Value Addition and Trade Facilitation Implementing Partner for AAF Project

The Afghanistan Access to Finance Project (AAF Project) is dedicated to revitalizing the country’s financial sector by promoting the adoption and enhancement of Sharia-compliant financial systems. Faced with significant challenges, such as only about 10% of the population having a banking account compared to a 68% average in South Asia, the financial sector remains constrained and vulnerable. Predominantly short-term bank lending hinders investments in sectors requiring longer maturity periods. Additionally, the banking system, still recovering from sharp declines in deposits, has shifted its focus towards more liquid assets and fee-based revenues to mitigate risks of undercapitalization and the ongoing issues with international payment systems.

Simultaneously, the microfinance sector has been adversely affected by the impacts of the COVID-19 pandemic and political changes, drastically reducing the number of operational Microfinance Institutions (MFIs) and their loan portfolios. The transition to Sharia-compliant services, compelled by recent regulatory changes and directives to waive interests on loans, has placed further strain on these institutions. In response, the AAF Project aims to strengthen micro, small, and medium enterprises (MSMEs), particularly women-led businesses, by developing Sharia-compliant financial products, enhancing institutional capacities, and expanding access to financial services to drive economic growth and stability in this challenging landscape.

Supporting this initiative, the project champions a variety of structured activities tailored to enhance financial inclusivity and address the prevailing economic challenges:

• Promoting Shariah-compliant Value Chain Financing through Financial Institutions: This involves the development of tailored Islamic financial products based on extensive market research and consultation to ensure competitiveness and adherence to Sharia principles.

• Institutionalizing Islamic Finance Expertise for the Financial Sector: The project standardizes practices for transitioning to Islamic finance by creating a Unified Conversion Guideline and establishing a Center of Excellence for Islamic Finance, ensuring continuous support and adaptation.

• Value Chain and Trade Ecosystem Building: By enhancing the value chains, supporting sustainable production methods, and improving market connectivity and regulatory environments conducive to international trade, the project aims to boost economic activity.

• Supporting Sharia’ Compliant Microfinancing for Economic Recovery and Women Empowerment in Afghanistan: The development and implementation of Sharia-compliant microfinancing options are designed to support economic recovery and empower women, alongside providing necessary technical support to financial institutions.

• Engagement Facility: ICPSD Technical Support to UNDP Afghanistan: This facet offers skill development and resilience training and facilitates business-to-business national trade meetings to enhance agricultural productivity and establish robust trade networks.

The combined efforts of these projects and activities aim to restore banking confidence, diversify financial products and align economic recovery with ongoing humanitarian efforts. Successful implementation hinges on expert leadership to synchronize financial services with value chain enhancements, ensuring comprehensive and sustainable development for Afghanistan’s businesses.

Building on the AAF Project’s efforts to promote financial inclusivity and address economic challenges, the “Value Chain and Trade Ecosystem Building” initiative is a crucial component of the strategy and a complementary part of the project. It specifically targets the economic infrastructure through three key activities that are designed to directly support the enhancement of Afghanistan’s financial and trade systems:

• Strengthening the Value Chain: This activity focuses on overcoming critical challenges such as the lack of machinery, inadequate formal payment channels, and high input costs. The goal is to improve the value chains and support sustainable production methods. By developing financial products tailored to the needs of local producers, the initiative enables them to enhance their products and access international markets with higher profit margins, thereby boosting economic growth.

• Market Connectivity Assessment: This involves a thorough analysis of trade challenges, including infrastructure deficits and regulatory hurdles, using advanced techniques such as satellite imagery. This analysis helps to identify bottlenecks, uncover niche markets, and pinpoint strategic trade opportunities. Based on these insights, the project also suggests necessary reforms to improve the trade regulatory framework, enhancing the overall business environment.

• Trade Facilitation: Recognizing the barriers faced by Afghan traders in a high-risk environment and the absence of formal banking channels for international payments, this activity aims to design accessible trade finance schemes. It includes developing clear export guidelines and policy recommendations for regulatory reforms. Additionally, the initiative focuses on strengthening business groups and cooperatives, enhancing their market access and competitive edge on a global scale.

These targeted activities within the “Value Chain and Trade Ecosystem Building” initiative are crucial for the AAF Project’s goal of restoring banking confidence, diversifying financial products and aligning economic recovery with ongoing humanitarian efforts