The Downfall of the Micro Lending Businesses in Zimbabwe: Causes and Remedies

Transcription

1 The Downfall of the Micro Lending Businesses in Zimbabwe: Causes and Remedies Hlupeko Dube, Faculty of Commerce, Department of Banking and Finance, Great Zimbabwe University, Masvingo, Zimbabwe. Id: Ephraim Matanda, Faculty of Commerce, Department of Banking and Finance, Great Zimbabwe University, Masvingo, Zimbabwe. Id: Abstract The purpose of this study was to establish the causes of the downfall of micro lending institutions and business in Zimbabwe and suggest remedies. The study used the descriptive survey design because it enabled the researcher to collect large amounts of data within a short time period by means of questionnaires and interviews. The data collected using questionnaires were coded, analyzed and interpreted by means of statistical models. The study concluded that high levels of competition with bank owned microfinance institutions (MFIs), high levels of administrative costs, concentration on consumer credit exposures, diversion from the core business, high levels of non-performing loans and poor institutional capitalization were some of the major causes of MFIs collapse in Zimbabwe. The study ended up by recommending that policy makers should come up with appropriate policies to help mitigate the collapse of the microfinance sector in the economy. The study also recommended that the Zimbabwean microfinance sector should enact strategies that had the capacity to ensure the survival of MFIs which were known the world over as engines of growth and development of nations. Key Words: Micro lending, microfinance institutions (MFIs), micro credit exposures, credit risk, institutional capitalization, diversion, non-performing loans 487

2 1. Background to the Study Anduoli (2013) and Sinha (1998) as quoted in Charles (2003) define microfinance as provision of financial services to the people who are living in poverty. Microfinance institutions (MFIs) are known for their positive impact on growth and development of nations. Deribie, Nigussie and Mitiku (2012) point out that microfinance is a tool for economic development through its financing of micro projects for the poor. The poor are excluded from financial systems throughout the world (Anduoli, 2013; Brau and Woller, 2004). Therefore micro finance was developed out of the need to solve this problem of the exclusion of the poor from formal financial systems. According to Charles (2003) Microfinance Institutions were constituted to extend loans to the poor to enable them to start and grow enterprises. By concentrating on giving financial services such as micro credit to the poor, they helped to improve their standards of living and empowerment. On the other hand Meier and Rudolf(YEAR) state that access to microfinance helped to alleviate poverty by generating incomes, creating jobs, allowing children to go to school, enabling families to obtain health care and empowering poor people to make choices that best served their needs. Micro-lending also called micro credit is a component of micro finance which focuses on the provision of small loans. Bateman (2012) defines microcredit as the provision of tiny micro-loans used by the poor to establish income generating activities..ayuub (2013) in Mago, Hofisi and Mago (2013) asserts that micro finance is believed to increase income and productivity of the poor. Deribie, Nigussie and Mitiku (2013) state that Microfinance Institutions served the needs of clients that are considered to have high credit risk. This was supported by Ngehnevu and Nembo (2010) who wrote that the microfinance industry served the poor who the traditional banks had challenges serving because they lacked what was required to be granted a loan. For example, they lacked collateral which was an important secondary source of loan repayment. They also did not always prepare financial accounts which were needed in credit risk analysis by most financial institutions. According to Nawai and Sharif (2010), high transaction and monitoring costs were the other reasons why banks found it difficult to give loans to the poor and low income groups of the society. The growth of Microfinance Institutions in Zimbabwe has been severely crippled by many factors in many countries of the world. However, in other parts of the world the sector experienced challenges which negatively affected the growth of the industry. According to Kofi (2012), Microfinance Institutions (MFIs) experienced problems in East Asian countries such as India and Bangladesh as well as Africa. The microfinance industry was fast growing in Africa especially in Ethiopia as mentioned by Ngehnevu and Nembo (2010). However, in the case of Zimbabwe, the microfinance sector grew massively during the period before After the year 2003, the number of licensed MFIs declined from more than 1600 in 2003 to 488

3 just less than 150 in 2013 (Zimbabwe Association of MFIs, Monetary Policy Statement 2013). The table below shows the trend in the number of registered MFIs in Zimbabwe since Figure 1 Many studies have been carried out to establish the factors that affected the growth of MFIs the world over. The majority of the studies focused on factors such as corporate governance, business ethics and risk management in such financial institutions. The impact of factors such as competition from bank owned MFIs, lack of expertise and focus has not been fully explored in African countries. 2. Statement of the Problem A stable and viable microfinance industry played an important role in extending retail loans to the poor and this helped in the reduction of poverty among such vulnerable citizens of an economy. However the number of Reserve Bank of Zimbabwe (RBZ) registered Microfinance Institutions (MFIs) in Zimbabwe has been declining since During the period the size of the Zimbabwean informal sector grew due to the collapse of all sectors of the economy. This resulted in massive retrenchments in both public and private sectors as almost all firms had closed down. Many people who were laid off started small businesses to earn a living. The economic meltdown in the period in Zimbabwe thus resulted in the informalisation of the whole economy. As a result the demand for loans by participants in the informal sector has been growing over the years, but unfortunately in the face of the declining number of microfinance institutions. Large banks were unwilling to advance loans to the informal sector due to high levels of default risk and administration costs 489

4 (Nawai and Sharif, 2010). Therefore if the collapse of the microcredit industry is not arrested immediately, the informal sector businesses would not be sustainable due to lack of debt financing. Hence it was on the basis of the above developments that this study was set out to explore the main causes of the downfall of the microcredit lending business in Zimbabwe in the period in question. The challenges bedeviling the sector once determined would lead to generation of remedies so as to enable the sector to grow towards sustainable development in its service delivery to the nation. 3. Objectives of the Study The major aim of this study was to explore the causes and impact of the collapse of the microfinance industry in Zimbabwe since The study however was based on the following sub-objectives: To identify the causes of downfall of microcredit institutions Zimbabwe. To establish the effects of competition on the microfinance industry in Zimbabwe. To recommend strategies that would help sustain the operations of micro lending businesses in the economy in the 21 st century. 4. Research Questions The research study was meant to come up with answers to the following questions: What are the causes of the downfall of micro lending businesses in Zimbabwe? What is the impact of competition on the survival of micro lending businesses? What strategies can be put in a place to prevent the downfall of Micro lending businesses? 5. Delimitations of the Study Although the study was of national interest because of the nature and diversity of the Zimbabwean small-to-medium enterprises (SMEs) sector, it was restricted to MFIs sub-sector whose role in service provision to the majority vulnerable citizens was indispensable. The study proceeded to pick samples of respondents from Masvingo, Gweru, Harare and Bulawayo were most MFIs were concentrated. Masvingo in particular was of interest to the study mainly because it witnessed the downfall of three micro lenders in 2012 within a very short space of time. One of these three micro lenders had branches in other parts of the country as well and its collapse had serious impact on almost the whole nation. The study was limited to MFIs operations in the period mainly because this was the time when the sector grew significantly and shrank again massively. The main focus of the research study was to explore the causes of the downfall of micro lending institutions or businesses in Zimbabwe and come up with possible remedies because MFIs were a force to reckon with in the development processes of emerging economies. 490

5 6. Research Methodology The study used the descriptive survey research design mainly because it enabled the researcher to collect information on views and opinions of respondents through the use of questionnaires. The design enabled the researcher to describe what was in one s mind. The study was aimed at getting the views and opinions of MFIs managers and credit analysts. 6.1 Population A population is the entire group of objects of a particular type under study (Mudimu and Muchengetwa, 2002). The population of this study was made up of managers and credit analysts of microfinance institutions in Masvingo, Bulawayo and Harare as well as academics. 6.2 Sample A sample is a subset of a population under study (Mudimu and Muchengetwa, 2002). In this study the sample chosen consisted of 80 respondents selected from managers, credit analysts and academics who were conversant with the micro lending business in Zimbabwe. Stratified sampling was used to select the respondents because of the composite nature of respondents under consideration. 6.3 Research Instruments The study used questionnaires to collect data from the respondents. It also carried out interviews with some money lenders who were into micro lending businesses and others whose operations had been suspended by the Reserve Bank of Zimbabwe in the period under review. 7. Literature Review Many studies have been done the world over on the challenges faced by Microfinance Institutions (MFIs) especially in emerging economies. A study by Owusu-Nuamah (2014) concluded that the collapse of the microfinance sector was caused by the inability of MFIs to sustain operations and fraudulent activities by staff. Another study by Kofi (2012) in Ghana established that most Microfinance Institutions collapsed on the account of non-performing loans. Kofi went further to state that the problem of non-performing loans was a challenge to Microfinance Institutions (MFIs) in East Asian countries such as India and Bangladesh as well as Africa. Therefore it could be argued based on the above schools of thought that the majority of challenges faced by the sector were misappropriations or fraud, unsustainability of lending activities, non-performing loans, lack of expertise and skills needed in employees manning MFIs credit exposures. 491

6 Fotang (2012) studied the Microfinance market in Cameroon and came to the conclusion that lack of long-term funding, growing loan delinquency level, lack of qualified human personnel and poor treasury management systems were the major challenges facing MFIs. On the other hand Lutzenkirchen and Weistroffer (2012) argued that the fast growth of MFIs made it difficult for them to hire and train loan officers. This was in agreement with the results of Marulanda et al (2010) who interviewed experts on the causes of failures of MFIs in Latin America. The study concluded that the failures of MFIs were caused by many factors which included uncontrolled growth and methodological flaws. Uncontrolled growth resulted in the hiring of untrained staff by MFIs. This compromised on effective credit risk analysis in the micro lending sector. In other words MFIs were constrained by factors such as poor funding or capitalization, poor human capital base in terms of training and development, lack of progressive business strategies, poor treasury and risk management strategies, lack of checks and balances in their business operations as well as research and development. It was therefore critical that this study was undertaken to explore the nature of the downfall of micro lending businesses in Zimbabwe in order to postulate possible remedies that could assist realign the business sector to the economy s development process. Marulanda et al went on to identify loss of focus and state intervention as other causes of failures of MFIs. Governments can pass legislation that hinders the operations of MFIs. For example, minimum capital requirements may be too high. Some researchers have blamed competition as the root cause of the collapse of microfinance firms. As Bauer and Meier (2012) put it, a rapidly growing Microfinance industry experienced high levels of competition. Competition has both positive and negative effects to borrowers. In the first case, the borrowers may benefit from lower interest rates. In the long term, competition leads to the fall of some weak MFIs which resulted in supply of microfinance declining. Bauer and Meier (2012) go on to mention that competition negatively affected the performance of MFIs. Schick s and Rosenberg (2011) as cited in Bauer and Meier (2012) carried out a study which established that high levels of competition in the microfinance industry resulted in the over indebtedness of the borrowers. This was caused by the fact that defaulting borrowers always exploited lack of historical information that the new Microcredit lender and the borrower had and accessed more loans. The new lender would not have enough information to manage the risk of double borrowing. Such borrowers would have met their principal and interest repayments which in most cases would have strained their resources and hence double dipping increased the probability of default. 8. Results, Analysis and Discussion The main objective of the study was to investigate the causes of downfall of some micro lending businesses in Zimbabwe. A sample of 100 respondents from micro lending businesses 492

7 was selected for the study. From the study it was established that many factors which are discussed below were to blame for the collapse of some micro lending businesses in Zimbabwe. 8.1 Diversion into Non-Core Business Operations The study established that one of the major causes of the downfall of some micro lending businesses was diversion into non-core business by MFIs. Micro lenders were only mandated to offer small loans but the study established that some had taken the role of taking deposits thereby increasing the risk profile of the business. It was also revealed from the study that some of the deposits were not transformed into loans but were invested in some other ventures. Deposit taking however, required effective management of credit and liquidity risks. The investment of deposits into other long-term projects resulted in liquidity challenges which caused panic withdrawals by the depositors. Some micro lenders had to borrow from commercial banks to cushion their operations but failed to service their debts which hindered them from accessing further loans. 8.2 Competition Competition was found to be one of the factors which caused some Micro lending businesses to collapse. The study concluded that micro lending regulations were not very strict as compared to banking regulations and this motivated most of the banks to have micro lending departments. This resulted in many bank owned micro finance institutions competing with non-bank owned micro lending institutions. Bank owned micro finance institutions had easier access to finance from their banks as compared to non-bank owned micro lending businesses. The same banks which owned micro finance departments were the providers of loans to their competitors and the non-bank owned micro lenders. The study found out that preference to funding was always given to the bank owned microfinance businesses relative to MFIs. The non-bank owned micro lenders were less creditworthy than the bank owned micro lenders. Some micro lending businesses could not stand the competition from bank owned micro finance institutions and hence collapsed. 8.3 Inefficient Credit Risk Management The study revealed that inefficient credit risk management was another major cause of the downfall of micro lending businesses. Most micro lenders did not make follow ups to establish if the loans were put into their intended uses. If lenders did not make follow ups, borrows ended up diverting the uses of loans. Ideally loans should be repaid from the primary source of repayment, which were the cash flows from the financed micro projects. If the loans were used to finance consumption expenditure their repayment proved to be very difficult. Another weakness in credit risk management was that the micro lenders did issue loans without verifying the physical addresses of some borrowers especially the informal sector 493

8 borrowers. Follow up in cases of default were therefore not very possible. This motivated some informal sector borrowers to default in the process. 8.4 Lack of Knowledge of Micro Lending Business Another important finding of the study was that lack of expertise of running micro lending business was another major cause of the down fall of some micro lenders. Micro lending business involved extension of micro loans which had risk associated with it. The lending business involved risks such as credit risk, operational risk, interest rate risk and liquidity risk all of which must be managed efficiently for the survival of the business. The study found out that some of the individual who started micro lending business were not knowledgeable in running the business. Some respondents pointed out that they had started micro lending businesses after they had received lump sum payments from their pension schemes. However, the success of micro lending businesses depended heavily on the ability to manage credit, operational and liquidity risks effectively. 8.5 Capitalization Inadequate capitalization was found to be a major contributing factor to the downfall of microfinance institutions in Zimbabwe. Seventy-eight per cent of the respondents indicated that poor capitalization was the cause of the downfall of microfinance institutions. A wellcapitalized micro lending institutions was better placed to absorb losses. The current economic environment was characterized by high levels of non-performing loans in the Zimbabwean financial sector. Financial institutions were forced to increase the levels of loan loss provisions which poorly capitalized micro lenders found it too difficult to implement. 8.6 Internal Controls Eighty per cent of the respondents indicated that poor internal control measures were a major contributing factor to the collapse of some micro lending institutions. Authorization was found to be weak in most micro lending institutions. Some of the respondents argued that the supervision of lending officers was so weak that some lending officers were engaged in corrupt activities of being micro lenders within micro lending institutions. Internal controls of bank owned micro lending institutions were found to be more effective than those used by MFIs. 8.7 Liquidity Challenges The liquidity crunch was identified by eighty per cent of the respondents as another challenge that cause micro lending businesses to dwindle. The financial sector in Zimbabwe has been facing liquidity challenges since 2009 when the economy was dollarized. The liquidity challenges caused non-bank micro lending institutions to have problems accessing loans from banks which they transformed into micro loans. The liquidity crunch also negatively affected the general demand for goods and services in the economy thereby 494

9 affecting the cash flows of micro borrowers. The study concluded that some micro borrowers defaulted unwillingly due to low business in the economy. 8.8 Operational Costs Seventy-two per cent of the respondents indicated that operational costs were another major challenge that caused the collapse of micro lending businesses in Zimbabwe. Most micro lending businesses were found to operate mainly in rented premises. The rental costs were found to very high and prohibitive for such MFIs. A number of micro lending businesses had opened many branches which increased operational costs which ended up being unsustainable resulting in the downfall of their micro lending businesses Types of Loans Issued Seventy-eight per cent of the respondents indicated that Micro lenders concentrated on issuing consumer loans instead of financing micro projects. Loan repayments were easier when the source of payment was cash flows from business operations. Consumption expenditure did not generate cash flows to repay borrowed funds and this resulted in high default rates. The portfolio at risk for MFIs was 27.14% as at 31 March 2014 (RBZ, 2014). 9. Conclusions and Recommendations The study concluded that diversion into non-core business was one of the major causes of the downfall of micro lenders in Zimbabwe. Based on this conclusion the study recommends that the Central Bank should tighten its controls on the financial sector to ensure they operated within set legal framework limits. This would help the micro lending institutions avoid venturing into illegal activities such as deposit taking from the unsuspecting public. In other words deviation of MFIs from core business operations into new areas increased the risk profile of their micro lending businesses. The management of a wide range of risks increased the chances of failure of micro lending institutions since they lacked the pre-requisite skills needed in identifying and managing those risks. Another major conclusion of the study on the downfall of micro lending institutions was found to be competition which MFIs could not resist from banks in the formal sector. Bank owned micro finance institutions were found to be better placed in terms of access to finance from their banks and management of financial risks relative to MFIs.. Some micro lending institutions were owned by individuals who did not have adequate skills of managing risks encountered in micro lending businesses. The study recommends that individuals with varied skills and expertise should come together to start micro-lending businesses in emerging economies if these were to grow and develop. The study also recommends that the 495

10 government should establish a micro finance bank which would finance micro lenders. This would help non-bank micro lending institutions to have easy access to loans. The study also concluded that inefficient credit risk analysis was also a major cause of the downfall of micro lending businesses in Zimbabwe. The study revealed that there were no monitoring visits made to ensure that borrowers used borrowed money for intended purposes. It was also concluded that supervision of loan officers was poor in Zimbabwe. The study recommends that micro lending institutions should come up with policies which helped to ensure efficient management of micro lending businesses. The management of credit risk in micro lending businesses should be regularly monitored and evaluated until the last payment was made by a borrower. The study also postulated that lack of knowledge of running micro lending businesses caused the downfall of the majority of MFIs in Zimbabwe. It is therefore recommended that the Central Bank should equip micro lenders with knowledge, skills and expertise needed in managing risks associated with lending activities. The Central Bank should also ensure that individuals running MFIs have the prerequisite skills and experience if they were to make meaningful business from micro lending activities. The study also concluded that lack of capitalization was another challenge that led to MFIs exiting micro lending business operations. It is therefore recommended by the study that micro lending businesses should be adequately capitalized in order to enable them to be able to absorb losses. The Central Bank should also ensure that the minimum capital requirements for micro lenders set at reasonable levels that will make that will make them stable. Inadequate internal controls were also found to be another major challenge causing micro lenders to go bankrupt. The study recommends that micro lenders should put in place effective internal controls that would reduce corruption in their day-to-day operations. The study also concluded that the liquidity crunch currently prevailing in the economy was another critical contributing factor to the collapse of micro lending institutions in the Zimbabwean economy. The liquidity crisis in the economy of late made it difficult for nonbank micro lending institutions to access loans from banks and also meets the demand for microloans by the general public. The study recommends that the government should put in place policies that helped improve liquidity on the Zimbabwean financial markets. Banks should also lend micro lending institutions at affordable interest rates if the sector were to grow towards sustainable development in the 21 st century. The study also came up with the conclusion that operational costs were so high in emerging economies that they led to some micro lending institutions collapsing. The study recommends that micro lending institutions should control their growth to reduce operating costs. Finally the study concluded that loan portfolios of MFIs were concentrated on consumption loans which did not constitute investment in an economy. The study therefore recommends that MFIs should concentrate 496

11 more on micro project loans which helped generate income and reduced the probability of default in micro lending businesses. Appendices Statistical Results from the Study Table 1:Diversion into non-core business cause the collapse of MFIs Cumulative Frequency Table 2: Severe competition cause the collapse of MFIs Frequency Cumulative Table 3:Microfinance institutions collapse due to inefficient credit risk management. Frequency Cumulative

12 Table 4: Lack of expertise cause the collapse of MFIs Va lid Val id Frequenc y Table 5: Poor capitalization cause the collapse of MFIs Frequenc y Cumulative Cumulative Val id Table 6: Failure to put in place internal controls caused the collapse of MFIs Frequenc y Cumulative Table 7: Many MFIs failed because of liquidity challenges Frequenc y Cumulative Table 8: MFIs fail because of high operational costs Frequency Cumulative

13 Table 9: Many MFIs failed because the concentration consumption loans Frequency Cumulative References Anduoli, P. (2013) A Study of Recent Trends and Problems in using Micro Finance Services in India. International Journal of Management Research and Development. ISSN (Online). Bauer, and Meir, T. (2012) Competition in the Microfinance and Over-Indebtedness. A Discussion of Empirical and theoretical Evidence from a Stakeholder Perspective. Brau, J. C. and Woller, G. M. (2004) Microfinance: A Comprehensive Review of Existing Literature. Journal of Entrepreneurial Finance and Business Volume 9, Issue 1. Deribie, E., Nigussie, G. and Mitiku, F. (2013). Filling the breach: Microfinance Journal of Business and Economic management. ISSN: Fotang, L.A. (2012) The Microfinance Market of Cameroon. Analyzing trends and Current developments. Kofi, A. S. (2012) Determining the Causes and Impact of Non-Performing Loans on Operations of Microfinance Institutions: A case of Sinapi Aba Trust. Lutzenkirchen, C. and Weistroffer, C. (2012) Microfinance in Evolution: An Industry in Crisis. Marulanda, B. et al. (2014) Failures in Microfinance: Lessons Learned. Ngehneva, C. B. and Nembo, F. Z. (2010) The Impact of Microfinance Institutions (MFIs) in the Development of small and Medium Size Businesses (SMEs) in Cameroon. A Case Study of CamCCUL. Owusu- Nuamah, (2014) Collapse of Microfinance Companies: Companies shot themselves in the foot. 499