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.