rebuilding zimbabwe's microfinance sector
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Introductory presentation for Zimbabwe's 2012 Microfinance ConferenceTRANSCRIPT
Rebuilding Zimbabwe’s Microfinance Sector
Microfinance in a post-economic crisis environment
After a decade of decline, Zimbabwe’s microfinance sector is at a critical stage
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AYANI – Inclusive Financial Sector Consultants Presentation Outline
• Zimbabwe’s 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 country’s 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
Zimbabwe’s per capita GDP dropped by 40% between 2002 and 2009 and the number of MFIs went from 1,800 to less than 30
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AYANI – Inclusive Financial Sector Consultants Zimbabwe Situation
• 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
Since 2009, the country has started to recover, recording an average GDP growth of 7%, a trend that is projected to continue
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AYANI – Inclusive Financial Sector Consultants Zimbabwe Situation
• Dollarisation brought inflation under control virtually overnight and the economy started to grow
• But, dollarisation brought its own challengeso In the short term, a large portion of the population was excluded
from the cash economyo 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 revenueso Tight liquidityo High interest rateso Donors remain hesitant
• As a result, lack of funding remains a critical issue
With a stable currency and inflation under control, the microfinance sector is reestablishing itself
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AYANI – Inclusive Financial Sector Consultants Zimbabwe Situation
• 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
Before we go any further, let’s define what we mean by microfinance. I use the Wikipedia definition:
Defining Microfinance
• Microfinance entails the provision of financial services to micro-entrepreneurs 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
Figures from around the world underpin the importance and potential of microfinance
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AYANI – Inclusive Financial Sector Consultants Microfinance around the world
• 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
For the sector to make a lasting impact on the livelihoods of the country’s poor, it will need to reach hundreds of thousands of clients
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AYANI – Inclusive Financial Sector Consultants The Challenge
• Finscope’s 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.
To achieve such numbers, all stakeholders must work together to build the foundations for effective and efficient delivery of microfinance
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AYANI – Inclusive Financial Sector Consultants
Enabling Environment
Strong Support Structures
Professional MFIs
Market-driven products
Efficient business processes
Foundations of Successful Microfinance
AYANI – Inclusive Financial Sector Consultants
An enabling environment is a key ingredient for the controlled and sustainable growth of the sector
Microfinance regulations· Prudential vs. non-
prudential · Pros and cons of self-
regulation· Supervision & reporting
requirements· Tiered system?· Interest rates?· …
Regulatory
Microfinance Policy· Deposit-taking/savings
mobilisation· Enforceability of
agreements· MFI and the
commercial financial sector
· Capital requirements· Synergies with existing
legislation· …
Legal
Enabling Environment
Enabling Environment
AYANI – Inclusive Financial Sector Consultants
An innovative and coordinated programme of support to the microfinance sector is essential
MFI
· Strong balance sheet
· Lean and mean structure
· Highly skilled staff
· Continuous improvement
· Strong networks
Product
· Developing market knowledge
· Ensuring breadth and depth of product portfolio
· Optimising delivery mechanisms
Process
· Managing transaction costs
· Managing operating expenses
· Exploring new technologies
· Building MIS
Support Structures
· Training & capacity building
· Market information
· Credit information
· Wholesale institution
Progressive development towards increased outreach and sustainability
Supporting the sector
AYANI – Inclusive Financial Sector Consultants
Relevant support structures enhance the sector’s effectiveness and efficiency
· Where would Zimbabwe’s 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
Support Structures
AYANI – Inclusive Financial Sector Consultants
Successful provision of financial services to the poor takes time: institutions will typically go through four stages of development.
Levels of Development Financing Instrument Purpose
Level One:Start-up
Grant/wholesale fund
Seed CapitalStart up costsLoan fundInstitution building
Level Two:Consolidation
Grant/wholesale fund
Institution buildingMISTrainingCapitalisation
Level Three:Growth
Local savings, grants, soft loans
Scale up - expansionInstitution buildingCapitalisation
Level Four:Commercialisation
LoansEquity Operations
Professional MFIs
AYANI – Inclusive Financial Sector Consultants
Successful MFIs around the world commit to three business principles
Sustainability/Profitability
Outreach/Economies of Scale
Commitment/Progressive Development
SuccessfulDelivery of Financial Services
Professional MFIs
AYANI – Inclusive Financial Sector Consultants
The majority of microfinance providers in Africa are still at the start-up and consolidation phase
Outreach/Profitability
Time
1. Start up
2. Consolidation
3. Expansion
4. Commercial viability
• 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
Most of Zimbabwe’s MFIs are currently at level 1. Some are moving on to level 2;
Current MFI Landscape
AYANI – Inclusive Financial Sector Consultants
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
Lessons learned around the globe over the past decades point to the key success factors for MFIs
Lessons Learned From Other MFIs
AYANI – Inclusive Financial Sector Consultants
Market research is an essential prerequisite to product development
Market research
Product Development
· Demography· Governance structures· Macroeconomic performance· Main economic activities· Infrastructure· Culture· Legal, regulatory and policy
environment
Socio-Economic Environment
· Size· Growth· Distribution· Activity segments· Financial needs
CreditSavingsInsuranceLiquidity
The Market
Market Research
AYANI – Inclusive Financial Sector Consultants
A good understanding of the market will facilitate innovations in product breadth, depth and delivery
An improved product portfolio will lead to more customers and higher transaction values per customer
Groups
DeliveryIndividuals
Mobile technology
ATMs
Smart Cards
Group loans
Insurance
Individual loans
Input credit scheme
Money transfers
Warehouse receipts
Products
Savings
Market-Driven Product Development
AYANI – Inclusive Financial Sector Consultants
Market-driven product development is an iterative process
1.Define and segment ME sector
2. Determine segment needs
3. Assess competitive position
4. Design Products
5. Sell Products
ANALYSISDESIGN &
IMPLEMENTATION
Market-Driven Product Development
AYANI – Inclusive Financial Sector Consultants
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
Efficient Business Processes
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AYANI – Inclusive Financial Sector Consultants
Globally, MFI operating efficiency improved by 30% between 2000 and 2005. The biggest gains tend to be made during the consolidation phase
Operating Efficiency
AYANI – Inclusive Financial Sector Consultants
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 low‐cost microfinance solution
Role of Technology
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AYANI – Inclusive Financial Sector Consultants
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
Lessons Learned From Elsewhere
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AYANI – Inclusive Financial Sector Consultants
IN CONCLUSION
WE HAVE COME A LONG WAY
AND
WE STILL HAVE A LONG WAY TO GO
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AYANI – Inclusive Financial Sector Consultants
THANK YOU