During the past two weeks, both lower and upper houses of Parliament have carefully considered the Microfinance Bill, together with other Bills.
Microfinance with Clive Msipha
After its third reading in parliament, the Microfinance Bill has been passed on to the senate and will shortly be put before the president for signing into law.
In 2005 a National Policy on Microfinance was enunciated after consultations among the Ministry of Finance, the Reserve Bank of Zimbabwe and other stakeholders.
The Zimbabwe Association of Microfinance Finance Institutions (Zamfi), the umbrella body of microfinance Institutions, has together with other stakeholders walked a very long and arduous road and welcomes the imminent enactment of a new supreme law to govern the microfinance sector.
The Microfinance Bill itself takes a very customer-centric view in that many of its features are not any different to the requirements set out in the Zamfi Code of Conduct. The background is that Zamfi is also a signatory to the Smart Campaign, which is a microfinance industry initiative aimed at promoting responsible lending and transparent pricing.
Sadly, the prevalent public view of microfinance in this country is that of an industry led by super villains; the kind you find in James Bond movies, who preside over organisations that charge very high interest rates, engage in illegal deposit-taking and in highly unethical practices.
However, as Zamfi we understand that while there have been a few cases of malpractice, the work of the greater measure of our members is not very well understood and the errant behaviour of a few misfits has dominated the headlines. This new Microfinance Act will set a high standard, and will also allow differentiation in the industry and a number of the highly professional outfits that are law-abiding will thrive in this new dispensation.
Many will often ask why the business of such small loans draws such a huge amount of attention.
Firstly, my view is that the only thing small about this industry is the general perception on it.
The potential of the industry, as has been demonstrated globally, is huge. For example, BancoSol began as a microfinance programme in post hyperinflationary Bolivia. The institution offered tailor-made credit and deposit products for its clients, who were largely shunned by the bigger commercial banks. From this base, BancoSol has grown to become one of the biggest financial institutions in Bolivia.
Compartamos in Mexico is also a similar story. Having started from a small capital base of US$ 250 000, the microfinance programme grew over the course of 15 years to become a billion dollar business listed on the New York Stock Exchange. Closer to home, the story of Capitec Bank in South Africa has followed a microfinance model to cater to previous underserved segments of the market.
Capitec has over the course of 15 years grown to enter the top five of mainstream banking in South Africa.
You may be wondering how these global experiences relate to our local situation and what role microfinance has to play locally? The banking sector in this country is still currently dominated by the multinational banks.
These institutions follow a different model and don’t lend aggressively to micro-enterprises and small to medium enterprises. The mantle has fallen on a number of our indigenous banks to do this. Some have evidently faced challenges in navigating mainstream banking, let alone venturing into the MSME segments.
Bank failures have eroded some trust in the formal banking system. The entire formal banking sector services less than 18% of the population. Microfinance institutions currently follow credit-led models and an opportunity exists to build confidence through lending. Put another way, microfinance institutions are a credible vehicle for financial inclusion.
The Equity Bank experience in Kenya comes to mind. With a microfinance-led model, this institution has more than 40% of the deposit accounts in the Kenyan market. This is the potential that the model has.
Microfinance as an industry gives small loans to micro-entrepreneurs. The best and most able of these entrepreneurs graduate to become bankable propositions. The industry’s greatest insight, borrowed from the insurers, is that you can lend in an unsecured manner, provided that one has the necessary diversification to manage the overall portfolio. Consequently, a number of microfinance models involve lending to people that do not have the traditional forms of collateral required by the banks.
Microfinance not only gives people access to funds but also the chance for social mobility for those who are highly motivated. In this regard, the vital importance of the industry cannot be underestimated. It is very possible that these small loans will set someone on the path to creating a company that will generate significant employment opportunities.
As an industry, we believe this proposed law will provide a solid legislative framework to operate in. We particularly welcome the move to allow players to apply for perpetual licences, with the regulator having the power to withdraw the licence of any misbehaving practitioner.
This will instil discipline as errant, unethical practitioners will be de-registered.
Lastly, we don’t as an industry underestimate the role that we have to play as an allocator of capital to sections of the market that are largely neglected. The new Microfinance Act will raise the bar in terms of compliance to very high standards of practice. We are of the view that this is healthy for the industry.
While we appreciate that the interest rates in the industry are currently very high, we also subscribe to the view that interest rates for the sector should be determined by market forces.
However, it is also our belief that the interest rates in the sector will be subject to the economic tenet of scale.
As the industry scales up, and attracts increased investment, coupled with the advent of some deposit-taking microfinance institutions, a natural consequence of these factors, in our considered view,will be lower interest rates in the sector. This has been the microfinance experience in Latin America, Asia and the same should happen here.tegy.
Clive Msipha is the Chairperson of The Zimbabwe Association of Microfinance Institutions ( Zamfi). He writes in his personal capacity.