Case study

Microcredit, Informal Credit and Rural Livelihoods: A Village Case Study in Balkh Province

Examining the effect of microcredit on informal credit relations
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This case study examines how the entry of microcredit into village and household economies in Afghanistan affects informal credit relations and livelihood outcomes, either directly or indirectly, through effects on the overall village economy. Study findings are based on analysis of qualitative data collected from a village in Dehdadi district in Afghanistan. The study analyzes two MFIs, which it calls MFI 1 and MFI 2, operating in the village. It focuses on MFI 1, which establishes credit unions through which loans are disbursed and managed. Study findings include:

  • MFI loans are much bigger than informal loans, motivating clients to apply;
  • MFI 1 requirements regarding savings and guarantors meant that only the most resourceful villagers were eligible for loans;
  • Many villagers reported interest in the loans but were either denied or decided to opt out due to strict requirements;
  • Repayment of loans was difficult because it did not follow the natural cash flow of clients'’ livelihood activities.

MFI 1 has a low number of clients, primarily due to its strict requirements. MFIs should understand informal credit relations and develop demand-driven services appropriate for local livelihood activities.