Reforming microfinance to suit developing economies: the right way and the Zimbabwe.

• Published date: 22 March 2015
• Author: Baumann, Vincent D.
• Date: 22 March 2015

I. INTRODUCTION

There are few countries in Africa that possess as much economic potential as Zimbabwe. Zimbabwe has an impressive trade portfolio including exports of nickel, diamonds, tobacco, and gold; annually, each of these commodities brings hundreds of millions of dollars into the Zimbabwe economy. (1) In 2001, Zimbabwe had a trade surplus of approximately 323 million U.S. dollars. (2) Because of its abundant natural resources, Zimbabwe has been dubbed "Africa's Breadbasket." (3)

In the early 2000's, Zimbabwe's economy took a sharp downward turn. By 2003, Zimbabwe had Africa's fastest shrinking economy and there were several contributing factors. (4) The first was Zimbabwe's involvement in the Second Congo War, which was prohibitively expensive for a country of its size. (5) 6 Zimbabwe President Mugabe, who still holds office, led a controversial land reform program that took farmland owned by white Zimbabweans and placed it in the hands of the Zimbabwean government. (6) The program devastated Zimbabwe's agricultural industry. (7) It has also damaged Zimbabwe's reputation in the international community, resulting in economic sanctions and the loss of major trade partners. (8)

When tax revenues on export income started to freefall, the Zimbabwean government began printing money in order to service its debt, causing one of the most extraordinary cases of hyperinflation ever seen. (9) In July of 2008, inflation in Zimbabwe hit 231,150,888%. (10) By January 2009, most Zimbabweans had abandoned their country's currency. (11) The Zimbabwean government has now suspended use of the Zimbabwean dollar and uses the U.S. dollar and South African rand as the predominant currencies. As a result of these shocks to the economy, poverty has become rampant in Zimbabwe. (13) The World Bank estimates that 72% of Zimbabweans live in poverty. (14)

In addition to high rates of poverty, several social issues plague Zimbabwe. Racial discrimination and gender inequality are prevalent in nearly every aspect of Zimbabwean life. (15) Zimbabwean women face limited access to employment and are less likely to escape poverty than Zimbabwean men. (16) Zimbabwe's Ministry of Women Affairs, Gender and Community Development stated that their goal is to "eradicate gender discrimination and inequalities in all spheres of life and development. (17) This is important not only to help improve the quality of life for women, but also to help advance the Zimbabwean economy. Gender equality and economic development are inextricably linked and efforts to further gender equality will significantly benefit Zimbabwe's economy. (18)

Similarly, Zimbabwe could also benefit economically from promoting racial equality. (19) Unlike gender inequality, the current political administration has expressed no desire to remedy the widespread racial discrimination affecting its white citizens. In fact the Mugabe administration has exacerbated discrimination in Zimbabwe. Zimbabwe's Indigenization and Empowerment Act ("Empowerment Act") was passed to help native Zimbabweans reclaim their economic sector from foreign interference. The bill requires white and foreign-owned businesses to have 51% ownership held by indigenous Zimbabweans. Because of these strict requirements, the Empowerment Act has chased foreign business from Zimbabwe. The bill has a troubling resemblance to the fast-track land reform programs of the early 2000s. Because of the current administration's attitude toward racial discrimination, it is unlikely any meaningful progress could be made in this area; however, any reform hoping to achieve economic growth must work towards ending racial discrimination.

One solution for alleviating poverty and promoting social equality is the use of microfinance. Microfinance has been successful in reducing poverty in many developing countries. (21) Zimbabwe currently has microfinance institutions which serve the poor, but they are undercapitalized, unregulated, and are more interested in generating profit than creating meaningful economic growth for Zimbabwe/ The Zimbabwean government has stated its commitment to improving the microfinance sector in order to help alleviate poverty. (26) The Zimbabwean House of Assembly is currently reviewing a bill, the Microfinance Act, which will bring much-needed reform to Zimbabwe's microfinance industry. (27) Although a well-run microfinance industry will not solve all of Zimbabwe's economic problems, it could be the key to helping Zimbabweans escape poverty.

In order to fully understand the potential impact of microfinance reform in Zimbabwe, it is important to understand Zimbabwe's informal sector. The informal sector is a large component of Zimbabwe's economy, and it could benefit tremendously from sound microfinance reform.

II. ZIMBABWE'S INFORMAL SECTOR

Like many developing countries, Zimbabwe's economy is divided into two sectors--the informal and formal sectors. (28) Zimbabwe's informal sector is unique in that it is exceptionally large. (29) Opinions are divided on whether or not the continued existence of the informal sector is good for the overall economy. (30) The informal sector of Zimbabwe's economy represents the bulk of its small-to-medium-sized enterprises (31) and has helped Zimbabweans find employment as the economy has collapsed. (32)

Zimbabwe's informal sector is vital to the country's economic growth and could play a large role in poverty alleviation. The Minister of Finance and Economic Development, Patrick Chinamasa, recently stated that stimulating economic growth would require Zimbabwe to tap into the value of the informal sector. (33) Microfinance is one method by which businesses in the informal sector could become scalable (34) and eventually integrated into the formal sector. Zimbabwe's economy is lopsided in that the majority of the country's economy is in the informal sector. This means that, unlike other developing countries, microfinance has the potential to provide capital to most of the businesses in Zimbabwe.

While microfinance institutions are prevalent in Zimbabwe, (36) other developing countries, (37) and even some industrialized countries, (38) they have not all enjoyed the same level of success. For the purposes of evaluating Zimbabwe's attempts at reforming its microfinance industry, it is important to first examine the model of a successful microfinance sector.

III. MICROFINANCE

A microfinance institution ("MFI") provides financial and banking services to the poor. (39) In regards to lending, MFIs are very different from banks. Because their customers are poor, MFIs typically do not require collateral (40) and typically issue loans for entrepreneurial purposes. (41) Loans are given at market rates and lending risk is partially alleviated by issuing loans to groups of people. (42) These loans are designed to provide capital to small-to-medium-sized enterprises.

The most widely-praised model of microfinance is Grameen Bank in Bangladesh. Muhammad Yunus, an economics professor, founded Grameen Bank in 1976. (43) Grameen Bank's first loan was only twenty-seven U.S. dollars, (44) but by 1997 Grameen Bank had a portfolio of over $260 million U.S. dollars and 2.3 million borrowers. (45) During that time, Grameen Bank's repayment rate was 98%. (46) Grameen Bank offered traditional banking services as well as some peripheral programs to benefit the Bangladesh community. (47)

Grameen Bank significantly improved the lives of its borrowers. Income increased for 97.93% of borrowers. (48) Grameen Bank's efforts have been widely recognized by the international community. The 2006 Nobel Peace Prize was awarded to Muhammad Yunus and Grameen Bank "for their efforts to create economic and social development from below." (49) The microfinance movement has continued to advance (50) and capture attention from all over the world. (51)

As microfinance has spread, there have been several instances where MFIs have been damaging to the communities they were designed to serve. India's microfinance system is one such example. (52) Unlike Grameen Bank, most Indian MFIs have regarded profit as their primary goal; they charge high interest rates, have dubious collection practices, and issue loans that are unreasonably large. (53) India's MFIs have a repayment rate of approximately 20%. (54) It is safe to say that India's microfinance sector has failed to match the success of Grameen Bank.

Similarly to India, Nigeria also failed to adopt a microfinance model that would provide growth and alleviate poverty. (55) Nigeria suffered a microfinance crisis similar to India throughout the early 2000s. Nigeria's MFIs were poorly managed; managers typically paid themselves too much, and deposits were frequently embezzled. (56) Additionally, Nigerian MFIs have charged interest rates on loans that range between 30 and 100 percent. (57) For these reasons, the people of Nigeria have little confidence in MFIs. (58) Zimbabwe's microfinance sector shares many of the characteristics of the failed microfinance sectors of Nigeria and India.

IV. ZIMBABWE'S MICROFINANCE SECTOR

Currently, Zimbabwe has a very small microfinance sector. Zimbabwe had over 1600 MFIs in 2003, but that number fell to less than 200 in 2004 (59) and has remained at that level since. (60) For a country with a population of over thirteen million (61) and poverty rate of 72%, (62) 200 MFIs is insufficient. Additionally, 70% of working Zimbabweans are employed by small-to-medium-sized enterprises. (63) These businesses stand to significantly benefit from microfinance.

Zimbabwe's existing MFIs seem to practice microfinance similarly to the Indian MFIs. For instance, the MFIs in Zimbabwe charge high interest rates. (64) The Zimbabwe government has also received complaints regarding aggressive collection practices in the microfinance sector. (65) Most Zimbabweans are easy targets for these predatory practices...