The underlying objectives of the Aga Khan Agency for Microfinance (AKAM) are to reduce poverty, diminish the vulnerability of poor populations and alleviate economic and social exclusion.
Providing clients with access to housing finance to improve housing quality and safety is a critical development priority for AKAM and its affiliates. In the low-income and underserved communities that AKAM targets, housing is often of low-quality and overcrowded with poor sanitation, insulation and ventilation.
Many of these areas face high vulnerability to natural disasters or in conflict zones that expose housing to further hazards and damage. Many AKAM institutions are offering loans for the refurbishment and renovation of homes enabling poor families to restore and upgrade their homes, and contributing to genuine improvements in their quality of life.
In Afghanistan, the First MicroFInance Bank Afghanistan (FMFB-A) introduced home improvement loans in 2008. With the support of IFC, FMFB-A developed a Housing Microfinance Toolkit that is now used as a reference across the region. In 2009, with initial support from USAID and in collaboration with the Aga Khan Planning and Building Services, Pakistan (AKPBSP), FMFB-A introduced free construction advisory services paired with its housing loans to promote better-quality construction, including seismic retrofitting, energy efficiency, sanitation and proper ventilation. With technical support from AKPBSP, FMFB-A developed guidelines for the construction and retrofitting of non-engineered buildings. FMFB-A hired Technical Officers to provide construction advisory services based on these guidelines and developed a rural housing product.
As of July 2017, FMFB-A had 8,153 outstanding housing improvement loans and an outstanding total housing loan portfolio of US$ 8.9 million, representing 10 percent of its total loan portfolio.
In Tajikistan and Kyrgyzstan, AKAM’s affiliates have offered housing microfinance for a decade. Today they serve nearly 9,000 housing clients, particularly rural households (over 60 percent of their housing clients) and women (40 percent of their housing clients). In 2017, with support from Kreditanstalt für Wiederaufbau (KfW) and the European Bank for Reconstruction and Development (EBRD) respectively, First Microfinance Bank-Tajikistan and First Microcredit Company-Kyrgyzstan introduced targeted loans for energy-efficient housing upgrades, paired with guidance on best practices and context-appropriate solutions.
As of July 2017, AKAM’s affiliates in Afghanistan, Egypt, Kyrgyzstan, Pakistan, Syria and Tajikistan offer housing finance with a total housing portfolio of US$ 30 million, serving 30,000 clients – 30 percent of whom are women and 45 percent of whom are in rural areas.
Given the scarce access to financial services among the rural poor and the importance of agriculture as a critical livelihood activity, agricultural finance is a key focus area for the Aga Khan Agency for Microfinance (AKAM). Several of AKAM’s institutions, particularly in sub-Saharan Africa, Pakistan, the Kyrgyz Republic and Tajikistan, have significant rural outreach and agriculture portfolios, but the unmet demand is still vast.
Where there are sister agencies, AKAM’s entities collaborate to help increase the farmers’ yield. In the Kyrgyz Republic, 48 percent of its people work in the agricultural sector, which accounts for nearly 18 percent of the gross domestic product. Harvesting of the main crops such as wheat, sugar beets, potatoes, cotton, tobacco, vegetables and fruit, as well as raising livestock, is the main business in the country. FMCC is the largest microfinance provider in the southern region of the Kyrgyz Republic. It works in provinces that have some of the highest poverty rates.
Given FMCC’s mandate to target the poor and underserved, it maintains a strong rural and agricultural focus with agricultural and livestock loans representing half of disbursements by number in 2016. The Kyrgyz Republic’s agricultural products include cotton, vegetables and fruits. As far as total production, the largest crop is assorted types of animal fodder to feed livestock. The second largest crop is winter wheat, followed by barley, corn and rice. Animal husbandry is the main economic input in the mountainous regions and so sheep, goats, cattle and wool are popular products to sell as are chickens, horses, pigs and in some areas, yaks. This means that not all clients will be equally affected by weather conditions or disease outbreaks.
In Madagascar, PAMF plans to expand outreach in rural areas where the microfinance penetration rate is extremely low – currently at around 3.5 percent – and where poverty is high. Consequently, 61 percent of its loans are rural. Although agriculture is a mainstay of the economy, employing 80 percent of the population, access to agricultural finance is low, particularly among PAMF-Mada’s focus areas of Sofia and Itasy. The focus of PAMF-Mada’s initial rural expansion has been small agricultural loans – in 2016, 24 percent of the numbers of loan disbursements were for agriculture.
PAMF Madagascar also collaborates with AKF to provide loans to rice farmers organised and trained by the Aga Khan Foundation (AKF) in improved cultivation practices. To continue to support its target market, PAMF Madagascar expects small agricultural loans to remain an important share of its lending activity.
While microfinance can help alleviate poverty through lending and productivity, micro savings can help to protect households from what is often not only a lower income, but an unpredictable one.
In rural and remote areas where financial services are not available, many people save but not in formal institutions. Instead, they buy extra livestock or gold or they put their cash under a mattress and hope that it will not be stolen. For them, there is nowhere to store money safely. In response, the Aga Khan Agency for Microfinance (AKAM) is moving all of its entities to become deposit-taking, if the regulations allow, to help its clients access formal, secure, and remunerated savings.
Some institutions, like the First MicroFinanceBank Ltd. of Pakistan (FMFB-P), work in rural and remote areas because part of their mission is to make savings accessible to everyone so that they can build their assets and save for the moments they deem important in life, whether it is for the education of a child, a wedding in the family or medical expenses for the birth of a child. In 2016, the number of new deposit accounts in FMFB-P increased by more than 50 percent to a total of 458,210 accounts. Of all of FMFB-P’s depositors over 95 percent are individual savers and they have an average savings of less than US$ 180. FMFB-P’s entire loan book is funded by deposits and equity.
Tajikistan has one of the lowest gross domestic products per capita among the 15 former Soviet Republics and nearly two-thirds of the population continues to live in poverty. In recent years, the economy has become heavily reliant on migrant remittances. More than 43 percent of Tajikistan’s GDP is made up by remittances.
The average Tajik migrant is a 32-year old, male, who has three dependents, spending 14 months at a time (cyclically) in Russia and remitting US$ 2,000-2,500 on average per year (US$ 150-200 per month). Remittances are generally seasonal and peak between September and December each year, around the time migrants return home after the completion of a contract. Recipients of remittances are most often women who remain to care for the family.
Over the last several years, FMFB-T has worked on increasing the number of access points for banking operations so that many communities can access remittances close to their homes. In 2009, the National Bank of Tajikistan granted FMFB-T the right to engage in money transfer activities in its banking service centres because remittance recipients are more inclined to receive remittances through banks or operators that have locations close to where they reside.
The bank is also advertising its remittance services so that it can begin to build a visible presence in Tajikistan. In Russia, FMFB-T has established a greater presence to attract remittance business and promote the services of the bank. Establishing a stronger presence in Russia enables the bank to engage more with the migrant communities, building relationships which can be further strengthened by remittance officers in Tajikistan. FMFB-T offers several remittance-linked products, including a remittance-linked savings product to help its clients increase the amount of the remittances that go into asset building as opposed to income smoothing.
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 760 active SME borrowers with a portfolio of US$ 14.4 million. These SME borrowers support over 10,820 full and part-time jobs.
The lessons learned from FMFB-A’s experience are being applied to the other AKAM affiliates as they expand. Today AKAM affiliates in Tajikistan, Kyrgyz Republic, Egypt, and Madagascar offer SME financing, collectively serving about 1,266 SMEs across the four countries.
