An investigation conducted by the Reserve Bank of Zimbabwe (RBZ) into operations of the country’s Micro-Finance Institutions (MFIs) and money-lending institutions has exposed a plethora of illegal activities by the institutions impacting on the country’s economic development.
The targeted examinations were conducted in September 2012 by Norman Mataruka, RBZ Senior Division Chief and Registrar of Microfinance Institutions.Results of the investigation have been shared with members of the Zimbabwe Association of Micro-Finance Institutions (ZAMFI).
According to Mataruka, the investigations were triggered by high incidences of non-compliance with the Money-lending and Rates of Interest Act (Chapter 14:14) and regulatory requirements.
The investigations were meant to assess the adequacy of corporate governance structures put in place by MFIs,business conditions of the institutions,legitimacy of sources of funding and general business activities,lending activities and quality of the micro-finance sector loan portfolio,condition and performance of the MFIs and compliance with applicable laws and regulations including statutory reporting mechanisms.
The investigation also sought to assess whether MFIs were implementing and complying with core client protection principles, according to Mataruka.
Mataruka says the massive investigation revealed that there were 170 registered micro-finance and money-lending institutions in the country distributed as follows;133 operating,37 not operating for various reasons such as 17 had not commenced operations,13 had ceased operations,five had expired operating licences which had not been renewed and two were still setting up operations.
On corporate governance and risk management practices, the investigation revealed a number of illegal operations such as; various violations of corporate governance principles and standards by MFIs.
Eight MFIs are reported to have been found taking deposits in violation of section 5 of the Banking Act (Chapter 24:20) which prohibits any other person from taking deposits except registered banking institutions.
“Some MFIs were mobilising deposits under the guise of issuing debentures and preferance shares,” Mataruka said.
Some of the institutions were found to be window dressing at licensing stage.
Mataruka reports that a total of six institutions could not be traced as they were not found at their last known physical addresses.
It was also noted that some MFIs failed to notify the central bank of the changes in address as required in terms of the Money-lending and Rates of Interest Act (Chapter 14:14).
“The examinations noted in general a high degree of dishonesty and falsification of information by MFIs, especially at the licensing stage,” Mataruka said.
He says some MFIs were window dressing at the licensing stage in order to obtain a licence.He added that once the institutions received money lending licences, they put in place different and inappropriate structures which would not have been approved by the central bank.
Mataruka says in a number of cases, the positions of the Chief Executive Officer or Managing Director and Acconutant were occuppied by people in full time employment elsewhere.
“The incidences were noted to be rampant in family owned and MFIs in group structures,” he said.
He said other MFIs were operating as one man band with the Managing Directors of the institutions in charge of all operations in contrast to the organizational structure that was approved at licensing stage,” Mataruka says.
He adds that the institutions cited budgetary constraints as the reason for such arrangements.
Some MFIs were found to be providing overly optmistic projections of their businesses resulting in them providing for unrealistic and expensive corporate governance structures.
Some of the findings of the investigations have revealed that excessive informalization of operations by some MFIs are due to a combination of factors including ignorance and general lack of growth impetus and inadequate funding.
It has been revealed that for most of the family owned MFIs, the operations are too informal and managed without regard to the legal and regulatory framework and generally accepted standards and principles of good business conduct.
Most institutions are reported to be taking the need for proper record keeping systems casually and consequently the contribution of the sector to both financial inclusion and economic development cannot be ascertained with some reasonable degree of accuracy, RBZ says.
Some business transactions were reported to be either not recorded and were there were attempts to keep records, the recording systems were rudimentary,incomplete and inconsistent and cannot be relied upon.
The examination is also reported to have noted rampant cosmetic accounting and misrepresentation of information including reporting of different financial positions to different authorities (understatement of income for tax purposes and overstatement of income in order to give an impression of compliance with minimum capital requirements), Mataruka said.
He says the demise of the Zimbabwe Moneylenders Association (ZIMLA), during the period of economic meltdown (2000-2008), left a void in the sector.
He adds that a number of MFIs have lagged behind in terms of international and regional trends including adoption of relevant industry principles,standards and practices.
Most of the MFIs are reported not to have access to internet facilities and are unable to access for instance the RBZ website for updates on regulatory requirements and other relevant information.
It is also reported that violation of stipulated licensing conditions was reflected in the failure by some MFIs to adequately separate microfinance and moneylending activities from other activities conducted within a group or by stakeholders of the microfinance institution.
In some cases, non-separation of activities is said to have resulted in even the financial records being mixed up.
One example is cited of microfinance activities which were being conducted in a butchery while others especially the recently licensed institutions were operating from the Director’s houses.
“In such circumstances, there is risk of abuse of the group structure to conduct non-permissable activities through the unsupervised entities in the groups,” Mataruka said.
A number of MFIs were also found to be conducting other forms of pre-lending credit analysis.
“While this has been exacerbated by the absence of a Credit Reference Bureau, for most of the MFIs engaging in salary based lending with repayments deductible at source, there is little or no effort to prevent borrower over-indebtedness,” Mataruka said.
He adds that this has mostly affected civil servants whose repayment is through the Salary Service Bureau (SSB) stop order facility.
He says the state of affairs has resulted in a number of civil servants being over-indebted and in most cases unable to service the debts resulting in them taking home as little as $20 per month.
A number of MFIs have been found not to be having appropriate Management Information Systems (MIS) for micro finance operations.In a number of cases, it is reported that institutions were using excel spreadsheets and manual systems for lending activities as well as for financial reporting.
“A number of MFIs lack adequate skills in the areas of accounting,risk management and general management attributed to inadequate funding,” Mataruka says.
He adds that these weaknesses have precipitated a myriad of operational challenges affecting a significant number of MFIs.
Also a number of them are reported to be facing severe liquidity challenges and are inadequately funded.
“A number of MFIs, mostly family owned have weak balance sheets characterised by weak capital positions.This is affecting the MFIs sector’s contribution to economic development,” Mataruka said.
Some of the findings reveal that some MFIs are largely funded through shareholder loans and a few have secured funding from banking institutions and development partners.
The investigation noted that a total of 17 MFIs failed to commence or sustain operations due to inadequate funding.
Mataruka says the general liquidity in the economy has not spared the sector and this has been exacerbated by donor fatigue and limited wholesale funding.
He says some MFIs were facing viability challenges emanating from severe liquidity challenges,high levels of non-performing loans,high cost of borrowing and inadequate capital which has led some institutions to cease operations.
He adds that a number of institutions were reporting high levels of losses on the backdrop of high levels of non-performing loans and weak risk management systems.
He says the loss making was more pronounced among the family owned moneylending institutions which do not receive any outside financial support.
The high level of informalization is also reported to have exacerbated the weak performance of some microfinance players due to the inadequate distinction between business and private expenses, especially in family owned institutions which renders it difficult to track their business performance.
The investigation has also unearthed rampant compliance irregularities by some MFIs and moneylending institutions.It is said that the letter accompanying every issued licence incorporates a provision requiring institutions to advise the RBZ of significant changes including changes in senior management and relocation of premises.
RBZ says the examinations noted that a number of MFIs had relocated or changed management without notifying or seeking the Registrar’s approval.
Instances of deliberate misrepresentation in regulatory reporting were identified.Some institutions are said to have failed to submit the quarterly regulatory returns for various reasons which included unavailability of an appropriate Information Technology (IT) system,lack of training and mere non-compliance.
Some institutions are reported not to have been adequately disclosing the terms and conditions of their loan products.This is said to have resulted in some members of the public entering into the borrowing contracts without fully appreciating the extent of their obligations.
It is said that the circular to MFIs issued by the RBZ in June 2012 provides for mandatory disclosure by MFIs to their clients of the full loan terms and conditions, as well as provision of a copy of the loan agreement to every client.
Some MFIs were found to be charging punitive interest rates which were bloated by the incorporation of duplicate charges such as application fees,administration fees and processing fees.
“Under normal circumstances, these fees are once-off payments, but most MFIs continued to charge same for the duration of the loan,” Mataruka said.
He added that some MFIs were charging insurance fees,even were they have not taken out an insurance policy for the credit risk.
“A number of MFIs indicated the SSB commission of 5% as one of the interest rate components which is passed on to their clients as 7,5% per month.SSB has agreed to reduce the commission charge to 2,5% on condition that the MFIs do not charge more than 21% interest rate,” Mataruka says.
He also said SSB has also resolved not to effect recovery were the resultant net salary will fall below $100.
Mataruka says some MFIs were also abusing the direct deduction system for loan repayments, especially the SSB stop order and paynet systems to collect beyond borrower’s loan obligations.
The investigation has also revealed that a number of MFIs were employing unethical debt collection practices.In some cases, clients are said to have been made to sign an agreement of sale of the collateral asset at loan disbursement stage so that if they default, the institution will just transfer ownership without consulting the client.
Some MFIs were said to have been disposing pledged collateral without following the due legal processes.In terms of the laws of Zimbabwe, collateral can only be disposed after obtaining a writ of execution from the courts.
Some are also said to be requesting or forcing borrowers to sign blank SSB stop order forms which they will insert the amounts to be deducted over a certain period which details are not disclosed to the borrower.
As a way forward, the investigators recommend the RBZ and ZAMFI to intensify awareness programmes for both microfinance institutions and the public.
ZAMFI advocates for an enabling regulatory environment and to promote best practices in the provision of demand driven services for the growth of the microfinance industry in Zimbabwe.
This is expected to lead to the re-orientation of the microfinance industry towards achievement of the primary objectives of enhancing financial inclusion and poverty reduction.
MFIs have also been called upon to comply with core client protection principles incorporating appropriate product design and delivery,prevention of over-indebtedness and promoting transparency.
They have also been urged to introduce responsible pricing,fair and respectful treatment of clients,privacy of client data and introducing mechanisms for complaint resolution.
MFIs have also been urged to desist from illegal activities such as deposit taking and abusive debt collection practices, just to mention a few.
RBZ says it will cancel operating licences of MFIs found to be mobilising deposits from members of the public.
MFIs are expected to charge interest rates which reflect their cost of funding.RBZ is considering the re-establishment of a Credit Reference Bureau (CRB) which it says is critical to better performance of the sector.
MFIs have also been urged to address incidences of multiple borrowing and over-indebtedness by a number of borrowers, address high levels of non-performing loans in the sector.
The RBZ has also revised the minimum capital requirements for micro-finance and money-lending institutions upwards from $5000 to $25000 to comply in a phased approach such as;
$10000 up to 31 December 2012,
$15000 to 30 June 2013,
$20000 to 31 December 2013
and $25000 to 30 June 2014.