Microfinance: Creating opportunities for SMEs

HARARE - Microfinance is an emerging phenomenon that opens access to capital for individuals previously shut out from financial services.

In its direct engagement with the community, microfinance represents a new way for financial capital to potentially stimulate economic growth in developing countries.

Popularly known on the streets as chimbadzo, microfinance is poorly understood, and it remains unclear whether it delivers on its promises.

Today’s article aims to shed light on the concerns that community has regarding microfinance.  It should be understood, however that poverty alleviation is the cornerstone of many microfinance initiatives. The promise of microfinance is that it spurs entrepreneurship and empowers borrowers to help themselves to start or grow their businesses. There are three institutional options that provide microloans, and borrowers must be capable of identifying an institutional option that quenches their needs.

Below are the three main institutional options common in Zimbabwe:

- Formal microfinance organisations

These are properly regulated and well-established microfinance institutions which are capable of offering:

Access to Capital — A formally regulated microfinance institution (MFI) can finance its loan portfolio with, equity, loans and deposits. Such MFIs can support large scale growth of Micro to Small Medium Enterprises (MSMEs).

- Savings services — Since the MFIs are mostly owned by banks, they create awareness on the need to bank from the unbanked population.

- Quality systems — Formal microfinance have quality staff and systems, minimising the chances of customers being shortchanged and are the most efficient of all types of institutions.

- Stability — Because they are regulated and subjected to various inspections and reporting, risk management and compliance issues, these MFIs tend to be more stable and offer less risky to those who want to save money mostly.

- Semi-formal microfinance organisations

These include credit unions, cooperatives and NGOs. NGOs often receive subsidies to experiment and to reach unserved markets and small business cannot rely on NGO finance their business activities neither can they rely on credit unions funds or cooperative funds.

- Informal microfinance groups

These groups are not regulated and offer exorbitant rates known as zvimbadzo. They are vulnerable to fraud and are more concerned on profiteering. Unfortunately, because they are not regulated, they are the most popular with consumer borrowers and MSME in Zimbabwe. The rates they charge make it difficult for small businesses to survive.

It is therefore critical to look at various factors when choosing on which micro finance company to borrow from and some of these factors are:

- Cost of funds

A microloan is a small loan given to small businesses and sole traders to help them grow. Most microfinance services are in the lending business just to make profits, and not to help entrepreneurs grow.  Some lenders do charge exorbitant interest rates, rates that are not sustainable in a business environment. So, before choosing which institutions to borrow from make sure that they are not taking advantage of your desperation and desire of capital.

The Cost of funds can be simply said to be the interest rate and the administration fees charged on a loan over a certain period.  If you are borrowing for working capital purposes, you should be in a position to determine your expected income contrasted with the cost of funds.

Always strive to get the lowest rate on the market knowing that the more expensive the money is, the lesser your profit margin.
n Repayment period

The shorter the repayment period is, the higher the instalment. Dealing in such a situation always put immensurable pressure on you and your business; no business can be professionally run in such circumstances. Loan repayment periods also depend on the nature of your business, if your project is a long-term project having a shorter repayment period it will not do your business any good. You can borrow to expand your business, but if the capital used is, needed all at once, you risk your business collapsing. It is a basic entrepreneurial knowledge that without sufficient working capital in your books, you cannot grow your business. So before applying for a microloan consider the nature of your business and repayment period of the facility.

- Capacity

An entrepreneur should be in a position to measure his/her ability to repay the loan by comparing income against recurring obligations.  In one of our previous articles, we alluded to the fact that regardless of how much research you do or how many tests you complete, it is difficult to estimate popular interest in your business with perfect accuracy. So as an entrepreneur you should learn to be mindful of your market. Micro lenders require collateral when borrowing from them such as property or large assets, to help secure their investments.

So if an entrepreneur borrows without the capacity to repay the loan you definitely legally lose your asset, so never take chances when borrowing. Be sure of your ability to repay the loan back.

- Analyses and opinion 

In a bid to assist entrepreneurs who are considering or have decided to take up a microfinance loan, I recommend POSB as I have found it to be a  competitive micro lender.

Express Loans Micro-Finance is a Micro-Finance arm of POSB and exists to provide credit to individuals as well as Small to Medium Enterprises (SME). They have the  ability and flexibility to reach MSMEs, the poor and rural business entrepreneurs.

The interest rates and repayment periods are also quite competitive.

To learn and talk more about the micro loans, join us on our up coming Entrepreneurship Expo that is coming soon.  Where entrepreneurs’, ventures capitalists and exhibitors meet.

*If you would like to be profiled in one of our articles, or have a comment or feed back please do get in touch with me on 0771057101 or email me on nicknobert@gmail.com.

    Comments (3)

    More deliberate and targeted interventions are needed to improve the financial literacy of the population so as to know that they have access to alternative cheaper sources of funds than the taking ZVIMBADZO. Chimbadzo will not help them do any business. I think that Chimbabdzo is just a legal way of postponing but unfortunately enlarging the problem

    Richard Chamboko - 2 August 2015

    Sir. You must tell the public how much interest MFIs are charging per month and how much that comes to in a year. I do not know the POSB rates, but I guess they are equally exorbitant. Truth be told, MFIs is the new frontier for bankers, ruling elites and all people bent on impoverishing poor people in the name of helping them to make money. Its a shame. Where else in the world is one paying interest as high as 30-45% interest per month on a micro-loan? Zimbabweans, be careful. Lets do the maths. I get a loan of 100 dollars to top up inputs for chicken feeds. You charge me 30-45% interest and I pay you pack 30-45 dollars. How much profit am I making, not mentioning that Zimra is waiting with a dagger and a big plate to squeeze every cent from me to sustain a bureaucracy that has become monumentally irrelevant to unspeakably struggling and amazingly patriotic Zimbabweans. The MFIs and banking sector in Zimbabwe and all its counterparts in real estate are the real cause for domestic nonsense, asset debasement and the untold suffering of many Zimbabweans. The way forward is simple: Get the real economics and politics working again! Leave poor people alone. They have suffered enough.

    Bob - 6 August 2015

    i agree with you guys, the rates are just exorbitant. most MFIs are charging between 20% - 35% depending on the amount borrowed. POSB is currently at 5%

    Nobert Munyoro - 13 August 2015

    Post a comment

    Readers are kindly requested to refrain from using abusive, vulgar, racist, tribalistic, sexist, discriminatory and hurtful language when posting their comments on the Daily News website.
    Those who transgress this civilised etiquette will be barred from contributing to our online discussions.
    - Editor

    Your email address will not be shared.