Meaning

Microfinance

Microfinance

Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services....

 is the provision of a broad range of financial services, for those who often do not have access, such as - deposits, loans, payment services, money transfers and insurance products - to low-income households to help them raise their income levels and improve their quality of life.

The Aga Khan Agency for Microfinance (AKAM)

AKAM was formally inaugurated in February 2005 by His Highness the Aga Khan and the former president of the World Bank, James Wolfensohn

James Wolfensohn

Sir James David Wolfensohn AO KBE FKC was the ninth president of the World Bank Group.-Early life:James Wolfensohn was born in Sydney, Australia, on 1 December 1933...

. The not-for-profit agency was created under Swiss law and is based in Geneva

Geneva

Geneva In the national languages of Switzerland the city is known as Genf , Ginevra and Genevra is the second-most-populous city in Switzerland and is the most populous city of Romandie, the French-speaking part of Switzerland...

, Switzerland

Switzerland

Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....

. It is governed by an independent Board of Directors chaired by the Aga Khan. AKAM brings together the fincancial services programming of the Aga Khan Development Network (AKDN), at the lower end of the ladder, unifying and consolidating their objectives and principles of development under one institutional umbrella.

The agency belongs to AKDN’s social development branch, and as such AKAM operates in both rural and urban areas, seeks to alleviate poverty by helping to improve incomes and quality of life through various programmes, initiatives, and partnerships. Today, AKAM operates in developing countries including Afghanistan

Afghanistan

Afghanistan , officially the Islamic Republic of Afghanistan, is a landlocked country located in the centre of Asia, forming South Asia, Central Asia and the Middle East. With a population of about 29 million, it has an area of , making it the 42nd most populous and 41st largest nation in the world...

, Burkina Faso

Burkina Faso

Burkina Faso – also known by its short-form name Burkina – is a landlocked country in west Africa. It is surrounded by six countries: Mali to the north, Niger to the east, Benin to the southeast, Togo and Ghana to the south, and Côte d'Ivoire to the southwest.Its size is with an estimated...

, Cote d'Ivoire, Egypt

Egypt

Egypt , officially the Arab Republic of Egypt, Arabic: , is a country mainly in North Africa, with the Sinai Peninsula forming a land bridge in Southwest Asia. Egypt is thus a transcontinental country, and a major power in Africa, the Mediterranean Basin, the Middle East and the Muslim world...

, Kenya

Kenya

Kenya , officially known as the Republic of Kenya, is a country in East Africa that lies on the equator, with the Indian Ocean to its south-east...

, the Kyrgyz Republic, Madagascar

Madagascar

The Republic of Madagascar is an island country located in the Indian Ocean off the southeastern coast of Africa...

, Mali

Mali

Mali , officially the Republic of Mali , is a landlocked country in Western Africa. Mali borders Algeria on the north, Niger on the east, Burkina Faso and the Côte d'Ivoire on the south, Guinea on the south-west, and Senegal and Mauritania on the west. Its size is just over 1,240,000 km² with...

, Mozambique

Mozambique

Mozambique, officially the Republic of Mozambique , is a country in southeastern Africa bordered by the Indian Ocean to the east, Tanzania to the north, Malawi and Zambia to the northwest, Zimbabwe to the west and Swaziland and South Africa to the southwest...

, Pakistan

Pakistan

Pakistan , officially the Islamic Republic of Pakistan is a sovereign state in South Asia. It has a coastline along the Arabian Sea and the Gulf of Oman in the south and is bordered by Afghanistan and Iran in the west, India in the east and China in the far northeast. In the north, Tajikistan...

, Syria

Syria

Syria , officially the Syrian Arab Republic , is a country in Western Asia, bordering Lebanon and the Mediterranean Sea to the West, Turkey to the north, Iraq to the east, Jordan to the south, and Israel to the southwest....

, Tajikistan

Tajikistan

Tajikistan , officially the Republic of Tajikistan , is a mountainous landlocked country in Central Asia. Afghanistan borders it to the south, Uzbekistan to the west, Kyrgyzstan to the north, and China to the east....

 and Tanzania

Tanzania

The United Republic of Tanzania is a country in East Africa bordered by Kenya and Uganda to the north, Rwanda, Burundi, and the Democratic Republic of the Congo to the west, and Zambia, Malawi, and Mozambique to the south. The country's eastern borders lie on the Indian Ocean.Tanzania is a state...

 and provides various microfinance opportunities whose “versatility allows it to be adapted to the needs and circumstances of the poor in urban and in rural environments.”

At the end of 2010 it had 156 branches in South

South Asia

South Asia, also known as Southern Asia, is the southern region of the Asian continent, which comprises the sub-Himalayan countries and, for some authorities , also includes the adjoining countries to the west and the east...

, Central Asia

Central Asia

Central Asia is a core region of the Asian continent from the Caspian Sea in the west, China in the east, Afghanistan in the south, and Russia in the north...

, the Middle East, West Africa

West Africa

West Africa or Western Africa is the westernmost region of the African continent. Geopolitically, the UN definition of Western Africa includes the following 16 countries and an area of approximately 5 million square km:-Flags of West Africa:...

 and East Africa

East Africa

East Africa or Eastern Africa is the easterly region of the African continent, variably defined by geography or geopolitics. In the UN scheme of geographic regions, 19 territories constitute Eastern Africa:...

, with 3,120 employees. Since its establishment in 2005, AKAM has assumed responsibility for microfinance programs that were administered by other agencies within AKDN for more than 25 years. At the end of June 2010, the agency managed a loan portfolio of over US $147.7 million in outstanding micro, small and medium sized loans to over 287,240 beneficiaries in 13 countries.

Objectives and Principles

The underlying objectives of the Agency are to “alleviate economic and social exclusion, diminish the vulnerability of poor populations and reduce poverty” so as to make the beneficiaries “self-reliant and eventually gain the skills needed to graduate to the mainstream financial markets”. To articulate its approach, AKAM has formulated a series of key principles. These are:

1. Providing a broad range of microfinance services
2. Aiming to balance costs with revenue but also generate a modest surplus to contribute to the expansion of services and geographic coverage
3. Operating alongside other AKDN agencies to draw on their experience
4. Utilizing institutional approaches and instruments that facilitate access and address the diversity of contexts and cultures
5. Consolidating all practices to ensure that procedures are transparent, efficient and appropriately documented with trained staff
6. Focusing on positive growth as required by contexts and circumstance
7. Drawing on partnerships outside the Network such as governments, international agencies and professional organizations to expand the general frame of reference and maximize success

Partners

AKAM throughout the years has received support from numerous institutions all over the world. Support in this case is defined as the provision of funding and/or technical assistance. The following is a list of the international institutions and organizations which as of 2011 have supported AKAM: Agence Francaise de Dévéloppement, the Bill & Melinda Gates Foundation, BlueOrchard, the Canadian International Development Agency, DEG, the European Investment Bank, the European Bank for Reconstruction and Development, Financierings-Maatschappij voor Ontwikkelingslanden (FMO), Frontiers, the International Finance Corporation, the Japanese International Cooperation Agency, Kreditanstalt fur Wiederaufbau (KfW), MicroFinanza Rating, the Microfinance Investment Support Facility for Afghanistan, Okiocredit, PlaNet Finance Group, Triple Jump, the World Bank Group, the United States Department of Agriculture and the United States Agency for International Development.

Afghanistan

The First MicroFinance Bank Afghanistan (FMFB-A) was founded in 2003 and became one of the first banks to be under Afghanistan’s legal framework on microfinance. FMFB-A opened its first branch in Kabul in May 2004 with KfW Banking Group and the International Finance Corporation as shareholders. The microfinance market was estimated at over 303,000 clients at the end of 2009, which is still only 18 percent of the two million households living under the poverty line in the country. FMFB-A is currently the largest microfinance institution in Afghanistan in terms of outstanding portfolio size with US$ 45.7 million in 2010 in microfinance loans compared to US$ 39.8 million in 2009. Of the total portfolio, 31 percent of the client base is rural. The institution’s rural portfolio represents 13,490 loans disbursed valued at US$ 22 million. FMFB-A’s, has a network of 45 branches, 17 of which are in rural areas, covering 14 provinces.

Kyrgyz Republic

The First MicroCredit Company (FMCC), which was launched as a microfinance programme in 2003, was established in its present form as a microcredit company, in 2006. It is the largest microfinance provider in the southern region of the Kyrgyz Republic. Over 950,000 people, or 65 percent of the population, work in the agrarian sector and 44 percent of people in the Kyrgyz Republic work on family farms. The number of FMCC loans outstanding totalled over 11,980 at the end of 2009. This is a 21 percent increase over 2008. About 41 percent of beneficiaries of the loan portfolio were women. Adding together all of the clients, the loans disbursed were valued at more than US$ 13.2 million.

Pakistan

The First MicroFinance Bank Pakistan (FMFB-P) was the first bank to be licensed in Pakistan, in March 2002, under the country’s new microfinance regulatory framework. It initially began as a programme in Rawalpindi and Karachi in 2002. In 2009, FMFB-P saw a 20 percent increase in its number of loan beneficiaries as well as a 30 percent increase in the number of savers. FMFB-P finished 2010 with over 206,000 outstanding loans valued at US$ 33.3 million. A quarter of FMFB-P’s microcredit beneficiaries are women. More than 180,000 savings clients had deposited over US$ 40 million with the bank by the end of the year. Drawing on other work done on clients needs research, FMFB-P and Harvard University started the development of social performance indicators to understand the needs of urban and rural clients so that they can develop products to better serve their clients.

Tajikistan

Tajikistan is one of the least developed of the 15 former Soviet Republics partially due to limited employment possibilities in the country. The First MicroFinance Bank Tajikistan (FMFB-T) received its banking licence and commenced operations as a microfinance bank in July 2004. FMFB-T is currently one of two microfinance banks in the country along with numerous microfinance institutions. Around 350,000 households are estimated to be living under the poverty line, out of which it is estimated that 127,000 households had access to microfinance services at the end of December 2010. At the end of 2009, FMFB-T had 11,705 outstanding loans with a total value of US$ 20.3 million.

Egypt

The First MicroFinance Foundation (FMF) was established in 2005 and was able to maintain a portfolio at risk in line with worldwide best practices, achieving 98 percent operational sustainability. FMF reached nearly 19,000 beneficiaries in 2009, with outstanding loans totalling US$ 4.5 million. The proportion of women borrowers has been maintained at 45 percent. Demand for microfinance is estimated at 20 million households, and only one million of those households are currently being served by existing microfinance entities. A small and medium enterprise department at FMF, which was piloted in May 2009, has financed a number of businesses in Darb al-Ahmar, one of the poorest areas in Cairo.

Syria

The First MicroFinance Institution Syria (FMFI-S) was established as a programme in March 2003 and was the first private-sector microfinance service provider in Syria. In 2009, the institution was transformed into a regulated non-bank financial institution

Non-bank financial institution

A non-bank financial institution is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market...

under the new Syrian microfinance law. This allowed it to invite other shareholders, such as IFC, KfW, and EIB, and mobilise deposits from the public. At the end of 2010, FMFI-S had an outstanding portfolio of 20,004 loans valued at US$ 21.3 million.

West Africa

The Première Agence de MicroFinance (PAMF) was established in 2006 to serve Mali, Burkina Faso and Côte d’Ivoire. The number of loans disbursed in these three countries was about 32,000 in 2009. This represents a 27 percent increase compared to 2008. The value of outstanding loans was over US$ 4.4 million, up from US$ 3.4 million in 2008. Women made up 46 percent of borrowers. Deposits increased over 2008, up 50 percent in number to just over 10,000, more than doubling in value to US$ 722,000. Currently, PAMF’s activities are overwhelmingly concentrated in rural areas and on rural products. About 85 percent of loans in the region are disbursed from rural branches. The PAMF microfinance institutions offer credit for cereal commercialisation, horticulture, animal fattening and alternatives to cotton growing.

East Africa

In East Africa, AKAM’s primary objective is to provide loans to microenterprises and small businesses for income generating activities such as small-scale agriculture, fishing and retail. AKAM’s East African institutions disbursed about 8,640 loans in 2009, with 45 percent of the beneficiaries being women. The value of outstanding loans surpassed US$ 1.8 million. Two new branches were opened in Chiure, Mozambique and Zanzibar, Tanzania which brought AKAM’s presence in the region to 10 branches in three countries–the third being Kenya.

Madagascar

The Première Agence de MicroFinance in Madagascar (PAMF-Madagascar) was established in December 2006 as a credit institution with the first four branches established in the region of Sofia, a rural area in the north of Madagascar. In late 2008, PAMF-Madagascar became a microfinance institution. It began taking deposits in July 2009. Today, PAMF-Madagascar has 11 branches in five regions of Madagascar (Sofia, Analamanga, Boeny, Diana and Itasy) and it now operates in both rural and urban areas. At the end of 2009, over 9,500 outstanding loans were distributed by PAMF-Madagascar. These totalled over US$ 1.8 million and over 1,100 savers deposited with PAMF-Madagascar.

Housing Loans

One of the key priorities for the agency was the development of a housing portfolio and methodology throughout six countries. Many of AKAM's institutions offer loans for the refurbishment and renovation of homes. By providing credit to poor families to restore and upgrade their homes, AKAM institutions are contributing to genuine improvements in the quality of life of its constituents.

In Afghanistan, the First MicroFinance Bank (FMFB-A) piloted a habitat improvement product in 2008. With the support of IFC, a housing microfinance loan product was developed.

As of December 2010, FMFB-A had 5,003 outstanding housing improvement loans and an outstanding total housing loan portfolio of US$ 6,759,010. This product is available in 21 urban branches and now FMFB-A is looking at adapting the product for rural areas – conducting a rural demand and repayment capacity survey to develop the most suitable product for these areas.

In collaboration with the Aga Khan Planning and Building Services, Pakistan and the Aga Khan Foundation USA, along with a grant from the United States Agency for International Development, FMFB-A will be providing construction advisory services in 2011.

In 2010, the agencies took the first step and developed guidelines for the construction and retrofitting of non-engineered buildings. Based on those standards, FMFB-A will provide construction appraisal and advisory services and promote innovative housing upgrades.

Construction advisory services consider a number of factors. These include site and construction material selection and construction design with regards to disaster mitigation, particularly in earthquake prone areas; and material selection and construction design with regards to sustainability, energy efficiency, sanitation and other health aspects. If these factors are taken into consideration, the housing infrastructure that is insufficient in both quantity and quality can be improved.

Small and Medium Enterprise (SME) Loans

Small and medium enterprises 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 improving quality of life and alleviating poverty, SME activity is at the heart of growth, sustaining jobs and employment creation for all including youth and disadvantaged individuals.

Additionally, the job creation element of SMEs can enable many poor people to feel more secure, because SME loans provide a mechanism to smooth incomes so that SMEs can employ and pay monthly salaries.
Through its SME lending, AKAM aims to stimulate sustainable employment to promote economic development and poverty alleviation. AKAM also supports investment in community services for broader improvements, such as improved access to health care and education, and upgrades in the built environment.

In 2008, based on the success in Afghanistan, the first institution to offer SME loans, AKAM launched a pilot of a similar SME initiative in Egypt which added an integrated in-house business development services component provided directly by AKAM’s microfinance institution in Egypt.

SMEs, on average, are responsible for the creation of around 20 full and part-time jobs per business. This provides the poor with a way to maintain or improve their quality of life in the face of uncertainty. Moreover, gaining access to financial services is a critical step in connecting the poor to a broader economic life and building their confidence so that they can play a role in the larger community.

Call Centre

At the First MicroFinance Institution Syria (FMFI-S) it was found that beside the branch network, FMFI-S had no other channels in place to sell its products and/or service to its clients. The institution decided that the set-up of a call centre would improve its service and eventually its outreach. International best practices have also shown that for the microfinance client target group, this channel can be very successful and cost effective.

Some seven million Syrians, about 38 percent of the country’s population, have a mobile phone. This makes getting in touch with clients and others who have shown an interest in getting a microfinance loan easier. With the help of the Frankfurt School of Finance & Management, FMFI-S started the process of improving customer service by upgrading the staffs’ skills and reducing loan approval time.
To ensure that the clients were getting the best possible service, FMFI-S established a call centre to handle customer complaints; customer queries; or to get information to dormant clients or to people referred by other clients.

The call centre handles product issues including promotional campaigns. This call centre also allows the institution to diversify and expand the SME client base using lower cost solutions than the expansion of the branch network.

By the end of 2010, seven outbound campaigns had been executed. The result of this campaign was that 32 percent of those who were called had a conversation with an FMFI-S staff member. Of this 32 percent, about 10 percent of them went into a branch and got a loan. Although the actual outreach through the call centre only equaled three percent of total loans disbursed, this is expected to increase in the coming months.
All branches have anecdotally noticed that the call centre has played a role in attracting new clients. Though there is an increased traffic burden on the branches, the call centre has contributed to the increasing number of visitors (potential clients) in Damascus and Masyaf branches.

Agricultural Lending

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 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.

PAMF Madagascar’s focus is 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, 62 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 2010, 48 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 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. However, to support growth in agriculture more broadly, increase impact and support sustainability, PAMF Madagascar plans to introduce an agricultural SME product to develop appropriate financial services for other actors and gaps in the rice value chain in particular.

In the Kyrgyz Republic the First MicroCredit Company (FMCC) is the largest microfinance provider in the southern region of the country. Given FMCC’s mandate to target the poor and underserved, it maintains a strong rural and agricultural focus with agricultural and livestock loans representing 73 percent of disbursements by number in 2010. 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.