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Loans for small businesses

by Brigitte Sadzik
Afghanistan’s stabilisation and development challenges are immense: the country remains one of the poorest and least developed countries in the world. Again and again, attention is drawn to unstable security, the drug economy and corruption. A DEG credit project for small and medium-sized companies shows that good results can be obtained nonetheless. [ By Brigitte Sadzik ]

The DEG (Deutsche Investitions- und Entwicklungsgesellschaft mbH), a German development-finance institution and member of KfW Bankengruppe, has been supporting Afghanistan’s economic reconstruction since 2002. At the beginning the project promoted business start-ups by providing capital assistance. Since then, it developed to a major structure-forming asset in the Afghan finance sector.

Between 2002 and the beginning of 2006, DEG supported a total of 330 business start-ups as well as small or medium enterprises (SME) by providing non-repayable equity assistance of roughly € 1.8 million. As a result, 5,600 jobs were created or safeguarded, respectively. Due to the lack of an operational finance sector at the time, cooperation with banks was impossible.

In autumn 2004, the Afghan Central Bank restarted issuing bank licenses – and 17 banks have been accredited by now. At first, however, bank services were restricted to monetary transactions, micro credits as well as an initially hesitant launch of the deposit business. Whenever corporate loans were granted, they were only given to the few existing major enterprises.

The SMEs – i.e. most Afghan businesses – could not benefit from the loans. On the one hand, after twenty years of turbulent wartime there was no technology to assess and monitor such loans anymore. On the other hand, the default risk with small businesses was greatly feared. In addition, there were no qualified local bankers at hand. All in all, the educational situation is dreadful: according to data from the Afghan Foreign Ministry, 71 % of the people are illiterate.

Under these circumstances, DEG started to build up a credit guarantee facilitation programme (Kredit-Garantie-Fazilität, KGF) financed by the United States Agency for International Development (USAID) and Germany’s Federal Ministry for Economic Cooperation and Development (Bundesministerium für wirtschaftliche Entwicklung und Zusammenarbeit, BMZ). The KGF introduces local Afghan banks to giving credit loans to start-up businesses and SMEs. Small and medium businesses that need a working loan credit between $ 3,000 and $ 300,000 thus gain access to market-conform financing. Due to the lacking legal framework as well as the futility of customary banking securities, this would not be possible without the aid of the KGF facilitation programme.

BMZ and USAID have provided capital for the guarantee fund; and the partner banks are granting SME-loans, safeguarding part of their credit risk via the fund. Furthermore, the KGF offers management consulting to partner banks, it helps the institutes with the design of the “KMU-Credit” programme, and provides staff training.

DEG engagement

Since March 2005, there is an expert representing DEG in Kabul. During the first year, he was working more or less on his own, as there was no qualified local staff to support him. He started out training young Afghans and by now, six Afghan loan experts are working in his project office, all of whom have qualified themselves by active project cooperation. Along with an additional external consultant, security guards, driver and cooking staff, the project office now counts 15 employees.

The KGF is cooperating with two partner banks: the FirstMicro Finance Bank (FMFB) and the Afghan International Bank (AIB). Both have been granting loans to SMEs since the end of 2005 and beginning of 2006, respectively.

The FMFB is a fully licensed commercial bank focussing on microfinance. Shareholders are the Aga Khan Agency for Microfinance (51 %), the KfW Entwicklungsbank (KfW development bank) (32,3 %) and the International Finance Corporation, a member of the World Bank Group (16,7 %). Before the project started, the FMFB had only granted loans of up to $ 3,000. First of all, organisational procedures as to handling and granting of SME-loans, work instructions and credit committees had to be established. Initially, the DEG expert assumed the job of the SME-department manager.

Since 2005/2006, the FMFB has expanded its SME-department staff from three to a total of 25 employees, the department manager position is filled since the beginning of 2007. Specially designed credit manuals ensure proper checks and monitoring. Several recently hired credit consultants have gone through intensive training, which is continued by their “training on the job“. The staff of DEG’s project office accompanies the credit check procedures. The programme’s guarantee commitments to the bank help to bear part of the credit risk – there is a high interest in top-quality credit portfolio and credit management.

In December 2005, the first loan was granted and paid out. Ever since, figures have gone up: in 2006, 72 loans were bestowed, in 2007 as much as 175 loans. In 2008, there were 420 loans and by the end of March 2009, as much as 792 loans were paid out, accumulating a total of $ 14.5 million. The credit periods go up to three years; by the end of March 2009, 299 loans of altogether $ 4.9 million were entirely paid back. The guarantee fund had to be drawn on only once. The SME beneficiaries employ more than 16,000 people and therefore secure the livelihood of many Afghan families.

The Afghanistan International Bank (AIB) has approached the business segment of SME-loans from a different angle. Before the project was launched, they granted only corporate loans. After a change in management, the SME-loans started out hesitantly. The AIB was facing the same problems as the FMFB: a massive lack of credit consultants and organisational structures as well as undeveloped credit technology.

After building their own staff capacities, the DEG project office participated in the recruitment of AIB credit consultants. Moreover, it took responsibility of the SME department management, helped shape organisational and formal procedures and accompanied the credit check routines.

Since 2008, the AIB has its own well-functioning SME department, staff was increased from 3 to 16. Loans range from
$ 50,000 up to $ 300,000. At first, mostly overdraft loans were granted, now short-term loans of a one-year period prevail.

The first AIB SME-loan was granted in March 2006, altogether there were only three loans in the first year. In 2007, there were 18 credit commitments, in 2008 already 106. By the end of February 2009, the AIB had accumulated 146 loans with a total volume of $ 12.5 million. 42 loans were paid back completely by the end of February 2009. 1,700 AIB employees are kept busy by the SME beneficiaries. Also in this case, the guarantee fund had to be drawn on only once.

Up to this day, the programme management is organised by the DEG and the local project office. All partners want to build sustainable structures and ensure the programme’s autonomy. Currently, the DEG is developing a concept for the programme to gain independence, thus ensuring the successful pursuit and implementation of the project’s objectives.

At the same time, there are negotiations on project cooperation with further local banks, some of which are particularly interested, as word has got about how successful the programme is. The intensive partner bank assistance for securing high credit quality has proven its worth.