Zimbabwe: Microfinance, global industry
By Clive Msipha, Newsday
Microfinance institutions are providers of financial services to middle and lower income sections of the market. They provide services targeted at microenterprises and small-to medium enterprises (MSMEs).
Microfinance institutions (MFIs) typically have a double bottom line objective of delivering profits and having a marked developmental impact.
By providing credit to sections of the market that other market players are not willing to participate in, MFIs play an important role in national economies.
In developed countries such as the United States, MSMEs are widely recognised as key contributors to employment, innovation, productivity and economic growth.
They account for over 57% of employment and over half of gross domestivc product.
Locally the industry has received bad media coverage as there has been confusion between MFIs and moneylenders.
MFIs are socially responsible and most are members of a self regulating body, the Zimbabwe Association of Microfinance Institutions.
Globally, MFIs interest rates are relatively high due to the high cost nature of the business.
The industry is labour intensive, the cost of administering small loans is also very significant and the cost of funding is elevated.
A vast majority of microfinance clients would ordinarily not be eligible for credit from the commercial banks.
Interestingly, microfinance impairment ratios are globally lower than those of their commercial banking peers.
Dr Muhammad Yunus can be credited for a lot of the groundbreaking work in the industry. He started off Grameen Bank in Bangladesh by lending small amounts of money to rural women and demonstrated the poor did pay back.
From these humble beginnings, Dr Muhammad Yunus built the Grameen Bank. He won the 2006 Nobel Peace Prize for his groundbreaking work at Grameen Bank.
Globally, microfinance is a big and high-growth industry. More recently there have been a number of success stories in the industry, namely Compartamos in Latin America, that started off in 1990 as a start-up and within ten years grew its operations and listed 30% of the company for under $500 million on the New York Stock Exchange.
SKI Microfinance in India listed on the Bombay Stock Exchange in 2010 and had a portfolio of close to $1 billion with six million active borrowers.
Africa has recorded its own success stories with Equity Bank in Kenya recording phenemonal growth over the past eight years. The company emerged as a financial institution with an MFI focus in 2004 and listed in 2006.
Currently Equity Bank has over nine million bank accounts, accounting for over half of the total number of bank accounts in Kenya.
Opportunities in Zimbabwe
Globally the total unmet demand by MSMEs is in the range of $2,1 trillion to $2,5 trillion. In Zimbabwe the demand for credit by MSMEs is estimated to be over $500 million.
Currently less than 10% of this demand is being adequately addressed. There are vast opportunities in the industry.
The Reserve Bank of Zimbabwe (RBZ) has introduced a deposit taking licence for microfinance institutions which will allow MFIs to expand their services beyond microcredit.
Microfinance is broader than microcredit and includes the provision of financial services to these same market segments.
Demand also exists for microsavings and microinsurance. By allowing select MFIs to take deposits, the RBZ will contribute greatly to the development of the sector.
MFIs will have access to cheaper funding, through taking deposits, and should consequently pass on these cost savings to its customers in the form of lower interest rate loans.
Asset management companies and pension funds have a significant role to play in funding the growth of the microfinance industry.
In other emerging market countries, microfinance investments have curved a niche for themselves as significant alternative assets investments.
They are also viewed as socially responsible investment due to the developmental impact MFIs have.
Generally microfinance investment performances are not correlated with the wider economy and as such they are a vital part of portfolio construction for the asset manager.
In other countries asset managers and pension funds have funded the expansion of MFIs by buying their securitised loans.
Asset managers have also played a part in the successful listing of Compartamos in 2007 (Templeton Asset Management and Gartmore Investment Management, were important shareholders), Equity Bank (Africap, Mecene Investments) in 2006, SKI Microfinance India in 2010 (Sequoia Capital, an early backer of Google and Yahoo).
Clearly the global microfinance industry is fairly well developed.
A huge opportunity in Zimbabwe exists for microfinance companies to replicate the success of their other emerging market peers and build large and scalable operations.
The author is the chief executive officer of Untu Holdings Limited. The company has a Zimbabwean microfinance subsidiary with branches in Harare, Bulawayo and Gweru. He can be contacted on 764474-8 or email@example.com, www.untu-capital.com