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 AKDN’s broader strategy for economic development in our countries of operation. 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. They need a more specialised, labour-intensive financial appraisal to determine the payment capacity and minimise the risks of default in case of business difficulties. SMEs look to where the microfinance loans stop, and fill the gap between microfinance and traditional banks. SMEs can be a sole proprietorship, family-run business, partnership or incorporated companies.

One of the reasons that SMEs are successful at the First MicroFinanceBank Afghanistan (FMFB-A) is the large number of successful microfinance clients. Their businesses are growing because of the bank’s microfinance lending activities and they 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. There are almost 200 active SME borrowers, with an average loan size of $35,500, provided in accordance with Sharia principles.

The lessons learned from FMFB-A’s experience are being applied to the other AKAM / AKFED affiliates as they expand. Today the combined SME loans in Tajikistan and Madagascar amount to $32.6 million.