In the previous edition, we introduced “The Microfinance Interview” a monthly question-and-answer feature through which we engage with key stakeholders of the sector such as MFIs, funders, service providers, development partners and regulators amongst others on issues of topical and mutual interest. In this, our second interview, the spotlight is on FMC Finance, one of the top credit-only microfinance institutions (MFIs) with a significant branch network and a sizeable loan book. MFSB talks to Ranga M. Mavhunga (RMM), FMC Finance’s Group CEO (pictured left) about the company’s business model, his views on salary-based consumptive lending versus developmental lending as well as the prospects of acquiring a deposit-taking licence, amongst other key industry issues.
MFSB: FMC Finance is one of the MFIs that appear to have taken a lead in agricultural financing through a specific product – the FMC Agriloans product. Tell us about this product and how it has performed to date?
RMM: The Agriloan product was designed to assist farmers with small hectarage to purchase inputs like seed and fertilizer. The loan was designed to ensure that farmers have at least a minimum hectarage which they cultivate during the farming season. Farmers have been able to access an average of $4,000 for cropping – i.e. maize, tobacco and market gardening. The product is designed in such a way that they pay a bullet payment at the end of the season. This product allows us to participate in Agriculture which is a key driver of our economy. The uptake has been good. Repayment is yet to start. We are hopeful that the farmers will pay at the end of the season despite the El Nino factor.
MFSB: FMC has a significant branch network across the country. What’s the ratio between your rural and urban branches?
RMM: We have 25 branches – 10 of which are rural branches.
MFSB: Given such a spread of branches – certainly one of the biggest – what is the size of your loan book and how many clients do you currently have on your books, on your last count?
RMM: The loan book has been growing and fluctuates between $20 million and $30 million driven by an average of +/-50,000 loanees.
MFSB: FMC appears to be focused on civil servants, particularly the uniformed forces. Is there a strategic reason for this other than that salary-based lending is relatively safe and government happens to be the largest employer?
RMM: Our business model is a salary based model targeting the civil service and private corporates. Given the economic situation where the bulk of government revenue goes towards employment costs (85% out of $4 billion in 2016) it is only prudent to target the civil service. We are however slowly diversifying the thrust to enterprise lending through group lending methodology, invoice discounting and order finance to promote SMEs.
MFSB: There was a bit of a debate about the issue of the appropriate model for MFIs at the inaugural Microfinance Summer School recently hosted by ZAMFI. What have you got to say about the issue of salary-based lending versus developmental lending? Is it a question of either or?
RMM:The debate is good. However, Zimbabwe has a very unique set up where the economy is highly informalized. The informal economy is driven by, among other factors, employed people who want to augment their meagre incomes. These provide the seed capital from their salaries or borrowings from banks and microfinance institutions under the guise of consumption. We have seen our clients funding inter alia, school fees, medical bills, building houses, agricultural inputs and starting small informal businesses. Salary based lending provides alternative security to enable customers to borrow for consumption and productive purposes.Consumption plays an important part in the economic equation. It provides effective demand for goods and services provided by the productive sector. Consumption lending is part of the development equation. The only problem is that the cost of funding and hence interest rates are high.
MFSB: What would you say is currently the biggest challenge for you as an MFI?
RMM: The biggest challenge to us is the general economic problems. Issues of liquidity, lack of a functional Credit Reference Bureau; the constrained nature of the Microfinance Act with regards to the tenure of licence. The current one year licence regime makes it hard to raise cheaper long term wholesale funding, it makes it difficult in turn to lend long term for productive purposes. The result is expensive short term loans which are for consumptive purposes. While this position is being reviewed, there is need for urgency to enable MFIs to address the issue of high interest rates and the bias towards consumption loans.
MFSB: The relationship between microfinance and technology (mobile money in particular) appears to be still at courtship stage? To illustrate this, I recently observed that only two companies have EcoCash Biller Codes, for instance. Do you agree about this infancy? If so, why do you think that’s the case?
RMM: Mobile technology has played an important disruptive role and has definitely enabled financial inclusion to happen. Microfinance caters for the unbanked and is a critical cog in the financial inclusion agenda. The use of alternative delivery channels like mobile money; money transfer platforms and Prepaid Visa/MasterCard’s enables access to money and rapid transfer of funds. MFIs cannot ignore the alternative channels for funds disbursement and ensuring that they have countrywide geographic reach as the economy becomes cash light.
MFSB: Seeing as we can that FMC is one of the top credit-only MFIs size-wise, how far are you from becoming a deposit-taking MFI?
RMM: FMC is working on becoming a deposit taking MFI. This requires new skill sets to manage the liability side of the Balance Sheet. Our current ICT platform has been upgraded in anticipation of this inevitable eventuality.
MFSB: Anything else you might want to say?
RMM: Just to emphasize on outstanding issues in the industry: First, the amendment of the MFI Act to ensure that licenses have a long tenure or become perpetual. This has ramifications on the interest rates charged to customers and the realignment of the loan book from consumption to productive. Second, the issue of information asymmetry needs to be resolved through the Credit Reference Bureau. The Central Bank has embarked on this route but it needs to be expedited to reduce credit risk hence interest rates. Last but not least, the establishment of the Microfinance Pension fund will go a long way for MFIs to provide employment stability and savings for own lending to viable microfinance. It is a new source of internal capital that the industry must embrace.
This interview was conductedin January 2016 and previously published in Newsday where it can be read at
https://www.newsday.co.zw/2016/01/28/not-all-microfinance-lending-is-consumptive/