From tanks to banks: finance in post-conflict countries

The financial sector in countries like Afghanistan, Congo and El Salvador has virtually disappeared. Early entrants into these post-conflict areas can take advantage of the situation. While contributing to stabilization, they are, however, challenged by extreme risks and high operating costs.

“Microfinance is much needed to restore conditions for economic stability in families," says Jacques Toureilles, General Manager of the Aga Khan Agency for Microfinance (AKAM), the first institution to receive a banking license under the new Afghani government. “By providing financial services we ensure that people can pick up their lives again. Families are quickly able to enjoy better housing and, thanks to increased economic activity, they can obtain better education and healthcare as well.” AKAM provides microfinance services through the First MicroFinanceBank (FMFB) and the Afghanistan Rural Support Program (ARMP).

 

Triodos-Doen, one of the funds managed by Triodos, became active in Afghanistan in October 2006. Triodos-Doen  invested USD 1 million dollars in BRAC Afghanistan Bank, with BRAC, Shorecap and IFC as the other shareholders. Marilou van Golstein Brouwers, Director of International Investments at Triodos Bank: “Afghani seem to be very good entrepreneurs. I think that once they start having an interest in protecting their own investments, they will have a positive effect on peace in their country.”

 

“There are no remaining banking systems in post-conflict countries,” adds Helen Alexander, Managing Director of ProCredit. “As there are no paid jobs, running your own small business is your only source of income. So in that environment, access to credit is very important to help stabilize the enterprise and make it grow as quickly as possible.”

 

The basics

While both AKAM and Triodos are active in Afghanistan, ProCredit considers this country too risky and not in a post-conflict situation at all. However, ProCredit has initiated activities in places like Serbia, Congo, Angola, El Salvador and Guatemala. “We see it as our role to establish some normality in these countries. To achieve this goal, it is very important to expand quickly, which involves investing heavily in building infrastructure and training staff."

Operating in a post-conflict country tends to be dearer than is the case in other poor countries. Living conditions are expensive since many goods, such as computers or furniture, have to be imported. But the most expensive operation is the development of basic infrastructure, according to Alexander. "Everything was destroyed during the period of conflict. So we have had to build offices for our branches from scratch."

Security measures are another additional cost when operating in post-conflict environments, although they differ per country. "Latin America is an environment driven by crime," says Alexander. "The general manager of our bank in El Salvador needs a bodyguard. That level of risk does not exist in Congo."

 

The difference

Toureille claims that the trading routes in Afghanistan have been restored amazingly quickly. According to him, people feel sufficiently confident to leave their villages now that the Taliban no longer hold sway. "I would say that apart from our focus on restoring houses in Afghanistan, there are no major differences from microfinance in this country and other developing countries."

 

"The most difficult dimension of operating in Afghanistan is the cost of providing all our services," says Toureille. AKAM decided to start with a large range of services. It offers a variety of interest-generating loans, savings facilities, leasing and housing finance. AKAM also provides so-called emergency loans.

 

Toureille says that it was relatively easy to continue to operate in Afghanistan during the Taliban period even though there was no regulatory framework. "Our practices are close to the client. We don´t take collateral for example, so retaining collateral from a client never becomes a legal issue." Yet Toureille would like to stress that AKAM believes very strongly in adherence to proper regulations and international standards and therefore ensures that it meets all regulatory standards in all the countries in which it operates.

 

In contrast, van Golstein Brouwers says that the infrastructure in Afghanistan is not much better than in other poor countries. “Highways are being built and internal roads in the major cities need to be improved. There is always the risk of assaults on these roads." Policemen guard the doors of the bank office in Kabul and foreigners run the risk of being kidnapped. Taking security measures definitely increases the cost of operating in Afghanistan, says van Golstein Brouwers.

 

Moreover, apart from the lack of physical infrastructure such as roads and bridges, the legal system also functions very poorly, according to van Golstein Brouwers. That may add to operating costs when it comes to ensuring repayment of the loans that BRAC Afghanistan Bank is providing. However, the investment in BRAC Afghanistan Bank is completely in line with the Triodos-Doen strategy. The collaboration seeks to increase the number of equity participations, in particular in start-up microfinance institutions (MFIs). Investing in recently  established MFIs is a must when it comes to countries with underdeveloped markets.

 

 

Qualified people
Opinions may differ on the safety of Afghanistan. Yet the Bangladeshi CEO of BRAC Afghanistan Bank, Ehsanel Haque, was not able to bring his family to Kabul for security reasons. Working in Afghanistan means a definite sacrifice for him. He lives and works in the same building all the time in order to avoid unnecessary travel. He can only go home after six months to see his family for a few weeks.

 

Van Golstein Brouwers would prefer more local management in the longer term. She expects locals to occupy middle management positions at the bank within a few years. It is difficult for the bank to find qualified general management locally, so that will take longer. "There's hardly any education for them in Afghanistan. And if we train Afghani in other countries, we always run the risk that they won't come back." The low level of education in Afghanistan is so bad that hardly anyone is capable of doing some basic bookkeeping.

 

Likewise, in most other post-conflict countries, international staff make up the general management of financial institutes. Plenty of expatriates are enticed by the idea of working in such an adventurous environment. However, it is not easy to find people who can combine an adventurous spirit with commitment to detail and finance.

"General management rarely consists of former bankers," says Alexander. "We usually employ people with a passion for the country. Like our General Manager in Congo, Oliver Meisenberg, who grew up in the place and used to be a journalist."

According to Alexander appointing local middle management staff is the biggest difficulty. "Depending on how long the conflict has been going on, we sometimes have to deal with one or even two generations that have had no education whatsoever."

 

ProCredit currently employs 20 loan officers in Congo and is training another 20. In order to achieve scale and recruit many more loan officers, it is setting up a big regional training center in Congo. The center will also train client advisors, people who advise the inexperienced population on banking services. "We simply have to make people understand how they can use ATMs, credit cards, current accounts and savings deposits."

 

 

Trust

A challenge that both the BRAC Afghanistan Bank and AKAM have to deal with is the lack of confidence Afghani people have in banks. "They find it safer to put their money under a mattress instead of into a bank," says van Golstein Brouwers. She expects that, due to this lack of trust, banking services in Afghanistan will not grow at the same speed as they do in other developing countries. In order to gain trust, Triodos is even relying on Afghani networks that were initiated in The Netherlands, where the headquarters of Triodos Bank are located.

 

On the other hand, banks do not always trust their clients either. There is a lot of 'dirty money' in Afghanistan. Toureille: "Banks like ours have to be very careful about where the money has come from. We clearly do not accept all deposits offered to our banks."

 

Wooing clients to deposit money in the bank was not necessary in Kosovo and Congo. "In both cases we were simply overwhelmed with the demand for deposits," says Alexander. "In Congo people had to wait in line for three hours to get to a cash box."

 

Within two years, ProCredit obtained 25,000 clients in Congo depositing an amount equivalent to Euro 20 million. The other side of the balance sheet shows 4,000 outstanding loans worth around USD 8 million.

 

 

Going rural
In the early stages of a period of economic revival in a post-conflict country, clients knocking on the bank's door for a loan tend to be market traders, owners of street cafe's and clothing and furniture manufacturers.
Initially, ProCredit did not finance many rural clients, mainly due to logistical constraints. "It takes time before you have an institution that is strong enough to venture outside of the city. In Congo we hope to start agricultural lending towards the end of this year. Usually it takes up to two years before we can start focusing on agricultural lending." 

Alexander says that the enormous number of displaced people after a war is a real challenge. "Women are often bringing up their children alone and they are quite vulnerable. If people are not in a stable family, it can be difficult to become strong enough to work because people simply aren't used to working and living in a stable environment.

 

In Afghanistan, contrary to what happened with deposits, the business of providing small loans grew much quicker than expected. Thanks to the many different products that AKAM offers, the institute has a large variety of clients. "In the farming area, we help people to redeploy their culture and to gradually shift from only feeding themselves to producing surplus agriculture so that they can make some money on the market," says Toureille.

 

At a later stage, AKAM attracted clients who were looking for a loan for housing improvements. As this is not an income-generating activity, clients are required to have some sort of financial stability in their family, either through their own enterprise or by being employed by someone else.

 

Toureille says, "As anyone will understand, real estate in Afghanistan was in a very poor shape at the beginning of this century. The loans we're talking about are very small and are meant to put a new roof on the house or to rebuild walls." These credits are generally no more than a few hundred dollars, whereas the average business loan is USD 500 dollars.

 

AKAM offers programs for clients in the city as well as in rural areas. In the latter case AKAM uses a different approach in the sense that a loan officer will first contact the head of a village. "There are usually some men who act as counselors in these villages. They will assemble and discuss which household needs the money most." 

 

Rural families are engaged in cultivating wheat and potatoes and they raise goats and sheep. There's much trading and transport going on, which is why AKAM finances transport vehicles such as bicycles and motorbikes so farmers can take their produce to market.

In the northern part of Afghanistan, AKAM has started working  together with the cotton industry by financing farmers so they can plant cotton. In the cities, AKAM finances small construction activities, garages and small restaurants.

 

Women
It is very difficult to talk to women in Afghanistan. Women are forbidden to leave their houses or talk to foreigners. That complicates the financing of female entrepreneurs. Toureille says, "We have been able to recruit a few female loan officers. When they travel to clients, they need a man, possibly a brother, to accompany them." Two-thirds of the AKAM borrowers tend to be male. Since men manage larger enterprises, they also receive larger loans.

 

BRAC NGO is a big player in microfinance in Afghanistan. But BRAC Afghanistan Bank, with Triodos-Doen as a shareholder, does deal in small enterprise financing. The bank started in October 2006 with 16 employees and grew rapidly, currently employing about 72 employees. The number of outstanding loans is 152 and loans typically go towards micro and small enterprise businesses in retail trading, manufacturing and the service sectors.

 

Up to now all its clients have been male, but BRAC Afghanistan Bank is establishing a unit 'for females by females'. In 2008 the bank wants to double its balance sheet which is currently about 26 million dollars. It wants to continue to focus on micro and small enterprises which is its core strength. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payback ratio

Contrary to other microfinance institutes, ProCredit does not offer group loans. It only provides individual loans to clients since the bank prefers to use individual risk assessment to predict how much money a client can repay.

 

Judging from the statistics on the ProCredit website, paying back the loan and interest is no problem. The typical payback ratio of clients is very high with arrears in Congo of only around 2 percent.

 

However, Congo still suffers from extreme violence and Kinshasa sometimes has to shut down for a day or two. When this happens the institute is more relaxed about paying right on time, says Alexander. "In such periods people are living hand to mouth and it becomes more difficult for them to pay back on time. We take that into account, so there may be peaks of arrears in such a period."

 

Van Golstein Brouwers says that in Afghanistan clients are generally careful to pay back their loans on time. At least as far as microfinance is concerned. Since lending out larger amounts has just started, it remains to be seen whether the high payback ratio also applies to bank loans. If bank clients do not pay back on time, it may be hard to force them because of the poor legal system.

 

 

Interest

Whereas the legal system in Afghanistan is a difficult  issue, the notion of interest is causing fewer problems than van Golstein Brouwers had expected. According to Islam, it is incorrect to make money on credits. "Strangely enough, it turned out not to be an issue at all in practice," says van Golstein Brouwers. "In some areas Afghani simply give it another name. It may become an issue when commercial banks enter the fray, because they focus on profit maximization. But maximum profits are not our goal." 

 

Interest rates in microfinance and small business sectors tend to be around 25% to 35% while in the corporate/commercial sector they would be around 12%. According to van Golstein Brouwers, additional expenses for such things as security and staff training are offset by BRAC‘s efficiency, the partner of Triodos in Afghanistan.

 

AKAM says it sometimes has to explain certain religious groups that interest merely covers the costs of services and that AKAM has to generate a small surplus in order to finance its own expansion. "When we take deposits from people they can decide for themselves whether they want to receive credit on the amount."

 

Again, judging from the ProCredit statistics, interest rates vary greatly per country. In Congo they be as high as 25%, while in El Salvador they are on average about 17%. Apart from higher operating costs in a post-conflict country, a low level of competition also contributes to higher rates, says Alexander. Yet in a high-risk country, interest rates are generally higher than elsewhere.

 

 

Rapid expansion

Interest rates should at least be high enough for a financial institute to achieve a certain level of profitability since profitability is a prerequisite for expansion. Alexander stresses the importance of rapid expansion in a post-conflict country.

 

ProCredit is about to open a third branch in Kinshasa and hopes to have seven branches, spread around the country, by the end of the year. "We're opening a bank in Sierra Leone and we have been looking at Nigeria. But we won't go yet, as there is a limit to how many difficult countries we can manage simultaneously.”  

 

Expansion could take place faster if ProCredit were to submit to countries’ corruptive practices. Alexander: "For us that is not negotiable. We are transparent on principle. Nothing will be paid to anybody without an invoice for services rendered."

 

Alexander admits that this principle may make it take much longer to get basic things done such as obtaining licenses. But ProCredit will not pay bribes, a philosophy that will work in favor of the institute in the long run. "Our bank managers just have to learn to communicate this policy to government officials. They have to be firm without becoming hostile. That will enable us to build up a solid reputation.” 

Of course corruption is a problem all over the world. But in post-conflict countries the situation is even worse. However, Alexander has noticed a growing awareness on the part of central banks that corruption is just not done. "Most countries are nervous about it. They want to bring in international shareholders who have a real commitment to transparency. In the end, if there are enough voices acclaiming this, it will bring stability into these societies."

Pride

"Our bank symbolizes the ability for ordinary life to be re-established in a country after a conflict," says Alexander. " We quickly bring in ATMs, debit cards and machines so that local businesses can start accepting cards."

 

ProCredit only enters a country when it can start as a fully-fledged bank. It took about a year to obtain a license from the Central Bank in Congo, and about a year and a half in Angola. But Central Banks are increasingly recognizing the value of institutes like ProCredit, Triodos and AKAM that help to instill faith into the banking system.

 

What may be even more important is that in a place like Kosovo, ProCredit started the banking system from scratch. By doing so, it could immediately introduce responsible banking. "We set the standards for responsible banking by making sure that we are accessible and transparent. That is something I am personally very proud of."

 

In Congo, a much bigger country, ProCredit is not the only one to set the banking standards since other international banks are also active there. Their practices worry her, though. "Big banks often nose into a country and start with consumer finance, as an easy way to make profit. But I don't consider it responsible banking if you come in with consumer finance with interest rates that assume that 20 percent of the loans will default."

 

"You need well trained people for enterprise finance. We fly people from Congo to Germany for training, as there is no training available in Congo. We are also setting up a training center in Congo for bankers from the region. This is all hugely resource intensive and time consuming."

 

Alexander would like to see more public-private partnerships that can stimulate sustainable profits. She hopes that the international community is intelligent enough to support the idea that only responsible and long-term commitment will lead to a sustainable banking sector in post-conflict countries