Reports released last week concerning financial institution Cabs suspending its US$10million Kurera/Ukondla Youth Fund did not come as a surprise to many.
The financial institution is reported to have taken this decision following the very high rate of non-performing loans (NPL) which stood at 78%.
According to its senior management, who gave an update before a parliamentary portfolio committee on Youth, Indigenisation and Economic Empowerment, Cabs had disbursed nearly US$4,9million with NPLs amounting to US$3,7million.
Following these disappointing developments, the building society received instructions in May from trustees of the fund to stop processing applications for the subsequent disbursing of loans while they formulate an alternative strategy for the fund.
Although supporting the noble cause of youth empowerment, the decision to suspend the fund was long overdue as over 70% of the loans disbursed in the past four years have not been repaid. The Youth Fund is run under the Ministry of Youth, Indigenisation and Economic Empowerment and administered essentially by three institutions; Cabs, CBZ and IDBZ. With the nature of these funds being revolving and the high NPLs prevalent, other institutions, CBZ and IDBZ, may possibly follow suit unless a change in strategy is formulated and implemented.
At this time when Cabs has made such a decision, it may be a good time to assess the harsh realities concerning national youth funds. Do such programmes normally succeed or they are just used for gaining political mileage?
What could have been the reasons for such a huge NPL ratio and are there possible solutions? Are there other possible ways in which youths can be assisted or should youth funds be abandoned?
Research done on youth funds in other African countries by the International Labour Organisation and some developmental institutions show that the ways the fund is crafted and administered have a huge bearing on its ultimate success.
Worth mentioning from the onset is the fact that loan repayments have always been a major challenge in most nations where such exercises have been carried out. Loan repayments in most nations have been low not because of inability to pay.
Rather, most youths are just reluctant to repay these funds as they are viewed as “free government money.” Thus the behavior by local youths in non-repayment of loans is in sync with peer nations. Regardless of the high risk of non-repayment when dishing out such loans, the loan origination and evaluation processes to a greater extent determine the success or failure of most youth funds.
Decision makers who craft and pursue stringent measures and thorough diligence in giving out loans are most likely to succeed compared to those who pursue lax policies.
In as much as Zimbabwe is trapped in a liquidity crunch, the 78% NPL ratio as revealed by Cabs leaves a lot to be desired. It highlights the hidden truth that the process possibly was not implemented in a thorough manner.
This also cements alleged reports that some youths were using the funds for vehicle purchases and others for paying the bride price to their in-laws.
In addition, reports alleging that there was mismanagement of funds within the ministry could have been another factor in the high NPL ratio. With Cabs among the few institutions with low default rates in their commercial loans, one is also forced to conclude that had they been allowed to decide who gets the money, the ratio could have been lower.
The view of Cabs for the formulation of an alternative strategy also points to a situation where management too came to the realization of diversion of funds from the intended core purpose. Such a high NPLs ratio further strengthens the position of banks that have always been reluctant to offer loans to this group as they regard them as “unreliable.”
Going forward, key pillars must be put in place so that such programs can become effective. Their success is measured by growth in the revolving funds which entails relatively low non repayment rates and a high number of jobs created (especially their quality) among other benchmarks. In light of this, proper assessment of business plans is critical.
Reducing the diversion of funds is very critical and this can be achieved by giving out loans to already established companies with existing track records rather than the current method which relies on successful business plans.
This is so because nowadays with a few dollars one can produce a “feasible” business plan even though one is not a true entrepreneur.
Furthermore, alternative ways in giving out loans such as paying suppliers rather than handing it over to youths can possibly produce better results.Other nations assume joint ownership of the assets acquired through youth funds.
Cabs and the respective ministry may need to consider such measures as they may reduce abuse of such funds thereby resulting in growth of revolving funds.
Other factors or areas such as developing entrepreneurial skills within youths through training also need attention as a way of ensuring successful schemes.
Lessons can be learnt from developed nations where entrepreneurship is supported strongly by policymakers.
Other nations have done this by even reducing the red tape associated with setting up and running new businesses.
Startups in other countries are funded by friends and family and angel investors. Such channels may also need to be considered by youths rather than rushing to national funds.
Overall, a cleansing ceremony may be required within the economy as honoring loan obligations is proving to be difficult starting from the top.