Common Problems in Access to Finance
Before starting my fellowship with the Aga Khan Foundation U.S.A. in November 2014, I worked as a Senior Loan Officer for the Kyrgyz Investment and Credit Bank (KICB). KICB’s primary shareholder is the Aga Khan Fund for Economic Development. That position gave me a valuable glimpse of the growing importance of small and medium-sized enterprises (SMEs) in developing countries, and insights into the special challenges that they face and how they can manage risk. The early 2000s were difficult years for post-Soviet countries like the Kyrgyz Republic, where the economies are very sensitive to political and economical changes. As the political situation in Kyrgyzstan complicated the relationship between banks and companies, most banks diversified their range of borrowers to include more SMEs. That created new opportunities but also new risks that some borrowers were poorly suited to manage.
In my three years working with bank clients, I saw many cases where smaller loan applicants were denied loans. The most common problems were shared by commercial borrowers who had difficulty proving the legal basis for their business activity and getting start-up capital. Most applicants could show evidence of business activity but high tax rates and corruption posed barriers for official paperwork. From the bank’s perspective, the official documents are necessary to be sure that a client is creditworthy and has the necessary security collateral. A second challenge is when borrowers cannot show current business activity when they want start-up capital to begin their own business. It’s like a catch-22 situation: banks need to see current business activity to be sure the borrower needs money.
As a loan officer I often advised applicants who grappled with these two common challenges. I often recommended they apply to microfinance institutions, because those lenders require less documentation and evidence of current business activity from borrowers. Microfinance lenders usually consider security collateral instead. However, repayment rates for microfinance borrowers are very high.
I saw the challenges that borrowers can face in repaying a loan. For example, I knew a borrower who had 10 years of work experience in the timber trade. He had a good credit history and I was sure that he could be a creditworthy borrower. He took a three-year loan to expand his business. He had successfully made payments for a year. Then in the second year, he started to miss his monthly payments. As he described the situation to me, the problem was that officials blocked his work and forced him to shut his business for three months. He tried to start another enterprise but did not have enough start-up capital. He even got a new job but that salary was not enough to cover the monthly payment. Ultimately, the borrower had to sell his house (the security collateral for the loan) to repay the loan.
A View of Success
On the other hand, I also worked with many extremely successful SME borrowers. One of the most exciting cases for me was a loan applicant who had prepared his business plan and financial model for two start-up ventures. He had extraordinary business experience, and a plan to obtain start-up capital that involved selling his house and car. I explained that to comply with the bank’s loan policies, he needed to get his start-up running for six months before qualifying for the loan. That meant significant risk but his plan was built on his experience: the first enterprise was a public bathhouse that would employ 15 people; the second was a small factory for making furniture with 35 employees.
Nine months later he came back and completed the loan application. He walked me through both businesses and their plans. I saw that he had sold personal assets to buy land for the public bathhouse and the factory and had purchased equipment. I helped him complete the loan application package and get a loan to buy raw materials. It was a great satisfaction to me when our credit committee approved that project. It was also excellent experience for me: I learned all about his start-up activities and the steps he took to succeed.
Joining Aga Khan Foundation U.S.A. as an Impact Investing Fellow, I have a chance to see how investors and the international development community regard the risks of doing business in developing countries, and what issues are important for creating an impact investment package. I am learning a lot and look forward to sharing more of what I learn later in my fellowship.
Pictured above: A Central Asian furniture operation, one of the many types of enterprises that can seek capital from KICB
By Shukhrat Azizmamadov, Impact Investing Fellow at the Aga Khan Foundation U.S.A.