Microfinance institutions hit turbulent waters

The liquidity crisis is affecting microfinance institutions

The liquidity crisis is affecting microfinance institutions

Taurai Mangudhla
ZIMBABWE microfinance institutions (MFIs) are in turbulent waters amid indications non-performing loans (NPLs) could soar into the future as corporates and individuals fail to honour their debt obligations due to the liquidity crisis.

Although the Zimbabwe Association of Microfinance Institutions (Zamfi) is yet to compile the sector’s report for the first half of 2017, players hinted on further deterioration of their loan book quality as economic activity slows down. In the first quarter of the year to March, MFIs registered a marginal deterioration in the quality of their loan books as measured by the Portfolio at Risk (PaR) ratio which grew to 12,35 percent as at March 31 2017 compared to 8,34 percent as at December 31, 2016, against the international benchmark of 5 percent, according to the Reserve Bank of Zimbabwe (RBZ).

MFIs loan book stood at $215,21 million as of March this year, constituting about 6 percent of the financial services sector aggregated loan book. Total banking sector loans and advances marginally decreased from $3,69 billion reported as at December 31 2016 to $3,59 billion as at March 31 2017, while NPLs marginally deteriorated to 8,39 percent as at March 31 2017 compared to 7,87 percent as at December 31, 2016, according to the RBZs banking sector report for the first quarter of 2017.

Zamfi director Godfrey Chitambo said MFIs are battling a number of challenges, chief among them being high levels of NPLs, dwindling funding and high cost of acquiring technology.

“The first one is high level of defaults by borrowers of loans from microfinance institutions. This is due to the current low levels of disposable income and salaries. In general people are prioritising other home-pressing needs ahead of paying their outstanding loans,” Mr Chitambo said.

“Secondly, in an environment of high level of defaults, issues of funding for new loans are becoming a challenge leading to low levels of outreach. “The third challenge is to do with high cost of acquiring new technology such as ICTs which have now become the key enablers in reducing operational cost, improving efficiency and delivery of services in the microfinance sector,” Mr Chitambo added.

He said continued operations under a one year licence regime has caused disequilibrium with other fundamentals and is a stumbling block for MFIs to harness long term investment into the sector.

This, Mr Chitambo, invariably limits the sector’s ability to introduce more innovative products and leverage on interest rates. Going forward, the Zamfi chief said inflation is likely to go up and this will have a negative effect for the sector.

Mr Chitambo said interest rates in the sector have been pegged to levels that do not sustain microfinance business especially for small-sized MFIs who lead the sector’s reach to unbanked markets in Zimbabwe thereby promoting financial inclusion, critical for equitable economic growth.

“As a leading lobby and advocacy network body of close to 100 MFIs in the country, the association is actively engaging its members and other stakeholders to explore both short term and long term sustainable solutions to the current challenges.

“The association is strongly encouraging MFIs to consider new equity injection from both local and foreign investors,” Mr Chitambo said, adding that “some MFIs are considering options of mergers and acquisitions in order to create new entities that have capacity to do more in serving the sector”.

Mr Chitambo said the newly ushered in Collateral Registry and the Centralised Reference Bureau should see less lending to clients that are not credit worth.

The collateral registry is also expected to unlock dead capital which borrowers could use as security.

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