MICROCAPITAL STORY: Islamic Microfinance Rapidly Growing in Afghanistan

In 2006, the Foundation for International Community Assistance (FINCA) became the first microfinance institution in Afghanistan to offer non-interest bearing Murabaha Islamic loans, contracts where sellers declare their cost and profit.

Beginning their operations in Afghanistan in 2004, FINCA switched to Murabaha Islamic loans, following market demand for a loan product compliant with the Shariah (Islamic law).

According to the Institute of Islamic Banking and Insurance (IIBI), the Koran condemns usury which has been interpreted in modern Islam as all forms of interest-bearing loans. Interest is viewed as taking advantage of a person’s weaker economic position. IIBI describes the giving, receiving or even witnessing of interest-bearing loans as forbidden by Islamic law. Instead, credit can be given for production purposes rather than consumption, as a form of trade.

Murabaha Islamic loans are not seen as loans, but rather a contract of sale between a bank and its client. Also known as mark-up financing or cost-plus financing, Murabaha involves the purchasing of goods by a bank at the customer’s request, to be sold to the customer at an agreed mark-up. The mark-up is seen as a service-charge which must be approved by a cleric and given a fatwa or religious decree. The customer then pays the bank for these requested goods in the form of installments. Thus Shariah-compliant banks and microfinance institutions can be sustainable without the use of interest-bearing loans.

Murabaha is the most widely accepted method of finance in the Islamic banking sector. It is frequently used in consumer finance, real estate, production, import trade, the issuing of letters of credit, and most commonly to finance short-term trade.

Offering Shariah-compliant loans in the form of Murabaha has enabled FINCA to expand and provide microfinance services in areas of Afghanistan where previous MFIs had been rejected. Subsequently, FINCA is currently Afghanistan ‘s fastest-growing and second largest MFI, serving nearly 55,000 clients (out of approximately 400,000 total borrowers in the country) with a repayment rate of 99 percent, and a loan portfolio of USD 10.9 million. Their current goal is to serve 90,000 clients by 2009.

FINCA Afghanistan focuses their outreach efforts on women, ethnic minorities and returning exiles. They have recently been presented with the 2007 Consultative Group to Assist the Poor (CGAP) Pro-Poor Innovation Challenge (PPIC) Award for their highly effective poverty outreach and demonstrated sustainable programs.

FINCA International is a leading global microfinance institution, currently operating in twenty different countries, reaching over half a million clients. Founded in Bolivia in 1984 by microfinance pioneer John Hatch, their mission is to provide financial services to the world’s lowest-income entrepreneurs. At the end of 2006, their annual report showed a loan portfolio of USD 166 million.

By Melissa Duscha

Additional Resources:

Foundation for International Community Assistance (FINCA)

FINCA Afghanistan

FINCA Afghanistan to Expand Rural Lending and Reach 90,000 Clients by 2009: http://www.villagebanking.org/site/c.erKPI2PCIoE/b.2663673/k.16A0/FINCA_Afghanistan_to_Reach_90000_Clients_by_2009.htm

INSEAD Knowledge: Islamic Microfinance Gains Popularity in War-Torn Afghanistan: http://knowledge.insead.edu/islamicmicrofinance080205.cfm

Institute of Islamic Banking and Insurance: http://www.islamic-banking.com/shariah/sr_murabaha.php

Islamic Finance: http://www.islamicbankingandfinance.com/

MICROCAPITAL STORY: State Bank of Pakistan (SBP) Issues Guidelines for Islamic Microfinance Services

Muslim Aid Microfinance Workshop in Sri Lanka aims to Develop Interest Free Credit Models

Towards Islamic Finance- A Primer: http://www.microfinancegateway.com/content/article/detail/41129