Afghanistan Rural Finance and Opium Workshop Summary
Outcomes
RURAL FINANCE IN AFGHANISTAN AND
THE CHALLENGE OF THE OPIUM ECONOMY
SUMMARY OF KEY OUTCOMES
This workshop, jointly
sponsored by the Ministry of Rural Rehabilitation and Development of the
Government of Afghanistan, the Department for International Development of the
United Kingdom, and the World Bank, brought together international and
Afghanistan-specific expertise to develop ideas and approaches for enhancing
rural finance in Afghanistan. The challenges posed by the opium economy, and
particularly of opium-related debt, were addressed.
A number of promising
initiatives for rural finance are already in place but there are major gaps,
both quantitative and in terms of the types of instruments matched to different
categories of clients. The importance of opium-denominated indebtedness
(estimated roughly at $190-350 million, including seasonal and accumulated debt), as an economic and social problem
and as a “driver” of continuing poppy cultivation by many poor farmers, was
emphasized.
A number of principles and
general directions were proposed to guide further work:
A near-term action program
was agreed, in four main areas.
i)
Opium debt. Financial
modelling and design of debt refinancing instruments; expansion of existing and
initiation of new pilot programs for opium debt refinancing in selected major
opium-producing areas, and draft policy on opium indebtedness for consideration
by the Government (World Bank/ DFID, design work February 2005, pilots and
policy mid 2005).
ii)
Synthesis study
on supply chains. Led by USAID in collaboration with DFID, the World
Bank, and others, drawing on earlier product-specific work. DFID will also
investigate opportunities for preferential access of Afghan products to markets
(both pieces of work to be completed by end-January 2005).
iii)
Strategies and plans for scaling
up national programs (particularly MISFA, NEEP, NSP) will be developed,
initially prioritising seven top poppy growing provinces, and review of
potential delivery institutions and mechanisms for expanded rural finance
facilitated through national programs and projects. Strategy work to be led by the World Bank and DFID with Afghan
partners and programs concerned (targeted for January 2005).
iv)
Paper assessing options for
increasing rural finance coverage through informal institutions, and formal
banking institutions (e.g. Milli Bank, Pashtany Tejarati Bank, and new
Afghanistan-based banks. Led by the
World Bank (target January 2005).
1. Findings on rural finance in Afghanistan
The workshop discussed
finance for rural areas as part of an accelerated livelihoods – and alternative
livelihoods – strategy. The following
are some of the findings from experience in Afghanistan to date:
q Security is a
pre-condition for development of sustainable financial service providers
q Rural finance is
one among many services needed for accelerated growth in rural areas, and it is
most effective when other services are also available– technical and business development
advice, input supply, market development
q A structure of
limited financial services exists throughout Afghanistan – the hawala system
q The demand for
credit is strong – but it has not been quantified or analysed, and certainly is
quite different for different socio-economic groups in the various areas of
Afghanistan
q There is demand
for savings and money transfer services – not just for credit
q Respect for
financial contracts and for credit repayment is general in Afghanistan
q Traditional
social capital in support of respect for contracts exists – e.g. in the jirga or shura – and new institutions such as CDCs could contribute to
further development of rural financial markets
q Initiatives in
microfinance with MISFA have successfully introduced new products, and
microfinance is spreading rapidly.
There are risks in accelerating the already rapid expansion plans, but
there is scope to extend microfinance services to new areas of Afghanistan, to
develop new products and to deepen penetration of existing areas through links
to community institutions.
q NGOs have played
a key role in microfinance development, and now financial institutions such as
FMFB-A and BRAC Enterprise Bank (still to receive a licence) are emerging
q Medium term
financing for investment is not readily available but initiatives in leasing
show potential for financing capital goods through that route
q Experience with
contract farming suggests that this approach has significant potential
q In the initial
phase of rapid roll out, the financial market has got ahead of the legal and
regulatory framework
2. Findings on opium poppy financing and debt
q Poppy farmers
commonly take out seasonal loans denominated in opium. Loans are typically used
to satisfy basic needs, particularly over winter. They must be paid back in
opium or cash equivalent. It is estimated that between 50% and 66% of farmers
take out loans and the total seasonal loans are between $125m and $200m.
q The terms of the
loan favour the creditor. The cash loan is typically equivalent to 50% of the
cash value of opium on the date of issue, but repayment is based on the full
value of opium when repayment becomes due.
q If opium yields
are poor, or crops are affected by a ban (as in 2000) or by eradication,
borrowers are unable to harvest sufficient opium to repay the loan. Given few
alternative options to obtain credit, some farmers are obliged to take out
further opium-denominated loans, plunging them into a downward spiral of
indebtedness. Such entrenched opium debt is particularly common in core poppy
growing areas. An estimated 30-60% of poppy farmers are affected. Average
indebtedness is estimated at $700 per household, and the total accumulated debt
may be between $65m and $150m.
q Opium-denominated
loans are taken out by all wealth groups, but poorer farmers are more likely to
become deeply indebted. Among the most marginal, total debts can be equivalent
to three quarters of annual cash income.
q Increases in
opium prices can help those whose loans are denominated in cash but further
penalise those whose debts are denominated in opium. Consequently, full
repayment is unlikely without external assistance, given the level of
accumulated debt, the need for new loans each year, the frequency of crop
failure and threat of eradication, as well as the absence of alternative
sources of income.
q The failure to
repay accumulated debts has become an increasing source of local tension and
conflict, resulting in the sale or mortgage of land, the sale of livestock or
household assets, the sale of daughters, destitution, and absconding by
borrowers.
q Two options can
be considered for addressing the opium debt problem: cancellation, or
refinancing.
q Cancellation of debts is not enforceable and would undermine traditional credit markets and the strong “repayment culture” that currently exists in Afghanistan.
q Opium debt refinancing is currently being tested on a very small scale in Badakhshan with farmers having average debts of $300-500. Loans currently average $200 and are repayable over a 15 month period. Refinancing needs to respect cultural and social norms and be accompanied by investment in alternative skills or assets. It needs to be accompanied by interdiction against trader/creditors.
3. Some
principles for future development based on international experience
q Savings first
approaches improve discipline, reduce risk and build up equity
q There is a range
of financial products that need to be matched to clients:
1. social protection
for the destitute
2. creation or
improvement of an income stream for the poorest (e.g. through partial grants
for a productive asset or development of a skill)
3. microfinance to
develop the smallest enterprises
4. microfinance
(including savings and money transfers) for households to meet consumption,
emergency, health and other needs
5. larger loans to
scale up established micro enterprise
6. longer term
financing, leasing, guarantees and risk management instruments for larger
businesses
q Grants and savings have a large role to play at the lower end of this range – stages 1 and 2 are suitable for largely grant financing. From stage 3 onwards, grants have to be used carefully and intelligently to support the development of sustainable programs.
q Subsidies should
not be provided on prices or interest rates, but are acceptable for many other
interventions such as capacity building, advisory services, pilot programs,
market information etc.
q Development of
rural finance has to pay more attention to capacity building and sustainability
than to simple disbursement of money if sustainability is to be achieved
q Representative
community institutions can help facilitate financial market development – but
making them agents for savings and loans creates unnecessary risk. Setting up separate financial services
associations (e.g. credit unions) can reduce risk and costs and promote
sustainability.
q Supply chain
financing develops financing as part of an integrated package of input supply,
advice and market outlet, and reduces costs and risks.[1]
q Sustainable
financial market development requires a conducive legal and regulatory
framework, but this needs careful preparation as an inappropriate framework
inhibits development
q Where product
chains and markets have been damaged (e.g. by conflict), exceptional measures
may be used to “kick start” the product chain.
Interventions include: using specialized institutions that facilitate
development at weak links in the product chain (in finance, business
development services, market access etc.); “challenge funds” that provide
matching grants for business development; and lines of credit (often associated
with business development services) that provide investment finance where there
is a lack of liquidity.
q All interventions have high capacity building costs, and Government and donors will have to accept high levels of cost and technical assistance
q Separate rural finance institutions to finance rural projects (agricultural and otherwise) may need to be explored (together with an experienced international operator), although diversified financial institutions with a broad product and client range are the best solution.
4. Areas for development and workshop recommendations
1. Design and test mechanisms for
possible refinancing of accumulated opium debt
1.1 Carry out financial modelling of restructuring of accumulated opium debt
through possible refinancing instrument and uptake of sustainable alternative
income generation stream.
1.2 Design
mechanisms for debt refinancing, taking account of, inter alia, eligibility, normal or extended
loan repayment terms but no
subsidy on interest rate, cash or in-kind finance, re-acquisition of productive
assets (i.e. land), collateral requirements, incentives for creditors, links to
interdiction, links to business development and skills training, monitoring requirements, capacity of potential
implementing partners. Also possibility
of grant financing for kick-starting of new alternative livelihoods activities.
1.3 Upscale
the existing Badakhshan pilot within the limits of near-term current capacity
constraints. Design new pilots for implementation in core
poppy producing provinces, taking account of current Badakhshan experience, and
design work above.
1.4 Coordinate
opium debt refinancing with other programs (e.g., NSP, NEEP, MISFA, RAMP) to
maximise development
synergy.
1.5 Assess
ways to attract new financial institutions to take up this challenge.
1.6 Develop
platforms for lesson sharing, development of best practice, and scaling up.
2. Understand the market in order
to develop a range of products and programs
adapted to each product/income stream and to each region:
2.1 Conduct product chain and regional
financial market surveys and needs assessments where there are gaps. Priority is to synthesize and apply existing
surveys and assessments, and to identify sub-sectors for focus.
3. MISFA programs may spread nationwide, deepening their market
by linking to existing community institutions and to trader networks, and
continuing to adapt products to the needs of agriculture and off- farm
enterprise
3.1 Firm up MISFA strategy for consolidation
and expansion. Noting that currently MISFA services are less represented in
areas of intense poppy cultivation, pay particular attention to extending MISFA
in the seven largest opium producing provinces.
4. Link social protection under NEEP and social capital
development under NSP to the range of initiatives and products outlined above
4.1 Consider how NEEP/NSP can work within an
integrated framework (at both CDC and district levels) to help move the poor
from the social protection phase to the enhanced income stream phase
4.2 NSP CDCs may facilitate the entry of MFIs
as well as savings and loan associations (and other financial and business
development programs), perhaps starting on a pilot basis in areas where the
implementing partners for NSP and MISFA are the same
4.3 Assess capacity of NSP to absorb more
resources
5. Expand supply chain financing as part of a program to
stimulate market development (drawing on study and pilot work done with RAMP
and OTF)
5.1 Investigate scope to develop contract farming approaches (including through traders)
5.2 Develop a sub-sector/product
approach for high-potential supply chains and assess scope for high-impact
interventions (e.g. specialized institution to promote the effective
functioning of the supply chain and related financial/non-financial services,
challenge fund, market rate credit facility through bank/MFI/specialized rural
finance institution, linked to business development services)
5.3 Consider how to factor in
infrastructure development needed for priority sub-sectors, such as roads and
storage (including cold storage and associated electricity requirements)
5.4 Convert non-sustainable market
development programs into sustainable operations, e.g. by tendering seed
provision currently conducted by NGOs to traders/suppliers, using technical
assistance and matching grants to assist traders/suppliers to carry out these
functions effectively.
5.5 Develop extension or other financing
and technology transfer mechanisms linked to markets
6. Develop approaches through the formal financial system
6.1 Explore scope for outreach through
the existing national banking system (building on work done by USAID). Efforts should be made to extend the formal
banking sector, particularly to rural areas, using e.g. guarantees, technical
assistance, branch subsidies. The Milli and Pashtuni Bank infrastructure, the
proposed BRAC Enterprise Bank, and the First National Micro-finance Bank may
offer opportunities.
6.2 Assist banks that already have functioning branches in Kabul to lend to upstream wholesalers/traders in Kabul
6.3 Develop business advisory services (embedded in supply chains) in association with the financial sector (building on existing initiatives with RAMP, PEP-MENA etc)
6.4 Explore guarantee funds to reduce
risk in financing rural enterprises.
Also challenge funds to attract local business and promote investment in
improved capacity and services (e.g. traders – see Point 5.4).
6.5 Explore scope for a financing
facility (perhaps through banks or a specialized rural finance institution) for
trader or wholesaler credit and other rural enterprises (possibly working with
Rabo Bank and its Development Fund).
6.6 Consider contracting specialist entities
to build embedded services to support agribusiness service providers in
priority supply chains (see Point 5.2).
7. Facilitate the growth of non-formal and semi-formal
financial markets
7.1 Consider programs to license and
monitor hawaladars to provide credit,
to link them to a re-finance mechanism or rural finance company (see Point
6.5), and to provide technical assistance in system and product
development. Consider possibilities of
how this might be done in the case of opium debt.
7.2 Explore ways in which community
associations (not the CDCs, which are not suited to this function) may provide
savings and loan services, using CDD and innovative microfinance approaches.
8. Develop the capacity of financial institutions,
facilitating partners and business development services at all levels
8.1 Develop capacity building programs,
building on/working through MISFA (which provides significant assistance to
microfinance initiatives already), RAMP and other existing initiatives.
9. Firm up a conducive legal and regulatory framework that
reduces risk and protects clients but allows flexibility in market development
9.1 Give priority to developing and adopting legislation and regulatory structure (e.g. the enabling and regulatory framework for leasing)
10. Bring support to rural finance and other
rural development within a coherent framework
10.1 Develop policy commitments with partners that donor finance is channelled primarily through the National Development Programs
10.2 Link with pioneering rural development programs such as USAID’s RAMP and alternative livelihoods programs either through the Alternative Livelihoods Working Group or other fora.
5. Immediate action plan
Financial modelling of
refinancing of opium-related debt.
This will assess the
viability and inform the design of refinancing instruments for opium-related
debt to enable deeply indebted farmers to get out of debt and develop
sustainable alternative income generation streams.
Led by DFID and
World Bank. Target for Delivery
February 2005.
Pilot projects: up-scaling of
existing pilot and design of new pilots for opium debt refinancing.
Led
by World Bank and DFID with MISFA.
Funding to be identified. Target
for start of action: March 2005.
Policy on opium-related
indebtedness. Based on
development/experience with pilots and further consultations, a draft policy on
opium indebtedness will be prepared for consideration by the Government. The policy will be framed in the context of
existing and evolving policies on : (i)
counter-narcotics; (ii) agriculture; and (iii) rural development. The policy may also include recommendations
for changes in legislation.
Led by DFID and World Bank. Regular meetings to be
held with Government of Afghanistan during process (first in mid-late January
2005); Target for delivery: May/June 2005.
Study: a synthesis
study will be carried out on selected supply chains with potential for
incentive financing to support alternative livelihoods (drawing on information
from RAMP, FAO and other sources).
Led
by USAID, in collaboration with DFID, World Bank and others. Target for delivery: by end January 2005
Preferential access: investigate
opportunities for preferential access of Afghan products to markets.
Led
by DFID. Target for delivery, by end
January 2005.
Strategies for scaling up
national programs:
(1) a plan will be
developed to roll out accelerated delivery of existing national programs and
projects (MISFA, NEEP, NSP, RAMP) in seven priority provinces (Nangahar,
Badakshan, Hilmand, Kandahar, Farah, Uruzgan, and Ghor)
(2) a plan will be
developed to accelerate roll out and deepen coverage of the national programs
in the country as a whole.
(3) a review of
potential delivery institutions and mechanisms for expanded rural finance
facilitated through national programs and projects.
Led
by the World Bank and DFID with the national programs and RAMP. Target for delivery: January 2005.
Options paper: a paper will be
prepared assessing options for increasing rural finance coverage through
informal institutions, and also through existing formal banking institutions
including Milli Bank, Pashtany Tejarati Bank, and new Afghanistan-based
banks.
Led
by World Bank. Target for delivery:
end-January 2005.
LIST
OF ACRONYMS
BRAC Bangladesh Rural Advancement Committee
CDC Community Development Council
CDD Community Driven Development
FMFB-A First National Microfinance Bank - Afghanistan
MISFA Microfinance Support Facility for Afghanistan
NEEP National Emergency Employment Programme
NSP National Solidarity Programme
OTF A US private consulting firm
PEP-MENA Private Enterprise Partnership for Middle East and North Africa
RAMP Rebuilding Afghanistan’s Agricultural Markets Program