eBusiness Weekly
Dr Keen Mhlanga
The inequality of wealth distribution across the globe is no secret. One out of every three people in the world live on less than $3.10 per day.
Nearly one in 10 lives in extreme poverty, which according to the World Bank is an income of less than $1,90 per day. The global distribution of poverty is uneven as well, with more than 75 percent of those living in extreme poverty living in South Asia or Sub-Saharan Africa.
This sobering fact has driven various organisations such as the United Nations, World Bank, and many non-governmental organisations, or NGOs, to initiate programmes targeted at reducing poverty. Microfinance is just one of many innovative tools in the global effort to shrink the wealth gap.
Poverty continues to affect billions of lives across the globe. Microfinance is but one tool of many that strives to alleviate poverty. Specifically, microfinance serves the demand the poor have for financial services.
The poor have been traditionally excluded from formal financial services, but through innovative financial products, such as group lending, microfinance institutions have been able to address the challenges in lending to the poor while delivering products microcredit, micro-savings, insurance, and more that can help clients lift themselves and their families out of poverty.
With the help of network organisations, microfinance investment vehicles, donors, and technical support providers, microfinance institutions attempt to reach the underserved and to include them as fully as possible in financial systems around the world.
This effort has grown from a handful of organisations serving a few clients to many thousands of microfinance institutions reaching hundreds of millions of low-income people across the globe. In Zimbabwe there is a cyclical pattern to poverty.
Without money, you cannot access education, and without an education you cannot get a high-paying, secure job, and without such a job, you cannot make much money. At the same time, without nutritious food or clean water, you cannot maintain good health and will fall ill, but without money you cannot access healthcare, and when you are ill you cannot work to make money.
Similarly, without enough money to make business investments, you will have to make do continuing to earn a low wage, but if you continue at that low wage, you will never be able to make business investments that can improve your income and your financial stability and security.
It is these investments in health, education, and finances that the poor lack access to, and in part is what keeps them from pulling themselves out of poverty.
The poor are generally incredibly hard working, but without access to financial mechanisms for saving, insuring, borrowing and investing, they have only little to show for their hard work.
Hence in Zimbabwe what microfinance is seeking to provide more than anything else is simply access to services that enable and empower the poor by giving them financial flexibility for managing and growing their incomes and securing assets.
Formal financial services are often missing in poorer areas. Before the emergence of microfinance institutions, the poor for the most part had only informal options for financial services. With formal finance out of reach, they developed a creative array of informal systems to fill the gap.
Nevertheless, informal systems are by no means perfect. With their very informality and small scale come inherent weaknesses, risks and challenges for the poor.
Microlending is a primary component of microfinance, and one of the most well-known activities associated with the industry. Microlending has two basic models: group lending and individual lending.
In Zimbabwe MFIs are registered and supervised by the RBZ, which is tasked to ensure that licensed MFIs carry out moneylending operations in accordance with the laws of the country. The RBZ ensures that all MFIs that are found flouting the laws governing their operations exit the sector immediately as they may cause financial instability.
Currently, Zimbabwe has a very small microfinance sector. Zimbabwe had over 1 600 MFIs in 2003, but that number fell to less than 200 in 2004 and has remained at that level since. For a country with a population of over thirteen million and poverty rate of 72 percent, 200 MFIs is insufficient.
Additionally, 70 percent of working Zimbabweans are employed by small-to-medium-sized enterprises. These businesses stand to significantly benefit from microfinance. Zimbabwe’s existing MFIs seem to practice microfinance similarly to the Indian MFIs.
For instance, the MFIs in Zimbabwe charge high interest rates. To rescue Zimbabwe’s once growing microfinance sector, and rapidly build solid institutions well integrated into the financial sector with robust outreach into rural areas, general steps have to be followed.
Microfinance service providers will need to prepare bankable business plans, approach banks early on to see what type of financing they would be prepared to wholesale, and also fundraise with the corporate world and donors. Merging is another strategy that could make it easier to overcome the current challenges faced.
Products and delivery channels will need to change in the higher cost operating environment with a view to increasing efficiency. More efficient business models are also needed to reach a significantly larger customer base than was the case in the past, including hitherto underserviced rural areas.
The Government of Zimbabwe should take immediate steps to halt microfinance service provider licensing renewal requirements and start working on removing other legal and regulatory obstacles preventing access to finance.
This implies advances need to be made to legal impediments in the area of savings and micro insurance, transactions and leasing instruments for MSEs, business loans including value chain finance as well as consumption finance including low income housing finance.
The Government should institute the Financial Inclusion Forum envisaged in the National Microfinance Policy and revise the national policy in view of the new political and economic environment, possibly with the facilitation of central bankers from other countries that have successfully addressed the specifics of microfinance and the creation of an optimal legal and regulatory environment.
Regulation of microfinance service providers that do not take deposits should move back to the Ministry of Finance, so that the RBZ can focus on prudential regulation and ensuring financial healthiness of the deposit-taking institutions that can pose a systemic risk to the sector.
Moreover, the single most important contribution a government can make towards building an inclusive financial sector is to create an enabling environment, at the enterprise and financial institution level.
More broadly some MFIs have been widely criticized for over-promoting borrowing in general, and as not much different than loan sharks in leading some of society’s most economically vulnerable into endless cycles of debt from which they cannot escape.
As one observer put the concern, “debts are bonds” binding the poor into poverty. Thankfully micro-financial services today have grown far more diverse than just loans, offering the poor a wide array of innovative and cost-effective financial intermediation tools to help them navigate their very real day-to-day financial needs and challenges.
Dr Keen Mhlanga is the executive chairman of Finking Financial Advisory. He can be contacted on keenmhlanga@gmail. com or +263719516766.
