The Reserve Bank of Zimbabwe (RBZ) says that microfinance is the provision of financial services to unbanked and under-banked households and small to medium enterprises. They also highlight that the global objective of microfinance is facilitating access to financial services by the poor and marginalized sections of the community. A microfinance institution is a financial entity that provides minor or small-scale loans. Microfinance institutions are crucial in economies such as the Zimbabwean one. That is why it becomes disturbing when most microfinance institutions are undercapitalized. We explore that and more in this article.
RBZ Cites Most Microfinance Institutions (MFIs) In Zimbabwe Are Ailing
As at 31 December 2022, the deposit taking microfinance institutions (DTMFIs) subsector was not adequately capitalized, with only two (2) out of the seven (7) operating deposit taking microfinance institutions being complaint with the minimum capital requirements of the ZWL$ equivalent of US$5 million. The subsector has not been able to significantly grow its capital over the year with some of the DTMFIs posting losses since inception.
This was revealed by the RBZ Governor, Dr John Mangudya. He also highlighted that as at 3 December 2022, the aggregate core capital for the subsector was ZWL$ 11.68 billion. The only 2 complaint deposit-taking microfinance institutions in question are InnBucks and African Century Bank. Their capital thresholds are well beyond US$5 million. The non-compliant deposit-taking microfinance institutions are:
Success Microfinance Bank
Capitalization stands at US$2.66 million
Empower Bank
Capitalization stands at US$1.94 million
Zimbabwe Women’s Microfinance Bank
Capitalization stands at US$1.03 million
GetBucks
Capitalization stands at US$0.64 million
Lion Microfinance
Capitalization stands at US$0.21 million
Mangudya emphasised the importance for the Boards and shareholders of deposit-taking microfinance institutions to remain resolute. He said they should put in place measures to boost their capital levels.
Understanding The Challenges Microfinance Institutions Often Face
It is essential that we explore some of such challenges. This helps us better understand why most of these deposit-taking microfinance institutions are undercapitalized. Evidently top of the list is the inadequacy of capital. The next biggest challenge is that of late repayment and even defaulting in some cases. The incidence of bad debts for microfinance institutions is high. I believe this is a major issue of concern. It is exacerbated when deposit-taking microfinance institutions have poor risk management frameworks. Looking at that, I cannot help but think of Empower Bank.
For some time now Empower Bank has been synonymous with loans. Many people have been accessing loans from them. Their being undercapitalized does speak to late repayments being one of their challenges. Another issue we cannot ignore is the instability of the Zimbabwean local currency. No matter what is done, loss of capital value is at play. Bureaucratic hurdles, both internal and external, also pose several challenges. Due to the mercurial nature of the economy, there is also a decline in demand for microfinance borrowing. These are some of the major challenges microfinance institutions often face.
Zimbabwean Microfinance Institutions Not Completely Innocent In All This
In principle, microfinance institutions serve those who ordinarily are not financially endowed. They in essence should be a better alternative to banks when one seeks a loan. This means normally microfinance institutions should have reasonable interest rates. However, it has been commonplace to find microfinance institutions in Zimbabwe charging steep interest rates. It is also commonplace for most microfinance institutions in Zimbabwe to use aggressive collection approaches.
These aspects ultimately discourage prospects from seeking loans from microfinance institutions. It has also emerged that many microfinance institutions in Zimbabwe are poorly run. They do not have the requisite knowledge and skills to operate profitably. There is also a general lack of innovation in the products and services they offer. Despite the operating environment that is difficult, most microfinance institutions in Zimbabwe are to blame for where they are now.
Microfinance Institutions Capitalization Is Important In Zimbabwe
I have seen so many Zimbabweans struggling to access capital for their businesses or startups. Though there are many causes for that, microfinance institutions are in the mix. I say so in the sense that microfinance institutions should be easing that challenge. Unfortunately, they are not capacitated enough to address the challenge. The fact that most microfinance institutions in Zimbabwe are undercapitalized explains a lot. Remember that Zimbabwe is basically an informal economy. Most of the action is in the informal sector. This is a sector which under normal circumstances should be catered to by microfinance institutions. No wonder why it is imperative that all microfinance institutions be adequately capitalized.
Microfinance institutions are often capitalized via owners’ equity and capital injections from civic society donors and the government as well. If they do not manage to raise enough from those 3 it becomes problematic. This is because to make money you need money. If their coffers are low, they cannot generate much. That is why microfinance institutions in Zimbabwe should pursue more investment. On top of that, they should streamline their operations. They need to incentive repayments more creatively so that delays and defaults are kept minimal to none. They should also consider joint responsibility (guarantor) borrowing more. This significantly reduces incidences of bad debt plus repayment delays are curtailed. I strongly believe that microfinance institutions in Zimbabwe have barely scratched the surface. They need to start thinking unconventionally.
