Abstract
Microfinance is important in a country’s rural development and poverty alleviation. In underdeveloped countries where a substantial fraction of the labour force is not gainfully employed, and the poverty rate rises over time, microfinance development is needed. In Afghanistan, the formal microfinance channels became active in 2003, and so far, they have provided considerable financing services to individuals and businesses. This article attempts to draw a clear picture of the impact of this sector on income, employment, women empowerment, and poverty. The article also attempts to highlight the prevailing challenges hampering the development of microfinance in Afghanistan. The findings of this article show that the microfinance sector has seen dramatic development over the past 20 years, and many microfinance institutions that provide financial services for thousands of households have been established. It further finds that there are cases of positive impacts from microfinance on income and employment. The effect of microfinance on women’s empowerment is less than expected; however, there is evidence of a positive effect for some women. The impact of microfinance on poverty is hard to conclude. In rural areas, impoverished people have not been targeted by microfinance because they might be unable to repay their debts.
Introduction
Microfinance refers to a broad range of financial facilitation for poor individuals and small businesses that generally do not have access to formal banking services (Jain & Jain, 2012). By accessing microfinance, poor people can secure their lives by participating in productive activities and achieving a stable financial source to meet their needs. Historically, since the 1970s, the importance of microfinance has been amplified by targeting rural individuals who lacked formal financial services (Zaman, 2004). Agriculture is the dominant sector in rural areas in most developing and underdeveloped countries, and microfinance could play an important role in overriding the risks arising from seasonal changes and unpredictable climate conditions for those involved in this sector (Moll, 2005). Microfinance improves production and living standards by augmenting productivity and promoting capital investment (Augsburg et al., 2013).
More than half of the population lives in rural areas of Afghanistan, where agriculture and livestock constitute households’ primary source of employment and income. However, the fragile agriculture sector with low productivity cannot provide employment opportunities for the increasing population. On the other hand, if the excess workforce is not redirected to other economic activity, food insecurity and poverty will jump due to an increase in hidden unemployment in the prevailing traditional agriculture sector. Adaptation of technology and capital accumulation in the agriculture sector is important to increase productivity. This will dramatically improve food security and help to decrease poverty and unemployment as a result. The development of small and medium enterprises could also play an important role in expanding employment opportunities in sectors other than agriculture. Currently, employment opportunities in economic subsectors such as fishing, tailoring, beekeeping, carpet weaving, aviculture, clay industry, and carpentry are potentially available in rural areas. Therefore, mobilising rural society with financial capital is essential for agricultural development and securing employment opportunities in other subsectors of the economy. Since providing financial resources through the banking sector in rural areas was difficult, microfinance development was a good alternative.
During the past 20 years, the microfinance sector has grown dramatically, and as a result, the coverage of microfinance facilitation has expanded from big cities to rural areas in Afghanistan. Considering this fact, several questions arise to be investigated. Did microfinance have a significant contribution to the rural development of Afghanistan? What challenges does this sector face in rural areas in Afghanistan? A limited number of studies and reports have tried to explain the impacts of microfinance in Afghanistan, yet a clear image of this sector’s effects is hardly available. Therefore, this article is motivated to combine those findings to draw a clear picture of the microfinance industry and its impact in Afghanistan.
The following section of this article explains the dynamic of microfinance and its expected impact in Afghanistan. Next, the article sheds synoptic light on the development of this sector in Afghanistan. Later, the article examines the impact of microfinance in Afghanistan and the prevailing challenges the sector faces. Finally, the article closes with a brief conclusion.
The Dynamics of Microfinance in Afghanistan
The availability of sufficient financial resources is an important factor in enhancing economic and social development in a society. Economic theories characterise the lack of adequate capital as an important reason for slow economic development in backward countries. In underdeveloped countries, due to the prevailing high unemployment rate, people’s incomes are meagre, making it hard for businesses to be financed through local savings. Also, as per the dominant interaction in the financial environment, impoverished and marginalised segments of society find it almost impossible to access funds from the conventional banking system. On the other hand, many people in rural areas fall into this category. They are deprived of access to formal banking and financial facilitations, making them unable to establish a new business or develop an old one. Continuing the existing economic activity with the prevalent unproductive methods will make them vulnerable and poor. Changing this dynamic required the provision of financial resources in rural areas through microfinance institutions (MFIs). These institutions provide small loans to poor people who cannot access funds from the standard banking system. The access of poor and marginalised households to finance could switch them to start small businesses or improve the old ones with higher productivity.
Microfinance, in particular, could improve economic activities in rural areas of a country. In underdeveloped countries, a large population has condensed in rural areas, and the primary source of income is agriculture and livestock. Due to the social structure and low literacy rate, the birth rate is also relatively higher than in big cities. Therefore, the population is growing faster, and the capital–labour ratio is falling over time. The continuation of such a situation increases the unemployment rate and poverty. Availing them with microfinance will improve agricultural performance and allow people to find alternative self-employment opportunities by establishing small businesses.
Microfinance is also considered an important tool for women’s empowerment as it allows women to play an active role in the national economy. It would also improve their role in society by enabling them to contribute to the well-being of their families and take part in socioeconomic decisions.
In Afghanistan, most women do not participate in formal economic activities. On the other hand, historically, Afghan women, especially those who live in rural areas, have been mainly involved in the handicraft sector, and they play an important role in income generation and employment. Unfortunately, in recent decades, the production of handicrafts in this country has dramatically decreased, negatively affecting women’s economic activities. Among other factors, the lack of financial resources is an important reason for the collapse of this sector. If regular financing facilitation is provided for women, they would play an important role in employment and income levels in the country. This will also put their families in a higher standard of living.
The positive effect of microfinance development is not limited to the economy; it also contributes to positive changes in the social well-being of society. One such impact is a reduction in criminal activity in society. As expected, a higher unemployment rate would be associated with an increase in the level of crime in society; microfinance would significantly contribute to decreasing crime by providing job opportunities. To the extent that national policies effectively reduce the unemployment rate, the crime rate will also decrease.
There might be a link between microfinance and access to health care in society. Access to better health services requires the availability of adequate finance. In rural areas, the low level of family income is an important determinant for the fragile healthcare services they access. If microfinance contributes to the household’s income level, it should also improve their access to health care. There would be a bilateral link between income and health care. A higher income would enable the household to access quality healthcare services, and a healthier household, on the other hand, would be more creative and productive, allowing them to gain more from the available opportunities in the market.
Microfinance is expected to contribute to poverty alleviation. Poverty is a multi-dimensional phenomenon depending on many social and economic factors; income and education are its dominant determinants. A higher income and education are associated with lower poverty. Therefore, it is expected that microfinance would contribute to a reduction of poverty through improvement in the economic and health conditions of the society (Figure 1).
Impact Flow-chart of Microfinance.
Literature Review
A bulk of research has focused on studying the impact of microfinance and rural development. Since the scope of microfinance is very broad, the available literature on this issue is also very diversified. Some literature focuses on explaining the institutional and policy issues as an important requirement for long run sustainability and avoiding the sector’s failure. For instance, Moll (2005) argues that for MFIs to be more effective in the long run, two important conditions are required: maintaining financial stability and financial expansion. Financial stability depends on the institution’s profitability, which could be necessary for financial expansion (delivering financial services to a new group of individuals while keeping the old clients). He also suggests that the two components are not substitutable but necessary for each other. Besides institutional issues, consumer creditworthiness is essential for the system’s sustainability.
Vetrivel and Kumarmangalam (2010) study the reason for failures in MFIs and suggest solutions for avoiding such failures. One of their main suggestions is to improve the borrower’s creditworthiness by training them to repay the loan they received from financial institutions. Demand deficiency is supposed to be another obstacle to microfinance sustainability in rural areas. Kiiru (2007), while studying the dynamics of microfinance, entrepreneurship, and rural development in Kenya, suggests some policy implementation for the effectiveness and sustainability of microfinance in rural areas. One such policy is to increase entrepreneurs’ demand for products in rural areas. This will augment the motivation and sustainability of borrowers and undermine the pressure of repaying their debt in the future.
Another group of literature has an impact-based look at microfinance, studying the role of microfinance on rural development, women empowerment, poverty alleviation, reduction in unemployment, and so on. The main finding of literature of this type suggests that microfinance improves the living standard of those deprived of access to regular financial facilitation. For example, Yadav (2014) states that poor and marginalised people who cannot access banking finance should be offered microfinance facilitation. Microfinance can increase the living standards of society’s poor and marginalised segments. Jain and Jain (2012) also find that microfinance plays a vital role in women’s empowerment in the Udaipur District of Rajasthan, India. The availability of microfinance motivated the participation of women in self-help groups in this province.
While a unifying and overall picture of the impact of microfinance in Afghanistan is hardly visible, several studies try to explain the effects of microfinance in some selected provinces of this country. Chandrashekhar and Sultani (2019), for example, examine the impact of microfinance on women entrepreneurs in Afghanistan using selected cases. This study uses secondary data from different sources to investigate the impact of microfinance on women’s empowerment in Afghanistan. The findings of this study show that microfinance significantly impacts women’s income and savings in Kabul province. Sultani and R. (2021) have studied the impact of microfinance on income and employment in the Bamyan Province of Afghanistan using the data collected from 220 individuals who received microfinance loans from The Microfinance Bank of Afghanistan. The study suggests that microfinance has a positive impact both on the level of income and employment. R and Sultani (2021) studied the effect of microfinance on enterprises in Afghanistan. It includes 28 successful cases of individuals who received loans from microfinance sources. The finding of this study shows that microfinance has dramatically increased clients’ income after they gained access to financial services from these institutions. The article also suggests a positive link between the availability of microfinance funds and employment. Microfinance programmes have played a crucial role in enabling female consumers to evaluate the recent performance of the microfinance institutes’ loan programme in the Balkh Province of Afghanistan. Additionally, the involvement of both male and female community members in the workforce was considered essential for ensuring that families accomplish their goals (Echavez et al., 2012).
The existing evidence supports the notion that microfinance has a substantial potential to empower women, particularly in programmes targeting female entrepreneurs, by encouraging them to use loans and participate in income-generating activities (Greeley & Chaturvedi, 2007). Moreover, the research also indicates that microcredit will have an impact on the independence of both women and men, as well as on the reduction of poverty. Women in Afghanistan have seen substantial advantages due to the microcredit programme, improving their socioeconomic standing. Furthermore, this assertion about microfinance initiatives is substantiated in many regions around the globe, particularly in South Asia (Greeley & Chaturvedi, 2007) (Table 1).
Summary of Literature.
The Development of Microfinance in Afghanistan
Microfinance plays an important role in rural development and poverty alleviation in Afghanistan. Providing financial opportunities for women in the rural economy constitutes one of the important goals for the government of Afghanistan, which is emphasised in Afghanistan’s national development strategy (ANDS, 2008). Since 2001, Afghans have implemented various microenterprise initiatives, primarily modelled after the architecture of the Grameen Bank. These programmes provide modest loans to women’s home-based business communes (Jumper, 2016). In 2003, the Microfinance Investment Support Facility for Afghanistan (MISFA) was established to increase the effectiveness of microfinance and to establish coordination between different institutions. The important objectives of this organisation were to provide technical assistance for various financial institutions and to prepare reports on microfinance developments regularly. The organisation was established with the financial support of the World Bank, and it worked under the management of the Ministry of Finance of Afghanistan.
After MISFA was established, the first microfinance bank was established. Consequently, several other MFIs started working in various provinces, providing financial facilitation to businesses and individuals. In 2008, 15 MFIs worked in 24 regions of Afghanistan. MFIs’ coverage increased from 13 districts in 2005 to 113 districts in 2008 (Hussein & Hamid, 2009).
As seen in Figure 2, the number of borrowers from MFIs increased from 160 thousand in 2005 to a peak of 365 thousand in 2007. Between 2008 and 2014, the data was not found. However, after 2015, the number of borrowers subsequently decreased. This may arise because the security situation has deteriorated in rural areas of Afghanistan during this period. Therefore, MFIs have shifted focus to big cities like Kabul and Mazar. Up to 2008, 60%–70% of the total borrowers were women. After that, the share of women borrowers has dramatically declined.
The amount of loans granted to individuals and businesses has dramatically risen from 71 million dollars in 2005 to 557 million in 2008 in cumulative form (see Figure 3). The loans granted to clients are based on the Afghan microfinance model in which the institutions use two broad frameworks: individual and group loans. Some MFIs focus on individual clients, while others offer group loans. The objective of group loans is to increase the credibility of borrowers. In other words, under the group loan, the risk of repayment decreases, as if one borrower from the group avoids repaying, the other group member will have to pay on behalf of their group member; otherwise, the lending services for all group members will be stopped. Another advantage of this system for MFIs is the decline in operational costs.
The distribution of microfinance across economic sectors in Afghanistan shows that service and trade sectors occupy more than half of the total loans from MFIs, followed by handicrafts, agriculture, and livestock. A small part of the microfinance loan has been given for consumption purposes. The distribution of microfinance loans in 2008, for example, is shown in Figure 4.
Besides formal banking and MFIs, informal finance has been another important source of lending in Afghanistan, and it has played a vital role in the mobilisation of resources in the community. Informal finance was dominant in the rural economy before MFIs emerged in this country. Even after establishing a formal financial system, informal financing still plays a vital role in rural areas of Afghanistan. The report indicates that in 2005, 42% of the households in rural areas of Afghanistan received loans from informal networks (Parto & Regmi, 2008).
Informal loans are predominantly used to meet the consumption needs of households, as most families in rural areas of Afghanistan rely on agricultural sectors to receive seasonal income. Therefore, families working in the agriculture sector earn income in the specific seasons when they sell agricultural products. In contrast, they finance their needs in other seasons by taking loans from traditional networks if they face financial shortcomings. In rural areas of Afghanistan, informal loans are mostly used to meet consumption needs, while in urban cities, they could be used predominantly for business purposes. In 2005, 96% of the informal loans in Paktya Province were used for consumption (NRVA, 2007). Although consumer loans do not play a role in increasing people’s income, they will play an important role in reducing poverty by helping people in difficult situations to meet their essential needs.
Microfinance on the Rural Developments in Afghanistan
A unifying conclusion related to microfinance’s impact in Afghanistan is hardly observed. Generally, it is expected that the availability of microfinance services is associated with higher levels of employment, improvement in households’ incomes, poverty reduction, and, more importantly, improvement in women’s economic condition. Due to the unavailability of sufficient data, it is tough to draw a clear image of how MFIs have played a significant role in improving welfare and reducing poverty, especially in rural areas in Afghanistan. The available studies provide different information on the impacts of microfinance in Afghanistan. For example, (Sultani & R., 2021), while studying the effects of microfinance on income and employment in Bamyan province using a survey of 220 individuals who received microcredit from the First Micro Finance Bank of Afghanistan, reported that the median income of a household doubled after they have received microcredit. In other words, while the median income of a household was 5000 before availing of a loan, it has increased to 10,000 a year after they receive a loan.
Figure 5 represents some successful entrepreneur women from different provinces of Afghanistan who received loans from MFIs. Based on the data in Figure 4, microfinance significantly improves women’s income in Afghanistan. On average, the income after a loan is three times greater than that before receiving a loan. It is worth mentioning that this figure only represents the impact of microfinance on the income of successful women. The effect would be different if one conducted a more comprehensive range of surveys, including successful and unsuccessful ones. Additionally, individuals who borrow from nuclear households have a stronger correlation with economic empowerment than those who reside in a joint family (Sultani, 2023). These results demonstrate that microfinance promotes socioeconomic advancement and significantly alleviates poverty. MFIs offer financial services to small and medium-sized enterprises and individuals in need. Additionally, MFIs create employment opportunities for women.
As it is expected for microfinance to be effective in job creation by enabling individuals to run businesses, some studies have been conducted to examine if microfinance has improved employment in Afghanistan. Sultani and R. (2021) argue that microfinance has positively impacted 88.2% of clients in the Bamyan province survey. In the case of successful entrepreneur women, it seems they have a relatively greater contribution to job creation in Afghanistan. As it is reported, on average, every woman has generated 10 employment (Chandrashekhar & Sultani, 2019). Approximately 1.5 employment opportunities are created for each client due to the expansions and new ventures (Greeley & Chaturvedi, 2007). Extrapolating this data to encompass all MISFA clients would result in 500,000 employment. The data indicates that customers saw a notably greater enhancement in their economic condition compared to non-clients and individuals who discontinued the programme. This conclusion is supported by the savings data obtained from all three groups. Some reports find that from 2008 to 2018, MFIs created around one million jobs (Microfinanza, 2019).
Figure 6 explains the changes in the flow of employment created by microfinance loans. The blue line shows the number of jobs created with newly established businesses financed by MFIs. The upper lines show the difference in business employment when connected with microfinance and after exit from the institutions. The number of jobs in firms associated with microfinance fell from 2008 to 2013, and it slightly rose afterward. This fall could be due to security deterioration, which made MFIs shrink their outreach. During 2012 and 2013, the exit of American and NATO forces from Afghanistan affected the overall business in this country, including those financed by MFIs.
Microfinance is expected to positively impact women’s empowerment in economic and social lives, as one of the main objectives of microfinance is to mobilise resources to enable women to participate in business activities and social decision-making. From 2005 up to 2008, between 60% and 70% of microfinance clients were women (Hussein & Hamid, 2009). However, this ratio dropped to around 40% in 2019 (Microfinanza, 2019). The logic behind targeting women was that most of the women living in rural areas were vulnerable. Economically, they are not self-sufficient but have the potential to be so. Microfinance is expected to put them in a better economic and social position. Several studies have examined if there is a significant improvement in women’s social and economic conditions after the availability of microfinance loans. Some studies have investigated the impact of microfinance on women’s empowerment in Afghanistan. A clear picture is not available for the same, however. Since there are no unique indicators for measuring women’s empowerment in the studies, it is difficult to conclude the overall impact. For example, Microfinanza (2019) reports that less than half of the women in its survey have stated being empowered in the sense that there was an improvement in their feeling of them having the role of deciding on how many children to bring and they face with wider consumption choices after availing micro loan.
The impact of microfinance on the state of women in their families depends on how the loan is used. For those who established their own business, microfinance tends to have a greater influence on women’s financial independence and their state in the family (Lyby, 2006). Due to the lack of skills, many women do not use money in business alone; instead, they put it on their male family members (Echavez et al., 2012). MFIs can only contribute to the complex empowerment process. Improving gender relations would require combining many initiatives across diverse domains of Afghan society. Microfinance has the potential to be one of these contributing activities. Loan accessibility is only one of several factors that might impact gender dynamics. The women who possessed a better social standing within their families and enjoyed greater opportunities to engage in public activities were the ones who derived the greatest benefits from their involvement in microfinance initiatives. Microfinance programmes have had limited impact on altering decision-making authority or the gender-based work allocation (Zand, 2011). Women remain predominantly confined to domestic tasks, while males predominantly work outside the household. The community setting significantly influenced the success of the MFIs’ loan programme in assisting its female clients (Echavez et al., 2012). The ladies residing in an outer suburb of Mazar-i-Sharif in Balkh Province exhibited a profound feeling of togetherness and mutual support. Their primary objective was to assist one another and exchange knowledge on essential life skills. The MFI’s female staff performed a successful door-to-door information campaign, effectively informing community members and encouraging them, particularly women, to utilise its services.
A recent study has revealed a notable enhancement in the economic condition of women following their acquisition of loans from MFIs (Sultani, 2023). The women borrowers saw improvements in several aspects, including personal income, credit accessibility, promotion of saving habits, capacity to provide for their families, expansion of their businesses, women’s empowerment in resource management, and increased employment prospects. Women borrowers’ economic and social empowerment was initially low before their involvement with MFIs but significantly increased following their association with MFIs. In addition, Sultani (2023) a notable enhancement in female borrowers’ social status was observed after obtaining loans from MFIs. Furthermore, they enhanced societal equity, domestic choices, societal accountability, self-assurance, familial decision-making, understanding women’s legal entitlements in Afghanistan, and familial bonds. On the other hand, Zand (2010) discovered no significant alterations in decision-making authority, gender-based division of work, or the scope and whereabouts of women’s endeavours in the village of Sabz Guzar in Parwan Province. Women are predominantly confined to domestic tasks, while males continue to primarily engage in labour outside the household, even in cases when women have made financial investments through loans.
The MFIs have focused on promoting women’s financial independence from their husbands and their contribution to the family economy. However, it has narrowly defined women’s role as merely ‘helping’, thereby missing the chance to empower women by enabling them to take on more prominent or different economic roles. In addition, women who took part in the loan programme in the village of Sabz Guzar in Parwan Province reported an increase in their ‘courage’ and ‘awareness’ (Zand, 2010). The connection between this transformation and the chance to casually interact with other women in the loan office and gain knowledge from them has been established. Women reported experiencing heightened self-esteem and bravery as a direct outcome of their involvement. Some women also considered it necessary to contribute more to the overall well-being of the home and have greater influence over household finances (Zand, 2011). In addition, Sultani (2023) found that many female borrowers express contentment with the microfinance services offered.
Another expectation from microfinance loans in rural areas is that they contribute to poverty alleviation and improvement in food security. In rural areas, unemployment is high, and most people are unemployed. Lack of financial resources might be one of the reasons for this situation. Providing financial resources for rural communities is expected to enable them to set up new businesses or improve their existing ones. This would help mitigate poverty and improve food security by increasing job opportunities. The National Risk and Vulnerability Assessment Report 2005 shows that more than 60% of microfinance loans in rural areas were used for consumption (NRVA, 2007). Using loans for financing consumption could be helpful as a short-term strategy, nullifying the negative impact of changes in income resulting from seasonal fluctuation and other unexpected shocks. It would not reduce poverty when it is used as one of the primary sources of financing for daily consumption. Because, in such cases, it will increase the depth of poverty after repayment of the loan with its accumulated interests in the future. In 2010, around 66% of the households at the national level used loans as one of the options for coping with unexpected shocks (Fadul, 2019). In the sense that microfinance smooths the consumption of households against income fluctuation, it will contribute to food security, especially for those farmers who earn income in one or two seasons of the year.
Challenges of the Microfinance Sector in Afghanistan
Although the reports provided by the MFIs draw an optimistic image of the effectiveness of these institutions in Afghanistan, it cannot be ignored that the sector faces some challenges that undermine the expected impacts. In this part, the article sheds light on some of the prevailing difficulties in minimising the effectiveness of microfinance facilitations in this country. One of the challenges arises from the availability of insufficient financial resources from MFIs. Although the minimum amount of loan for opening a business could vary from one business to another, the complaint of microfinance clients reported the amount of loan to be inefficient for their business (Parto & Regmi, 2008). Each MFI offers a different loan interval depending on the type of business, the socioeconomic state of the clients, and so on. In several MFIs, loans vary from 20,000 to 120,000 Afghanis (Microfinanza, 2019). However, it is not clear what frequency the clients have received the minimum loan limit. It could be argued that for those who availed 20,000 Afghani, the chance of doing business is very limited.
The religious position of the people in the villages has also caused them to block and challenge the development of debt because, in many cases, people hate debt and, for this reason, pay interest against the debt. It happens that they do not turn to loans. Some people have good ideas for business, but due to religious restrictions, they cannot finance their activities through debt. Although recently, some institutions have been providing financing services in villages called Islamic financing, the level of Islamic financing is up to 5% of the market demand. The founding of the Islamic Bank of Afghanistan (IBA) in 2018 was a notable achievement, as it became the nation’s first fully operating Islamic bank. It is important to emphasise that despite experiencing economic growth since 2001 and strong demand for Islamic banking and finance, the country has only managed to construct one fully operational Islamic bank and six Islamic windows (Rostan et al., 2021). IBA possesses 40% of the $365.5 million (AFS. 27.8 billion) total investments in Islamic banking products (Vizcaino, 2018). The Islamic windows of six banks collectively owned the remaining 60%.
Islamic microfinance plays a vital role in Afghanistan by offering practical solutions to improve the financial situation of disadvantaged households, both at the individual and family levels. Explicitly designed for underprivileged persons excluded from traditional financial systems, this platform enables their involvement in economic activities, increasing their income, creating assets, and promoting investments. The importance of Islamic microfinance lies in its ability to reduce poverty, stimulate private initiatives, boost demand, generate employment opportunities, diversify household income, empower women, decrease unemployment rates, contribute to exports, and foster regional development by addressing inequalities and unlocking resources in remote regions (Hammas, 2023).
Sultani (2022) mentioned nine major obstacles encountered by MFIs in Afghanistan, including ‘Management Issues’, ‘Administrative Issues’, ‘Loan Procedure Issues’, ‘Lack of Technology’, ‘Lack of government support’, ‘High-interest rates’, ‘Security issues’, ‘Lack of Promoting’, and ‘Political instability.’ The initial element, ‘Management Issue’, includes 13 factors: inadequate management skills in MFIs, insufficient management skills in MFIs, and the absence of standardised reporting and monitoring systems in MFIs. The staff’s unprofessionalism and lack of dedication to the organisation, their limited understanding of the MFI’s financial procedures, the non-sustainability of future operations owing to insufficient funding, and their lack of legal awareness. The second issue, referred to as the ‘Administrative Issue’, includes eight factors, such as inadequate collaboration among MFIs in delivering retail microfinance services to millions of impoverished individuals and ineffective methods and inspectors for monitoring and evaluating the performance of MFIs—insufficient funding for performing the training programmes, Unhealthy rivalry among MFIs, and so on. The factor of ‘high-interest rate’ consists of four variables: borrower dissatisfaction with a high-interest rate, the high loan interest rate of microfinance, the financial unsustainability of MFIs to offer loans at a lower interest rate to borrowers, and borrower dissatisfaction with the repayment period for their loan instalments.
Another serious problem facing the microfinance sector in Afghanistan, especially in rural areas, is the traditional community with strong religious beliefs. The belief that interacting with interest is sinful has made many individuals avoid doing businesses financed through loans. The dominance of this faith may deprive many talented individuals of participating in productive economic activities they otherwise deserve. The development of Sharia-based financial support could be an alternative solution to the challenge, but it is still far from being a perfect substitution for conventional financing systems. Contrary to other study communities, prohibiting such (the collection of interest, which is banned in Islam) did not significantly impede people’s involvement in the loan programme in an outlying suburb of Mazar-i-Sharif, Balkh Province (Echavez et al., 2012).
During the past 20 years, in line with the Afghanistan National Development Strategy, one of the objectives of the microfinance sector was to empower women by providing financial resources that enable them to participate in socioeconomic activities in the country. The positive effects of microfinance on women’s empowerment cannot be ignored. However, women seem to be less affected than what was expected. This might result from the society’s prevailing social structure and the MFIs’ attitude as the other part of the dynamic. In the rural society of Afghanistan, the dominant role of men, the low level of education of women, and the negative attitude toward women’s work outside their houses are the major problems that arise from the social structure of the society.
In most cases, granting a loan to a woman should not necessarily be considered that she is financially in a better position. Studies also confirm that many women handed over the loan to their husbands after receiving it from microfinance. In this case, the loan will not directly affect women’s economic condition; it could increase the family’s overall welfare only if their family members spend it on productive activity. In such a situation, women would indirectly be affected either because of the improvement in the economic condition of the family or by feeling proud of being part of the reason for the improvement.
The attitude of MFIs could also be part of the reason for the sector’s failure to empower women effectively. Based on the Afghanistan microfinance model, microfinance loans were to be granted in an individual-based and group-based strategy. Group loans would enable women to learn from each other and increase their confidence in establishing their businesses. Many MFIs have concentrated on individual loans, as it is reported that 90% of loans were granted in individual form (Microfinanza, 2019). Providing training programmes for women on creating and managing a business could have increased the effectiveness of loans on women’s empowerment. MFIs have almost ignored this issue.
The interest rate of microfinance loans is also high, and clients could face challenges while repaying. Although there is no unifying information about the interest rate charged for micro-loans (as each institution sets different rates), MFIs’ interest rate is generally very high relative to those prevailing in commercial banks of Afghanistan. For the clients to be able to repay their debt in the future, they need to invest in businesses with high returns. In most rural areas, establishing a high-yielding business is hardly looking. Therefore, it is difficult for many small entrepreneurs to generate income that is more than what they need to repay. Interest burden does not only harm the individuals, but it is also a challenge for the overall system. A higher interest burden on individuals may decrease their credibility, and as a result, the risk of capital return for MFIs would increase.
Discrimination in the distribution of loans is also a problem that some borrowers complain about. The local staff from the same area usually carry out consumer-related activities, including distributing loans in rural areas. Since rural relationships largely influence the staff, they use family and social relationships to distribute loans (Microfinanza, 2019). This kind of attitude may cause the misallocation of resources in society. Some people who do not deserve it would be granted a loan based on family relations, while others would be deprived of access to finance despite having good business ideas. Such an attitude is harmful and unhelpful for the microfinance sector. In addition, other problems, such as increasing insecurity, corruption in the financial sector, and low literacy levels in villages, are among the major challenges that have directly or indirectly influenced the sector.
Conclusion
During the past 20 years, the development of MFIs has been significant in Afghanistan. Despite the poor security situation in many provinces, MFIs were active even in rural areas. The impact of microfinance on the economic condition of individuals is different depending on the purpose of receiving micro-loans and how individuals have used it. In the cases where micro-loans are used for business purposes, they have played an important role in income, employment, and poverty mitigation. When microfinance is used for consumption purposes, it will not improve income and employment unless used to smooth consumption by bridging the income fluctuations resulting from seasonal and unexpected changes. In the latter case, microfinance could reduce food security and poverty, at least in the short run. As per the available information, the impact of microfinance on income and employment in urban areas tends to be greater than that of rural areas. Because in urban areas, microfinance is mostly used for business purposes.
The prevailing challenge hampering the impact of microfinance in rural areas might arise from the fact that most individuals do not have business ideas. Therefore, providing training on how to develop a business before granting a loan would increase the effectiveness of microfinance in rural areas. However, most MFIs have almost ignored this.
Women’s empowerment is a need for sustainable development as they constitute nearly half of society and play an important role in socioeconomic development. In countries like Afghanistan, special consideration is needed to empower women economically and socially. The previous attempt by MFIs to empower women was good, and it has had a significant impact on the socioeconomic status of some women. However, further effort is required to enable women in their social and economic lives. Increasing group loans and establishing self-help groups for women could leverage women’s empowerment, especially in rural areas.
Footnotes
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.