Microfinanciers turn to capital preservation strategies
MICROFINANCE players have announced plans to adopt capital preservation strategies owing to uncertainty attached to the disputed polls with financiers expected to take a cautious and measured approach towards lending, a new report has shown.
The strategies include providing capital mainly in US dollars owing to its stability, property investments and derivative instruments such as gold coins and gold-backed tokens.
In its performance report for the six months ended June 30, 2023, the Zimbabwe Association of Microfinance Institutions (Zamfi) said the microfinance sector had responded strategically towards lending more in US dollars.
According to Zamfi, this strategy was influenced by its bid to mitigate against the challenges of the exchange rate instability, high inflation and political risks.
“Going forward, the microfinance players are expected to remain implementing capital preservation strategies such as lending largely in US$, investing in properties and derivative instruments such as gold coins and gold-backed tokens,” Zamfi said, in a statement attached to the report.
“The overall performance of the microfinance sector for the six months period ending June 30, 2023, reflect a sector which has responded strategically towards lending more in US$ denominated loans in a bid to mitigate against the challenges of exchange rate instability, high inflation and uncertain political risks.”
While Zamfi projected that the post-election period will most likely be characterised by a cautious and measured approach to lending by microfinanciers, it expected current government policies to remain.
These policies will be focused at achieving price and exchange rate stability which were perceived to be the key enablers for sustained and inclusive economic growth and poverty alleviation.
“The total loans amounted to ZWL$288,8 billion as at 30 June 2023, up from ZWL$36,8 billion reported as at March 31, 2023. The number of active clients being served by the credit only MFIs increased from 137 949 as at March 31, 2023 to 158 178 clients. The sector has remained an active player in channelling most of its loans to the productive sector which constituted 69% of the total loans,” Zamfi said.
“These loans include agriculture loans amounting to ZWL$7,8 billion or 3% of the total loans. There is need, therefore, to come up with de-risking instruments for the agricultural sector, such as credit guarantees, livestock, and crop insurance mechanism so as to encourage lending by MFIs to small-holder farmers.”
Zamfi reported that the aggregate equity capital for the sector amounted to ZWL$69,1 billion as of June, a significant increase from ZWL$10,7 billion reported as at March 31, 2023.
“This exceptional increase in equity capital was due to a significant monetary exchange gain as a result of rapid and volatile currency depreciation between the months of April and June 2023,” Zamfi noted.
As a result of its performance on lending, Zamfi said the credit-only microfinance sector reported aggregate net profit of ZWL$32,9 billion for the period under review compared to ZWL$1,03 billion last year during the same period.
“The financial sustainability of the sector, represented by the operational self-sufficiency ratio of 171,7% as at 30 June 2023, is a remarkable achievement, which is reminiscent of a sector poised for growth and a key player in the financial inclusion strategy and agenda of the government,” Zamfi said.
Zamfi reported a portfolio at risk ratio of 5,47% at the end of June which was close to the internationally acceptable benchmark of 5%.
“Credit risk coverage ratio, has significantly improved from 4,48% as at March 31, 2023 to 46,6% as at June 30, 2023, though this is still below the acceptable threshold of 80% to 120%.
“An appropriate training on credit risk management and loan loss provisioning, is scheduled for the upcoming quarter to address the fundamental challenges of under-provisioning by many MFIs in the sector,” Zamfi added.-newsday
