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RBZ mulls reforms to Microfinance Act

The Reserve Bank of Zimbabwe (RBZ) is mulling to introduce a raft reforms, including amendments to the Microfinance Act, creation of credit and collateral registries as well as encouraging consolidation in order to enhance operations of microfinance institutions (MFIs), a central bank official has said.

By Taurai Mangudhla

Reserve of Zimbabwe governor John Mangudya
Reserve of Zimbabwe governor John Mangudya

A credit registry is expected to start operating by year-end to enhance credit risk management and mitigate against rising non-performing loans (NPLs), RBZ bank supervision division deputy director Rachael Mushosho recently told a Zimbabwe Association of Microfinance Institutions (Zamfi) CEO winter school in Masvingo.

Government hopes to have set up the registry by as early as September with provisions to extend the process to year end.
“We have already done most of the work, we are now finishing the logistics because we really want to have it in place to manage risk in the sector,” she said. Mushonga added the central bank is also encouraging MFIs to consolidate into bigger institutions and gain a competitive edge at a time banks are downscaling or establish microfinance desks.

She said the credit reference system is expected to enhance credit risk management and mitigate against rising NPLs while the collateral registry is seen facilitating use of alternative or moveable assets as collateral in place of the traditional forms of collateral and give the poor and marginalised who normally do not own assets that are traditionally used as collateral access to credit.

She said the collateral registry is expected to reduce the credit risk for banks and MFIs which accounted for 4,92% of total banking sector loans as at March 31, 2016. MFI sector’s total loans amounted to US$187,49 million out of the total banking sector loans worth US$3,81 billion as at 31 March 2016 , according to the central bank.

She said there was a high concentration in the sector with the top 20 MFIs controlled 86,71% of total MFI sector loans as at 31 March 2016, adding the majority of the players in the sector have loan books of less than US$1 million.

“Product offering is still limited with consumption lending (mainly salary based loans) constituted 53,99% of total loans. The proportion declined from 70,89% in 2013 reflecting a shift by a number of MFIs from overreliance on salary based loans – hence diversification into productive lending,” she said.

Mushosho said portfolio at risk (PaR) (30 days) worsened from 10,72% as at December 31 2015 to 11,40% as at March 31 2016.

Overall PaR has been on a downward trend since December 2012, reflecting moderate credit risk in the microfinance sector.

Amendments to the Microfinance Act seek to address shortcomings of the Microfinance Act by, among other things, providing for perpetual licences for deposit-taking microfinance institutions, extending the tenure of the licence for credit-only microfinance institutions from the current one year to three years, enhancing corporate governance and risk management within the microfinance sector and providing clarity in terms of classes of microfinance institutions.

“We have done the layman draft of the Amended Act which has to go through Cabinet,” she said.

Mushosho said MFIs are struggling as a result of inadequate funding due to lack of long term funding, slow product innovation, inadequate skills due to brain drain as well as high default rates.

She said the RBZ continues to call on the sector to consolidate and create bigger players in the sector that have more impact than the numerous small players, adding the central bank is finalising the Agent Banking Guideline and MFIs should take advantage of this development and partner with banking institutions to offer financial products to the currently unbaked.

“MFIs are also urged to take advantage of high mobile penetration rate in the country and introduce new innovative and mobile technology driven products and services,” Mushosho said.

“In line with the RBZ call during the January 2016 Monetary Policy Statement, banks have reduced their rates from upwards of 50% to 18% and are currently working towards 15% guidance provided by the Reserve Bank. MFIs are also expected to reduce their lending rates and pass on the benefit to their clients.”

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