Small and Medium Enterprises (SME)
AKAM supports of local innovators, such as this Afghan man who invented and now manufactures pressure cookers for household use. Previously, all such products were imported from Pakistan or further abroad. Small and medium enterprises (SME) are often referred to as the "missing middle" in developing country economies. SME activity is at the heart of growth, sustaining jobs, creating new employment and helping in the development and support of local production. This is particularly important, as not everyone wants to run their own business. Additionally, the job creation element of SMEs can enable many poor people to feel more secure, knowing that they have a stable job to go to each day.
The role of AKAM institutions in the provision of SME financing is part of the broader AKDN strategy for economic development in its countries of operations. SME financing is designed to contribute to the seamless provision of financial services, from informal community savings and lending groups, through formal microcredit and SME lending, and finally on to commercial finance. As microfinance clients look to develop their businesses, they often outgrow microfinance and would have the option of becoming SME clients so that they can expand their businesses. SME financing should support greater capacity for local production and job creation, and encourage environmental protection.
Despite their importance to economic growth and employment, many SMEs find it extremely difficult to access financial services, specifically finding loans that fit their needs. Microfinance institutions usually limit the size of loans they offer and have rigid repayment conditions not suitable for SME business activities (such as lack of grace periods for fixed asset investments and loans limited to short terms – typically 12 months). However, many SMEs are still too small, or have insufficient collateral or credit histories, to be able to secure loans from traditional
banks in developing countries. They are caught in a gap between the growing supply of finance for micro entrepreneurs and the market for conventional business financing.
The investment needed by these enterprises is normally higher than the typical microfinance loan. These are loans with a higher risk profile per borrower than typical microfinance loans and need a more specialised, labour intensive financial appraisal to determine the payment capacity and minimise the risks of default in case of business difficulties. SME looks to where the microfinance loans stop, and fills in the gap between microfinance and traditional banks. SMEs can be a sole proprietorship, family run, partnership or incorporated companies.
One of the reasons that SMEs are successful at the First MicroFinanceBank Afghanistan (FMFB-A) are the large number of successful microfinance clients, whose businesses are growing because of the bank’s microfinance lending activities and who are becoming effective entrepreneurs, as they graduate to SME loans. These conditions have reduced the overall risk associated with giving loans in a higher monetary range. Currently, about 60 percent of SME clients in Afghanistan are former microfinance clients.
The SME function also develops a long-lasting relationship with its customers. The SME loan officer’s relationship with the customer is built on professionalism and mutual trust. Ultimately, the financial institution intends to grow with its customers.
FMFB-A established an SME function in 2005. Today, SME loans are being offered to clients from 18 branches throughout the country. The current outstanding portfolio is 460 active SME borrowers with a portfolio of US$ 6 million. These SME borrowers support over 10,820 full and part-time jobs.
As a pilot for SME expansion to other AKAM countries, a small SME function began disbursing loans in Cairo in May 2008. The lessons learned from this implementation are being applied to the other AKAM affiliates as they expand.
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