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Microfinance is a market-driven approach to development, alleviating poverty through the creation of local economies and sustainable livelihoods. It is, however, also associated with negative perceptions such as profiting off poverty and creating cycles of debt. We spoke with Mahir Momand, a microfinance expert who pioneered the field in Afghanistan, about how his work reduced poverty, addressed gender inequality and ultimately threatened the basis of the Taliban insurgency.



Mahir Momand is a microfinance expert and the CEO of Thrive Refugee Enterprise, an organisation that provides microfinance and business support to refugees and asylum seekers in Australia. Previously, Mahir served as CEO of the National Association of Credit Unions in Afghanistan, worked for the World Bank, UNHCR and was Financial Adviser to the Federal Ministry of Labour in Afghanistan. The microfinance programs run by Mahir have helped establish a total of 165,000 small and medium business enterprises in Afghanistan. These have provided a livelihood for nearly 1 million people.

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Microfinance organisations assist to create local economies, and without local economies you cannot develop a country's economy.

We now see in many countries the oversupply of microfinance.

The Taliban did not come back to give them an AK47 and $200 to go kill infidels because they were busy creating their own small ethical businesses rather than getting into something illicit.

These microfinance loans come with interest and in a way it's profiting of poverty.

People are becoming over indebted because of the easy access to loan.

We'd like to get refugees to be economically integrated, socially integrated, we'd like to get them in that credit history so they can be included in the financial system. We'd like the Australian public to know that refugees are good for the economy of this country.

Welcome to Conversations in Development. A podcast about foreign aid, development and social change. I'm Olivia Rosenman and I'm here with Peter Mason my co-host and the CEO of the international development agency, Cufa. Hi Peter.

Hi Olivia.

In this episode, we're talking about microfinance with Mahir Momand, who is the CEO of Thrive, an organisation that provides micro financing and business support to refugees here in Australia. Mahir, thank you so much for joining us on Conversations in Development.

Thank you very much for having me.

So Mahir, you've worked in microfinance for a number of years both in Afghanistan and here in Australia working with refugees. Can you define microfinance and tell us a bit about some of the different forms that it can take?

To me microfinance is assisting people by provision of finance to them where they start micro enterprises. There are various forms of microfinance, but one thing that I believe has been always the core of microfinance, has been micro enterprises and small businesses. What we were doing in Afghanistan was using microfinance in order to meet so many different agendas. For example, women empowerment. Bringing women into the economic fabric of the country at the time. Also, getting people to reach peace through economic development and through microfinance. The purpose of that microfinance could be numerous in a large number. The core of it is always using finance to develop small enterprises so people become self-sustainable or financially self-sustainable.

It's an interesting point you make there about developing small enterprises. How sustainable is that long-term?

That's a good question. For any economy to thrive, you need to have a good functioning small and medium enterprises' sector. Microfinance can assist in making sure that there is an existence of a good and vibrant SME sector. Here in Australia also in the past two to three years, there is a big focus from the government and in a lot of other sectors in small businesses and start-ups is one area where a lot of people are focusing on. For a country's economy to perform well, you need to have a very efficient SME sector. If you take the example of countries like Afghanistan, you have almost no other chance of bringing other types of economy into play, but small industries and small enterprises.

For example, in Afghanistan, you cannot have factories. For factory to exist you need to have plants and equipment. For plants and equipment to operate you need to have electricity. There is no electricity in a lot of areas. Therefore, the only form in certain areas of the world, especially in third world countries, is this very form of micro enterprises, small enterprises whereby people can buy and sell within their own communities. If they produce sufficient number of goods, then they can export to other major cities within the countries or overseas. The idea is to get microfinance organisations assist to create local economies, and without local economy they cannot develop a country's economy.

Mahir, I'd like to go back to talk a little more about Afghanistan. You talked about empowering women, you talked about-

Bringing peace and stability through-

... peace and stability. Those were the two things and I thought having worked in credit unions as you have, I know the power of credit unions to be able to do that. But then from a development context, is it a wise move to spend so much money on developing credit unions when the environment is so insecure and people are just struggling for their daily needs? I always wondered, when is the right time?

That's a very interesting question. I'll start answering that by telling you a story. Starting with senior American generals in the US Embassy in Afghanistan. We were having with a very heated debate, me telling them that I'm not interested in creating what I at the time called 'political credit unions.' Telling them that I'm in the business of creating financial credit unions. Now, let me explain what I meant by that and why was that debate taking place. In Afghanistan, and this can be true in so many different parts of the world, we use microfinance and credit unions for bringing peace and stability.

How did we do that? The American troops went to a lot of areas in Afghanistan especially in areas where there was a lot of insurgency operations going on. They would go, clean the area from the Taliban and they'd create what they call a bubble. Let's say a bubble of 20 kilometres radius. Every time they clean those areas and they left those areas and went to another area to clean, the area that they cleaned would turn back to Taliban strongholds, because there was nothing for those communities to survive on. There were no economies to survive on.

What we were doing in the form of microfinance, in the form of credit unions, to go to those areas together with the American forces, they would clean it for us, we would go and give people small loans to create small enterprises so they can buy and sell between themselves. One was creating a small business in the agricultural area, someone else was doing some other business. We were creating economy within that, right? And therefore-

You're saying creating an economy enhances that peace and security because people have a-

That's what exactly we were doing.

... an economic stake.

As a result the American forces did not have to come back to this area to clean it, because the people who were living there now did not become Taliban, and the Taliban did not come back to give them an AK47 and 200$ to go kill infidels. Because they were busy creating their own small ethical and elicit businesses rather than getting into something illicit.

You're saying that they reason that they would take the AK47 and the $200 was simply because they had no other option-

Exactly right.

... in terms of income.

Exactly right and we were giving them positive alternatives. Microfinance and credit unions can be used before there, stability to bring stability and peace to an area. We have shown it in Afghanistan time and again during that period of time. We established 165 thousand small and medium enterprises, which employed one million people in that country. Afghanistan is a country of 30 million people. To have employed one million people just under five years’ time was seen as a big success. The reason me and my colleagues were attacked in Afghanistan was because the Taliban could very clearly see that we were taking away from their insurgency plate, because the people who they recruited for insurgency purposes were the same people that we would go target and gave alternatives to create small businesses, right? We were taking away from their plate of insurgency.

The other group that we were targeting was people who were growing opium. Afghanistan unfortunately today remains the biggest producer of opium in the world, right? We were giving them opportunity to grow things like saffron, which is much more expensive than opium. By doing that, we were cutting Taliban's revenues because majority of those revenues went to the Taliban not the poor farmers. The third category as I mentioned earlier was we were working with women. We were creating women-based economy and including Afghan women for the first time in the history of Afghanistan by giving them opportunity to start businesses right from their houses without the need to leave the doorstep. Because the tradition there is such that, they don't allow women to leave their doorsteps.

By doing that, we were attacking the Taliban's ideas by giving opportunity to farmers who we were cutting Taliban's revenues. By working with people who didn't have jobs, and were prone to become Taliban, we were cutting from the Taliban's pool of insurgents. Microfinance can be a fantastic and efficient tool in bringing peace and stability to regions. We have proven it in Afghanistan. I believe this can be true in so many different parts of the world.

There was a lot of hype about microfinance in the early 2000’s. You had 2005 declared the UN international year of microfinance, 2006 Yunus and his Grameen Bank won the Nobel Peace Prize. I think in the years after that, the Grameen Bank and microfinance as a concept had a bit of a fall from grace. You heard the stories of mass suicides in India. What actually happened?

One thing that has been a big thing always in microfinance world is something called ‘mission drift’. Mission drift is when microfinance organisations start with that whole idea of providing financial services to create small economies, and then they drift from that main mission and then they engage in so many other development activities forgetting what their core thing was about. This is quite common. I've see it hundreds of times. Organisations who start with that main thing, then they go and do so many other things. That's one reason I think why that's happening.

The second thing is you referred to situations where probably the microfinance clients had to go through difficult times and they couldn't repay, and there were things that the media covered at the time. I think microfinance in today is so big that you cannot simply bring it down by just a few cases. Let me also highlight that a few cases are too big to have. I'm not saying that people's lives don't matter. One single life matters much more than what can people say about it. That's all well and good, but at the same time, the good microfinance brings today in Asia, in Latin America, in Africa is so big, saves so many lives who would otherwise go into so much hunger and all that.

It's still big but I think it has also taken new shapes and new forms because it is evolving as well. At the end of the day, if you go back to the definition that I provided you, that definition remains the core of it, which is provision of finance to get people to create small economies. The good thing about microfinance is that it's not charity, it's not a handout. I've seen it myself when I was working with the United Nations, that if you give charity to people how lazy you actually make those people to become. It's not a handout, it's not a charity. You give people loans, you charge interest on it.

What about the opposite criticism in these microfinance loans come with interest and in a way it's profiting off poverty?

Actually, I think you've got to get our terminology right. Back in the early 2000s and before that, it was called micro credit and it was credit driven. Whereas when Mahir is talking about credit unions and microfinance, you're talking about access to savings products and access to credits both. Somewhere safe to save and maybe get insurance products or the other sorts of financial services in a micro sense, but also credit as well. We've got to be careful with that terminology. There's nothing wrong with micro credit. In fact, it was the year of micro credit not actually micro finance, because credit used well will certainly produce great development results. People also need somewhere safe to save. They also need micro insurance products. They also need all those other financial services. We go to make sure when we talk about microfinance, it actually is more encompassing than just loans.

That's right, but loans remain the core of it. A lot of times ... and I agree with you, people use the term microfinance and micro credit interchangeably, but majority of the times they refer to credit actually. It's not, because micro saving is not that well known. Giving people just this idea that saving is important in itself can be a very big thing. A lot of microfinance organisations do that. They teach people how to save, micro insurance is another thing. To answer your question Olivia, the criticism about microfinance organisations, in short MFIs charging interest.

The good thing about MFIs is that these are social enterprises run commercially for social outcome. Therefore, because they're run commercially, they need to charge interest. These are not charities. We need to make it very clear that these are not charity. These are small businesses that charge interest. Without them charging interest, they cannot survive. Not all microfinance organisations receive donations. Actually the majority of them would be an organisation that are purely run on commercial basis. They need to charge interest and pay for their operating cost.

The other criticism that microfinance organisations receive is that their interest rates are usually higher than the banking institutions. I come from an economics background as well by profession. If you gave small loans and you charge for example, X%, that X% needs to be higher than banks giving out very big loans and charging small percent. Because if you're just making a loan of let's say, $1,000 and you're charging 10% on it, you cannot make enough money to sustain your organisation. That is the reason why microfinance organisation in certain cases may be charging more than what the banks are charging. When you compared it equal to equal, apple to apple, they're not charging more. They're actually charging commercially. Even if banks were giving out small loans, they'd be charging larger amounts.

Here in Australia, if I give you the example, if you take a mortgage of $700 thousand, you may be paying 4% on it, but if you take a commercial loan here in Australia from banking institutions, you may be paying up to 15% on it. Why? These are both loans. Because the commercial loan that you have is probably much smaller for a shorter tenure, for a shorter term compared to a 30 years loan that you have gotten for 700 thousand for a house. These are different products. You cannot compare them.

Also, with microfinance, certainly at the level that we work at in an international development space, you're often not taking collateral for that and so the risk is higher.

That's right. However, even if you say that, it's true that the repayment rate, the default rate would be probably a bit higher in microfinance organisations compared to banks. When you again compare it apple to apple, it's not any different.

That's right.

Which tells you that poor people when they're given opportunities, when you give them loans, that they're so honest and sincere and appreciative of that service that you've provided them, which then shows in their repayment habits.

You've spoken of the benefits of microfinance and emphasised that it's not a handout. I wonder if both of you think the whole development aid sector would be improved if there was more microfinance and less traditional aid.

I think we need to separate two things here Olivia. One is aid in the cases of for example, disaster relief, right? And then development that is a separate thing, right? We still need to have aid in cases of disaster relief. We still need to have aid when there is war going on in places and people don't have food and they need to be provided with food and there is fear of famine and all that, right? That is a separate thing. If we're talking about making people self-sustainable in the long-term, then yes, there's more and more work needed to be in the areas of microfinance.

But I think I'm also seeing a shift personally that a lot of organisations are now identifying the fact that many NGOs in the past or development organisations have had huge overhead costs. It is not anymore acceptable. Actually a lot of development organisations now have a KPI to tell their audience and the public to how much overhead or operating cost they have. The other shift that I'm seeing is that more and more people are moving towards making people self-sustainable rather than giving them handouts. We need to separate those two, but at the same time yes, there is need for more and more microfinance organisation to be out there to provide people opportunity to become self-sustainable and self-sustaining.

If you use microfinance to help people be able to sustain themselves, but they still live in a society where there aren't adequate social services, how far can microfinance go when it's operating within a society that isn't adequately developed?

Impact assessment has been one way to measure the effectiveness of microfinance institutions. In my time under my watch, we conducted international level impact assessments of microfinance in Afghanistan. The results of those came out very clearly and told us a few things. People who we have lent to initially we'd take a snapshot of their household, their livelihood, their lifestyle, right? We'd return six months, nine months, 12 month, 24 months later to see because of our loans what has changed. We'd take another snapshot of their life. We'd see in 12 to 18 months’ time that there would be major changes in their lives.

Let me explain what those major changes were. If we take an example of a family that had let's say five children, which is quite normal in Afghanistan, that'd be actually a small size family. Out of these five children, three of them were school age and none of them were going to school. They're working with their father on the street selling cold water in hot summer days. By the time we'd return in 12 months or 18 months’ time, you'd see that those three children are not anymore on the street. They're actually going to school. In terms of education, you could clearly see the impact on the education.

The second thing you'd see that the women in that family, if they had delivery time, earlier they couldn't afford to go to a hospital because it cost money, and they would be delivering through local traditional methods, right? Now you could see that they actually can afford those type of health services. You could see that earlier if they didn't have a TV in their house, now they have a TV, right? You could see that if it was the woman who we have lent to, the husband, or the brothers, or the fathers in the family would listen more to them, because now they're bringing in economic benefit to the family. We could clearly see three or four points direct impact of microfinance on health improvement, on education improvement, on people's status in the society because of that.

I'm not saying that microfinance is the silver bullet to all the issues that exist out there in the community. In areas where the government cannot provide, it can be a good way of sustaining, because whether we like it or no, economics are the basis of so many things. If you have money, you can buy certain services. If you have, money you can go to a doctor. If you don't have money, then you need to use local medicines and local methods to do that. Impact assessment has always been done there not only in my programs but around the world and you can clearly see how it actually impacts people in their lifestyle.

I think there is really interesting question here. We're talking about the benefits of microfinance, but we're now seeing in many countries the oversupply of microfinance. I know in Cambodia, where we work, there is almost a microfinance institution every single street corner. In some of the communities that we work in, people are becoming over indebted because of the easy access to loans.

Who are all these organisations? Where is it all coming from?

It's a mix of not for profits and also commercial microfinance, because microfinance can be very profitable. And then you have a lot of wholesale funds coming in from overseas. People trying to place wholesale funds into those microfinance institutions. There is almost this supply driven approach to microfinance rather than a demand driven approach from the communities. You're finding a fair bit of over indebtedness, not at the crisis point of Andhra Pradesh in India, but we're seeing more and more people getting over their heads in terms of debts. I guess I'd like to understand from Mahir's perspective if he saw any of that in his travels around whether it's the UN or Afghanistan. Whether microfinance is just for good or that it actually have a negative impact as well?

I believe that like every industry, microfinance if MFI do their job right, they need to evolve. What I mean by that is that when they start fresh, they're doing very much basic level financial service delivery and all that. When they go to the next level, there's a need for microfinance institutions to invest in things like credit bureaus, which are non-existent in so many different parts of the world in third world countries. Because if you have a central credit bureau where every person's credit is recorded like we have here in Australia, which is Equifax and Veda and all that.

Then, before a microfinance institution lends to someone, they can check whether this person has had previous loans or no. Because if the person says, "Look, I don't have any other loans." You just take it at the face value of that. In reality the person has five other loans also and he's already late on three of them and the whole reason he's here to get a loan from you is to get this money and to repay those loans probably, right? Therefore, that evolution in the industry needs to go to the next level whereby microfinance institution need to get together, invest in creating things like credit bureaus and other organisation that provide that high level support.

In Afghanistan, we have seen that situation where we'll get into a point of people coming to a microfinance institution, borrowing to repay the loan the other ones. We got to a situation we said, "Yeah, now this is time for our organisation to invest, create a credit bureau." When that was done, we could clearly see that that benefited everyone.

Who are you saying needs to make that investment to establish a credit bureau? Is it the government?

We did not rely a lot on the government in Afghanistan. It is in the benefit of the microfinance institution themselves, because if you are an MFI operating in certain environment, you don't want to have what we call, a bad portfolio, unhealthy portfolio of loan book, right? Therefore, it is wise for you as an institution to invest in things that would help you protect the integrity of your loan book. One way to do that is to work with other microfinance institution, because it's in everyone's benefit. Therefore, you reach almost a point where you need to have organisation Apex Bodies or the Industry Associations to provide that type of support.

Certainly in Papua New Guinea, they're doing exactly that now. The financial institutions have come together and setup their own credit bureau because of that exact problem, but yes, it's not driven by the government it's driven by the financial institutions.

Peter, you mentioned that in Cambodia there's now a lot of commercial microfinance organisations that have come in there and that it can indeed be quite profitable. Is there a conflict there between the microfinance organisations that are operating on a not for profit basis and the ones that are coming in there on a commercial way? Can they effective work together? How do they compete?

It's an interesting environment there, because what we're seeing is the microfinance institutions are starting to only service the middle class. You've got this rising middle class. Whenever I talk about middle class in Cambodia, we're not talking about what we would perceive in Australia as middle class. We're talking about people that have some assets like a motorbike or some other ... Computer, some basic assets but that would be the middle class. They would have a regular salary. They're not working necessarily out in the rural areas. They're the ones that a lot of the commercial and also not for profit organisations are now starting to target, because the loan sizes start to increase because they can afford to repay higher levels of loan. Whereas those that are working with the very poor, you're talking about much smaller loans, higher transaction cost because they're paying smaller amounts of money back regularly, so that costs the institution a lot more money. Those commercial institutions they're not servicing the poorest of the poor. They're servicing that next layer on top.

Mahir, and we will have to wrap up but maybe I'll ask you a final question. You're the CEO of Thrive, which is a microfinance organisation working here within Australia. How does your business work?

Thrive is established to help people of refugee and asylum seeking backgrounds in Australia to start their own small businesses, because a lot of refugees come here and only 31% of them are employed, the rest of them are unemployed. You have refugees who come here, who go knocking so many employers' doors to find work. No one would employ them because they don't have Australian work experience and they don't get Australian work experience because no one employs them. He's accustomed to situation and then they get fed up of that whole situation. They come to us. They say, "Well, we'd like to start a small business."

First, we help them understand what it takes to start a small business in Australia. Because where refugees come from, if they want to start a business, they'd just probably just go open shop, but here in Australia you can't do that. You need to have the business properly registered with ABN and ACN and all other requirements. Also, before people start small businesses in Australia, they need to undertake what we call a feasibility study and we assist them with that by helping them develop a business plan, a marketing plan, a cash flow projection, and all that. That's element one of our work.

We provide the microfinance loans, which are up to $20 000 in Australia. That's element two of our work, microfinance provision. We don't stop there because in Australia unfortunately, up to 85% small businesses fail in the first two years. What we do as a result of that, we provide up to three years mentoring support. It's kind of like a holistic support that we provide to them. It's not just microfinance and provision of loans.

One thing that I would like to highlight Olivia I think it is important to recall, that is why we do what we do. We're not a for profit organisation. There are three main reasons why we do what we do. We would like to get refugees to be economically integrated, socially integrated, we'd like to get them that credit history so they can be included in the financial system. We'd like the Australian public to know that refugees are good for the economy of this country. One thing that we lack in this country, there is no focus on refugee economics. People don't understand. All they look at is, refugees are a burden on the system. They don't understand. They don't see it from the economic perspective.

All right. Well, Mahir, thank you so much for joining us on Conversations in Development


Thank you very much for having me. Thank you.

Conversations in Development is produced by me Olivia Rosenman with music by Studio Garry. The podcast is brought to you by Cufa. Cufa is an international development agency whose work creates infinite value alleviating poverty reaching more than 4 million people across the Asia Pacific. To learn more about Cufa's work and for more information on our guests, visit ConversationsInDevelopment.com.au, and for more Conversations in Development, make sure you subscribe to the podcast to catch all our episodes.