Chapter Nine
Aid Effectiveness and Microfinance: Lessons from Afghanistan
by Martin Greeley
1 Introduction
This chapter assesses the development of the Microfinance Investment Support Facility for Afghanistan (MISFA). Its main analytic concern is to determine lessons from design and implementation which might account for the strong performance of the project and which might offer guidance for interventions in other contexts, especially in Low Income Countries under Stress (LICUS).
After a brief section on context, the paper first reviews development results, geographic coverage and achievements against progress indicators. It then examines design considerations and implementation issues. This is followed by a discussion of funding modalities, donor coordination and governance issues before drawing conclusions in the form of lessons for LICUS contexts.
2 Context
The recent political history of successive state failures in Afghanistan has been well documented, but there had been little attempt at nation building even prior to the arrival of the Soviet forces in 1979 and the beginning of civil war. The monarchy had retained control through allowing considerable latitude to local leaders on revenue raising and on law and order enforcement. These conditions of weak central leadership followed by virtual non-stop fighting from 1979 left Afghanistan as one of the poorest and least developed countries in the world (see Table One). The international community supported the Bonn peace process in 2001 and pledged substantial reconstruction and development support at Tokyo in January 2002. The wars were devastating. Key indicators, such as maternal mortality, were the worst in the world. The wars also led to massive internal displacement (mainly out of the cities) and an outflow of refugees, probably over five million people in all, that have been returning since the US-led international forces took control away from the Taliban in November 2001. War lords and commanders with local support, dating from mujahudeen fighting the Soviet forces but representing much longer traditions of family, clan and ethnic affiliations, were important in the military victory in 2001 and had expectations of political power. Other groups, loyal to the Taliban, had to be reintegrated peacefully -- and those elements amongst them that continued to oppose the new powers in Kabul had, and still have, to be contained and defeated in a guerrilla war. The new Afghanistan is an extreme example of quasi-statehood where political legitimacy and provision of security are both fragile and, in some geographic areas, either or both are absent.
Following the defeat of the Taliban, the political and economic development of Afghanistan followed a twin track process with the benchmarks established for political progress in the Bonn Agreement being the responsibility of the Afghan Support Group and an Implementation Group being established for donor mobilization and harmonisation on economic reconstruction. Economic reconstruction plans drew on a preliminary needs assessment (Asian Development Bank, World Bank, UNDP, January, 2002)[i]. This identified microfinance as a short term need particularly in the context of social protection, and of long term importance particularly in the contest of employment. Critically, the assessment identified the longer term need to support microfinance services (ADB et al, 2002 p27) “within a sound policy and institutional framework aimed at ensuring the viability of microfinance institutions and their access to capital”. This needs assessment was followed within three months by the Afghanistan Transitional Authority’s (ATA) first budget and National Development Framework (NDF). Within this, microfinance was explicitly identified as an element: “support to micro, small and medium enterprises through the backing of micro-finance schemes and the provision of training in small business management…” (ATA, National Development Framework, April, 2002).
Table One: Afghanistan - Social Indicators[ii]Population (millions; 2002) (underestimate) 21.8
Life expectancy at birth (2001) 42.8
Infant mortality per 1,000 live births (2001) 165
Under-five mortality per 1,000 live births (2001) 257
Children underweight (percent under age 5; 1995–2001) 48
Undernourished people (percent of population; 1998–2000) 70
Adult literacy (percent age 15 and above; 2001) 36 Male 51 Female 21
Primary school enrolment ratio, gross (in percent; 1995–99) Male 53 Female 5
Population without sustainable access to improved water (in percent; 2000) 87
Sources: Central Statistics Office of Afghanistan; UNDP, Human Development Indicators, 2003; UNICEF, The State of the World’s Children, 2003; and World Bank, World Development Indicators, 2003.
Thus, the development of the project concept followed this early identification of microfinance as a key element in the reconstruction of Afghanistan. Following a CGAP[iii] country sector review and a World Bank identification mission in May 2002, a detailed proposal for sector development was drawn up by a World Bank Mission in October 2002. The programme falls under the Ministry of Reconstruction and Rural Development. An initial grant agreement was signed in June 2003 with US$1m funding from CGAP and specified that:
A Microfinance Investment and Support Facility (MISFA) will be set-up to provide performance-based institution-building and on-lending funds to a wide range of retail financial intermediaries that serve the poor. It will also provide and facilitate access to technical assistance and training for those intermediaries, and will establish reporting standards for those intermediaries. The overall objective of MISFA is to provide flexible and high quality support to help establish a healthy microfinance sector that provides diverse financial services to the poor sustainably and at scale. While the World Bank is the lead agency for creating MISFA, with CGAP as key advisor, all other donors interested in funding microfinance in Afghanistan will be invited and encouraged to join MISFA as co-funders.
3 Development Results
With the initial CGAP funding, MISFA was established in the summer of 2003. MISFA, initially within the MRRD, now has its own offices, and is functioning as a microfinance sector apex organisation supporting all the major microfinance institutes (MFIs, the service delivery agents) operating in Afghanistan. It provides them with grant funds for capacity building and loan funds for disbursement to clients; the loan funds carry an interest of 5%. MISFA closely monitors performance of its partner MFIs and second and subsequent tranche releases are dependent on strict performance criteria relating to the use of funds and the size and quality of the loan portfolio.
MISFA has been able to garner donor support and to rapidly scale-up its activities. Whilst it has yet to complete its 18-month pilot phase, funding projections have risen from an initial fund of US$1m in mid-2003 to a budget from March 2005, largely with funding promised, of nearly $US50m. Most funding has been routed through the Afghanistan Reconstruction Trust Fund, a multi-donor financing instrument managed by the World Bank.
Table Two: The Projected Growth of MISFA – 2003-2008
PilotJune 03 -March 05 / April 05 - March 06 / April 06 - March 07 / April 07 - March 08
Total US$ / $25 million / $48.5 million / $57.4 million / $57 million
MISFA / 13.2% / 6.0% / 3.5% / 3.1%
Sector TA / 5.6% / 2.0% / 1.8% / 1.3%
MFI Grant / 49.2% / 39.0% / 34.4% / 27.0%
MFI Loan Fund / 32.0% / 53.0% / 60.3% / 68.6%
An important trend apparent from Table Two is the reduction in the percentage share of MISFA itself and of MFI grants and the increase in loan funds. A core challenge for MISFA has been the justification of very high capacity building expenditure and a lower proportion of outlay on funds for actual disbursement as loans. This is discussed further below, but the MISFA argument has always been that the high percentages on grant support to MFIs are front-end or start-up costs and that loan funds will take over as the dominant use of donor funds. This is exactly what the table shows.
A particular strength of MISFA, which explains why it has managed to grow quickly, is its variety of partnership arrangements embracing a diversity of service delivery models. These MFI partners bring international experience of microfinance service provision and adapt their own proven models to Afghan conditions. MISFA has been happy to draw on this expertise and has made loan funds available to eight partners initially, rising through 2005 to at least 12 partner MFIs. Table Three describes their outreach to October 2004. For most observers, these results represent the bottom line in terms of scale of service delivery. Starting from a near zero base in 2003 the growth in service delivery, to nearly 60,000 borrowers, is very impressive by international standards. Ideally, for impact assessment, these numbers would be supported by further data on the poverty status of borrowers and data on incomes and changes in family welfare. At this stage it is only possible to infer from loan utilisation records, and the odd case study, that positive changes have occurred. With the early MFI starters, BRAC[iv] for example, their first clients are now on second or subsequent loans which are prima facie evidence of worth.
Table Three: MISFA Client Activity: October 2004
Active Loan Clients / Loan Portfolio Outstanding($) / No. Savings Clients / Savings Outstanding
($)
BRAC / 46,809 / 3,034,290 / 65,777 / 662,542
AKDN / 3,334 / 1,948,229 / 0 / 0
FINCA / 3,260 / 363,684 / 3,499 / 31,443
Mercy Corps / 1,587 / 139,815 / 0 / 0
CARE / 304 / 90,349 / 1,832 / 55,807
WfW / 576 / 81,739 / 0 / 0
CHF / 304 / 98,200 / 0 / 0
WOCCU / 0 / 0 / 892 / 4,651
DACAAR / 1,272 / 89,516 / 6,480 / 14,137
MADERA / 210 / 23,136 / 0 / 0
Parwaz / 560 / 40,000 / 560 / 5,429
Totals / 58,216 / 5,908,958 / 79,040 / 774,009
Source: MISFA presentation to World Bank supervision mission, December 2004
4 Geographical Coverage
As the map below shows, MISFA partners are operating in over half[v] of all provinces. Security conditions have prevented MISFA partners from operating in large parts of the country. The south in particular has not been accessible. MISFA is under pressure to extend its operations to more of the southern provinces and several of its partner MFIs are willing to do so, subject to security conditions improving. There are no systematic differences in the feasibility of successful microfinance in the southern provinces beyond these security-led constraints on MFI operations.
Currently, (March, 2005) with well over 60,000 borrowing clients, the microfinance sector, under MISFA’s tutelage, has grown significantly. New growth will come first from expansion planned by existing partners. As security conditions and new partners allow, further and faster growth will occur. MISFA has substantial potential to attract significant donor support and the budgetary estimates given above are very realistic. Ultimately, MISFA partners will seek to attract more commercial money as their operations become profitable. This ambition can be realised because, consistent with CGAP’s central goal, sector growth has been planned with the financial sustainability of service deliverers as a fundamental driver.
The performance of one agency, BRAC Afghanistan, has been instrumental to MISFA’s success. BRAC Afghanistan started operations with a small start-up fund from BRAC, Bangladesh but was identified from the first MISFA design mission as an important partner. The hope, fully realised, was that they could expand rapidly as their programmes had in Bangladesh. Adopting essentially the same model and using trained Bangladeshi staff, the growth of their microfinance programme has been the backbone of MISFA success. As Table Four below illustrates they have grown rapidly and, within MISFA, they account for a very high proportion of total borrowers, total loans and Provinces covered.[vi] BRAC has ambitious growth plans and has not been scared to project sustainability further forward than most MISFA partners, as they expect to continue growing rapidly for a number of years. Indeed, it is possible that they could absorb more funds than are currently available through MISFA, which of course also has other constituencies to satisfy including a wish to promote diversity in service delivery. BRAC Afghanistan’s growth benefits from vast experience shaping the microfinance sector in Bangladesh, also an Islamic Asian country, and has been able to adopt ideas from there. The Small Enterprise Loans that BRAC Afghanistan has now started, with loans for merchants and small entrepreneurs that are larger than those available through their main programme operating through village centres, are a good example of the “jump-starting” that is possible because of this experience elsewhere. Ultimately, as in Bangladesh, BRAC Afghanistan, without compromising its financial sustainability, will seek to link its microfinance service provision with its other services -- for health, education, agriculture, and community development. This derives from an appreciation of the diversity of coordinated support required to promote sustainable livelihoods, especially in the vulnerability context of contemporary rural Afghanistan. This vision and commitment make BRAC an extraordinarily important part both of what MISFA has delivered so far and what it may achieve in the future.
Table Four: An overview of BRAC Afghanistan Microfinance Programme
Particulars / PositionDecember, 2002 / December, 2003 / June, 2004 / November, 2004
Provinces Covered / 3 / 6 / 12 / 12
Districts Covered / 8 / 13 / 41 / 46
Regional Offices / 3 / 4 / 12 / 13
Area Offices / 8 / 28 / 70 / 75
Village Organizations / 163 / 1,008 / 2,171 / 3,477
Members / 3,845 / 24,571 / 43,824 / 67,379
Borrowers / 264 / 15,710 / 28,958 / 50,497
Member to Borrower Ratio / 7% / 64 % / 66% / 75 %
Number of Loans disbursed (up to) / 64 / 16,894 / 37,476 / 67,690
Amount Disbursed (US $) / 18,840 / 1,509,194 / 3,441,931 / 6,699,201
Average Loan Size (US $) / 71 / 90 / 92 / 100
Value Outstanding (US$) / 17,960 / 786,976 / 1,727,627 / 3,211,404
Member Savings (US $) / 3,740 / 121,719 / 267,304 / 7,57,225
Source: BRAC Afghanistan, December 2004
5 Progress Indicators
As described in the box below, the agreement between the Government of Afghanistan (GoA) and the World Bank, the administrators of the ARTF, specified progress indicators in five areas. The first of these, coverage, has been described above and clearly is a positive result for MISFA. The second, qualitative impact, is identified as an intangible and is therefore difficult to assess. There are some very successful case studies that have been written up by various MISFA partners and this evidence is supported by field trip reports from MISFA. Field trips to BRAC programme villages for this paper also suggested that the more qualitative aspects of provision were very positive, with women talking about the importance of continuing access to loan funds and how it contributed to household livelihood security. However, there is an agreed need for MISFA to promote more extensive monitoring of loan use and client performance so that they are able to respond to information demands on the types of impact being achieved. The third indicator, range of services, is built into the MISFA model of support to varied service providers with different targeting methods, market segments and loan sizes ranging from below $50 to $3,000. The fourth indicator can be assessed through the performance of MISFA’s MFI partners; they operate to detailed business plans and have received extensive training and tailored support from MISFA on fiduciary standards, reporting and monitoring as well as, where appropriate, on business development. The fifth indicator has recently been achieved with a Board established for MISFA and a management plan in place.