Economic decline gave rise to MFIs

The Reserve Bank of Zimbabwe (RBZ) announced that it licenced eight additional microfinance institutions (MFI) between January and March 2016. This has increased the number of authorised MFIs to 163 from 155 as at December 2015, with 3 deposit taking MFIs namely; Getbucks Financial Services, African Century Leasing Company and Collarhedge Finance. Although MFIs play a critical role in reaching the unbanked and those that are financially excluded, their role in an economy such as that of Zimbabwe is yet to be tested and clearly understood. These institutions, of course, extendquick loans to those in need, but at exorbitant interest rates. Most of these loans are for consumption and therefore counterproductive.

Financial Matters Shingai Moyo

The rapid rise in MFIs in one way or the other a result of effective of dollarisation. If one looks back before 2009, there used to be a limited number of these institutions and by that time, they were commonly known as “loan sharks”. Dollarisation stimulated a boom in credit, particularly consumer credit. As a result financial institutions, particularly banks, reported huge profits amongst which microfinance and consumer credit institutions stood out. These MFIs directed their efforts to the salaried segment with consumer credit being the main product, especially for the lowly paid civil servants. The consumer credit product achieved exponential growth rates and became the most lucrative way to make quick money.

Although MFIs are adding to financial inclusion, their impact on the economy seem to be detrimental and to some extent are a catalyst to poverty. In fact, it turns out that microfinance usually ends up making poverty worse. The reasons for this are fairly simple. Most microfinance loans are used to fund consumption – to help people buy the basic necessities they need to survive. Consumption accounts for 90% of microfinance use. As a result, borrowers don’t generate any new income that they can use to repay their loans. So they end up taking out new loans to repay the old ones, wrapping themselves in layers of debt.

The only consistent winners in the microfinance game are the lenders themselves. Many of these MFIs charge exorbitant interest rates that sometimes exceed to 200% per year. For example, there are so many MFIs that charge 20% per month, translating to an equivalent of 240% per annum in a US dollar environment. The US dollar is regarded worldwide as a reserve currency. How can one borrow a reserve currency at such a ridiculous price? These MFIs should be regulated. Besides celebrating the rise and growth in the number of such institutions, the RBZ should focus on the developmental aspects that they are bringing. Loan sharks under the cover of microfinance have become a socially acceptable mechanism of extracting wealth and resources from poor people.

Surprisingly, banks due to huge profit opportunities offered by these MFIs have their own MFIs or in short are increasingly becoming loan sharks as well. There are only a few banks here in Zimbabwe that do not have microfinance as a separate unit or that do not offer such loans.

Most banks are partnering MFIs or are financing them.

Socially responsible banks should actually not associate themselves with MFIs and should just stick to core business. MFIs have actually impoverished most Zimbabweans. Due to easy access to these expensive loans, most Zimbabweans are now a in debt-trap. The media is awash with stories of people losing their properties, little assets and integrity, to loan sharks calling themselves microfinance providers, and they crown themselves with the moral aura that this term carries. Zimbabwe is a very small economy and having 163 MFIs highlights serious economic problems the country and people are currently facing.

Moyo is an economic and financial consultant. He writes in his personal capacity.