Access to Finance in Afghanistan

Transcription

1 Access to Finance in Afghanistan April 2012 Research & Statistics Department

2 1. Introduction Access to finance remains a key element for business development in an economy. Entrepreneurs, who have new ideas and business plans in their mind, lack the necessary capital to execute their projects. Financial intermediation thus helps allocate resources in an economy, as it makes the private savings accessible to investors and entrepreneurs. Hence, availability and access to capital remain a key determinant of investment in an economy. On the other hand, a business cannot successfully operate in the market unless sufficient capital is allocated to those activities which produce sufficient surplus to cover all set-up, operating and capital costs of the enterprise. This is to say that businesses cannot settle for a lowlevel of production because markets expand, competition increases, and new products are offered day by day, and those businesses moderately operating in the margin will no longer be able to survive. An entrepreneur must have ambitious goals. It should seek to expand its business and increase its market share. It should look for new products and methods of production to acquire higher competition power in the market. To do so, it needs capital; to expand its business, benefit from economies of scale, decrease its total costs and finally increase its profit margin. Usually, there exist various options to acquire the desired capital. Financial sources differ from one country to another, but conventional modes of finance remain almost the same across countries in the world. Therefore, it is important that the entrepreneur have the necessary knowledge of financing options in the country. This booklet provides the basic and yet practical information on accessing credit in Afghanistan. It describes the sources of financing, financial products and practical aspects to obtain credit in Afghanistan. 2. Sources of finance in Afghanistan Formal sources of financing in Afghanistan include commercial banks, microfinance institutions, and other financial institutions. Commercial banks in Afghanistan offer short- to medium-term loans to both individuals and businesses, but focus primarily on corporate clients. Microfinance institutions (MFIs), on the other hand, concentrate on small & medium enterprises (SMEs) with more or less similar terms as those of commercial banks. MFIs, unlike commercial banks, usually require third party guarantee instead of collateral, and their loans do not exceed AFN 2.5 million or $50,000. There are also other financial institutions in Afghanistan which provide large-size, long-term loans with more flexible and easier terms and conditions. 2 P a g e

3 A. Commercial banks There are a total of 17 commercial banks in Afghanistan, including three state-owned, nine private banks, and five foreign bank branches. These banks offer both conventional and Islamic banking products. Fund-based financing methods include term loans, overdraft, SME financing and Islamic financial products such as murabahah, mudarabah, musharakah and ijarah. Non-fund based financing is in the form letter of credit and bank guarantee. (i) Fund-based financing (ii) Term loans Term loans are offered by banks over a specified period of time and with a fixed interest rate. Commercial banks in Afghanistan usually provide short-term loans of up to 3 years. To be eligible to obtain a loan, the client must provide collateral worth around 200 percent of the amount of loan. The preferred type of collateral for banks in Afghanistan is immovable property. Size and tenor: The size of loans offered by banks in Afghanistan is usually between AFN 1 million (US$20,000) and AFN 600 million (US$12 million) in size, with a maturity period of 3 months to 3 years. The maturity of loans also varies according to the economic sector in which the business is operating. Loans given to trade, construction and manufacturing sectors usually mature between 1 and 3 years, while the maturity of agricultural loans is up to 18 months. However, there is only one commercial bank in Afghanistan (i.e. Azizi Bank) which provides long-term loans of 3 to 5 years. Interest rate: Banks charge fixed interest rate depending on the type of business of their clients and their risk profile, and the rate is subject to negotiation. The interest rate on individual loans is usually between 10 and 15 percent per annum; while on corporate loans it varies from 9 to 25 percent per annum. Repayment of loan: Though the interest rate is on annual basis, the payment of interest is made monthly. The interest is calculated on the principal amount of loan according to a fixed interest rate. The result is divided by 365, and then multiplied by the number of days each month. With this method, the monthly payable amount of interest is determined. In case where the loan is received to purchase machineries and equipments, the client is supposed to pay only the interest on its loan during the first three months. The principal amount 3 P a g e

4 of loan will have to be paid after the third month along with the interest. However, for short-term loans received for any other purpose, the interest plus the principle must be paid each month. Types of term loans: Commercial banks in Afghanistan offer different types of term loans under different product names. Housing loans range between $6,000 and $200,000 in size and are given up to a period of 1 year. The interest rate charged on housing loans is between 14 to 20 percent per annum. Repairment loans can reach $4,000 in size, with a 25-percent interest rate. These loans are disbursed for a period of 1 up to 3 years. Individual loans are given for personal purposes to non-corporate clients. Maximum amount of loan that banks offer for consumption purposes is $500,000, while the minimum amount can be $500 or Af.25,000. The maturity on individual loans does not usually exceed 12 months. Banks: Almost all banks in Afghanistan offer term loans. a) Overdraft facility Overdraft facility allows depositors or account holders to withdraw money in excess of their account s balance, up to a specified limit. The credit limit is purely granted on the basis of credit-worthiness of the customer and the type of collateral provided. Purpose: It facilitates the smooth running of business operations by meeting day to day financial requirements when unexpected expenses occur. Businesses can easily cover their short-term cash flow problems through the overdraft facility. Size and tenor: The maximum limit of overdraft facility with some banks in Afghanistan reaches up to Af.600 million ($12 million). The tenor of overdraft usually reaches 6 to 12 months, but it can be further extended to 3 years conditioned on annual renewal based on the performance and requirement of the business. The interest charged on overdraft is a fixed interest rate which is calculated daily and charged monthly on the overdrawn amount. Usually, the interest rate ranges between 15 to 25 percent. In comparison to term loans, overdraft is more flexible in terms of repayment. Some banks specify three different dates within a year for the repayment of the overdraft. The client can repay the overdraft amount in either of these dates. Collateral is also required for overdraft facility. 4 P a g e

5 Banks: Almost all banks in Afghanistan offer the overdraft facility. b) SME financing Small & medium enterprises (SMEs) are the engine of economic activities and growth in developing countries. These businesses are in constant need of financing for variety of purposes to run their operations and to tide over their short term liquidity mismatches. To respond to such a significant demand for financing, commercial banks provide loan packages specifically designed to meet the SMEs need. SME financing is provided both as a running financing and as a term loan on installment bases. Purpose: SME financing is used for business development, increasing the working capital, and managing liquidity due to market shocks. Size and tenor: The amount of loan to SMEs depends on the size of the business. Small businesses can receive Af.10,000 to Af.250,000 in loan, for 6 to 18 months period. Medium-size enterprises, on the other hand, can receive loans ranging from Af.300,000 ($6,000) to Af.5 million ($100,000) with a maximum maturity of 36 months. Interest rate: Interest rate on SME loans varies between 18 to 20 percent, and is calculated on a declining-balance method. In a declining-balance method, the interest is recalculated at each period on the remaining amount of principal left to be repaid. In other words, the client pays the interest on the amount of principal left to be repaid and not on the total amount of principal. Banks: Afghanistan International Bank, The First MicroFinance Bank, Bakhtar Bank, BRAC Bank, and Ghazanfar Bank provide SME financing. (iii) Financing under Islamic banking In Afghanistan, there are no fully-fledged Islamic banks, but commercial banks have Islamic banking windows which offer Islamic banking products according to the Shariah law. Islamic banking windows provide mudarabah, musharakah, murabahah, and ijarah modes of financing. 5 P a g e

6 a) Mudarabah Mudarabah is a profit-sharing mode of Islamic financing, in which the bank (called rabbul-mal) provides money for an investment project and the agent enterprise (called mudarib) invests the capital and manages the business project. Profit generated from the project is shared between the two parties according to a pre-determined ratio. In other words, the bank and the agent receive profit based on a ratio they have agreed on. In case of loss, however, only the bank (lender of money) bears all the loss, while the mudarib loses only the services it provides. It should be noted that mudarabah is a trust-based financing, and banks only engage in such a partnership with well-known and trusted clients. Purpose: Mudarabah can be used for various purposes such as short-term financing, project financing, SME set-up, and import financing. Size and tenor: The amount of financing in case of mudarabah can range between Af.900,000 ($18,000) and Af.100 million ($2 million). The contract engaged by banks in Afghanistan is usually up to 12 months. Banks: Afghan United Bank, and Maiwand Bank provide mudarabah financing in Afghanistan. b) Musharakah (partnership) Musharakah is a profit and loss sharing contract in which two or more parties engage in a partnership agreement on an investment project. The difference between mudarabah and musharakah is that, in mudarabah only one party provides the fund, while in musharkah all parties contribute some capital. In case of a banking musharakah, the bank and the client company contribute capital to the investment project. The profit generated from the project is determined according to a specified ratio, whilst any possible loss is shared among the parties per their capital contribution. Both parties (bank and client) may participate in the management of the project. Purpose: Musharakah can be used for various purposes in Afghanistan such as short-term financing, project financing, SME set-up, import financing, and working capital financing. 6 P a g e

7 Pricing: The parties in musharakah can freely agree, with mutual consent, on the ratio of profit allocated to each party, which may differ from the ratio of their contributed capital. Banks in Afghanistan usually set for 16 to 22 percent rate of profit in musharakah, and require the profit payment on quarterly basis. In case of a loss, both parties incur the loss to the extent of their invested capital. Banks: Ghazanfar bank, Maiwand bank, and Afghan United Bank provide musharakah financing. c) Murabahah (sale contract) Murabahah is a particular kind of sale contract in which one party purchases goods and sells it to another party at a price that includes a profit margin agreed by both parties. In this contract, the market price (true cost) of the item must be clearly stated at the time of the sale agreement and both parties should agree on the profit margin which the seller receives. In the context of a banking murabahah, upon request by the client, the bank purchases an asset from a third party usually a supplier or vendor and resells the item to the client either against an immediate payment or on a deferred payment basis (meaning a delayed payment in the future). Purpose: Murabahah can be used for purchasing machineries and equipment, or for importing goods and raw materials from abroad. In the latter case, it is a form of trade finance based on the letter of credit system. Size and tenor: The size of loan in murabahah, offered by banks in Afghanistan, ranges between Af.2.5 million ($50,000) and Af.100 million ($2 million), and may be provided for a few months to a year. Pricing: The profit margin requested by banks in Afghanistan is usually between 15 and 20 percent of the total price of the purchased asset. Banks: Ghazanfar bank, Maiwand bank, and Afghan United Bank engage in murabahah contract. 7 P a g e

8 d) Ijarah (leasing) Ijarah is a contract in which the benefits (usage) of an asset is transferred by the owner (i.e. lessor) to the lessee (i.e. user) for an agreed period of time at a specified price or rental amount. In the context of a banking ijarah, the bank purchases the asset (usually property and machinery) and leases it to the client for an agreed timeframe. The rental amount to be paid at each period can be either a fixed or a variable amount. Ijarah can be performed in two ways. Operating ijarah is a simple form of leasing, in which the asset is returned to the bank at the end of the period; whilst in an ijarah muntahi-be altamlik or ijarah wa al-iqtina the ownership of the asset is transferred to the lessee at the end of the contract period. Purpose: Ijarah can be used for purchasing or leasing machineries, vehicles, building, or other types of property. Tenor and bank: Bank-e-Millie and Afghan United Bank offer ijarah up to a period of 3 years. (iv) Non-fund based financial services Credit facilities provided by banks for which the banks actual funds are not involved are termed as 'non-fund based facilities'. The most common types of non-fund based financing are letter of credit and bank guarantee. a) Letter of credit Letter of credit (LC) is a document issued by a commercial bank to be used in trade finance. LC is used for international trade transactions in which the supplier and the purchaser are in different countries. To close a deal between the two parties, the purchaser refers to a local bank (called the issuing bank) and requests to issue an LC to the confirming bank of which the supplier (or the beneficiary) is a client. Upon receipt of the LC, the supplier makes the shipment of the goods and the purchaser will transfer the money once he is satisfied of the quality of goods he receives. To use a letter of credit, the applicant is required to provide cash collateral and/or collateral of property to the issuing bank. All letters of credit are subject to irrevocable payment, meaning they cannot be cancelled without prior agreement of the beneficiary, the confirming bank, and the issuing bank. Amount and tenor: The amount of LC as issued by banks in Afghanistan starts from Af.1 million ($20,000) up to Af.50 million ($1 million). Letters of credit are issued for a maximum period of 12 months. 8 P a g e

9 Pricing and charges: Banks in Afghanistan require cash collateral of 25 to 100 percent of the value of transaction, in addition to collateral of property, in order to issue a letter of credit. Cash margin and collateral will be returned to the customer only upon completion of the transaction. Charges of banks for issuing a letter of credit is 0.20% to 0.30% of the amount of transaction, but these charges are minimum Af.15,000 ($300). Banks: Almost all banks in Afghanistan issue letter of credit. b) Bank guarantees Bank guarantee is a commitment given by the banker to perform or discharge the liability of its customer in case if it fails to settle the debt. Purpose: In Afghanistan, where the sectors of construction, real estate, and logistics are booming, bank guarantee provides an optimal way for the companies to manage their contracts with the suppliers and sub-contractors. BG enables the businesses to avoid making payments early in the project and committing to make the disbursement at the end in order to better manage their cash flows. Pricing and charges: The charges for bank guarantees vary from one bank to another. However, generally with a 100% cash collateral, banks charge 0.40% of the amount of BG, but it should be minimum Af.500 and maximum Af.3,000. With a 50% cash collateral, banks charge 0.50% of the amount of BG, and it should be minimum Af.1,250 and maximum Af.5,000. Amount and tenor: The amount of BG as issued by banks in Afghanistan starts from Af.1 million ($20,000) up to Af.5 million ($1 million). Bank guarantees are issued for a maximum period of 12 months. B. Microfinance institutions Microfinance institutions (MFIs) in Afghanistan provide credit to microenterprises and SMEs. Unlike in other countries, MFIs in Afghanistan provide loans only for income-generating activities and do not lend for consumption purposes. Some microfinance institutions require their clients to have at least 6 months of experience in their business. The size of a loan in microfinance does not exceed Af.2.5 million or $50,000. There are a total of nine MFIs in Afghanistan which operate in most provinces. Microfinance Investment Support Facility for Afghanistan (MISFA) provides funds to seven of 9 P a g e

10 these MFIs. FINCA Microfinance Afghanistan and WOCCU Afghanistan provide credit based on the Islamic modes of finance, and The First MicroFinance Bank also accepts deposits. i) Conventional microfinance loans Microfinance institutions in Afghanistan provide three types of loans. Individual loan which ranges between Af.25,000 and Af.100,000 in size. Group loan is given to a group of individuals where each individual assumes responsibility for the repayment of the loan. Group loans can be between Af.5,000 and Af.25,000. SME loan is a small and medium-size loan which is given to microenterprises, and SMEs. Generally, an SME loan is between Af.100,000 ($2,000) and Af.2.5 million ($50,000). Microfinance loans are not interest-free. Microfinance institutions charge 15 to 20 percent of annual interest on their loans; the repayments are made monthly. The tenor of loan is usually 6 to 12 months. Collateral or collateral substitutes may also be required to receive a microfinance loan. ii) Islamic microfinance Islamic products offered by microfinance institutions in Afghanistan are usually based on the murabahah (sales contract) mode of finance. Individual murabahah loans are given for a period of 6 to 12 months, with an amount of Af.20,000 to Af.60,000. However, old clients who have successfully repaid their loans in the past can apply for another round of loan and can receive up to Af.150,000 for a maximum period of 18 months. Female Group loans are also based on a murabahah system. The amount of loan disbursed to a group of female individuals ranges between Af.5,000 and 30,000. Female Group loans are primary targeted to women engaged in handicraft making, but women engaged in other activities can also apply. C. Other institutions Apart from commercial banks and microfinance institutions, there are other financial institutions in Afghanistan which provide large-size, long-term loans with more flexible conditions. i) International Finance Corporation (IFC) International Finance Corporation is a member of the World Bank group that aims to promote the private sector in developing countries. IFC provides long-term financing to private companies under different forms of investment such as loans, profit participating loans, equity finance, and trade finance. 10 P a g e

11 Loans provided by IFC are usually targeted at SMEs and/or at specific sectors. The amount of loans ranges between 25 to 50 percent of the project cost generally between $1 million to $100 million. The loans typically have maturities of 7 to 12 years. Grace periods and repayment schedules are determined on a case-by-case basis in accordance with the borrower's cash-flow needs. If warranted by the project, IFC provides longer-term loans and longer grace periods. Some loans have been extended to as long as 20 years. The corporation offers loans in local currency as well, in order to help the local companies manage the currency risk. IFC may also provide loans to private enterprises in form of profit participation. The corporation provides the capital, and instead of receiving fixed amounts of loan repayments it engages in contract with the enterprises over a specified percentage of profit allocation. IFC also makes equity investment with private companies and financial institutions. The corporation generally subscribes between 5 and 20 percent of a project s equity and maintains its investment for a period of 8 to 15 years. ii) Afghan Growth Finance (AGF) Afghan Growth Finance is established by the US-based institution Small Enterprise Assistance Funds (SEAF) with the objective to provide long-term capital to SMEs in Afghanistan. AGF focuses on agribusiness and agro-processing, manufacturing, transport, energy, and services sectors. It invests with private companies in various forms such as providing term credit, Islamic finance, project finance, equipment finance and working capital loans. Credits provided by AGF are based on more flexible terms and conditions compared to commercial banks. Profit participation and equity investment may be alternatives to fixed interest repayments for the loan. The maturity on loans offered by AGF is also flexible, and the borrower may be offered grace periods based on the company s performance. AGF also provides pre-credit and post-credit services to its clients, and works closely with the companies on better management of the project. The size of the loan provided by AGF ranges between $100,000 and $12 million. iii) Afghanistan Finance Company (AFC) Afghanistan Finance Company provides lease financing, working capital financing, and venture capital to firms operating mainly in the agriculture sector. Products offered by AFC are more tuned to those farmers and agricultural companies who require having machinery, equipment and vehicles but do not have the ability to purchase such facilities. Leasing financing is a good solution for such small companies. 11 P a g e

12 iv) Fund projects by donor institutions In addition to private financial institutions, there are numerous projects by donor institutions such as USAID, DFID and others, which provide grants, funds and credit to business projects managed by the private sector. These fund projects concentrate on specific sectors and seek business projects which specific objectives and outcome. Agricultural Development Fund (ADF), Afghanistan Rural Finance Center (ARFC), Afghanistan Business Innovation Fund (ABIF), and Harakat are some of such fund projects and organizations. 3. Practical steps for applying for a loan This section gives brief information on steps involved in applying for a loan next to commercial banks in Afghanistan. Information provided below includes general and common requirements by commercial banks some banks may have their own specific requirements and procedures. While this practical information remains limited to the banking sector, similar requirements and procedures may be envisaged for microfinance institutions. 1. The customer approaches the Credit Department of the bank, and discusses its desire to obtain a loan. 2. The client company will be required to provide a formal letter (called board resolution ) stating the interest of the company to apply for a loan. The letter should be signed by the CEO and the vice-chairman of the company. 3. The credit officer defines all terms and conditions of the loan, and asks for the required documents. (A list of usual required documents is provided in the next paragraph.) 4. Upon provision of the required documents, the loan application will be reviewed by the Credit Manager and all terms & conditions (including the interest rate) will be finalized by the Credit Committee in the bank. 5. A schedule is set by the bank to make an inspection of the company on its operation and activity, in order to verify if the information provided by the client is true. 6. Upon positive report by the inspection team, the Credit Committee approves the loan. The date for the first disbursement will be communicated to the client. 7. Within one month of the loan disbursement, the bank will make a post-disbursement inspection of the company. Banks in Afghanistan require their clients to provide the following documents for their application. Please note that this is a usual list of required documents; some banks may ask for additional documents. Business license (usually AISA license) A board resolution of the company on bank loan Legal statue of the company, Articles of association, etc. 12 P a g e

13 Audited financial statements for the last 3 years Business plan (for the next 3 years) Custom duty certificates, Income Tax returns, BRT returns, and Tax clearance certificates Bank account statement of the last year List of fixed assets of the company with the supporting documents ID of company s president / vice-president Corporate guarantee (guarantee by a third party) Original documents of collateral security Collateral and security must be insured by registered insurance companies The approval of loan may depend on the following terms: Risk profile of the customer Customer s history and profile for previous loan repayments Purpose of loan application, and nature of business project Type of collateral presented for the loan The value collateral must be between 125 to 200 percent of the amount of loan The duration of loan application depends on the documents provided by the customer. It takes minimum 7 working days for the application to be processed, while in some cases the application process may take up to 3 months. 4. Contact details at AISA Companies willing to obtain more information on acquiring loan and credit may refer to the Investment Support Department (ISD) at AISA. ISD staff will practically help interested businesses in their initial procedures to apply for a loan, and may introduce some potential companies to other institutions which provide technical assistance to SMEs willing to acquire credit, such as Financial Access for Investing in the Development of Afghanistan (FAIDA). Contact: Mohammad Sulaiman Akbari Investment Support Department Phone: [email protected] 13 P a g e

14 5. Contact list of banks and financial institutions A. Banks Bank-e Milli Pashtany Bank New Kabul Bank Afghanistan International Bank (AIB) Main branch: Ibn-e Sina Watt, Pashtunistan square Phone: Website: Main branch: Mohammad Jan Khan Watt Phone: Website: Main branch: 10-42, Torabazkhan Square, Shar-e-Naw, Phone: Website: Main branch: Haji Yaqoob square, Shahabuddin Watt, Shahr-e Naw Phone: Website: 14 P a g e

15 Azizi Bank BRAC Bank Main branch: Zanbaq Square Phone: Website: Main branch: BRAC Afghanistan Bank Torabaz Khan square Shahr-e-Naw Phone: Website: Afghan United Bank (AUB) Bakhtar Bank Maiwand Bank Main branch: AUB Building Zarghona Maidan, Shahr-e-Naw Phone: Website: Main branch: Sherpur square Phone: Website Main branch: Torabaz Khan Square Shar-e-Naw Phone: Website 15 P a g e

16 Ghazanfar Bank The First MicroFinance Bank Habib Bank Ltd Bank Al-Falah Ltd ARIAN Bank Main branch: Sherpur main road Phone: Website: Main branch: Plot No 174, Ashraf Watt Ansari Square, Shar-e-Naw Phone: Website: Main branch: First floor, Park Plaza, Torabaz Khan road Shar-e-Naw Phone: Website: Main branch: House No 279, Second Street, Shahr-e-Naw Phone: Website: Main branch: Torabaz Khan square Opposite Iranian Embassy Phone: Website: 16 P a g e

17 B. Microfinance institutions (MFI) BRAC Microfinance Afghanistan MUTAHID DFI Main branch: House No 43, Lane No 4 Kocha-e Qasabi, Bahristan Kart-e-Parwan Phone: [email protected] Website: Main branch: 2nd Floor, Former Aria Restaurant 3rd Street, Taimany Project Phone: [email protected] Website: Kabul IIFC Group (Islamic Investment and Finance Cooperatives Group) Main branch: Kotai Sangi Phone: [email protected] Website: Foundation for International Community Assistance (FINCA) Main branch: House No 100, 8 th Street Qala-e-Fathullah Phone: [email protected] Website: World Council of Credit Unions (WOCCU) Main branch: Saadullah Khatebzadah Market 3 rd floor Kabul Afghanistan Phone: [email protected] Website: 17 P a g e

18 OXUS Microfinance Afghanistan HFL (Hope for Life Microfinance) Main branch: House No 10, Street No 4 Taimani, Phone: Website: Main branch: Taimani, Phone: [email protected] Association for Social Advancement (ASA) Main branch: House No 384, Street 11 Qula-e Fathullah, Pai-Kobe Naswar Phone: [email protected] Website: Child Fund Afghanistan Microfinance (CFA) Main branch: Khiyaban Road Kunduz, Afghanistan Phone: [email protected] Website: Ariana Financial Services Group (AFSG) Main branch: Main Street, Bagh-e-Bala [email protected] C. Other institutions International Finance Corporation (IFC) Main branch: The World Bank, House No.19 Street No. 15 Wazir Akbar Khan Phone: P a g e

19 Website: Afghanistan Growth Finance (AGF) Harakat Main branch: Nasir Khesraw Balkhi Building Floor 5 th, Sarsabzi square Taimani, Phone: [email protected] Website: Phone: [email protected] Website: Afghanistan Business Innovation Fund (ABIF) Phone: [email protected] Website: Agricultural Development Fund (ADF) Phone: [email protected] Afghanistan Rural Finance Center (ARFC) Phone: [email protected] Website: Afghanistan Finance Company Main branch: House No.53, 10 th Street Wazir Akbar Khan Phone: [email protected] Website: 19 P a g e

20 For any inquiry regarding this brochure, you may contact the Research & Statistics Department: Phone: ; P a g e