The executive director of the Zimbabwe Association of Microfinance Institutions (Zamfi), Godfrey Chitambo, revealed that since dollarisation MFIs have been facing real challenges, which include inadequate capitalisation.
“The current liquidity crisis is a real threat at a macroeconomic level and if the main banking sector catches a cold, then MFIs freeze, since they are less prepared to combat the crisis,” said Chitambo.
Economic analysts have indicated that MFIs are feeling the impact of the current liquidity crisis and are operating on low capital bases, impacting on their lending activities to individuals and small-to-medium enterprises.
“Most MFIs are operating on thin capital bases, and unfortunately, lend to individuals and SMEs that banks would term high risk and unbankable,” said Brains Muchemwa, an economic analyst.
RBZ governor Gideon Gono said in his Monetary Policy Statement early this month, a performance evaluation framework would enable the central bank to assess the impact of microfinance activities and facilitate appropriate policy intervention.
“The Reserve Bank is currently working on an appropriate Performance Evaluation Framework to enable evaluation of the impact of microfinance activities and facilitate appropriate policy intervention,” said Gono.
He said the microfinance sector in Zimbabwe was currently facing a number of challenges, including insufficient funding, inadequate IT infrastructure and absence of a credit reference bureau.
Nonetheless, Zamfi had established a microfinance wholesale fund as part of initiatives to improve liquidity in the sector, but the fund was being overwhelmed by the huge demand.
“Zamfi and other like-minded donors have come up with a wholesale fund which is now functional as of December 2011, but the money on offer is just a drop in the ocean and cannot meet demand,” said Chitambo.
Market players said there was need for institutions like the National Social Security Authority (NSSA) to also avail funding to MFIs, given that the sector advances to SMEs and individuals in the informal sector.
Muchemwa said: “Such institutions as NSSA should also extend loans to MFIs in as much as they do for the banks in order to ameliorate funding challenges for MFIs.”
Chitambo also argued that international donors and poverty reduction partners should be engaged to intervene on the viability problems facing MFIs since the sector caters for the poor and marginalised.
But the huge demand for credit in the economy presents challenges for banks and MFIs to accurately measure and ascertain credit risk profiles given the absence of a credit reference bureau (CRB) in Zimbabwe.
Because of adverse selection in their lending processes, the MFIs sector is generally characterised by huge default rates, which impacts on the viability of the sector. Most individuals are highly borrowed and the bubble is expected to burst owing to the increasing subprime lending.
“Most clients are heavily borrowed, and the absence of a CRB makes lending decisions a cocktail of wild guesses. In fact, household gearing levels are rising at an alarming rate and banks and MFIs face an avalanche of bad consumer loans in the not so distant future,” said Muchemwa.
Zamfi cemented that many people were over-borrowed and because of the lack of a CRB, the demand for credit has escalated to a phenomenal level, resulting in a high default rate. The association is currently finalising a partnership with a South African company to help set up a credit reference bureau.
“We are finalising a partnership deal with a South African company and this will help reduce defaults and slightly increase on profitability and also the image of the sector,” said Chitambo.
Commercial banks have also jumped into the booming market, with some holding MFIs as subsidiaries. Since the MFIs sector is not heavily regulated, banks can enjoy huge profits emanating from high interest margins on the back of low operational costs.
Muchemwa said: “The net interest margins in mainstream banking have been narrowing steeply, especially from around May 2011, and unfortunately, the operating costs per employee have risen sharply over the same period. Well-funded MFIs, with lean operating structures, are therefore providing rare opportunities for some banks to improve their bottom lines.”
The RBZ indicated that it continued to receive complaints from microfinance clients regarding unethical and undesirable business practices such as inadequate disclosure of business conditions.
The sector is highly infiltrated by unlicensed MFIs who are evading the supervision of the central bank. The RBZ governor said a total 157 MFIs were registered and licensed and operated under the supervision of the central bank.
MFIs have also been accused of abusive debt collection practices, including disposal of pledged collateral without following due legal procedures.
“A number of bogus individuals with a few cents to spare have found it convenient to masquerade as registered MFIs and in the process defrauded desperate borrowers. The RBZ is always available to assist would-be borrowers to verify the authenticity of would-be lenders,” said Muchemwa.
MFIs have also been accused of taking deposits from members of the public disguised as bilateral loans. The RBZ also said that such action could pose a threat to financial stability since such institutions did not meet regulatory requirements to function as banks.
Chitambo said “We call upon all members and non members of Zamfi to desist from fouling the market from bad practices which are tarnishing the image of MFIs.”