INTERGRATING FINANCIAL SERVICES INTO POVERTY REDUCTION STRATEGIES

1. INTERGRATING FINANCIAL SERVICES INTO POVERTY REDUCTION STRATEGIES PRESENTATION BY THE RESERVE BANK OF ZIMBABWE 11 OCTOBER 2005 W S MUSHIPE

2. A brief description of Zimbabwe’s economic, social, political and demographic environment • Zimbabwe is classified as a low-income country by the World Bank. • The Zimbabwean economy has been performing below its potential due to; • recurrent droughts, • shortages of foreign currency, • withdrawal of international support, • poor publicity of the country which led to the withdrawal of donor funding, • low business confidence; and • HIV/AIDS pandemic.

3. Trends in Key Macroeconomic Aggregates

4. Brief description of Zimbabwe’s economic, social, political and demographic environment cont’d • Economic performance revolves around the principal sectors of; • Agriculture which contributes 16%, • Mining which contributes 4%, and • manufacturing which contributes 20% of GDP. • Macroeconomic performance is highly influenced by the performance of agriculture, accounting for the livelihood of some 70% of the population • 60% of all raw materials for industry and 45% of the country’s exports are agricultural in origin. • The GDP growth rates averaged 8.8 percent in the 1980s and 0.8 percent in the 1990s respectively. • The budget deficit averaged 8.5 percent in the 1980s and more than 10 percent in the 1990s. • The inflation rate averaged 12 percent in the 1980s and currently it stands at 265 percent. • On average, lending interest rates have remained relatively high in the last two decades, subsequently impeding access to credit for smallholder farmers and small scale borrowers.

5. A background on the poverty reduction strategies in the country, the challenges and the impact of these strategies on the economic development of the country. • Various poverty reduction and redistributive policies and strategies since 1981 as follows: • Growth with Equity Strategy (1981), • The Zimbabwe Transitional National Development plan (1982-1985), • The Zimbabwe first five Year National Development Plan (1986-90). • Economic Structural Adjustment Programme (ESAP) in the early 1990s. • In 1995 Government undertook a National Poverty Assessment Survey, which established that about 57% of households lived in poverty and 45% in extreme poverty. Higher levels of poverty were recorded in rural areas (75% of households) compared to urban households (39% of households). • Another Poverty Assessment Survey Study was undertaken in 2003 and the results are being finalized. • Zimbabwe Programme for Economic and Social Transformation (ZIMPREST) 1995-2000.

6. A background on the poverty reduction strategies cont’d • The adoption of the Economic Structural Adjustment Programme and non-realisation of some of its objectives such as increase in foreign and local investment and reduction in Government expenditure, worsened the poverty situation. • Non-realisation resulted in decline of economic growth coupled with increasing unemployment, deepening poverty and reduced access to social services. • This situation was compounded by the recurrent droughts and floods experienced by the country since 1990s, HIV and AIDS pandemic.

7. Poverty Reduction Strategies Cont’d • In 1995 Government of Zimbabwe launched the Poverty Alleviation Action Programme (PAAP) as a national policy and strategy to alleviate extreme poverty. • Government also adopted a national policy on Drought Management in 1998. • The objective was to provide a quick response for the support of vulnerable households. • The programme was implemented both in urban and rural areas. • The purpose of the programme was to provide social safety nets to vulnerable households and individuals supplementing their incomes whenever necessary through labour intensive public works provided by local authorities.

8. Poverty Reduction Strategies Cont’d Micro Enterprises Development Programme (MEDP) • The overall goal of MEDP is poverty reduction and employment creation through micro credit using existing micro financial institution as delivery mechanisms to the economically active poor (the entrepreneurial poor). • This is being achieved through an MEDP revolving loan window to those institutions that qualify to participate under the programme, which are: • Savings & Credit Co-operative Societies (SACCOs)/ Village Banks • Registered private money lending companies), and • NGOs engaged in micro credit as well as micro enterprise development

9. Poverty Reduction Strategies Cont’d Small and Medium Enterprises • In 2002 Government created a Ministry responsible for the development of small to medium scale enterprises. • The Ministry operates at grassroots level initiating and funding various income generating projects thereby contributing to poverty reduction. • Budget allocations have been set aside for micro-projects for rural communities to complement efforts of other development partners such as NGOs.

10. Impact of Intervention Strategies • As a result of deteriorating economic growth, high inflation rates,high levels of unemployment and increasing fiscal budget deficits, the government abandoned the interventionist policies of the early 1980s in pursuit of market oriented reforms • Although some of the objectives of the Economic Structural Adjustment Programme (ESAP) were not realised as earlier highlighted, the programme was successful in liberalising the economy in terms of foreign trade and foreign exchange restrictions.

11. Impact of Intervention Strategies Cont’d • Zimbabwe Programme for Economic and Social Transformation (ZIMPREST) which was meant to balance capitalism and socialism. Through this programme the government tried to correct mistakes made from the prior ESAP programme. However, ZIMPREST did not produce the desired results because of continued droughts, lack of balance of payments support and donor pullout/withdrawal among others. • The Zimbabwe Government adopted the programme of economic reform with a formal commitment to protect the poor and vulnerable groups from the negative impacts of ESAP via the Social Dimensions of Adjustment Programme (SDP). • SDP aims to protect the poor from the negative impact of subsidy removal, introduction of fees and unemployment.

12. Background of the Financial System in Zimbabwe • The Zimbabwean Banking Sector has evolved from a relatively shallow regime consisting of a few players operating under a highly regulated environment into a well diversified and developed sector. • Economic reforms introduced in the early 1990’s resulted in the relaxation of regulatory controls and triggered the influx of new players. • The financial sector consists of Reserve Bank of Zimbabwe (RBZ), discount houses, commercial banks, merchant banks, finance houses, building societies, the Peoples Own Savings Bank, insurance companies, pension funds, venture capital companies, asset management companies, developmental financial institutions, microfinance institutions and moneylenders.

13. Major players and their roles • The number of operating banking institutions declined form forty (40) as at 31 December 2003 to twenty-nine (29) as at 31 December 2004, following the liquidation of two discount houses and the placement of nine other institutions under curatorship. • As at 30 June 2005, banking institutions were distributed as follows: twelve (12) Commercial Banks, Five (5) Merchant Banks, Five (5) Discount Houses, Four (4) Finance Houses and Four (4) Building Societies. • Non-banking financial institutions include the Peoples Own Savings Bank (POSB), insurance companies, pension funds, developmental financial institutions, a stock exchange market, venture capital companies, asset management companies, microfinance institutions and money lending institutions. • There are twenty-four (24) registered asset management companies, twenty five (25) micro-finance institutions and one hundred and nine (109) money lending institutions.

14. Major players and their roles cont’d • The major role of the financial sector is the distribution of financial resources from financial surplus sources to financial deficit destinations. • The Reserve Bank of Zimbabwe is at the apex of the banking system. Its mandate is to enable a sound financial system • Micro-finance institutions play the role of enabling sustainable human development and poverty reduction through the provision of credit to the entrepreneurial poor. • Micro-enterprise credit plays the role of addressing unemployment and increased poverty. • Commercial banks play the following roles; • Offer savings accounts and fixed deposits • Offer short term and long term lending including overdrafts • Offer stop order facilities and accepting documents for safe custody • Facilitate funds transfer and electronic funds transfer • Offer investment advice and protect the investors interests

15. Major players and their roles cont’d • The Zimbabwe Stock Exchange (ZSE) • The Zimbabwe Stock Exchange (ZSE) is the market where new and second hand securities are bought and sold. • 80 counters are traded on the ZSE • Merchant banks offer investment banking and international trade finance services • Finance Houses/Leasing companies provide finance for purchase of assets • Building societies provide mortgage finance • Discount Houses trade in money market instruments such as bankers’ acceptances, negotiable certificates of deposits and treasury bills.

16. Client Outreach and Products • The financial sector in Zimbabwe offers a wide spectrum of financial services ranging from; • mortgage finance, • leasing, • hire purchase, • international trade finance, • retail banking, • investment banking, • corporate finance, • micro-enterprise credit, • short and long term capital and securities trading amongst others.

17. Client Outreach and Products cont’d • The clientele for the financial institutions ranges from the high end net worth individuals, top end of the corporate market, transnational corporations to the lower end of the corporate market, small and medium scale enterprises and the entrepreneurial poor. • Most of the financial institutions have a branch network in major cities and towns. • Only POSB and some micro-finance institutions have rural branch networks in remote areas.

18. Performance of the Financial Sector • Total assets for the banking sector grew by 232% during the year 2004 from $5,99 trillion to $19.86 trillion as at 31 December 2004. As at the end of 2004, on balance sheet assets amounted to $17,79 trillion representing 90% of the total industry assets down from 90,21% recorded in 2003. Off-balance sheet items accounted for $2,06 trillion which was 338% higher than the $470 billion recorded as at 31 December 2003. • In the last quarter of 2003 the concentration risk within the sector was considered low as indicated by a declining large exposure to the capital ratio which declined 243,2% to 218,9%. • The growth of the banking sector assets was partly reflective of the hyperinflationary environment.

19. Performance of the Financial Sector cont’d • Profitability, as measured by the return on assets, improved marginally during the year ended 31 December 2004, from 6,5% to 8,1%. The improvement is largely attributed to improved margins as well as cost containment efforts by banking institutions. The same efforts saw the cost to income ratio declining from 70,7% to 59, 4% during the year under review. • The minimum capital requirements for the different financial institutions stood as follows; Commercial Banks ($10 billion about US$385 000), Merchant Banks, Finance Houses, Building Houses($7,5 billion), Discount Houses($5 billion about US$ 193 000), Asset Management Companies($500 million), Micro-finance institutions ($50 million) and money lending institutions($10 million). • New capital requirements were announced by the Monetary Authorities this year, whereby the new capital requirement for commercial banks was set at $100 billion to be complied with by 1 September 2006. • By and large from the above statistics, the Zimbabwean financial sector largely remains vibrant and sound

20. Demand and supply dynamics • The demand and supply for financial services in Zimbabwe is shaped by macro-economic fundamentals such as interest rates, inflation and economic policy • The demand and supply of the services are also shaped by non financial developments such as technological changes. • Changing in legal and regulatory framework has also affected financial development.

21. Policy and Legal Framework for Financial Services in Zimbabwe • All the various types of banking institutions are covered by specific Acts save for the micro finance institutions whose bill is still inn draft, eg • Banking Act, • Building Societies Act and • Asset Management Act.

22. Policy and Legal Framework for Financial Services in Zimbabwe: Supervisory Authorities

23. Regulations of the financial services cont’d • The regulations governing the financial services in Zimbabwe are currently fragmented. • There is, therefore need to harmonise the regulations and preferably have one regulatory authority. • To this end, effective from 11 March 2005, regulation of non banking financial institutions falls under the supervision of the Reserve Bank.

24. POLICY FRAMEWORK FOR MICRO AND RURAL FINANCIAL SERVICES • The rapid growth in micro finance has,not been followed by the systematic development of an appropriate regulatory framework because traditionally, financial policy formulation in Zimbabwe has tended to focus on developments in the formal financial sector. • In order for MFIs to effectively fulfil their role of intermediation and to grow in a sustainable manner, these institutions must operate in a financially sound and safe manner.

25. POLICY FRAMEWORK FOR MICRO AND RURAL FINANCIAL SERVICES • Regulation and supervision of the MFIs, is necessary, hence the decision to supervise the microfinance sector in Zimbabwe, which process commenced in January 2004. • The goal and purpose the Reserve Bank of Zimbabwe’s regulation of the microfinance sector is to ensure permanent access to financial services for a majority of poor and low-income households and their micro-enterprises. • The purpose is to support the development of sustainable microfinance systems that can provide diverse services of high quality. • The end objective is to have a regulated, viable and financially sustainable microfinance sector which would play a significant role in economic development in the country.

26. ROLE OF GOVERNMENT IN ENSURING A STABLE FINANCIAL SYSTEM • The mandate of ensuring stability of the financial system is largely vested in the Reserve Bank of Zimbabwe. • However, the Reserve Bank acts in consultation with the Ministry of Finance on certain decisions such as registration of banks and cancellation of banking licenses. • Maintenance of the stability of the financial system is one of the Reserve Bank of Zimbabwe’s core purposes. • This involves, among other things, seeking to ensure that the failure of one or more banks does not lead to an unnecessary failure of others, thus calling for the soundness of large parts of the entire banking system.

27. THE PROGRESS AND CHALLENGES EXPERIENCED IN MAINSTREAMING MICRO AND RURAL FINANCE INTO THE FINANCIAL SYSTEM • The Reserve Bank took over the registration and supervision of microfinance institutions with effect from 1 January 2004. Prior to this, microfinance institutions were regulated by the Ministry of Finance. • There is, however no regulation specifically for the MFIs. Currently the microfinance sector is regulated under some provisions of the Banking Act, a position which does not adequately cover the special features of MFIs. • Microfinance is unique and different from banks, hence, regulation of this sector under the Banking Act amounts to inappropriate regulation.

28. THE PROGRESS AND CHALLENGES EXPERIENCED IN MAINSTREAMING MICRO AND RURAL FINANCE INTO THE FINANCIAL SYSTEM • Out of an estimated 1700 MFIs operating in the sector in December 2003, only 260 institutions applied to operate as MFIs. • Current microfinance sector supervisory activities include: • Development of an off-site framework based on the provision of quarterly returns for the sector. • Education and outreach programmes with respect to proper completion of the return. • Resolution of complaints from aggrieved borrowers. • Development of an On-site Manual for supervisors of the microfinance sector. • Capacity building activities for microfinance sector examiners. • Preparation for the stakeholder conferences. This includes preparation of the draft MFI law, commissioning of survey of the sector.

29. THE PROGRESS AND CHALLENGES EXPERIENCED IN MAINSTREAMING MICRO AND RURAL FINANCE INTO THE FINANCIAL SYSTEM Savings and Credit Co-operatives Societies (SACCOS) • In Zimbabwe, Credit Unions are regulated under the Co-operative Societies Act, which is administered by the Ministry of Youth and Employment Creation. • The apex body, NASCUZ (National Association of Savings and Credit Unions of Zimbabwe) have limitations, the major one being lack of finance and absence of regulatory backing when requiring compliance from their members. • NASCUZ has expressed preference to be regulated by the Central Bank.

30. CHALLENGES EXPERIENCED IN MAINSTREAMING MICRO AND RURAL FINANCE INTO THE FINANCIAL SYSTEM Policy Environment • The policy challenges for the sector in Zimbabwe are as follows: • Problem of identification and definition of the sector via-a-viz the small to medium scale enterprises and their funding sources; • Diversity of microfinance institutions in terms of ownership structure, size, location, products offered, sophistication, target markets which make it difficult to enact ‘one size fit all’ policies; • Scarcity of information about the sector in Zimbabwe; • Lack of institutional capacity; • The lack of an enabling policy environment for microfinance is therefore a major constraint to the viability and sustainability of MFIs in Zimbabwe.

31. CHALLENGES EXPERIENCED CONT’D Inadequate Regulatory Structure • In general, the major challenge in regulating the microfinance sector is to have an appropriate regulatory framework which at one end, meets the needs and growth aspirations of the sector, whilst providing an appropriate balance in terms of the needs and aspirations of the regulators as evidenced by legislation governing the sector. • The current position in Zimbabwe of fragmented and outdated legislation is a constrain to the deepening and broadening of microfinance services and the participation of private institutions as service providers.

32. CHALLENGES EXPERIENCED CONT’D Institutional under-development • Lack of institutional capacity in Zimbabwe is the missing link to MFIs having sustainable operations with effective and expanding outreach. • The need is to have strong institutions with good governance so as to provide quality services to the poor on a permanent basis. • A good MFI with a commitment to provide microfinance services to the poor should have the capacity to: • mobilize resources in the market, including public deposits (if authorized to do so), to meet its resource requirements; • provide products and services that are attractive to the poor at • minimal transaction costs to the clients and the institution itself; • offer competitive prices to clients.

33. Recommendations on more effective mainstreaming of micro and rural finance into the financial system • Encourage partnership between commercial banks, MFIs and Savings and Credit Co-operative Societies (SACCOS). • Commercial banks can redirect their loan portfolios and retail their banking services to the poor especially the creditworthy, through partnerships with MFIs and SACCOS. • These MFIs and SACCOS have structures within the rural areas of Zimbabwe areas. MFIs and SACCOS are legally regulated within the financial system and they have the knowledge to deal with microfinance loan portfolios. • The partnerships should mandate these bodies to have full control of the loan portfolios.

34. Recommendations cont’d • Redesigning of the monetary policy to include not only the extension of credit to the poor but also to put in place financial instruments which can serve to mobilize the savings of the poor. • The monetary system needs to design special financial instruments to attract micro-savings into the corporate particularly where it can be structured to serve the poor. • The concept of Mutual Funds for the poor provides a significant institutional mechanism to move the poor from the village economy into the more dynamic corporate sector where a significant share of corporate wealth could be owned by the poor. • A Mutual Fund for the poor is an idea of aggregating micro-savings and investing a small fraction of the savings portfolio in the corporate sector.

35. Recommendations cont’d • The development of micro-finance services in Zimbabwe has been donor driven. • Given the current donor fatigue, there is therefore need for provision of seed capital and capital for loan portfolios by the government and monetary authorities. • Capitalization of operations can therefore develop sustainable commercial services on a permanent basis and expansion of scope of operations and outreach. • The current position in Zimbabwe of fragmented and outdated legislation is a constrain to the deepening and broadening of microfinance services. Therefore, comprehensive legislation needs to be put in place to promote participation of the corporate sector to ensure capacity growth and sustainability.

36. Recommendations cont’d • There is need to build the capacity of regulators through employment of MFI practioners, local and regional attachments and regular attendances of MFI specific courses and seminars. • As a conclusion, in order to ensure effective mainstreaming of micro and rural finance, there is need for continuous stakeholder consultations aimed at promoting a common understanding of the operations of the micro and rural finance sector. END OF PRESENTATION