Aga Khan Development Network The First MicrofinanceBank Afghanistan
Aga Khan Development Network
Context 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 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
Financial System Challenges Conventional Finance Islamic Finance 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. 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
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 Increased access to housing microfinance with construction advisory services to improve the quality of housing for Afghanistan s urban & rural poor Demand and Capacity Assessment Product evaluation and toolkit development with IFC Contract with Aga Khan Planning & Building Services Construction Advisory Manual finalized Impact assessment on Quality of Life (QoL); and efficiency and effectiveness of model Q1 2008 Aug 2010 2010/11 Q4 2011-13 2007 2008/10 2010/11 Q1 2011 Q4 2013/14 Pilot in Hirat & Kabul Agreement signed with USAID and AKF USA for scale up and bundling of Construction Advisory Training and construction of demo houses in Kabul, Samanghan & Kishm Development and rollout of rural product with seasonal repayment schedule 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 Challenges Opportunities Weak legal and collateral challenges (Shari (20%), Urfi (70%) and community (10%) title deeds) Client lack of interest/awareness Psychological vs physical collateral (limited) 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 Conventional Finance Challenges Volatile environment lack of trust in Banks Partner with development agencies to train masons, TOs and others in the value chain Islamic Finance Challenges 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.
Critical Success factors 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
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