Rebuilding Zimbabwes Microfinance Sector

Microfinance in a post-economic crisis environment

AYANI Inclusive Financial Sector Consultants

Presentation Outline
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After a decade of decline, Zimbabwes microfinance sector is at a critical stage Zimbabwes per capita GDP dropped by 40% between 2002 and 2009. and the number of MFIs went from 1,800 to less than 30

Since 2009, the country has started to recover, recording average GDP growth of around 7%, a trend that is projected to continue
With a stable currency and inflation under control, the microfinance sector is reestablishing itself For the sector to thrive and to make a lasting impact on the bankability and livelihoods of the countrys poor, we still have a few mountains to climb

All stakeholders must work together to build the foundations for effective and efficient delivery of microfinance

AYANI Inclusive Financial Sector Consultants

Zimbabwe Situation
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Zimbabwes per capita GDP dropped by 40% between 2002 and 2009 and the number of MFIs went from 1,800 to less than 30 GDP per capita dropped from US$485 to US$300 (2000 US$) The microfinance sector, which experienced excellent growth during the 1990s, was virtually decimated Hyperinflation wiped out the balance sheets of all MFIs that continued to focus solely on microfinance In such an environment, lending/borrowing comes to a grinding halt Those MFIs that survived resorted to business activities that enabled them to retain asset value in a hyperinflationary environment For the same reason, i.e. money being a worthless assets, microenterprises moved out of the cash economy

AYANI Inclusive Financial Sector Consultants

Zimbabwe Situation
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Since 2009, the country has started to recover, recording an average GDP growth of 7%, a trend that is projected to continue Dollarisation brought inflation under control virtually overnight and the economy started to grow But, dollarisation brought its own challenges o In the short term, a large portion of the population was excluded from the cash economy o In a country where 80% of the population earns less than US$200 per month, the absence of denominations smaller than US$1 is a problem for microenterprises And, some crisis characteristics still remain: o Low tax revenues o Tight liquidity o High interest rates o Donors remain hesitant As a result, lack of funding remains a critical issue

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Zimbabwe Situation
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With a stable currency and inflation under control, the microfinance sector is reestablishing itself Relative macroeconomic stability is a prerequisite for a thriving microfinance sector

As the economy has started to grow again, the number of MFIs is on the increase, and stands at 157 today
A draft National Microfinance Policy has been developed with the input of various stakeholders Thanks to the efforts of ZAMFI, CBZ and Hivos, the Zimbabwe Microfinance Wholesale Facility was established last year and is disbursing loans to MFIs

And we are currently attending the first microfinance conference to be held in more than ten years

AYANI Inclusive Financial Sector Consultants

Defining Microfinance

Before we go any further, lets define what we mean by microfinance. I use the Wikipedia definition: Microfinance entails the provision of financial services to microentrepreneurs and small businesses that lack access to formal banking and related services due to the high transaction costs associated with serving these client categories. The two main mechanisms for the delivery of financial services to such clients are: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group. In my definition, microfinance DOES NOT include lending, through payroll deductions or otherwise, for the purpose of consumption

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Microfinance around the world

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Figures from around the world underpin the importance and potential of microfinance
The global market for microfinance grew from US$4 billion in 2001 to an estimated US$50 billion The potential global market is estimated at US$250 billion It is estimated that there are around 200 million microfinance borrowers worldwide In 2008, there were 6.7 million microfinance borrowers in Sub-Saharan Africa, with an average loan balance of just over US$300, well behind Asia and Latin America Kenya, a country with a relatively well-developed sector, has about 500,000 microfinance clients With an estimated 850,000 micro- and small enterprises and 200,000 contract growers operating in Zimbabwe, the market is there

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The Challenge
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For the sector to make a lasting impact on the livelihoods of the countrys poor, it will need to reach hundreds of thousands of clients
Finscopes 2011 consumer survey found that: o 80% of the adult population earns less than US$200 per month o 18% of adults receive a regular salary o 40% are financially excluded, i.e. have no access to financial services (18% in urban areas), one of the highest rates in Southern Africa o 22% use only informal mechanisms to manage their finances o 69% do not have any kind of financial product covering risk o Lack of liquidity remains a huge barrier to financial inclusion and to microenterprise development The 2009 report by Ayani conservatively estimated demand for business and input loans by micro and small enterprises, including smallholders, to be at least US$110 million. At an average loan size of US$400, that translates into close to 300,000 borrowers.

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Foundations of Successful Microfinance

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To achieve such numbers, all stakeholders must work together to build the foundations for effective and efficient delivery of microfinance

Strong Support Structures

Professiona l MFIs

Enabling Environment Efficient business processes Market-driven products

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Enabling Environment

An enabling environment is a key ingredient for the controlled and sustainable growth of the sector
Legal Regulatory Microfinance regulations Prudential vs. nonprudential Pros and cons of selfregulation Supervision & reporting requirements Tiered system? Interest rates?

Microfinance Policy Deposit-taking/savings mobilisation Enforceability of agreements MFI and the commercial financial sector Capital requirements Synergies with existing legislation

Enabling Environment

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Supporting the sector

An innovative and coordinated programme of support to the microfinance sector is essential

Support Structures

MFI
Product

Process
Managing transaction costs Managing operating expenses Exploring new technologies

Training & capacity building Market information Credit information Wholesale institution

Strong balance sheet Lean and mean structure Highly skilled staff Continuous improvement Strong networks

Developing market knowledge

Ensuring breadth and depth of product portfolio

Optimising delivery mechanisms

Building MIS

Progressive development towards increased outreach and sustainability

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Support Structures

Relevant support structures enhance the sectors effectiveness and efficiency Where would Zimbabwes microfinance sector be today if ZAMFI had not tenaciously and somewhat miraculously survived a decade of crisis? Global information on microfinance is no less than overwhelming. Sifting through and disseminating relevant information will ensure the sector remains up to date The wholesale facility is an important part of the structure, especially in an environment where liquidity is tight Establishment of a credit bureau will help improve the risk profile of the sector and improve individual MFIs decision-making Trainers, BDS providers and consultants help to build skills and ensure sector competitiveness

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Professional MFIs

Successful provision of financial services to the poor takes time: institutions will typically go through four stages of development.
Levels of Development Level One:
Start-up

Financing Instrument

Purpose
Seed Capital Start up costs Loan fund Institution building Institution building MIS Training Capitalisation

Grant/wholesale fund

Level Two:
Consolidation

Grant/wholesale fund

Level Three:
Growth

Local savings, grants, soft loans

Loans Equity

Scale up - expansion Institution building Capitalisation

Operations

Level Four:
Commercialisation

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Professional MFIs

Successful MFIs around the world commit to three business principles

Sustainability/ Profitability

Outreach/Economies of Scale

Successful Delivery of Financial Services

Commitment/ Progressive Development

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Current MFI Landscape

The majority ofMFIs microfinance providers in Some Africa are still aton Most of Zimbabwes are currently at level 1. are moving to level 2; the start-up and consolidation phase
Large number of providers with very small client base <1,000 Portfolio quality problems - high delinquency rates Lack of measurable objectives linked to a clear strategy Still trying to figure out operations and product offering Poor MIS and lack of required skills Unable to cover operational costs from revenues generated
4. Commercial viability 3. Expansion Outreach/ Profitability 1. Start up Time 2. Consolidation

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Lessons Learned From Other MFIs

Lessons learned around the globe over the past decades point to the key success factors for MFIs
Successful MFIs: Have an in-depth understanding of their markets Set up and are managed as businesses Design and deliver market-driven products Have qualified staff and sophisticated operating systems Provide training programmes for their staff Have strong management and a vision for the sustainable provision of financial services Have solid governance structures Develop and maintain national and international networks Learn from successful institutions, products and systems Stay abreast of national and international developments

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Market Research

Market research is an essential prerequisite to product development

Market research Socio-Economic Environment The Market

Demography Governance structures Macroeconomic performance Main economic activities Infrastructure Culture Legal, regulatory and policy environment

Size Growth Distribution Activity segments Financial needs Credit Savings Insurance Liquidity

Product Development

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Market-Driven Product Development

A good understanding of the market will facilitate innovations in product breadth, depth and delivery
Insurance

Products

Input credit scheme Individual loans Group loans Groups

Warehouse receipts Money transfers Savings Smart Cards

Delivery
Individuals Mobile technology ATMs

An improved product portfolio will lead to more customers and higher transaction values per customer

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Market-Driven Product Development

Market-driven product development is an iterative process

2. 1. Define and segment ME sector

Det ermine segment needs 3. Assess competitive position

4. Design Products

5. Sell Products

ANALYSIS

DESIGN & IMPLEMENTATION

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Efficient Business Processes

Operating efficiency is defined as the ratio of operating expenses to the gross loan portfolio Portfolio size Portfolio quality Average loan size Lending methodology and delivery mechanisms Business processes

MIS
Salary Structure

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Operating Efficiency
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Globally, MFI operating efficiency improved by 30% between 2000 and 2005. The biggest gains tend to be made during the consolidation phase

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Role of Technology

Technology will drive process innovation and the resulting improvements in operating efficiency

According to CGAP, those who lack a bank account but have a mobile phone will reach 1.7 bn in 2012, over 50% of the unbanked population worldwide Mobile payment users are predicted to exceed 190 mio in 2012 and money transfers could total US$600 bn globally by 2013 Rapid public acceptance of mobile financial services in the Philippines, Brazil, India and Kenya demonstrates that the technology is mature and provides an effective and lowcost microfinance solution

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Lessons Learned From Elsewhere

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Recent programme evaluations elsewhere in Africa teach us that:

Financing of the microfinance sector should be market-driven It takes a long time to build institutional capacity Balancing outreach, portfolio quality and institution building objectives is fundamental to sustainable growth Governance is crucial in selecting sector partners Minimal delays in funds disbursement are essential for MFI continuity A continued systems approach (macro, meso and micro) increases the likelihood of success Active and coordinated involvement of bilateral and multilateral development partners is key during the initial stages of development A integrated vision and approach to the sector amongst key stakeholders is fundamental An integrated delivery approach (combining Microfinance and Technical Assistance) is effective

AYANI Inclusive Financial Sector Consultants

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IN CONCLUSION

WE HAVE COME A LONG WAY

AND

WE STILL HAVE A LONG WAY TO GO

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THANK YOU