Given the economic circumstances, most individuals are borrowing in order to meet their needs. This promotes the microfinance business / money lending business which is very profitable. Microfinance business offers people a platform to gain credit access by giving out loans e.g. personal loans, business loans, salary based loans. Some may argue that money lending business is a flooded market in Zimbabwe given that there are too many microfinancing institutions, as well as banks. The truth is the money lending business can work for you even if there are many competitors. You need the right attitude (positive attitude), the technical know-how and the right marketing and pricing strategies. You just need to start small in order to master what the microfinance business requires you to do in terms of management, planning and organizational skills.
What you need
A clean, presentable and comfortable office space is a must otherwise clients would be afraid to come borrow thinking you running some underground shady business. First impression really matter in the microfinance business as it will help to draw more clients and create an atmosphere of professionalism. Examples of office space in Harare would be central CBD which is quieter or better yet, out of town areas such as Newlands, Eastlea and Belvedere. Although location will depend on your target market, make sure your environment is presentable.
Microfinance Business License
Microfinance Institutions are governed by the Reserve Bank of Zimbabwe. You can only operate one when licensed by the Central Bank. Fees and renewal of the license is done annually. It is important to note that there are minimum prescribed capital requirements that have to be fulfilled in order to start operating a money lending business. The minimum capital requirements include paid-up equity share capital of at least US$20 000.00, with proof of the capital being registered with the Registrar of Companies which will be increased to $50,000,00 by 31 December 2020. Other requirements for obtaining money lending business licence relate to the legal form of the business, ownership, corporate governance and management. It is important that you go through the Regulatory acts and adhere to them in order to avoid penalties or closure of your business.
Market Research for Money Lending Business
You have to carry out market research and write a good business plan before you start the microfinance business. It is imperative that you carry out a thorough market analysis and ascertain the industry or the types of lines of credit you wish to offer. The following questions may be useful
- What is your target market
- What type of loans will the business offer and the interest rate
- What is the tenure attached to each type of loan
- Terms and conditions to be considered, what requirements must the client fulfill
Contract and policy drafting
This requires lots of efforts and proper planning. The microfinance sector is regulated by the RBZ, which sets a limit in interest rates to be charged and these may vary from one fiscal year to another. Besides having interest rates that are line with the RBZ requirements, you may need to attach attractive rates but also consider the prevailing rates that competitors are charging. Remember these rates feed into your profit. A lower rate may be misjudged as a sign for a poor performing company and vice versa.
After ascertaining the rates various contracts maybe drafted. If the need arises, you may get legal and finance expertise to help in drafting these in order to reduce loopholes which clients may use against the business. To add on, you may have to draft various policies such as operational, front and back office to facilitate the smooth flow of your business.
Management and Staff
The number of employees will depend on the size of your microfinance business. The employees required for a money lending business include receptionists, credit analysts,loan officers, accountants, finance staff, marketing staff and any other relevant posts such as compliance. You should employ people with relevant experience and qualifications to be successful in the money lending business. Remember that the Reserve Bank of Zimbabwe runs surveillance programs frequently. Thus it is important to make sure the staff is well conversant with the requirements as it may not be pleasing to pay fines or to have your license withdrawn.
Profitability and startup costs
Start up costs for the microfinance business may be a little high especially considering that you need office space and qualified employees. To add on, you need to fulfill minimum capital requirements as prescribed by the Reserve Bank in order to start operations. For office set up, operational costs, purchase of a motor vehicle and employee salaries you may need at least $20 000. To add on, you then need the capital as prescribed by the Reserve Bank of Zimbabwe.
The microfinance business is very lucrative. Microfinance Institutions charge interest rates of as high as 20% per month. This provides an opportunity for huge profits, considering that the traditional banks charge a maximum of 18% per year. You have to balance the need for profits with the need to attract clients with affordable interest rates. You should manage the rate of your non performing loans. High rate of non performing loans will get you out of business. Assess the credit risk of the clients who you are giving loans to. Take into consideration the probability of default for different sets of clients.
Market and Viability of Microfinance Business
You have to devise a marketing plan in order to capture the clients you require. Creating networks is also the base upon which you can get referrals. And according to statistics, a large percentage of microfinance businesses thrive because of the referrals they get from clients.A microfinance business is worth the risk. With proper management and planning, you can be able to tap into the money lending business industry. You require an efficient debt collection plan and it is important that you set debtor collection targets and always try to reach them on time. This increases your income flows and keeps the business functioning properly.
To add on, Zimbabwe has a high percentage of marginalized people with most in the lower tax brackets. Thus this forms a huge market for microfinance as most may have the desire to start their own businesses, build homes and send children to better schools. Your marketing plan will help you secure clients and you can also create your own niche. Your products must be designed such that you have competitive advantage over some of your competitors.
Nothing should hinder you from starting your own microfinance business as long as you plan properly and you are able to secure startup capital. Initially, it may be hard to understand how to hold all the ropes but with time, you may become the most successful entrepreneur there is. It requires passion , dedication and time.
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