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Elizabeth Mfarinya
Approximately, RTGS$7 billion is rumoured to be in circulation in the informal sector in Zimbabwe. This includes money exchanging hands in popular informal markets like Mbare Musika, Machipisa and smaller markets between informal traders, small business enterprises, transport operators and even air time vendors. This is a substantially huge amount that is going unbanked given the prevailing liquidity crunch crisis in the economy.
The challenge is, it is hard to persuade players in this sector to bank their incomes with a commercial bank with the stringent requirements banks need.
Most of the players are moving away from the popular national mattress banking approach to mobile banking with the likes of Ecocash and Netcash as the liquidity crunch persists.
But they can never really consider moving to a commercial banking facility given banks’ rigidity in the nature of their operations such that according to a Finscope SMEs survey, only 14 percent of SMEs were banked by November 2012.
Needless to say, the Government is also at a great loss with the informal way this vibrant sector has been operating. Collection of presumptive tax by the Zimbabwe Revenue Authority has proven to be such a tedious task with no-one really knowing who is doing what business, where, or how much they are making.
A lot of them are mushrooming in the CBD after 4pm when the city police have knocked off and as of January 2018, 83 percent of SMEs were not licensed, according to the Ministry of Small to Medium Enterprises and Co-operative Development.
The long and short of it is that, the economy at large is losing out the more this sector goes uncurbed.
Micro-finance institutions have, however, come in as an ultimate solution to this challenge crippling the economy. With around 194 micro-finance institutions having been recorded by RBZ by the end of 2018, there has been a significant growth in this financial services sector.
Their mandate being to target groups within the economy that cannot otherwise access financial services in large commercial banks. This includes low income earners and SMEs whose income does not reach the minimum threshold required by banks.
So because of MFIs, even the informal traders can now access financial services. It is, however, the nature of the requirements needed by MFIs that is capacitating the formalisation of the informal sector.
Popular requirements for small businesses and traders to access financial services in MFIs include a licence of operation, a tax certificate, three months bank statement and sometimes accounting books showing income trends.
Consequentially, SMEs and informal traders are now slowly moving towards getting licensed, remitting taxes and banking their incomes.
Basically, they are formalising in an attempt to access loans and other services from MFIs which are their only source.
The catch, however, is that unlike banks, MFIs are so flexible in trying to help informal traders and SMEs access financial services as their mandate is largely concentrated on personal growth and community development. They are not rigidly centred on getting their fixed set of documents for one to access services.
Micro-finance institutions have the capacity to waive some requirements and tailor make a product that best suits a client’s needs and way of operation, something that large banks have failed to do.
As a result, any informal player now has the capacity and room to access these financial services from MFIs.
Banks by nature are risk averse service providers and often require collateral assets against the business loans they offer. MFIs on the other hand are quite relaxed on this requisition basing on the fact that very few of the informal traders actually have assets in their possession.
The MFIs’ are rather managing the risk by closely monitoring business loans that they disburse.
They monitor how the loan is being utilised, whether it is being used for the intended purpose or not, something that banks don’t normally bother with. Micro-finances monitor the business’ returns to guarantee their repayments and by so doing facilitate and promote the maintenance of proper accounting records by the informal traders and SMEs.
Hence the continual interaction between the MFIs and the informal sector is creating room for the latter to formalise smoothly.
So micro-finance institutions could exactly be what the Zimbabwean economy needs right now to get the money circulating informally to the bank and to the Revenue Authority to revive the economy. The pace may be slow, but with the pertinent growth in the micro-finance industry, formalisation of the informal sector may just be one step away from making a complete turnaround. — Premier Service Microfinance.
Bongani Ndlovu