Overview
The microfinance sector in Afghanistan is going through a period of reform. This is due largely to the consequences of an early emphasis on rapidly achieving operational sustainability through growth in client numbers and loans made. This focus reduced attention given to issues of portfolio quality, accountability, and meeting client interests, and was coupled with a lack of acknowledgement of the existing informal credit market. All of this laid the foundation for the current problems that microfinance institutions (MFIs) are facing with increasing client default rates and, in some cases, fraud.
AREU research on the impact of microcredit on informal credit systems and rural livelihoods illustrated the viability challenges MFIs were facing. These challenges were linked to having invested little effort in determining the viability of clients by understanding the social and economic contexts in which they were to invest their loans or in offering loan products meeting client needs. This showed a lack of understanding of the interconnections between MFI viability and that of clients. Based on a growing understanding of these connections and recent lags in growth and performance, the Microfinance Investment Support Facility for Afghanistan (MISFA) has introduced a series of reforms at the sector level to refocus MFIs on quality instead of growth. These reforms include requiring partner MFIs to prepare more reliable business plans, have a trainer on staff to address capacity gaps in management and credit operations, and create internal audit units to improve control systems and reduce opportunities for fraud. To track MFI progress in implementing these reforms, MISFA has institutionalised an MFI report card system.
MISFA reforms have initially targeted MFIs' internal structures, capacity, and control systems. However, they also recognise the need to consider greater diversity of loan products and methodologies to meet client needs. To support diversification in the future, after internal reforms are in place, MISFA has committed to an action research agenda to investigate demand for savings products, agriculture and livestock loans, and Islamic finance products.