Banks have failed to advance loans to individuals and SMEs largely because of stringent requirements, unlike microfinance institutions which have more relaxed rules.
Microfinance institutions are however ruthless in recovering loans and they have a very tight security deposit scheme requiring that borrowers surrender the collateral before they receive the loan.
Microfinance institutions, despite being registered by RBZ, have a free range and have no limits to rates charged on borrowings. The Zimbabwe Association of Microfinance Institution (ZAMFI), the mother body, does not set the parameters for interest rates as its focus is on lobbying government on members’ behalf and representing them on policy issues. Membership to ZAMFI is not mandatory, making monitoring of microfinance institutions very difficult.
Investigations show that individuals getting loans from most microfinance institutions pay 15 cents for every dollar they borrow at the end of every month until they fully service the loan, making it the most expensive money in the world.
Apart from the 15% interest per month charged, borrowers also have to pay various service fees before the loan is processed and during repayment.
For example if a borrower uses Oxlink Capital, one of the microfinance institutions, they pay an additional 3% processing fee and a 1% variable service fee.
At Oxlink Capital, a borrower pays an extra US$2 for a statement and US$5 for “amount reconciliation”.
This means that if an individual borrows US$100 from Oxlink Capital, they are expected to pay US$26 in the first month, being the amount that would cover the compounded interest, various fees, statements and reconciliation.
Microfinance companies give 90 days to clear the debt, thus if you take three months to repay US$100, you would pay upwards of US$70 in fees, interest and other costs.
Hamilton Finance, another microfinance institution founded in the United Kingdom and jointly owned by Lloyd Hama and Ruvimbiko Buyanga, also charges 15% interest per month and has a ‘non refundable application fee’.
At microfinance institutions, title deeds, vehicles, electronic gadgets, jewellery and movable and immovable property are accepted as collateral. All movable security is left with the lender.
A borrower at Hamilton Finance told businessdigest how a loan advanced by the microfinance institution spiralled out of control.
“In our case, we borrowed some money eight months ago, hoping to repay in three months,” the borrower said. “We pledged a friend’s house as security, and we have been paying about US$2 000 per month as interest and have rolled over the loan twice now. We have paid US$16 000 in interest only, some US$3 000 above the loan amount. If a miracle were to happen and we pay the US$13 000 back at least this month, it means we will end up paying US$29 000 which is very high.”
The borrower said they had surrendered title deeds as security but the “catch is that the loan seeker has to sign agreements of sale documents as pledge of security”.
Naume Maketshemu, Hamilton operations manager, dismissed the accusations that they were taking over properties surrendered to them as security as “baseless”.
“We wish to categorically state that Hamilton Finance has never taken and has no intention of taking over anyone’s property without taking the necessary legal procedures,” said Maketshemu. “Since commencing operations in January 2010, we have advanced loans to various clients. These loans were advanced on the security of title deeds in respect of immovable property belonging to our clients. The rest of the clients on our loan book tendered various movable property including motor vehicles, plasma screens, laptops, projectors and refrigerators as collateral.”
Maketshemu said Hamilton Finance engaged “qualified valuators” to do valuations and the clients were “invariably advised of the values ascribed to the property”.
It is only after the client is satisfied that the company concludes a loan agreement, she said.
In April Hamilton Finance flighted full page advertisements advising loan defaulters that they would lose stands they had used as collateral if they did not regularise their payments.
Stand sizes and prices which had been used as security varied with the most highly priced going for US$100 000. Now, Hamilton Finance no longer accepts stands as collateral. This comes after the microfinance institution faced resistance when the company tried to forfeit stands borrowers had pledged to secure loans.
Hamilton says it has made a difference to businesspeople “particularly those in the small to medium scale enterprises (category) and individuals who do not own immovable property”.