Special Focus Areas
Social distancing and lockdown measures, supply chain disruptions, movement restrictions, and border closures induced by the COVID-19 pandemic had a significant negative impact on the Afghan private sector. For example, the COVID-19 Business Pulse Survey found that around 88% of businesses experienced lower sales, while over 37% had to lay off part of their workforce.
Over the years ACGF has aimed at building resilient financial institutions that are able to cope with and to manage times of crisis. Within the context of this experience, ACGF supported its PIs in maintaining their lending operations to MSMEs during the COVID-19 crisis. Key measures in response to the pandemic included:
Women in Finance
Women in Afghanistan, as many women around the world, face numerous challenges. Socio-cultural conditions (such as reproductive and care obligations, decision making biases, lower social status, early marriage, etc.) prevent women from obtaining education and ultimately participating in the labour market. According to the International Labour Organization, around 76% of women in Afghanistan had less than basic education in 2020, comparing against 56% of men. Moreover, only 17% of women were participating in the labour force, comparing against 67% of men.
Those women that manage to partially overcome the socio-cultural stigma and start their own business usually operate in the informal sector and lack critical entrepreneurship skills, both hindering them to access formal financial services. UN Women reports that only around 7% of women have an account at a financial institution or mobile money service provider, comparing against 23% of men in Afghanistan.
ACGF has been committed in supporting its PIs to provide gender-sensitive financing products, e.g. by fostering the development of specific female lending products or increasing guarantee coverage for loans given to female-owned MSMEs. Going forward, the focus on gender-specific financing mechanisms shall enable women to overcome the existing challenges of accessing finance, carefully considering the country specific environment.
Less than a quarter of adults in low-income countries countries with a majority muslim population have an account at a formal financial institution; worldwide this figure stands at 50%. A main issue relates to the fact that many Muslim-headed households and MSMEs may voluntarily exclude themselves from formal financial markets because of Shari‘a requirements. 34% of the unbanked Afghan population cite religious reasons for not having an account in a formal financial institution.
Islamic legal systems, among other characteristics, prohibit predefined interest and require financial providers to share the risks of the business activities for which they provide financial services (profit and loss sharing). Most conventional financial services do not comply with these requirements and are, therefore, not relevant for religiously minded Muslim individuals and firms in need of financing.
As a result, finance institutions in the Islamic world evolved to provide financial services compliant with Shari‘a principles. Over the past two decades Islamic finance has grown rapidly. Since 2018, ACGF has been offering an Islamic guarantee product, and guaranteed a cumulative Islamic loan disbursements of approximately USD 6.3 Mio. While initially Islamic guarantees had only been provided to one PI, by the end of 2020 a total of three PIs benefited from the product.
It is expected that the Da Afghanistan Bank, the Central Bank of Afghanistan, will require financial services to be fully sharia-compliant in the future, putting in place an Islamic finance regulatory regime. ACGF is preparing for a full transition to sharia compliant guarantee operations and supports its PIs in adjusting its lending operations.
Agriculture has traditionally dominated Afghanistan’s economy and makes important contributions to economic growth, employment creation, poverty reduction, food security, and the fiscal health of the nation. About 70% of Afghans live and work in rural areas, and 61% of all households derive income from agriculture. Although the share of agriculture in GDP (27% in 2020) has sharply declined over the last decades, agriculture still accounts for most of the country’s exports.
Despite its potential, average growth rates in the sector remain low with declining productivity, largely driven by low rates of commercialization, a lack of adaptation capacity with respect to climate-related hazards (e.g. droughts), and inefficiencies over the entire agricultural value chain. One of the main challenges is a lack of funding for the agricultural sector. A World Bank Enterprise Survey in Afghanistan found that access to finance was considered as the most important constraint to the growth of domestic agri-businesses.
The previous government acknowledged the challenges and developed a set of strategies and policies to support the creation of markets, to remove supply-side barriers and to promote inclusive development of the agriculture sector. ACGF can act as an important vehicle to increase access to agricultural finance.
Historically, between 12% and 20% of ACGF guaranteed loans were related to the agriculture sector. To support its PIs in increasing lending to agriculture businesses as well as to increase related guarantee activities, ACGF conducted a scoping study for agriculture lending and guarantees in 2020. Its aim was to map the status of agriculture lending in Afghanistan and to better understand the potential to increase agriculture lending in the future. Furthermore, it served as a basis for positioning ACGF in the agriculture finance market.
Originally, ACGF planned the development of an agriculture-related strategy for its guarantee operations in 2021/ 2022. Within this strategy ACGF intended to highlight main goals, strategic objectives, activities, indicators, and an implementation roadmap for expanding PI’s lending outreach to the agriculture sector. Given the current circumstances and the overall suspension of operations, ACGF is currently identifying possible measures of continuing special support to MSMEs in the agriculture sector.
Solar Energy Financing
Afghanistan faces a massive energy shortfall. While urban areas frequently experience power outages, households in rural areas often entirely lack access to electricity. Inefficient and insufficient energy generation induces high costs for businesses and impedes economic productivity and development.
Solar energy has the potential to significantly mitigate the lack of clean, reliable, and affordable energy in Afghanistan. Levels of solar irrigation are high, and systems are easy to install even in off-grid areas. Despite these opportunities, high upfront costs and a lack of access to finance so far impeded a widespread adoption of solar systems/technology in Afghanistan.
Thus, any attempt to increase Afghan solar energy production must also provide appropriate financing solutions. For instance, current loan appraisal processes by Afghan financial institutions do not consider the productivity gains for MSMEs when calculating the repayment abilities of potential borrowers.
Within the framework of the World Bank “Access to Finance” programme, ACGF began evaluating the solar financing landscape with the aim of supporting its PIs in the development of a solar lending product targeted at Afghan MSMEs. After a comprehensive development and training phase, a new solar product was launched by one of ACGF’s PIs, shortly before August 15, 2021. ACGF intended to guarantee this loan product under a pilot project to assess technical and financial viability. Before a first loan was issued under the pilot, the PI stopped all disbursements following the political developments in the country. Together with international organizations, ACGF is currently exploring different avenues of revitalizing its efforts in the solar energy financing sphere.
Over the past decade, financial technology providers have emerged to provide digital solutions to traditional challenges in the provision of financial services to MSMEs. For instance, digital solutions can help financial institutions collect, verify, and analyse their customers’ data during the loan application process. Algorithms utilizing artificial intelligence and machine learning can help overcome a lack of complete financial information, improving the loan approval process. They can also enable financial institutions to play to Afghanistan’s strengths such as its relatively high penetration of mobile phones compared to that of bank accounts (67% of Afghan population in 2017, compared to only 15% bank account penetration). Therefore, digital solutions hold great potential to increase efficiencies, lower transaction costs, and expand financial services to the underserved MSME sector.
Overall, financial institutions in Afghanistan are not yet fully digitized. Inadequate digitization levels at PIs became particularly relevant during the COVID-19 pandemic. Ineffective loan monitoring and appraisals restricted PIs’ willingness to lend to MSMEs in times of crisis, where external financing was particularly important for businesses.
In 2019, ACGF commissioned a study to understand how digital solutions can improve services to existing MSME borrowers and expand access to formal finance. To respond to the main findings of the previously mentioned study, ACGF designed a TA component designated to strengthening digitalization at PIs. The TA component aimed at developing digitalization roadmaps for PIs to reduce the risks of their lending activities, to enhance operational efficiency and portfolio quality, as well as increasing resilience against current and possible future external shocks. Given the critical situation of the Afghan financial sector, more pressing issues are expected to be prioritized over the digitization efforts such that a resumption of these activities can only be expected in the medium-term.