In 2002, the banking sector had completely collapsed and no operational financial service providers were available in Afghanistan outside the informal sector. Microfinance services were in great demand, in order to help Afghans access financial services to improve their livelihoods and to transition from dependence on humanitarian assistance to economic independence.
The development of the project concept followed the identification of microfinance as a key element in the reconstruction of Afghanistan. A Microfinance Investment and Support Facility (MISFA) was set up to provide funds, technical assistance and training to a wide range of retail financial intermediaries that serve the poor. The overall objective of MISFA was to provide flexible and high quality support to help establish a healthy microfinance sector.
Half a million loans-- US$120 million--have been disbursed in 22 provinces with a 98 percent on time repayment record.
Highlights:
- Many poor Afghans have been able to access financial services for the first time. Sustainable and growing financial service provider organizations are being created and the first steps taken towards an inclusive financial sector.
- 75 percent of the clients have been women–35 percent of them from rural areas. Case studies have shown that the availability of microfinance services not only increased household incomes, it also contributed to women's empowerment, particularly in the public sphere.
- The sector has reached out to serve the special needs of people with disabilities, nomadic people, and returning refugees, in addition to contributing to the anti-narcotics program.
- Within three years of beginning the program, 14 microfinance institutions had been established (vs. only three in 2003) with more than 220 branches in 22 of the 34 provinces. At the end of September 2006 the sector had more than 260,000 active clients, US$60 million in outstanding loans, and had mobilized US$6 million in savings by poor people. In 2006 the microfinance sector disbursed US$7 million in loans per month and added more than 10,000 active clients per month.
- 2000 staff (two thirds women) were employed in the microfinance sector by end 2006.
- By late 2006 the sector was already covering 80 percent of its costs from its own income earned from loan portfolios. Two microfinance institutions were operationally sustainable and most of the rest were on target to become operationally sustainable by the middle of 2008.
- While most microfinance institutions were originally set up by experienced international NGOs, they are in the process of becoming companies under Afghan law. In 2006 the central bank published “Deposit Taking Microfinance Institutions” regulations under the Banking Act that will allow these institutions to eventually migrate to become specially-regulated deposit-taking microfinance institutions, and from there to full commercial banks should they wish to.
- While the World Bank was the lead agency for creating MISFA, with CGAP as key advisor, all other donors interested in funding microfinance in Afghanistan were invited and encouraged to join MISFA as co-funders.
- IDA administers the Afghanistan Reconstruction Trust Fund (ARTF) through which US$74.3 million have been contributed by six different donors over the past three years.
Besides drawing on pooled ARTF funds, the project has also independently leveraged US$7 million from three other donor organizations. MISFA recently reached agreement with USAID to directly receive US$30 million for microfinance expansion as well as to set up a new SME finance window.
- At current growth rates, the sector could be serving 800,000 households by the middle of 2009.
- A follow-on IDA microfinance project is under preparation that will provide US$30 million through MISFA.
- The immediate next steps are to provide the funding and other support necessary to strengthen the sector. As the sector becomes more established, it will also begin to offer a broader range of financial services, for example savings, insurance, and housing loans, while also using technology, for example mobile telephone networks, to increase outreach and improve efficiency. Steps are already being taken to widen the range of financial service products to meet demand (including Islamic loan products), diversify microfinance institution funding sources to include commercial funding, and expand small business lending by commercial banks and microfinance institutions.
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