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Microfinance in Zimbabwe

Microfinance is a relatively new industry in Zimbabwe. It began to show face in the early 1990s but started to grow exponentially in the early 2000s with the advent of factors that led to the rapid informalisation of our economy. With unemployment officially acknowledged at levels exceeding 80%, the informal sector has taken root in Zimbabwe as the largest employer. Regrettably informal operators are unable to access funding from traditional capital providers because they lack collateral and they find the modus operandi of traditional banks too demanding and intimidating. Recent studies indicate that demand for microfinance is too large and growing rapidly in tandem with the growth of informal operator countrywide. It must noted henceforth that this is the sector that has become the main source of survival for the majority of the population and therefore largely responsible for absence of the usual strife that characterizes other nations and yet to date there has been no direct fiscal allocation to this key sector.

In Zimbabwe the definition of microfinance was compelled to recognize the reality posed by a dichotomous approach to the granting of micro loans in relation to the purpose of the loans vis -a- vis - production and consumption. A large contingent of money lending institutions (MLIs) grew substantially in response to the high and growing demand for consumer loans during the early 2000s by employed persons who were finding it difficult to survive on their basic salaries and wages in an environment where microfinance, as proffered by microfinance institutions (MFIs) was generally more accepted as funding for micro projects/ businesses. Most development partners and NGOs were strongly opposed to this development as they believed that consumption loans encouraged non essential spending and actually created perpetual debt traps for unsuspecting borrowers. And yet the truth of the matter was that both MFIs and moneylenders were offering loans for both production and consumption. Regrettably there has been no attempt to commission a study aimed at ascertaining the end use of all borrowed funds by both MFIs and MLIs. 

It is important to note that with effect from 30 August 2013, The Microfinace Act number 3 of 2013 was gazetted, ending a long era where microfinance was governed by a host of sevral pieces of legislation including, the Money Lending and Rates of Interest Act Chapter 14.14; the Prescribed rates of Interest Act and Statutory Instrument number 126 of 1993. These statutes have not been repealed and continue to be applicable alongside the act. The new act recognises two basic types of microfnance institutions, the Credit only and Deposit Taking Microfinance Institutions.

Ernest and Young in their report on National Survey on Microfinance and Proposed Legal and Regulatory Framework 2005 recommended that Zimbabwe’s definition of microfinance needed to recognize the above unique situation. Zimbabwe’s National Microfinance Policy announced in April 2008 was developed through collaborative work by a National Task Force on Microfinance whose membership comprised Government Ministries, apex organizations of MFIs and MLIs, academia, MFIs development partners and the Central Bank. The policy defines microfinance as “the provision of a range of financial services, including savings, small loans, insurance and money transfer services to marginalized members of the population and SMEs that do not have access to finance from formal financial institutions.”

Joanna Ledgerwood, in her hand book for micro finance, states that “microfinance has evolved as an economic development approach intended to benefit low income women and men”. The term microfinance might also refer to the provision of financial services to low income clients, including the self employed. Such financial services generally include savings and credit; however some micro finance organizations also provided insurance and payment services. In addition to financial services many MFIs also provide social intermediation services such as group formation, development of self confidence and training in (basic) financial literacy and management capabilities among members of a group. Thus the definition of microfinance includes both financial and social intermediation. MF therefore is simply not banking but a development tool.
Microfinance activities usually include:

  • Small loans, typically for working capital

  • Informal appraisal of borrowers and investments

  • Collateral substitutes such as  group guarantees or compulsory savings

  • Access to repeat and larger loans, based on repayment performance

  • Streamlined loan disbursement and monitoring

  • Secure savings clubs

Microfinance in Zimbabwe has undergone significant transformation during the current decade. The rapid deterioration of the Zimbabwean economy since 1999 led to the unprecedented growth of the informal sector and sector activities as already alluded to in the foregoing paragraph. Areas that were assigned for informal sector operations in many urban, peri urban, growth points, business and service centers physically grew multifold in order to accommodate the ever growing entrants into the sector. Activities at growth points and service centers in rural areas became varied in response to the need by unemployed economically active persons to eke out a living. In response to the inability by traditional financial service providers to enable the informal sector to access capital, microfinance emerged strongly as the most effective vehicle to provide access to capital for members of the informal sector. Demand for micro-loans kept growing in leaps and bounds during the decade and yet there was no corresponding increase in the availability of funding.

By the end of the year 2003, the Zimbabwean economy had taken a real battering with inflation in three digits and several banks having compulsorily closed down. Reserve Bank of Zimbabwe (RBZ) took over the licensing of MFIs with the intention of fostering normalcy in the financial services sector in December 2003. After drawing up a fifteen point dossier of requirements for registration for both MFIs and MLIs which included inter alia, competent board members and at least two key board committees viz audit and credit committees, the number of licensed operators plummeted to 200 by the beginning of 2004. Since then numbers of licensed and operating MFIs and MLIs have continued to decline as shown by the figure below. From 2004 onwards the numbers of operators have not exceeded 200.

Microfinance Institutions operating in Zimbabwe