Source: Financial inclusion among MSMEs – Sunday News May 14, 2017
Economic Focus, Butler Tambo
A FINSCOPE survey of 2014 on financial inclusion in Zimbabwe revealed that only 23 percent of the rural population is formally banked compared to 46 percent of the urban population, and only 14 percent of people in the sector are banked.
In addition, there is low financial literacy rate and a decline in the actual usage of banking services between 2011 and 2014.
Notwithstanding the fact that 57 percent of business owners are women in Zimbabwe and that they constitute a majority of the population, women remain highly excluded from the financial services sector.
These figures are an indictment of the banking sector and show a lack of confidence by consumers of the banking sector.
Confidence in the banking system could be low for a number of reasons. The extended period of economic challenges characterised by hyper-inflation and loss of Zimbabwe dollar savings following dollarisation sapped depositor confidence. The frequent collapse of a number of domestic banks since 2003 further dented confidence.
The major causes of bank failures in Zimbabwe boil down to inadequate risk management systems, poor corporate governance, inadequate capitalisation, diversion from core business to speculative activities, rapid expansion, creative accounting, overstatement of capital, high levels of non-performing insider loans, unsustainable earnings and chronic liquidity challenges.
Rate of non-performing loans and Micro, Small and Medium Enterprises
In the 1990s following liberalisation of the financial sector, there was a credit boom in which loans were issued without proper risk assessment or appropriate valued collateral. As a tightening of monetary policy to curtail high bouts of inflation during the period there was a reduction in aggregate demand which caused a slowdown in economic activity. The reduction in economic activity resulted in the poor servicing of loans which caused a spike in non-performing loans (NPLs).
NPLs/Loans ratio peaked to levels never seen before. In 2003-2005, many commercial banks became insolvent. By end December 2004 NPLs reached a staggering 28,9 percent. The dramatic expansion of the banking sector in the late 1990s culminated in the financial sector crisis, leading to the closure of a number of banking institutions among them United Merchant Bank owned by the late businessman, Roger Boka which collapsed in 1998, ENG Capital, CFX, Interfin, Royal Bank, Barbican Bank to mention a few.
After the adoption of the multi-currency system in February 2009, some measure of confidence was restored in the banking sector, as measured by the phenomenal increase in deposits from as low as US$300 million in 2009 to US$4 billion in 2013.
During the same period, however, NPLs in Zimbabwe, increased significantly and rate of growth in loans also declined. The rate of NPLs increased from below two percent in March 2009 to above 20 percent by September 2014, and by December 2016, the sectors with the largest proportions of NPLs were individuals, commercial, mining and agriculture sectors, which constituted 18,41 percent, 14,30 percent, 13,13 percent and 12,28 percent of total non-performing loans, respectively.
In most instances of personal NPL, banks were comforted with the immovable security that would have been registered as collateral but overlooked the secondary risk of failure to dispose of the asset due to liquidity problems in the market. Most of the mortgaged properties were overvalued and in the event of default, most banks were not able to recover the loaned amounts leading to massive losses for most banking institutions. Some borrowers in post 2009, misrepresented the status of their assets and banks only discovered this anomaly at the point of disposal rather than visiting the properties before registering the bonds.
Banks were not continuously checking the security value, ownership, physical status and other legal status of the properties that would have been used as collateral by various clients and because of flaws, most banks were faced with high default rates on loans advanced and these NPLs led to some banking institutions collapsing.
In an environment of short-term deposits and absence of credit information infrastructure, banks can only minimise non-performing loans by following a conservative approach to lending. On the other hand, however, monetary authorities were urging banks to achieve high loan to deposit ratios to satisfy high demand for credit which unfortunately led to a large proportion of NPLs. For instance the downfall of Interfin Merchant Bank was related to excessive lending since the bank had loan to deposit ratio of 114,2 percent. This implied that the institution used more of its depositor’s funds to finance loan requests and considering that the institution was a merchant bank, it had exceeded its maximum limits by greater margins.
Monetary authorities should instead push for improvement of the creditworthiness of borrowers. Furthermore, the asset-liability mismatch whereby high lending rates co-exist with very low deposit rates creating a high interest rate spread is another factor that could be leading to declining depositor confidence.
There is a negative relationship between the interest rate spread and banking sector development. High spreads (especially those that are double digit) are indicative of an inefficient banking system whose costs are passed on to customers. This may explain why we observe bank charges being levied by banks are excessive to the extent of being the second largest source of revenue for banks. For the ordinary depositor, it is not worthwhile to keep money in the bank as it loses value rather than gain. In fact, the short-term savings or deposits currently taking place are forced in the sense that employers pay directly into the bank accounts of people rather the giving out cash. The liquidity squeeze has been compounded by little foreign capital flows tricking into economy and therefore few banks manage to secure external lines of credit due to the high risk tag attached to the country.
Measures to reduce NPLs and encourage financial inclusion
Currently, informal sector traders are able to generate resources that surpass income of those in formal sector employment.
The average revenue for the informal sector players is about $1 413, with the maximum being about $24 000 per month which is way ahead of the salaries for formal sector players who are getting bank loans. Since banks are more willing to take aboard as clients those in formal employment compared to those in the informal sector with more resources, banks could be depriving themselves potential sources of revenue if they properly manage the risks. It is important that the banks should review their current know-your-customer (KYC) information and simplify the information that is required for opening accounts so that it can attract some of the informal sector players into the banking fold. The success of electronic and mobile banking platforms (EcoCash, One wallet, Telecash etc) in attracting the resources from the same customers that are considered risky by banks also point to the need by banks to review the KYC requirements so that they can access the resources that are in the informal sector.
The Grammen Bank model can also be used as the basis for assessing and enhancing creditworthiness of informal sector players. The Grameen Bank in Bangladesh is now widely known for its lending schemes to the poor as a poverty alleviation strategy. The banks credit programme is characterised by small loans to the poor for self-employment activities. Borrowers are required to form groups of five and accept joint responsibility for repayment of loans, with access to credit in future being conditional on all group members repaying their loans. The organisation of borrowers into groups provides incentives for additional peer monitoring, even though the bank also sequences the granting of loans to some group members in order to monitor their repayment performance before granting loans to the remaining group members. The bank was also able to reduce risk by creating a platform where the bank has good knowledge about the borrowers by requiring bank workers from a branch to travel to the borrowers businesses once a week rather than requiring the borrowers to travel to the bank branch.
Although the loans are designed for the poor women with the average loan size being about US$160, the interest rate on loans was about 20 percent in 2000, which was the same as the rate charged by other commercial lenders. It therefore follows that the biggest challenge for informal sector access to credit are not the interest rates but absence of marketable assets to serve as collateral.
Most informal sector traders in Zimbabwe indicated that banking services are not accessible to them. The majority of the traders have time constraints to go to the banking halls as their trade is too competitive and time sensitive. It is therefore important that the banks come closer to the players rather than the players looking for the banks. There is need for the banks to be innovative through establishing branches in proximity to the informal traders; introducing agent banking and leveraging on the cellphone capabilities to gather information on potential clients. The other advantage of establishing bank branches is that bank staff can become acquainted with the trades of the informal players hence processing applications for opening accounts and loans becomes easier. If these recommendations can be implemented they would make the MSMEs more relevant and efficient and the sector can grow alongside formal businesses and ultimately the former would become meaningful contributors to the country’s GDP and decent employment as well.
Butler Tambo is a Policy Analyst who works for the Centre for Public Engagement and can be contacted on butlertambo@gmail.com or +263776607524.
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