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The Journey to Inclusive Finance in Afghanistan

With geographically far-reaching activities targeting rural citizens and women, the FAIDA program drastically improved Afghanistan’s financial landscape.

For several decades, Afghanistan faced a challenging financial landscape. Financial institutions were ill-equipped to provide nationwide financial services, especially in terms of micro-lending to micro, small, and medium-sized enterprises (MSMEs), which represent the majority of Afghan businesses. Without sufficient measures in place to ensure access, transparency, accountability, and security to financial products, financial institutions were hard-pressed to expand their services to investors, businesses, and individuals wary of the risks involved. As a result, Afghanistan’s financial sector remained stunted and engaged only a small portion of its citizens.

To add to the lack of available services and financial products, unemployment was high across the country. Many Afghans living in rural areas lacked access to sustainable economic opportunities. With most financial institutions and banks located in the nation’s capital, Kabul, people in rural areas could not access finance. Women and young people, historically underrepresented in the financial sector, were largely left out of the economy. Furthermore, few financial institutions complied with Islamic or Sharia law, which prohibits the use of interest or fees for loans. In a Muslim-majority country like Afghanistan, this posed a significant barrier for many potential consumers, limiting access to vital banking services.

In 2011, USAID launched the Financial Access for Investing in the Development of Afghanistan (FAIDA) program, implemented by Chemonics. Over the course of six years, FAIDA spurred economic progress — led by private sector growth and job creation — and provided financial access to new consumers across the country. Through a vast system of initiatives and interventions, the program strengthened value chains at every level, from small-scale farmers to women-owned businesses to emerging exporters to the country’s largest banks and lenders. It mobilized $59 million in private financing, took significant measures to improve transparency, created new financial products and services to meet Afghanistan’s cultural needs, and gave women access to learning opportunities to improve their financial inclusion.

Mobilizing Private Financing

With private sector-led sustainable economic growth as its core objective, FAIDA employed an effective two-pronged approach to address the needs of both lenders and borrowers. Without mobilized funding available to provide loans, the financial sector could not engage a large portion of potential consumers. To address this, the program tapped into the private sector and invited its representatives to devise a solution to the need for expansion. Working with banks and financial institutions, FAIDA created 302 financial sector training certification programs, developed and launched 33 new financial products, trained more than 2,700 financial sector employees across 31 Afghan financial institutions, and commented on 46 financial sector laws.

 Through these efforts, nearly $60 million became available for private financing — and of that, $30 million went to MSMEs through more than 1,000 targeted loans. This provided crucial injections of capital to help grow individual businesses as well as the broader Afghan economy.

Enhancing the Use of Mobile Money

To foster a healthier environment for lenders, FAIDA addressed significant policies to build trust and transparency. One of the largest banks, Da Afghanistan Bank (DAB), made several key amendments to existing mobile banking provisions. These amendments included stricter regulations and enforcement on suspicious transaction reporting, as well as measures to improve transparency and accountability among mobile money operators, agents, and merchants.

As a result, after the Supreme Council of DAB approved and implemented the amendments in 2011, DAB received its Electronic Money Institution (EMI) License in July 2013. In 2015 and 2016, FAIDA provided several additional rounds of comments on the updated EMI regulations to DAB, focusing on reducing barriers to entry and investments — a key part of ensuring continued growth of the EMI sector.

Supporting Islamic Services

According to World Bank data, only 10 percent of Afghans hold accounts with a financial institution. In addition, 34 percent of Afghan adults cite religious reasons for not having a bank account. To support financial institutions in becoming Sharia-compliant, FAIDA established a product design and development team to work in Afghanistan’s emerging Islamic banking sector. The team designed the Islamic Finance Window Operating Model to help banks and other financial institutions offer Sharia-compliant services.

Ultimately, these services allowed more Afghans — many living in rural parts of the country — to access services and products. For example, availability of murabaha, or financing that shares profit and loss between borrower and lender, was previously limited. With program support, five financial institutions offered murabaha and other new products in 2012. In 2013, nine additional financial institutions began offering these products to Muslim consumers. Mohammad Nazir Ayoubi, an auto parts dealer in Herat, was one such consumer.

“It was very important to get additional capital for my business, but I wanted a loan that followed Sharia principles,” he explained. With the loan he secured, Mohammad was able to invest in his business.

Expanding Financial Access to Women

With an emphasis on inclusion, FAIDA implemented programs to encourage the financial participation of previously underserved individuals. For the first time, many Afghans living in rural parts of the country and women could participate in the financial sector. Opportunities like multifaceted training programs, internship programs, and networking events gave women the chance to improve their financial literacy and encouraged their participation in the sector.

One Afghan woman, Samira Aslami, enrolled in an internship program and spoke about how the opportunity helped her establish her career.

“The Women in Financial Sector Internship program has provided me a big opportunity to … learn important professional skills that are not taught in Afghan universities,” she reflected. “The six-month internship program is in fact a six-month professional experience for Afghan women and has made finding a job much easier.”

The Future of Afghanistan’s Financial Sector

By working closely with the private sector, FAIDA improved Afghanistan’s financial infrastructure and bolstered job creation, benefitting thousands of Afghans and their families. By the end of the project in 2016, 7,064 full-time equivalent jobs were created, and 102,700 families reaped financial benefits. The project’s emphasis on inclusion helped grow the ratio of rural-to-urban loan clients to 50:100, and 33 percent of FAIDA participants were women. And through connections forged by FAIDA, key Afghan banks and financial institutions established transparency and accountability mechanisms and drafted and adopted 60 financial sector reforms.

By the end of its six years, FAIDA had supported the Afghan banking sector to grow stronger, enabling more citizens to participate in the financial sector and putting the country on a positive economic trajectory. However, there is still much work to be done, with many more individuals and businesses to reach and empower.

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