The First MicrofinanceBank Afghanistan

Aga Khan Development Network

Aga Khan Development Network

Context

• 80% of population in Afghanistan lives

in informal/slum settlement without access to basic services.

• As per Doing Business Survey 2013,in

189 economies, Afghanistan ranks – 130 for getting credits, – 168 for enforcing contracts, – 175 for registering property and – 189 for protecting investors

• FMFB is the largest microfinance

institution in Afghanistan and the only one with a commercial banking license – > USD 72 million outstanding loan

portfolio; – 60,000 clients. – Only institution in Afghanistan

offering housing improvement services

1. Cash based economy with lack of trust in financial institutions

2. Recent consolidation of microfinance sector 3. Only three of seven MFIs present are operationally self

sufficient 4. Central bank regulations do not cover MFIs 5. Deposit taking microfinance regulation is pending approval 6. Human resource capacity at institution and regulatory

levels is an area of concern 7. Outreach and coverage largely limited to urban areas 8. Weak legal framework does not provide necessary cover to

investors. 9. Expensive credit line and limited supply of local currency

lines 10. Institutional outreach vs Access to Finance 11. High cost of operations 12. Lack of professional property valuators 13. Enforcement of building codes and lack of technical know

how 14. Earthquake prone region

Financial System Challenges Conventional Finance

1. Lack of regulatory cover 2. Consensus on concepts of Islamic Finance

in the industry – Absence of Sharia board at Central Bank

3. Lack of professionals to manage sharia compliant portfolio – Sharia Experts or Sharia Boards at institutional level

4. Investment in robust technological systems to track transactions and goods

5. Cost of doing business – separate business unit

6. Implementation of Sharia Accounting and Auditing Standards

1. The banking sector is going through a reputation building phase due to Kabul bank crises.

2. Focus is on commercial clients vs low income clients

3. Housing finance is not an area of focus largely because of absence of mortgage law

4. Core banking Systems used are based on IFRS standards, particularly for MFIs

5. Commercial institutions do not recognize informal title deeds.

Islamic Finance

Sector Highlight & Positioning

Source: MicroView – Afghanistan Microfinance Association

FMFB’s Housing Improvement Product • Loan Amount: $200 - $4000 • Loan Duration: 6 to 24 Months • Interest Rate: 2.08% per month • Interest Calculation: Declining • Product Eligibility:

– Afghan National – Age between 18-65 – Businessman/women – employees

• Collateral: – Personal guarantor – Household assets – Title deed

• Facilities – Construction Advisory – Seasonal Repayment Facility for Rural

Clients

Over 26,000 loans disbursed valuing over USD 45 million at PAR below 2%

having 18% females

Evolution of Housing Microfinance at FMFB

Demand and Capacity

Assessment

2007

Pilot in Hirat & Kabul

Q1 2008

Product evaluation and toolkit development

with IFC

2008/10

Agreement signed with USAID and AKF – USA for scale up and bundling of

Construction Advisory

Aug 2010

Contract with Aga Khan Planning & Building Services

2010/11

Training and construction of demo

houses in Kabul, Samanghan & Kishm

2010/11

Construction Advisory Manual finalized

Q1 2011

Development and roll-out of rural product

with seasonal repayment schedule

Q4 2011 - 13

Increased access to housing microfinance with construction advisory services to improve the quality of housing for Afghanistan’s urban & rural poor

Impact assessment on Quality of Life (QoL);

and efficiency and effectiveness of model

Q4 2013/14

Innovations Earthquake resilient, sanitation, ventilation, and energy efficiency

Advisory services to select building

materials

Construction manual (AKPBS) to apply

techniques

Demo houses to illustrate techniques

Seasonal repayment to match rural cash

flows

Housing Finance Challenges in Afghanistan

Conventional Finance Challenges Islamic Finance Challenges

Challenges Opportunities

Weak legal and collateral challenges (Shari (20%), Urfi (70%) and community (10%) title deeds)

Psychological vs physical collateral (limited)

Client lack of interest/awareness Partner with development agencies to build awareness, incentivise the right behaviours and achieve integrated value chain interventions

Finding and training TOs, and cost of providing technical assistance

Partner with development agencies to train masons, TOs and others in the value chain

Volatile environment lack of trust in Banks Develop a savings driven product as a means to incentivise Integrated approach lower risk/build trust

Achievements: • 357 staff members trained in HMF; • Automated seasonal repayment module for the Bank’s MIS developed; • FMFB-A provided TA to IFC’s local partners in Egypt to develop product.

• Availability of strong operational policies and procedures

• Strong community based security system – Guarantor and Head of Shura

Certificate

• Outreach and diverse product inventory

• Client centric and research driven product development

• Market positioning

• Dedicated Training Department

• Presence of other AKDN agencies in country

Critical Success factors

FMFB Afghanistan construction advisory promotes safer construction practices as the region is prone to seismic disasters. Aga Khan Agency for Microfinance currently provides housing finance services in Afghanistan, Pakistan, Tajikistan and Kyrgyzstan through its microfinance

banks and institutions.

www.akdn.org/akam

For more information: Naeem.razwani@fmfb.com.af