VZCZCXRO4927
PP RUEHDBU RUEHIK RUEHPOD RUEHPW RUEHSL RUEHYG
DE RUEHBUL #2239/01 2170659
ZNR UUUUU ZZH
P 050659Z AUG 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 0645
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0868
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEABND/DEA HQS WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 03 KABUL 002239 
 
DEPT FOR SRAP, SCA/FO, SCA/RA, AND SCA/A 
DEPT PASS AID/ASIA BUREAU 
DEPT PASS USDA FOR FAS MICHNER 
DEPT PASS USTR FOR DELANEY AND DEANGELIS 
DEPT PASS TDA FOR STEIN AND GREENIP 
DEPT PASS OPIC 
CENTCOM FOR CSTC-A, USFOR-A 
OSD FOR SEDNEY 
TREASURY FOR MHIRSON, ABAUKOL, AWELLER, AND MNUGENT 
COMMERCE FOR HAMROCK-MANN, DEES, AND FONOVICH 
 
SENSITIVE 
 
SIPDIS 
 
E.O.12958: N/A 
TAGS: PREL PGOV ECON ETRD EAID EAGR BEXP AF TI
SUBJECT: Developing a Private Sector-Led Rural Finance 
System in Afghanistan 
 
SUMMARY 
 
¶1. (SBU) The financial sector in Afghanistan has made 
significant progress in establishing a market-based 
system for access to credit in rural areas.  With 
substantial U.S. Government (USG) assistance, financial 
services are expanding to meet agricultural market needs 
and demonstrating that lending to micro, small and medium 
agricultural enterprises (MSMEs) can be profitable. 
While the challenges remain great, the USG will build 
upon progress achieved and rollout new innovative 
approaches.  New interventions will focus on incentive 
programs for commercial banks to lend to agribusinesses, 
extending a network of Islamic cooperatives that have a 
proven track record in conservative rural areas, 
combining credit with business services, developing 
sharia-compliant agricultural products, and expanding 
credit to farmers for primary inputs through lines of 
credit to farm stores. 
 
¶2.  (SBU) Interventions will also support innovative 
information and communication technology (ICT) 
approaches, such as mobile banking, which offer new hope 
of extending finance to rural areas where it is currently 
cost prohibitive to build a brick-and-mortar branch.  In 
addition, USG seeks to enhance collaboration with 
regional development platforms and Provincial 
Reconstruction Teams (PRTs) in order to build up a rural 
finance sector in newly-secured areas.  In those areas 
where the market will not be able to attract private 
sector lenders, the USG will collaborate with other 
donors in supporting the Government of the Islamic 
Republic of AfghanistanQs (GIRoAQs) Rural Enterprise 
Development Program (AREDP) which has a village 
cooperative savings and loan component. End Summary. 
 
ASSISTANCE TO DATE 
 
¶3. (SBU) When the Taliban fell from power in 2001, 
AfghanistanQs national finance system, not to mention its 
rural finance system, had totally collapsed.  Increasing 
employment opportunities and incomes in rural areas 
remains a top priority with access to credit serving as a 
critical component of the USGQs strategy to stabilize 
rural areas in Afghanistan. 
 
¶4. (SBU) Today, AfghanistanQs national financial sector 
hosts 17 commercial banks operating 200 branches in more 
than 20 of AfghanistanQs 34 provinces with $972 million 
in loans outstanding to just over 42,000 active clients; 
and 16 microfinance institutions (MFIs) that are partners 
with the USG-supported Microfinance Investment Support 
Facility for Afghanistan (MISFA), a GIRoA/donor supported 
apex organization which has been a model of donor 
coordination.  MISFA-supported MFIs report 450,000 active 
clients; one credit union network with 25 outlets and 
over 10,000 borrowers, nearly 3,800 of whom are using 
their loans for agriculture purposes.  While the cost of 
capital remains high on the commercial market, targeted 
programs are making progress at making affordable capital 
available. 
 
¶5. (SBU) Commercial Banks and Credit Guarantees:  The USG 
is working directly with commercial banks to expand 
agricultural business credit.  Technical assistance 
provided to four commercial banks has resulted in more 
than 1,700 loans through 12 branches to key agriculture 
value chains, including dry fruits, cashmere, pistachios, 
yellow pulse, fresh fruits, and medicinal plants. A $20 
million Development Authority Credit guarantee was 
provided in late 2008 to Bank Alfalah to increase lending 
to agricultural SMEs that normally wouldnQt qualify for 
loans. This facility is available at the bankQs regional 
 
KABUL 00002239  002 OF 003 
 
 
branches in Kabul, Mazar, Herat and Jalalabad. 
 
¶6. (SBU) Credit Unions:  The USG works with credit 
unions, referred to as Islamic Investment and Finance 
Cooperatives (IIFCs), which have been successful at 
reaching smaller farmers that commercial banks typically 
shun. IIFCs are unique not only because they are Shara- 
compliant, but also because they are community-owned 
institutions that provide custom-tailored services in the 
rural markets in which they work. Granting local Shura 
Boards the authority to sanction loans and verify that 
borrowers are of good ethical and financial standing 
ensures community support.  Nearly 86 percent of IIFCs 
portfolio in the south derives from agricultural markets. 
 
¶7. (SBU) Microfinance Institutions:  Reaching even 
further down market are seven USG-supported MFIs, which 
together have provided more than 163,000 loans. About 25 
percent of the portfolios of these institutions are 
invested in agricultural and agriculture-related 
enterprises. 
 
¶8. (SBU) Value Chain Financial Actors:  The USG is 
supporting increased rural incomes and the security of 
those incomes through mechanisms under which farmers 
receive inputs on credit Q such as seeds and fertilizer 
with payments deducted when the produce is harvested and 
sold to the financier. Farmers are well-acquainted with 
this model of financing as it is used extensively under 
the informal system of financing. 
 
¶9. (SBU) Non-Bank Financial Company:  In 2006 the USG 
established the Afghanistan Rural Finance Company (ARFC), 
a non-bank finance institution which is playing a key 
role in providing investment capital to the agricultural 
sector. A for-profit Afghan entity, the ARFC has issued 
$14 million in direct loans averaging $300,000 to 
cooperatives, private agribusinesses and rural SMEs, 
particularly in the eastern and southern regions of the 
country. 
 
LOOKING FORWARD 
 
¶10. (SBU) Innovations in Rural Finance: Over the next few 
years, in support of the USGQs priority to bring 
stabilization to the south and east, USG programs will 
continue to increase employment opportunities and incomes 
in rural areas by rewarding its most successful rural 
finance initiatives, such as the sharia-compliant 
cooperative model, increasing access to farm credit 
through farm stores, continuing to couple incentive 
programs for commercial banks and MFIs to do agricultural 
lending with technical assistance, combining finance to 
agribusinesses with services, such as training or quality 
control, and ramping up support through an already- 
established GIROA assistance program to rural areas. 
 
¶11. (SBU) The USG will expand incentive programs to 
develop new sharia-compliant credit products and assist 
commercial banks and MFIs to establish SME/Agribusiness 
windows for extending loans to agribusiness. The USG will 
also expand credit for agricultural inputs by extending 
lines of credit to farm stores that have traditionally 
provided store credit to farmers. Interventions will also 
support innovative ICT approaches, such as mobile 
banking, which offer new hope of extending finance to 
rural areas where it is currently cost prohibitive to 
build a brick and mortar branch. Support for the GIRoAQs 
Afghanistan Rural Enterprise Development Program 
(AREDP)village savings and loan cooperative program will 
deliver access to credit in rural areas where providing 
commercially-based services is not yet feasible. 
 
 
KABUL 00002239  003 OF 003 
 
 
¶12. (SBU) Civ-Mil Coordination:  The United States Agency 
for International Development (USAID) will enhance its 
collaboration with regional development platforms and 
PRTs in order to build up the rural finance sector in 
newly-secured areas.  Under the strategy currently under 
development, USAID resources will oversee capacity- 
building efforts to ensure the sustainability of rural 
financial institutions like the IIFCs, while military- 
sponsored funds from the CommanderQs Emergency Response 
Program (CERP) will help to subsidize the construction of 
new infrastructure. 
 
EIKENBERRY