women clients usually borrow to support the family’s livelihoods.
What are some examples of financial products and services offered by MFIs?
In Afghanistan, there remains a high demand for microcredit or loans used for small businesses, agriculture and home repair. Borrowers may apply for individual loans, or for group loans with friends, neighbors and relatives. In addition to conventional loans, some MFIs also offer Sharia compliant loans as well as voluntary savings deposit services. However, MFIs have different guidelines about their services and product lines. If there are more than one MFI near you, inquire about their policies and procedures and compare to see which one best suits your needs.
Are MFIs the same as commercial banks?
No. There are major differences between MFIs and banks. To illustrate:
Social: to provide poor people and marginalized groups access to sustainable financial services
Maximize profits for shareholders
Increase income of poor people
To become financially sustainable in order to continue services to the poor.
Customers access branches
MFIs access customers at their location, although customers are also welcome to visit MFI branch offices.
Procedures and loan application
Longer, more complicated process before disbursement
Short and simple process; minimal collateral requirement, quick disbursement
Cost of operation
Generates higher profit margin from providing higher loan amounts and paying salary to a smaller number of staff.
Generates low—in some cases insignificant—profit because loan amounts are very small and require more staff to administer.
HOW MICROFINANCE WORKS
If I want to take out a loan, what is the first step?
Vist the office of an MFI near you and ask to speak with a loan officer to find out if you qualify.
Can anybody apply for credit?
No. Microcredit cannot help every poor Afghan. The program is designed to meet the financial needs of only those with:
a viable business idea and plan;
entrepreneurial skills; and
the ability to repay the loan.If you meet the requirements, you will not be turned down. MFIs deliver very small loans to borrowers, taking little collateral. Clients are Afghan men and women, who require capital to start a business, or, who already run a small business but need capital to expand it.
If I am borrowing for the first time, how much can I borrow?
Clients without collateral may borrow through:
Group Lending. In this type of lending, the group itself acts as a social collateral. Members of the group guarantee the repayment of each member’s loan. Group loan applications may take approximately 5-6 working days to process. Subsequent loan applications would take 1-3 days. Group loans range from 5,000–40,000 AFN.
Clients with collateral, who require a higher loan amount, may borrow through:
Individual Lending. This is usually provided to borrowers, who need more money to run his/her business. The borrower is asked to provide the MFI with a physical collateral, for example, the deed of an owned house or property, documents of his car, etc. The application process may take up to two weeks. The loan amount ranges from 40,000-700,000 AFN.
Can people borrow money for special occasions, for example, weddings and funerals, or to buy gold?
No. Microcredit was created for the specific purpose of income and employment generation. It is intended to be used only for the borrower’s business.
How do clients use the loans?
Clients use the loans to open a new business for the first time, or to expand an already existing enterprise. In urban areas, some of the productive uses of credit include:
small retail shops
beauty salon/barber shop
tailoring, embroidery, handicrafts
repair service (bicycle, motorcycle, car, etc.)
Some female clients take out a loan to buy equipment, for example, sewing machines, fuel and flour for bread making, materials for carpet-weaving. Male clients would use the loan to buy tools and equipment for a range of services, for example, tools for plumbing or electrical repair.
In rural areas, borrowers often have small income-generating activities related to agriculture, such as food processing and trade. Some use the loan for livestock rearing, others to buy fresh produce for resale.
What is the fee that MFIs charge to borrowers? How much is it and what is it for?
The fee charged by MFIs to borrowers (sometimes referred to as service charge, or administrative fee) goes to meet the cost of operation and service delivery incurred by the MFIs. Specifically, the fee collected pays for staff salary, office rent, purchase of equipment, transportation, security costs, etc.
MFIs operating in Afghanistan charge between 1.25 and 1.5 percent per month.
This service charge barely covers the operating cost of an MFI. In a country characterized by instability and ongoing conflict, operating costs are high. Staff salaries and administrative expenses, such as office rent, transportation, etc. are far higher in Afghanistan, compared to the other countries in the region.
For example, the average salary of a loan officer in Afghanistan is twice or three times more than loan officers in India and Bangladesh. In addition, while most loan officers typically use bicycles or motorcycles in Bangladesh, India and Pakistan for field work; Afghans are forced to use cars due to the tougher terrain, weather and security conditions.
What happens if a client is unable or unwilling to repay the loan?
Each case will be dealt with according to the individual circumstances and the policy of the MFI lender. MFIs have different policies when dealing with borrowers defaulting, but every effort will be made to help the client repay because MFIs are bound by client protection principles, organizational ethics and professionalism.
Medical issues, death, natural disasters and other emergencies may occur, causing difficulty for the client to repay. Whatever the case may be, the borrower must contact the MFI loan officer as soon as possible to negotiate a new payment arrangement. Individual borrowers may repay using their collateral, while group borrowers may seek assistance from fellow members.
In many cases, clients default because they over estimated their ability to repay, or they used the loan for something else other than its intended purpose of financing an income-generating activity. To avoid this situation, it is important to:
First, evaluate your ability to repay before deciding to apply for a loan.
Second, use the loan only for the purpose it is meant for: to finance a new or expanding small business.
If a borrower continues to default and refuses to repay, the MFI, as a last resort, may bring the matter to the guarantor, the local community and Shura, and if still unresolved, may elevate the case to a government agency.
Why do some MFIs requires savings when giving a loan?
Some MFIs require borrowers to set aside a percentage of the loan as a savings account in order to promote the culture of savings, and as an incentive/bonus for repaying the full amount of the loan. The total amount of the mandatory savings is given back to the client after the full amount of the loan is repaid.
Studies have shown that ordinary Afghans want a secure and accessible place to deposit savings in. Given the opportunity, clients would want to save money for their children and build other assets for the future, or for unexpected emergencies. Providing borrowers a secure place for their savings and facilitating them having extra cash reserve that can help with cash flow issues, is consistent with the MFIs’ social mission of helping poor Afghans avoid or escape poverty.
BENEFITS AND IMPACT OF MICROFINANCE
How can microfinance benefit the poor?
Microcredit can provide a range of benefits that are important to poor households:
Regular source of income
Increase in household earnings
Improved buying power of basic necessities: food, shelter, clothing; as well as manage shocks, such as sickness,
natural disasters, or death.
Ability to build assets—for example, buy land, or save money—which gives them future security.
Has there been any significant impact on Afghan lives resulting from microfinance?
Improved economic wellbeing. According to a baseline study conducted by the United Kingdom-based Institute of Development Studies (IDS), participation in microfinance in Afghanistan has led to clients having better economic conditions. Many clients have reported that after a series of loan cycles, their lives have improved. They have better access to health, education, housing/land, while others say they are able to save money. About 72 percent of the total clients surveyed reported improvement in their economic situation from the previous year, compared to only 51 percent of non-clients.
Job creation. The study also reported that microfinance creates jobs, not just for borrowers, but also for those hired by them for their small businesses—in many cases family members. Nearly 45 percent of all clients generated employment for others.
Access to health services. Women, who make up the majority of microfinance clients, also reported accessing health services more after becoming borrowers—obtaining immunization cards for children; seeking medical advice when they fell ill.
Empowerment. One impact commonly mentioned by women borrowers is the sense of pride arising from being self-sufficient economically, and from being able to provide better care for their families.
Because of all these compelling reasons, many borrowers faithfully repay their loans to ensure continued access to the service in the future.
Based on its current benefits and impact on Afghans, the microfinance program is expected to contribute to the national economic development of Afghanistan in the long term.
SUSTAINABILITY OF MFIs
Why can’t government/donors subsidize some of the MFIs’ operational costs so poor clients pay a minimal fee, or none at all?
There are practical reasons why microfinance services should be delivered to poor people without financial assistance from the government and donors:
An MFI must become sustainable in order for it to provide credit services to poor people for the long-term.
The Government of Afghanistan cannot afford to continually subsidize long-term economic development programs.
Foreign aid to Afghanistan is decreasing each year and this is not a sustainable source of funds because the international community will not be in the country permanently.
If an MFI cannot become sustainable it will have to shut down and will not be able to help clients become self-sustainable themselves.
For all these reasons, it is important to make sure that the MFIs providing financial services to the poor become sustainable institutions. By charging a reasonable administrative fee for providing services, MFIs are able to earn revenue to sustain their operations. If they have a steady stream of revenue, they have a better chance to survive in the long term on their own, without depending on government or donor money.