One step back from the brink: donors, disbursement and default
A recent spate of articles, commentaries and in some cases regulations have highlighted the pitfalls of rapid expansion, over-indebtedness and default. The experience of the microcredit sector in Afghanistan is in many ways a microcosm of events occurring around the world. Absorptive capacity and potential market size were overestimated, national and international expectations were overly optimistic, and this optimism was reinforced by a period of rapid growth from early 2006 to early 2008.
However, by late 2008, cracks in the veneer of unbridled success attributed to the Afghan micro-credit sector were beginning to appear. Growth was slowing rapidly, arrears and default were rising, and in consequence the operations of a number of microfinance institutions (MFIs) began to deteriorate. At its peak in 2008, the MFI sector (excluding NGOs, SHGs, etc.) had 15 registered limited liability companies providing microcredit(and one in registration process), 428,929 clients, 373,080 borrowers and a portfolio outstanding of approximately US$107 million.
At the same time the apex supporting the sector had a portfolio of US$96 million, peaking in 2009 at US$127 million amongst all 16 partners. By March of 2011, the number of borrowers had declined by 30% and the number of institutions by more than 40%. Today, although the sector stands at US$110 million, 88% of this is held by just 3 institutions and the apex portfolio outstanding has declined to US$56 million and the apex is actively engaged with just 6 of the 9 remaining microcredit institutions.
What then accounts for this spectacular rise and pull-back within the sector and at the apex? What mistakes or misplaced assumptions occurred, and ultimately what strategies and measures were used to ensure that, despite these errors, micro-credit and micro-finance would continue to play an important role in the promotion of an inclusive and developmental finance sector?
In 2001/2002 there were few facilities available to people to access credit in Afghanistan. In 2003, the Microfinance Investment Support Facility Afghanistan (MISFA) was established at the invitation of the Afghan government to “get donor coordination right from the start and avoid the counter-productive efforts that have emerged from conflicting donor objectives in other post-conflict situations. It was established as a vehicle through which the Afghan government and international donors could channel technical assistance and funding to build Afghanistan’s micro-credit/finance sector.”
This effort was supported primarily via the Afghanistan Reconstruction Trust Fund, with additional assistance from CGAP, USAID and other donors.
MISFA – MISFA was originally established along the lines of a time-bound project directed and overseen by the Ministry of Rural Rehabilitation and Development. A similar approach had been followed with seeming success in Bosnia-Herzegovina at the turn of the last century. An outside consultancy was contracted to establish the infrastructure and to vet MFI partner applications. In March of 2006, it was decided that MISFA should move from a project structure towards that of an institutional structure and was duly registered as a not-for-profit limited liability company, with an independent board and the Ministry of Finance as the sole shareholder. However, within the Memorandum of Association was a clause that, within a period of 5 years, the government either fully divest its position or wind down MISFA as entity.
At the close of the first financial year in March 2004, MISFA had an outstanding portfolio of US$1.213 million, growing to more than US$127 million by March of 2009. The strategic plan for MISFA, developed in early 2008, envisioned a potential market of 3.5 million borrowers, actual clients of 750,000 and a portfolio outstanding of US$220 million by December of 2010.
Many of the issues that MISFA and its partners experienced were first documented by Dr. Fred Levy in the CGAP Occasional Paper No. 6, published in January 2002. Capacity constraints and political imperatives for disbursement provide the primary rationale for the expansion of outreach followed by a rapid decline in portfolio quality and repayments. In addition, insufficient attention was allocated towards governance structures at a strategic level, and lack of definitive data regarding market potential and product usage resulted in unrealistic expectations. Finally, the entire success of the sector was overstated from the outset - when funds were withheld, the results were never as robust as previously described.
Market Potential – Estimates by MISFA and by the WB/CGAP in 2008 and earlier, placed market demand at 3 million persons plus. Given that, ideally, there would be only 1 loan per household from an MFI, the potential market appears to have been grossly overstated. The National Risk and Vulnerability Assessment for 2007/2008 (released in late 2009) estimated the total number of households in Afghanistan at 3.4 million and the number of persons living below the poverty level as 36% on a national level. Given that most efforts in regard to micro-credit were targeted towards urban borrowers, and that only 26% of the population of Afghanistan is classified as urban, the potential market including rural areas (where considerable unmet demand exists) is probably closer to 1.5 million households maximum.
In addition, this demand has been further proscribed by the deterioration of the security situation, making some markets unavailable, or previously robust markets inaccessible, resulting in default due to an inability for micro-credit organizations to either collect on existing loans or offer new financing facilities. Clearly, the market was overestimated and expectations for demand and growth far exceeded the reality on the ground.
Donor and Stakeholder Disbursement Pressure - The fundamental approach pursued by donors and other stakeholders was flawed in that it sought to achieve or demonstrate short-term accomplishments using a long term developmental tool e.g. micro-credit. In order to demonstrate this progress, emphasis was placed on disbursements and outreach regardless of impact and capacity. Unfortunately, the reigning paradigm equated disbursement with accomplishment, at both donor and governmental levels, and MFIs were incentivized to expand rapidly in order to serve as a vehicle for funds placement.
At the end of its first fiscal year, MISFA was working with 3 partners and had a portfolio of US$1.213 million. As MISFA was envisioned as a “project” of limited duration, a la Bosnia-Herzegovina, and as success was posited on establishing a sustainable commercial market within 5 years, there was a sense of urgency amongst the donors, the government and the implementing agency for MISFA to move rapidly in order to achieve these goals. An additional 5 MFI partners were added the next year and another 7 MFI partners the following year. By March of 2006, MISFA’s portfolio stood at just under US$25 million (total portfolio outstanding in the sector stood at US$42.5 million.) By March of 2008 MISFA’s portfolio had grown to over $96 million (US$107 million for the sector as a whole). Borrowers grew at a similar rate rising from 175,000 in 2006 to 373,000 by 2008.
Indicative of the emphasis placed on disbursement and outreach, it was not until 2007 that financial indicators were tracked or monitored. Success was judged based on outreach and portfolio, and MFIs were pressured to grow if they wished to receive further funding.