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 alongside financial innovation, financial literacy and financial consumer protection. In this eighth instalment, the spotlight is on Mustard Seed Consulting (MSC) a key service provider to the microfinance sector. Petronella Chigara-Dhitima (PC-D), MSC’s Managing Director talks to the MFSB about licensing, regulatory, capitalisation and sustainability aspects of the microfinance sector. She also addresses the current structure of the sector, its prospects and attractiveness to international investors as well as how players must position themselves for change, consideredimminent. Last but not least, she discusses her company’s products and services and their role in meeting the sector’s training and development needs.
MFSB: What’s your view on the number of MFIs in Zimbabwe and what advice would you give to the licencing authority about this?
PC-D: In purely market driven economies, one would say there is no maximum allowable number of MFIs in any market. In this vein, market forces will dictate who survives and who gets swallowed up in mergers and acquisitions. Ours though, is not such a perfect economy and as a result even the tiny ones, which are barely reaching the minimum threshold to make their business profitable are still trudging on. Given the size of our market (population of less than 13 million and much smaller (and even smaller if considering adult population that is financially active), 180 is certainly too many. Countries with even larger markets than ours have fewer and stronger institutions – Uganda has 92, Tanzania about 140, and Kenya has about 24. Of course these numbers exclude credit cooperatives which are active in these countries. I would recommend licensing on exceptional basis for example deposit taking MFIs or credit based MFIs that bring in larger investments than the USD25, 000!
MFSB: Credit-only MFIs are required to have a minimum of US$25,000 while deposit-taking MFIs must put up US$5 million in capital. Do you think these capital levels are appropriate given the current structure of the MFI sector in Zimbabwe?
PC-D: Firstly, the gap between the two is too wide – it doesn’t even sound like these are players in the same industry. The second issue is to do with economies of scale. What kind of operation would a US$25,000 MFI run professionally and profitably? The result is exorbitant interest rates to compensate for the volumes they can’t make. The third issue is to do with market perception: the general feeling is that microfinance is not a serious sector hence the ease of entry! Such low capitalization levels may attract the wrong crowd into the sector. Finally, when there is such a wide gap, one would be tempted to stratify the market a little further and create another tier of institutions in between these two extremes.
MFSB: In terms of sustainability of MFIs, what is/are the key ratio(s)?
PC-D: Generally speaking, MFIs are expected to be profitable just like any corporate business is – so Return on Equity (ROE) is a standard measure. In addition, in some markets where microfinance was highly donor dependant, the industry coined two sustainability indicators – Operational and Financial Self Sufficiency. The first one – Operational Self Sufficiency (OSS) simply means the MFI is able to cover its operational and financial costs from its own internally generated funds. Financial Self Sufficiency (FSS) is similar to OSS but includes the adjustments e.g. to operational and financial costs to show how sustainable the MFI is when subsidies are taken away.
MFSB:In a nutshell, what must be done in order to improve these ratios?
PC-D: Profitability is driven by portfolio size which results in efficiency. Microfinance is inherently inefficient since it deals with much smaller loans than banks. For an MFI to build a portfolio of USD$5million demands a lot in terms of human capital since its spread over many clients. Operating efficiency (which is operating expenses divided by average loan portfolio) for MFIs in mature markets is single digit (3-5%) while here in Zimbabwe it’s above 30%! The major reason is the size of the outstanding portfolio. I use this simple example of two MFIs – one (MFI X) with a US$1million portfolio and another (MFI Y) with a portfolio of US$5million – obviously the US$5 million one is poised for greater efficiency. I honestly wonder how MFIs with US$100,000 expects to be efficient let alone be profitable. I suppose that’s why they end up charging high interest rates. There is a threshold of economies of scale that should be reached by any MFI to continue in business profitably.
MFSB: SACCOS are an important facet of the microfinance sector in Zimbabwe. How should they be treated in terms of the licencing framework, in your view?
PC-D: SACCOs are usually treated differently simply because they are membership based. In many countries their licensing is not the same as that of MFIs.
MFSB: Is regulatory capacity for the microfinance sector adequate in Zimbabwe?
PC-D: I guess the numbers involved make it difficult for regulatory authorities to supervise. The effectiveness of regulation is in the power to supervise and penalise and if the regulatory authorities cannot effectively supervise all institutions, there may be breach of regulations that goes unnoticed.
MFSB: Broadly, what are the microfinance sector’s capacity development needs from your experience as a provider of technical assistance and training in Zimbabwe?
PC-D: Oh there is a lot that’s needed. The sector is very young and immature, necessitating basic skills in managing a microfinance portfolio. At the same time, globally, the sector has grown immensely which means our immature institutions have to really work hard to catch up with where the sector is going. The digital wave and rise of Fintech companies bring new risks and challenges for business that requires solid management expertise. The current wave of client centricity, pushing frontiers to rural and agricultural market segments makes the business even more complex.
MFSB: What part is Mustard Seed Consulting playing in order to meet these development needs?
PC-D: Mustard Seed Consulting (MSC) works with MFIs, SACCOs and banks locally and internationally, providing advisory services in many of the areas highlighted above. MSC also runs training courses for different levels of staff and managers (including boards) to strengthen both technical and managerial skills. MSC has worked with the national association on various training programs, and launched a diploma course in collaboration with a local university (Harare Institute of Technology).
MFSB: Have you collaborated with any local and international partners in providing technical assistance to the microfinance sector?
PC-D: Yes, we have had partnerships with international firms in order to assist local entities and these have worked out very well!
MFSB:Which international firms are these, if I may ask?
PC-D:We have worked with MEDA as partners in delivering consulting services locally; we have handled contacts for ACCION, for the International Training Centre of the International Labour Organization (ILO), Food and Agricultural Organization (FAO). These assignments have been both local and international.
MFSB: What have you got to say about the oft-expressed view that most MFIs sorely need capacity development but the available technical assistance is too expensive for the majority of MFIs?
PC-D:The statement is directly related to the type of institutions we are licensing. Definitely a US$25,000 MFI (or anywhere below US$1million) may not have the financial ability to attract the technical expertise needed to manage the MFI, which means they hire people with no experience who require training and grooming. However, the size of the balance sheet does not allow them to contract consultants such as MSC as well. The serious players know that such TA is needed and are willing to pay for it.
MFSB: What are some of the capacity development programmes available locally for people in the microfinance sector?
PC-D: MSC, together with HIT and ZAMFI launched a microfinance diploma course in 2016. Since then various schools have come up with similar courses. The local association (ZAMFI) runs a number of courses annually including the just ended winter school. MSC on its own also runs a number of courses throughout the year for middle and senior managers.
MFSB: In terms of institutionallevel capacity development, what part can regulatory intervention play?
PC-D: In Nigeria,the central bank has put its weight in the development of young professionals and works closely with their bankers association and microfinance sector consultants to certify microfinance professionals. This is something that can be replicated locally.
MFSB: What other rolescan the association of microfinance institutions play in addressing the capacity development needs of the sector?
PC-D: In many countries, the microfinance association plays a critical role in linking the local sector to the global initiatives. Currently Social Performance and MFI accreditation to be SMART Certified have become topical issues. Getting MFIs to know such industry-wide developments and pooling resources to facilitate such accreditations or exposure to such initiatives is really critical. Zimbabwe has been missing from the MIX market for many years now and the association could also play a role in stimulating interest and highlighting benefits to members. Providing a snapshot of the industry and keeping track of developments which can be documented is a great way of increasing industry capacity. The training work that is currently underway should also continue but can include national conferences, regional summits etc.
MFSB:For the benefit of the uninitiated, what is the MIX Market?
PC-D:This is a global information database that provides instant access to the data, analysis, and tools that deliver key insights into the financial inclusion sector. The data is collected from MFIs around the globe (on voluntary submission basis). The MIX Market platform can help you assess financial, operational, and social performance of different institutions, check country statistics or perform cross sectoral analysis.
MFSB: What, in your view, are the prospects of the microfinance sector in Zimbabwe?
PC-D: Growth! I believe we will see growth in this sector especially once serious players with big investments strengthen themselves in the market. Most likely the environment is going to be very competitive and it will not be surprising to see mergers and takeovers!
MFSB:What’s your views on the attractiveness of the microfinance sector to big foreign/international players such as FINCA, BRAC & EQUITY?
PC-D: I believe it is very attractive partly because of current levels of investment that are low to medium. Some of these international players can easily set up entities that are capitalised above US$10million and push the cost to client to lower levels. A few of these have already scouted the market! Also, local Interest rates are much higher than regional rates!
MFSB: How should MFIs prepare for this eventuality?
PC-D: It can’t business as usual! There is need to be strategic, to create competitive positioning in the market before it’s too late.
MFSB: Tell us a little about how and why Mustard Seed Consulting was formed.
PC-D: Having worked in the sector in many different countries, the founders of Mustard Seed were convinced that Zimbabwe didn’t need more MFI actors but rather mentors who can groom and develop MFI leadership and strengthen managerial capability. For us, the impact of working with more than one firm was much more than just creating another MFI and we still believe that. Strengthening the greatest asset that the MFI has – people- is our calling and we are passionate about it.
MFSB: What services does your company offer?
PC-D: MSC offers microfinance advisory services, mentoring and coaching of senior and middle managers, strategic and business planning, market research, product development, client satisfaction surveys, monitoring and evaluation as well as lots of training courses for loan officers, middle managers and senior management. The company also offers financial education for staff, SMEs and MFI clients!
MFSB: We hear about the name Boulder a lot in microfinance sector circles. Can you please clarify what this is all about and whether you have had an experience with it?
PC-D: Boulder Microfinance Training Program (MFT) has been in existence for 23 years and is renowned for offering not just courses but the opportunity for participants to interact with global industry players on the financial inclusion landscape. Boulder “strives to help you improve and expand your skill sets, tools, critical thinking and strategic approaches to specific problem areas.” It runs a three week course every July at the ILO Training Centre in Italy. I have been privileged to teach on the program for 16 years now.
MFSB:Wow, that’s significant. Well done for putting Zimbabwe on the world map. Thank you for your time Petronella. Anything we haven’t discussed that you would like our readers to know about yourself, MSC, or the Zimbabwean microfinance sector in general.
PC-D:I would encourage local entities to position themselves for more competitive terrain both from traditional players (like the international firms) and the fintech companies that are doing business in a more efficient way through technology! I would say “make hay while the sun shines – it won’t be business as usual soon.”
Petronella is a microfinance expert with more than 23 years of experience in 16 African countries and other developing countries in Asia and Latin America. She has managed bank downscaling programs in Zimbabwe and Tanzania, set up commercial green field microfinance operations in Ghana and provided technical assistance to Accion partners in West Africa. She is an expert in organizational development, human talent development, market research and product development for low income households. Petronella serves as the ITCILO MMW Master Trainer responsible for trainer certification, is a certified SMART Assessor and certified CGAP trainer. She has taught at the Boulder Microfinance Training Program for the past 16 years. She is an Associate of MFO. Petronella has a BBS (Hons) degree from University of Zimbabwe and a Master of Business Administration from University of Liverpool.