Developing a Private Sector-Led Rural Finance

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SENSITIVE

SIPDIS

E.O.12958: N/A
TAGS: PREL PGOV ECON ETRD EAID EAGR BEXP AF TI
SUBJECT: Developing a Private Sector-Led Rural Finance
System in Afghanistan

SUMMARY


1. (SBU) The financial sector in Afghanistan has made
significant progress in establishing a market-based
system for access to credit in rural areas. With
substantial U.S. Government (USG) assistance, financial
services are expanding to meet agricultural market needs
and demonstrating that lending to micro, small and medium
agricultural enterprises (MSMEs) can be profitable.
While the challenges remain great, the USG will build
upon progress achieved and rollout new innovative
approaches. New interventions will focus on incentive
programs for commercial banks to lend to agribusinesses,
extending a network of Islamic cooperatives that have a
proven track record in conservative rural areas,
combining credit with business services, developing
sharia-compliant agricultural products, and expanding
credit to farmers for primary inputs through lines of
credit to farm stores.


2. (SBU) Interventions will also support innovative
information and communication technology (ICT)
approaches, such as mobile banking, which offer new hope
of extending finance to rural areas where it is currently
cost prohibitive to build a brick-and-mortar branch. In
addition, USG seeks to enhance collaboration with
regional development platforms and Provincial
Reconstruction Teams (PRTs) in order to build up a rural
finance sector in newly-secured areas. In those areas
where the market will not be able to attract private
sector lenders, the USG will collaborate with other
donors in supporting the Government of the Islamic
Republic of AfghanistanQs (GIRoAQs) Rural Enterprise
Development Program (AREDP) which has a village
cooperative savings and loan component. End Summary.

ASSISTANCE TO DATE


3. (SBU) When the Taliban fell from power in 2001,
AfghanistanQs national finance system, not to mention its
rural finance system, had totally collapsed. Increasing
employment opportunities and incomes in rural areas
remains a top priority with access to credit serving as a
critical component of the USGQs strategy to stabilize
rural areas in Afghanistan.


4. (SBU) Today, AfghanistanQs national financial sector
hosts 17 commercial banks operating 200 branches in more
than 20 of AfghanistanQs 34 provinces with $972 million
in loans outstanding to just over 42,000 active clients;
and 16 microfinance institutions (MFIs) that are partners
with the USG-supported Microfinance Investment Support
Facility for Afghanistan (MISFA),a GIRoA/donor supported
apex organization which has been a model of donor
coordination. MISFA-supported MFIs report 450,000 active
clients; one credit union network with 25 outlets and
over 10,000 borrowers, nearly 3,800 of whom are using
their loans for agriculture purposes. While the cost of
capital remains high on the commercial market, targeted
programs are making progress at making affordable capital
available.


5. (SBU) Commercial Banks and Credit Guarantees: The USG
is working directly with commercial banks to expand
agricultural business credit. Technical assistance
provided to four commercial banks has resulted in more
than 1,700 loans through 12 branches to key agriculture
value chains, including dry fruits, cashmere, pistachios,
yellow pulse, fresh fruits, and medicinal plants. A $20
million Development Authority Credit guarantee was
provided in late 2008 to Bank Alfalah to increase lending
to agricultural SMEs that normally wouldnQt qualify for
loans. This facility is available at the bankQs regional

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branches in Kabul, Mazar, Herat and Jalalabad.


6. (SBU) Credit Unions: The USG works with credit
unions, referred to as Islamic Investment and Finance
Cooperatives (IIFCs),which have been successful at
reaching smaller farmers that commercial banks typically
shun. IIFCs are unique not only because they are Shara-
compliant, but also because they are community-owned
institutions that provide custom-tailored services in the
rural markets in which they work. Granting local Shura
Boards the authority to sanction loans and verify that
borrowers are of good ethical and financial standing
ensures community support. Nearly 86 percent of IIFCs
portfolio in the south derives from agricultural markets.


7. (SBU) Microfinance Institutions: Reaching even
further down market are seven USG-supported MFIs, which
together have provided more than 163,000 loans. About 25
percent of the portfolios of these institutions are
invested in agricultural and agriculture-related
enterprises.


8. (SBU) Value Chain Financial Actors: The USG is
supporting increased rural incomes and the security of
those incomes through mechanisms under which farmers
receive inputs on credit Q such as seeds and fertilizer
with payments deducted when the produce is harvested and
sold to the financier. Farmers are well-acquainted with
this model of financing as it is used extensively under
the informal system of financing.


9. (SBU) Non-Bank Financial Company: In 2006 the USG
established the Afghanistan Rural Finance Company (ARFC),
a non-bank finance institution which is playing a key
role in providing investment capital to the agricultural
sector. A for-profit Afghan entity, the ARFC has issued
$14 million in direct loans averaging $300,000 to
cooperatives, private agribusinesses and rural SMEs,
particularly in the eastern and southern regions of the
country.

LOOKING FORWARD


10. (SBU) Innovations in Rural Finance: Over the next few
years, in support of the USGQs priority to bring
stabilization to the south and east, USG programs will
continue to increase employment opportunities and incomes
in rural areas by rewarding its most successful rural
finance initiatives, such as the sharia-compliant
cooperative model, increasing access to farm credit
through farm stores, continuing to couple incentive
programs for commercial banks and MFIs to do agricultural
lending with technical assistance, combining finance to
agribusinesses with services, such as training or quality
control, and ramping up support through an already-
established GIROA assistance program to rural areas.


11. (SBU) The USG will expand incentive programs to
develop new sharia-compliant credit products and assist
commercial banks and MFIs to establish SME/Agribusiness
windows for extending loans to agribusiness. The USG will
also expand credit for agricultural inputs by extending
lines of credit to farm stores that have traditionally
provided store credit to farmers. Interventions will also
support innovative ICT approaches, such as mobile
banking, which offer new hope of extending finance to
rural areas where it is currently cost prohibitive to
build a brick and mortar branch. Support for the GIRoAQs
Afghanistan Rural Enterprise Development Program
(AREDP)village savings and loan cooperative program will
deliver access to credit in rural areas where providing
commercially-based services is not yet feasible.


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12. (SBU) Civ-Mil Coordination: The United States Agency
for International Development (USAID) will enhance its
collaboration with regional development platforms and
PRTs in order to build up the rural finance sector in
newly-secured areas. Under the strategy currently under
development, USAID resources will oversee capacity-
building efforts to ensure the sustainability of rural
financial institutions like the IIFCs, while military-
sponsored funds from the CommanderQs Emergency Response
Program (CERP) will help to subsidize the construction of
new infrastructure.

EIKENBERRY