Can and should we still be active in Afghanistan outside of direct humanitarian aid? Or are all the hops and malt lost there anyway, or doesn’t every economic activity directly or indirectly support the Taliban? An interview with Bernd Leidner, Chairman of the Board of the Afghan Credit Guarantee Foundation (ACGF).
The Afghanistan Credit Guarantee Fund (ACGF) is originally a German development cooperation project. ACGF was one of the most successful international development cooperation projects in Afghanistan before the Taliban took power. This fund guaranteed 50% of the loans granted to small and medium-sized enterprises in Afghanistan. Now that the Taliban have taken power, ACGF is resuming its guarantee activities. Bernd Leidner, one of the two managing directors of the ACGF, comments.
The interview was conducted by Roger Peltzer, who is a member of the Board of Trustees of the ACGF Foundation and who played a key role in the transformation of the guarantee program managed by DEG – Deutsche Investitions- und Entwicklungsgesellschaft into a foundation in 2014.
Question: Mr. Leidner, you have been in the “business” of establishing credit guarantee funds for over 30 years – first in Palestine and then from 2004 also in Afghanistan. How does a credit guarantee fund work?
Answer: The most important prerequisite is first of all sufficient equity in the loan guarantee fund, provided by a government or often also by donor institutions. On this basis, the fund is then in a position to guarantee loans from banks to small and medium-sized companies, usually at a rate of 50 – 80%. Ideally, 100% guarantees are not issued so that the banks retain a certain level of risk and therefore ensure that they select their borrowers carefully. Without these guarantees, banks would largely not grant such SME loans due to the associated risk – whether it is merely subjectively perceived or actually objectively present. In Afghanistan, as in other developing countries, we also have the case that the central bank recognizes these guarantees as collateral and grants the banks additional advantages for the calculation of capital ratios and provisions. Without the credit guarantee fund, banks would otherwise be able to grant significantly fewer loans overall and the risk costs of these loans would be higher.
It is also important to note that in many countries the final borrower, i.e. the customer who receives the loan from the bank, does not know that this loan is guaranteed. This should not affect the payment behavior of customers. The partner banks also receive substantial technical assistance (TA) from the ACGF, which enables them to develop needs-based credit products and professionalize their credit processes, thereby minimizing default risks.
Question: Can a credit guarantee fund then only issue guarantees 1:1 in the amount of its own capital?
Answer: No, because the probabilities of default are low in normal times, as we shall see, guarantee funds can leverage their capital and cover significantly more guarantee volume than the equity available; in the case of ACGF, this leverage is usually five times. This factor is one of the key efficiency advantages of credit guarantee funds.
Question: How did the Afghanistan Loan Guarantee Fund and the current foundation structure come about?
Answer: After I had gained experience with loan guarantees in the Palestinian territories, DEG approached me in 2004 with the request to design a loan guarantee program for Afghanistan. This was then launched in 2005 with an initial EUR 1 million from the BMZ (the BMZ later provided substantial additional funds) and USD 5 million from USAID. Initially, DEG was the trustee of this line and had to approve all the guarantees issued by our team in Kabul individually in Cologne. In this way, we were able to provide guarantees amounting to USD 99 million between 2005 and 2014, and therefore loans to SMEs totaling USD 133 million – with very good repayment rates: the default rate of the underlying loans was less than 2%.
This program was not part of DEG’s core business and at the same time the volume of business was growing; an institutional solution had to be found. With the support of BMZ and DEG – and after initial skepticism on the part of the Federal Audit Office and the Federal Ministry of Finance – we then launched the Afghan Credit Guarantee Foundation. This is a non-profit foundation under German law based in Cologne. It maintains a subsidiary in Kabul organized under private law, which drives the local business forward in cooperation with the head office in Germany.
Question: What happened after the foundation was set up?
Answer: We initially received a grant of USD 5.6 million from the World Bank. In addition, there was a line for technical assistance measures in the amount of USD 2.5 million. In 2020, the World Bank promised us a financial framework of up to USD 60 million, of which USD 16 million was disbursed before the Taliban took power. At the same time, KfW approved an endowment of up to EUR 14.5 million. As a result, we were able to expand our business considerably and had 60 employees on site before the Taliban came to power. The lending business was expanded to a cumulative USD 260 million. At that time, ACGF had almost half of all outstanding SME loans in Afghanistan on its books. The loan sizes ranged from a few thousand USD to USD 0.5 million. Our monitoring and evaluation system showed that our activities had saved around 50,000 jobs and created 9,000 new ones. Without wanting to sound arrogant, we were certainly one of the more successful German and international development cooperation projects in Afghanistan.
Question: And then the Taliban came to power. What impact did this have on the ACGF?
Answer: First of all, with the support of the BMZ and other organizations, we quickly evacuated all our employees (so-called local staff) including their families (250 people in total) to Germany. Our office was seized by the Taliban, but after the initial storm had subsided, we soon opened a new office in Kabul. As counterintuitive as it sounds, the security situation has definitely improved under the Taliban, so that we can travel to Afghanistan again without any problems and do so regularly. Our partner banks and partner microfinance institutions naturally suffered considerable losses in their loan portfolios as a result of the regime change – even if these ultimately turned out to be lower than we had initially feared. We then agreed with these banks to compensate them for the guaranteed losses in a lengthy negotiation and review process. This was not good for our foundation capital, but it was absolutely necessary in order to maintain the credibility of the ACGF and the partnership with the financial institutions.
Question: And what happens now?
Answer: Together with our partners, we have restarted our guarantee business and concluded new guarantee framework agreements. The entire lending business in Afghanistan now consists of Islamic financing, which does not include interest, but fees, profit margins, etc. Some donors are very interested in us expanding our activities again and, in particular, promoting entrepreneurs and contributing to the provision of basic needs for the population and the supply of everyday goods by financing the private sector. The EU has now granted us funding of EUR 11.9 million for grants to entrepreneurs, technical assistance services and operating costs. We are also talking to the World Bank and the UNDP about providing further guarantee capital.
Question: Is it even possible to run such a business under the current circumstances? And how can the appropriate participation of women in the work of the ACGF and in the lending business be ensured?
Answer: The situation in Afghanistan is more differentiated than it appears to the general public here. It is still possible and common for women to work in the private and financial sector. We have now hired four employees for our still small team at our subsidiary consulting company in Kabul.
In the area of microfinance, which we cover primarily with our partner OXUS Afghanistan, the proportion of women among borrowers is still around 50%. For cultural reasons, women in Afghanistan find it particularly difficult to provide the collateral usually required for a loan. The ACGF guarantees therefore make a special contribution to the participation of women in economic life. This is very important to the ACGF and our donors.
Question: What are your main priorities in development cooperation for Afghanistan and how are you dealing with the new government?
Answer: The Afghan population needs a strong private sector, which traditionally consists mainly of SMEs. Despite all the difficulties, SMEs are able to react to the framework conditions and seize their opportunities with flexibility and initiative. In times of limited fiscal leeway, it is primarily the private sector, mainly SMEs, that must create income and jobs. The current framework conditions have not only deteriorated. The supply of financial services, especially loans, is extremely important for a functioning SME sector. Creating access to financing for SMEs and establishing and consolidating structures in the financial sector is ACGF’s mandate, to which we will remain committed in the future.
ACGF works exclusively with private banks and microfinance institutions. The central bank is an exception to a certain extent.
Question: The ACGF is a very German construct. What about Afghan ownership?
Answer: Before the fall of the Taliban, we had an employee of the Afghan government on the three-member Board of Trustees, seconded from the Ministry of Finance. However, he then also emigrated abroad.
In the very long term, given the significantly changed framework conditions compared to today, it could make sense to strengthen the structures in Afghanistan in the long term. First of all, however, the headquarters in Germany have proven to be extremely successful. I don’t know where we would be today if we had had the Foundation’s capital and management during the uprising in Kabul.
Question: The ACGF Foundation is set up as a consumption foundation, i.e. you can and do use up your capital. In this respect, they are dependent on the occasional provision of additional capital. Is this a sustainable business concept?
Answer: In order for our business model to work, we have to put a lot of effort into credit checks and technical assistance for our partners. The Afghan financial sector is not yet very mature and efficient. We also make considerable efforts to ensure very good governance and compliance against the backdrop of our international investors. In addition, due to the upheavals and their economic situation, our partner banks are far from being able to raise cost-covering guarantee fees and, as a non-profit foundation, we are not obliged to charge standard market guarantee fees. In this respect, our operating and risk costs significantly exceed our fee income from the guarantee business. However, we are continuously working on narrowing this gap. In addition, we were hardly able to generate any interest income from the investment of our guarantee capital for many years due to the low interest rates.
Last question: The ACGF is one of the more successful German and international development cooperation projects with Afghanistan. What can DC learn from the experience gained with the ACGF? Answer: ACGF can be considered part of the Afghan financial sector. We have established a structure whose function is to mobilize local capital while cushioning credit risks. Even if the loan guarantees cannot cover costs due to the underdeveloped Afghan financial sector, we use private sector principles to offer demand-oriented financial services. In Afghanistan, there is not only a need for guarantees, but also a demand. ACGF attaches great importance to a trusting partnership with local banks and is guided by international best practices in the implementation of its business.
Featured photo: Workshop owner in Kabul; Photo: Daniel Jobmann
