January 7, 2025
Grow FX loan book, microlenders told
MICROFINANCE institutions in the country have been urged to recapitalise and lend in foreign currency to hedge against risks.
The sector was given the nod to lend in foreign currency in a move that meant microfinanciers considered a value preservation strategy and policy with the capacity to improve the profitability and sustainability of the sector.
During the quarter, the local dollar — which was reintroduced in 2019 after a decade of the multi-currency system — significantly lost value against the greenback. The exchange rate instability fuelled hyperinflation and the general loss of confidence among economic players. The situation resulted in challenges in product pricing, high delinquency levels and capital erosion.
According to the Zimbabwe Association of Microfinance Institutions (Zamfi) first-quarter report, the microfinance sector remained resilient during the quarter, amid challenges including the instability of the exchange rates, a resurgence in inflation and rising interest rates.
According to Zamfi, aggregate equity capital for the microfinance sector amounted to $10,7 billion as at March 31, 2023, an increase from $8,2 billion reported as at December 31, 2022. “The period under review experienced a rapid loss of value with respect to the local currency against major international currencies leading to an exchange loss on locally denominated monetary assets and liabilities including capital,” Zamfi said.
“To hedge against the foreign exchange risk, the microfinance institutions are advised to recapitalise in foreign currency and lend the same amount to clients in need of foreign currency denominated loans.” During the quarter ended March 31, 2023, microfinance institutions advanced $36,8 billion compared to $19,9 billion recorded in the comparable period in 2022.
Zamfi said total assets for the credit-only microfinance sector amounted to $48,3 billion during the quarter under review, up from $20,8 billion reported as at December 31, 2022. During the quarter, the dominant asset being loans decreased slightly from 80 percent to 76 percent during the period under review.
Zamfi said the number of active clients being served by the credit-only MFIs remained largely unchanged from 135 620 as at December 31, 2022 to 137 949 as at March 31, 2023. The micro-lenders association noted a large and significant portion of the financially excluded clients who are yet to access financial services from the microfinance sector.
Financial inclusion helps formalise the informal sector and reduces the extent of shadow banking. It thus provides an improved framework for monitoring and supervision of financial transactions and, in turn, shields the customer from malpractice and the financial system from unwarranted shocks. During the quarter, the credit-only MFI sector recorded a portfolio at risk ratio of 15 percent, an increase from 12,71 percent recorded in the comparative period.
“Credit risk coverage ratio has continued to deteriorate from 22,17 percent (September 30, 2022) to 12,74 percent (December 31, 2022) and to the current low level of 4,48 percent as at March 31, 2023. “The financial indicators, therefore, reflect a deteriorating sign of portfolio quality as well as inadequate levels of bad debts provision against credit losses in the sector,” Zamfi said.
The credit-only microfinance sector reported aggregate total revenue of $10,7 billion during the quarter under review, a 409 percent increase from the $2,1 billion recorded in the comparative period.
The growth in revenue is attributed to significant increases in lending by all MFIs in the sector due to high prospects for profitability, associated with micro-lending business. During the quarter, total operating costs amounted to $8,3 billion compared with $1,4 billion recorded in the prior quarter largely due to inflation and a depreciating local currency.
Return on assets and return on equity ratios were 4,9 percent and 22,2 percent respectively during the quarter. Zamfi said high delinquency levels could be reduced through continuous rating of clients in terms of performance, particularly on issues such as timely repayment of loans.
To reduce and counter the threat of capital erosion, especially on working capital denominated in local currency, Zamfi said it becomes strategic for MFIs to inject new capital into the business in the form of foreign currency such as the US dollar. Zamfi said micro financiers may need to diversify their products by increasing their product range instead of concentrating on one type of product, loan or sector of the economy.
