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Martin Kadzere Senior Business Reporter
The Reserve Bank of Zimbabwe (RBZ) has warned that inflationary pressures on the back of escalating interest rates are expected to heighten credit risk in the microfinance and financial services sector, as the majority of borrowers are likely to default.

While the microfinance sector appeared to have gained traction over the past few years, credit risk has become the biggest concern due to increasing operational costs likely to dent profitability and sustainability of some of the microfinance institutions, particularly those that lack adequate funding and institutional investors.

High levels of inflation impact negatively on the ability of borrowers to repay and erode profitability, which in turn curtail lending.

The inflationary pressures emanate from the lagged effects of monetisation of past fiscal deficits, the ongoing correction of mispricing and subsidisation of many goods and services including foreign currency, fuel, electricity, which resulted in forex shortages, spiralling parallel exchange rate premiums and speculative pricing, thus posing the risk of a costly re-dollarisation of the economy.

The central bank’s Monetary Policy Committee, last week raised its main interest rate to 70 percent from 50 percent to stabilise a plummeting currency and rein in surging inflation to take account of developments on inflation and the exchange rate.

The increase follows the RBZ’s decision to ban the use of foreign currency and reintroduce the Zimbabwe dollar, abandoned in 2009, in an effort to tame inflation which, at the last official counter before demonetisation, peaked at 231 percent in June 2008.

The central bank says in its 2018 microfinance industry report that the small-scale financial service providers should consider strategic partnerships with bigger banking institutions, mobile network operators and insurance companies in providing incremental and innovative microfinance products to the marginalised.

“In view of the changes in the operating environment, microfinance institutions are expected to review their business models with the view to bolster profitability and ensure both operational and financial self-sufficiency,” said the central bank.

The RBZ said the sector continues to face funding challenges as the majority of the institutions lack anchor institutional investors and rely on the limited owners’ funds, which are insufficient to underwrite meaningful microfinance business.

The sector’s aggregate equity for the period ended December 31, 2018, was $197,85 million, representing a 45,84 percent increase from $135,66 million as at December 31, 2017. The growth in the aggregate capital was largely attributed to capitalisation of retained earnings by some microfinance institutions, the RBZ said.

“Lack of adequate funding continues to militate against the microfinance sector’s ability to increase the depth and breadth of microfinance outreach,” said the RBZ.

It noted that potential investors have been shying away from the sector due to the short-term tenure of operating licences and poor corporate governance within the sector.

However, the RBZ expects an improvement in access to funding by microfinance institutions due to various capacity building initiatives focusing on corporate governance, risk management and compliance and the proposed amendments to the regulatory framework, which will change the licence tenure from one year to perpetual licences.