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| EMERGENCE OF INFORMAL MICRO FINANCE COMPANIES IN ZIMBABWE IMPACT ON WELL BEING OF BORROWER By
November 2002
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===================== The generally harsh economic environment (a result of seriously ailing macro-economic fundamentals) within Zimbabwe has given rise to the unabated erosion of earnings in real terms, inter alia, leading to widespread poverty. Such a situation has given rise to the mushrooming of micro-finance institutions, who seek to ‘plug’ the gap by availing funds (albeit at cut-throat terms) to the majority low earners.. It is against such a background that Trades Centre commissioned this study, as part of its efforts to equip the target group with information on the Trade and Development nexus, but this time through the financing eye. Through this study it is important for policy makers to realize the role micro-finance schemes play in so far as providing a financial sigh of relief (to the overburdened borrower) as well as poverty alleviation is concerned. But more importantly they should also note that rules and regulations governing the setting up as well as operation of such institutions should always be modified and improved on so as to keep pace with the changing realities as well as protecting and ensuring that consumers/borrowers are not always on the receiving end of the financing’ game, as is obtaining currently.
====================== 1.1 Introduction Prior to 1980 commercial banking institutions were mainly a preserve for the white settlers since only an insignificant number of black Africans qualified to borrow or even do business such as operating accounts with them. With the attainment of independence, the Government tried to influence the commercial banks into funding the black entrepreneurs. The commercial banks were also encouraged to reach out to the rural areas through opening branches to enable the black majority to access their services, of which borrowing was one of them (ironically at the time of writing this paper a number of the same branches are either being closed or being sold to new upcoming indigenous banks). The commercial banks could hardly provide loans against their commercial judgement (i.e. they had and still have to balance the interests of the creditor, the borrower and their profitability) as this could result in bad debts to the detriment of the shareholders. The borrowing interest rates were also beyond the reach of the majority aspiring black entrepreneurs. In an effort to assist the up coming business owners, who had no security, the Government introduced a number of development finance programmes previously mentioned such as SEDCO, CGC, and the IDC, which would provide the borrowers with low interest capital finance. For example during the early 1 990s CGC would provide loans at rates of 5% pa whilst the commercial banks’ rates were 39% pa. Because of poorly planned logistics most of the developing finance programmes failed as many borrowers either diverted the funds into non-enterprising uses or their businesses failed because of management failures, resulting in repayments defaults. During the early 1 990s when the Government decided to embark on the economic reforms there was an increase in the number of commercial banks due to the liberalisation of the regulating laws (a factor that was perceived to provide a conducive platform for the economic reform programme). This enabled a number of indigenous people to apply and obtain licences to operate commercial banks. Though this development brought in competition among the banks, it did not change or improve the provision of loans to upcoming businesses and consumption or individual borrowing. Some other notable changes were improvements on the provision of services like ATMs and accessibility of financial services on the Internet etc. From the above it can be concluded that lending for consumption purposes increased to the extent that the Banks could not provide the required funds. Another reason for the failure to access funds was the lack of collateral by the prospective borrowers, which most upcoming moneylenders did not put much emphasis on. Moneylenders were also able to advance small amounts, which the banks considered costly for their operations. Apart from commercial banks all other financial institutions that give personal loans do so only when full security has been provided for. The Zimbabwe financial system can be divided into two broad categories namely Banking Financial Institutions (BFI) and Non-Banking Financial Institutions (NBFI). ====================== 4.6. Conclusion The formal financial sector provides large, long-term credit with high transaction costs at market rates mostly to urban based or well established industries with security. On the other hand the informal financial sector provides small, short-term loans with low transaction costs, but very high interest rates to low individual income earners and unsophisticated small to medium business enterprises with very little or no security. Under the above circumstances the poor do not have access to the capital required for them to embark on businesses that could lift and sustain them above marginal levels of existence, while those borrowing for consumption have their monthly incomes tied to repayments of loans to Moneylenders. The high rates of interest charged by Zimbabwe’s Moneylenders in the absence of an effective monitoring system by the Government to protect the borrower have made lives of the borrowers very difficult. On a positive note, properly planned and coordinated the developmental micro finance schemes either put in place by the NGOs or Government initiated should result in very successful projects with the capacity to employ large numbers of people and fully utilise other factors of production. As can be seen on the operations of the developmental based Micro finance, it helps to uplift the marginalized so that they reclaim their lost social and economic status. However the Loan sharks are taking the broad social gains away, because the Government is not controlling their activities. One interviewee said he is surviving on funds sent by his wife who is engaged in poultry production in the rural areas whose capital and expertise was provided by Women Development Savings and Credit Union. If all Micro finance companies could measure their activities’ impact on the borrowers’ economic and social well being and embed them in their ethics and values, there would be more prospering than suffering as is the case at the moment. 4.7 Recommendations The government is loosing a lot of revenue through failure to control the activities of the Moneylenders. It is not possible to get correct accounting information about one’s Lender’s annual activities at the end of the year without monthly, quarterly and/or half yearly monitoring techniques being applied. Requesting Moneylenders to submit monthly or quarterly returns on their loan books and profits earned would enable the authorities to compare the final accounts and avert “doctored” accounts at the year end which are used to declare less tax. The interviewed official claimed that there are no resources to monitor the Moneylenders but later agreed that the State is loosing more on Taxes than employing an average of six inspectors. Poor monitoring has also resulted in the manipulation of the borrowers by being charged excess interest rates, which are not prescribed by the guiding Act. Every one through taxes would feel the effect of supporting a transaction as in section 2.6 where goods worth 2m were sold for 4.2m as the Parastatal is surviving on grants from...... |
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