Developing a Housing Microﬁnance
Product: The First Microﬁnance Bank's
Experience in Afghanistan
Table of Content

Executive Summary ...................................................................................................................................................................... 4
1. Lessons learned from FMFB-A’s experience .......................................................................................................... 6

A. Background and Context ........................................................................................................................................................ 7

B. Afghanistan’s Housing Challenges at the Outset of the Project ........................................................................ 8

1. A stabilizing economy ................................................................................................................................................... 8

2. An underdeveloped ﬁnancial sector ....................................................................................................................... 8

3. A signiﬁcant housing gap exacerbated by a weak enabling environment ............................................... 9

4. A pent-up demand for housing microﬁnance .................................................................................................... 10

5. A greenﬁeld market for housing ﬁnance .............................................................................................................. 11

C. FMFB-A’s Strategy to Enter the Housing Finance Market .................................................................................... 12

D. Phase I – Market Research and Product Design ......................................................................................................... 13

1. Detailed market and design study ............................................................................................................................ 13

2. Internal capability evaluation .................................................................................................................................... 13

3. Product design ................................................................................................................................................................ 14

4. Business and implementation plan (including market entry strategy) ...................................................... 15

E. Phase II – Pilot Test and Nation-wide Launch ............................................................................................................... 16

1. Pilot Test ............................................................................................................................................................................ 16

2. Results of the pilot phase ............................................................................................................................................ 16

3. Nationwide roll-out of FMFB-A’s HMF product o ering ................................................................................ 20

4. Portfolio performance in the ﬁrst year of the national roll-out (2010) ...................................................... 21

F. Phase III – Consolidation and Expansion of the National Roll-out

Strategy (2011 – 2013) .................................................................................................................................................................... 22

G. Key Takeaways and Lessons Learned ............................................................................................................................... 24

1. Challenges remaining in the housing and housing ﬁnance sectors ............................................................. 24

2. Lessons that can be applied to other countries ................................................................................................. 24

3. Current state of FMFB-A’s housing ﬁnance operations .................................................................................. 25

H. Annex 1 – IFC’s Global Housing Microﬁnance Toolkit ............................................................................................... 27

I. Annex 2 – Outline of training provided to FMFB-A sta ......................................................................................... 28

J. Annex 3 – Construction Technical Assistance (CTA) services ................................................................................ 30

K. Annex 4 –Linkages between Construction Technical Assistance

and Financial Services .................................................................................................................................................................. 31

L. Annex 5 – Lessons and Trends in Delivery of Construction Technical Assistance ...................................... 32

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 1
Abbreviations
AKAM Aga Khan Agency for Microﬁnance

AKPBS Aga Khan Planning and Building Services Pakistan CTA

CTA Construction Technical Assistance

FMFB-A First Microﬁnance Bank of Afghanistan

GI Galvanized Iron

HF Housing Finance

HIL Home Improvement Loan

HMF Housing Microﬁnance

IFC International Finance Corporation

KFW German Development Bank

LO Loan O cer

MCB Mortgage and Construction Bank

MENA Middle East and North Africa

MFI Microﬁnance Institution

MISFA Microﬁnance Investment Support Facility for Afghanistan

NGO Non-governmental Organization

PAR Portfolio At Risk

SWOT Strengths-Weaknesses-Opportunities-Threats

USAID U.S. Agency for International Development

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 2
Acknowledgements
This paper has been sponsored by the Knowledge Management Project, an initiative spearheaded by the Micro nance
Advisory Services unit of IFC Middle East and North Africa. The project aims to raise awareness among micro nance
institutions about the importance of risk management, product development, and transformation.

The project team received support from many quarters in preparing this study. We wish to thank Nahla El-Okdah, IFC, whose
suggestions during the writing process helped shape this report. We would also like to thank Mohammed Ali H. Khaled,
Matthew S. Leonard, and Karen Beshay (all from IFC) for their invaluable input.

We would also like to recognize the kind support of FMFB-A management, especially Naeem Razwani, whose insights were
essential to this report.

We are also grateful to Lauren Moser from Enclude, who offered advice about her engagement with FMFB-A as a consultant.

While these individuals provided invaluable assistance to the team, the authors are solely responsible for this report. The
statements herein are the authors’ alone and do not necessarily represent the views of the World Bank Group, its Board of
Executive Directors, or the governments they represent.

Dr. Friedemann Roy, Lily Hua Qin,
Senior Housing Finance Specialist Consultant to the Global Housing Finance Program

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 3
Executive Summary
The objective of this case study is to document an example to develop an HMF product at FMFB-A started in 2007 as
of the successful design and implementation of housing a response to client demand. Its aim has been to increase
micro nance (HMF) products by analyzing the approach access to housing micro nance for Afghanistan’s
taken by the First Micro nance Bank of Afghanistan low-income households in urban and rural areas. It also
(FMFB-A) from 2009 to 2013. This report aims to sought to improve the quality of housing for this segment
encourage other lenders to follow suit and offer by offering construction technical assistance (CTA) services.
housing-related loans to low-income earners. It is part of
IFC’s MENA Micro nance Knowledge Management The launch of the HMF product offering was organized in
project, which aims to raise awareness among micro nance three phases.
institutions (MFIs) about the importance of risk
management, product development, and transformation. 1. Phase I – Market research and product design
(2007-2008). As FMFB-A was the rst lender to launch
FMFB-A was established in 2003 with the mission to HMF products, detailed market research was vital to
reduce poverty and promote nancial inclusion by developing its offerings. Additionally, FMFB-A conducted
providing its clients with access to nancial services. an internal capability evaluation.
Shareholders of FMFB-A are the Aga Khan Agency for
Micro nance (AKAM), Aga Khan Foundation USA, the 2. Phase II – Pilot test of the newly-designed HMF product
German Development Bank (KfW), and the International in select branches (2008-2009). Four branches were
Finance Corporation (IFC). FMFB-A has a nation-wide selected to test the product design. FMFB-A then re ned
presence in Afghanistan and serves over 53,000 clients with the initial product offerings and adjusted its business plan.
an outstanding portfolio of $64.5 million (as of March,
2015). Housing nance accounts for about 17% of its total 3. Phase III – Consolidation and expansion of the national
portfolio (about $8 million as of December 2014). FMFB-A roll-out strategy (2011 – 2013). After the successful
is currently the only MFI in Afghanistan that offers a launch of the HMF product in urban areas, FMFB-A
housing micro nance product. developed a rural product and moved into rural
geographies along with the introduction of CTAs.
FMFB-A implemented a rigorous, albeit exible, approach However, prior to that, additional market research was
to the roll-out of its HMF products in Afghanistan. The idea done to understand the clients' needs and also the demand
for CTAs in rural areas.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 4
The factors critical to FMFB-A’s success included:

• Thorough market research and an internal review, which allowed the institution to better understand the
dynamics of Afghanistan’s housing market and FMFB-A’s own capabilities;

• Appointing an “HMF product champion” whose primary responsibility was to manage this process;

• Conducting a critical review of the pilot,which helped hone the HMF products and FMFB-A’s marketing
approach.This review allowed for a successful national roll-out in the rst year; and

• Continuous review of the performance of the HMF products by management. FMFB-A’s management has
measured the success of the HMF product development process by using the indicators captured in Chart 1.

Chart 1 Evaluating FMFB-A’s Success in Rolling-out HMF Products

Phase I. HMF Marekt in 2008 Phase II. HMF product launch (2009-2010) Phase III. Consolidation and
• Market research, internal • Pilot, review and adjustment expansion (2011-2013)
capability analysis, product • National roll-out of improved product • Roll-out in rural areas
design, market entry strategy, design • Offer of housing support services
business planning • Reﬁnement of business plan

Timeline

2008 2009 - 2010 2011 - 2013

Improved quality of Viable housing micro nance Customer and future strategy
housing for clients indicators product established
• Customer Satisfaction
• Features
• Number of houses/structures with • Operational Self Sufﬁciency for • Delivery
improved seismic resistance housing products • Cost
• Operational Satisfaction
• 30-day PAR for housing loans • Head Ofﬁce
• Number of houses with improved
• Field
sanitation and/or drainage facilities • Strategic Implementation
• Technical Service
• Average cost savings over time per Advisory
client adopting upgrades and/or • Comparison of Urban TA
improved construction techniques against Rural implementation

Key criteria for market entry Additional considerations
for product improvement
Source: FMFB-A, authors

Following the market assessment, the goal of the rst phase was to design a product that catered to the needs of low-income
earners in the informal sector and also allowed for a return. It was also important that the HMF products were well integrated
with the existing organizational set-up. The pilot assisted in verifying whether the proposed offerings complied with these
criteria. Key indicators to measure the success were operational self-suf ciency and better housing conditions for borrowers.

The goal of the second phase was to develop a new product and tap into new market segments so that FMFB-A could
maintain its competitive edge and meet the needs of its rural clients. At that time, FMFB-A actively offered CTA services to its
clients to increase the value of its HMF products. Key indicators to measure the roll-out progress were customer and staff
satisfaction as well as continued operational sustainability and pro tability.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 5
Following this strategy, FMFB-A has managed to improve housing conditions for the Afghan people in the areas where it is
operating. It has also successfully developed a replicable and scalable HMF model. Within ve years, its portfolio grew from
$500,000 to $11 million. FMFB-A also increased its share of female borrowers while portfolio quality, measured by PAR
ratios, remained at the levels FMFB-A recorded for its micro loans. It is likely that FMFB-A will play a leading role in the
Afghan HMF market for the foreseeable future.

Lessons learned from FMFB-A’s experience
a. First-mover strategy wins time, nancial resources, and market recognition. With no existing competitors in the
HMF sector, FMFB-A entered the market with a “ﬁrst-mover” advantage. Being the ﬁrst provider of HMF loans
allowed FMFB-A to meet customer needs, acquire superior brand recognition, and build customer loyalty. It also
gave the lender time to perfect its products and services.

b. Product design should be based on market demand, a client needs assessment, and an internal capacity
evaluation. Before rolling out the HMF products and before launching its construction technical assistance,
FMFB-A conducted market surveys, which were used to design the product prototype. The pilot was used to re ne
product features and marketing strategies for further roll-out. FMFB-A exerted extensive effort to understand the
market demand for this product

c. A critical review of the pilot project can ensure a successful national roll-out. During the pilot review, FMFB-A
learned that some product features required changes before a national roll-out could be considered. For example,
the loan size sought by customers was higher than FMFB-A initially projected. This experience of “testing the
water” provided valuable insights into the market and FMFB-A’s internal capacity. That was instrumental in
tailoring products to customer needs and strengthening internal infrastructure to prepare for the product
expansion.

d. A concise marketing strategy is key to customer outreach. When a product is not well known, the choice of a
marketing strategy is key to ensuring broad customer outreach. Marketing strategy, both internal and external,
should be tailored to the characteristics of the targeted audience in order to achieve maximum effectiveness.

e. Offering CTA services can increase customer satisfaction and enhance loan quality. FMFB-A found that
construction costs in Afghanistan were rising and many clients were unaware about how to build safely. So, it
advised home owners on construction techniques, building materials, sanitation, ventilation, energy ef ciency, and
ways to prevent earthquake damage. Combining the loan offering with construction technical assistance helped
raise awareness about safe construction, reduced future repair costs, and potentially improved the quality of the
loan.

f. A scarcity of quali ed staff requires strategic internal capacity building and a smart allocation of talent. In order
to build up in-house technical expertise, increase outreach to female customers, and maintain staff skills, FMFB-A
had to deploy its employees strategically to maximize resource utilization. It made a conscious effort to recruit
more female loan of cers, and offered continuous training.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 6
A. Background and Context
The First Micro nance Bank of Afghanistan (FMFB-A) was established in 2003 with the mission to reduce poverty and
promote nancial inclusion by providing its clients with access to nancial services. It has been supported with the nancial
and technical resources from multiple international development agencies, such as the Aga Khan Agency for Micro nance
(AKAM), International Finance Corporation (IFC), the German Development Bank (KfW), and the U.S. Agency for
International Development (USAID).

Over the years, FMFB-A’s operations have grown from a single credit product to nance the short-term needs of
microenterprises to more diversi ed offerings reaching an ever-broadening segment of bene ciaries. Seeking to increase the
availability of quality housing to low-income earners, FMFB-A successfully developed, launched, and operated a housing
micro nance (HMF) product line coupled with construction technical assistance. To date, FMFB-A is the only nancial
institution in the country to offer HMF products, which are now available in 21 urban and six rural branches throughout
Afghanistan.

This case study presents FMFB-A’s experience in developing and implementing HMF products and covers the period from
2008 to 2013. It aims to provide guidance to other lenders on how to offer such products.

The case study provides an overview of the economic environment in Afghanistan and looks at the housing and housing
nance markets.Then, it focuses on FMFB-A’s product development and implementation process from pilot, to roll-out, to
expansion. The last section summarizes the key lessons learned by FMFB-A, which may provide guidance to micro nance
institutions in other regions that are considering HMF products.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 7
B. Afghanistan’s Housing Challenges at the Outset of
the Project
At the outset of the project, in 2008, Afghanistan was characterized by the following features:

1. A stabilizing economy

After more than three decades of wars, internal con icts, and violence, Afghanistan was left in tatters. However, thanks to
foreign aid and some political stability, the economy had slowly begun to recover. In 2008, GDP grew by 3.6 percent and in
2009 by 21 percent. Despite that, structural conditions for sustainable growth were largely absent and the challenges remained
signi cant. Afghanistan remained one of the poorest countries in the world with a per capita GDP estimated at only $325 and
its social indicators were some of the lowest in the world. While economic growth rates were high, approximately 80-90
percent of economic activity was estimated to be informal, human capital was poorly developed, and the bulk of investment
and development activity, as well as a large portion of recurrent expenditures, were still nanced through international aid.1

Table 1. Key Population Indicators

Population 27 million (2008)

Population growth rate (average annual) 3.4% (2001 – 2008)

Population aged 0-14 49% (2008)

Source: World Bank

2. An underdeveloped ﬁnancial sector

At the outset of the project, the formal nancial sector in Afghanistan was underdeveloped and very fragile. The micro nance
sector was characterized by rapid growth with weak institutions, which eventually led to a repayment crisis in 2008. The crisis
was a result of rapid client outreach, which had come at the expense of proper due diligence in lending, compliance with
internal control processes, and internal monitoring of performance. In addition, although the banking sector appeared
relatively stable at the time, a few years later, it suffered from the Kabul Bank crisis2 , which was a byproduct of inadequate
supervision by the country’s central bank. Given this weak nancial landscape, access to nancial services for the Afghan
population was and remains rather limited. At the individual level (in 2008), only 9 percent of those aged 15 and above have
an account with a formal nancial institution3 . Similarly, only 3.4 percent of rms in Afghanistan hold a bank loan or a line
of credit and only 1.4 percent of Afghan rms use banks to nance their investments4 .

1
C. Ward, D. Mansﬁeld, P. Oldham and W. Byrd, Afghanistan – Economic Incentives and Development Initiative to reduce Opium Production, World Bank and
DFID, February 2008, p. 1.
2
Kabul Bank held about one-third of the of the banking system’s assets of $4 billion. The government had to shoulder $825 million for the cost of the
lender-of-last-resort facility loans that covered the deposit guarantee. Kabul Bank was subsequently put into receivership, revoking shareholders’ rights
altogether. The bank’s deposits and good assets were then transferred to a bridge bank, New Kabul Bank, whose privatization is ongoing.
3
Global Findex Data, 2011
4
World Bank, 2008

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 8
3. A signiﬁcant housing gap exacerbated by a weak enabling environment

In 2008, the housing market was characterized by large unmet demand, a severely damaged housing stock, few new affordable
housing developments and, as a result, a massive expansion of informal settlements. Table 2 provides some key data on the
housing and housing nance sectors in Afghanistan in 2008.

Table 2. Key Indicators of the Housing and Housing Finance Sectors in Afghanistan

Number of people living in urban
23 percent(2008)
areas (percentof total)

1 million units (2006);
Housing deﬁcit
1.5 million units (2014)

Mortgages/GDP < 1 percent

There was a large demand for housing for several reasons:
• Population growth and rapid urbanization created huge demand for housing in urban areas. Since 2001, the
country had experienced a steep rise in its population and most of the growth had happened in urban areas.
and in certain provinces: Kabul, Herat, Nangarhar, Balkh, and Kandahar. By 2008, about 23 percent of the Afghan
population lived in urban areas5. Attracted by improved employment prospects, people were moving to cities and
district towns. For example, in Kabul, where an estimated 700,000 returnees had settled since 20016 , the
population grew by 15 percent a year between 1999 and 2002. It would continue to grow by at least 5 percent a
year as a result of migration and natural growth7.

• The relatively high percentage of young people also created a high demand for housing. With the youngest
population in the world – an estimated 57 percent under the age of 188 - the demand for housing was expected to
increase further as these young people began to seek jobs and start families in cities.

• The increase in the return of refugees from the Islamic Republic of Iran and Pakistan, estimated at about 6 million,
aggravated the housing problem in Kabul as well as other large cities, such as Jalalabad, Mazer-e Sharif, and Kandahar.

On the supply side, most of the housing stock was damaged or destroyed in con icts or Afghanistan’s frequent earthquakes. In
addition, Afghanistan suffers from a lack of building codes and appropriate construction material. Since a construction
industry had barely existed in the country, most of the materials had to be imported, making houses more expensive.

In urban areas, the housing shortage led to an expansion of informal settlements with no access to basic services (see Figure 1).
It was estimated that 75- 80 percent of homes were without access to water9. A World Bank assessment in Kabul showed that
informal settlements provided shelter for 80 percent of the city’s population (2.44 million people), covered 69 percent of its
residential land, and with the land value excluded, represented xed private capital investment of $2.5 billion10. It was also
estimated that in the informal settlements (legal and illegal) of Kabul, with mostly self-constructed dwellings, more than
two-thirds of houses were occupied by more than one family. A study by the Aga Khan Trust for Culture reported that almost
9 out of 10 families in informal housing lived in only one or two rooms11.

5
Ministry of Economy, 2005.Population Census of 1384. Kabul.
6
UNHCR (United Nations High Commissioner for Refugees), Statistics Division; Pakistan, Population Census Organization; and Pakistan, Ministry of States
and Frontier Regions, 2005. Census of Afghans in Pakistan, 2005. Islamabad: United Nations High Commissioner for Refugees.
7
World Bank, 2005. Kabul Urban Land Crisis: A Summary of Issues and Recommendations. Kabul Urban Policy Notes Series, no. 1. Energy and Infrastructure
Unit, South Asia Region, World Bank, Washington DC.
8
Islamic Republic of Afghanistan, 2005. Interim Afghanistan National Development Strategy: An Interim Strategy for Security, Governance, Economic Growth
and Poverty Reduction. Vol. 1. Kabul.
9
S. Farhan Fasihuddin, Housing Microﬁnance Capacity Building in Afghanistan, Presentation given at FinNet Meeting 2011.
10
World Bank 2005. Why and How Should Kabul Upgrade Its Informal Settlements? Kabul Urban Policy Notes Series, no. 2. Energy and Infrastructure Unit,
South Asia Region, World Bank, Washington, DC.
11
Aga Khan Trust for Culture. 2006. Baghe Babur &GozarGah Area Survey Initiative, Preliminary Report. Historic Cities Program, Kabul

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 9
Despite the enormous need for housing, only a few new housing developments were under way. Housing initiatives were
subsidized through free land allocation and were not targeted at those who needed housing support most. Instead, they were
directed at middle-class residents with businesses or salaried employment. The price of housing was further exacerbated by
costly imported materials, unskilled labor, and a lack of low-income housing developers.

A poorly functioning and inappropriate legal and regulatory regime had prevented nancial institutions from entering the
housing nance market. Given the lack of bankable titles and an ef cient land administration, lenders faced dif culties
inregistering mortgages. Women faced particular challenges in gaining ownership of or title to property. The typical way for
a woman to obtain home ownership was through inheritance. As men were typically the legal holder of the property, access
to nance was restricted for women, especially in cases where lenders required property as collateral12.

In addition, it was not possible to foreclose on a property without court orders and these proceedings took a very long time.
Limited knowledge of housing nance products and restricted access to long-term liquidity in local currency were other
important constraints. As a result, the housing market represented for lenders an overly risky proposition.13

4. A pent-up demand for housing microﬁnance

As conventional mortgages were not available in Afghanistan the vast
majority of the population relied on informal sources for their housing
nance needs. As much as 70 percent of the world’s population access shelter
through “incremental building”, a process of slowly improving shelter by
adding components of a house. This process of incremental building leads The Afghan Microﬁnance Sector
many clients of micro nance institutions to divert business loans for this
purpose. This reinforces the fact that there is demand for housing The micro nance sector in Afghanistan
micro nance products. had been growing signi cantly in recent
years. In 2003, the Micro nance
Unlike traditional mortgages, housing micro nance relies on not only the Investment Support Facility for
property as collateral (given that there is often uncertainty surrounding Afghanistan (MISFA) was established as
title), but also on an assessment of the client’s creditworthiness that takes an apex institution with the primary
into account the incremental building approach. objective of promoting micro nance
lending and entrepreneurship. MISFA
Given the country’s severe housing shortage and large size of informal currently supports ve micro nance
settlements, as well as the challenges facing the development of the formal institutions, including FMFB-A,
mortgage market, this micro-lending approach, which speci cally targets operating in 23 provinces and 111
home improvements and basic construction, was a more feasible vehicle to districts.
provide much-needed nance to low-income groups. Moreover, the
micro nance sector had a comparative advantage of a country-wide branch While nancial services are expanding,
network as well as experience in handling borrowers with informal income these institutions have yet to broaden
sources. HMF also provided an opportunity to improve access to nance for their offerings to meet new demand,
female borrowers as loans could be granted, using title deeds as collateral including an appetite for housing
which belonged to their husbands or close relatives. nance and mid- to long-term loans.

As mentioned earlier, up until 2008, no MFI offered speci c HMF products. At the end of March 2008, the Afghan
However, the size of the unof cial HMF market was estimated at about $21 micro nance industry recorded over
million to $27 million, although the actual demand may well have been 303,000 active borrowers, served by 19
much larger. The World Bank estimated that if 50 percent of the 325,333 MFIs with an outstanding portfolio of
homes in the informal sector in Kabul needed improvements costing $750,14 $192 million (IFC’s Consolidated
the potential market for home improvement would have been about $122 Micro nance Database, 2014).
million. Provided people would borrow about 50 percent of the required
amount, the potential total loan volume at the time would be about $61
million.

12
S. Narain, 2006. A Gender Strategy for the First Microﬁnance Bank, Afghanistan. Gender Entrepreneurship Markets (GEM) Initiative, IFC, Washington DC.
13
World Bank and IFC, 2008. Housing Finance in Afghanistan: Challenges and Opportunities. Washington, DC.
14
World Bank and IFC, 2008. Housing Finance in Afghanistan: Challenges and Opportunities. Washington, DC.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 10
5. A greenﬁeld market for housing ﬁnance
Despite the considerable demand for housing nance, no MFI had entered the market. When the management of FMFB-A
considered the implementation of housing micro nance products in 2008, it was faced with the situation summarized in
Table 3.

Table 3. Incentives and Obstacles to the Introduction of HMF Products in Afghanistan

Incentives Obstacles
Considerable demand for housing arising from Weak legal and regulatory framework (especially in the
increasing urbanization and a young, growing population areas of land administration and registration,
and enforcement of liens)

Somewhat stabilized and growing economy High cost of construction material; limited capacity
in the construction industry

Signiﬁcant potential demand for home improvement Continued violence and insecurity in certain
and incremental construction areas of the country

Better understanding of ﬁnancial needs of low income Lack of longer-term funds in local currency
earners at MFIs

To launch HMF products successfully, FMFB-A needed to develop a thorough understanding of the demand for housing
nance products. FMFB-A management considered conducting a detailed market assessment to identify the potential and
effective demand.

In general, effective demand for housing nance products can be deemed to exist if the following criteria are met: i) there is a
need for habitat improvements, upgrading, incremental building, etc. in the communities where the targeted population lives
(i.e. potential demand); and ii) potential borrowers demonstrate the willingness to borrow to complete these improvements
and they can afford the loan (i.e. effective demand). Other important factors to consider are suf cient ability among staff
members to process HMF loans, effective guarantee mechanisms to limit risks, lending methodologies and policies designed for
high-risk areas, and cost-effective ways to reach rural clients. FMFB-A needed to consider all these factors before venturing
into the housing nance space.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 11
C. FMFB-A’s Strategy to Enter the Housing
Finance Market
The development of an HMF product at FMFB-A began in 2008. USAID, AKAM, AKF, IFC, and KfW assisted FMFB-A
management in the design of a market entry strategy, the development of HMF products, and the launch of new offerings.
The process was organized in three distinct phases, which are described in further detail below and illustrated in Chart 2.

• Phase I – market research and product design (2007-2008).

• Phase II – launch of HMF product at FMFB-A through pilot-testing and the reﬁnement of the roll-out plan and
business projections (2009 – 2010).

• Phase III – consolidation and expansion of the national roll-out strategy (2011 – 2013).

Chart 2. Implementation Process to Launch Housing Finance Products at FMFB-A

2008

1. Detailed market study and internal
capability assessment
+ Organizational adjustments within FMFB-A
2008 Phase I
Market research and
product design 2. Product design & development
+ Product design
+ Roll-out strategy/projections
+ Market entry strategy

3. Pilot-testing in 4 branches
(2009-2010)
Phase II Pilot and 4. Pilot review/product roll-out in 13 provinces
launch + Reﬁnment of business plan

5. Review to decide on any further
(2011-2013) Phase III adjustments
Consolidation and + Expansion to rural areas and o ering CTA
expansion 2011-2013 Services

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 12
D. Phase I – Market Research and Product Design
1. Detailed market and design study
A detailed market assessment was commissioned by FMFB-A in late 2007 and completed in 2008. Its goals were to (i) identify
the target clientele, (ii) determine the potential demand and the size of the market (effective demand), and (iii) determine
affordability levels of the target segment. The market research allowed FMFB-A to gain clarity on the type of projects for
which customers were likely to approach them for nancing, and which later shaped the design of the product. The main
ndings of the research were:

• There was considerable demand for both home improvement loans (HIL) and new construction.

• No other lenders had entered the housing ﬁnance market in Afghanistan, which meant that FMFB-A would
bene t from a rst mover advantage.

2. Internal capability evaluation
The goal of this assessment was to identify the necessary organizational adjustments needed to introduce an HMF product
within the organization and the costs of implementation. The evaluation took into consideration the following elements:

• Interest and willingness to expand into housing products;

• Financial and operational performance; and

• Funding and other resources needed for pilot implementation and scale up.

The proposed design for the housing nance products (especially the housing micro nance loan) largely built on FMFB-A’s
operations and capabilities. But there was a need to make a few adjustments in areas such as underwriting and loan
administration (including servicing and collection), monitoring, risk management, and IT-infrastructure. FMFB-A also needed
to develop a marketing approach and train staff members.

The results of the market research and the internal capability evaluation are summarized in the form of a SWOT analysis,
which is depicted in Chart 3.

Chart 3. Simpliﬁed SWOT Analysis of FMFB-A in View of Housing Finance Market Entry

Strenghts
S Weaknesses
• Insuﬃcient capacities within staﬀ to
W
• Young and dynamic staﬀ
• Well-developed standards and procedures process housing loans
• Good reputation in market • Weak marketing and sales approach
• Wide branch network • Level of client retention unclear

Opportunities O Threats T
• No MFIs oﬀer HMF products • Weak legal framework
• FMFB-A collects deposits • Market potential could be much smaller
• Female borrowers are barely served by than expected (low literacy rate, high
formal ﬁnacial institutions levels of informal employment)
• Volatile environment

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 13
The ndings of the internal capability evaluation revealed that:

- FMFB-A’s structure appeared well-equipped to take on the implementation of the HMF product offering;

- FMFB-A bene ted from a wide branch network and good reputation in the market as it already offered a number of other
loan products. Therefore, it seemed prepared to handle the implementation of an additional product with a longer tenor and
higher loan amounts; and

- Staff members lacked the technical knowledge and sales skills needed for the housing product.

3. Product design
Based on the ndings of the market research and internal capability evaluation, the HMF product features were determined
for the pilot, as summarized in Table 3. FMFB-A management decided to keep maximum loan limits relatively low, set at
$1,400, in comparison to business loans. This was also done to allow FMFB-A’s management to gain a better understanding
of client repayment patterns and to minimize the credit risk. It was projected that the average loan size would amount to $700.

In order to manage credit risk, the prototype design of the HMF product envisaged a linked savings component to reaf rm
the assessed repayment capacity of the borrower, provide further collateral to the bank, and promote asset building with the
client. A borrower was required to save for three months before requesting a loan. The amount saved was to be equal to three
monthly payments and would be inaccessible to the borrower during the term of the loan.

Table 4. HMF Loan Features at Pilot Stage

Loan amount $100 – $1,400

Loan tenor 6 - 24 months

Interest rate 2.08 percent per month on declining balance (25 percent p.a.)

- Afghan national
Eligibility - Age between 18 – 65
- Entrepreneur or salaried employee

- Personal guarantor
Collateral - Household assets
- Title deed

- Improvement
Loan purpose - Extension
- New construction

It was agreed that the loans could be used for either home improvement or construction to cover activities such as home repairs
and upgrades, structural changes, new home completion, connection to basic utilities such as water and electricity, solar energy
installation, house insulation, and hygiene improvements, such as septic tanks. The home was required to be the primary
residence of the borrower or borrower’s property within the jurisdiction of the FMFB-A branch where the loan was granted.
Additionally, salaried employees who applied for a loan were required to open a current account at FMFB-A and to have their
salary transferred into this account.

Disbursement of the loan proceeds was made in a single tranche to reduce time and administrative burden. FMFB-A was able
to set this policy for two reasons: (i) the loan amounts were relatively small; and (ii) FMFB-A management believed that their
underwriting methdologies are well enough developed to ensure the correct deployment of the funds. 15

Finally, to strengthen their internal capability to deliver this product, management invested in building the capacity of their
staff both in terms of housing nance and marketing skills.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 14
4. Business and implementation plan (including market entry strategy)
The ndings of the market research and the internal capability analysis were used by FMFB-A’s management to develop a
preliminary business plan, pro t targets, as well as a cost and risk analysis (management of credit, interest rate and liquidity
risk, as well as appropriate funding instruments). FMFB-A management considered this exercise critical to having a clear
understanding of the investments necessary for a successful market entry as well as realizing the potential bene ts of the HMF
product offering. Setting measurable objectives was also viewed as pivotal to ensuring commitment of all staff to the new
product.

The implementation plan outlined the steps and timeline necessary to implement the new products within FMFB-A’s
organization. It also identi ed the branches in which the pilot was to take place to test the new products. At the end of the
pilot phase, the business plan and the implementation plan would be revised based on the results achieved during the pilot.

To ensure a smooth implementation process, management appointed an “HMF product champion” whose primary
responsibility was to manage this process. He enjoyed the full support of management so that he was in a position to initiate
the steps necessary for a successful product launch within FMFB-A’s organization.

15
Disbursement is typically considered a tool to ensure that the funds are used for housing purposes. Often the interest rate o ered is lower and/or the term is
longer than for business loans. To avoid cannibalizing their business, MFIs need to ensure a correct deployment of the funds. The disbursement in several
tranches linked with on-site visits could be one option. Another option is to transfer the money directly to the construction material provider or builder. This
policy requires, however, arrangements with hardware stores and/or builders as well as the availability of a transfer mechanism to ensure a quick payment of
small amounts to the beneﬁciaries.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 15
E. Phase II – Pilot Test and Nation-wide Launch
1. Pilot Test
The goal of the pilot was to test the product in order to make adjustments before its nation-wide roll-out. It was decided to
pilot the HMF product in four branches targeting parts of Kabul and Herat provinces. The pilot branches were selected
according to the following criteria: (i) the proximity to the new target group; (ii) the availability of up to two staff members
to dedicate time to more intensive marketing activities; and (iii) the ability to easily organize local marketing activities to
attract new customers. The length of the pilot was xed at nine months (from September 2008 to May 2009) The rst loan
disbursements were made in early 2009.
In preparation for the pilot, HMF policies were distributed to the branches and speci c training sessions were held with
branch managers and loan of cers. A reference for the development of the policies and the review of the product design
became IFC’s Housing Micro nance Toolkit. Its objective is to provide guidance to lenders, investors, developers and policy
makers on how to introduce HMF products and improve existing HMF offerings.

The toolkit also offers an orientation on operational practices and policies, including risk management and funding models
as well as appropriate training methodologies, programs, and samples. It covers the whole value chain of the housing
nance process, including marketing and customer service, underwriting (application processing, le building, and closing),
funding, and loan servicing (collection, and le administration). IFC’s HMF Toolkit16 is geared towards emerging markets
and takes into consideration the realities, constraints, and risks of these economies. A brief description of the toolkit is
shown in Annex 1.

2. Results of the pilot phase
The review of the pilot involved both FMFB-A senior management as well as branch managers and loan of cers (LOs) from
the pilot branches. Table 5 provides a summary of the objectives set for the pilot and the results achieved. While the number
of loans disbursed was below target, a higher average loan amount led to a higher than projected total loan portfolio size.
Eighty percent of the loans were used to nance home refurbishments.

Table 5. Planned Versus Actual Results for the Pilot Test

Criterion Planned Actual

Number of loans disbursed 750 586

Average loan size $700 $1,251

Total loan portfolio size 17
$452,000 $552,000

Portfolio at risk (PAR) > 30 days 18

2 percent 1.2 percent

Source: FMFB-A

The evaluations also showed that more than 90 percent of loans were disbursed to men. Outreach to female clients was lower
due to a fewer number of female LOs participating in the pilot. After the completion of the pilot, a detailed review was
undertaken. Table 6 shows a summary of the review. It also shows the actions which were initiated by FMFB-A management
to improve the HMF product offering. The review concentrated on product design and institutional capacity to process the
loans.

This toolkit was developed as part of the IFC’s advisory activities at FMFB-A. The toolkit has now been updated and incorporates experiences and best
16

practices from other emerging markets where housing microﬁnance o erings have been implemented.

17
This number already includes repayments made during the pilot.

18
PAR is a ratio of the unpaid principal balance of all loans with payment past-due over the total loan portfolio. It is a standard measure of portfolio
quality in microﬁnance.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 16
Table 6. Pilot Findings and Actions Taken

Item Findings Actions Taken

Product Design

• Clients needed more money to • Maximum loan size to be
Client Feedback ﬁnance the construction. increased.

• The pre-savings requirement was • Restructuring of the savings
not popular with clients and was requirement: 5 percent of the loan
therefore removed. repayment to be channeled into a
savings account.

• Higher defaults of those clients who • Introduce a maximum loan
Borrower Proﬁle
took out a business and HMF loan exposure (combined for all loans)
at the same time. of $5,000 for every client.

Institutional Capacity

• Marketing is not eﬀective:
only 20 percent of branch sta
in the pilot branches could explain • Redesign marketing approach.
Marketing Strategy the housing loan product to
a potential client. • Recruit more female LOs.
• Outreach to female clients should
be improved.

• There was a shortage of analytical • Detailed training modules to be
skills for loan appraisal. developed and implemented for
LOs.
• Technical evaluation in branches
Sta Capacity Building
was done by LOs who received • Technical evaluation module to
some orientation from technical be developed for technical
o cer (engineer) based at the head appraisal.
o ce.

• Some information was missing in • Forms to be revised to capture all
loan forms e.g. details of house to pertinent information about
be improved, client’s estimate of proposed improvements.
improvements, etc.
Documentation
• Staﬀ to be further trained.
• Technical oﬃcer was unable to visit
and appraise all requests. • Train deputy branch managers
on technical appraisal.

Source: FMFB-A, Enclude

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 17
a. Feedback from clients

Feedback from clients was obtained through discussions during loan appraisal, loan disbursement, monitoring, and loan
closure. There were no written responses as literacy levels among many clients were very low.

Loan Size

Con rming what the market research had previously revealed, the pilot review noted that clients did in fact have the capacity
to take larger loans than those initially proposed by management. Average loan size during the pilot was $1,251 against a
projected average of $70019. Based on this analysis and feedback from the four pilot branches, it was agreed to increase the
maximum initial loan size to 100,000 Afghanistan Afghanis (about $2,000) and the maximum for subsequent loans to
200,000 Afghanistan Afghanis ($4,000). There was no need to extend the loan tenor, which was up to 24 months.

Savings requirement

The following was concluded from the pilot with regards to the savings requirement:

• Home improvement in Afghanistan occurred primarily within a six-month period from April to September.
Requiring potential borrowers to save for three months caused many people to miss the season to repair/
complete their houses;

• The initial amount of savings itself was a hindrance to those who needed to do improvement as many of them
did not have savings. However, they had operating businesses or were earning salary from jobs in government
and private sector.

• As all other FMFB-A products did not require pre-loan savings, the housing loan was perceived by clients to be
an expensive product compared with business loans.

In view of the above, management reduced the pre-loan savings period to less than one month and the initial savings amount
to 150 percent of a monthly installment. Moreover, the mandatory savings requirement for loan eligibility was also removed.
However, because the loan amount in most cases was not suf cient to do the improvement required, borrowers returned to
the branches to request the release of their blocked savings to complete work on the house. At a pilot review workshop, the
participants recognized the value of savings as additional collateral and as a means to encourage clients to build an asset base.
To address the challenges above, it was proposed to change the savings requirement from pre-loan to ongoing where clients
would deposit at least 5 percent of the loan installment monthly together with repayment of principal and service charge.
Loan of cers at the branches were charged with monitoring deposits from clients and following up with those who were not
saving regularly.

b. Borrower proﬁle

During the pilot, 94 percent of housing loans were disbursed to microentrepreneurs and the rest of the disbursements were to
salaried employees. An attempt was made to categorize the micro entrepreneurs by industry or type of business but this was
unsuccessful as industry codes for housing clients were changed to “home improvement” during the pilot.

Additionally, clients who took out more than one loan (a business loan in addition to a home improvement loan, for example)
experienced higher default rates than those with just one. To avoid the over-indebtedness of clients, the maximum loan
exposure for each borrower in urban areas was capped at $5,000 across small business loans and agriculture loans.To avoid
arrears for salaried employees, staff ensured that the date on which the installment was due corresponded with the date on
which the borrower receives his/her monthly salary to permit the repayment amount to be directly subtracted from the salary
payment.

This experience is quite common at most MFIs which have entered the housing market.
19

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 18
c. Marketing, sales strategy, and capacity building

The four pilot branches used a combination of different marketing methods to reach potential clients. The most common
method used was word-of-mouth by the LOs. Other methods included the distribution of lea ets, poster, banner, meetings
with village (Shura) heads, and short presentations at social gatherings.

The pilot review revealed that some staff members could not adequately explain the product features and processes to a
potential client. These were the branch manager, deputy branch managers, loan of cers designated to disburse home
improvement loans, and some client relations of cers. Prior to the launch, the home improvement loan had been introduced
in the pilot branches through a one-day presentation made by the marketing manager. The presentation had included the
rationale for the product, product features, target clients, type of home improvements to be nanced, and the loan process.

During the pilot period, the average number of HMF loans disbursed by a loan of cer was four. The branches which used
more aggressive marketing strategies (e.g. direct phone calls to potential customers) disbursed a higher number of loans.
These branches were also understood to have had more extensive training of their LOs.

As a result of the above ndings, a decision was made by management to increase the marketing budget. The national product
roll-out was to be accompanied by more active use of lea ets, posters, and banners in cities and at branches, creating more
awareness among potential customers and the public at large. Speci c sales incentives for LOs were also considered. In
addition, it was decided to increase training to LOs at the branch level. This included training on loan product features, the
loan policy, and sales techniques. A detailed training module on HMF products and operations was prepared for the LOs,
branch managers, and other staff members who are involved in the processing of HMF loan. Based on the results of the pilot
review, some changes to the initial HMF loans features were made. The main changes, as cited above, were an increase in the
maximum loan amount and a different structuring of the savings requirement. Thus, the market research and the internal
capacity assessment were already quite effective in determining the elements of a successful HMF product offering. Table 7
shows the revised features of the HMF product that was later rolled out nationally.

Table 7. HMF Loan Features After Pilot Review

Features Prior to Pilot Features modiﬁed After Pilot

$2,000 1st cycle,
Loan amount $100-$1,400 $3,000 2nd cycle
$4,000 3rd cycle

Loan tenor 6 - 24 Months Same
2.08 percent per month on
Interest rate Same
declining balance
- Afghan national
Eligibility - Age between 18 – 65 Same
- Entrepreneur or salaried employee
- Personal guarantor
Collateral - Household assets Same
- Title deed
- Improvement
Loan purpose - Extension Same
- New room construction

For rural clients, adjustment of
Other features N/A repayment terms possible to take into
consideration seasonal ﬂuctuations
in incomes
Source: FMFB-A

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 19
3. Nationwide roll-out of FMFB-A’s HMF product o ering
To prepare for the roll-out of HMF products across • Improving product branding: In the Dari
all branches, management concentrated on the language, the Home Improvement Loan was
following areas, based on the outcomes of the pilot branded “Tameer”, which translates into
test: “building” or “construction”. The brand
delivered a clear and understandable message to
a. Increased training activities at the branch level. clients and was aimed at creating customer
FMFB-A’s in-house construction engineer and staff loyalty.
from the audit department developed two training
modules. • Sales support activities: The following material
and methods were strengthened to incentivize
• Financial appraisal: It covered areas such as loan more active sales among LOs:
product criteria, underwriting guidelines, loan
processing, and servicing customers with payment
dif culties. * Brochures (lea ets) advertising the product and
explaining product features were distributed
• Technical appraisal: The objective of this training directly to potential clients;
was to improve the staff’s understanding of
construction processes and facilitate the * Posters that highlighted loan purpose and key
assessment of the nancial and technical viability product features were displayed in shops where
of the proposed project for which the applicant construction materials were sold. The posters
was seeking nance from FMFB-A. also included a one-year calendar to motivate
shop keepers to hang the posters;
The existing training material, which was originally
prepared for the pilot, was revised to capture the * Stand banners that advertised the home
changes in the product design. Additionally, a improvement loan were developed and
training manual was developed to ensure that future strategically positioned in FMFB-A’s branches;
FMFB-A staff members could be adequately
prepared for their job. The content of the training is * Field staff were encouraged to increase
shown in Annex 2. word-of-mouth marketing to potential and
existing clients, who in turn, were encouraged to
The training was delivered to branch managers, refer other good clients.
deputy branch managers, credit administrators and
assistants, loan of cers, front line staff (customer In order to promote better linkages between
relations of cers), branch assistants and savings individual client activities, management encouraged
of cers. A total of 345 staff members were trained, staff members to recognize ways of selling more
of which 60 percent were LOs. than one product to an individual client. For
example, a client who has saved at FMFB-A for a
b. More concise sales and marketing strategy. To couple of months could be a target for a housing
nance loan and can use the savings as equity for the
improve the public’s awareness of its HMF product
housing project. The equity and the savings would
offering and facilitate the sales of HMF loan then help him or her complete their housing project
products, management concentrated on the faster than having to save the whole amount.
following areas: Additionally, loan of cers could use savings as an
indicator of a client’s discipline and ability to put
aside a certain amount regularly

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 20
c. Increased internal awareness. As the pilot revealed, only 20 percent of staff
could effectively convey the HMF features and processes to potential clients.
FMFB-A’s management required branch managers to keep all staff members
informed about product updates. Additionally, management implemented
performance-based bonus payments, which were tied to the number of loans sold
and PAR during a certain period to incentivize LOs.

d. Clear and achievable targets. Based on the nding of the pilot, management set the
following targets for the rst year of the national roll-out of FMFB-A’s HMF products:
Picture 2. Newly designed marketing material
for FMFB-A’s HMF product o ering
• At least 5,968 loans disbursed amounting to $4,694,702;
Source: FMFB-A

• Roll-out in nine branches over ﬁve months;

• Regular updates of the loan policy guidelines and further training activities as required;

- Number of loans disbursed;
- Amount disbursed;
- Portfolio outstanding;
- Portfolio at risk (PAR); and
- Portfolio by branch, gender, and loan purpose (type of house improvement).

4. Portfolio performance in the ﬁrst year of the national roll-out (2010)

Actual disbursements exceeded, by far, the objectives set for the rst year of the national roll-out. By the end of 2010, the
value of loans outstanding increased to $6,759,010 and the number of loans outstanding totaled 5,282. The average loan
amount was $1,179. Monthly loan disbursements showed that there was a seasonal demand, possibly related to weather
conditions, as monthly loan disbursement peaked in July to November 2009 and decreased rapidly in December 2009 and
January 2010 (see Chart 4).

Chart 4. Monthly Disbursement of HMF Loans by FMFB-A (in thousands of US Dollars)

Amount of HMF Loans Disbursed
600.00

500.00
USD in “000s

400.00

300.00

200.00

100.00

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
09 10 10

Source: FMFB-A

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 21
F. Phase III – Consolidation and Expansion of the
National Roll-out Strategy (2011 – 2013)
To capitalize on the loan performance in the years 2009 and 2010, management set more ambitious targets to allow for a
replicable and scalable model to expand FMFB-A’s HMF product offering. Management achieved the goal of increasing
outreach to those who do not have access to nancial services in urban and rural areas. The following targets and measures
were set by management and aimed at a robust and wide-reaching expansion of its HMF activities:

• To build a housing ﬁnance portfolio of 10,000 loans amounting to more than $11 million by the end of 2011;

• To improve the housing stock and quality of construction through construction technical assistance (CTA)
services and home improvement innovations bundled with a loan offer; and

• To achieve long-term sustainability by covering inﬂation-adjusted costs with revenues generated from the HMF
loan business and achieving a surplus to nance any further expansion;

FMFB-A launched the HMF product in urban areas before expanding the offer to rural areas. The reason for this strategy is
that incomes in urban areas are typically higher than in rural areas and higher incomes generally translate into higher
affordability levels. Additionally, nancial literacy among consumers in urban areas is usually higher, which facilitates the
introduction of new nancial products.

As already mentioned above, rising migration to urban areas has led to an increased demand for housing which has also
propelled the demand for housing nance. These two trends were also con rmed by the market research. Therefore, it was
quite obvious for FMFB-A to launch the HMF products in urban areas. After the successful completion of the pilot, FMFB-A
management achieved a better understanding of the market dynamics and felt con dent enough to increase the penetration of
its products in other provinces of the country.

1. Increased focus on rural areas
To get a better understanding of the market conditions and the individual needs of potential customers from rural areas,
FMFB-A conducted a demand and repayment capacity survey in the rural areas in April 2011. This study also included some
market intelligence on the demand for construction technical assistance (CTA) services as management believed that
customers would value these additional services. In rural areas, most people either build houses on their own or rely on the
help of family members. As there is often a lack of appropriate skills in construction, the offer of CTA services could provide
guidance to borrowers on safer construction methods.

The survey came up with the following key ndings: (i) FMFB-A could tap into a promising market given the signi cant
demand among rural Afghanis for home improvement; (ii) a key challenge would be the assessment of incomes, which are
typically linked to seasonal agricultural activities and a considerable degree of informality; and (iii) most customers would
also value CTA services.

In December 2011, a pilot test of a new rural housing product was started based on the above ndings and was launched in
ve rural branches: Balkh, Badakhshan, Herat, Bamyan, and Jabul Siraj. In the pilot phase, FMFB-A’s disbursement target was
200 loans worth $200,000. This would help ascertain the average cost of housing improvements in rural areas, test the
management information system for seasonal repayment schedule, and improve process ows while also trying to determine
the cost involved in disbursing and monitoring these loans.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 22
2. Introduction of CTA services
FMFB-A also worked on the introduction of CTA services20 as an additional feature to the HMF product offering. FMFB-A
signed a contract with Aga Khan Planning and Building Services Pakistan (AKPBS) to obtain advisory support in the
development of a package of CTA services to be offered to clients21. In addition, the mandate also comprised capacity
building measures for FMFB-A staff and the construction of demo houses. These houses are aimed at providing an example
of how environmentally driven techniques can improve living conditions and mitigate natural disaster risks given that
Afghanistan is earthquake-prone. The demo houses were built in Kabul, Samangan, and Kishm.

The AKPBS team carried out an initial assessment in Kabul Based on the observations and ndings of the visit, AKPBS
and identi ed several areas to target improvements in housing proposed a capacity building and training strategy for
standards and construction practices, including: FMFB-A’s technical of cers which would cover four major
areas of housing construction: (i) disaster risk mitigation;
• Technical drawings and designs; (ii) earthquake resistant construction; (iii) thermal and
energy ef ciency; and (iv) basics of water and sanitation.
• Sizing and location of doors and windows for seismic
resistance, ventilation, and energy ef ciency; FMFB-A staff travelled to Pakistan to learn from AKPBS’s
work there. With the help of AKPBS, FMFB-A was able to
• Double glazing for windows and thermal insulation; achieve the following:

• Masonry techniques; • Speci c two-week training course for the technical
• Binding walls to foundations and new additions to of cers who were supposed to provide CTA services to
existing structures; customers of FMFB-A. The training also included
visiting local carpenters and masons to build models of
• Rooﬁng materials and weight; and roof hatch windows, fuel-ef cient stoves, double-glazed
windows, and improved latrines. A draft set of
• Design and placement of latrines and wells.
construction guidelines was designed which served as
The team also noted that several of AKPBS’s environment the basis for the construction advisory services.
upgrades would be appropriate to address important housing
• Delivery of “demo houses”. These houses were built to
and quality of life challenges in Afghanistan. These innova-
tions included: make up for the limited number of of cers who were
capable of providing construction technical assistance.
• Seismic-resistant solutions and techniques; It allowed FMFB-A to showcase good construction
techniques and offer guidance for appropriate building
• Water warming facilities; standards22. Due to the considerable construction cost,
FMFB-A only erected these houses at select branches.
• Bed racks;
Fewer houses were constructed than planned due to
• Kitchen worktops and utensil cabinets; challenges in land ownership and permission. Despite
that, feedback indicated that where available, these
• Thermal insulation techniques; houses were considered an effective tool for
disseminating information about construction
• Lightweight rooﬁng techniques;
standards and building materials.
• Roof hatch windows; and

• Dry pit compost latrines.

20 CTA services, or housing support services, enable homeowners to improve their house on their own. They can comprise all areas of the housing value chain.
Annex 3 includes detailed information about housing support services.

21 In Pakistan, AKPBS is mandated to assist local communities in areas such as habitat risk reduction, energy e cient building and construction improvement,
water supply and sanitation, and natural resources conservation. With the two countries having much in common, AKPBS’ experience in Pakistan proved
valuable to FMFB-A in Afghanistan.

22 Houses were built with walls reinforced with galvanized iron wire lintels (to support the weight above the doors and windows) and plinth seismic bands to
strengthen the building against earthquakes. Partial wall insulation using locally available material, such as wooden shavings, wooden battens, plastic sheeting
and galvanized iron wire, would make the house warmer during the winter and cooler in the summer.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 23
G. Key Takeaways and Lessons Learned
1. Challenges remaining in the housing and housing ﬁnance sectors

Recent research has shown that the primary challenges to housing development have remained unresolved during the past ve
years. As already mentioned above, these problems include shortage of land in major cities, clear land titles, destroyed or
undersupplied housing infrastructure (utilities, roads, etc.), and lack of a legal framework (building codes, housing nance
regulations, foreclosure laws, etc.). All these problems are further exacerbated by the lack of affordable housing nance for
the majority of Afghanis23.

Currently, the supply of housing nance in Afghanistan by banks and micro nance institutions (MFIs) is very limited given
that MFI clients have demonstrated a signi cant demand for housing nance, which they have satis ed by resorting to
business micro-loans, borrowing from relatives and friends, or using their savings. Despite the recognition of sizeable
untapped mortgage and home improvement markets, banks still do not consider the environment conducive to developing a
signi cant housing nance practice. Similarly, banks are concerned about housing affordability given their clients’ low
incomes. MFIs are also concerned about their ability to assess clients and make projections about their income, which are key
for longer term loans.

2. Lessons that can be applied to other countries

Despite the unprecedented challenges in Afghanistan, there are a number of lessons that can be learned from FMFB-A’s
experience that would be applicable in other markets. Many MFIs in other markets have experienced a sizable growth in their
portfolios and are looking to reach new customer groups. The remainder of this paper shares some key areas which have been
vital to FMFB-A making inroads into the HMF market in Afghanistan.

a. First-mover strategy reaps bene ts in terms of time, nancial resources and market recognition.

With no existing competitors in the housing microﬁnance sector, FMFB-A entered the market with the “ﬁrst-mover”
advantage. Being the rst provider of HMF loans allowed FMFB-A not only to acquire superior brand recognition and
customer loyalty, but also to have more time to perfect its product and services based on the experience gained during the
pilot phase. In addition, FMFB-A was able to take full advantage of nancial support from the international donor
community, which was interested in developing the housing nance market in Afghanistan. In fact, FMFB-A managed to
leverage its partnerships with IFC, KfW, and USAID, which brought in more funding to FMFB-A to support its product
expansion and capacity building efforts.

b. Product design should be based on market assessment and an internal capacity evaluation.

Before rolling out the HMF products in urban and rural areas - and before launching construction advisory services -
FMFB-A started with market surveys which were used to design product prototypes. It also conducted a pilot run, which was
used to reﬁne product features and offer a strategy for further roll-out. This experience of “testing the water” provided
valuable insights into the market and the institution’s internal capacity, which was instrumental in improving the product
offering and strengthening internal infrastructure in preparation for product expansion. In the case of rural clients, for
example, it was observed that they are more inclined to seasonal repayment schedules because of the nature of their cash ow,
which is dependent on agriculture and rural activity, including livestock.

c. A critical review of the pilot results is essential to ensuring a successful national roll-out of HMF products.

In the case of FMFB-A, during the pilot phase, the following lessons were learned, which helped ensure a successful roll-out
of the product:

• The loan size sought by customers was higher than FMFB-A initially projected;24

• Clients’ repayment willingness could be increased by requiring them to contribute 10 – 20 percent of the project

23 IFC, Afghanistan Housing Sector Assessment, October 2013.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 24
• The decision to roll-out the HMF product in urban areas ﬁrst was considered an adequate response to prevalent
demand patterns in Afghanistan. It also helped to test the product before its offering in rural areas, where
demand patterns are different and where market penetration is more dif cult because of low incomes and low
nancial literacy levels; and

• The disbursement of the loan in tranches is typically considered a tool to ensure that the proceeds are deployed
for the housing projects and are not used for other purposes. FMFB-A opted for disbursement in one single
tranche.

d. A concise marketing strategy is key to customer outreach.

When a product is new to the market, the choice of marketing strategy is key to ensuring broad customer outreach. Marketing
strategy, both internal and external, should be tailored to the characteristics of the targeted audience in order to achieve
maximum effectiveness.

e. Offering CTA services can increase customer satisfaction and enhance loan quality.

Advising clients on the selection of building materials, construction techniques, and innovative methods and interventions
that address earthquake resistance, sanitation, ventilation, and energy ef ciency was an effective way of adding value to
FMFB-A clients and boosting sales. Combining the loan offering with construction technical assistance helped raise awareness
about safe construction, reduce the cost of future repairs, and ultimately improve the quality of the loan.

f. A scarcity of quali ed staff requires strategic internal capacity building and a smart allocation of talent.
To maintain the high caliber of staff and improve their capabilities, FMFB-A management:

• Hired technical of cers. As FMFB-A is not an engineering company, attracting and retaining quali ed technical of cers
was dif cult, particularly in rural areas. Ultimately, FMFB-A was able to recruit and retain 11 technical of cers. In order
to increase the ef ciency of those employed, the function of the technical of cers was adjusted to focus more on
appraising/assessing projects that included structural changes or improvements rather than cosmetic or minor
construction techniques, discuss innovative housing upgrades, and monitor quality. Loans for minor (non-structural)
projects, such as painting and plastering, were assessed and monitored by deputy branch managers instead of technical
of cers. FMFB-A also hired a full-time senior technical of cer, based at its head of ce, who was responsible for training
and coordinating with technical of cers at the branch level. In areas where technical of cers are not available, basic
training was provided to deputy branch managers on conducting technical evaluations.

• Built demonstration houses. The construction of demonstration houses was another way to deal with the limited
availability of quali ed technical of cers as they offered an alternative means of easily conveying basic information
to clients. Construction guidelines can be shown to borrowers and masons through examples in the demonstration
houses. The feedback was that they were an effective means of promoting and raising awareness of improved
construction practices. However, the number of demonstration houses that can be constructed is limited due to their
high cost.

• Provided extensive staff training. Most of the FMFB-A clients were new to housing loans and lacked suf cient
nancial literacy as well as construction knowledge. Educating customers on the housing micro nance product,
the lending process, and construction techniques became a critical responsibility for loan of cers and technical
of cers. It was therefore essential to provide adequate training to all staff, especially new staff, in all branches.
Regular training (e.g. semi-annual) on housing micro nance topics and new developments within FMFB-A for
established employees working in the eld was also recommended. Given that it was not always feasible to
provide training face-to-face in light of the security situation in Afghanistan, other means of communication,
such as newsletters and teleconferences were implemented to ensure frequent communication with the regions.

3. Current state of FMFB-A’s housing ﬁnance operations
FMFB-A has made signi cant strides in rolling out a successful housing micro nance loan product with a resulting
well-performing portfolio. This is an important achievement given the security situation, operational challenges, and poor
regulatory environment in Afghanistan. What makes this achievement even more remarkable is that no other MFI in the
country (or any other nancial institution for that matter) has to date entered the HMF market in Afghanistan despite
FMFB-A’s demonstrated success.

24
FMFB-A’s experience has been very similar to other lenders which also launched HMF products. However, in the pilot phase, it is recommended to o er
lower loan amounts initially until sta gains a better understanding of the borrowers’ payment patterns.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 25
Since the launch of the HMF program, FMFB-A has experienced a steady and exponential growth of its HMF portfolio. The
institution has managed to transform potential demand for housing nance into an actual supply of nancial products which
have speci cally targeted informal low-income earners (both self-employed and salaried employees) from urban and rural
areas.

At the end of 2009, the loan portfolio outstanding already amounted to $2.7million. With the signi cant growth presented in
the graph below, FMFB-A has managed to keep its PAR at very low levels. As of Dec, 2014, housing micro nance loans
account for about 17% of FMFB-A’s total lending. The percentage of female borrowers increased from 7.7% of the total
housing loan portfolio in 2009 to 19% at the end of 2013.

Chart 5: FMFB-A’s Housing Portfolio in USD thousand (2009 – 2014)
$11,128.00
14,000 $12,423.00 12,000

$8,484.97
12,000 $10,024.50 10,000

Total Number of Outstanding Borrowers
Value of Loans Outstanding (000's USD)

10,000
8,000
$6,759.01
8,000

6,000
6,000
$2,713.58
4,000
4,000

2,000 2,000

$0
2009 2010 2011 2012 2013 2014

Source: FMFB-A Total Number Of Outstading Borrowers Value of Loans Outstanding (000’s $)

Critical to the successful implementation and expansion of lending activities has been the support from FMFB-A’s
shareholders, the quality of the consulting services provided by IFC and AKPBS, support from other partners such as USAID,
and the diligence in the preparation of the product launch (market research, internal capability analysis). Another critical
factor for success was the exibility and responsiveness of management, which allowed for adjustments to loan products
based on changing demand patterns. FMFB-A management continues to review the performance of the HMF loan portfolio
and is ready for further adjustments to retain a competitive edge in the Afghan housing nance market.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 26
H. Annex 1 – IFC’s Global Housing Microﬁnance Toolkit
The Global Housing Microﬁnance Toolkit (“the Toolkit”) has three objectives:

• To provide a practical guide for managers of microﬁnance institutions (MFIs), banks, and non-bank ﬁnancial
institutions (NBFIs) for introducing new housing improvement loan products, or expanding their existing
housing micro nance (HMF) portfolio;

• To provide a practical guide to housing development entities, such as investors, real estate developers and other
entities considering entering into or engaging in the business of nancing housing improvements for
low-income households; and

• To provide an efﬁcient means for IFC’s Housing Advisory Services, as well as IFC housing ﬁnance projects globally,
to engage with the management of housing nance entities and other stakeholders, including those
considering entering into housing nance or investing in housing entities.

The HMF Toolkit consists of seven modules with supplementary documents in annexes:

• Module 1 provides an overview of housing microﬁnance lending, including the conditions that underpin successful
micro nance programs and the functions that are involved in micro nance lending. It provides the rationale for
providing HMF lending programs, compares HMF loans with other micro nance products, and de nes the
characteristics of HMF loans.

• Module 2 provides the Housing Microﬁnance Feasibility Assessment guide and outlines steps that a microﬁnance
organization should take to complete the assessment.

• Module 3 describes how to design HMF products and provides a set of sample products that together could meet
a range of household needs.

• Module 4 describes the types of ﬁnancial, credit, and operational risks that are associated with housing
micro nance lending as well as approaches for identifying, quantifying, and mitigating them.

• Module 5 provides guidance to ﬁnancial institutions on the funding of an HMF portfolio, the types of funders and
funding available, advantages/disadvantages of each, and an overview of the fundraising process.

• Module 6 provides ﬁnancial institutions with an outline of a construction technical services (CTS) training program
for HMF lending staff and a nancial literacy training overview.

• Module 7 provides an example of a policies and procedures manual that lays out step-by-step procedures for a
lender to follow in carrying out HMF lending.

An addendum to the modules provides:

- A sample set of housing micro nance products;
- Examples of forms and documents that a lender could use to effectively manage the housing micro nance lending process;

- A sample of a completed loan le, as well as sample loan tracking documents as they would appear in the les of a HMF
lending institution;

- A sample set of responsible nance guidelines and policies that an institution could include in core operations;
- Other materials to help lenders understand and manage the HMF lending process;
- Examples of risk management tools and approaches which an MFI could use to help manage risk associated with HMF;
and

- A list of potential HMF funders which MFIs could approach to fund their HMF loan products.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 27
J. Annex 3 – Construction Technical Assistance
(CTA) services
As already de ned above, housing support services, or CTA services, are products and services that enable home owners to
improve their house on their own. They can comprise all areas of the housing value chain. See Chart 6 for details on the
housing value chain.

Chart 6. The Housing Value Chain and Corresponding Potential Housing Support Services

The Housing Support Services On-going
Construction support
*Construction and Non-construction HSS Design advice, technical
building assistance
Assistance to service Community
obtain/ produce Development
quality building
Assistance to materials
access ﬁnance Housing
subsidy , savings
facilities Design and
Assistance to building
secure/improve skills/services
services Building
Assistance to materials
securing Financing
land tenure
Essential
services
(WATSAN,
land and
power,etc.)
tenure
The Housing Value Chain

Source: Habitat for Humanity

Housing support services can range from providing support to the registration process of land titles, advice on the
construction process, and tips for community development. There are broad categories:

1. Pure technical information. The lender provides to customers brochures, videos, contact lists of masons etc.
These services can be provided by staff. Professional support is required to design the brochures or any other material.

2. Professional services. The lender provides the support to the design and planning process, trainings, support to permit
processing, etc. It may include visits by technical staff to the borrower’s home. The lender may cover these services through
a co-operation agreement with an architect or other service providers.

3. Construction technical assistance/engineering advisory. The lender provides on-site support to the borrower at her/his
housing unit. This can range from basic (repairs) to structural work (masonry, plumbing etc.). This latter category is the
most intensive form of housing support services and typically requires the employment of an engineer.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 28
K. Annex 4 - Linkages between Construction
Technical Assistance and Financial Services
An important consideration in determining how to deliver housing support services is creating an effective link between the
provision of these services and housing micro nance. While it has already been demonstrated that housing micro nance, solely
as a nancial product, can be offered sustainably and at scale, this is less evident when it is linked with housing support services.
Several of the key questions that must be resolved when designing these links include:

1. Are the housing support services delivered as an optional service or as a mandatory component of the housing
micro nance loan ?

2. Are these services provided by the micro nance institution or by a separate organization ?
a. If by a separate organization: How will the two organizations operate effectively to deliver both services
to the same clients ?

b. If the micro nance institution directly delivers the housing support services: Will the existing eld staff
assume these functions, or will new positions be created?

3. In either case, how will these costs be covered ?

One helpful way to design housing support service delivery is to determine whether the services are to be conducted as an
essential component of the housing micro nance loan, or whether they are seen as optional or occasional. The former might
imply services that are required and relatively standardized steps in the loan due diligence and follow-up processes. These
services are likely to be delivered by the micro nance institution’s staff, and their costs are usually included in the price of the
loan. The second suggests relatively customized services that are delivered by a separate business unit that charges on a
fee-for-service basis. Clearly, a micro nance institution may offer both types of housing support services, employing multiple
linkages. Another helpful way to understand the links between housing support services and housing micro nance is to classify
them according to the institutions involved in delivering the housing support services. There are three classi cations of linkage
methods:

• In-house: Housing support services are delivered by the staff of the microﬁnance institution, whether via loan
of cers or construction specialists;

• Linked: Housing support services are delivered by the staff of another organization operating in partnership with
the micro nance institution;

• Embedded: Housing support services are delivered by the staff of another organization but are placed within the
of ces of the micro nance institution.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 29
L. Annex 5 –Lessons and Trends in Delivery
of Construction Technical Assistance
Although successful models, clear guidelines and best practices have yet to be identi ed. lessons and trends are beginning to
emerge in the area of housing support services and their effective delivery alongside housing micro nance.

The following key lessons were identi ed from existing experience,25 and may inform future design of housing support services:

What clients value:

Evidence suggests that clients place a high value on training and technical services that inform and guide them in planning and
carrying out their intended home improvement projects, such as:

• Segmenting and sequencing desired improvements into ﬁnancially feasible steps;
• Creating a basic plan for speciﬁc improvements, including an estimate of materials and costs;
• Receiving guidance in avoiding common errors associated with the type of improvement; and
• Receiving guidance in how to select materials and construction laborers.

Clients also appreciate having access to more quali ed technical services when needed, and in many cases they are willing to
pay for these, provided they are not mandatory but optional. This suggests the need for creating a demand-driven method of
providing more specialized and customized services.

Furthermore, clients value alliances with materials suppliers that result in price discounts, product delivery services, and other
forms of preferred treatment.

What micro nance institutions value:

Micro nance institutions tend to value linking housing support services to housing micro nance for any or all of the following
reasons: the perceived social impact this generates, the contribution this makes in reducing loan risk, and the increased
competitive advantage this earns them among clients.

Moreover, lessons emerging in housing support service delivery are consistent with many of the principles adopted by
institutions that provide business development services linked to micro nance. The following guidelines, slightly adapted, apply
well to housing support services.26

• Assess the market: Learn about existing supply and demand of services in the low-income housing markets,
including informal and indigenous sources. Determine what clients already have, including sources of nancing,
and what they need to improve their homes with quality and at low cost;

• Determine a core competency: Providers of housing support services must determine what speciﬁc services are to
be delivered efﬁciently alongside housing microﬁnance. “Have a broad vision, but a narrow specialization.” Without
this, housing support service provision will not reach sustainability;

• Be client-driven: In order to remain relevant, housing support service providers need to keep a pulse on clients’
needs and preferences with respect to services offered, delivery methods, and pricing.

See Habitat for Humanity, “Housing Support Services: Do They Add Value to Housing Microﬁnance?” Atlanta, January 2013, p. 8
25

26
Lessons adapted from “Synergies through Linkages: Who beneﬁts from Linking Microﬁnance and Business Development Services”, MertenSievers and Paul
Vandenberg, 2007.

Developing a Housing Microﬁnance Product: The First Microﬁnance Bank's Experience in Afghanistan 30
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