First MicroFinanceBank Afghanistan:

The Case for Expansion

July 2008

Replacing despair with hope and

confidence in a better future

First MicroFinanceBank Ltd. Pakistan (FMFB-L)Project of the Aga Khan Development Network

(AKDN)

Incorporated Nov. 2001, operational March 2002

65 branches across Pakistan

Full array of services: Loans, insurance, savings, etc.

Islamic banking models

First MicroFinanceBank Afghanistan (FMFB-A)

Mission

To reach out the poorest of the poor who currently do not receive adequate financial services.

FMFB-A is dedicated to serving the urban and rural poor of Afghanistan, especially farmers and

women.

Vision

FMFB-A envisions an Afghanistan in which all low-income people have reliable access to the full

range of financial services.

FMFB-A Objectives

1. To offer the transient and chronic poor of Afghanistan an array of financial services

2. To offer these services in a manner consistent with Islamic beliefs and tenets

3. To help break the cycle of poppy farming in Afghanistan through the provision of microcredit

Islamic Banking and Microfinance

Islam prohibits riba (interest) and gharar (gambling)

Four basic principles must be met:Risk-sharing among parties to the contractMateriality – real economic transactionNo exploitationNo financing of haram (sinful/forbidden) activities

Islamic financial products emphasize concern for risk sharing between user and provider of funds

Afghan Post: A Unique Partnership

Pakistan experienceThis network is expected to facilitate the

disbursement of PKR 15M to over 1M clients in the next 3-5 years.

Afghan Post is expanding rapidlyMutually beneficial partnership arrangement

Will allow rapid scaling up of microfinance operationsAfghan Post will benefit from optimum utilization and

development of its resources

Social, Demographic, and Cultural IssuesPopulation estimated at 30 million

Largely rural; agriculture approximately 52% of GDP

Number of different ethnic groups make for cultural differences

Social development low

Afghan society is largely based on kinship groups

Role of women in society is very restrictive

Macroeconomic and Political Situation in AfghanistanReforms since 2002 have laid the foundation for

a market-based economy

Economy has been expanding; ~12% in 2007

Inflation rates have been dropping; ~20% in 2007

Resources are still inadequate, particularly skilled manpower

Corruption affects reform efforts

Narcotics problem continues to grow

Insecurity is on the rise

Infrastructure

Country is undergoing a large physical reconstruction program with international assistance

Physical infrastructure, communications, and services are currently lacking but situation is gradually improving

Market Size

Market appears ample and largely untapped

However, market is fragmented

Legal and Regulatory Issues

Banking Law of Afghanistan written in 2004

MFIs appear to be operating, without trouble or hindrance, but in a regulatory enforcement vacuum

World Bank program aims to introduce “state of the art” regulation and practices

Competition

MISFA: apex institution created under the auspices of the World Bank

15 MFIs established (some have introduced Islamic banking)

Informal Actors: Opium traders frequently act as narco-usurers (money lenders)

ChallengesLack of local capacity

Security

Social and cultural structure

Operating costs are generally higher than in other neighboring countries

The absence of a comprehensive legal framework for microfinance activity

Opportunities

Economy is growing

Afghanistan is supported by public and private donors

Still room for growth in the microfinance sector

Government is promoting private sector development

Products and Services: LoansAgricultural Loans

CommodityPoppy EradicationLivestock

Health & Lifecycle Loans

Small & Medium Size Enterprises Individual lendingCash Flow-based lending

Products and Services:OtherSavings Deposits

SecurityEase of AccessVoluntaryPositive Rate of Return

Insurance (third-party provider)Lifecycle – death or illnessCrop failure

Fund Transfer Services

Product DeliveryBranch Network

Urban focusNATO-controlled areas

Mobile Banking Increase frequency of client contactProvides easy access to services and funds for

clientsSavings mobilization

Afghanistan Post OfficeExpansion of Post Office network

Provincial capitols: ~ 130 officesSmaller towns: ~ 375 offices

Infrastructure and StaffingStaffing

Extensive trainingPromotion from withinRegular evaluationsCompensation structure

Management Information Systems (MIS)eRapid Idirect