WHEN I was in Zimbabwe recently, I could not help but notice a resurgence of activity in the microfinance sector which had largely gone aground during the past hyperinflation days.
I spoke to four or five microfinance entrepreneurs and most of them peg their interest rates for the investors in the region around 10 percent per month. You immediately shudder to think what borrowers in this sector are expected to pay.
Microfinance institutions provide unsecured lending where loans are not backed by collateral and therefore riskier for the institution and more expensive for the borrower. The higher the interest rates, the greater the capacity of a microfinance institutions to transfer the cost of defaults to the performing clients.
Some institutions apply coercive collection mechanisms to ensure that payment gets prioritised. Some extend further loans to clients who may already be debt-stressed.
Micro-loans from microfinance institutions are generally easily accessible to the greater public than formal bank loans. Unfortunately, there does not seem to be sufficient regulation of the sector in Zimbabwe.
If the current wave of micro loans were focussed on developing and building SMEs in the country, I would have been very excited. But I found that the major reason many people in Zimbabwe are taking debt like performance-enhancing steroids is to fuel their insatiable desire for consumption.
When we mention drugs, most minds race to extreme drugs like morphine heroin or even cannabis. When I worked in the pharmaceutical industry, modern medicine always amazed me. If you break your leg in a car accident, you would welcome an urgent injection of morphine. I would characterise morphine as a wonder drug which unfortunately has gained notoriety from inappropriate use. Similarly, debt when correctly used can fuel wealth accumulation faster for entrepreneurs yet it can also ruin lives.
In the days of the decline of the Zimbabwe dollar and rapid inflation growth, borrowing made everyone look like a genius. Whatever was borrowed then, even with an interest rate with a couple of zeros behind it, you always ended up repaying the debt in less real value than originally borrowed.
There is an urgent need to increase client financial education. Microfinance can fulfill its societal mission of expanding financial inclusion by increasing transparency, pricing disclosures and building strong markets. Many financial products are opaque and do not make clear the implications of accessing the funds.
Educating clients about the pricing of microfinance products is essential to any successful effort toward transparent pricing. Some borrowers are not even aware of their effective interest rate on all their repayment schedules.
The government and Consumer Council need to provide intermediation financial education for consumers. The need for the establishment of a national credit clearing bureau where the names and credit histories of all borrowers can be accessed has been previously muted but not implemented.
The government in Zimbabwe is the largest employer where most workers support their extended families by paying for school fees, medical bills, and even funerals. It seems most microfinance institutions are clearly targeting this group of workers as it is easier to get them to repay loans.
When we compare microfinance institutions and traditional banks, there are several significant differences which affect interest rate levels. For sustainable microfinance institutions, they must not only cover their costs but also generate a reasonable profit. The working class traditionally excluded from the financial system may not understand the dangers of high interest or the details of their loans before taking on debt.
Consumer financial vulnerability has been defined as the state and/or feeling of being exposed financially, experiencing financial insecurity and/or an inability to cope financially. Consumer financial vulnerability can result from weak personal and household balance sheets brought about by macro and micro-economic factors. Predictors for consumer financial vulnerability are income, expenditure, savings and debt servicing ratio. Consumer financial vulnerability seems to be also increasing in Zimbabwe.
In South Africa, just like in Zimbabwe, Mashonisas – which in Zulu loosely translates to "one who buries you under", lend only to people with regular salaries, mainly government workers. They secure the loan by confiscating borrowers’ ATM cards and using these to withdraw the money owed to them at the end of the month before returning them to their owners.
South African household debt stands at over 70 percent of disposable income, according to a number of recent studies and it may get worse as banks push into unsecured loans. Listed entities in South Africa like Capitec and African Bank carved out a profitable niche by focusing on black communities that had been ignored by bigger banks arising from the apartheid legacy.
A recent financial wellness study, a collaboration between the University of South Africa and Momentum and based on interviews with 2,937 respondents, found that 4.8% of South African households are in dire debt from which they cannot escape and nearly 60% of the households sampled were shown to be in bad debt.
Standard & Poors has warned that the rapid growth in unsecured lending is starting to create a credit bubble following a 35% year-on-year increase in unsecured lending to households for February 2012.
A culture that prizes high-end brands and other aspirational choices is also developing in Zimbabwe. Buying labels is good if one has the financial capacity to do so. The dangers of borrowing to do so are also increasing. I am alarmed when civil servants have to increase credit facilities for clothing, particularly at a time cheaper alternatives are available from the world’s factory China or other emerging factories in Vietnam and Thailand.
The dangers of uncontrolled credit in an economy enjoying newly found stability like Zimbabwe needs to be continually highlighted to consumers.
Tafirenyika L. Makunike is the chairman and founder of Nepachem cc (www.nepachem.co.za), an enterprise development and consulting company. He writes in his personal capacity