�

The Role of Opium as a Source of Informal Credit

�

STRATEGIC STUDY #3

Preliminary Report January 1999

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).

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.

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 obtaining salaam 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.