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1999 01 31 * STA # 3: The role of opium as a source of informal credit

http://www.unodc.org/pakistan/en/report_1999-01-31_1.html
girl The Role of Opium as a Source of Informal Credit

 

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Preliminary Report JANUARY 1999



CONTENTS

The Strategic Studies Series

One of UNDCP?s principal objectives is to strengthen international action against illicit drug production. In Afghanistan, its principal objective is to reduce and eventually eliminate existing and potential sources of opium cultivation. It is recognised that in order to achieve this there is a need to further the understanding of the diversity of conditions and priorities that different socio-economic and spatial groups take into account when making decisions about their involvement in opium poppy cultivation.

The Strategic Study Series is one of the tools by which UNDCP intends to document the process of lesson learning within the ongoing Afghanistan Programme. Studies in this series will focus on issues that are considered to be of strategic importance to improving the design of current and future alternative development initiatives in Afghanistan. Information collection for these studies is undertaken by the UNDCP Drug Control Monitoring System (AFG/C27) in close coordination with the ongoing presence and project activities of UNDCP?s Poppy Crop Reduction project (AFG/C28). Recognising the inherent problems associated with undertaking research into the drugs issue in Afghanistan, emphasis is given to verifying findings through systematic information-gathering techniques and methodological pluralism. As such, the Studies will be undertaken in an iterative manner, seeking to consolidate preliminary findings with further fieldwork. It is envisaged that this approach will allow panel or longitudinal studies to be undertaken which assess both the changes in opium poppy cultivation and lives and livelihoods amongst different socio-economic, gender and spatial groups over the lifetime of the Afghanistan programme.

These Strategic Studies will be an integral part of the regional study, ?The Dynamics of the Illicit Opiate Industry in South West Asia? due to be published and disseminated in early 2001. The purpose of this regional study will be to: (i) contextualise the illicit drugs situation in South West Asia for the donor community, addressing issues of interest to their development agendas, including poverty, health, gender and the environment (ii) and for UNDCP to identify ?best practice? in the design and implementation of alternative development, law enforcement and demand reduction initiatives.

Strategic Studies will include:

  • An Analysis of the Process of Expansion of Opium Poppy Cultivation to New Districts in Afghanistan.
  • The Dynamics of Farmgate Opium Trade and the Coping Strategies of Opium Traders.
  • The Role of Opium as a Source of Informal Credit.
  • The Role of Opium as a Livelihood Strategy for Returnees.
  • Access to Labour: The Dynamics of the Labour Market for Opium Poppy in Afghanistan.
  • The Role of Women in Opium Poppy Cultivation in Afghanistan and the Consequences Arising from its Replacement for Women?s Economic and Social Standing.
  • ?The Balloon Effect?: An Analysis of the Process of Relocation of Opium Poppy Cultivation in Afghanistan.

Executive Summary

Initial fieldwork in Qandahar in late 1997 revealed that a significant number of households obtained advance payments, known as salaam, on their future opium production. Those households with little or no land, indicated that this credit was essential to meeting their basic needs during the winter months, a time of food shortage for many Afghan households. Indeed, it was a common claim that a ban on opium cultivation in the target districts would prompt many of those households without land to relocate to neighbouring areas where they could cultivate opium and thereby continue to obtain salaam.

Further fieldwork suggested that other commodities, including agricultural inputs, could be purchased on credit. Respondents indicated that lenders had a preference for those who cultivated opium poppy.

Recognising that the existing informal credit systems in Afghanistan possibly gave preferential access to those households that cultivate opium poppy, and coopted more vulnerable households into opium poppy cultivation, UNDCP sought to verify these initial findings with more in-depth research in the target districts of Ghorak, Khakrez, Maiwand and Shinwar. To verify findings and distinguish between generic patterns and localised issues, in-depth interviews were conducted over a wide geographical area with respondents from the different socio-economic groups within each district.

In total 108 interviews were conducted, of which eighty-one were in Qandahar between 14 and 28 June 1998, and 27 in Shinwar between 2 and 5 July 1998. Considerable effort was made to interview a number of respondents who had previously been interviewed during the fieldwork for the Baseline Survey in order to verify findings and to provide more quantitive data to support to the qualitative information collected.1/ This Study was also undertaken in close consultation with ?Strategic Study 2: The Dynamics of Farmgate Opium Trade and the Coping Strategies of Opium Traders?.

Although this document represents an initial phase of a study that will be consolidated with further fieldwork, preliminary findings would suggest that:

  • Credit is an integral part of livelihood strategies amongst all the socio-economic groups in the target districts.
Whilst the vast majority of those interviewed for the purpose of both this Study and theBaseline Survey had obtained credit during the previous twelve months, the highest incidence of credit was amongst the landless, where almost all were found to have both obtained credit during the previous twelve months and cultivated opium poppy.
  • The landless were found to have a relatively higher level of household debt than those who owned land.
Moreover, amongst the landless, credit was generally obtained to satisfy basic needs. As such, the landless tended to borrow to purchase food, clothes and medicine, whilst the wealthier members of the community primarily obtained credit for productive investment in agriculture. In the longer term this trend may lead to a growing inequality of wealth and income within the target districts, reinforcing the socio-economic and political structures that create and sustain poverty.
  • Within the target districts credit can be obtained from a variety of different sources through a range of different mechanisms.
These diverse types of financial and material assistance allow households to spread their liabilities across a range of lenders, including family, landlords and commercial traders.
  • Obtaining an advance on a fixed amount of agricultural production is the most common means for obtaining credit in the four target districts.
This system, known as salaam, provides advance payments on opium, wheat and black cumin. Opium was the crop on which the majority of borrowers had obtained an advance payment.
  • Salaam
facilitates the ?distress sale? of agricultural crops, allowing traders to acquire opium, wheat and black cumin at prices significantly less than their harvest price.
The terms of salaam typically improve with the proximity of the harvest of the crop on which it is being obtained. Consequently, households were found to delay the sale of their future produce until it was absolutely essential, obtaining a number of advances throughout the winter cropping season.
  • Although none of the informal credit systems operating in the target district are ?interest bearing?, the cost of borrowing far exceeds the amount of the initial loan.
This high cost of borrowing in the target districts reduces the resources available for consumption and productive investment in agricultural, particularly for the most vulnerable.
  • The major source of credit in the target districts would appear to be shopkeepers and traders.
These traders and shopkeepers tend to be located in the village or district bazaar. They typically trade in a variety of commodities, including fertiliser, foodstuff and medicine. Whilst the majority of respondents reported that they generally obtained loans from these shopkeepers through purchasing commodities on credit, they also suggested shopkeepers were a major source of salaam, particularly those in Shinwar and Maiwand who specialised in the opium trade.
  • Opium is an important source of credit, savings and investment within all four target districts.
Salaam was obtained on opium by the majority of those interviewed and as such is integral to obtaining seasonal credit. Opium is also one of the commodities that can be purchased and resold as a means of obtaining cash loans under a system known as anawat. The fact that opium is non- perishable with a relatively stable value in comparison with the local currency, the Afghani, means that it is typically used as a means of household saving. Moreover, further fieldwork has revealed that the centralised nature for the trade in opium in the east and subsequent price differentials between districts make it an important commodity for short term speculation for those with sufficient disposable income in Shinwar.2/
  • Opium is currently the preferred crop for those providing advances in Maiwand, Ghorak and Shinwar.
Indeed, in Maiwand and Shinwar opium was the only agricultural product on which an advance could be obtained.
  • Indigenous systems of informal credit have evolved with the diversification of agricultural production.
For instance, the advance system seems to adapt to other high value crops. Indeed, the high incidence of salaam payments on black cumin in Khakrez illustrates that lenders adjust to new market opportunities and are not committed solely to the provision of advances on opium.
  • The dramatic fall in the yield of opium in 1998, has led to many households, particularly the most vulnerable, facing considerable problems repaying their seasonal debts and servicing their longer term debts.
Given the substantial increase in the post harvest price of opium in the south in 1998, those who purchased opium on the open market to repay their salaam debt, were found to be paying as much as four times the value of the original advance given. Those without disposable income obtained further loans to purchase the opium required to repay theirsalaam. The high cost of borrowing under these informal systems means that the real cost of repaying the salaam initially received, could be as much as six times the original loan, a significant loss particularly to the most vulnerable
  • Strategies for the repayment of debts differ between socio-economic groups.
Typically households initially sought to reschedule their repayments. However, this was at the sole discretion of the lender and was found to be far easier to obtain for those who owned land. Amongst the landless, wage labour was a popular strategy for repaying their existing debts, although it was recognised that opportunities were limited. Those with land cited the sale or rental of household assets as a strategy for the repayment of household debts. Whilst the sale of land was considered a last resort by those respondents that owned land, offering the use of land or water rights to a neighbouring villager on a temporary basis, was viewed as a more acceptable way of repaying existing debts. Increasing opium poppy cultivation was cited by all socio-economic groups as a means of repaying their loans.
  • Few households were found to consider defaulting on their payments as a viable strategy under the existing informal credit systems.
Whilst the landless would appear to have the greatest opportunity to abscond, this strategy was not cited by any of the respondents despite their obvious distress. Failing to repay existing debts was viewed with disdain by both the present authorities and the general population.

Recommendations

  • It would appear that opium poppy cultivation is not purely a function of profitability but is an important means of obtaining credit during times of increasing vulnerability. It is essential that interventions aimed at reducing opium poppy cultivation adopt a strategy that seeks to secure livelihoods rather than simply increase incomes.
  • Credit initiatives would appear to represent a strategic niche for influencing the level of household opium cultivation amongst the most vulnerable, and, as such, should be integrated into development interventions in the target districts of C28 and possibly in other source areas.
  • Credit initiatives need to be integrated into an overall strategy for integrated rural development and should not be considered in isolation.
  • There is a need to establish the appropriate mechanisms by which credit can be targeted on the most vulnerable, who currently have few alternatives for obtaining credit other than through the cultivation of opium. These mechanisms will need to be context specific and should be identified through the active participation of the community, particularly the most vulnerable.
  • Given the limited market opportunities currently available to the most vulnerable, consideration should be given to the provision of credit in- kind.
  • Ideally, the community should have responsibility for the management of any credit fund established. To achieve this the design, implementation and monitoring of such a scheme has to be undertaken with the active participation of the community, particularly the most vulnerable.
  • UNDCP should conduct a workshop in partnership with those agencies currently implementing credit schemes in Afghanistan in order to define ?best practice and lessons learnt? and how these might best be applied in UNDCP?s target districts.

1/ See Socio-Economic Baseline Survey for UNDCP Target Districts in Afghanistan(forthcoming).

2/ For a more detailed discussion see Strategic Study 2: The Dynamics of the Farmgate Opium Trade and the Coping Strategies of Opium Traders.


1. Objective

This Study seeks to explore the role of opium as a source of informal credit in UNDCP?s target districts.

2. Introduction

Currently, Afghanistan has no formal credit institutions. However, there are a number of informal sources of credit, providing both cash and ?in-kind? loans to those households that have insufficient savings or income to meet their short, medium, or long term expenditures. These sources of credit may be family, friends, or traders in agricultural or non-agricultural goods. Loans are provided on the basis of personal knowledge of the borrowers ?trustworthiness?, including income, assets and status within the community.

This Study explores the informal sources of credit in the districts of Ghorak, Maiwand, Khakrez and Shinwar in Afghanistan. It seeks to establish the role that opium plays within these informal credit systems and how this impacts on household cropping patterns amongst the different socio-economic groups in the target districts. The issues addressed in this Study include the types of credit available, current levels of household debt, the impact of debt on various socio-economic groups, and strategies for repayment. This Study is undertaken in close consultation with Strategic Study 2: ?The Dynamics of Farmgate Opium Trade and the Coping Strategies of Opium Traders?.

3. A preliminary report

This is a preliminary report focusing on the four target districts of the Poppy Crop Reduction Project (AFG/C28), Ghorak, Khakrez and Maiwand in Qandahar and Shinwar in Nangarhar Province. To explore the nature and scale of household debt, initial fieldwork was timed so as to coincide with the period when households were repaying the loans they had obtained during the winter cropping season. It is intended that this work will be consolidated with further fieldwork (see Annex A: Terms of Reference).

Due to the perceived sensitivities associated with both credit and opium poppy cultivation, emphasis was given to conducting a number of in-depth semi-structured interviews within the four target districts. To verify findings and distinguish between generic patterns and localised issues, in-depth interviews were conducted over a wide geographical area within each district. Consequently, three villages were selected from each district on the basis of location and, in the case of the districts of Shinwar and Maiwand, the source of irrigation.

To explore the role of credit for the different socio-economic groups within the target districts, nine households were selected in each village. Since wealth and land-ownership seem to be inextricably linked in rural Afghanistan, respondents were selected on the basis of whether they were landless, owner-cultivators or landlords. For the purpose of this Study, owner-cultivators were defined as those who worked their own land and offered neither their labour, nor, hired tenants or sharecroppers on a permanent basis. Landlords were defined as those households that hired tenants or sharecroppers to work on their land on a permanent basis. Within each village interviews were conducted with three households from each of these three socio-economic groups.

In total 108 interviews were conducted, of which: 37 were with households who did not own land; 35 with owner-cultivators; and 36 with landowners who employed sharecroppers or tenant farmers. In total eighty-one respondents were interviewed in Qandahar between 14 and 28 June 1998 and 27 were interviewed in Shinwar between 2 and 5 July 1998.

So as to verify findings and to provide more quantitive data to support to the qualitative information collected, efforts were made to interview households who were respondents for the Baseline Survey undertaken in February and March 1998. Consequently, of the 108 interviews conducted, approximately 60% were with households interviewed during theBaseline Survey.

4. Future analysis

In order to strengthen the recall of respondents, this initial fieldwork was conducted during the period in which most households were repaying the credit they had obtained for the winter cropping season. To consolidate these preliminary findings, UNDCP envisages that further fieldwork will be undertaken during the winter cropping season 1998/99, when many households are expected to obtain loans both for the approaching agricultural season and for periods of food scarcity. This further fieldwork will be particularly important for exploring the coping strategies respondents adopted in order to repay the debts they incurred in the 1997/98 growing season.

5. The importance of credit

Fieldwork reveals that loans, or poor, in Pashto, are an integral part of household livelihood strategies in the four target districts of Ghorak, Khakrez, Maiwand and Shinwar. Indeed, 95% of respondents interviewed for this Study claimed that they had obtained loans during the previous twelve months. Only five respondents suggested that they had not taken loans in the last year, three of which claimed to never having taken any loans.image_report_99-01-31_4

The Baseline Survey supports this finding, suggesting that 85% of the 600 households surveyed had obtained loans during the previous twelve months. The prevailing need for credit within the target districts is highlighted by the fact that the proportion of households who obtained credit varied little between districts, ranging from 82% in Ghorak to 95% in Maiwand.

Moreover, respondents for theBaseline Survey revealed that credit is often seasonal, with 72% of respondents obtaining loans between mid September and mid March (see Figure 1). Indeed, 30% of respondents reported that they obtained their initial loan between mid September and mid November, the months of Maizan and Aqrab, when the cultivation of winter crops begin.3/ During these two months households reported that they required loans for the purchase of agricultural inputs, such as seed and farm power. Traditionally, Maizan and Aqrab are also the months in which many marriage ceremonies take place.

Forty-two percent of respondents for the Baseline Survey reported that they obtained their initial loans during the months of JadeeDalwa and Hood, representing the period from 20 November until 19 February. During this period some households reported that they experienced food shortage and obtained loans to purchase wheat for consumption. Several farmers also claimed that they required money for the purchase of fertiliser and agricultural labour for opium poppy cultivation.

An analysis of the distribution of loans over the calendar year, suggests that there is little variation in the seasonal demands for credit between the different socio-economic groups. Of those interviewed for the Baseline Survey, 28% of those without land, 33% of owner-cultivators and 31% of landlords obtained their initial loans in Maizan and Aqrab. Whilst during Jadee, Dalwa and Hood, 47% of the landless, 37% of owner-cultivators and 44% of landlords obtained their initial loans.

3/ Maizan is the Afghan month that begins mid September and finishes mid October, whilst Aqrab begins mid October and finishes mid November. See Annex B for a breakdown of the months within the Afghan calendar year.


6. Types of informal credit

Fieldwork revealed that there are a number of different types of informal credit systems operating in the target districts, including the advance sale of a fixed amount of agricultural production, the delayed payment for commodities from shopkeepers or traders, and interest free loans from immediate or extended family members. These diverse types of financial and material assistance allow households to spread their liabilities across a range of lenders including family, landlords and commercial traders.

6.1. Advance payments
Three quarters of respondents reported that they had obtained advances on a fixed amount of their expected future agricultural production. Respondents suggested that, while this source of informal credit, known as salaam, was traditionally given for wheat, in the last two decades it had evolved to include new cash crops such as black cumin and opium poppy.

Fieldwork revealed that eighty-one respondents received 132 separate advances, indicating that several respondents had obtained advances more than once. The explanation offered for the incremental increase in the number of advances obtained each month from Maizan to Hamal was that the terms of salaam improve with the proximity of the approaching harvest Consequently, advance payments made in the month of Maizan are much less than those made in Hamal. Indeed, to improve the terms of salaam, households reported delaying the sale of their future produce until it was absolutely essential, often selling small amounts of produce as they required cash. Consequently, respondents reported multiple salaam arrangements, with one quarter of cases being documented just prior to the harvesting of opium poppy in Hamal, (see Figure 2).image_report_99-01-31_5

While respondents reported that salaam was available on wheat, black cumin and opium, they suggested that opium was the preferred crop of lenders. Indeed, 60% of those interviewed in Ghorak, Khakrez, Maiwand and Shinwar had received salaam on their future opium crop. While in Shinwar and Ghorak, opium was the only agricultural produce for which respondents had received advance payments, in Maiwand salaam was also received on wheat. Khakrez was the only district in which advance payments were reported on all three crops.

The sixty percent of respondents who reported that they had received salaam on their future opium crop, sold on average 17.7 kg of opium prior to harvest at an average price of $17.90 per kg. The total amount of opium sold by each household ranged from 1 kg to 90 kg. Findings suggest that the price received as an advance payment ranged from $10.00 per kg to $36.00 per kg, depending on location and the time at which salaam had been obtained. In Ghorak, Shinwar and Maiwand 78%, 70% and 63% of respondents, respectively, had obtained salaam on opium. In Khakrez only 30% of respondents had sold opium in advance.

In Maiwand and Khakrez seven farmers reported that they had received advance payments on their wheat crop, receiving an average of $0.12 per kg. The price paid in advance was found to vary from $0.10 kg to $ 0.15 per kg, depending on the time at which salaam had been obtained. The total amount of wheat sold by each household, ranged from 450 kg to 4,500 kg, with an average of 1,671 kg per household.

Almost three quarters of respondents in Khakrez reported that they had obtained an advance on their black cumin crop. Indeed, both the proportion of respondents obtainingsalaam on black cumin and the total amount received for the crop was found to be double that of opium. On average those that obtained salaam on black cumin sold 100 kg of black cumin at an average price of $1.45 per kg. The price paid in salaam for black cumin was found to range from $0.67 to $2.00 per kg.

When comparing the average advance payments received on each crop, respondents appear to lose a greater proportion of the harvest price on opium than on wheat and black cumin. For instance, the price received as an advance on the future opium crop was on average 42% of the value of opium at harvest time. Salaam paid in advance for wheat was on average 48% of its value at harvest time, while respondents received on average 54% of the harvest price for their black cumin crop. Prices received in advance on all three crops were not found to vary significantly by socio-economic group.

6.2. Purchase of commodities on credit
Respondents suggested that purchasing commodities from shopkeepers or other traders on credit was the most common strategy adopted for meeting shortfalls in income and savings. The commodities obtained through this system ranged from food, medicine and other household goods, to agricultural inputs, including seeds, tools and fertiliser.

It was claimed that the price charged for purchasing commodities on credit was higher than the cash price of the commodity. Indeed, respondents reported that shopkeepers added a substantial surcharge when providing commodities on credit. For instance, the Baseline Survey reveals farmers generally obtained fertiliser from shopkeepers using this informal credit system. For both Urea and Diammonium Phosphate (DAP), the price of obtaining fertiliser on credit was reported to be 40% higher than purchasing it with cash. Given that over half of those without land, almost 50% of owner-cultivators, and only 25% of landlords reported that they obtained fertiliser on credit, purchasing commodities on credit would appear to be an important source of investment for agricultural production, particularly for more vulnerable socio-economic groups.

The system known as anawat in Qandahar and hila in Nangarhar also operates through the purchase of commodities on credit. Respondents indicated that anawat requires commodities to be obtained at an agreed price that is considerably higher than the cash price. However, informants reported that the commodities obtained were typically sold back to the seller within a very short period, often instantly, at half the price paid by the household. Indeed, several informants admitted that in reality they didn't actually transfer the ownership of the commodities. As such, anawat allows households to obtain cash loans whilst bypassing Islamic strictures on interest. For instance, one respondent had taken anawat to raise enough money for building his house. Under this anawat agreement made in 1995, the respondent purchased 16 kg of dry opium and immediately resold it to the lender for the equivalent of $700. According to UNDCP data on opium prices, the average price of dry opium in 1995 was the equivalent of $65 per kg. At a total value of $1,040 the interest payable on this loan was approximately 50%. The respondent reported that his inability to repay this initial loan without resorting to further loans led to a spiral of indebtedness that finally resulted in the sale of his household assets, including his livestock.

The commodities obtained through anawat were found to be items such as opium, livestock, or luxury items such as a motorbike or even a car. Payment for the loan is agreed and scheduled for a later date.

Anawat was viewed unfavourably by most respondents with many of those interviewed due to the punitive mark-up that is charged by the lender. Most, reported that they tried to avoid taking this kind of loan. Moreover, while key informants suggested that this informal system of credit had been developed to circumvent religious restrictions on interest, many respondents considered anawat as an interest bearing loan or sood, and thus considered it haram, or forbidden.

6.3. Interest free loans
Respondents indicated that their preferred credit arrangement was to obtain an interest free loan, known as qarze hasana. This type of loan was typically obtained from members of the immediate or extended family.

Respondents indicated that they often obtain qarze hasana in order to pay for marriage. The costs associated with marriage were considered considerable by respondents in particular by those from the poorest of households. In Afghanistan a bride price, or walwar, is paid by the groom to the bride's father. Interviews revealed that walwar typically ranged from $1,400 to $5,500. Moreover, traditionally the wedding ceremony, which is often lavish, is paid for by the groom and his family.4/

Although the repayment schedule for this type of loans is normally fixed between the two parties, respondents suggested that the debt is often repaid at a much later date. A number of respondents indicated that a considerable proportion of their existing debts could be attributed to qarze hasanaloans obtained in order to pay walwar. A few informants suggested that they had increased their poppy cultivation in order to pay the costs associated with their marriage.

4/ 'Marriage ... is the main occasion for conspicuous consumption, where senior lineages tend to exhibit their status by excessive spending'. Ahmed (1980) Pukhtun Economy and Society. Routledge & Kegan: London.

7. Sources of informal credit

Respondents in all four districts suggested that their major source of credit was shopkeepers and traders in the village or at the district bazaar. Indeed, in Maiwand and Shinwar both respondents and key informants suggested that shopkeepers and traders had a virtual monopoly on credit provision.image_report_99-01-31_3

Shopkeepers providing loans typically traded in a variety of commodities including fertiliser, foodstuff, clothes and medicine. The majority of respondents reported that they generally obtained loans from these shopkeepers through purchasing commodities on credit. However, they also reported that shopkeepers were a major source of salaam, particularly those in Shinwar and Maiwand who specialised in the opium trade.

Whilst both landowners and landless respondents indicated that landlords were a source of credit, only one fifth of the landlords interviewed admitted providing loans. Three of these landlords reported providing credit on opium through salaam in Ghorak District. The other four landlords had provided cash loans to sharecroppers or family members. From these interviews it would seem that landlords are not the major source of credit in the target districts. However, it is important to recognise that the sensitivities associated with both credit and opium may have led to bias in the responses of those interviewed. Indeed, several respondents in Maiwand District highlighted this by revealing that a few influential landlords had become major opium traders who secured their share of the opium produced in the area through the salaam system. Moreover, interviews conducted under Strategic Study 2: The Dynamics of the Farmgate Opium Trade and the Coping Strategies of Opium Traders, revealed that 60% of traders provided salaam on opium production. All the traders interviewed owned land, ranging from one fifth of one hectare to twelve hectares.

8. The� nature and extent of household debt

8.1. Indebtedness amongst the landless

Those who did not own land suggested that obtaining credit was problematic, claiming that lenders considered there was a greater risk that those without land might abscond. However, despite this claim, 95% of those respondents without land received some form of credit prior to or during the winter cropping season. The Baseline Survey supports these findings, indicating that 95% of landless respondents had obtained loans in the twelve months prior to interview.

Generally, landless respondents indicated that they obtained credit from local shopkeepers or traders. A limited number obtained loans from their landlords. All those respondents without land reported that they obtained credit to purchase wheat for family consumption. Furthermore, most of these respondents indicated that they had also obtained credit to purchase clothes and medicine. Fifty per cent of landless respondents also cited the purchase of agricultural inputs, in particular fertiliser, as a reason for obtaining credit. Sixteen per cent of landless respondents indicated that they had obtained credit to repay existing debts.

Although a few landless respondents claimed that they had consciously tried to avoid taking loans, the majority reported that they had generated considerable debts. Analysis of the data produced by the Baseline Survey reveals that those categorised as landless had an average debt of $709. The average debt of those respondents interviewed for the BaselineSurvey and subsequently revisited for this Study was approximately $695 prior to the harvest of winter crops. On average, the debt of these respondents was 53% of their total annual net household income.

The degree of indebtedness experienced amongst those respondents without land would seem to vary considerably. For instance, one landless sharecropper claimed that he would rather forego food than obtain credit, fearing that he would be caught in a permanent state of debt, whilst two respondents appeared to have debt that exceeded their total gross income.

Poor opium yields in 1998 would appear to have had a considerable impact on respondents? ability to repay the debts they had incurred during the winter period. Almost one third of those respondents without land claimed that their debts had increased because of the poor harvest and the need to reschedule their repayments.

8.2. Indebtedness amongst owner-cultivators

The fieldwork for this Study suggests that 86% of respondents categorised as owner-cultivators had obtained credit prior to or during the winter cropping season. The Baseline Survey supports this finding suggesting that 90% of the 161 owner-cultivators interviewed reported that they had obtained a loan in the twelve months prior to interview.

Respondents indicated that owner-cultivators primarily obtained credit for agricultural inputs through the salaam system, while commodities such as clothes, tea, sugar, medicine were frequently purchased from shopkeepers on credit. Relatively few owner-cultivators were found to obtain wheat for consumption on credit.

An analysis of the data for those households interviewed for the Baseline Survey reveals that owner cultivators had generated an average debt of $1,052 prior to the harvest of winter crops. The fieldwork for this Study supports these findings, revealing that the average debt incurred by those classified as owner-cultivators was $1,245. The average debt of these respondents represented 39% of their net household income.

Again, the degree of debt experienced by owner cultivators was found to vary with some respondents reporting that they had not incurred any debts over the previous 12 months, whilst others claimed to have debts that exceeded their gross household income. One fifth of those interviewed for this Study reported that their debts had increased after the winter harvest due to poor yields and the need to reschedule their existing loan repayments.

8.3. Indebtedness amongst landlords

Seventy-two per cent of the landlords interviewed during the fieldwork for this Studyreported that they had obtained credit prior to or during the winter cropping season. TheBaseline Survey supports this finding suggesting that 78% of the 163 landlords interviewed reported that they had obtained credit during the preceding twelve months.

Fieldwork revealed that landlords primarily utilised the salaam system for the purchase of agricultural inputs whilst some commodities are bought from shopkeepers on credit, including clothes, tea, sugar and medicine. Respondents categorised as landlords also revealed that they purchased costly items such as tractors, motorbikes and cars from traders on credit.

The average debt of the landlords interviewed for the Baseline Survey was $1,502. Those respondents interviewed for both Baseline Survey and this Study were found to have an average debt of $1,668 prior to the harvest of winter crops. On average the debt of these respondents was found to be 22% of their net household income.

Amongst the majority of respondents classified as landlords, the level of debt fell after the harvest of winter crops, due to the repayment of seasonal loans. However, four respondents indicated that their debts had increased due to the need to reschedule the repayment of their existing loans after a 50% reduction in opium yields during the 1997/98 growing season.


Table 1: Summary of the nature and extent of indebtedness amongst respondents, disaggregated by socio-economic group

Proportion of group obtaining credit in previous 12 months

Most frequent reason for obtaining credit

Debt as a proportion of average net income

Landless

95%

(i) food
(ii) clothes and medicine
(iii) agricultural inputs
(iv) repay existing debts

53%

Owner- cultivators

86%

(i) agricultural inputs
(ii) clothes and medicine
(iii) food

39%

Landlord

72%

(i) agricultural inputs
(ii) clothes and medicine
(iii) luxury items

22%


9. Repayment strategies

Under the current informal credit systems households would appear to obtain both short term and long term credit. For instance, salaam is seasonal in its nature, typically paid after the harvest of the winter crops. Similarly, the purchase of agricultural commodities on credit such as fertiliser is often seasonal. However, larger cash loans such as those obtained through theanawat system are for at least twelve months whilstqarze hasana may be both short term and long term, depending on the agreement reached between the two parties.

Given the poor opium poppy harvest in 1998, respondents from all socio-economic groups reported that they would have considerable problems both repaying the seasonal debts that they had incurred and servicing their longer term debts. In particular, the dramatic fall in the yield of opium in 1998 in the target districts of Ghorak, Khakrez and Maiwand led to a significant shortfall in the opium available for repaying their salaam.5/ Indeed, many respondents claimed that after deducting both the opium for agricultural taxes, known as usher, and the share used as payment for hired labour, there would be insufficient opium to repay both the debts they had incurred through the salaam system and the cash debt that they had generated with shopkeepers or traders.

At the time of the fieldwork, four weeks after the harvest of opium poppy, 60% of respondents had failed to repay the seasonal debts they had incurred during the winter cropping season. During a number of interviews respondents became quite distressed about their financial situation. Indeed, one respondent began to cry as he described his inability to repay his existing debts due to an extremely poor harvest and insufficient collateral to obtain further loans.

Where households were not able to repay their existing debts, respondents indicated that they would initially seek to reschedule their debt with the lender. Respondents suggested that delaying the payment of existing debts was at the sole discretion of the lender. They further suggested that such delays were often far easier to obtain for those who owned land. Respondents indicated that the terms of rescheduling debts were unfavourable with the amount of the loan doubling or tripling where repayment is delayed over a twelve-month period

Respondents revealed that lenders expected debts incurred through salaam to be paid promptly, particularly when they had obtained salaam on opium and from a lender from outside their own village. However, in Shinwar, respondents claimed that they had rescheduled the repayment of their salaam with local opium traders. Reports indicated that opium traders expected twice the amount of opium in 1999 from those households who could not repay the agreed amount in 1998. Respondents indicated that this allowed traders to accrue substantial profits and secure delivery of increased quantities of opium.

To repay the advances they had received, some respondents indicated that they had purchased opium from other farmers or traders. Given the substantial increase in the price of opium in Qandahar between May and June, those who were compelled to purchase opium on the open market to repay their salaam debt, were found to be paying as much as four times the value of the original advance given.6/

The great majority of landless respondents reported that they had obtained credit via the anawat system in order to purchase the opium required to repay theirsalaam. Given the high mark-up accrued by the lender under anawat system, the real cost of repaying thesalaam initially received, could be as much as six times the original loan, a significant loss particularly to the most vulnerable.

Many landless respondents, and some owner cultivators, indicated that wage labour was a popular strategy for repaying their existing debts. These jobs would be taken on a day basis during slumps in agricultural activity. However, local opportunities were usually limited to the collection of firewood, and simple construction work, such as building mud-walls, orkarez cleaning. Whilst it was recognised that wage labour opportunities did exist across the border in both Pakistan and Iran, only one respondent indicated that he was considering migrating. This respondent believed he could repay the walwar he owed to his parents-in-law by obtaining a job as a brick maker in Pakistan.

A number of respondents also indicated that they would increase opium poppy cultivation as a means of repaying their loans. For instance, in Shinwar District 25% of respondents indicated that they would increase the share of land that they cultivated with opium poppy in the 1998/99 growing season to repay their current debts. Future fieldwork during the winter cropping season of 1998/99 will allow these claims to be verified.

Respondents also cited the sale or rental of household assets as a strategy for the repayment of household debts. Indeed a number of respondents reported that they had sold livestock to purchase the amount of opium they owed as salaam.

The sale of land was considered a last resort by those respondents that owned land, and none admitted to having ever used this strategy in order to repay debts. However, a number of respondents mentioned that they did know of such cases. Whilst respondents suggested that the sale of land would not be considered unless they had exhausted all other options, offering the use of land to a neighbouring villager on a temporary basis, was viewed as a viable strategy for repaying existing debts.7/

In Shinwar, respondents indicated that under this system, known as grau, irrigation water rights tokarez were also leased as a payment for existing debts. Reports indicated that this type of repayment arrangement is initially agreed upon for either one agricultural season or a calendar year. Those respondents who had entered into a grau agreement reported that regaining the use of their land or irrigation water was their prime priority.

The sharecropper: In order to repay his marriage expenses the respondent claimed that he had obtained salaamfrom a trader for 14 kg of opium. Unfortunately, poor yields in 1998 meant that he only received 7 kg as his fifth share of the final opium crop. The trader agreed to accept the 7 kg of opium from the respondent on the understanding that the current 7 kg deficit would be supplemented with a further 7 kg in 1999. In order to repay the 14 kg owed, the respondent claimed that he would increase the amount of land he allocated to opium poppy in the 1998/99 growing season, and, in the interim, search for wage labour opportunities.

The Landlord: The respondent reported that he had sixteen sharecroppers cultivating his land. He claimed that he had obtained loans of approximately $1,000 for agricultural production, including farm power, seed, fertiliser and wages and food for agricultural labourers. He had also obtained salaam on 4.5 mt of wheat, 22.5 kg of opium and 180 kg of black cumin. The poor harvest in 1998, particularly for opium poppy, resulted in the respondent failing to make any repayments during the post harvest period. However, the respondent believed that given a successful harvest of both opium poppy and black cumin, repaying these loans in 1999 would not be problematic.

The owner cultivator:The respondent claimed that he had faced very high medical expenses over the last decade. In order to maintain these expenses, he allocated 80% of his household land to opium poppy. Extraordinarily high hospital costs during 1997 had prompted the respondent to obtain ananawat loan from an opium trader in the district bazaar. The $9,000 required to repay this loan was due shortly. Although the negotiations regarding the settlement of the debt were ongoing, the respondent believed that the debt could only be repaid if the opium trader would accept the 3 hectares of land he owned as grau. After entering into this arrangement the respondent did not believe that he would regain possession of his land. He believed that the chronic illness experienced by his brother and mother would ultimately render the household landless.

5/ In some areas in Qandahar and Helmand the opium yield is thought to be less than half the 1997 level (see UNDCP Annual Opium Poppy Survey 1998).

6/ The price of one kilogramme of opium in Quandahar increased from $33 to $42 between May and June 1998. By August the price was $60 per kilogramme.

7/ '[T]he importance of ownership of land goes beyond the mere productive value. The prestige and influence within a Pashtoon village is closely associated to landownership.' Ahmed (1976) Millennium and Charisma among Pathans. Routledge & Kegan: London.


10. The incidence of default

Both respondents and key informants claimed that there are very few defaulters under the existing informal credit arrangements. Fieldwork for Strategic Study 2: The Dynamics of the Farmgate Opium Trade and the Coping Strategies of Opium Traders supports this claim. Moreover, a significant number of respondents for both Study?s reported that failing to repay existing debts was viewed with disdain by both the present authorities and the general population.

11. Preliminary findings

Although this document represents an initial phase of a study that will be consolidated with further fieldwork, preliminary findings would suggest that:

  • Credit is an integral part of livelihood strategies amongst all the socio-economic groups in the target districts.
Whilst the vast majority of those interviewed for the purpose of both this Study and theBaseline Survey had obtained credit during the previous twelve months, the highest incidence of credit was amongst the landless, where ninety five per cent were found to have obtained credit during the previous twelve months. Eighty six percent of those classified as owner cultivators and seventy two percent of those classified as landlords were found to have obtained credit in the previous twelve months.
  • The landless were found to have a relatively higher level of household debt than those who owned land.
Moreover, amongst the landless, credit was generally obtained to satisfy basic needs. As such, the landless tended to borrow to purchase food, clothes and medicine. Wealthier members of the community primarily obtained credit for productive investment in agriculture, purchasing agricultural inputs such as seed, fertiliser and farmpower. In the longer term this trend may lead to a growing inequality of wealth and income within the target districts, reinforcing the socio-economic and political structures that create and sustain poverty.
  • Within the target districts credit can be obtained from a variety of different sources through a range of different mechanisms.
In the target districts the advance sale of a fixed amount of agricultural production, the delayed payment for commodities from shopkeepers and traders, and interest free loans from immediate or extended family members are the most common means for obtaining credit. These diverse types of financial and material assistance allow households to spread their liabilities across a range of lenders, including family, landlords and commercial traders.
  • Obtaining an advance on a fixed amount of agricultural production is the most common means for obtaining credit in the four target districts.
This system, known as salaam, provides advance payments on opium, wheat and black cumin. Opium was the crop on which the majority of borrowers had obtained an advance payment. These seasonal loans allow households to purchase food, commodities and agricultural inputs during the winter cropping season. Repayment is made at harvest time in agricultural produce.
  • Salaam
facilitates the ?distress sale? of agricultural crops, allowing traders to acquire opium, wheat and black cumin at prices significantly less than their harvest price.
The terms of salaam typically improve with the proximity of the harvest of the crop on which it is being obtained. Consequently, households were found to delay the sale of their future produce until it was absolutely essential, obtaining a number of advances throughout the winter cropping season.
  • Although none of the informal credit systems operating in the target district are ?interest bearing?, the cost of borrowing far exceeds the amount of the initial loan.
Those compelled to purchase commodities, such as fertiliser, on credit were found to pay a high surcharge. Moreover, advances on opium were on average 40% less than the harvest price in a typical year. Cash loans obtained through the purchase of commodities on credit incurred the highest penalty with costs of upto 50% of the value of the loan. This high cost of borrowing in the target districts reduces the resources available for consumption and productive investment in agricultural, particularly for the most vulnerable.
  • The major source of credit in the target districts would appear to be shopkeepers and traders.
These traders and shopkeepers tend to be located in the village or district bazaar. They typically trade in a variety of commodities, including fertiliser, foodstuff and medicine. Whilst the majority of respondents reported that they generally obtained loans from these shopkeepers through purchasing commodities on credit, they also suggested shopkeepers were a major source of salaam, particularly those in Shinwar and Maiwand who specialised in the opium trade.
  • Opium is an important source of credit, savings and investment within all four target districts.
Salaam was obtained on opium by the majority of those interviewed and as such is integral to obtaining seasonal credit. Opium is also one of the commodities that can be purchased and resold as a means of obtaining cash loans under a system known as anawat. The fact that opium is non- perishable with a relatively stable value in comparison with the local currency, the Afghani, means that it is typically used as a means of household saving. Moreover, further fieldwork has revealed that the centralised nature for the trade in opium in the east and subsequent price differentials between districts make it an important commodity for short term speculation for those with sufficient disposable income in Shinwar.8/
  • Opium is currently the preferred crop for those providing advances in Maiwand, Ghorak and Shinwar.
Indeed, in Maiwand and Shinwar opium was the opium was the only agricultural product on which an advance could be obtained.
  • Indigenous systems of informal credit have evolved with the diversification of agricultural production.
For instance, the advance system seems to adapt to other high value crops. Indeed, the high incidence of salaam payments on black cumin in Khakrez illustrates that lenders adjust to new market opportunities and are not committed solely to the provision of advances on opium.
  • The dramatic fall in the yield of opium in 1998, has led to many households, particularly the most vulnerable, facing considerable problems repaying their seasonal debts and servicing their longer term debts.
Indeed, at the time of fieldwork, four weeks after the harvest of opium poppy, the majority of respondents had not repaid the seasonal debts they had incurred during the winter cropping season. Some households had managed to reschedule the repayment of theirsalaam until the following year on the understanding that a surcharge of 100% would be paid. Others indicated that they had purchased opium from other farmers or traders to repay the opium they owed. Given the substantial increase in the price of opium, those who were compelled to purchase opium on the open market to repay their salaam debt, were found to be paying as much as four times the value of the original advance given. Those without disposable income obtained further loans to purchase the opium required to repay their salaam. The high cost of borrowing under these informal systems means that the real cost of repaying the salaam initially received, could be as much as six times the original loan, a significant loss particularly to the most vulnerable.
  • Strategies for the repayment of debts differ between socio-economic groups.
Typically households initially sought to reschedule their repayments. However, this was at the sole discretion of the lender and was found to be far easier to obtain for those who owned land. Amongst the landless, wage labour was a popular strategy for repaying their existing debts, although it was recognised that opportunities were limited. Those with land cited the sale or rental of household assets as a strategy for the repayment of household debts. Whilst the sale of land was considered a last resort by those respondents that owned land, offering the use of land or water rights to a neighbouring villager on a temporary basis, was viewed as a more acceptable way of repaying existing debts. Increasing opium poppy cultivation was cited by all socio-economic groups as a means of repaying their loans.
  • Few households were found to consider defaulting on their payments as a viable strategy under the existing informal credit systems.
Whilst the landless would appear to have the greatest opportunity to abscond, this strategy was not cited by any of the respondents despite their obvious distress. Failing to repay existing debts was viewed with disdain by both the present authorities and the general population.

12. Recommendations

  • It would appear that opium poppy cultivation is not purely a function of profitability but is an important means of obtaining credit during times of increasing vulnerability. It is essential that interventions aimed at reducing opium poppy cultivation adopt a strategy that seeks to secure livelihoods rather than simply increase incomes.
  • Credit initiatives would appear to represent a strategic niche for influencing the level of household opium cultivation amongst the most vulnerable, and, as such, should be integrated into development interventions in the target districts of C28 and possibly in other source areas.
  • Credit initiatives need to be integrated into an overall strategy for integrated rural development and should not be considered in isolation.
  • There is a need to establish the appropriate mechanisms by which credit can be targeted on the most vulnerable, who currently have few alternatives for obtaining credit other than through the cultivation of opium. These mechanisms will need to be context specific and should be identified through the active participation of the community, particularly the most vulnerable.
  • Given the limited market opportunities currently available to the most vulnerable, consideration should be given to the provision of credit in- kind.
  • Ideally, the community should have responsibility for the management of any credit fund established. To achieve this the design, implementation and monitoring of such a scheme has to be undertaken with the active participation of the community, particularly the most vulnerable.
  • UNDCP should conduct a workshop in partnership with those agencies currently implementing credit schemes in Afghanistan in order to define ?best practice and lessons learnt? and how these might best be applied in UNDCP?s target districts.

8/ For a more detailed discussion see Strategic Study 2: The Dynamics of the Farmgate Opium Trade and the Coping Strategies of Opium Traders.


ANNEX A: TERMS OF REFERENCE

Strategic Study 3: The Role of Opium as a Source of Informal Credit

Objective:

This Study seeks to explore the role of opium as a source of informal credit in UNDCP?s target districts.

Summary:

The study will be based on semi-structured interviews with a cross section of farmers from target districts including sharecroppers, owner-cultivators and landlords. It will explore informal sources of credit on agricultural products with a particular emphasis on opium. Issues to be addressed will include socio-economic profiles of lenders and borrowers, current levels of debt, and strategies for repayment. This Study will be undertaken in close consultation with ?Strategic Study 2: The Dynamics of Farmgate Opium Trade and the Coping Strategies of Opium Traders?.

Justification:

Substituting the existing informal credit system that gives preferential access to those households that cultivate opium poppy and thereby coopting more vulnerable households into opium poppy cultivation, is seen as integral to UNDCP?s efforts to reduce opium poppy cultivation in its target districts. This Study forms the first phase of a three-stage process aimed at increasing the credit opportunities of communities in Ghorak, Khakrez, Maiwand and Shinwar. The second phase will consist of a workshop with other agencies with experience of implementing credit schemes in Afghanistan in order to define ?best practice and lessons learnt?. The third phase will field a consultant to assist in the design of an appropriate and sustainable credit initiative in consultation with the relevant stakeholders in the target districts, in particular the village shuras. It is envisaged that this iterative and consultative process will assist UNDCP in its efforts to find viable credit opportunities for communities in its target districts.

Methodology:

Due to the current sensitivities associated with discussing the issue of credit and opium cultivation in rural Afghanistan, emphasis will be given to conducting a number of in-depth semi-structured interviews. However, in order to verify findings and distinguish between generic patterns and localised issues, in-depth interviews will be conducted over a wide geographical area across UNDCP?s four target districts

Semi Structured interviews will be conducted in three villages in each of the four districts. To document the role credit and opium plays in the livelihood strategies across different socio-economic groups, interviews will be conducted with three households from three categories, landless, owner-cultivators and landlords. In total nine interviews will be undertaken in each village.

A number of these interviews will be conducted with farmers who were already interviewed for the Socio-Economic Baseline Survey, allowing fieldwork to draw on existing information and contacts. Moreover, the quantitative information on credit already gathered during the 600 household interviews conducted by the Baseline will be used to consolidate the findings of this more qualitative fieldwork.

Given the assumed role of farmgate opium traders in the provision of credit this Study will be undertaken in close consultation with ?Strategic Study 3: The Dynamics of Farmgate Opium Trade and the Coping Strategies of Opium Traders?. This will allow findings to be cross checked against those provided by lenders.

Reporting:

A preliminary report will be produced by the end of July 1998 this will represent the third report in the Strategic Studies series.

KEY ISSUES TO BE DISCUSSED

i. What is the socio-economic profile of those that take credit?

ii. During what months is credit typically taken?

iii. What is the socio-economic profile of those that provide credit?

iv. What area are those that provide credit from?

v. How is credit given? Cash? Kind?

vi. Is credit available for farmers on all crops or just specific crops? Wheat? Black cumin? Opium? Fruits?

vii. How do credit arrangements differ from crop to crop?

viii. What is the credit used for? Productive purposes? Subsistence? To repay previous debts?

ix. What was the amount of the last loan taken?

x. What are the repayment arrangements? Cash? Kind? If opium what quantity?

xi. What is the farmers current level of household debt?

xii. Does the farmer have periods of time where there is no debt owed? When?

xiii. If the farmer cannot repay his debt on time what are the financial penalties?

xix. If the farmer cannot repay these debts what strategies will he adopt to ensure they are repaid? Sell land? Work elsewhere? If work elsewhere? Where and what kind of work?

ANNEX B: CALENDAR

Afghan Months:

Gregorian Months:

Jadee

January
Dalwa

February
Hood

March
Hamal

April
Sawar

May
Jawza

June
Saratan

July
Asas

August
Sunbula

September
Maizan

October
Aqrab

November
Quos

December
Jadee