December 18, 2007—When the Taliban regime lost power in 2002, it left a devastated country behind. With no functioning banking system, Afghanistan's entire economy was financed by informal moneylenders. The World Bank, CGAP (the Consultative Group to Assist the Poor), and the donors that followed, seized the opportunity to establish a model microfinance industry in this virgin territory - doing things right, from day one. Four years later, microfinance in Afghanistan is thriving despite deteriorating security in the country, and a new impact survey has found that the benefits to clients are real.
Sosan Naeem moved back to Afghanistan in 2003 after 12 years in Pakistan, where she and her family were war refugees. Rebuilding a life in Kunduz Province, North Afghanistan, was not easy. When Sosan took a US$150 loan from the Child Fund Afghanistan (CFA), she was able to invest in her husband's business selling animal skins, and to use the rest of the money to buy a lamb, providing milk and rearing potential. Her family's income increased, and she and her husband were able to gradually build up their business and rebuild their home.
Sosan's story is a familiar one among microentrepreneurs and the microfinance institutions that serve them, but behind the scenes there was a larger strategy at work in Afghanistan to build a sustainable microfinance market.
The origins of a plan
In 2002, the World Bank and prominent members of the new Afghan government joined forces to establish a single mechanism for channeling what was hoped would be major investments in a new, rapid-growth microfinance industry. The Microfinance Investment Support Facility for Afghanistan, Ltd. (MISFA) ), the apex institution that funds the CFA and 14 other MFIs, was funded via the World Bank's Afghanistan Reconstruction Trust Fund (ARTF), and CGAP was quickly brought on board to provide critical microfinance technical expertise.
Creating a successful microfinance apex
In just four years, MISFA has catalyzed the growth of Afghanistan's fledgling microfinance institutions (MFIs), helped implement a state-of-the-art national regulatory framework, and initiated the "Afghanization" of the microfinance sector.
The 15 microfinance institutions (MFIs) funded by MISFA have beaten the odds in a difficult and worsening security situation to reach 385,000 clients by July 2007, and seventy percent of those clients are women. They disbursed 808,000 loans totaling US$282 million, with a portfolio outstanding of US$87 million. Five of MISFA's MFIs had achieved operational self-sustainability by that date.
'MISFA has completely defied all expectations of what one could achieve in Afghanistan,' says Syed Hashemi, Senior Microfinance Specialist at CGAP. 'They said, "You can't lend to women in Afghanistan" - they have lent to women. They said, "You can't employ female loan officers in Afghanistan" - they have female loan officers. And they said, "You can't have women in management positions in Afghanistan" - and we are now seeing women becoming branch managers.
The impact: Empowerment and opportunity
Ultimately, MISFA's most important success lies with the impact the project has had on the lives of poor people, particularly women, in Afghanistan. The Institute of Development Studies and a local market research firm just released research showing that microfinance in Afghanistan has led to increased business activity, employment opportunity and assets, as well as improved socio-economic status for women.
Interviews with more than 1,000 households across five regions of the country in the spring of 2007 revealed that 700,000 employment opportunities have been created for women like Bibi Hawa, who returned to Gabriel village on the outskirts of Herat 11 years ago from Iran. When the young mother heard that the NGO BRAC was assisting people in her village to set up small businesses, she thought she could put her tailoring skills to good use. Her first loan of Afs. 8,000 helped her to buy a sewing machine, tables, and an iron to set up her small tailoring business. With the security of the additional income, she was able to put her children in school. Slowly repaying and borrowing again - her second and third loans were for Afs 12,000 and Afs. 20,000 each - the family now has two shops in the village market that sell clothes for men, women and children - all tailored by her. One of the shops is run by her husband while the other is looked after by her eldest son.
Such changes - affecting the standard of living of the entire family - perhaps explain why eighty percent of women clients in the study also reported an "improved attitude" in their husbands and other relatives.
Despite impressive progress to date and excellent prospects for the future, Afghanistan's microfinance industry will have to navigate a treacherous security situation if it is to fully transition into the formal financial sector.
MISFA's policy of "Afghanization" will be critical for microfinance to survive. Already the international NGOs that brought their microfinance expertise to Afghanistan to begin the development of the sector have transformed their operations by creating local corporations under Afghan law that can later on become licensed by the central bank to provide savings services and other financial products that poor people need. "The evolution of the microfinance sector in Afghanistan has been unusual in that the main stakeholders - donors, government, the apex, and MFIs - all recognize that their relative importance must change over time. Government and donors were more important in the early stages of development, but as time goes on it is private sector Afghan institutions serving the interests and needs of Afghan people that will take over," says Stephen Rasmussen, the World Bank's task team leader for the microfinance project.
Ultimately, success for the World Bank and CGAP will mean a microfinance sector that has made the transition from being donor funded to being part of the mainstream Afghan financial sector. "Microfinance will only become sustainable and permanent in Afghanistan when it no longer requires the presence of outsiders", says MISFA Director, Amjad Arbab.
In 2006, MISFA became the first apex in a conflict-affected country to transform from a government program to a private company. MISFA also requires its MFIs to become Afghan companies.
Ten out of MISFA’s 12 employees are Afghan, while 90% of MISFA-funded MFI staff—nearly 4,000 employees—is local as well. Five MFIs are run by Afghan CEOs.