adminregarding the status and condition of the microfinance sector in Zimbabwe.
1.2 The feedback received by the Reserve Bank of Zimbabwe from members of the public has shown some degree of confusion and lack of understanding of how microfinance and money-lending institutions should operate in particular, the scope of permissible activities and how the activities should be conducted.
1.3 As part of the Reserve Bank of Zimbabwe’s general public awareness programmes, this article seeks to answer some of the questions people have regarding the operations of Money-lending and microfinance institutions that are regulated by the Reserve Bank of Zimbabwe. In this article the abbreviation MFI will be used to mean either money-lending or microfinance institution.
2. What is Microfinance?
2.1 Microfinance is generally regarded as the provision of financial services to the unbanked and under-banked households and small to medium enterprises.
2.2 Globally, the main objective of microfinance is facilitating access to financial services by the poor and marginalised sections of the community.
2.3 Microfinance targets those members of the community that would ordinarily not be able to open a bank account or access loan facilities in the mainstream banking sector because of stringent requirements.
3. Who registers and supervises the IMFs?
3.1 MFIs are registered and supervised by the RBZ, which is tasked to ensure that licensed MFIs carry out money-lending operations in accordance with the laws of the country.
3.2 The RBZ ensures that all MFIs that are found flouting the laws governing their operations exit the sector immediately as they may cause financial instability.
4. What legal instruments govern the operations of IMFIs?
4.1 The operations of the MFIs are governed by the Money-lending and Rates of Interest Act [Chapter 14.14], and some sections of the Banking Act [Chapter 24:20] that are applicable to MFIs.
4.2 From time to time the RBZ issues regulatory directives which the MFIs are required to comply with.
5. What is the scope of business of MFIs?
5.1 All the MFIs registered and supervised in terms of the Money-lending and Rates of Interest Act [Chapter 14:14] are not allowed take deposits from members of the public.
5.2 This means the institutions are only permitted to issue loans to their target market which may be individuals (consumer loans), small to medium enterprises (business loans) or a combination of the two.
5.3 Consumer loans are loans to meet day-to-day expenses or for subsistence purposes. Business loans encompass funding for working capital or capital expenditure for starting, or expanding an existing business venture.
5.4 Business loans issued by MFIs include order financing, contract financing, and group lending. Only a company registered as an MFI by the Reserve Bank is permitted to offer loans to members of the public.
5.5 Members of the public should always deal with duly licensed MFIs and have a right to demand sight of a valid licence.
5.6 In addition to the provision of business loans to SMEs some microfinance institutions offer capacity building and business development services to their borrowing clients as a way of enhancing the borrowers’ capacity to repay borrowed funds. These services may include training in business management and records keeping, market research, and provision of general business advice.
6. Where do MFIs get money to lend to their customers?
6.1 MFIs require funding for their lending activities. The minimum capital requirement for the MFIs is currently set at US$5 000. In order to underwrite meaningful business and to adequately satisfy the borrowing requirements of their clients, MFIs in addition to capital and other contributions by their shareholders, often source loans from banks.
6.2 Another source of funding for MFIs is financial support from the donor community. Some MFIs are owned by non-governmental organisations which receive grants from international development partners who pool together their financial resources and establish a fund for financing community projects.
7. What are MFIs not allowed to do?
7.1 MFIs are not permitted to solicit for or mobilise deposits from any person or company inside or from outside Zimbabwe.
7.2 Only banking institutions and building societies licensed and supervised in terms of the Banking Act [Chapter 24:20] and Building Societies Act are allowed to take deposits from members of the public.
7.3 It is the responsibility of members of the public to ensure that they do not deposit their hard earned money with MFI’s. When in doubt, members of the public are urged to consult the Reserve Bank.
7.4 MFIs that take deposits contravene the Banking Act and members of the public are urged to report such institutions to the Reserve Bank so that prompt corrective supervisory action can be taken in the interest of financial stability.
7.5 It has been established that some unscrupulous MFIs lure unsuspecting members of the public with attractive “interest rates” on “deposits”, in what is commonly referred to as a pyramid or Ponzi scheme.
7.6 A pyramid scheme is an illegal and fraudulent money-making investment scheme where one person’s investment is used to pay another and so on.
Since the interest rate offered on these deposits is way above market rates, the pyramid scheme operator cannot sustainably meet the interest obligations, and as a result funds contributed by the subsequent “depositors” are used to pay out the earlier “depositors”.
8. Why are MFIs not permitted to take deposits?
8.1 MFIs are not allowed to take deposits because the size of their capital is not sufficient to act as a buffer for depositors’ funds in the event of losses.
8.2 Only Microfinance Banks (MFBs) registered in terms of the Banking Act are allowed to take deposits as their minimum capital requirement of US$5 million provides a sufficient capital buffer to protect depositors’ funds. Further, MFBs are required to comply with strict prudential and risk management requirements.
9. What documents should clients receive from MFIs?
9.1 Members of the public who access loans from MFIs should ensure that they receive a loan agreement or contract which should have the following minimum requirements:-
(a) It must be in writing, setting out clearly at a minimum the following material terms and conditions;
- The loan amount or principal debt;
- The interest rate per month and per annum;
- Any other applicable charges, clearly itemised;
- Penalty rates in the event of default;
- Amount and schedule of payments including due dates of payment; and
- Methods of repayment agreed upon by both the money-lender and the client.
(b) The loan agreement must be signed by all parties to the loan contract.
9.2 It is within the borrower’s right to demand and the money-lender should avail a copy of the loan agreement to the borrower together with the copy of the schedule of repayments.
10. What supervisory action is taken against non-complying MFIs?
10.1 The Reserve Bank is mandated by the Banking Act and the Money-lending and Rates of Interest Act to take appropriate supervisory action on offending MFIs in order to safeguard financial stability in the country as well as to protect the defenceless members of the public.
10.2 The Reserve Bank has authority to cancel any MFI’s operating licence or to reject its application for renewal of licence where it is established that an MFI is not conducting its business in line with the law.
10.3 In this regard, in June 2012, the Reserve Bank cancelled licences for two money-lending institutions, Mcdowells International (Private) Limited and All-Angles Investments (Private) Limited for illegally taking deposits from members of the public. In July 2012, the Reserve Bank rejected renewal of licence for another MFI, Paramount Holdings Limited, when it was established that the institution was illegally mobilising deposits disguised as “preference shares”. The Reserve Bank will continue to closely monitor the operations of MFIs to ensure that sanity is maintained in the financial sector.
11. What is the role of members of the public?
11.1 Every Zimbabwean has a role to play in fostering the maintenance of financial stability. It is therefore the duty of members of the public to report to the Reserve Bank or Zimbabwe Republic Police any MFI that they consider to be contravening the laws and regulations governing the conduct of their businesses. This will enable the Reserve Bank in partnership with the ZRP to immediately take appropriate corrective action and avoid further damage to financial stability.
11.2 It is unfortunate that on many occasions, members of the public willingly participate in irregular conduct by some institutions and only rush to the Reserve
Bank when they have lost their hard-earned cash or property.
11.3 The Reserve Bank will take appropriate supervisory action, including cancellation of operating licences, against any MFI found to be conducting its business in
an undesirable manner, or conducting non-permissible activities.
11.4 In addition, the shareholders and directors of such an institution will be deemed unfit to hold shares or positions of accountability in the financial sector.
11.5 Any person who would have been cheated by an MFI has a right to legally demand their money from the MFI.
11.6 It is not the responsibility of the RBZ to look for money for reimbursement of the “depositors” as deposit taking by MFIs is an illegal activity.
12. Can RBZ place a Microfinance Institution found to be taking deposits under curatorship?
12.1 The Reserve Bank places an institution under curatorship where there are prospects of resuscitating the institution or bringing it to viability. This is often the case with some banking institutions that will be facing challenges where it is clear that given time and competent management, the bank can be revived or where it is clear that a curator could be given an opportunity to look for new shareholders for the bank.
12.2 The law used to place banks under curatorship does not apply to MFIs. As a result the only option available for the RBZ, when an MFI is found to be illegally taking deposits, is to close the institution. Once the MFI has been directed to cease operations, it will be the responsibility of the MFI to reimburse the “depositors”.
13. Conclusion
13.1 The Reserve Bank will continue to conscientiously discharge its regulatory and supervisory role in the interest of maintaining financial stability. In this regard, appropriate corrective action will be taken on those institutions found flouting the laws, regulations and directives issued from time to time.
13.2 Microfinance institutions and other institutions supervised by the RBZ must conduct their operations in compliance with applicable laws, regulations and best practices.
13.3 Members of the public and other stakeholders are urged on their part to enforce such compliance on the institutions they deal with, and where in doubt to consult the Reserve Bank. Financial stability is vital for economic growth and development and as such should be safeguarded at all cost.
- Additional information can be found on the Reserve Bank website, www.rbz.co.zw or members of the public may contact conduct Bank Licensing, Supervision and Surveillance Division on the Reserve Bank numbers (04) 703 000 or 703111.
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