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Islamic Housing Microfinance: Challenges and Approaches in Afghanistan Zaigham M. Rizvi 3 rd Global Islamic Microfinance Forum Oct. 6, 2013 Dubai, UAE

Housing Issues and challenges A snapshot of Muslim World

Housing is a ‘Numbers’ game – The Muslim World is no exception!  The Muslim world represents 1 of 4 humans on the planet  Nearly the same ratio in number of countries on globe  Represents 1 of 2 poor on the planet  A great challenge of widening demand/supply gap, adding to the already existing housing backlog  Most of the housing backlog and short supply is in low- income segment of the population  Population growth and urbanization are further compounding the existing urban housing backlog  Rising costs (land, construction, construction materials etc.) are making housing unaffordable for the poor

Housing Supply Challenge of Muslim World Figures speak for themselves  An IDB study (2012) suggests housing needs of the Muslim World at 8 mn units/year, nearly all in Low-Income Segment:  MENA 3.2 mn;  Asia 2.7 mn; and  Africa/others 2.3 mn.  Need for new housing of 8 mn due to population growth is based on persons/Household and population growth at 2.5%  Urban population likely to rise from 25% to 35% of total  Rapid Urbanization is a major issue in low income segment  Urbanization and population growth further increases the need for Incremental Housing in major metropolises  Supply is short and is 30-40% on new demand for housing

Housing Finance Challenges of Muslim World  As most of housing shortage is in low income segment, poor need empowerment in housing finance  Institutional Housing Finance is either non-existent or at infancy stage in most of the Muslim World (Afghanistan and some African Countries)  Slightly advanced in some others (Malaysia, Turkey, Egypt, Morocco, Indonesia, Pakistan and Saudi Arabia)  Regulatory Framework also needs major upgradation  Additional challenges include: o Role and responsibilities of Specialized Housing Finance Institutions (HFIs) and Commercial Banks (CBs) o Long Term Liquidity Facility Institutions and Instruments o Role of Capital Markets

Sharia-Compatible Housing Finance  An issue of faith e.g. Afghanistan with nearly 100% Muslim Population  Also an issue of Financial Inclusion. Even if conventional finance is available, Faith-Based clients do not avail it  Standardization and Diversification of Real Estate/Housing Products both on Asset Side and Liability Side  Limited supply and wide scope of Islamic REITS and MBS Products  Role of Islamic Banks and Windows at Conventional Banks  Need for Research and Development Center

Urban Realities – A glimpse into reality

Some Housing Solutions for Bottom of Pyramid (BoP)- Candidates for Housing Microfinance  Solutions are being attempted  Success is being demonstrated  Yet answers have no match with quantum of Issue  Much more is needed to be done Issues we know, Answers we need

Housing Micro-Finance (HMF)  Nearly 1/5 th of population (BoP) in the Muslim World is a candidate for HMF  At BoP income segment, people are more concerned for Faith- Based Finance  Issues with HMF are: o Product Design o Outreach o Housing Microfinance Regulations o Income Assessment, sustainability and seasonalty issues o Appraisal, Surveillance o Delivery; and o Recovery

Challenges of HMF  Challenges include Cost-efficient Finance, Loan Surveillance, and timely loan recovery  Manufacturing scale of production, Community- based finance etc  Credit Guarantee, Management of Default and Loan Realization

Afghanistan Issues and Answers in Housing Microfinance

Afghanistan: Socio-Economic Snapshot  Afghanistan’s current population is 31 mn plus  Kabul has a population of about 5 mn ( official estimate at 3.1 mn)  Youth population, with 2 out of 3 under 24 years of age  Three to four decades of war has partially or totally destroyed institutional, physical and economic infrastructure in major cities  State land has been illegally grabbed by elites and land mafias  Land records are either destroyed or have been manipulated  In Kabul, Land Records were recreated and computerized under USAID funded LIETRA Project and now under LARA Project  The only specialized HFI which existed in pre-Taliban era has not been revived for various reasons  Central Bank of Afghanistan (DAB) is actively working on different initiatives on housing, and is seeking technical assistance and funding support

Afghanistan: Socio-Economic Snapshot Cont’d Economic Challenges and uncertainties  GDP per capita: Official $542, Unofficial $ 785  41% of its population lives below poverty line. And one-third of its population is candidate for HMF  Economy has been largely fueled by inflow of foreign assistance since 2001, which is expected to substantially drop in Post-2014 scenario after withdrawal of allied forces  However, large segments of the population have yet to experience the tangible benefits of a growing economy Political Challenges and Uncertainties  Upcoming elections in 2014  Withdrawal of foreign forces in 2014 and resulting uncertainty in economic and peace scenario  Sustainability of Incomes, Business and Investment environment etc

Financial Sector in Afghanistan  There are 14 private and 2 state-owned licensed commercial banks operating in Afghanistan.  Serve primarily the international donors, large businesses mostly for trade finance, foreign NGOs, and a recent trend of funding commercial real estate.  The banks’ lending ability for housing finance, though very limited, is restricted to short tenors of 2-3 years  Only 5% of the population uses formal banking services in spite of the large banking sector  None of the commercial banks have assets/liability books with a tenor beyond 2 years, while more than 90% of liability books are in demand deposits, and largely Dollar denominated.  This leads to non-availability of local currency (Afs) based long term funds.  More than 90% of the population being faith-driven would only go for Islamic banking.  Currently in Afghanistan there is no financial institution specialized in housing finance.

Overview of Housing  Current population of 31 mn is projected at 140 mn by turn of the century.  Overall there is an estimated housing shortage of 1.5 mn units  Total households are 3.4 mn, with household size of 9.1  Immigrants to neighboring Pakistan and Iran were registered at 6 mn plus. The number of returning immigrants must have grown substantially over three decades (some estimates say current figure is over 25 mn).  During three decades of civil wars, most of the existing stock of housing has been largely destroyed in cities like Kabul.  New housing supply during three decades of wars has been much less than incremental demand.  A World Bank study of 2004 estimated an amount of US$ 2.4 billion to repair and/or rebuild the damaged housing in Kabul. Today, the situation is even worse.

Challenges of housing shortage – case of Kabul  Massive urbanization into 4 major cities, mostly to Kabul for economic and other reasons  Of the total population of 31 mn, Kabul has 5 mn  51% of total urban population of Afghanistan is in Kabul with a large and growing young population, seeking housing  Challenge of Returnee Immigrants from Pakistan and Iran, mostly resettling in Kabul  Growing informal settlements including Informal Hill Housing on mountains surrounding Kabul  A large part of existing housing is in need of an upgrade  Kabul’s informal settlements shelter 80% of the population and cover 69% of the residential land in Kabul

Nearly half of urban Afghanees live in Kabul

Needs of Housing Microfinance  The vast majority of the population in the low income category, relies on informal sources of finance like friends, relatives, and moneylenders, as is prevalent in over 85% of economic activity in Afghanistan  These considerations and large market potential suggests a micro and low-income housing finance approach, mostly oriented towards home improvement loans.  The microfinance sector, which is gaining momentum in Afghanistan, is making initial efforts to expand into low- income housing  Potential demand in Micro and SME finance is considerable, since four out of five people fall at bottom of income/affordability pyramid  Estimates suggest a total financing need of $276 million per year for home improvement and new construction in Kabul’s informal housing sector

Housing Supply Continuum Three segments:  Luxury Housing: Supply of luxury housing for high end segment has seen a momentum, in some major metropolises, mostly in Kabul.  Affordable Housing: Commercial scale supply of affordable housing for middle income segment is practically nil. Some programs do exist to build such housing for civil servants, teachers, and security forces, while on-ground progress is nil.  Micro-housing for Bottom of Pyramid: Growing informal settlements and need of rural poor is mainly met by donor driven NGO initiatives that are active in both urban and rural micro-housing

Kabul Housing: From Luxury to BoP

Microfinance  Overall one out of four, and in urban areas one out of two, are at BOP, earning less than $ 200 pm.  In Kabul, close to 90% of the population is a candidate for Low-Income and Housing Microfinance.  Housing microfinance is a major need and challenge of rural Afghanistan  The microfinance sector is active and is largely funded by the Microfinance Investment Support Facility for Afghanistan (MISFA).  MISFA now supports 15 microfinance institutions, operating in 23 provinces and 111 districts.  First Microfinance Bank of Afghanistan (FMFB-A) is a lead among Microfinance Institutions (MFI) operating both in Urban and Rural housing microfinance  FMFB is the top client of MISFA as well

M ICROFINANCE I NVESTMENT S UPPORT F ACILITY FOR A FGHANISTAN (MISFA)  MISFA commenced its operations in 2003, with the primary objective to promote and support microfinance lending and entrepreneurship development in Afghanistan.  MISFA provides funding support to MFIs, NGOs and other institutions in their lending operations.  It also serves as supervisory agency for its clients  In MISFA decisively entered into housing microfinance business.  MISFA is operating in 80 Districts of 23 Provinces  Its outstanding housing portfolio was Afs 135 million as of March 2010, and by May 2013 it had reached Afs 745 million

First Micro-Finance Bank (FMFB)  FMFB started its operations in 2004 under a commercial banking license, with a business focus on microfinance  With an equity capital of $6 million, it is 51% owned by Aga Khan Foundation, along with IFC, KFW and others  FMFB’s individual loans include consumption loans, loans for trade finance, services, agriculture, SME, and housing finance.  FMFB has a network of 45 branches, 17 of which are located in rural areas, covering 14 provinces  With support from the IFC, FMFB has developed a housing microfinance loan product  FMFB is the only financial institution that has successfully launched a rural housing microfinance product in 2010/11 with Technical Assistance and support of USAID, IFC and Aga Khan Foundation  Percentage of women borrowers: 19%  Average loan size in urban areas: $ 1,801  Average loan size in rural areas: $ 801

First Micro-Finance Bank (FMFB)  At present, housing loan products are offered across FMFB-A’s branch network  FMFB-A is the market leader with a total outstanding portfolio of $80 million and an active client base of more than 60,000.  Kabul has the highest average loan disbursement of $1,822 for urban while Mazar-e-Sharif for rural equalling $968 in 2012  The pilot of the rural housing product also concluded in the last quarter of 2012 with branches being able to achieve 99% of the targeted 200 loans  Seasonal repayments emerged strongly as a key need for rural clients, given the seasonality of their income. It is expected that this module will be installed across FMFB-A by mid  FMFB-A is the only financial institution in the country that offers a housing improvement product, which constitutes about 17% of its micro finance portfolio (by value).  As of December 2013, FMFB-A has disbursed 18,857 housing loans amounting to over $33.6 million.

Issues we know – Answers we need  Generally Political Sloganasm  “Housing for all”,  “Slums Free Cities”,  “Maang Raha hai har Insaan-Roti, Kapra, aur Makan” (every individual is demanding for bread, clothe and house), and so on……  In some countries delivery on these slogans is SOME, and in most it is NONE  Every country is facing a common issue of “shelter less poor” with an ever increasing backlog  Recent uprising in the ME has shown that even affluent economies are no exception  Regional successful models are to be shared and indigenized  IDB may assist Al-Huda to set up a digital and physical platform for country specific Data, Information and Business Models on HMF  Islamic Development Bank to play a pivotal role in promoting sharia- compliant housing finance, more so in housing micro-finance

Urban congestion: hard to imagine Railway Train-track Veggie Market 

This document is prepared by Mr. Zaigham Mahmood Rizvi for the sole purpose of providing a presentation to the 3 rd Global Islamic Microfinance Forum held on October 6, The information contained in this document has been compiled by Mr. Rizvi from self study and from different sources. He is grateful to all those serving this noble cause in some form or the other. Thank you. Zaigham M. Rizvi Expert Consultant Housing: The World Bank Senior Adviser Housing: ShoreBank Int’l USA Secretary General: Asia-Pacific Union for Housing Finance-APUHF (

192 Ahmad Block, New Garden Town, Lahore - Pakistan. Ph: (92-42) , Fax: (92-42)