Aga Khan Agency for Microfinance

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Products for Small and Medium Enterprises (SME)

Small and medium enterprises (SME) are often referred to as the “missing middle” in developing country economies. While individual microenterprises help to sustain and support the core livelihoods of families and households and are central to the alleviation of poverty, SME activity is at the heart of growth and employment creation. This is particularly important as not everyone can be an entrepreneur. 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.

Despite their importance to economic growth and employment, many SMEs find it extremely difficult to access finance services, specifically, 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. Many SMEs are either too small or have insufficient collateral or credit histories to be able to secure loans and financing from commercial banks in developing countries. They are thus caught in a gap between the growing supply of finance for microcredit and the market for conventional business financing.

Now widely recognized, the financing gap has encouraged many international financial institutions, donors and microfinance providers to work to develop sustainable solutions. AKAM’s strategic partner, KfW, and its sister organisation DEG, has been particularly supportive of the development of this line of business and has provided both debt financing facilities and technical assistance grants to assist AKAM institutions in developing appropriate credit policies and assessment procedures.

AKAM intends for a growing number of its institutions to develop tailored loan products and to begin providing SME financing. The loans provided to these businesses are often structured with much more flexible disbursement and repayment terms, and can include arrangements such as revolving lines of credit. These allow clients to pay interest only on the amount drawn down. Leasing facilities allow clients to acquire larger fixed assets without having to meet the normal collateral and guarantee requirements that would otherwise be required.

In addition to requesting loans, SME clients may also seek additional financial services such as current accounts and international money transfer services that may help them to facilitate their import and export businesses. SME loans are also available to small agro- processors and larger farmers for purchase of assets that will help improve their productivity and increase the price they get for their goods such as tractors and mini-combines.

Larger businesses also have more complex non-financial needs, particularly as they seek to manage and plan for growth. AKAM is building partnerships with other entities that are capable of providing the much needed business development services (BDS) and market analyses that SME clients require. BDS will enable businesses to identify market opportunities and unfilled niches and to expand their customer base.

BDS also helps to strengthen the accounting and stock management functions in small businesses, which in turn, allows AKAM financial institutions to better assess their credit risks. Both clients and loan officers feel more secure in their lending relationship when they have confidence in the business plans and projections prepared by clients. SME lending may also be integrated into the larger Enterprise Development (ED) initiatives being undertaken by AKF in a number of countries.