Islamic finance can foster social cohesion in Afghanistan

Afghanistan is a country like no other. Its staggering and unspoiled beauty, the dignified attitude of her people, Alexander the Great’s mysterious journey, all conjure up tales of adventures that have fed our imagination. Yet, a more sinister drama is unfolding in the present.

Afghanistan today is in the throes of epochal changes that are straining the base of her society and wreaking havoc on social relations. The development of key sectors of the Afghan economy reverberates through a society largely composed of rural and traditionally minded communities while, for the first time, exposing large sectors of the population to modernism and its perceived ‘evils’.

The social divide is widening, the gap between the haves and have-nots is not abating, and the swelling professional class is not evolving into a middle class with reasonable purchasing power.

Afghanistan has one of the biggest intact unexploited mining resources in the world. In aggregate, their value is estimated to be anywhere between USD 1 trillion and USD 3 trillion. Smart international investors are already taking notice and full exploitation of its resources could make Afghanistan the richest mining region on earth.

This little-known fact – coupled with a pivotal position in the key strategic region of Central Asia – explains why the 19th century Great Game, played out between the British and Russian empires, is being staged once again.


On-the-ground experience working with urban and rural communities shows that a friction exists at a fundamental level between conventional business practices and Afghan traditions.

Islamic practices pervade all aspects of life and religious tradition and codes, together with customary practices, provide the principal means of controlling personal conduct and settling legal disputes. Further, most Afghans living outside the four principal cities of Kabul, Kandahar, Herat, and Mazar are organized into tribal and other kinship-based groups, which follow their own traditional customs.

Objections to financing through interest payments are widespread and often absolute, and go hand-in-hand with deeply rooted religious commitments that view borrowing on interest as sinful. The denunciation of paying riba (backed by religious figures) routinely leads to strong opposition and open protest by community members, and there are indications of intensified condemnations by mullahs in mosques and in the media.

Only a weak minority differentiates between income-generating (value adding economic activities where interest may be tolerated) and non-income generating (resale with a mark-up, etc.) use of financing, and have dealings with those who work for conventional microfinance institutions, which are branded immoral and deemed a destabilizing foreign influence that brings ruinous effects.

Further, borrowing from non-kin is taboo in the Afghan culture. The concept of conventional insurance as well is deemed unacceptable by large swaths of the population above all when it comes to personal lines, and in particular, to life policies.

The attempts to offer conventional financial products result in an increase of social and cultural strains and are perceived as yet another foreign attempt (or even perceived as plot) to challenge basic tenets of the Afghan society. This perception – shared not only in the countryside but also by sectors of urban society – is fuelling resentment and distrust among people.

As a consequence, the already meager financing in the rural areas, where 75% of the population lives, is drying up and almost non-existent. This is undermining any meaningful economic and social take-off, which in turn leaves local communities feeling marginalized and which fuels their thirst for compensation.

As an additional note, large segments of Afghans’ assets are not kept in banks, but instead remain stored in homes (‘mattress finance’) or deposited with a range of money traders known as hawala dealers. It is worth noting that only 3% to 10% of Afghans currently hold accounts in the country’s commercial banking sector and that the black economy is estimated at three to four times the official GDP.

Within this landscape, Islamic finance and takaful represent a necessary tool to address the population’s discomfort with the conventional approach, ease cultural tensions and creatively mend social relations.


The Afghanistan Rural Enterprise Development Program (AREDP), a national government-led multi-donor funded program, aims to empower the Afghan people living in rural communities through technical, socio-economic and financial assistance.

Initially targeting the provinces of Nangarhar, Parwan, Bamyan, Balkh, Herat, Kandahar and Helmand, the program is due to expand its activities to 10 additional provinces in 2015 and it is hoped that it will cover the entire country in due time.

Education on Islamic modes of financing is provided and ready-to-be used bespoke contracts to address trading, agriculture and capital goods acquisition needs are developed to the benefit of ‘Saving Groups’ (SGs) and ‘Village Savings and Loans Associations’ (VSLAs).

In particular, murabaha to finance the acquisition of goods, salam with parallel salam for agricultural production and small trade, and istisna’ for the production of artisanry. In addition, mudaraba, and musharaka mutanaqisa partnerships, ijara muntahiya bi-tamlik as a leasing tool, wadia for savings, and qard al-hasan for emergency financing.

This hands-on initiative required extensive traveling to the provinces and meeting communities to better understand local economic realities. Relations were also developed with knowledgeable Afghan scholars to obtain the ijaza (authorization) and tests were implemented before the distribution of the contracts to the communities. Finally, bespoke metrics to measure the results were set up.

On average, 5,523 SGs (2,562 female SGs) totaling 62,479 members (29,243 of which are women) have access to Islamic modes of financing. They are situated in 678 villages across seven provinces and their cumulative aggregate savings has reached AFN 107 million (USD 1.9 million; of which 45% are generated by female SGs) whereas the cumulative amount of financing disbursed to 9,192 entrepreneurs is AFN 67 million (USD 1.2 million).

Most importantly, a weblog on Islamic finance has been launched. This permanent and ever-expanding capacity-building resource is a prime initiative for Afghanistan and allows for the emergence of a virtual community of stakeholders from different sectors of activities and geographic areas.


The takaful initiative aimed to educate the regulator, Afghanistan Insurance Authority (AIA), and the four insurance companies operating in the country: Afghanistan National Insurance Company, the Insurance Corporation of Afghanistan, the Afghan Global Insurance, and the Insurance Group of Afghanistan. As a stepping stone, capacity was built through public seminars and topical information on the building blocks of the takaful industry, which was provided at workshops or at one-to-one meetings.

At the subsequent stage, training courses were tailored to specific needs. The AIA was provided with ‘General Guidelines for the Establishment of a Regulatory Framework for Takaful’, which has helped the regulator process the completion of the first version of the takaful regulation draft that could possibly become a section of the new law on insurance, at present under discussion at the parliament.

The four conventional companies were taught how to create takaful products and actual development has taken place. General-personal lines and family takaful (a way to accumulate future wealth) policies based on mudaraba were developed. A conventional product for property was converted to become shariah compliant using a wakala to allow the use of real estate as collateral by banks issuing Islamic financing. Finally, a motor vehicle plan was also converted to takaful as car insurance is compulsory.

In due time, commercial takaful will play a role in tackling major risks as insurance for Islamic-raised financing needed to build infrastructure ought to be shariah compliant. Takaful contributions must be invested in Islamic instruments and the much talked-about issuance of a sovereign sukuk will definitively help matters. Recently, an Afghan investor based in Europe sought approval from the AIA to establish an Islamic insurance company.

These initiatives are challenging the abysmally low penetration of financial products in rural Afghanistan. By empowering local communities, they are exerting positive influence on the locals’ self-perception, gender emancipation, education, societal sustainability and personal growth.

As an outcome, a more balanced society that recognizes the value of diversity and that is less prone to radical influences is, albeit slowly, shaping up. There is indeed a clear perception that the only way to effectively address the many issues that plague the countryside shall be through the satisfaction of the pent-up demand for Sharia-compliant finance and insurance products.

Alberto Brugnoni is the managing partner of ASSAIF, the oldest Islamic finance consultancy in Europe. In 2012 he laid the base of the takaful industry in Afghanistan. He then led the Islamic finance team of the Afghanistan Rural Enterprise Development Program (AREDP), the flagship initiative of the Ministry of Rural Rehabilitation and Development.

*This article was originally published on Zawya on 25 August 2014. Read the original article here.

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