Credit Guarantees

ACGF's core products are credit guarantees which incentivize lending by its PFIs — enhancing access to finance for MSMEs so that they can realize their full growth potential.

“An estimated 50-70% of SMEs in emerging markets (and even higher in Afghanistan) are either not funded or underfunded by the formal financial sector.”
World Bank. "Improving Access to Finance for SMEs | Opportunities through Credit Reporting, Secured Lending and Insolvency Practices." Washington D.C., 2018.

ACGF was established to facilitate opportunities for formal financing for the MSME sector in Afghanistan as the country continues its political and economic transition. ACGF’s credit guarantees alleviate the constraints that typically hinder MSME borrowers’ access to finance such as:

Lack of sufficient collateral

Perception of high risk by the lenders

Mismatch between loan conditions and repayment capacity of the borrower

Insufficient loan amount to fully realize borrower’s growth potential

Lack of proper accounting

Lack of credit history

During COVID-19 ACGF has demonstrated its high relevance for the stability of MSME lending in Afghanistan:

  • Helping PFIs to pursue reschedulings over recoveries, with more than USD 1.2m of guarantee amounts rescheduled (as of end of July 2020)
  • Active risk monitoring and updating of guidelines for PFIs’ new disbursements
  • Specific TA projects designed to support delinquency management tools
  • Strong incentives on provisioning relief for rescheduled loans
  • 0% risk weight to the portion of the loan guaranteed by ACGF and approved by DaB
Photographer: Naveed Nawabi

Benefits

Credit guarantees are designed to encourage the prosperity of both credit lenders as well as borrowers that consequently aid the overall development of the Afghan economy.

Micro, Small & Medium Enterprises:
Substituted collaterals

Easier access to financing

Loan sizes and conditions appropriate to the need and repayment capacity of borrowing businesses

Realizing the growth potential of revenues and earnings

Ability to recruit new employees and create jobs

Partner Financial Institutions:
Increased lending volume, decreased risk

Profit increases

Outreach to previously inaccessible target groups

Financial services innovation and a focus on customer needs

Increasing lending volume without drastic risk increases

Risk sharing with the PFIs allowing for the mitigation of the objective and subjective risk perceptions that are salient to PFIs

Afghanistan:
Overall economic development

Private sector development

Creation of enhanced incomes

Employment for the local population

Counterbalancing economic and security challenges

Strengthening trade, production and access to local & global markets

UN Sustainable Development Goals

ACGF contributes to the advancement of the United Nations Sustainable Development Goals in Afghanistan. ACGF strives to achieve transformational change through strengthening of the financial sector, which provides the MSME sector with credits, and in turn creates new and secures existing jobs.

Poverty in developing countries are reduced by job creation through access to finance for MSMEs
Developing and supporting projects that focus on access to finance for female entrepreneurs
Tens of thousands of jobs are created or supported by easier access to finance for MSMEs
One aspect of Technical Assistance is to develop projects focusing on innovations in the financial sector
MSME-financing also targets underserved minorities, in all regions of a country
Under the framework of Environmental & Social Risks, environment-friendly businesses are supported
Strong support to financial and governmental institutions for equity for access to finance
Working with national, regional & international actors

These benefits make ACGF’s credit guarantees a valuable tool that is well-suited for the development of the financial sector in the challenging economic context of Afghanistan.

Photographer: Naveed Nawabi

Eligibility Criteria

In order to stay focus on SMEs in Afghanistan, ACGF has certain limitations, specifically designed to look over the interests of the potential borrowers:

Guarantee range for loans:

USD 10,000 to 500,000, or equal value in Afghan Afghani

SME size of maximum:

• 500 employees,
• USD 15 million annual turnover,
• USD 15 million total assets
- all three criteria to be met

Duration:

In most cases, maximum 3 years

Eligible sectors:

• Private sector (except housing)
• Trade finance (except pure import/re-export investments)
• In case of a trade finance, a physical set-up of the respective business in Afghanistan is required

Eligibility of borrowers:

• Individuals – single ownership, partnership, family business
• Legal entities – incorporated companies with private and business residences in Afghanistan

Eligibility for payback:

• Feasibility: generating sufficient cashflow/income for sufficient repayment capacity
• Creditworthy: both individually (i.e. in respect to his/her entrepreneurial suitability, managerial and technical know-how and experience) and materially (i.e. in respect of their financial position)

Eligible loan purposes:

Inclusion of working capital and fixed assets

With these eligibility criteria in place the loan conditions (e.g. interest rates) are set at the discretion of the PFIs. Hence, the PFIs remain in control throughout the lending process.
Overall, the credit guarantees of ACGF are progressive tools for supporting and developing the financial sector of Afghanistan.
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