Afghanistan: Rural Finance Expansion

Sovereign Project | 44457-012

Summary

This TA focuses on supporting the Government's and the central bank of Afghanistan's (DAB Da Afghanistan Bank) efforts to expand Islamic finance. As DAB is the primary counterpart, the primary effort will be to support DAB in its work program to improve the Islamic finance regulatory regime. Further, a number of tailored capacity building trainings will be provided to ensure DAB's staff are well grounded in technical, regulatory and commercial principles of Islamic finance. Also, to support the banking sector more broadly, work will begin on developing appropriate Islamic finance products and template contracts which help meet the needs of those in rural areas where financial literacy levels are generally lower, but demand for Islamic finance products is strong versus those in urban areas.

This TA had to be reduced in scope and scale due to significant problems in engaging appropriate consultants who were willing to work in areas which had significant security issues.

Latest Project Documents

Title Document Date
Rural Finance Expansion Dec 2011

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Project Name Rural Finance Expansion
Project Number 44457-012
Country Afghanistan
Project Status Closed
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 7983-AFG: Rural Finance Expansion
Technical Assistance Special Fund US$ 500,000.00
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Sector / Subsector

Finance - Banking systems and nonbank financial institutions - Inclusive finance

Public sector management - Economic affairs management

Gender Equity and Mainstreaming Gender equity
Description

This TA focuses on supporting the Government's and the central bank of Afghanistan's (DAB Da Afghanistan Bank) efforts to expand Islamic finance. As DAB is the primary counterpart, the primary effort will be to support DAB in its work program to improve the Islamic finance regulatory regime. Further, a number of tailored capacity building trainings will be provided to ensure DAB's staff are well grounded in technical, regulatory and commercial principles of Islamic finance. Also, to support the banking sector more broadly, work will begin on developing appropriate Islamic finance products and template contracts which help meet the needs of those in rural areas where financial literacy levels are generally lower, but demand for Islamic finance products is strong versus those in urban areas.

This TA had to be reduced in scope and scale due to significant problems in engaging appropriate consultants who were willing to work in areas which had significant security issues.

Project Rationale and Linkage to Country/Regional Strategy

Afghanistan's reconstruction challenge is closely linked to the country's ability to break-free from rural development constraints. More concerted and coordinated efforts are required to encourage the sustainable expansion of financial institutions' coverage into rural areas, home to more than 75% of Afghans. More than 45% of the rural population in Afghanistan lives below the national poverty line, and access to formal finance is crucial to enable rural households to seize business growth opportunities and pull themselves out of poverty. Credit support extended to farm and non-farm rural sectors would complement general ongoing reconstruction efforts, and boost investments, trade, and job creation. Islamic finance products in particular are demanded by the rural populace.

Current rural finance penetration (by commercial banks and microfinance institutions) is estimated at 0.3% of GDP, or $40 million outstanding. There's a pressing need for greater channeling of national savings by formal financial institutions' particularly commercial banks- as credit for the working capital and investment needs of rural Afghanistan. The financial system would need to intermediate about $2.6 billion towards rural lending for such lending to reach 3% of GDP by 2020, an international average of rural finance penetration. The expansion of rural finance in Afghanistan faces a number of immediate and medium-term constraints. The most immediate ones include lack of capacity in the financial industry to undertake credit assessments and manage rural finance risk. The consequent lack of physical presence in rural areas also impedes greater access. More medium term impediments are of an institutional nature and require, among others, sector reforms and product development.

Impact Increased access to Islamic finance.
Project Outcome
Description of Outcome Financial institutions expand their Islamic finance operations
Progress Toward Outcome Due to the uncertain security environment, the recently completed elections and the withdrawal of international troops, procurement of consultants to undertake various activities has proven very difficult. However, two consultants have been recruited and are working on regulatory and product development activities.
Implementation Progress
Description of Project Outputs

1. Strategy and action plan to improve Islamic finance regulatory regime developed

2. Islamic finance products introduced

3. Islamic finance capacity development institutionalized

Status of Implementation Progress (Outputs, Activities, and Issues) Due to the uncertain security environment, the recently completed elections and the withdrawal of international troops, procurement of consultants to undertake various activities has proven very difficult. However, two consultants have been recruited and are working on regulatory and product development activities.
Geographical Location Kabul, Afghanistan
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design

A consultation mission conducted broad discussions on the TA's premises, diagnosis and proposals.

Key stakeholders consulted included (i) DAB (the Central Bank of Afghanistan); (ii) MISFA (an Apex-type of institution under the Ministry of Finance in charge of promoting MFIs), (iii) a number of commercial banks and MFIs; (iii) the newly-created AIBF (a financial sector-wide capacity development "joint-venture" owned by the DAB), and (iv)development partners.

An informal roundtable meeting was also held during the consultation mission, at which a number of proposals were presented and discussed. Stakeholders' views and expectations were incorporated, and broad support was an important outcome of the event. Preliminary versions of the TA concept note were shared with specific stakeholders of the rural finance agenda. Continuous feedback was and will continue to be sought.

During Project Implementation

A mission was fielded to Afghanistan in December 2013 to discuss the obstacles in implementing the TA. An agreement was reached with DAB, the EA on an appropriate way forward. Consultants have now been selected, or are in the midst of selection and discussions with commercial banks, MFIs, AIBF and development partners will continue in earnest once the government is in place following the Presidential election.

Implementation was initiated in March 2014, with the hiring of islamic finance experts. Activities are now ongoing, and the first session of consultations and capacity development took place in Kuala Lumpur, Malaysia, in August 2014.

Business Opportunities
Consulting Services Three individual consultants are required for this TA, namely: an Islamic finance products specialist (international), Islamic finance regulation specialist (international), and Islamic finance regulation specialist (national). The consultants will be engaged by ADB in accordance with the Guidelines on the Use of Consultants (2014, as amended from time to time). Only individuals will be engaged, as per the agreement reached with DAB.
Procurement No procurement is required for this TA.
Responsible ADB Officer Matthew Hodge-Kopa
Responsible ADB Department Central and West Asia Department
Responsible ADB Division Public Management, Financial Sector and Trade Division, CWRD
Executing Agencies
Da Afghanistan BankMohammad Taib Siddiqi, Head of Islamic Banking, FSDtaib.siddiqi@centralbank.gov.af / mohammadtaib@gmail.comCharahi Pashtonistan, Foroshgah, Kabul Afghanistan
Timetable
Concept Clearance 18 Oct 2010
Fact Finding -
MRM -
Approval 14 Dec 2011
Last Review Mission -
PDS Creation Date 15 Dec 2010
Last PDS Update 20 Mar 2015

TA 7983-AFG

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
14 Dec 2011 09 Jan 2012 09 Jan 2012 30 Jun 2013 30 Jun 2015 -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
500,000.00 0.00 0.00 0.00 0.00 0.00 500,000.00 14 Dec 2011 466,395.06
Title Document Type Document Date
Rural Finance Expansion Technical Assistance Reports Dec 2011

Safeguard Documents

See also: Safeguards

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Evaluation Documents

See also: Independent Evaluation

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