GOVERNOR S FOREWORD... 5 DIRECTOR S FOREWORD... 7 CHAPTER 1 INTRODUCTION... 9 CHAPTER 2 REGULATORY FRAMEWORK... 13

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2 CONTENTS GOVERNOR S FOREWORD... 5 DIRECTOR S FOREWORD... 7 CHAPTER 1 INTRODUCTION... 9 CHAPTER 2 REGULATORY FRAMEWORK CHAPTER 4 CONDITION AND PERFORMANCE OF THE MICROFINANCE SECTOR CHAPTER 5 RESPONSES TO CHALLENGES IN THE MICROFINANCE SECTOR CHAPTER 6 ROLE OF MICROFINANCE IN FINANCIAL INCLUSION CHAPTER 7 OUTLOOK APPENDICES 39 MISSION STATEMENT

3 MIMISSIO N STATEMENT Vision To become a transformative and responsive Central Bank. Mission Maintaining financial stability and financial inclusion through credible policies and risk based supervision of banks, supported by a skilled human resource base and a modern integrated ICT system. Values Trust Integrity Passion Transparency Accountability Efficiency Creativity

4 PURPOSE OF THE REPORT The purpose of this microfinance annual report is to provide an analysis of the status and performance of the microfinance sector in Zimbabwe for the year ended 31 December This report presents an overview of the microfinance activities during the period under review.

5 GOVERNOR S FOREWORD 1. This inaugural Microfinance Annual Report comes at a time when microfinance has enjoyed unprecedented growth in the past decade to become an important subsector of the global financial system. Policy makers and regulators worldwide recognize the vital role of microfinance as an important tool in economic development and poverty alleviation through facilitating access to financial services. 2. In Sub-Saharan Africa microfinance has continued to register impressive growth particularly in East Africa on the backdrop of the expansion of mobile technology driven solutions. 3. Since the adoption of the multicurrency regime in 2009, the Zimbabwe microfinance sector has enjoyed steady growth as reflected by an expansion in branch outreach and number of clients accessing financial services from microfinance institutions. 4. Notwithstanding the noted positive growth, the microfinance sector has not been spared from the challenges affecting the domestic economy which include market illiquidity, absence of affordable wholesale funds, and non-performing credit. 5. Cognisant of the role of microfinance in channelling financial services to low income groups, and the challenges hindering the sector from reaching its full potential, the Reserve Bank spearheaded the development of the National Financial Inclusion Strategy (NFIS) which was launched on 11 March Microfinance occupies a prominent role in the NFIS as one of the four key pillars and is expected to play a critical role in facilitating access to financial services by the unbanked particularly small to medium enterprises (SMEs) which are recognised globally as the engine for growth. 6. The Reserve Bank remains resolute in the execution of its mandate to maintain the safety and soundness of the financial sector through proactive supervision and

6 enhancement of its supervisory tools and techniques to provide a more supportive and efficient regulatory and supervisory framework for the microfinance sector in line with international best practice. 7. To this end, the key stakeholders in the microfinance sector drafted a Microfinance Policy to guide the sector s development. The policy awaits requisite Government approval. 8. The provisions of the Microfinance Act [Chapter 24:29] which was gazetted in 2013, have promoted strengthened risk management and corporate governance systems and practices in microfinance institutions. The introduction of the deposit-taking microfinance licence has provided the long awaited avenue for funding through authorized deposit mobilization. In the past some errant microfinance institutions (credit-only) have ventured into illegal deposit-taking resulting in members of the public losing their money. 9. The Reserve Bank and other stakeholders have since proposed amendments to the Microfinance Act to further refine the legal framework. The amendments seek to address, inter alia, tenure of the microfinance licence, the confusing categorization of the microfinance institutions and liability of directors. 10. I wish to thank all our stakeholders for their dedication and invaluable support to the Reserve Bank in its endeavours to create a strong, sustainable and inclusive financial system that is supportive of economic growth. Dr. J. P. Mangudya Governor

7 DIRECTOR S FOREWORD 1. Microfinance plays a critical role in providing access to finance by the low-income groups and micro, small and medium enterprises who cannot access the same from the formal banking system, due to the absence of collateral acceptable to banking institutions. Microfinance is used as a tool to reach out to remote areas that are shunned by banking institutions. 2. In view of its importance in economic development and poverty alleviation in Zimbabwe, the microfinance sector has assumed an important role in the National Financial Inclusion Strategy alongside other pillars namely financial literacy, financial innovation and financial consumer protection. To promote the growth of the microfinance sector, the Reserve Bank embarked on initiatives which include establishment of the credit reference system and collateral registry, licensing of deposit-taking microfinance institutions (DTMFIs), capacity building workshops and consumer financial literacy awareness campaigns. 3. The above measures are expected to reduce information asymmetry in the sector, facilitate effective management of credit risk and promote access to microfinance products and services by segments previously excluded from formal financial services. 4. Further, the enactment of the Microfinance Act [Chapter 24:29] in 2013 which incorporated a Code of Conduct also enhanced the consumer protection framework for consumers of microfinance products and services. 5. The microfinance sector grew at an average of 32.61% in the last five years, in spite of the constraints in the operating environment. Total loans increased from $63.43 million as at 31 December 2011 to $ million as at 31 December The number of licensed microfinance institutions and branches increased from 95 and 106 to 152 and 571 from 2009 to 2015, respectively. Over the years, microfinance branch network has also expanded to cover all the ten provinces of the country, while the proportion of women accessing funding from microfinance institutions increased from 32.90% in 2014 to 42.10% in 2015.

8 6. Despite funding and capitalisation challenges the microfinance institutions have been able to raise local and offshore funding to finance productive sectors of the economy, particularly small and medium enterprises and small scale farmers. 7. In 2013 the Reserve Bank in conjunction with other key stakeholders constituted the Microfinance Advisory Council (MAC) to promote the development of the microfinance industry and expansion of financial inclusion. MAC has been instrumental in raising awareness of the legal and regulatory provisions among the microfinance institutions. 8. In 2015 the Reserve Bank licensed three deposit-taking microfinance institutions which are expected to play a major role in the development of the microfinance sector by facilitating the mobilisation of savings from the unbanked segments of the population. 9. The Reserve Bank extends its sincere appreciation to all the stakeholders in the microfinance sector, including the Zimbabwe Association of Microfinance Institutions, microfinance institutions, and development partners for their continued support and cooperation towards achievement of an inclusive, safe and sound financial system. N. Mataruka Director Bank Supervision

9 1.1 The origins of microfinance date back to the 19th century when credit unions and rural cooperatives emerged to provide sustainable financial services. Microfinance then became the domain of development CHAPTER 1 INTRODUCTION agencies in the 20th century, driven by large institutions such as the United Nations. 1.2 During the period 2004 to 2008, microfinance enjoyed unprecedented growth globally to become an important sub-sector of the formal financial system in emerging markets. The impressive asset growth, healthy returns and widespread international recognition of microfinance as a development tool captured the interest of both academics and policy makers. Figure 1 Evolution of Microfinance Microfinance is generally defined 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 mainstream financial institutions. 1.3 As a result, the sector was promoted by many national governments eager to bridge the financial inclusion gap, and was elevated onto the agendas of the United Nations and the G8 Group in The United Nations General Assembly designated 2005 as the Year of Microcredit to underline the importance of microfinance. Donors and socially oriented investors recognized the potential for social and financial returns and directed increasing funding towards microfinance.

10 Global Microfinance Outlook 1.4 Global economic growth slowed down to 3.1 percent in 2015, and is projected to marginally recover to reach 3.4 percent in 2016, as a modest recovery in advanced economies continues and activity stabilizes among major commodity exporters, according to the World Bank s January 2016 Global Economic Prospects. 1.5 The average growth in the global microfinance sector is estimated at 10-15% in 2016 with robust growth anticipated in Asia pacific and Sub-Saharan Africa as shown in table 1. 1 Table 1 : Average microfinance growth rates in the selected major microfinance markets Country India 7.3% 7.5% Cambodia 7.0% 7.2% Kenya 6.5% 6.8% Bolivia 4.1% 3.5% Azerbaijan 4.0% 2.5% Ghana 3.5% 5.7% Mongolia 3.5% 3.6% Paraguay 3.0% 3.8% Costa Rica 3.0% 4.0% Tajikistan 3.0% 3.4% Armenia 2.5% 2.2% Peru 2.4% 3.3% 1 Microfinance Market Outlook: Developments, forecasts, trends, www. responsability.com

11 Kyrgyz Republic 2.0% 3.6% Georgia 2.0% 3.0% Ecuador -0.6% 0.1% Average 3.5% 4.0% Sources: IMF and Responsibility Research Evolution and Development of the Microfinance Sector in Zimbabwe 1.6 The microfinance sector in Zimbabwe dates back to 1963 when the Catholic Missionary initiated a Savings Development Movement, (SDM) for rural women 2. The savings clubs grew in numbers from an estimated 30 in 1970 to 1500 in The post-independence period in Zimbabwe created an enabling environment for the further development of microfinance, particularly savings and credit cooperatives (SACCOs) and (Rotating Savings and Credit Associations (ROSCAs). 1.8 A new economic dispensation created by the liberalization of the financial sector in the early 90 s created a financial system characterised by stringent lending practices by banking institutions in Zimbabwe which excluded low income groups and MSMEs from accessing finance from banking institutions due to lack of acceptable collateral. The situation presented an opportunity for NGOs to provide financial support to the microfinance sector. 1.9 The growth of the sector was however, affected by the hyperinflationary environment experienced from 2000 to 2008 which resulted in some microfinance institutions closing down The microfinance sector which contributed 2.32% of Gross Domestic Product in 2015, is expected to continue registering modest growth on the back of anticipated growth of deposit-taking microfinance institutions (DTMFIs) coupled with high demand for credit. Financial inclusion initiatives are also expected to spur growth in the microfinance sector through outreach programmes by stakeholders. 2 Raftopoulos, B. and J. Lacoste. (2001). From Savings Mobilization to Microfinance: A Historical Perspective on the Zimbabwean Self Help Development Foundation (SHDF). Food and Agricultural Organization (FAO) Paper presented at the International Conference on Livelihood, Savings and Debts in a Changing World: Developing Sociological and Anthropological Perspectives.

12 1.11 Microfinance as one of the key pillars of NFIS is expected to play a key role in promoting access to financial services in Zimbabwe. It can offer a wide variety of financial services to the unbanked particularly at the bottom of the pyramid Digital financial services continue to gain popularity and provide opportunities to not only expand outreach and reduce costs but also expand the menu of financial services. From allowing MFIs to access micro-entrepreneurs in remote areas, to enabling the implementation of more robust ICT and risk assessment tools, technology represents a huge opportunity for microfinance institutions across the world.

13 CHAPTER 2 REGULATORY FRAMEWORK 2.1 Prior to August 2013, microfinance institutions were regulated under the Moneylending and Rates of Interest Act [Chapter 14:14] and the Banking Act [Chapter 24:20]. 2.2 The legal and regulatory framework for the microfinance sector in Zimbabwe was largely inadequate. The legislation for the sector was a notable constraint to the deepening and broadening of microfinance services and the participation of foreign investors. 2.3 The Moneylending and Rates of Interest Act [Chapter 14:14] was deficient in that it did not sufficiently provide for important issues such as consumer protection, corporate governance and was now out of sync with market developments. Microfinance Act [Chapter 24:29] 2.4 In recognition of the need for a more supportive and efficient regulatory and supervisory legislative framework for the microfinance sector, the Microfinance Act [Chapter 24:29] (the Act) was gazetted in The Act provides for registration and deregistration of microfinance institutions, including deposit-taking microfinance institutions and expectations for the standard loan agreement, administrative, accounting, and risk management and corporate governance practices. Code of Conduct 2.6 The Act is also customer centric and has strengthened the consumer protection framework for microfinance clients through embracing the Core Client Protection Principles shown in Fig 2 below which are enshrined in the Code of Conduct which is in the Act.

14 Fig 2: Microfinance Core Client Protection Principles Microfinance Policy 2.7 The National Microfinance Policy (NMP) seeks to achieve the following among other objectives: I. to put in place well-focused programmes to reduce poverty through empowering the economically active poor and building an inclusive financial sector; II. promote the development and integration of the microfinance sector into the formal financial system; and III. the creation of an enabling environment, conducive to the long-term development and sustainability of the microfinance sector.

15 CHAPTER 3 ARCHITECTURE OF THE MICROFINANCE SECTOR 3.1 As at 31 December 2015, the microfinance sector comprised 152 microfinance institutions including three deposit-taking microfinance institutions licensed in The number of registered microfinance institutions (MFIs) increased from 147 as at 31 December 2014 to 152 as at 31 December Fig 3 shows the trend in the number of licensed MFIs and the number of branches since December Dec Dec-09 Fig 3 Trend in No. of MFIs & Branches 31-Dec-11 No. of MFIs 31-Dec Dec-13 No. of Branches 31-Dec Dec-14 Credit-only microfinance institutions 3.4 Credit-only MFIs are subject to non-prudential regulation, which entails: i. registration of institutions to conduct the business of lending; ii. iii. iv. enforcing appropriate standards on corporate governance arrangements; on-going review of condition and performance based on periodic submission of regulatory returns; and monitoring with a view to minimize unethical business conduct. 3.5 Credit only microfinance institutions issue loans to individuals as well as to micro, small and medium enterprises.

16 Deposit-taking Microfinance Institutions 3.6 The first deposit-taking MFIs were registered in As at 31 December 2015, there were three registered deposit-taking microfinance institutions namely African Century Limited, GetBucks Financial Services (Private) Limited and Collarhedge Financial Services (Private) Limited. All three institutions were licensed in African Century Limited and GetBucks Financial Services (Private) Limited commenced operations in January Deposit-taking microfinance institutions are subjected to prudential regulation which is achieved through the rigorous application of the following prudential standards, among others: i. Minimal capital requirements; ii. iii. iv. Limits on unsecured lending; Provisioning requirements; Limits on lending to a single borrower or related party; v. Restriction on declaration of dividends; vi. vii. Liquidity requirements; and Standard loan documentation requirements. Other Providers of Microfinance Services 3.8 In Zimbabwe microfinance is provided by banks, Post Office savings Bank (POSB), microfinance institutions (MFIs), associations (ROSCAs), Savings and Credit Cooperatives (SACCOs) and non-governmental organizations (NGOs). The government is also a supplier of microfinance resources to the rural poor mainly in the form of agricultural inputs and seasonal loans. 3.9 The majority of banks in Zimbabwe offer microfinance services and have established dedicated SME divisions or units to provide financial services and capacity building.

17 Branch Network 3.10 As at 31 December 2015,, Midlands, Manicaland and Bulawayo provinces dominated in terms of the number of branches of MFIs as shown in Fig There has been a notable increase in MFIs establishing head offices outside major cities of the country including in such areas as Beitbridge, Kariba, Matobo, Shurugwi, Lupane, Rusape, Mashava, Zvishavane, Gwanda and Marondera. This has enhanced outreach of microfinance products and services Fig 4 shows the total number of MFI branches in each of the country s eight provinces as at 31 December Figure 4 Distribution of MFI Branches by Province Two MFIs with 51 branches dominated the sector in terms of branch network while 100 microfinance institutions had one (1) branch each The number of active clients declined from 205,282 in 2014 to 204,242 in 2015, notwithstanding the increase in the number of branch outlets from 473 to 571 during the same period. Fig 5 shows the growth in the number of active clients from 2011

18 to No. of clients No. of women clients 250, ,000 Fig 5 Growth in Number of Clients 205, , , , ,000 50, ,749 85,982 58,325 67,536 54,622 31,453 16, Dec Dec Dec Dec Dec The proportion of women borrowers increased from 32.90% in 2014 to 42.10% in Agent Banking 3.16 Increasingly, agent banking and e-banking are being recognized as efficient and cost effective delivery channels for financial products and services To this end, a number of microfinance institutions have embraced the concept of agent banking by establishing agents in various areas including rural areas where they cannot establish branches Some Microfinance Institutions have also become agents of banking institutions, mobile financial services providers and insurance companies. This has enhanced their service delivery channels as they are now able to disburse and collect loans using the banks and mobile money platforms The Reserve Bank has developed Prudential Standards on Agency Banking, which provide a framework for the participation of banking institutions and MFIs in branchless banking and bring financial services to the target markets particularly the rural communities.

19 USD in milions CHAPTER 4 CONDITION AND PERFORMANCE OF THE MICROFINANCE SECTOR Introduction 4.1 The microfinance sector plays a significant role in promoting financial inclusion, selfsufficiency and economic development particularly among the low income groups and small to medium enterprises. Lending Activities 4.2 Loans to the microfinance sector amounted to $ million as at 31 December 2015, an increase of 19.21% from $ million as at 31 December The top twenty microfinance institutions with a total loan book of $ million controlled 86.98% of the sector s total loans as at 31 December The largest microfinance institution, with a loan book of $32.50 million, commanded a market share of 17.37% as at 31 December As at 31 December 2015, loans comprised 83.13% of total microfinance assets of $ million compared to 77.45% as at 31 December Fig 6 shows the trend in growth of loans in relation to growth in total microfinance sector assets. Fig 6: Growth in Total Microfinance Sector Assets and Loans MAR-15 JUN-15 SEP-15 DEC-15 Total Assets Total Loans 4.6 The bulk of loans disbursed by microfinance institutions were for consumption

20 purposes constituting 54.26% while loans for productive or income generating purposes constituted 42.43% as at 31 December Table 2 shows the distribution of loans between productive or income generating purposes and for consumption purposes % 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% Fig 3: Distribution of Loans : % 53.30% 54.24% 46.70% 45.76% 29.11% 10.00% 0.00% Productive Consumption 4.8 There has been a significant shift from consumption lending as reflected by the drop in the proportion from 70.89% in 2013 to 54.24% in It has also been established that some of the individual loan facilities under consumption lending are utilised for productive purposes. 4.9 MFIs have contributed to the development of various areas in the country through financing projects involving activities such as: i. Banana Plantations in Honde Valley, Manicaland; Mhende Irrigation Scheme- Chirumanzu District, Mvuma ii. iii. iv. Micro-mortgage facilities to staff of universities, teachers unions and other tertiary institutions; Irrigation Projects such as Redwood Irrigation Scheme in Umguza, Matebelenad North; Cattle Fattening Schemes such as Masakhane Zihlobo Pen Fattening in Nkayi; and

21 v. Small Scale Dairy projects in Chipinge The funding by MFIs has positively impacted on the livelihoods of people around the country. Small scale general dealers who benefited from working capital increased the variety of their trading stock and diversified their businesses as well as introducing credit facilities. Small Scale Farmer, Mutoko, Mashonaland East 4.11 Microfinance institutions have also provided value chain financing to smallholder livestock farmers who managed to increase their fattened cattle throughput. Small scale horticulture farmers have also benefited immensely from microfinance loans that have increased their disposable income and assets accumulation. Portfolio at Risk (PaR) 4.12 The size of the portfolio at risk (PaR) ratio in the microfinance sector increased marginally from $19.29 million as at 31 December 2014 to $20.06 million as at 31 December The growth was in line with the growth in the loan portfolio for the entire sector on a year on year basis.

22 USD MILLIONS 4.13 Although the level of credit risk in the sector as measured by the Portfolio at Risk (PaR) ratio has been declining over the years from a peak of 25.52% as at 31 December 2012 to 10.72% as at 31 December 2015, the sector remains vulnerable to credit risk The improvement in the PaR ratio in the sector over the years is largely attributable to improving credit risk management strategies and strengthening of underwriting standards employed by microfinance institutions including enhanced credit risk analysis and increased use of credit references The level of PaR is expected to continue improving in line with the on-going supervisory initiatives including the capacity building in the areas of credit analysis and delinquency management and the establishment of a credit reference system by the Reserve Bank. Earnings 4.16 Net profit after tax in the sector declined from $24.84 million for the year ended 31 December 2014 to $12.88 million for the year ended 31 December The decline is largely attributed to increases in operating costs Fig 8 shows the trend in net income for the sector. 25 FIG 8 :NET INCOME : Consequently return on assets and return on equity declined significantly during the same period as shown in Fig 11.

23 40% 35% Fig 9 : Profitability Ratios: % 34.26% 30% 25% 20% 21.09% 15% 10% 5% 0% 13.28% 11.87% 12.25% 6.87% 5.72% 4.23% 2.66% ROA ROE 4.19 For the year ended 31 December 2015, eight (8) institutions, recorded net profit in excess of one million dollars with eighteen (18) institutions posting losses. The losses recorded by twelve (12) out of the eighteen (18) institutions were largely attributed to start-up costs while those for the remaining six (6) institutions losses were attributed to increases in provisions for bad & doubtful debts during the year. Composition of Income 4.20 Total operating income of $ million largely comprised interest income for the year ended 31 December Ten microfinance institutions recorded total operating income of $62.22 million constituting 62.12% of total income for the sector. Sustainability 4.21 A number of microfinance institutions are considered sustainable 3 as reflected by the average Operational Self Sufficiency (OSS) of % for the year ended 31 December OSS is the ratio of an MFI s operating revenues to its operating expenses including the financial costs and impairment losses on loans The average OSS ratio is above the break-even point of 100%. Fifteen (15) microfinance institutions out of 145 recorded OSS ratios of less than 100% largely due to high 3 Sustainability refers to the ability of a microfinance institution (MFI) to cover all its costs through interest and other income paid by its clients independent of external subsidies from donors or the government.

24 USD Millions employment costs A total of 18 institutions posted losses amounting to $7.65 million, with one institution s losses of $7.01 million contributing 91.67% of the total loss figure which significantly weighed down the sector s average OSS ratio The sector s top twenty MFIs (total loans) had operating expenses ratio of less than 70% for the year ended 31 December 2015, indicating that the larger MFIs are striving to enhance their operational efficiency. Capitalisation 4.25 Microfinance institutions funding mix for their operations include debt and equity. Aggregate equity infusion in MFIs increased by 25.94% from $72.49 million in December 2014 to $95.71 million in December Microfinance institutions also accessed a total of $ in debt financing for the period ended 31 December The trend in the sector capital levels from 2011 to 2015 is shown in Fig 10. Fig 10: Total Sector Capital Levels: Social Performance 4.27 Although a few microfinance institutions have embraced social performance measurement, there is still more work to be done in this area as Zimbabwe is lagging

25 behind. To accelerate this, the Zimbabwe Association of Microfinance Institutions (ZAMFI) together with other stakeholders convened a Social Performance Management workshop in April The workshop was facilitated by the Grameen Foundation Southern Africa office based in Uganda Initiatives are underway to adopt the Progress out of Poverty Index (PPI) for Zimbabwe. The PPI will scientifically measure progress out of poverty which all MFIs can use going forward. Challenges in the Microfinance Sector 4.29 The performance of the sector has been constrained by the challenges discussed below. Funding 4.30 MFIs are primarily funded through equity, loans and credit lines. Since the adoption of the multi-currency system in February 2009, these traditional sources have been limited. The microfinance sector has operated under a constricted liquidity environment which has manifested through constrained funding ability, limited credit creation and high lending rates A number of microfinance institutions continue to struggle to build financial capacity to underwrite meaningful business. Weak capitalisation is constraining the organic growth of microfinance institutions The liquidity constraints and limited availability of wholesale funds in the economy has adversely hampered the provision of financial services to the low income groups and micro, small and medium enterprises Inadequate funding has also affected microfinance institutions capacity to acquire robust ICT and risk management systems to support their operations and facilitate impact and financial stability assessments. Weak management information systems (MIS) have also affected institutions ability to submit regulatory returns therefore hampering performance monitoring of the industry.

26 Shortage of Relevant Microfinance Skills 4.34 The sector continues to experience shortage of critical and relevant skills in microfinance in the areas of micro-credit analysis, risk management and administration, largely due to funding constraints and inability to train and retain skills. The shortage of relevant microfinance skills has negatively affected the institutions capacity to manage risks emanating from their activities. Absence of a Comprehensive Credit Reference System 4.35 The absence of a comprehensive credit reference system for use by MFIs operating in Zimbabwe has affected the quality of MFIs credit risk management systems resulting in multiple borrowings among the low income groups which leads to overindebtedness Information asymmetry in the sector is hampering access to financial services by the low-income groups as the microfinance institutions do not have access to credit information for the prospect borrowers. Illegal Deposit-Taking by Some Microfinance Institutions 4.37 In 2012, the Reserve Bank cancelled the operating licences of a number of credit-only microfinance institutions which were boosting their funding bases by illegally mobilizing deposits, and quoting fictitiously high deposit rates which were meant to entice members of the public. Customer Complaints 4.38 The Reserve Bank has been inundated with complaints from the members of the public regarding unsustainably high lending rates which have contributed to high levels of indebtedness. The institutions, given the target market, have failed to aligning their cost structures to reflect the obtaining operating environment In addition, the nature of complaints also reflect that some MFIs are not fully and clearly explaining the terms and conditions of their loan facilities.

27 CHAPTER 5 RESPONSES TO CHALLENGES IN THE MICROFINANCE SECTOR 5.1 Cognisant of the need to create profitable and sustainable microfinance institutions that offer affordable financial services, the Reserve Bank has taken initiatives discussed below to eliminate the impediments to the growth of the microfinance sector. Capacity Building Initiatives 5.2 The Reserve Bank in conjunction with other stakeholders including ZAMFI has facilitated a number of capacity building programs including training workshops and attachment programs for Reserve Bank officers to share supervisory experience in the area of regulation and supervision of deposit-taking microfinance institutions. 5.3 The Institute of Technology (HIT) in collaboration with ZAMFI and the Reserve Bank developed and introduced a professional training programme in microfinance which leads to a Professional Certificate and Diploma in Microfinance. Membership of Industry Association 5.4 The Reserve Bank continues to encourage microfinance institutions to be members of a recognised industry association. Membership of an industry association enables microfinance institutions to tap into industry best practices and standards and facilitates access to technical assistance, information, training and tools, and funding. Microfinance Advisory Council 5.5 In 2013 the Reserve Bank in conjunction with the Ministry of Finance & Economic Development, ZAMFI, other financial sector regulatory authorities and other stakeholders formed the Microfinance Advisory Council (MAC) to spearhead the development of the microfinance industry and promoting financial inclusion. 5.6 The terms of reference of MAC include: i. advise the government on strategies and policies for the development of the microfinance sector; ii. promote and facilitate capacity building in the microfinance sector;

28 iii. iv. promote professionalism, integrity, accountability and dissemination of best practices in the microfinance sector; and promote financial inclusion through encouraging and facilitating the development of innovative microfinance products and delivery channels; 5.7 MAC has reviewed the Zimbabwe Microfinance Policy and organised workshops to educate microfinance institutions on their duties and responsibilities in terms of the Microfinance Act [Chapter 24:29]. Initiatives to Enhance Financial Capability Levels 5.8 The World Bank Consumer Protection and Financial Literacy Diagnostic Review and the FinScope Consumer Survey of 2014 revealed that although Zimbabwe has a high rate of general literacy, there is low financial literacy. As a result, consumers do not understand some financial concepts particularly the financial language used in loan applications and loan agreements which results in over indebtedness and high default rates. 5.9 In this regard, the Reserve Bank issued Consumer Education and Awareness Bulletins to educate the public on financial terminologies, financial services and responsible financial management Further, the Reserve Bank engaged civil organisations and associations including the Zimbabwe Teachers Association, Progressive Teachers Union and Consumer Council of Zimbabwe as important stakeholders in financial consumer education and protection. Establishment of Credit Information System 5.11 The Reserve Bank with the technical support of experts from the World Bank is working towards the establishment of a credit information system which will alleviate the information asymmetry in the financial sector. Establishment of a Collateral Registry 5.12 The Reserve Bank has also accessed financial and technical support of the World Bank to establish a collateral registry which will enhance access to finance for lower income groups on the back of movable assets as collateral.

29 CHAPTER 6 ROLE OF MICROFINANCE IN FINANCIAL INCLUSION 6.1 The FinScope Survey of 2014, revealed that only 23% of the rural population is formally banked compared to 46% of the urban population, and only 14% of MSMEs owners are banked. In addition there are low levels of financial literacy and capability, and a decline in the actual usage of banking services between 2011 and Empirical evidence has demonstrated that microfinance can be a catalyst in economic development and eradication of poverty through engagement of previously excluded sections of the community, particularly the youth and women. The scope of microfinance emerged from humble beginnings of provision of micro-credit to the low income groups to become a key pillar of financial inclusion through provision of a wider range of financial products and services including insurance, savings and remittances. Access to Financial Services 6.3 The role of microfinance in financial inclusion manifests itself through the creation of facilities that enable the low income groups and MSMEs, which are affected by comparatively higher levels of financial exclusion, to access a variety of financial services including microcredit, micro-savings, remittances, payments, microinsurance and pensions, delivered through an extensive branch network in partnership with banking institutions and mobile network operators. 6.4 Microfinance institutions are undoubtedly best-placed to address some of the demand-side barriers to access to finance by MSMEs as, among other attributes, they possess vast experience in MSME financing. In this respect, the microfinance sector is expected to be instrumental in the implementation of the SME Financing Policy.

30 A young businesswoman running a wire meshing business at Hauna Growth Point, Manicaland 6.5 With adequate and appropriate funding, microfinance institutions can be the main source of funding for the MSMEs that cannot access funding from the banking institutions due to lack of collateral usually demanded by the banks.

31 Women 6.6 Notwithstanding the fact that 57% of the business owners in Zimbabwe are women (Finscope Survey, 2012), and that women constitute the majority of the Zimbabwean population, women remain highly excluded from the formal financial services sector. 6.7 The microfinance institutions have recognised this opportunity and have in the past year increased their lending to women owned enterprises from 32.90% in 2014 to 42.10% in 2015 of the aggregate loan portfolio of the sector. Small-Scale Agriculture Financing A General Dealer Store run by a woman at Siphambi Businesss Centre, Masvingo 6.8 In recognition of the fact that Zimbabwe is an agro-economy with agriculture contributing about 12% of the country s GDP in 2014 and more than 60% of inputs to the manufacturing sector, the microfinance institutions have made inroads in broadening of access to financial services particularly by smallholder farmers. A number of microfinance institutions have provided financial support to smallholder farmers for the production of groundnuts, paprika, bananas and livestock.

32 Small Scale Banana Planation owned by a woman in Honde Valley, Manicaland 6.9 The role of microfinance institutions in the financing of agriculture is expected to be bolstered by the implementation of an Agricultural & Rural Finance Policy which is being developed as part of the implementation of the NFIS. Youth 6.10 Youth in Zimbabwe are excluded from formal financial services largely due to high levels of unemployment, negative stereotypes about youth who are considered high risk-takers, lack of collateral, limited business and life experience, and lack of track record or credit history. This is in addition to the other demand side constraints affecting all consumers of financial services.

33 A young farmer attending to a Horticulture project Microfinance Institutions are expected to be instrumental in implementing financial inclusion strategies for the participation of the youth in some or all of the following measures proposed in the National Financial Inclusion Strategy: i. Design and implementation of financial literacy programs for the youth; ii. iii. iv. Establishment of a youth empowerment window by all financial institutions; Development of appropriate collateral substitutes in order to address the challenge of security among youth borrowers; Capacitation of vocational training centres across the country to ensure well trained graduates are in a position to apply their knowledge on start-ups; and v. Ensuring that regulatory frameworks and policies are youth friendly and protective of youth rights in order to increase youth financial inclusion. Savings mobilisation 6.12 The registration of deposit-taking microfinance institutions will go a long way in mobilisation of deposits from the historically marginalised segments of the population, through the development and introduction of innovative and tailor-made savings accounts which suite the size and level of their cashflows. By providing savings opportunities for households and MSMEs, deposit-taking microfinance institutions reduce the vulnerability of their clients to natural disasters, and

34 unexpected illnesses, while enabling them to smoothen their consumption expenditures with their savings. Reaching Out to the Remote Areas 6.13 One of the impediments to financial inclusion is the absence of suppliers of formal financial products and services in the remote and rural areas of the country, largely due to inadequate financial and poor physical infrastructure Microfinance institutions play a significant role in facilitating financial inclusion as they are uniquely positioned in reaching out to the rural communities. Many of them operate in a limited geographical area, have a greater understanding of the unique and specific needs of local communities, and are flexible in their operations providing a level of comfort to their clients Microfinance institutions have managed to reach out to remote areas shunned by other formal financial institutions. Over the years, microfinance institutions have expanded their branch network from predominantly urban centres like and Bulawayo to all the ten provinces of the country. The spread of microfinance into these predominantly agriculture-based regions has opened more opportunities for the growth not only of the microfinance institutions themselves but also of smallholder farmers and MSMEs at Growth Points and Rural Business Centres who are now able to access working capital finance Microfinance institutions have partnered with other providers of financial services and mobile finance to ensure that households in remote locations can benefit from financial services including remittances and payment services at greatly reduced transaction costs and in time to meet a range of financial obligations The implementation of the NFIS is expected to result in the roll out of micro-insurance services including crop and livestock insurance, weather index insurance and microhealth insurance to the rural communities.

35 CHAPTER 7 OUTLOOK 7.1 The microfinance industry is poised for further growth through the implementation of the National Financial Inclusion Strategy (NFIS) which was launched on 11 March Microfinance, as one of the key pillars of NFIS, is expected to drive the national inclusion agenda. 7.2 Going forward, the roll out of the NFIS will see increased focus by stakeholders in the provision of formal financial services to the unbanked segments of society through delivery channels such as agent banking. 7.3 The Reserve Bank will continue to enhance the regulatory environment to ensure that the legal framework is supportive of financial inclusion initiatives including mobile technological innovation and agent banking. Credit Growth 7.4 The re-engagement of the international community by the Government of Zimbabwe coupled with a raft of macro-economic reforms is expected to improve the general macro-economic environment in Zimbabwe. The resultant effect will see improved inflows in foreign investments and off-shore lines of credit which is expected to spur credit growth in the sector. 7.5 The establishment of deposit-taking microfinance institutions is expected to further boost credit growth in the microfinance sector through mobilization of savings deposits. 7.6 Measures put in place to resolve non-performing loans in the main stream banking sector which include setting up a credit reference system and collateral registry are expected to spur micro-credit growth and enhance credit risk management. Risk Management 7.7 In view of capacity building initiatives by the Reserve Bank and other stakeholders, microfinance institutions are envisaged to implement prudent risk management systems to improve loan portfolio quality.

36 Financial Inclusion 7.8 The microfinance sector is expected to play a pivotal role in achieving financial inclusion through extension of credit for productive purposes and other financial services such as micro-leasing, micro-insurance, savings and agricultural loans for small scale farmers. 7.9 The Reserve Bank, in collaboration with other key stakeholders such as microfinance practitioners, mobile network operators and Government will continue to explore ways of promoting sustainable financial inclusion Financial inclusion initiatives are expected to be boosted by the entrance of more deposit-taking microfinance institutions in the market which in turn promotes the deepening of financial markets. Technology and Innovation in Microfinance 7.11 The adoption of mobile technology, which had a transformative impact on the banking sector in the past years is expected to transcend to the microfinance sector From allowing MFIs to access micro-entrepreneurs in remote areas to enabling the implementation of more robust ICT and risk assessment tools, technology represents a huge opportunity for microfinance institutions in Zimbabwe Technology is expected to play an important role in building and managing large loan portfolios which are typical for MFIs, and help in adopting efficient delivery channels and putting in place robust MIS. The microfinance sector is expected to gradually embrace technology and become a technology driven industry Efforts by the umbrella body, ZAMFI to ensure microfinance institutions acquire affordable information technology systems are expected to gather pace in the next twelve months.

37 Compliance 7.15 Regulatory compliance levels are expected to improve in the sector following Reserve Bank efforts to enforce compliance and the microfinance institutions embracing the microfinance code of conduct. Consumer Protection and Financial Literacy Programmes 7.16 In view of the target market served by microfinance institutions, the adoption of sound pro-consumer principles and practices is expected to buttress public confidence in the financial system as well as stimulating healthy competition and responsible pricing amongst the players in the sector The rolling out of a consumer protection framework for the microfinance sector in the next twelve (12) months is a critical component for the growth of an inclusive financial system in Zimbabwe In view of the anticipated growth in microfinance in the coming year, the need for financial literacy becomes paramount. The challenge is more pronounced among MFI clients who are poor and have limited experience and interaction with the formal financial sector. Microfinance institutions are expected to spearhead use of a variety of channels to deliver financial literacy programmes to such clients The microfinance sector is envisaged to increase public awareness campaigns in rural and urban areas, make use of mass media platforms, face-to-face communications with clients, personal counselling on debt management and embracing of innovative channels aimed at improving financial literacy among microfinance clients. Financial Literacy Framework 7.20 The Reserve Bank, in conjunction with other stakeholders, is developing a financial literacy framework which is aimed at enhancing financial education among consumers of financial services. The scope of the financial literacy framework includes: i. knowledge and awareness on the various types of financial products and services; ii. knowledge and awareness on risks related to financial products;

38 iii. iv. consumer protection; and financial management skill.

39 APPENDICES LIST OF REGISTERED MICROFINANCE INSTITUTIONS AS AT 31 DECEMBER 2015 NAME HEAD OFFICE ADDRESS CONTACT TEL REGION Microfinance (MFI)/Money Lending (MLI) 1 ABC Easy Loans t/a BancEasy Loans (Private) Ltd 4th Floor, Heritage House, 67 Samora Machel Avenue, , , /7 MFI 2 ABC Moneylenders (Pvt) Ltd 3 African Century (Pvt) Limited Hatfield House, Seke Road, Graniteside, African Century Gardens, 153 Josiah Chinamano Avenue, / MLI , 341 Deposit- Taking MFI 4 Airmode Investments (Pvt) Ltd 9 Essex Avenue, Fitchlea, Kwekwe , , Kwekwe MLI 5 Aquapave Investments (Pvt) Ltd 135 Kwame Nkrumah Ave, MLI 6 ANF Microfinance (Pvt) Ltd 7 Ashlene Investments (Private) Limited 8 Baardy Micro Capital (Pvt) Ltd Block 2, Office 12, Longchen Plaza, 3rd Floor, West Wing, Construction House, Leopold Takawira Street, Office 400, 4th Floor, Conctruction House, Leopold Takawira Street, , MFI /9, MLI , MLI 9 Transport & Equpment Finance Company (Pvt) Ltd Dagenham Road, Willowvale, , MFI 10 Big Grape Financial Services (Private) Limited 4 Maiden Drive, Newlands, , MFI 11 Bizlink Finance (Pvt) Ltd 12 Campion Capital (Pvt) Ltd 6th Floor, Bard House, 69 S. Machel Avenue, 12 Lomagundi Road, Mount Pleasant, MLI , /20, MLI 13 Cablefin Finance (Pvt) Ltd No. 1 Armagh Avenue, Eastlea, /869/ / MLI 14 Cash Connect Finance (Pvt) Ltd Suite 7, Third Floor, Mass Media House, 19 Selous Avenue, , MFI 15 Cash Dial Finance (Pvt) Ltd 48 Joshua Nkomo Street, Bulawayo , MLI 16 Cash Twentyfour (Pvt) Ltd Jalyd House, 87 Chinhoyi Street, , MFI 17 Clarion Financial Services (Private) Limited 7 Bates Street, Milton Park, MFI 18 Credit Plus Loans (Pvt) Ltd Stand No 411/2, Office No. 3 New Market Centre, R. Mugabe St, Masvingo Masvingo MLI

40 LIST OF REGISTERED MICROFINANCE INSTITUTIONS AS AT 31 DECEMBER 2015 NAME HEAD OFFICE ADDRESS CONTACT TEL REGION Microfinance (MFI)/Money Lending (MLI) 19 Collarhedge Finance (Pvt) Ltd Office No.14, Mezzanine Floor, Kopje Plaza Building, Cnr Jason Moyo/Kaguvi Street, , , , , MFI 20 Comoglobe Enterprises (Private) Limited Suite 106, First Floor, 40 Samora Machel Avenue, Nicoz Diamond Building, MLI 21 Coverlink Finance (Pvt) Ltd Third Floor, Nicoz House, Corner First Street/Nelson Mandela, , , , ; MLI 22 Credfin (Pvt) Ltd 12 Silwood Close, Chisipite, , , , , , MFI 23 Crossroads Financial Services (Pvt) Ltd 4 Hyde Park, 183 Baines Avenue, / MLI 24 Cushion Me (Pvt) Ltd 8A Cromer Street, Shurugwi , Shurugwi MLI 25 Cutec Microfinance (Pvt) Ltd Chinhoyi University of Technology, P. Bag 7724, Chinhoyi Chinhoyi MFI 26 Darnster Finance (Pvt) Ltd Suite 5, Albion Flats, 127A Fort Street, Corner 13th and 14th Avenue, Bulawayo , , Bulawayo MLI 27 Delta Financial Services (Pvt) Ltd No. 7 Shashi Flats, Mabelreign, / MFI 28 Denvalene Financial Services (Pvt) Ltd Zimpost Building, Tongogara Street/Hughes Street, Masvingo , , Masvingo MLI 29 Dotparic Investments (Private) Limited no. 38/2 Tongogara Street, Rusape Rusape MLI 30 Easy Credit (Pvt) Ltd 8th Floor, Pegasus House, 52 Samora Machel Avenue, , , , , MFI 31 Educate (Private) Limited 125 Kwame Nkrumah Avenue, MFI 32 Eduloan (Pvt) Ltd 16 Palmer Road, Milton Park, / MLI 33 Equality Microfinance (Pvt) Ltd Opportunity House, 19 Street, , , MFI 34 Face Saver Trading (Pvt) Ltd 413 Maphisa, Matobo /247, /247 Matobo MLI 35 Fastbucks Finance Enterprises (Pvt) Ltd no. 1 Zandaam Court, Cnr Mazowe & Chinamano Street, , , , , MLI 36 Fidelity Life Financial Services (Pvt) Ltd 4th Floor, Fidelity House, 66 Julius Nyerere, (04) or , /8 MLI 37 First Choice Finance (Private) Limited Teign Road, Borrowdale West, , , MFI