Seamless Provision of Financial Services from Microfinance to SME Finance

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Seamless Provision of Financial Services from Microfinance to SME Finance

Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

AKAM seeks to expand its SME debt finance model, demonstrated in Afghanistan. Employing an innovative credit methodology tailored to the informal nature of SMEs and higher risks in weak and post-conflict states, AKAM leverages public guarantees to extend private SME finance and uses existing microfinance client relationships to mitigate risk.

About Project

Solution: What is the proposed solution? Please be specific!

AKAM employs a unique credit methodology with a specialized SME unit within its MFI to appropriately manage the specific risks of SME loans, which are significantly different than those for microfinance loans, while capitalizing its existing client relationships and networks. AKAM developed an SME credit methodology tailored to the more informal nature of these enterprises that allows appraisal without financial records and can be used with illiterate customers. Dedicated loan officers are trained in the methodology to work closely with clients to understand their businesses and complete a thorough appraisal using information readily available from the client. AKAM integrates business development services (BDS), recognizing that while providing loans to SMEs has the potential for strong impact, it also carries risks for the SME with potential negative effects if clients lack the capacity to manage these risks. Typically, microfinance customers find some way to repay a loan even if the project financed by the loan fails, given the relatively small installments. However, most SME customers are dependent on the cash-flow of their business to repay the loan. Therefore AKAM’s model combines BDS with finance to improve the client’s capacity in general business management and/or linkages to vocational training. AKAM’s approach seeks to grow with its clients by responding to their evolving needs for microfinance, SME-finance, and non-financial services. The approach leverages AKAM’s current microfinance client base, responds to the growing needs of successful micro and small entrepreneurs and uses its existing network infrastructure to implement an SME unit more cost-effectively.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

Through its SME lending, AKAM aims to stimulate sustainable employment to promote economic development and poverty alleviation. AKAM also supports investment in community services for broader improvements in quality of life such as improved access to healthcare and education and upgrades in the built environment. In Afghanistan FMFB-A has disbursed loans worth USD 237,000 to upgrade nine health clinics, USD 55,000 for two public bathrooms and USD 58,000 for three private schools and training centers. Mohammad Zahir is an FMFB-A SME client who owns a 24-hour private hospital in Kunduz offering outpatient, inpatient, surgery, pharmacy, and maternity services. Mr. Zahir’s 20-bed facility employs 19 people and provides high quality medical services in a region with limited health infrastructure (in 2005 according to UNAMA Kunduz had 29 health centers/hospitals with only 82 beds total for a population of 770,000). Mr. Zahir took a USD 50,000 loan from FMFB-A to purchase an endoscopy machine and ultrasound equipment so his patients no longer have to travel to Kabul for treatment. The loan enabled Mr. Zahir to upgrade the quality of services offered in his facility and provide more convenient access to a wider range of services for his patients. Ahmad Mirzayee is a 25 year old FMFB client who used his self-taught computer skills to start a digital printing business designing and creating advertising for many small businesses in Kabul. Mr. Mirzayee identified this emerging niche market and approached FMFB for a USD 20,000 SME loan to purchase a digital plotter. The SME loan offered him a longer term and more flexible repayment options allowing him to better manage his cash flow and working capital. Just a few years ago such a business would have been unthinkable, but that did not stop Ahmad from identifying a business opportunity and pursuing it.
About You
Aga Khan Agency for Microfinance
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About You
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Your Organization

Aga Khan Agency for Microfinance


, GE

About Your Organization
Organization Name

Aga Khan Agency for Microfinance

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Non-profit/NGO/Citizen-sector Organization

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Your solution
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below

Afghanistan, Burkina Faso, Egypt, Ivory Coast, Kenya, Kyrgyzstan, Madagascar, Mali, Mozambique, Pakistan, Syria, Tajikistan

Region(s) your solution focuses on:

Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm


Number of employees in your target firms


Average number of employees of your target firm


Specify the size, average and range of expected loans or investments in each target firm

SME loans from USD 3,000 to USD 100,000, average of USD 15,000 with an average term of 16 months

What stage is your solution in?

Operating for 1‐5 years

How does your proposed innovation leverage public intervention in catalyzing private SME finance?

AKAM’s “Seamless Provision of Financial Services from MF to SME” was developed in Afghanistan in 2005 by AKAM’s MFI the First MicroFinanceBank Afghanistan (FMFB-A) in cooperation with various public partners. The model uses public funds for partial credit guarantees to mitigate risk and facilitate private SME debt-finance. The high risk environment in developing and post-conflict economies is a severe obstacle for private lenders, particularly when starting up SME finance, but even if good risk management systems are in place. SME loan guarantees are especially important in countries with significant instability or environmental risks. In Afghanistan, AKAM/FMFB-A used credit guarantees provided by public partners (DEG – Deutsche Investitions- und Entwicklungsgesellschaft in Afghanistan) to embark on SME finance and to develop the institution’s capabilities and gain experience over time, eventually expanding its outreach to more rural areas, more risky sectors and new clientele. Furthermore, DEG used the experience with FMFB-A to extend its SME credit guarantee fund to other banks, thereby serving the financial sector as a whole. AKAM will use the experience in Afghanistan as a model to be rolled out in the other countries where it operates, establishing similar partnerships to mobilize guarantees to enable SME lending. In expansion countries, as in Afghanistan, DEG’s guarantee fund may start with the AKAM affiliate and thereby learn from the market. It will, however, reach out to other partner banks to generate sustainable guarantee volumes. The cooperation with AKAM sets an example in the market that if successful, entices other banks to follow this path. The guarantee fund thereby evolves into an intervention targeting the entire financial sector.

The model also uses public sector resources for technical assistance (TA) to build the capacity of a dedicated SME unit. Setting up a dedicated SME unit requires comprehensive preparation and significant investment: development of policies and procedures, establishment of tools and forms, recruitment and training of specialized SME staff. In a post-conflict environment the training and human resource development requirements can be even more challenging. DEG’s credit guarantee fund alleviated some of these challenges by providing technical assistance to FMFB-A to set up the SME department, develop its credit technology and training and subsequent mentoring of staff. The TA allowed FMFB-A to expedite disbursement and to geographically expand provision of SME-credit with properly trained staff. The guarantee funds for the proposed expansion would also leverage public resources and expertise for technical assistance to build AKAM’s institutional and human resources capacity to extend SME credit in new locations, to new clientele, and in greater volumes.

What barriers does your proposed solution address?

Asymmetry of information, Informality, Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Specific barriers to fragile and weak states.

If you checked any of these barriers, describe how your solution addresses them

Asymmetry of information: Although AKAM does not exclude new clients, a high percentage of the SME clients are former microfinance clients, thus have a track record with and are known to AKAM’s MFI. By maintaining a large share of “known” and therefore lower risk clients, AKAM is able to achieve some stability to allow it to allocate a limited share of the portfolio towards promising but relatively higher risk new or priority clients such as women entrepreneurs.

Informality: AKAM’s SME credit technology is flexible enough to accept varying degrees of informality in the business while encouraging formalization, e.g. clients do not have to submit a business plan, and loan officers are trained to extract all the required information through the loan appraisal process even if financial records are not available to build financial statements for clients.

Lack of collateral: Credit guarantees partially substitute collateral requirements of the client allowing more flexibility even in the most difficult legal and post-conflict environments (e.g. DEG credit guarantee fund in Afghanistan). Furthermore the SME credit technology accepts both formal and informal collateral.

Lack of financial capacity: Often small business owners in developing countries do not have formal financial statements restricting their access to traditional commercial banks. AKAM’s SME credit technology builds financial statements based on the raw business data collected from the client.

Lack of SME access to skills, knowledge and markets: AKAM provides SMEs access to BDS (directly or through external partners) by providing classroom training and field coaching to build their skills and knowledge to improve their businesses.

Unavailability of financial products tailored to SME needs: AKAM’s SME solution offers SME products tailored specifically to the local SME business needs and capabilities developed through an initial needs assessment and periodic review of the changing needs of SME businesses in each country AKAM works in. Additionally, the existing microfinance relationship with clients helps to identify many of their needs, preferences, and requirements.

Specific barriers to fragile and weak states: Weak and post-conflict states face security constraints and weak legal frameworks in terms of enforcement. These are high risk environments for SME lending, which requires risk sharing, robust risk management systems and appropriate credit technology. AKAM’s SME solution achieves risk sharing through the partial credit guarantees and employs a credit methodology tailored to and tested in a post-conflict setting. The approach encompasses strong risk management with dedicated staff undertaking close and frequent monitoring of clients and their businesses. The loan appraisal and credit committee process assesses the competitiveness and viability of individual SME projects through a detailed loan appraisal, assessing raw business data and the overall sector distribution and concentration (sectoral and geographic) risk in the portfolio.

Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

To meet the needs of SMEs, AKAM and FMFB-Afghanistan established a Small and Medium Enterprise Department in 2005, with the support of DEG and KfW. Initially the SME unit operated only from the main branch in Kabul, but by early 2007, the outreach for the SME product was expanded to other branches in the provinces. Today, FMFB-A serves small business clients in 18 branches throughout the country.

Since inception, the SME department has disbursed over USD 24.7 million to 1,258 SME borrowers (as of June 30, 2010). The outstanding portfolio is 446 active SME borrowers with USD 6.0 million. The SME department maintains its high standards of quality with a consistently high repayment rate of over 98.6 %. These 446 active SME borrowers support over 12,000 full and part-time jobs in Afghanistan, of which more than 1,000 are held by women. FMFB-A has become a recognized market leader and one of the most active players in the Afghan SME market. FMFB-A also links SME clients to BDS providers and this year, through cooperation with a USAID-funded BDS provider, 25 SME business managers were trained in owner/manager bookkeeping and basics of accounting.

DEG provides a guarantee to cover 72% of the credit risk of each SME borrower. This risk coverage gives AKAM and the other shareholders the buffer to pilot SME lending in the difficult environment of Afghanistan. In 2008, based on the success in Afghanistan, AKAM launched a pilot of a similar SME initiative in Egypt which adds an integrated in-house BDS component provided directly by AKAM’s MFI in Egypt. AKAM is also conducting market research and developing plans for replication in Madagascar, Mali, Syria, and Tajikistan.

How many firms do you expect to reach?

AKAM expects to reach over 5,000 additional SME businesses by expanding the existing Egypt and Afghanistan SME departments and establishing departments in Syria, Tajikistan, the Kyrgyz Republic, West Africa, East Africa, Madagascar and Pakistan.

What is the volume of private SME finance you aim to catalyze?

Through the proposed expansion, AKAM aims to mobilize USD 45 million through lines of credit which it expects to rotate as loan capital to disburse 5,000 loans worth USD 75 million in total¨.

What time frame will be required to reach these targets?

AKAM expects it will take five to seven years to establish SME units in all the proposed countries and reach 5,000 SMEs. AKAM will use a phased approach for expansion into new countries and anticipates that after two to three years of operation each SME unit would be self-sufficient and would no longer require subsidies for TA or operations. After three to five years, in most cases, AKAM expects it could begin to slowly phase down the guarantee, although in some areas and sectors AKAM expects that the guarantee element would continue to be needed.

Does your solution seek to have an impact on public policy?


What would prevent your solution from being a success?

This solution may not succeed if AKAM and its MFIs are unable to leverage sufficient loan capital (USD 45 million) to reach the desired number of loans to 5,000 SME businesses or access enough TA funds to provide sufficient management, training and coaching to the expanding and newly formed SME lending departments.

In more difficult and post-conflict environments, the inability to sufficiently mitigate risk through the DEG guarantee fund or a similar fund could hinder the solution’s progress.

A lack of partnerships with competent BDS providers or the inability to identify the resources to create the internal capacity to provide appropriate BDS services for the continued growth of the SME business could deter the solution.

Corruption or fraud among clients and/or staff—AKAM’s rigorous internal audit system as well as annual external audits will help mitigate this risk.

Severe downturns in security and other exogenous factors such as general economic downturn, natural disasters, droughts, and political risk that negatively impact loan repayment could also jeopardize progress.

List all the funding sources that are required for the sustainability of this solution

For the proposed expansion, USD 45 million is needed over five years as local currency loan capital which would be repaid by AKAM’s MFIs. Additionally, AKAM would require at least a 50% guarantee fund through DEG and/or other partners. For the guarantee fund, which would be open to other partners beyond AKAM’s MFIs, DEG would require approximately USD 5 million per country for capitalization for the fund to back-up the guarantees, a budget to provide technical assistance, and operational expenses for the start-up phase.

AKAM would also require USD 7 million in technical assistance and operational expenses to cover establishment costs, training and capacity building, and operational expenses for two years for each SME unit at an average cost of USD 300,000 per year per country.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

Today, AKAM has a network of 13 microfinance institutions; to establish an SME unit in each of them would take approximately five years. Each SME unit is expected to be sustainable after two to three years. During the initial establishment period AKAM would need subsidies to cover the costs of training and operations for two years or until the unit generated an SME portfolio of sufficient size to cover operational costs and the cost of funding. AKAM’s MFIs would initially attempt to raise a share of its loan capital from public sources but it is expected that after five years AKAM could access lines of credit from private sources at market rates. AKAM’s MFIs would require partial credit guarantees for their SME portfolio for which they would pay a risk-adjusted fee. DEG charges risk-adjusted guarantee fees to its partners, which together with the interest earned on the capital of the guarantee fund, represents its income so that after the initial capitalization, the guarantee fund would be sustainable after three to four years. Before the financial crisis and three years after starting up, DEG’s guarantee fund in Afghanistan was 94% self-sufficient in terms of operational expenses (including claims); however, part of the TA provided to the partner banks and the expatriate director were subsidized.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

AKAM’s primary strategy when dealing with volatility in sources of funding is to diversify funding sources by drawing on local and international sources in each of its countries of operation. In the long term, the main funding required would be loan capital so if a major lender was lost, AKAM could scale back the portfolio and level of activity to a minimum to maintain the SME unit until other sources of funds become available.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

In each country, AKAM will seek a partnership with DEG to access credit guarantees and hands-on technical assistance. It will also seek partnerships with KfW, IFC, and other existing or potential shareholders of its MFIs to access credit lines and technical assistance funds. Additionally, AKAM’s MFIs will seek to partner with local banks to access local currency lines of credit wherever possible.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

AKAM works in some of the most politically sensitive countries in the world. Afghanistan’s political situation could become more precarious and the security environment could become even riskier. Most of the post-Soviet countries (the Kyrgyz Republic, Tajikistan) face both the possibility of natural disasters and political crises. The economic downturn in 2008 and 2009 also showed that the world economy will affect the countries in which AKAM works by shrinking the pool of the potential clients and in some cases negatively impacting repayments.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

AKAM seeks to scale-up its solution by scaling up its existing programs in Afghanistan and Egypt as well as expanding geographically into new countries. Rather than target specific sectors or industries, AKAM’s expansion strategy seeks breadth of outreach and will target all sectors to maintain portfolio diversification (a critical risk mitigation strategy) and also remain demand-driven.