the downfall of the micro lending businesses in zimbabwe...

International Review of Research in Emerging Markets and the Global Economy (IRREM)

An Online International Research Journal (ISSN: 2311-3200)

2015 Vol: 1 Issue: 4

www.globalbizresearch.org 487

The Downfall of the Micro Lending Businesses in Zimbabwe:

Causes and Remedies

Hlupeko Dube,

Faculty of Commerce,

Department of Banking and Finance,

Great Zimbabwe University,

Masvingo, Zimbabwe.

Email Id: [email protected]

Ephraim Matanda,

Faculty of Commerce,

Department of Banking and Finance,

Great Zimbabwe University,

Masvingo, Zimbabwe.

Email Id: [email protected]

____________________________________________________________________

Abstract

The purpose of this study was to establish the causes of the downfall of micro lending

institutions and business in Zimbabwe and suggest remedies. The study used the descriptive

survey design because it enabled the researcher to collect large amounts of data within a

short time period by means of questionnaires and interviews. The data collected using

questionnaires were coded, analyzed and interpreted by means of statistical models. The

study concluded that high levels of competition with bank owned microfinance institutions

(MFIs), high levels of administrative costs, concentration on consumer credit exposures,

diversion from the core business, high levels of non-performing loans and poor institutional

capitalization were some of the major causes of MFIs collapse in Zimbabwe. The study ended

up by recommending that policy makers should come up with appropriate policies to help

mitigate the collapse of the microfinance sector in the economy. The study also recommended

that the Zimbabwean microfinance sector should enact strategies that had the capacity to

ensure the survival of MFIs which were known the world over as engines of growth and

development of nations.

__________________________________________________________________________

Key Words: Micro lending, microfinance institutions (MFIs), micro credit exposures, credit

risk, institutional capitalization, diversion, non-performing loans

mailto:[email protected]

mailto:[email protected]





1. Background to the Study

Anduoli (2013) and Sinha (1998) as quoted in Charles (2003) define microfinance as

provision of financial services to the people who are living in poverty. Microfinance

institutions (MFIs) are known for their positive impact on growth and development of

nations. Deribie, Nigussie and Mitiku (2012) point out that microfinance is a tool for

economic development through its financing of micro projects for the poor. The poor are

excluded from financial systems throughout the world (Anduoli, 2013; Brau and Woller,

2004). Therefore micro finance was developed out of the need to solve this problem of the

exclusion of the poor from formal financial systems. According to Charles (2003)

Microfinance Institutions were constituted to extend loans to the poor to enable them to start

and grow enterprises. By concentrating on giving financial services such as micro credit to the

poor, they helped to improve their standards of living and empowerment. On the other hand

Meier and Rudolf(YEAR) state that access to microfinance helped to alleviate poverty by

generating incomes, creating jobs, allowing children to go to school, enabling families to

obtain health care and empowering poor people to make choices that best served their needs.

Micro-lending also called micro credit is a component of micro finance which focuses on

the provision of small loans. Bateman (2012) defines microcredit as the provision of tiny

micro-loans used by the poor to establish income generating activities. .Ayuub (2013) in

Mago, Hofisi and Mago (2013) asserts that micro finance is believed to increase income and

productivity of the poor. Deribie, Nigussie and Mitiku (2013) state that Microfinance

Institutions served the needs of clients that are considered to have high credit risk. This was

supported by Ngehnevu and Nembo (2010) who wrote that the microfinance industry served

the poor who the traditional banks had challenges serving because they lacked what was

required to be granted a loan. For example, they lacked collateral which was an important

secondary source of loan repayment. They also did not always prepare financial accounts

which were needed in credit risk analysis by most financial institutions. According to Nawai

and Sharif (2010), high transaction and monitoring costs were the other reasons why banks

found it difficult to give loans to the poor and low income groups of the society.

The growth of Microfinance Institutions in Zimbabwe has been severely crippled by

many factors in many countries of the world. However, in other parts of the world the sector

experienced challenges which negatively affected the growth of the industry. According to

Kofi (2012), Microfinance Institutions (MFIs) experienced problems in East Asian countries

such as India and Bangladesh as well as Africa. The microfinance industry was fast growing

in Africa especially in Ethiopia as mentioned by Ngehnevu and Nembo (2010). However, in

the case of Zimbabwe, the microfinance sector grew massively during the period before 2003.

After the year 2003, the number of licensed MFIs declined from more than 1600 in 2003 to





just less than 150 in 2013 (Zimbabwe Association of MFIs, Monetary Policy Statement

2013). The table below shows the trend in the number of registered MFIs in Zimbabwe since

2003.

Figure 1

Many studies have been carried out to establish the factors that affected the growth of

MFIs the world over. The majority of the studies focused on factors such as corporate

governance, business ethics and risk management in such financial institutions. The impact of

factors such as competition from bank owned MFIs, lack of expertise and focus has not been

fully explored in African countries.

2. Statement of the Problem

A stable and viable microfinance industry played an important role in extending retail

loans to the poor and this helped in the reduction of poverty among such vulnerable citizens

of an economy. However the number of Reserve Bank of Zimbabwe (RBZ) registered

Microfinance Institutions (MFIs) in Zimbabwe has been declining since 2003. During the

period 2003-08 the size of the Zimbabwean informal sector grew due to the collapse of all

sectors of the economy. This resulted in massive retrenchments in both public and private

sectors as almost all firms had closed down. Many people who were laid off started small

businesses to earn a living. The economic meltdown in the period 2006-08 in Zimbabwe thus

resulted in the informalisation of the whole economy. As a result the demand for loans by

participants in the informal sector has been growing over the years, but unfortunately in the

face of the declining number of microfinance institutions. Large banks were unwilling to

advance loans to the informal sector due to high levels of default risk and administration costs





(Nawai and Sharif, 2010). Therefore if the collapse of the microcredit industry is not arrested

immediately, the informal sector businesses would not be sustainable due to lack of debt

financing. Hence it was on the basis of the above developments that this study was set out to

explore the main causes of the downfall of the microcredit lending business in Zimbabwe in

the period in question. The challenges bedeviling the sector once determined would lead to

generation of remedies so as to enable the sector to grow towards sustainable development in

its service delivery to the nation.

3. Objectives of the Study

The major aim of this study was to explore the causes and impact of the collapse of the

microfinance industry in Zimbabwe since 2003.

The study however was based on the following sub-objectives:

To identify the causes of downfall of microcredit institutions Zimbabwe.

To establish the effects of competition on the microfinance industry in Zimbabwe.

To recommend strategies that would help sustain the operations of micro lending

businesses in the economy in the 21st century.

4. Research Questions

The research study was meant to come up with answers to the following questions:

What are the causes of the downfall of micro lending businesses in Zimbabwe?

What is the impact of competition on the survival of micro lending businesses?

What strategies can be put in a place to prevent the downfall of Micro lending

businesses?

5. Delimitations of the Study

Although the study was of national interest because of the nature and diversity of the

Zimbabwean small-to-medium enterprises (SMEs) sector, it was restricted to MFIs sub-sector

whose role in service provision to the majority vulnerable citizens was indispensable. The

study proceeded to pick samples of respondents from Masvingo, Gweru, Harare and

Bulawayo were most MFIs were concentrated. Masvingo in particular was of interest to the

study mainly because it witnessed the downfall of three micro lenders in 2012 within a very

short space of time. One of these three micro lenders had branches in other parts of the

country as well and its collapse had serious impact on almost the whole nation. The study was

limited to MFIs operations in the period 2003- 2015 mainly because this was the time when

the sector grew significantly and shrank again massively. The main focus of the research

study was to explore the causes of the downfall of micro lending institutions or businesses in

Zimbabwe and come up with possible remedies because MFIs were a force to reckon with in

the development processes of emerging economies.





6. Research Methodology

The study used the descriptive survey research design mainly because it enabled the

researcher to collect information on views and opinions of respondents through the use of

questionnaires. The design enabled the researcher to describe what was in one’s mind. The

study was aimed at getting the views and opinions of MFIs managers and credit analysts.

6.1 Population

A population is the entire group of objects of a particular type under study (Mudimu and

Muchengetwa, 2002). The population of this study was made up of managers and credit

analysts of microfinance institutions in Masvingo, Bulawayo and Harare as well as

academics.

6.2 Sample

A sample is a subset of a population under study (Mudimu and Muchengetwa, 2002). In

this study the sample chosen consisted of 80 respondents selected from managers, credit

analysts and academics who were conversant with the micro lending business in Zimbabwe.

Stratified sampling was used to select the respondents because of the composite nature of

respondents under consideration.

6.3 Research Instruments

The study used questionnaires to collect data from the respondents. It also carried out

interviews with some money lenders who were into micro lending businesses and others

whose operations had been suspended by the Reserve Bank of Zimbabwe in the period under

review.

7. Literature Review

Many studies have been done the world over on the challenges faced by Microfinance

Institutions (MFIs) especially in emerging economies. A study by Owusu-Nuamah (2014)

concluded that the collapse of the microfinance sector was caused by the inability of MFIs to

sustain operations and fraudulent activities by staff. Another study by Kofi (2012) in Ghana

established that most Microfinance Institutions collapsed on the account of non-performing

loans. Kofi went further to state that the problem of non-performing loans was a challenge to

Microfinance Institutions (MFIs) in East Asian countries such as India and Bangladesh as

well as Africa. Therefore it could be argued based on the above schools of thought that the

majority of challenges faced by the sector were misappropriations or fraud, unsustainability of

lending activities, non-performing loans, lack of expertise and skills needed in employees

manning MFIs credit exposures.





Fotang (2012) studied the Microfinance market in Cameroon and came to the conclusion

that lack of long-term funding, growing loan delinquency level, lack of qualified human

personnel and poor treasury management systems were the major challenges facing MFIs.

On the other hand Lutzenkirchen and Weistroffer (2012) argued that the fast growth of MFIs

made it difficult for them to hire and train loan officers. This was in agreement with the

results of Marulanda et al (2010) who interviewed experts on the causes of failures of MFIs in

Latin America. The study concluded that the failures of MFIs were caused by many factors

which included uncontrolled growth and methodological flaws. Uncontrolled growth resulted

in the hiring of untrained staff by MFIs. This compromised on effective credit risk analysis in

the micro lending sector. In other words MFIs were constrained by factors such as poor

funding or capitalization, poor human capital base in terms of training and development, lack

of progressive business strategies, poor treasury and risk management strategies, lack of

checks and balances in their business operations as well as research and development. It was

therefore critical that this study was undertaken to explore the nature of the downfall of micro

lending businesses in Zimbabwe in order to postulate possible remedies that could assist

realign the business sector to the economy’s development process.

Marulanda et al went on to identify loss of focus and state intervention as other causes of

failures of MFIs. Governments can pass legislation that hinders the operations of MFIs. For

example, minimum capital requirements may be too high. Some researchers have blamed

competition as the root cause of the collapse of microfinance firms. As Bauer and Meier

(2012) put it, a rapidly growing Microfinance industry experienced high levels of

competition. Competition has both positive and negative effects to borrowers. In the first

case, the borrowers may benefit from lower interest rates. In the long term, competition leads

to the fall of some weak MFIs which resulted in supply of microfinance declining. Bauer and

Meier (2012) go on to mention that competition negatively affected the performance of MFIs.

Schick’s and Rosenberg (2011) as cited in Bauer and Meier (2012) carried out a study which

established that high levels of competition in the microfinance industry resulted in the over

indebtedness of the borrowers. This was caused by the fact that defaulting borrowers always

exploited lack of historical information that the new Microcredit lender and the borrower had

and accessed more loans. The new lender would not have enough information to manage the

risk of double borrowing. Such borrowers would have met their principal and interest

repayments which in most cases would have strained their resources and hence double

dipping increased the probability of default.

8. Results, Analysis and Discussion

The main objective of the study was to investigate the causes of downfall of some micro

lending businesses in Zimbabwe. A sample of 100 respondents from micro lending businesses





was selected for the study. From the study it was established that many factors which are

discussed below were to blame for the collapse of some micro lending businesses in

Zimbabwe.

8.1 Diversion into Non-Core Business Operations

The study established that one of the major causes of the downfall of some micro lending

businesses was diversion into non-core business by MFIs. Micro lenders were only mandated

to offer small loans but the study established that some had taken the role of taking deposits

thereby increasing the risk profile of the business. It was also revealed from the study that

some of the deposits were not transformed into loans but were invested in some other

ventures. Deposit taking however, required effective management of credit and liquidity risks.

The investment of deposits into other long-term projects resulted in liquidity challenges

which caused panic withdrawals by the depositors. Some micro lenders had to borrow from

commercial banks to cushion their operations but failed to service their debts which hindered

them from accessing further loans.

8.2 Competition

Competition was found to be one of the factors which caused some Micro lending

businesses to collapse. The study concluded that micro lending regulations were not very

strict as compared to banking regulations and this motivated most of the banks to have micro

lending departments. This resulted in many bank owned micro finance institutions competing

with non-bank owned micro lending institutions. Bank owned micro finance institutions had

easier access to finance from their banks as compared to non-bank owned micro lending

businesses. The same banks which owned micro finance departments were the providers of

loans to their competitors and the non-bank owned micro lenders. The study found out that

preference to funding was always given to the bank owned microfinance businesses relative

to MFIs. The non-bank owned micro lenders were less creditworthy than the bank owned

micro lenders. Some micro lending businesses could not stand the competition from bank

owned micro finance institutions and hence collapsed.

8.3 Inefficient Credit Risk Management

The study revealed that inefficient credit risk management was another major cause of the

downfall of micro lending businesses. Most micro lenders did not make follow ups to

establish if the loans were put into their intended uses. If lenders did not make follow ups,

borrows ended up diverting the uses of loans. Ideally loans should be repaid from the primary

source of repayment, which were the cash flows from the financed micro projects. If the loans

were used to finance consumption expenditure their repayment proved to be very difficult.

Another weakness in credit risk management was that the micro lenders did issue loans

without verifying the physical addresses of some borrowers especially the informal sector





borrowers. Follow up in cases of default were therefore not very possible. This motivated

some informal sector borrowers to default in the process.

8.4 Lack of Knowledge of Micro Lending Business

Another important finding of the study was that lack of expertise of running micro

lending business was another major cause of the down fall of some micro lenders. Micro

lending business involved extension of micro loans which had risk associated with it. The

lending business involved risks such as credit risk, operational risk, interest rate risk and

liquidity risk all of which must be managed efficiently for the survival of the business. The

study found out that some of the individual who started micro lending business were not

knowledgeable in running the business. Some respondents pointed out that they had started

micro lending businesses after they had received lump sum payments from their pension

schemes. However, the success of micro lending businesses depended heavily on the ability to

manage credit, operational and liquidity risks effectively.

8.5 Capitalization

Inadequate capitalization was found to be a major contributing factor to the downfall of

microfinance institutions in Zimbabwe. Seventy-eight per cent of the respondents indicated

that poor capitalization was the cause of the downfall of microfinance institutions. A well-

capitalized micro lending institutions was better placed to absorb losses. The current

economic environment was characterized by high levels of non-performing loans in the

Zimbabwean financial sector. Financial institutions were forced to increase the levels of loan

loss provisions which poorly capitalized micro lenders found it too difficult to implement.

8.6 Internal Controls

Eighty per cent of the respondents indicated that poor internal control measures were a

major contributing factor to the collapse of some micro lending institutions. Authorization

was found to be weak in most micro lending institutions. Some of the respondents argued that

the supervision of lending officers was so weak that some lending officers were engaged in

corrupt activities of being micro lenders within micro lending institutions. Internal controls of

bank owned micro lending institutions were found to be more effective than those used by

MFIs.

8.7 Liquidity Challenges

The liquidity crunch was identified by eighty per cent of the respondents as another

challenge that cause micro lending businesses to dwindle. The financial sector in Zimbabwe

has been facing liquidity challenges since 2009 when the economy was dollarized. The

liquidity challenges caused non-bank micro lending institutions to have problems accessing

loans from banks which they transformed into micro loans. The liquidity crunch also

negatively affected the general demand for goods and services in the economy thereby





affecting the cash flows of micro borrowers. The study concluded that some micro borrowers

defaulted unwillingly due to low business in the economy.

8.8 Operational Costs

Seventy-two per cent of the respondents indicated that operational costs were

another major challenge that caused the collapse of micro lending businesses in

Zimbabwe. Most micro lending businesses were found to operate mainly in rented

premises. The rental costs were found to very high and prohibitive for such MFIs. A

number of micro lending businesses had opened many branches which increased

operational costs which ended up being unsustainable resulting in the downfall of

their micro lending businesses.

8. 9 Types of Loans Issued

Seventy-eight per cent of the respondents indicated that Micro lenders concentrated on

issuing consumer loans instead of financing micro projects. Loan repayments were easier

when the source of payment was cash flows from business operations. Consumption

expenditure did not generate cash flows to repay borrowed funds and this resulted in high

default rates. The portfolio at risk for MFIs was 27.14% as at 31 March 2014 (RBZ, 2014).

9. Conclusions and Recommendations

The study concluded that diversion into non-core business was one of the major causes of

the downfall of micro lenders in Zimbabwe. Based on this conclusion the study recommends

that the Central Bank should tighten its controls on the financial sector to ensure they

operated within set legal framework limits. This would help the micro lending institutions

avoid venturing into illegal activities such as deposit taking from the unsuspecting public. In

other words deviation of MFIs from core business operations into new areas increased the risk

profile of their micro lending businesses. The management of a wide range of risks increased

the chances of failure of micro lending institutions since they lacked the pre-requisite skills

needed in identifying and managing those risks.

Another major conclusion of the study on the downfall of micro lending institutions was

found to be competition which MFIs could not resist from banks in the formal sector. Bank

owned micro finance institutions were found to be better placed in terms of access to finance

from their banks and management of financial risks relative to MFIs.. Some micro lending

institutions were owned by individuals who did not have adequate skills of managing risks

encountered in micro lending businesses. The study recommends that individuals with varied

skills and expertise should come together to start micro-lending businesses in emerging

economies if these were to grow and develop. The study also recommends that the





government should establish a micro finance bank which would finance micro lenders. This

would help non-bank micro lending institutions to have easy access to loans.

The study also concluded that inefficient credit risk analysis was also a major cause of the

downfall of micro lending businesses in Zimbabwe. The study revealed that there were no

monitoring visits made to ensure that borrowers used borrowed money for intended purposes.

It was also concluded that supervision of loan officers was poor in Zimbabwe. The study

recommends that micro lending institutions should come up with policies which helped to

ensure efficient management of micro lending businesses. The management of credit risk in

micro lending businesses should be regularly monitored and evaluated until the last payment

was made by a borrower. The study also postulated that lack of knowledge of running micro

lending businesses caused the downfall of the majority of MFIs in Zimbabwe. It is therefore

recommended that the Central Bank should equip micro lenders with knowledge, skills and

expertise needed in managing risks associated with lending activities. The Central Bank

should also ensure that individuals running MFIs have the prerequisite skills and experience if

they were to make meaningful business from micro lending activities.

The study also concluded that lack of capitalization was another challenge that led to

MFIs exiting micro lending business operations. It is therefore recommended by the study

that micro lending businesses should be adequately capitalized in order to enable them to be

able to absorb losses. The Central Bank should also ensure that the minimum capital

requirements for micro lenders set at reasonable levels that will make that will make them

stable. Inadequate internal controls were also found to be another major challenge causing

micro lenders to go bankrupt. The study recommends that micro lenders should put in place

effective internal controls that would reduce corruption in their day-to-day operations.

The study also concluded that the liquidity crunch currently prevailing in the economy

was another critical contributing factor to the collapse of micro lending institutions in the

Zimbabwean economy. The liquidity crisis in the economy of late made it difficult for non-

bank micro lending institutions to access loans from banks and also meets the demand for

microloans by the general public. The study recommends that the government should put in

place policies that helped improve liquidity on the Zimbabwean financial markets. Banks

should also lend micro lending institutions at affordable interest rates if the sector were to

grow towards sustainable development in the 21st century. The study also came up with the

conclusion that operational costs were so high in emerging economies that they led to some

micro lending institutions collapsing. The study recommends that micro lending institutions

should control their growth to reduce operating costs. Finally the study concluded that loan

portfolios of MFIs were concentrated on consumption loans which did not constitute

investment in an economy. The study therefore recommends that MFIs should concentrate





more on micro project loans which helped generate income and reduced the probability of

default in micro lending businesses.

Appendices

Statistical Results from the Study

Table 1:Diversion into non-core business cause the collapse of MFIs

Frequency Percent Valid Percent

Cumulative

Percent

Valid 1.00 62 77.5 77.5 77.5

2.00 7 8.8 8.8 86.3

3.00 11 13.8 13.8 100.0

Total 80 100.0 100.0

Table 2: Severe competition cause the collapse of MFIs

Frequency Percent

Valid

Percent Cumulative Percent

Valid 1.00 59 73.8 73.8 73.8

2.00 8 10.0 10.0 83.8

3.00 13 16.3 16.3 100.0

Total 80 100.0 100.0

Table 3:Microfinance institutions collapse due to inefficient credit risk management

Frequency Percent

Valid


Valid 1.00 58 72.5 72.5 72.5

2.00 7 8.8 8.8 81.3

3.00 14 17.5 17.5 98.8

11.00 1 1.3 1.3 100.0

Total 80 100.0 100.0

.





Table 5: Poor capitalization cause the collapse of MFIs

Frequenc

y Percent

Valid


Val

id

1.00 63 78.8 78.8 78.8

2.00 9 11.3 11.3 90.0

3.00 8 10.0 10.0 100.0

Total 80 100.0 100.0

Table 6: Failure to put in place internal controls caused the collapse of MFIs

Frequenc

y Percent

Valid


Val

id

1.00 64 80.0 80.0 80.0

2.00 3 3.8 3.8 83.8

3.00 13 16.3 16.3 100.0

Total 80 100.0 100.0

Table 7: Many MFIs failed because of liquidity challenges

Frequenc

y Percent

Valid


Valid 1.00 64 80.0 80.0 80.0

2.00 6 7.5 7.5 87.5

3.00 10 12.5 12.5 100.0

Total 80 100.0 100.0

Table 8: MFIs fail because of high operational costs

Frequency Percent

Valid


Valid 1.00 59 73.8 73.8 73.8

2.00 8 10.0 10.0 83.8

3.00 13 16.3 16.3 100.0

Total 80 100.0 100.0

Table 4: Lack of expertise cause the collapse of MFIs

Frequenc

y Percent

Valid


Va

lid

1.00 53 66.3 66.3 66.3

2.00 14 17.5 17.5 83.8

3.00 13 16.3 16.3 100.0

Total 80 100.0 100.0





Table 9: Many MFIs failed because the concentration consumption loans

Frequency Percent

Valid


Valid 1.00 63 78.8 78.8 78.8

2.00 7 8.8 8.8 87.5

3.00 10 12.5 12.5 100.0

Total 80 100.0 100.0

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