Practices Negate Objectives of Financial Inclusion and Confidence Building Measures
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 regulatory authorities 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 (NFIS) alongside financial innovation, financial literacy and financial consumer protection. In this instalment, the spotlight is on the Deposit Protection Corporation (DPC) which administers the Deposit Insurance Scheme in respect of which Deposit Taking Microfinance Institutions (DTMFIs) pay a statutory flat premium rate of 0.2% of annual average deposits. Mr John Mafungei Chikura (JMC), the DPC’s Chief Executive Officer, talks to the MFSB about regulatory framework for the Scheme, the quantum and affordability of premiums, the scope of cover as well as the corporation’s challenges and opportunities in relation to the microfinance sector. Chikura also talks about the evolving consumer protection policy framework for the sector and other pertinent developments in the deposit protection space.
MFSB: How many MFIs currently contribute to the Deposit Insurance Scheme and under what regulatory framework do they do so?
JMC: Currently there are four Deposit-Taking Microfinance Institutions (DTMFIs) registered by the Reserve Bank of Zimbabwe namely Getbucks Microfinance Bank Limited, African Century Limited, Lion Microfinance Limited and Success Microfinance Bank Limited (formerly Collarhedge Finance Private Limited) which are contributing to the Deposit Insurance Scheme. The extension of membership to Deposit-Taking Microfinance Institutions is in terms of Section 35 of the Microfinance Act (Chapter 24:29) which requires deposit taking microfinance institutions to be contributors to the Deposit Protection Scheme in line with the provisions of the Deposit Protection Corporation Act (Chapter 24:29).
MFSB: In your view, is the current level of cover for clients of MFIs adequate at US$250.00?
JMC: In terms of public policy objectives, the Corporation aims to cover in full at least 90% of depositor accounts in deposit-taking microfinance institutions. At the current cover level of $250 per depositor per DTMFI, 89.8% of the depositors are fully covered in compliance with the public policy objectives. However, it should be noted that there is a need to strike a balance between providing a confidence building cover level and the need to build a Microfinance Deposit Protection Fund (MDPF) that will have the capacity to compensate depositors in the event of failure of a DTMFI. The Corporation shall continue to review the maximum deposit protection cover level for DTMFIs from time to time to strike a balance between need to comply with the public policy requirements and the Corporation’s capacity to compensate depositors from the Microfinance Deposit Protection Fund in the event of failure of a microfinance institution.
MFSB: Can you comment on the affordability of deposit insurance premiums for deposit-taking MFIs.
JMC: All contributory institutions to the Deposit Protection Fund (DPF) currently pay a statutory flat premium rate of 0.2% of annual average deposits eligible for premium assessment, payable on a quarterly basis. Membership to the DPF currently includes all commercial banks, building societies, merchant banks, finance houses, People’s Own Savings Bank, Infrastructure Development Bank of Zimbabwe as well as deposit-taking microfinance institutions. The final premium payable to the DPF is therefore dependent on the size of deposits each institution is holding. Currently, all deposit-taking microfinance institutions have been able to pay insurance premiums without facing any challenges.
MFSB: Do you feel that the applicable legislation/regulation clearly and unambiguously defines permissible activities for the MFIs?
JMC: Section 25 of the Microfinance Act [Chapter 24:29] provides a clear framework on the permissible and non-permissible activities of deposit-taking microfinance institutions. The Reserve Bank of Zimbabwe also issued Prudential Standards No. 02-2016/BSD: Deposit-Taking Microfinance Institutions in November 2016, which aim to provide further operational guidelines to all deposit-taking microfinance institutions. However, there is still room to refine the framework in light of changes in the local and international financial space. Following our engagements with deposit-taking microfinance institutions and having taken note of their feedback, we are also in discussion with other safety-net players on how best to refine the regulatory framework on the operations of deposit-taking microfinance institutions.
MFSB: From where the DPC stands, what are the main risks posing a threat to microfinance institutions.
JMC: Microfinance institutions play a key role in financial inclusion and financial intermediation through the provision of affordable and flexible financial products and services. The main risks facing the microfinance institutions include credit risk, liquidity risk and adverse macroeconomic environmental risks. Since microfinance institutions provide loans to the banking public, inability of the borrowers to repay the loans is a threat to the sustainability of the institutions. Liquidity risk also poses a challenge to the sector as shortages of physical cash can hamper businesses in the informal sector to which microfinance institutions lend, thereby increasing non-repayment of loans. The microfinance sector is also vulnerable to the adverse macroeconomic environment. The depressed economy has a negative impact on the asset quality of the microfinance institutions.
MFSB: What are currently the DPC’s biggest challenges, in relation to the microfinance sector?
JMC: We have noted with concern some credit-only microfinance institutions practising unethical lending practices and some unlicensed institutions taking deposits from the public, which are not covered by the DPC Scheme. Quite a number of people have been duped and lost hard-earned savings through such institutions, which end up failing to repay clients and at some stage being taken to courts by clients. This negatively works against the objectives of financial inclusion and confidence in the financial system. As DPC, we continue to receive complaints from the public having been duped by some of these institutions, which are not members of the Deposit Protection Scheme. We encourage the public to verify with the regulatory authorities the authenticity of some these institutions and their related products or services. This also calls for the strengthening of the regulatory framework to protect the unsuspecting public as well as the integrity of the financial system.
MFSB: And opportunities? Does the DPC see any opportunities in relation to the microfinance sector?
JMC: The increase in the number of credit-only and deposit-taking microfinance institutions is a welcome development in driving the financial inclusion agenda and overall economic growth. The microfinance sector increases competition for banking business resulting in better service delivery and new product innovations
MFSB: What Consumer Protection mechanisms does the DPC have in place to address grievances against deposit-taking microfinance institutions?
JMC: A policy framework is being developed in liaison with other regulatory players and stakeholders in order to put in place a comprehensive framework for the financial industry. Section 28D to 28F of the Banking Amendment Act, 2015 provides that every banking institution must establish procedures for dealing with customer complaints as well as to keep the record of every complaint received.
MFSB: Anything else we haven’t discussed that you think our readers would want to know?
JMC: We encourage depositors of the following closed banks who have not yet submitted their claim forms for the payment of the insured amount to contact Deposit Protection Corporation (DPC) for reimbursement: AfrAsia, Allied, Interfin, Royal and Trust Bank. Claims forms can be downloaded from our website www.dpcorp.co.zw or requests via electronic mail can be sent to [email protected]. We are pleased to advise members of the banking public that the Corporation also entered into an arrangement with Zimpost to act as a postal partner where depositors of closed banks can now visit any Zimpost branch across the country to collect or submit claim forms for free. This channel helps to provide clients even in the most remote parts of the country with the convenience of collecting or submitting claim forms as Zimpost offers the largest distribution network across the country. The Corporation also opened a regional office in Bulawayo on the 17th of July 2017 as part of efforts to increase brand visibility and convenient access to our services by the general public.