THE MICROFINANCE INTERVIEW: FOSTERING RESPONSIBLE LOAN PRICING
..AND PAVING THE WAY FOR OFFSHORE FUNDERS
The Microfinance Interview is a monthly question-and-answer feature through which we engage key stakeholders of the sector such as MFIs, funders, service providers, development partners and regulators amongst others on issues of topical and mutual interest. This is in recognition of the influential role of Microfinance as one of the four pillars of the National Financial Inclusion Strategy. In this, our third installment, the spotlight is on the Zimbabwe Microfinance Fund (ZMF), a financial apex body. Brian Zimunhu (BZ), (pictured left) the Fund’s founding Managing Director talks about the rationale of setting up the ZMF, its evolvement over the years as well as its current challenges and opportunities. Zimunhu also speaks about ZMF’s sources of funding, products and services, pricing structure and target market. He further gives insights on the ZMF’s current exposures and the impact of its funding on the target market. Over the years, the ZMF has seen an inverse relationship between the growth of loan portfolios and the drop in interest rates – the bigger the portfolios grow, the more the interest rates fall. The Fund also sees huge potential to finance microenterprise lending, but recognises that this potential needs to be nurtured into real business by building bridges between lenders and borrowers. The fund also bemoans the narrow focus of financial services providers whereby everyone appears to think the salaried and urban clients are the low hanging fruit so attention has been focused on a few borrowers at the expense of identifying and developing what can be called “lending Blue Oceans.”
MFSB: What was the rationale of setting up the Zimbabwe Microfinance Fund?
BZ: The Zimbabwe Microfinance Fund (ZMF) is a financial apex body formed in 2011 with the objective of providing wholesale lending capital to Financial Service Providers (FSPs) such as Microfinance Institutions (MFIs), Microfinance Banks, Agricultural Value Chain Actors and Savings and Credit CooperativeSocieties (SACCOS) for retailing to micro, small and medium enterprises (MSMEs).
MFSB: Which key stakeholders were instrumental in getting the fund up and running?
BZ: The key stakeholders in question include: Zimbabwe Association of Microfinance institutions (ZAMFI); Development partners such as DFID, HIVOS, GIZ and DANIDA as well as the Reserve Bank of Zimbabwe (RBZ)
MFSB: Can you briefly outline the evolution of the Fund since inception? A brief history, so to speak.
BZ: The ZMF commenced business in 2012 lending to its partners through a third party financial institution. Over the years, ZMF has built adequate internal capacity and all business processes have now been internalised.
MFSB: Would you care to disclose the identity of the third party FI?
BZ: Of course, this was a “Partnership for Success” with CBZ Bank…. Back to the earlier question, the fund has grown from $2million as of 2012 to $12 million as at end of December 2016. As a revolving fund, ZMF has been able to disburse loans upwards of $17 million from inception to December 2016. This has been achieved through 25 partner FSPs. More than 60% of these loans have gone to women borrowers while an average of 35% has gone to rural clients.
MFSB: What sort of borrowers does the ZMF’s lending programmes target?
BZ: The key target audience are Financial Service Providers and Value Chain Actors who are into developmental lending serving micro, small and medium enterprises that are committed to improving the socio-economic and environmental well-being of the communities they serve.
MFSB: What are the ZMF’s sources of funding?
BZ: Donated Equity from social/development investors and debt financing.
MFSB: What are some of the Fund’s key products and services?
BZ: These include General/Term loans, Line of credit, Value chain financing, Asset financing, Green financing, Housing Microfinance, Fund Management, Capacity Building and Bridging Finance.
MFSB: Please outline the interest rates and fees that the ZMF charges for its loans.
BZ: Our interest rates are in the range of 7 -13% per annum and we charge establishment fees up to 3% of loan amount.
MFSB: What are your key considerations in determining this interest rate and fee structure?
BZ: The Fund considers the risk profile of partner Financial Service Providers, the cost of capital, area of funds deployment and use of funds. Benchmarking against market rates is also a key consideration.
MFSB: By area of funds deployment do you mean physical location or sector? Please explain this.
BZ: OK, I mean physical location and indeed there is need to clarify this. So, as a Fund we are very clear and alive to the fact that while financial exclusion is most rampant in rural areas, servicing clients from those locations is both more expensive and highly risky. As way of incentivising and cushioning FSPs extending the boundaries of financial inclusion by serving the rural and supposedly risky clients, ZMF tends to lean to the lower end of the interest rate band.
MFSB: What were the sizes of the fund and loan book respectively as at 31 December 2016?
BZ: These were $12 million and $10 million respectively.
MFSB: Can you give us the Fund’s exposures in sectoral terms at the end of 2016?
BZ: As of end of 2016 the Fund was exposed to the following sectors: Distribution (62%), Agriculture (29%), Manufacturing (4%), Services (3%) and other (2%).
MFSB: What would you say has been the impact of your funding interventions on the target market?
BZ: Among the key impacts of our funding are growth in enterprise lending as opposed to mere consumer lending amongst the ZMF partners, improved operational self-sufficiency amongst partner Financial Service Providers and increased rural reach and access to finance by women. We have also fostered responsible loan pricing and sparked growing interest from off shore funders.ZMF alone may never be able to meet the ever-increasing funding needs of the sector and funding from offshore funders will help in keeping the country’s MSMEs oiled but also shoring up the levels of the much-needed Foreign Direct Investments.
MFSB: Does the Fund offer any capacity building to its borrowers? If so, briefly outline the nature of the initiatives.
BZ: Yes, the Fund offers risk mitigation capacity building to its loan clients and collaborates with ZAMFI in offering sector-wide capacity building. The risk mitigation capacity building helps loan clients enhance their systems and processes through funding issues like acquisition of Management Information Systems (MIS), development of policies and procedure manuals, new product development or training targeting an area of need. Sector-wide capacity building follows training needs assessments to identify areas for capacity building. The ZMF helps in resource mobilisation for these trainings.
MFSB: Having been operational for close to five years, what would you say have been the ZMF’s key constraints?
BZ: At inception, the challenge was slow uptake of funds as FSPs lacked immediate capacity to handle big loans from the Fund; interestingly, the challenge now has become limited funding in the face of increasing demand for loans by partner FSPs. The challenging economic environment, which has significantly increased the level of inherent credit risk, is another key constraint.
MFSB: And opportunities? There must be some opportunities
BZ: There are several opportunities including national recognition of Microfinance as a key pillar of the National Financial Inclusion Strategy. The initiatives by the RBZ and other development partners to build strong financial infrastructure such as the Credit and Collateral Registry will go a long way in enhancing risk management and promoting financial inclusion. There are opportunities for funding climate smart technologies to help microenterprises and households cope with or mitigate the effects of climate change. We also see increasing demands for loans and increased absorption capacity amongst our existing clients.
MFSB: Since the ZMF is licenced as credit-only MFI with capacity to do retail loans, have you ever considered going that route?
BZ: ZMF’s business model is to reach out and positively impact on as many Bottom of the Pyramid (BoP) clients as possible working through partner FSPs and Value Chain Actors. Direct lending to retail clients is not part of our current strategy.
Brian (44) is the founding Managing Director of the Zimbabwe Microfinance Fund and is an ex-officio member of the company’s board. He is responsible for the development and implementation of the ZMF corporate strategy. Brian has vast experience in the financial services sector spanning regulation, banking and development finance. He holds a B.Com. (Hons) Degree in Banking (NUST), MSc Banking and Financial Services (NUST), Masters in Microfinance (Université Libre de Bruxelles) and a Certificate in Banking.