MICROCAPITAL STORY: Meet a MicroBank: An Interview with Managers of First Microfinance Bank (FMFB) of Afghanistan, Member of Aga Khan Development Network (AKDN)

The Aga Khan Development Network (AKDN) focuses on health, education, culture, rural development, institution-building and the promotion of economic development. It is dedicated to improving living conditions and opportunities for the poor. In Afghanistan, AKDN’s projects include large-scale rural development, health, education and civil society programs. Through one of its nine operating agencies, the Aga Khan Agency for Microfinance (AKAM) also provides microfinance services in the rehabilitation of historic neighborhoods in Kabul and Herat. A key product development priority for AKAM began in 2007 with the development of the Housing Product Initiatives program in Afghanistan, via the First MicroFinance Bank (FMFB) of Afghanistan with additional assistance from the International Finance Corporation (IFC), a member of the World Bank Group.

Karim Haidar, Head of Microfinance for The First MicroFinance Bank (FMFB) Afhghanistan

Michael Osegge, ShoreBank International Consultant for The First MicroFinance Bank’s (FMFB) Housing Product Initiatives Program

MicroCapital: What is the story behind First MicroFinance Bank (FMFB) with regards to Afghanistan’s “Housing Product Initiatives” and its founding?

KH: The FMFB Pilot Housing Initiatives began in 2007 due to the high demand by the Afghanistan community to improve housing in the region. As you are probably familiar, Afghanistan has experienced two decades of war with many homes in the provinces and districts experiencing a great deal of damage. We are now seeing many refugees returning to their respective homes that require a great deal of refurbishment.

MC: Can you tell me on what types of housing microfinance lending projects focused funding?

KH: These are not loans used for purchasing homes and land. They are specifically used for housing improvements (reconstruction, completion and refurbishment).

MC: What was the vision for Housing Product Initiatives at its beginning?

KH: The vision for the Housing Product Initiatives was to provide credit to poor families in Afghanistan (in order to help restore and upgrade homes) and contribute to improvements in their quality of life. One of the most pressing problems facing families in the developing world is overcrowding within one’s home. This has negative impacts on the health of the family as people must sleep in the same rooms where they cook, eat, wash and in rural areas, where they house their animals at night. Added rooms allow for activities to be spread out. When combined with other initiatives such as vents and windows, this can help to increase ventilation and reduce the prevalence of cooking smoke in the house. In addition, work performed by other AKDN institutions has shown these improvements to reduce the levels of asthma and other respiratory infections, particularly in children. Other improvements, such as new roofs, double-pane windows, improved insulation and better water and sanitation facilities can also have an enormous positive impact on well-being. In many cases, an added room can also become a place of business and help the family to generate much-need income by operating a small store or workshop. This is particularly beneficial to women as it allows them to work and generate income while still being able to remain in the home to look after their families.

MC: How did the pilot phase develop? What are FMFB’s Housing initiatives-objectives?

MO: It was on the basis of the feasibility study that the Housing Pilot was developed. FMFB Afghanistan had retained a consultant in late 2007 that carried out a market and feasibility study for the implementation of a “housing finance pilot program”. The purpose of the feasibility study was to assess the market demand for housing improvements/renovations in Afghanistan as well as the productivity level that would be achieved by issuing these microloans. The Housing Pilot started in May 2008 and was initially meant to run for nine months with the objective of issuing at least 750 microloans. The initial phase covered four bank branches (of 19 branches covered by FMFB) by which the funds would be distributed.

FMFB formally launched the pilot phase of Housing Loan in two zones of Kabul city and (some zones of) Herat city. Lending has been focused on incremental renovations, including the addition of new rooms. Of particular note is the fact that these loans are being provided to many families who are living in the informal settlements that have sprung up and around Kabul since the departure of the Taliban.

The pilot was successful based on the review done in April 2009. Rollout to other provinces has commenced.

MC: Can you provide greater detail as to what the market and feasibility study entailed for the implementation of the housing finance pilot in Kabul and Herat City?

MO: The findings of the market and feasibility study were that 83 percent of the people surveyed needed loans for housing improvements. The study also looked at the affordability criteria and concluded that the average loan size would be USD 700 dollars (based on income and household expenses). Presently, 700 loans have been distributed to our clients who have significantly improved their housing condition. This amounts to USD 850,000. We expect to issue additional loans in more zones (both urban and rural areas) with the assistance of the IFC and capacity building advisory services from ShoreBank International for 2009.

MC: What is the current role of the IFC in this project?

MO: The IFC’s current role has been to provide funding for these housing projects in terms of building the capacity of the FMFB to offer a housing microfinance product to a larger population in Afghanistan. IFC hired the services of ShoreBank International Ltd (SBI) through a resident housing microfinance consultant. SBI is a US-registered organization that offers a broad range of advisory and financial services in its core market segments of small business finance, microfinance and housing finance. SBI provides capacity building to FMFB and has so far improved loan documentation, developed marketing materials and strategy as well as financial and technical assessment training materials for a housing product initiative such as this one. It also facilitated the refinement of the product which is now ready for rollout and will, within this year, develop a housing microfinance toolkit that will be used to replicate similar housing initiatives in other countries.

MC: What were some of the major challenges in establishing a Housing microfinance product/initiatives presence in Kabul and Herat City, Afghanistan?

MO: Kabul and Herat are considered to have historical districts or zones. Currently, there are certain building restrictions requiring the use of original/local building materials. If homeowners were in need of improvements, they would be restricted to using materials that were originally used during the creation of the home. This becomes a challenge since costs can run high in order to maintain a home’s original makeup. Fortunately, the historic district represents less than 1 percent of the country.

Land title is also another issue that requires a flexible approach. Land title is unclear or non-existent in Afghanistan. It becomes very difficult for customers without land title to access loans. However, this should not be viewed as a total barrier to access housing finance as long as the client has sufficient land security (such as when the client has been residing on the land for several years or is not living on “high value land” (land immediately adjacent to industrial parks or airports that are slated for expansion)). Thus, we require some form of proof of ownership.

Thirdly, Afghanistan has many informal settlements which are limiting our expansion in part of the country. We cannot expand our services in areas where there is no local government approval in terms of housing planning.

Lastly, security is an issue in Afghanistan that limits our ability to expand, specifically in the Southern and Eastern parts of the country. As of now we are concentrating on the Northern and Western parts of the country.

MC: Can you tell me more about the existing housing product initiatives in terms of plans for expansion over the next few years?

MO: When we launched the pilot, the design of the program was such that it restricted us to only issue loans for the refurbishment of an existing home. Upon further analysis on the success of the pilot program, we learned that there is a new demand for clients who have not yet completed construction on their home (such as the incomplete roofs, etc.). We intend to target that market as well in the near future. Thus, expansion plans for 2009 is to disburse 1500 loans amounting to USD 1.2 million. We expect these figures to increase subsequently in 2010 and beyond.

MC: Is Housing Microfinance funding primarily issued to individual customers in Afghanistan or is it also extended to small neighbourhood groups or cooperative housing schemes for simple infrastructure projects such as collective water, sanitation systems or other shared resources?

MO: At this time, funding is primarily issued to individual borrowers (both men and women) in Afghanistan. The percentage of funding for women is small in Afghanistan, representing 10 percent of the portfolio. Currently, many women do not own land or homes in the Afghanistan, thus limiting their accessibility to funding.

MC: How is “Housing Microfinance” in Afghanistan different from other developing nations? How is it different from the Western Countries?

MO: In Afghanistan and in many developing countries, “housing microfinance” is a fairly new phenomenon. I believe it is completely new to Afghanistan since there are not many institutions that provide this type of product. We know of only one other enterprise in Afghanistan that provides housing microfinance loans. Furthermore, “housing microfinance” is radically different from the mortgage based housing finance common in Western countries, but it also quite different form the traditional microfinance in that it is focused towards entrepreneurial and productive pursuits. As mentioned earlier, title to property is often difficult to establish in many countries, particularly in Afghanistan as a result of the many years of conflict and changing governments and in post-Soviet countries, where title often still remains with the State. As such, mortgage instruments are often unsuitable, and in many countries, the framework for mortgage lending is still absent.

MC: I have noticed that housing microfinance projects typically require significantly longer loan maturities than other types of lending. Is that the case with your clients in Afghanistan?

MO: Yes. Housing microfinance projects typically require longer maturities than other types of lending. This is true in the case of Afghanistan. FMFB Afghanistan has issued loans for a maximum of 24 months.

MC: Can you tell me what the average loan size per client?

MO: The current average loan size per clients is USD 1200. This is higher than the average for the initial product design proposes in 2007 because of increase in price of construction materials and labor.

MC: Please tell me about the Credit Life Insurance (CLI) component for housing microfinance clients in Afghanistan?

MO: Unfortunately, we currently do not have insurance companies that can provide services such as Credit Life Insurance for clients in Afghanistan. Ideally, institutions should require a Credit Life Insurance component for housing finance clients; in part because of the longer maturities and because of the significance of the loan for the well-being of the family. In addition, this could be combined with a guaranteed construction completion scheme that would ensure that the project is completed, even if the head of the household passes away or is seriously injured. For example, it could provide additional funds to hire workers to complete the work for the family. FMFB acknowledges these risks but there is little that be done until the country is stable and has developed an insurance industry that can successfully operate within the country. However, AKAM has a dedicated micro-insurance unit and has been operating micro-insurance schemes in Pakistan for two years and will soon explore similar options in Afghanistan.

MC: Are borrowers required to have an equity stake in the proposed renovation housing project?

MO: Yes. The borrowers are required to contribute 30 percent to the improvement costs.

MC: How do you determine who is qualified for a loan and what type of credit analysis is performed (if any)?

MO: We look at a borrower’s income and expenses in order to determine net income and his/her ability to repay the loan. Net income should be at least 170 percent of the monthly installment. We also require each prospective borrower to provide a guarantor. For example, we look for someone who in good social and financial standing who can guarantee the credit worthiness of the prospective borrower.

MC: Presently, have you encountered any repayments difficulties with your borrowers?

MO: We have seen a few cases particularly with salaried borrowers who are not paid on time by their employers or when they have transferred to other provinces. This can cause late payments.

MC: In the past few years microfinance has been getting a lot of positive press. Do you feel that microfinance is as an integral component to the rebuilding of Afghanistan’s housing infrastructure?

MO: Given the lack of mortgage facilities available to citizens in Afghanistan, we view our microfinance product as a huge opportunity and a very critical component to the rebuilding of Afghanistan’s housing infrastructure. The global financial crisis that society is currently facing certainly impacts the loan demand for countries like Afghanistan. As a result, this program is a great opportunity for our clients as well as the rest of the citizens of Afghanistan to improve their living conditions.

By Zoran Stanisljevic

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