GOVERNMENT is concerned with the punitive interest rates charged by microfinance institutions at a time the tide of inflation has been tamed, Acting Secretary for Small and Medium Enterprises and Co-operative Development Mrs Ethel Hlabangana has said.
She was speaking at the official launch of the Zimbabwe Microfinance Wholesale Facility (ZMWF) in Harare yesterday.
"The birth of institutions like the ZMWF is expected to help bring sanity in the interest rate regime on the market," she said.
She expressed hope that ZMWF would address capitalisation of microfinancial institutions that would in turn offer low interest rates to the ultimate borrowers.
She said Government had been a lone voice in the field of microfinance as can be witnessed by the launch of Sedco during the 1980s.
"Government was early in recognising the crucial significance of microfinance as a weapon to fight poverty hence its dedication to financing SMEs through Sedco," Mrs Hlabangana said.
She also noted that the provision of wholesale funds to microfinance institutions through the ZMWF would go a long way in curtailing the financial gap that had bedevilled the micro, small and medium enterprises who operation the informal sector.
"The ultimate beneficiaries of this fund are the market women, cross-border traders, farmers and small-scale manufacturers who face challenges in getting loans from commercial banks yet they contribute significantly to employment creation and economic growth," Mrs Hlabangana said.
Speaking at the same event, Registrar of Microfinance Institutions Mr Norman Mataruka said microfinance is key to the development of the economy and achievement of the Millennium Development Goals through its important role in the provision of financial services particularly to the disadvantaged sections of the population.
He said SMEs are now recognised as important economic drivers in Africa and other developing countries.
"It is therefore critical that the microfinance industry is properly positioned to serve the SME sector in the best interest of our economy," Mr Mataruka said.
He bemoaned the issue of some MFIs who were taking deposits in violation of the Banking Act that prohibits any other person besides banking institutions from taking deposits.
"In other instances, MFIs were charging unsustainably high interest rates of as much as 40 percent per month or 480 percent per annum, contrary to the objective of microfinance of uplifting the standards of living for the poor," he said.
He noted that the Reserve Bank of Zimbabwe had instituted appropriate supervisory actions including cancellation of licences, non-renewal of licences in response to the identified irregularities and deficiencies.
Mr Mataruka reiterated the need for MFIs to increase focus on developmental financing which has a positive impact on production in mining, agriculture and manufacturing.
"From our ongoing interaction with the wholesale fund, we have been advised that the uptake has been slow owing to difficulty that most MFIs are facing in satisfying the minimum requirements for accessing the fund loans." He said.
To date loans amounting to US$735 000 to only eight MFIs have been approved.
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I am relieved to see the Zimbabwean gov't is aware of this problem. Interest rates over 100% per year are, alas, all too common, particularly in Africa. The poverty alleviation potential at such rates is obviously flawed, and profiteering has become a chronic problem in the microfinance sector. Microfinance institutions (MFIs) and their investors will fiercely resist any proposals to limit the profit they can extract from the poor, suggesting that such rates are necessary to cover operating costs, and that the poor do not care about the cost of capital. These are flawed claims, and Zimbabwe would be wise to learn from the experiences of countries such as Ecuador and Bolivia, where regulators have managed to lower interest rates dramatically without damaging the sectors.
Why is it, for example, that Ecuador caps interest rates at 30% p.a. and has a thriving sector, while Mexican interest rates reach in excess of 200%? The operating costs in Mexico are not correspondingly higher than those in Ecuador, but the profitability of many Mexican MFIs are multiples higher than those of Ecuador. Greed and exploitation are rampant across the microfinance sector, and the only means to prevent such activities is to enforce transparency and formally regulate practices.
Even if a cap were placed at a level considered by many to be high, for example 100%, this would at least limit the exploitation possible, and the government can always modify this at a later date. All financial institutions should be obliged to declare publicly the actual APRs they are charging, in their marketing materials and loan contracts, to allow clients to compare rates charged by institutions. This should conform to an agreed upon calculation method. An institution such as that established by microfinance veteran Chuck Waterfield (www.mftransparency.org)can easily, quickly and cheaply assist the Zimbabwean government to calculate the actual APRs charged by all the MFIs as has been done in a number of countries across Africa and further afield.
Taking deposits from the poor without adequate supervision represents a tangible additional cost to the poor and increases the risk of contagion and crisis in the event of default, and is alas common in the sector under the guise of "deposit guarantees" or "teaching clients to save". This should always be tightly regulated to maintain faith in the financial system of Zimbabwe. Such practices are common, particularly in Africa alas.
Finally, Zimbabwe would be wise to carefully study the various microfinance crises of Nicaragua, Bosnia, Morocco, India, Bolivia etc. to avoid falling into the same traps. Such crises generally follow the same pattern, and it appears Zimbabwe is already on the slippery slope towards a microfinance crisis. Preventing this now is far easier, cheaper and more beneficial for the poor than cleaning up the mess later.