Background: the operating environment
Zimbabwes banking system was well established before 2000, but was almost bust at the end of 2008. It is now rebuilding with US$800m of official deposits by last month. Cash held outside the system totaled US$500m, showing continuing distrust.
35 per cent of banks are under-capitalized but recent minimum capital regulations will restore confidence by putting certain banks out of business. The minimum requirement for non-deposit-taking microfinance institutions (MFIs) is currently US$5,000 (a US$1m minimum is mooted for deposit-taking MFIs). Despite this low requirement only 10 of an original 309 MFIs apparently remain.
Banks had only lent 37 per cent of deposits taken with only 6 per cent of this to individuals by June. Average loan interest rates are high, even for creditworthy corporate borrowers.
Governments and the IMFs GDP growth estimate of 6 per cent for 2009 appears low and forecasts are closer to 15 per cent.
Donor funding of US$700m per annum is being received. The IMF committed US$500m in September alone. Add private sector investment and the economy should get a decent boost, despite the short life of the unity government.
The Short Term Economic Recovery Program (STERP) launched in March influences Governments banking strategy. Its overall focus is to stabilize the economy and includes food security and women as priorities.
STERP acknowledges that SMEs and co-operatives are crucial to development and industrial and marketing clusters, special tax zones and financing are being mobilized. Whilst US$453m of private sector credit lines have been secured, none has been for disbursement to SMEs or individuals. Government has raised US$4.3bn of a total US$8.5bn STERP requirement.
Tax collection is substantially up vs. 2008, but the US$1bn for 2009 seems optimistic. By June US$285m of US$321m budgeted had been collected - VAT being the major component. This indicates a consumption (not production) bias, confirmed by a very low corporate tax contribution.
March capacity utilization was 10 per cent with a STERP target of 60 per cent by September. It is now 25 per cent, severely limited by an unreliable infrastructure but this too is being addressed by STERP.
The South African Rand will probably become the functional currency as continued use of US Dollars seems unsustainable. With relaxed exchange controls dividend and interest remittances are easier.
The business case
Since commercial banks are not lending to the poor the commercial case is straightforward - there is an informal funding gap. Government itself recently recognized MFIs roles in deepening the financial sector.
MFIs must be upfront and honest especially regarding effective interest rates. MFIs have high rates because their borrowing and operating costs are high and loans are unsecured. They must however strive towards commercial interest rate benchmarking and ensuring borrowers financial literacy to facilitate better success in loan repayments.
80 per cent of the population is now poor compared with 25 per cent in 1990/91. Banks dont want small loans and deposits from the poor because they are expensive to manage and the poor cant afford bank charges. But, this is short-sighted because the poor can become loyal customers. Zimbabwe has one of the worlds highest literacy rates with enterprising people who lack mainly financial capital to maximize opportunities.
Expensive product low income market
Zimbabwe has the highest country risk profile in Southern Africa which creates a high interest rate environment. Zimbabwe MFI interest rates are as high as 120 per cent per annum including monthly interest, upfront fees and insurance. Equivalent South African rates vary from 48 per cent to 80 per cent. Explaining fees and rates to borrowers without being branded a loan shark is a challenge.
Interest rates and loan repayments should be reduced for reliable borrowers. MFIs must however ensure sustainability by covering their own operating costs. If they are profitable this will increase their numbers, leading to increased competition and lower interest rates.
The credit crunch
Zimbabwean banks escaped the turmoil but global risk appetite and liquidity are reduced so obtaining funding remains difficult. MFIs must therefore be innovative in raising funds, maintain discipline and be prudent lenders.
The MFI response
MFIs apply group borrowing models and stokvels i.e. traditional collective savings and loan schemes are precedents. Average loan sizes are ZAR1,500/US$200 to ZAR3,800/US$500 with three six months maturity. Interest rates are high as noted. Loans are unsecured but savings deposits can act as security and make groups more self-sufficient. Simplicity and accessibility are essential.
MFIs must go to the people to lend and also to act as community billboards and matchmakers for micro-enterprises.
Three million Zimbabweans live outside the country. Cash repatriated from South African alone in 2008 was ZAR2.8bn/US$289m to ZAR3.5bn/US$360m. Lets assume a Zimbabwe-specific site with 270,000 diaspora lenders (i.e. only 9per cent of the total), each lending an average of US$17.50/ZAR132.00. Total cash raised would be US$4.7m/ZAR35.7m at current exchange rates. Assuming a MFI loan averaging ZAR1,750/US$230, around 20,400 microfinance loans could be made. This notional, diaspora-funded microfinance loan book would exceed the size of the largest Zimbabwe MFI loan book and many South African ones.
Microfinance can make a real, sustainable impact in the fight against poverty in Zimbabwe. Access to credit assists the success of informal income-producing ventures. An integrated, well thought through MFI model with government, aid organizations, local community leaders and local and international expertise as partners is essential.