A Brief Overview of the Regulation for Monitoring and Supervision of Microfinance Institutions

Introduction

Unemployment is a significant challenge to the economic growth and development of any society. It is the responsibility of governments to take effective measures to address this issue. Recognizing the problem of unemployment in Afghanistan, the Islamic Emirate has taken fundamental steps to resolve it. Among these efforts, on November 13, 2024 Da Afghanistan Bank organized a national conference titled “National Conference on Microfinance: Opportunities and Challenges”. This conference aimed to encourage investment and create job opportunities, during which the regulation for monitoring and supervision of microfinance institutions was introduced. Below is an overview of this regulation.

Foundation

For the first time, Da Afghanistan Bank has established a comprehensive regulatory framework for the organization and management of microfinance institutions. This framework is based on Articles 70 and 123 of the Central Bank Law. The regulation facilitates the establishment of microfinance institutions at national, regional, and provincial levels.

Objectives

The Islamic Emirate considers reducing poverty and unemployment as one of its core responsibilities and priorities. In line with this, the Central Bank has formulated a regulation to supervise and regulate microfinance institutions to support small businesses and create new employment opportunities. The primary objectives of this regulation include: establishing, maintaining, and monitoring a responsive, transparent, and sustainable ecosystem for the microfinance sector to improve the economic well-being of people, especially the underprivileged, creating the necessary administrative structure for the systematic development and sustainable growth of the microfinance sector,   issuing, renewing, suspending, or revoking licenses for microfinance institutions and other entities operating in the sector, and regulating and monitoring the performance of microfinance institutions and their supporting entities.

Scope of Application

This regulation applies to microfinance institutions (non-deposit-taking) and facilitating organizations that directly or indirectly support microfinance activities. Additionally, it is applicable to commercial banks and branches of foreign banks seeking to provide microfinance services through specialized windows.

Licensing Conditions

Individuals or entities wishing to provide microfinance services or seeking authorization to begin operations must obtain a license from the Central Bank before commencing activities. Applicants can obtain application forms from the Central Bank’s headquarters, provincial branches, or its official website. License applicants must: sign a commitment form after verification, submit the necessary supporting documents to the Central Bank for review within 60 days. Incomplete documents must be corrected within one week after receiving notification.Beaides, they must develop a comprehensive business plan that includes details of shareholders, institutional capital, funding sources, available budget for microfinance operations, allocation of resources, and plans for capacity-building training programs for beneficiaries. The business plan must also outline projected revenues, risk management strategies, and development and sustainability programs for at least three years. Additionally, microfinance institutions must register under a unique business name with the Intellectual Property and Central Registration Directorate of the Ministry of Industry and Commerce.

Organizational Structure

Microfinance institutions must adhere to principles of accountability, transparency, and sustainability in their operations. This includes establishing appropriate systems and policies, following Da Afghanistan Bank’s guidelines, and complying with the requirements outlined in this regulation. Institutions may hire staff or engage with advisory firms for Sharia-compliant financial guidance, ensuring that their services align with Islamic principles. Advisors must hold at least a master’s degree in Islamic jurisprudence or related fields.

Conditions for Loan Disbursement

Microfinance institutions are prohibited from disbursing loans exceeding 1,500,000 Afghanis to a single client. They must assess the borrower’s repayment capacity and act in accordance with their internal policies. Institutions are required to implement customer identification measures, adhere to anti-money laundering laws, and comply with regulations for preventing terrorism financing. Loans exceeding 20,000 Afghanis must be registered electronically, and borrowers must possess valid electronic identification cards. New loans cannot be issued to borrowers with outstanding debts from other microfinance institutions unless the prior loan is cleared. Second-category loans must not exceed 40% of the institution’s loan portfolio, of which 10% may be allocated for loans exceeding 1,000,000 Afghanis. Da Afghanistan Bank may adjust allocation criteria to enhance public access to microfinance services based on specific needs. All transactions must be conducted in Afghanis (AFN).

Conclusion

The Islamic Emirate prioritizes reducing poverty and unemployment while creating job opportunities for its citizens. Accordingly, the regulation for the supervision and monitoring of microfinance institutions has been introduced to formalize and develop this sector. Microfinance serves as a financial tool for low-income individuals and communities to generate income through business and economic activities. Establishing regulations for this sector plays a vital role in promoting order and transparency. The implementation of this regulation by Da Afghanistan Bank is expected to enable numerous microfinance institutions to commence operations, offering financial support to thousands of people for starting businesses. This will significantly reduce unemployment while attracting foreign currency, investments, and expertise from developed nations, ultimately strengthening Afghanistan’s national economy.