Islamic finance a boost for USAID's Afghan farm fund
SYDNEY, Feb 7 (Reuters) - Economic instability and legal obstacles have slowed the introduction of modern forms of Islamic finance in Afghanistan. But sharia-compliant loans are beginning to play a role in the farm sector through a U.S.-funded aid programme.
The Afghan government is using Islamic financial contracts to extend credit to farmers in areas where conventional banking has not fully satisfied demand for funds.
The Agricultural Development Fund (ADF), set up in 2010 through a $100 million grant from the U.S. Agency for International Development (USAID), offers both conventional credit and Islamic financing.
About $11 million of its loans approved between May 2011 and April 2012, or 70 percent of them, were sharia-compliant, the ADF says. Islamic finance obeys a religious ban on payment of interest and instead pays lenders with returns on real assets.
Demand for such financing has been particularly strong in rural communities because people there tend to be conservative, said Juan Estrada-Valle, acting chief executive of the ADF.
In Afghanistan's conventional banking sector, official lending rates hover around 15 percent, according to the World Bank, and farmers have been forced to buy agricultural inputs from traders on credit at inflated margins that in some cases exceed 40 percent.
"Credit has the potential to revolutionise Afghan agriculture, enabling commercial farmers and other agribusinesses to grow at a rapid pace and contribute to the growth of rural communities," Estrada-Valle said.
The ADF has had to overcome perception problems with its Islamic contracts. Some customers and their religious advisors were under the incorrect impression that Islamic loans should be free or cheaper than conventional ones.
While customers already knew of Islam's prohibition on interest, borrowers had to be educated about other principles including the fact that non-payment by a solvent borrower is a sin, Estrada-Valle said.
The ADF's loan portfolio includes an all-women saffron association in Herat, apple farmers in Wardak province, and an industrial-scale producer of agricultural machinery in Jalalabad.
As of October 2012, the ADF had provided loans to more than 15,000 farm households in 30 of Afghanistan's 34 provinces; it says it expects to reach 60,000 farmers by the end of 2014.
Its Islamic contracts follow the Hanafi school of thought, the predominant version of Islamic law in Afghanistan. The fund has so far developed five sharia-compliant contracts which cater to specific needs, said Natalie Schoon at British-based financial consultancy Formabb, who was involved in the project.
One contract incorporates a down payment to allow hiring of labour and tools for the harvest period; others are designed bearing in mind crop cycles.
Estrada-Valle said the ADF initially intended to make funds available to local financial institutions for on-lending to agricultural enterprises, but the financial institutions appeared not to have any appetite for this.
So the ADF changed its focus to lending through non-financial institutions to farmers as well as agriculture-related enterprises; typical intermediaries include associations, cooperatives and large-scale farm stores.
A law covering independent Islamic banks has yet to be approved by Afghanistan's parliament, and this is hindering the overall development of Islamic finance in the country. But since the ADF was set up as a fund, it is not subject to banking regulations, Schoon said.
Last May, the central bank said it was considering issuing short-term Islamic bonds, or sukuk, to help the government raise money and develop the financial markets.
(Editing by Andrew Torchia)