May 23, 2011

Innovative Loans Let Afghan Farmers Plant, Grow, and Harvest Prior to Repaying

Small commercial farmers in central Bamyan Province, Afghanistan, celebrated a landmark last month when they gained access to farm credit for the first time. Using loans from the Afghan government they will not have to repay until after their harvests, the nearly 440 potato farmers purchased seeds and fertilizer for spring planting.

The loans, worth $926,750 and made through eight farming cooperatives, were made possible by the Afghanistan Agricultural Development Fund (ADF), which is implementing a grant from the U.S. Agency for International Development (USAID).

At a late April ceremony in Katway Village, Minister H.E. Mohammad Asif Rahimi of the country’s Ministry of Agriculture, Irrigation, and Livestock praised how farm credit linked and strengthened farmers, food exporters, and food manufacturers.

“Credit brings knowledge, money, and machinery to our farmers when they need it, where they need it, and on realistic terms at affordable costs,” Rahimi said. “It makes our farmers more prosperous and our cooperatives more powerful and effective.”

More than 700 farmers from 11 cooperatives applied for the ADF loans, but loans were considered only for commercial members with more than 4 jeribs (about 2 acres) of land dedicated to potato growing.

Rahimi said farm credit works best for farmers who need to borrow against future harvests as compared to loans that require repayment to begin immediately or charged high interest.

With support from Sharia scholars, the ministry’s agriculture experts, and the DAI-led Afghanistan Agricultural Credit Enhancement Program funded by USAID, the ministry built a system for farm lending that respects modern, responsible Islamic lending practices.

The ADF lends to intermediaries that work directly with farmers: banks, microfinance institutions, credit unions, leasing companies, farm stores, cooperatives, and large Afghan agribusinesses. The ADF establishes how these intermediaries can lend and to whom, helping ensure that the farmers who borrow will be able to repay. Agribusinesses and coops, for example, want loans to help farmers improve their crops or perform better grading and packaging so that they and the farmers make more money.

The ADF studies business plans submitted by prospective borrowers, rejecting impractical ones and sometimes helping promising applicants craft better ones. Together they decide when the debt can realistically be repaid. The Bamyan potato farmers used a variant of murahaba, an Islamic financial product in which the cooperatives procured agricultural inputs sold to farmers at a markup that the ADF and cooperative share.

“If the ADF lends unwisely, maybe to a good institution with a bad business plan, then the lender suffers, the borrower suffers, and so do all the other farmers and agribusinesses that need loans,” Minister Rahimi said.

The potato farmers were given terms of seven months or 11 months after harvest to repay their loans, which averaged about $116,000 per cooperative, or $2,116 per farmer.

The loans are forecast by the ministry’s technical experts to increase the cooperatives’ output by 18 percent. The farmers are also using production and postharvest handling technologies not common among potato producers in Afghanistan, such as the use of certified potato seed, high-density planting, and potato cellars for long-term storage. ADF’s technical assistance team is also advising borrowers on growing, harvesting, and sales to enhance their likelihood of success and repayment of loans.

The ministry is facilitating the transition of agricultural financing in Afghanistan from farming subsidies and grants to fully commercial financial services.

“Government can be slow,” Rahimi said. “Sometimes it seems like a buffalo in a horserace. This time was different. Now, seven months into the project, Afghanistan has its institution—the ADF—it has its systems and its partners, and it is lending to farmers and agribusiness.”

So far the ADF has lent more than $16 million out of an initial grant of $100 million. Loans made in Jalalabad are helping a local business manufacture farm equipment to compete against Pakistani and Chinese imports; across northern Afghanistan, ADF loans are helping the Almond Growers Association and its many members; and in Kabul and Parwan, ADF loans are financing grape-trellising that has increased production dramatically.