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| FAQ |
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| 1.What is microfinance? |
“Microfinance” is often defined as financial services for poor and low-income clients. In practice, the term is used to refer to small loans and other financial services that poor and low income people can access from providers that identify themselves as “microfinance institutions”, or MFIs.
More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. These services are not limited to credit, but include savings, insurance, and money transfers. |
| 2. How much can a microfinance client borrow? |
MFIs share a similar mission but the services they offer to clients to fulfill their mission may vary from borrower to borrower, depending on client needs. Typically, microfinance loans range from 5,000 to 150,000 Afs (between US$100-3,000). There are MFIs that also offer group lending within this range.
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| 3. Who are microfinance clients? |
Microfinance clients are poor, low-income people, who do not have access to banks and other formal financial institutions. They are usually self-employed, household-based entrepreneurs. Their diverse “microenterprises” may include small retail shops, street vending, artisanal manufacture, repair and service provision.
In rural areas, microentrepreneurs often have small income-generating activities such as food processing and trade; some, but far from all, are in agriculture and livestock.
All across Afghanistan, the total number of microfinance clients is creeping up to the half-a-million mark: more than 440,000 Afghans, a majority of whom, 61 percent, are women. The women clients usually borrow to support certain livelihoods activities, for example, sewing, carpet-weaving, embroidery and poultry and livestock.
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| 4. Can people borrow money for special occasions, such as weddings, funerals, etc? |
No. Microfinance services are created for the specific purpose of income and employment generation. It is intended to be used only for the client’s enterprise. By opening a business or expanding an already existing one using the loan, the borrower is expected to increase his or her household’s income. This will enable the family to have enough money for food and other basic necessities and eventually, for savings and building assets. weddings, unexpected medical issues or death.
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| 5. What are MFIs and what is their mission? |
MFIs operating in Afghanistan are registered with the Afghanistan Investment Support Agency (AISA) as not-for-profit organizations.
Their common goal or mission is to ensure that marginalized groups — poor households and individuals, including women and those who live in the rural areas — are not left out and have access to financial services because they are the ones who are most in need.
In a country, such as Afghanistan, with its history of war, refugees and continuing internal displacement that affect every Afghan’s life to this day, and with its vast, mountainous, challenging terrain, it is hard for banking institutions to reach millions of people. Also, commercial banks operate with minimal risk and lending to poor people is considered risky. MFIs are mandated to serve those that banks cannot.
Most microcredit borrowers have microenterprises—unsalaried, informal income-generating activities. However, microloans may not predominantly be used to start or finance microenterprises. Scattered research suggests that only half or less of loan proceeds are used for business purposes. The remainder supports a wide range of household cash management needs, including stabilizing consumption and spreading out large, lumpy cash needs like education fees, medical expenses, or lifecycle events such as weddings and funerals.
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| 6. Are there MFIs in cities and urban areas? |
Yes. In fact, the headquarters of most MFIs are located in the capital, Kabul. Even though banks have a high presence in cities and urban areas, there is still a strong demand for microfinance loans. This is because many poor Afghans cannot offer a collateral — something that banks usually require from borrowers. |
7. Do MFIs operate nationwide? |
By 2009, MFIs have more than 300 branches in 136 districts across 27 provinces. Seventy-two percent of the total number of active clients live in urban areas, while 28 percent reside in rural villages. Some MFIs operate in provinces known for their challenging landscape and security conditions, such as Helmand, Kandahar and Uruzgan.
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| 8. How do MFIs serve low-income Afghans? |
MFIs deliver very small loans to unsalaried borrowers, taking little or no collateral. Clients are typically Afghans who already run a small business but need capital to expand it; or those who require capital to start a business. Broadly, there are two major categories of lending:
- Group Lending: In this type of lending, the group itself acts as a social collateral. Members of the group guarantee the repayment of each member’s loan. A group member can borrow up to $800. It takes around 5-6 working days to process the application of a group member borrowing for the first time. Subsequent loan applications would take 1-3 days.
- Individual Lending: This is usually provided to borrowers who require relatively more money to run his/her business; the loan amount ranges from $800-3,000. The borrower is asked to provide the MFI with a physical collateral, for example, the deed of an owned house or property, documents of his car, or her jewellery, etc. The application process may take up to two weeks.
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| 9. How does microfinance help the poor? |
Microcredit can provide a range of benefits that poor households highly value, including long-term increases in income and consumption. A harsh aspect of poverty is that income is often irregular and undependable. Access to credit helps the poor to smooth cash flows and avoid periods where access to food, clothing, shelter, or education is lost. Credit can make it easier to manage shocks like sickness of a wage earner, natural disasters, or theft. The poor use credit to build assets such as buying land, which gives them future security. Women participants in microcredit programs often experience important self-empowerment.
Even so, there is a strong indication from borrowers that microcredit improves their lives. They faithfully repay their loans even when the only compelling reason is to ensure continued access to the service in the future. Client demand indicates that poor people value microfinance services. |
| 10. Why do some people say that microfinance is un-Islamic? |
The fundamental mandate of microfinance is to help poor people escape poverty. This is accomplished by providing them loans on terms suitable to them, and by enabling them to learn basic financial and business principles so they could help themselves. This is very much consistent with Islamic principles, which put a great deal of importance on helping the poor and the oppressed.
In fact, microfinance was pioneered in Bangladesh, a neighboring country to Afghanistan, where 80 percent of the population are Muslims, and where poverty is also prevalent. The brainchild of microfinance is himself a Muslim, Muhammad Yunus, who was awarded the Nobel Peace Prize in 2006, which elevated his banking-for-the-poor methodology into a global movement that includes Islamic and Muslim-majority countries—Bangladesh, Pakistan, Indonesia, Egypt, to name a few.
The perception that microfinance is un-Islamic stems from the fee charged to borrowers. This cannot be considered “usury” (the practice of lending money at unreasonably high rates of interest) for the following reasons:
- Unlike traditional money lenders, institutions providing microfinance are not for profit organizations with a social mission to alleviate poverty.
- The fees do not end up for the personal gain of any particular individual. The “usury” forbidden in the Holy Qur’an refers to the act of exploitation, of “devouring people’s wealth under false pretences” (Verse 4:61). Microfinance is especially created for poor people, who are struggling in life because they possess no material wealth and social capital. The terms of repaying the loan are disclosed to the borrowers and are mutually agreed upon before any transaction occurs. This program provides poor people a safer alternative to some traditional money lenders, who employ various ways of cheating people without their knowledge.
- The fee charged by microfinance institutions (MFIs) goes to meet their cost of operation and service delivery, e.g. staff salary, office rent, purchase of equipment, transportation, etc. As other service providers in Afghanistan, including the government, MFIs incur a high cost of operation. Without the service charge, no institution can survive the high cost of operating in Afghanistan and in the end, it’s the poor who lose livelihood opportunities.
- Any surplus wealth earned is re-invested into the microfinance program to maintain a revolving pool of funds that will enable MFIs to bring assistance to all corners of Afghanistan. This revolving fund system is what will enable MFIs to continue providing services to the poor in the long-term. This is very much consistent with the teachings of Islam, which states that wealth acquired by just means should not remain stored at a place and fall out of circula¬tion. Arrangements should be made to ensure that wealth remains in constant use and circulation, particularly for the benefit of those classes which are deprived of their due and reasonable share.
- Islam advocates for the just distribution of wealth. This is why microfinance is recognized by the Government of Afghanistan as one of the most important initiatives that could bring some wealth and prosperity to poor people by giving them an opportunity to start their own business and potentially create employment for others. Because microfinance is part of the national strategy to reduce poverty, the Government supports the budgets of MFIs.
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| 11. How much is the fee MFIs charge and what is it for? |
MFIs operating in Afghanistan charge between 1.25 and 1.5 percent per month.
The service charge to clients in Afghanistan barely covers the operating cost of an MFI. In a country characterized by instability and ongoing conflict, operating costs are high. Staff salaries and administrative costs are far higher in Afghanistan, compared to the other countries in the region. For example, the average salary of a loan officer in Afghanistan is in the range of $200-400, compared with India and Bangladesh, where the average is about $100. In addition, hiring of extra support staff, mainly for security — an unavoidable expense in the volatile context of Afghanistan — increases personnel cost to a much higher level than in the other countries.
In terms of administrative expenses, office rent and transportation are also much higher In Afghanistan than in the neighboring countries. While most loan officers typically use bicycles or motorcycles in Bangladesh, India and Pakistan for field work; their Afghan counterparts are forced to use cars, which are more costly, due to the tougher terrain, weather and security conditions.
In addition, the administrative cost of making tiny loans is much higher in percentage terms than the cost of making a large loan. It takes a lot less staff time to make a single loan of $100,000 than 1,000 loans of $100 each. Moreover, credit decisions for borrowers who have neither collateral nor a salary cannot be based on automated scoring. These decisions require substantial intervention of an MFI staff in assuring that the client understands the process, rights, obligations and is going to use the funds for good reasons.
It should be noted that microfinance in Afghanistan is at its infancy. But as the sector keeps maturing, administrative costs are expected to stabilize, if not decline, as managers learn more lessons and good practices from experience and training, and MFIs gain greater efficiency and stay on the path of sustainability.
Sustainable MFIs, which are no longer dependent on foreign subsidies and are able to meet their operations costs through their income, are the ones who will ultimately stay for the long haul and provide better services to a greater number of poor Afghans.
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| 12. What do borrowers get out of this service? |
Clients understand that the value of the service they are getting far outweighs the fee that they pay for the service. They recognize that MFIs are trusting their entrepreneurial skills and loaning them capital that they would normally not get from banking institutions.
Benefits: What clients are receiving against the fee is a chance to start a business, become self-sufficient, provide for their families and live in a dignified manner without having to borrow from friends, family or a money lender at a much higher cost.
Convenience: They are also receiving door-to door service, where either the loan officer comes to their homes, or they travel to a branch located in close proximity to make payments or receive disbursement. Banks do not offer this type of service.
Accessibility: Typically, MFIs, whose goal is to reach the under-served, often has branches not just in urban areas, but also in local neighborhoods, rural districts, and even remote villages to ensure that the poor have access to financial services. MFIs also operate in areas that are remote or have low population density, making lending more expensive. This is often why traditional banks tend to stay away from such areas.
Collateral: MFIs recognize that poor people often do not own assets and therefore cannot provide a collateral, something that commercial banks strictly require from borrowers. MFIs operate under the conviction that poor people without assets are already victims of an unjust distribution of wealth -- something Islam is very much opposed to. Therefore, depriving them access to financial services and livelihood opportunities would be a form of oppression. Economic justice in Islam is secured in perfect harmony with the principle of allowing the exercise of in¬dividual freedom in the economic field.
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