The Zimbabwe Independent chief business reporter Paul Nyakazeya this week spoke to Oxlink Capital (Pvt) Ltd CEO Brains Muchemwa about the cost of money in Zimbabwe, consumer lending and micro finance institutions.
Nyakazeya: There has been a dearth in consumer lending in this country over the last decade. What is the situation now?
Muchemwa: Many financial institutions are going into consumer lending, giving loans to individuals and small traders. I should say that this segment is slowly taking a prominent share on banks and micro finance institutions (MFI) balance sheets.
Nyakazeya: What is the value of consumer lending in this country?
Muchemwa: Any model that allows households to bring forward future consumption and smoothen the consumption is the most growth-accelerating model that any economy would want and considering our fragile economic conditions, banks and MFI are providing the much needed relief and are indeed acting as a catalyst to the much desired growth that Zimbabwe needs today, albeit on a small scale due to the seed capital and liquidity constraints.
Nyakazeya: There is debate about whether Zimbabwe is over-banked or not? What is your take on this?
Muchemwa: All the important parameters that can be objectively used to measure whether the country is over-banked or not, such as branch density, competition levels or accessibility of credit point, Zimbabwe is still far from being over banked, at least from my opinion. There is still huge scope for more financial institutions to enter into the market, only that the new entrants need to have strong capital bases to appreciate the huge opportunities.
Nyakazeya: Recently, the Reserve Bank has been castigating banks for not fairly compensating depositors. Is it fair that banks are not giving reasonable interest rates to depositors?
Muchemwa: Sorry I cannot answer that one, the Bankers Association of Zimbabwe should give you a fair response.
Nyakazeya: What are the major risks that justify MFIs to charge high rates?
Muchemwa: Like I alluded to, the major risks relate to unpredictable cash-flows. MFI’s usually finance individuals, SMEs, small traders whose cash-flows are unstable. You lend money to a small trader and tomorrow they tell you a funeral befell the family and they ended up using the money.
And they have no capacity to repay. Either they require a fresh loan to get back to business or they are done for good. Crossborder traders equally tell you they would have lost their stuff at the border, etc. Some salaried borrowers do not get their full salaries and others don’t get them at all! Funny enough most of these borrowers are over-borrowed. The absence of a credit reference bureau creates an avenue where borrowers take advantage of information asymmetry and usually exploit the market to benefit unfairly. And until such a time that we have a comprehensive credit reference bureau, the risks remain pronounced and that will reflect on the rates being charged for loans.
Nyakazeya: MFIs are well known for taking people’s security with some allegedly losing their properties. There is a lot of debate surrounding this. What are your views?
Muchemwa: I do not understand why debate should be on that issue. The issues are so clear. Banks have even more rigorous security requirements than MFIs, only that people cannot get loans from banks so they are at times not informed about the lending process. Most criminals that would ordinarily rob banks, for fear of not wanting to be shot by police, turn to Micro Finance Institutions thinking they will make away easily with money without having to be chased. Unfortunately there is nothing like that in the world. People have to exhibit high civil responsibility, and indeed most of the steps taken by MFI’s in requesting security would be to safeguard themselves against speculators, fraudsters and rogue elements that believe money is free. And these are the fraudulent elements of the borrowing community would wish to label micro-lenders in bad light.
Only those with limited knowledge of how to apportion losses between lenders and borrowers fall for the unfortunate story that Micro Finance Institutions are there to grab people’s assets. Which banks or lenders in this country give out money without asking for security or guarantees? If you know of any, please let me know.
Nyakazeya: What is the future of consumer lending in this country?
Muchemwa: Currently disposable incomes are very low and that affects the efficiency and vibrancy of the consumer lending segment. However, there are excellent prospects. As the economy grows, so do the incomes of households in general and that speak of a bright future in consumer lending. Look at the developed world, for example, consumer lending is the in-thing and the global financial crisis we experienced recently was due to consumer lending models going bad.
That tells the importance of consumer lending in the bigger picture. Indeed economies revolve around production and consumption. And there can’t be meaningful consumption without strong consumer demand. Important lessons should be learnt upon looking at the importance of strong domestic demand in China, India South Africa and other countries with strong internal growth driven model. Just in South Africa, consumer loans are over 48% of total loans and advances by banks. This gives us a picture of the road ahead and the potential.
Nyakazeya: What do you say to people who say micro-finance companies reap-off people? What are the current rates being charged by MFIs and are they justified?
Muchemwa: It all depends who qualifies the justification and on what basis. MFIs are charging anything above 5% -25% per month and this is quite high from a nominal perspective. However, considering that MFIs in Zimbabwe are taking the riskiest segment of borrowers that the mainstream banks are shunning, the charges are fair, and indeed understand equally that unlike banks, MFIs don’t take deposits and their losses hit them right to the core unlike banks that can get deposits and leverage on the same. So I should say the pricing reflects on the excessive credit risk for the riskiest segment in the market that even banks don’t want to touch. Go to Zambia today. Notwithstanding that Zambia stabilised long ago, their MFIs charge between 10-20% per month. Isn’t that outrageous?
In Tanzania you are looking at 6-8% per month. Botswana tops 6% per month, whilst South Africa, notwithstanding having one of the most efficient financial markets in Africa, is sitting on around $300 billion bank deposits and a loan to deposit ratio of almost 100%, charges around 4% per month. In short, if you evaluate Zimbabwe in the regional context with the right level of information upon factoring the excessive credit risks, etc, in this country, the charges are not too wild as many would want to portray. It is important to understand that globally micro-finance is a US$40 billion industry that exhibit varying charges from Asia to Africa, and that debate about the high interest rates charged by MFIs has existed since the 1970 on why the poor are charged the highest. Look here, portraying MFIs charges in Zimbabwe as out of this world is not different from portraying the image out there that Zimbabwe is a jungle and if you invest you lose all your money, which image is unfair, biased and exaggerated.
Nyakazeya: What should be done to ensure that the cost of money is not expensive in Zimbabwe?
Muchemwa: Liquidity in the country has to improve, and indeed the economy needs to generate more exports and, among other things, put up a good investment case to lure and retain FDI (foreign direct investment). Equally, the interbank market needs sufficient instruments such as TBs (treasury bills), lender of last resort functionality, etc, to ensure that liquidity flows with much ease.
Nyakazeya: Any advice to borrowers?
Muchemwa: My advice is that always borrow responsibly.