MFIs mull forex lending

The Chronicle

Oliver KazungaSenior Business Reporter

THE Zimbabwe Association of Microfinance Institutions (Zamfi) is considering foreign currency lending to assist producers in securing critical imports based on the anticipated effectiveness of the inter-bank exchange platform.

The association has commended policy measures adopted by Government particularly the interbank foreign exchange market saying the system presents a good opportunity for their sector.

In a performance report for the quarter ended 31 March 2019, Zamfi said microfinance institutions (MFIs) with sound risk management and governance systems may soon be able to tap into the interbank market and on-lend the foreign currency to clients involved in import and export business.

“During the quarter under review, a number of policy measures were undertaken by Government, which in the short to medium term period are expected to be a catalyst for the profitability of the sector. 

“The main policy measure among a host of them and relevant to the financial sector has been the creation of an active interbank market for foreign currencies,” reads the report. 

“The policy was crafted with the intended goal of seeking to attract foreign exchange balances into the formal banking market both from local and international sources.” 

Citing official Government reports, Zamfi said the funds in the private nostro accounts have since increased from US$200 million to US$800 million within a short period of time.

In addition, the Central Bank recently announced a US$500 million facility to oil the interbank foreign exchange market.

“Therefore, MFIs with sound risk management and governance systems may soon be able to tap into such funds and on-lend them in foreign currency to SME clients, largely involved in import and export business,” said Zamfi.

The MFIs association said the credit-only microfinance sector total loans increased by $18,5 million from $207,3 million as at December 31, 2018 to $225,8 million as at March 31 this year.

Using the prevailing interbank rate of US$1: RTGS$5,5 as at 06 June 2019, the RTGS$225,8 million translates to US$$41 million. 

“This compares unfavourably to the microfinance loan book of US$$75,1 million reported in December 2015, before the country adopted the surrogate bond note currency pegged as 1: 1 with US$ in 2016.

“The pressure to grow is now inevitable as microfinance is traditionally a high-growth industry. Exponential growth in outreach is a key factor in achieving sustainability, viability and significant market share by MFIs,” said Zamfi.

“However, the money and capital markets in Zimbabwe are currently starved of capital hence many MFIs, especially small MFIs are finding it hard and difficult to keep pace with the need to increase outreach to significant levels.”

During the period under review, the Zamfi report also shows that the credit-only microfinance sector registered an aggregate net profit of $4,5 million compared to $2,7 million recorded the previous year during the same period.

Total income from interest and fees amounted to $30,2 million against total costs of $25,6 million leading to an operational self-sufficiency ratio of 117 percent as at March 31, 2019. 

Zamfi said operational expenses ratio significantly increased from 24 percent in December 2018 to 32 percent as at March 31, 2019 largely fuelled by annual inflation, which reached a peak of 75,86 percent (the highest since dollarisation in 2009).

It said the rise in annual inflation was predominantly being influenced by depreciation of the RTGS dollar to the US dollar. 

“Rising inflation in the absence of corresponding significant increase in loan books of MFIs in RTGS$ terms may pose a threat to efficiency and productivity of MFIs in the short term period.

“To protect their business against rising inflation, the MFIs may consider offering a diversified pool of loans products both in local RTGS dollar as well USD dollar,” said the association.

It added that some few MFIs in the market with access to USD dollars were already offering such products and as such were bound to reap the benefits of sustained credit operations despite the prevailing economic environment.

Going forward, Zamfi said improvements in both efficiency and productivity shall largely remain within the reach of MFIs through adoption of technology notably, smart cards, Point-of-sale (POS) devices, and mobile banking.

It also noted that access to Internet has the capacity to speed up services, increase outreach, reduce operation cost and risk and ultimately broaden access to financial services by both clients in urban and rural areas.

— @okazunga.