BINDURA UNIVERSITY OF SCIENCE EDUCATION

FACULTY OF COMMERCE DEPARTMENT BUSINESS STUDIES

An Analysis of the Impact of the Reserve Bank of Zimbabwes Regulatory Framework on the Growth of Microfinance Institutions

BRIAN ZUNGU

(B0621724)

A SURVEY OF 2008-2009 A DISSERTATION SUBMITTED IN PARTIAL FULFILMENT OF THE

REQUIREMENTS OF THE BACHELOR OF BUSINESS STUDIES HONOURS DEGREE IN BANKING AND FINANCE

AUGUST 2010

APPROVAL FORM

The undersigned certify that they have supervised the student Brian Zungus dissertation entitled An analysis of the impact of the Reserve Bank of Zimbabwes regulatory framework on the growth of the microfinance institutions submitted in Partial fulfilment of the requirements of the Bachelor of Business Studies in Banking and Finance Honours Degree at Bindura University.

. STUDENT

.. DATE

SUPERVISOR

.. DATE

. CHAIRPERSON

.. DATE

DECLARATION

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I Brian Zungu declare that this research project herein is my own work and has not been copied or lifted from any source without acknowledgement of the source.

RELEASE FORM

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NAME OF STUDENT: DISSERTATION TITLE:

Brian Zungu An Analysis of the Impact of the Reserve Bank of Zimbabwes Regulatory Framework on the Growth of the Microfinance Institutions. Bachelor of Business Studies in Banking and Finance Honours Degree.

DEGREE TITLE:

SIGNED: PERMAMENT ADDRESS:

DATE: House No. 6920 Kuwadzana 5 Harare

DEDICATION

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I dedicate this project to my parents Mr. and Mrs. Zungu who committed their moral and financial support to the success of this dissertation. To them I say may God bless you in everything that you do .I also extend my heartfelt appreciations to my friends Sayton Mutasa, Prosper Chari who helped me with finer details to my project .To you my friends I say this is our heritage .

ACKNOWLEDGEMENTS

Ideas are like stars, we never reach them but like mariners on the sea, we chart our course by them. I would like to acknowledge the contribution made by the following people in keeping me on course to successfully complete my project: Firstly, this project could not have been successful without the professional counsel of the project supervisor Mr Mapanzure. I cherish your professionalism and demonstration of an ideal learning environment. I acknowledge my familys unwavering moral and financial support in both good and bad times. Special mention goes to my friends Prosper, Nyaradzo, Chido and Sayton who helped me with finer details on my project. I would like to thank all those who responded to my questionnaires and interviews, as their valuable insights were an important part in the project. Finally, I thank God for giving me the vision of furthering and becoming even better as I move on to the next step.

ABSTRACT

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The study set out to analyse the impacts of the Reserve Bank of Zimbabwes regulatory framework on the growth of the microfinance sector. Theoretical and empirical literature was reviewed with emphasis being placed on the licensing process, the forms and depth of supervision and the compatibility of the framework with the operational procedures and subsequently the growth of MFIs. A qualitative research design was used and 30 MFIs were selected using the stratified random sampling technique from a population of 60 MFIs. In the study, primary data was collected through questionnaires and interviews to both the MFIs and the RBZ whilst secondary data was collected through publications on the subject and magazines. In the analysis tables, charts and graphs were used so as to reveal the salient message in the data and thus facilitate interpretation. There were a few limitations to the research as some respondents were reluctant to divulge information which they thought will be either confidential to the company or could probe the regulatory authorities. However, the researcher ensured that there was anonymity in the responses and assured them that the data would be used solely for the purposes of this study. The research findings pointed to the fact that the RBZs regulatory framework was hindering the growth of MFIs due to the frequency of license renewals, lack of adequate cheap funding, rigorous reporting and supervision requirements which proved to be costly for the MFIs and the failure to review laws and regulations (such as the induplum rule) to suit the current business environment and MFI operations. Therefore to achieve MFI growth, the license renewal period should be reviewed upwards, the regulatory framework should allow MFIs to recover the high costs of lending to micro enterprises and not depress their profitability. Increased outreach should be facilitated to the sector through the provision of cheap funds to the sector in the form of government grants. APPROVAL FORM..........................................................i RELEASE FORM.............................................................................................................iii DEDICATION...................................................................................................................iv vii

ABSTRACT........................................................................................................................vi LIST OF ACRONYMS.......................................................................................................x LIST OF TABLES.............................................................................................................xi List of Figures..................................................................................................................xii

Figure 5: Frequency of Supervisory Methods Enforced By Rbz .........................................................xii

List of Appendices............................................................................................................xii Appendix D: Questionnaire to the Rbz............................................................................xii

1.1 Introduction........................................................................................................................1 1.2 Background to the Study....................................................................................................1 1.3 Statement of the Problem...................................................................................................2 1.5 Significance of the Study....................................................................................................3 1.6 Assumptions of the Study...................................................................................................3 1.7 Scope of the Study...............................................................................................................3 1.8 Limitations to the Study.....................................................................................................4 1.9 Definition of Terms.............................................................................................................4 1.10 Organisation of the study.................................................................................................5

CHAPTER TWO: LITERATURE REVIEW....................................................................6

2.1 Introduction........................................................................................................................7
2.2 Implications Of The Central Banks Involvement ...........................................................................7

The involvement of the central bank in the regulatory framework also brings in unwanted political interference on the operations of MFIs since the central banks are not independent of their governments. (Business Monitor International: 2004) alleged that whilst the RBZ is doing its best to regulate the financial sector, its task is being made difficult by government policies, which undermine its operations. The political interference is even greater in overheated economies like Zimbabwes, ZAMFI (2008) revealed that RBZ quasi fiscal operations in 2008 discriminately funded MFIs creating an uneven playing field thereby scaring away potential investors due to the prevailing unfair competition. ..................................................................................................................8 ...................................................................................................................................................8 2.4. Regulation of Microfinance Institutions........................................................................11 2.4.1 Licensing Of Microfinance Institutions........................................................................12
2.4.2 Who Should Regulate Microfinance Institutions.........................................................................12 2.4.3 Why Do We Need Regulations....................................................................................................14 2.4.4 Shortcomings of regulation..........................................................................................................16

2.5 Supervision........................................................................................................................19
2.5.1 Supervisory Methods...................................................................................................................19

CHAPTER THREE: RESEARCH METHODOLOGY.................................................21

3.1 Introduction......................................................................................................................21 3.2 Research Design................................................................................................................22

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3.3 Research Population.........................................................................................................22 3.4 Research Sample...............................................................................................................23

Table 1: Targeted Respondents by Type..........................................................................23 ............................................................................................................................24 Figure 1: Geographical Spread of the Targeted Respondents..................24
3.5 Data Collection Methods and Instruments.....................................................................24
3.5.1 Primary Data................................................................................................................................25 3.5.2 Secondary Data ...........................................................................................................................28

3.6 Data Presentation and Analysis Plan..............................................................................29 3.8 Summary...........................................................................................................................30

.................................................................................................................................30 CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS..................................31

4.1 Introduction......................................................................................................................31 4.2 Research Findings.............................................................................................................31
4.2.1 Application and Renewal of Operating Licenses.........................................................................31 4.2.2 Minimum Capital Requirements..................................................................................................33 Financial institutions need capital so as to absorb shocks that is capability to sustain losses. In addition, the more money owners of a financial institution have at stake, the more closely they are likely to closely monitor the behaviour of the management. However, with small loan sizes, there may be no need for MFIs to have as large a capital requirement as commercial banks.......................34 4.2.3 The Induplum Rule......................................................................................................................34 4.2.4 The Process of Recovery of Bad Loans.......................................................................................35 4.2.5 Interest Rates Chargeable By MFIs.............................................................................................35

Figure 3: Interest Rates Charged By MFIs per Month.................................................35

4.2.6 Supervisory Disclosure and Reporting Requirements.................................................................37

Figure 4: MFIs ability to comply with reporting requirements...................................37

4.2.8 The Effectiveness of Supervision ...............................................................................................38 Figure 5: Frequency of Supervisory methods enforced by RBZ .........................................................39

4.3 Summary...........................................................................................................................40

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS......40

5.1 Introduction......................................................................................................................41 5.2 Summary ..........................................................................................................................41 5.3 Conclusions.......................................................................................................................42 5.5 Suggestions for Future Research.....................................................................................44

REFERENCES.................................................................................................................45 APPENDICES..................................................................................................................49 APPENDIX A: COVER LETTER...................................................................................49 APPENDIX B: QUESTIONNAIRE TO MICROFINANCE INSTITUTIONS............50 APPENDIX C: INTERVIEW GUIDE............................................................................52 ix

APPENDIX D: QUESTIONNAIRE TO THE RESERVE BANK OF ZIMBABWE....53

LIST OF ACRONYMS

BPRs CGAP FTC MFIs NBMFIs NGOs RBZ SACCOS SAMCAF SEC ZAMFI SEDCO

Peoples Credit Banks Consultative Group to Assist the Poorest Federal Trade Commission Microfinance Institutions Non Bank Microfinance Institutions Non-Governmental Organizations Reserve Bank of Zimbabwe Savings and Credit Cooperative Societies Southern Africa Microfinance Capacity Building Facility Securities and Exchange Commission Zimbabwe Association of Microfinance Institutions Small to Medium Enterprises Development Cooperation

LIST OF TABLES

Table 1: Targeted Respondents By Type Table 2: License Application Fees Charged By Rbz Table 3: Average Time Taken By Rbz to Renew Licenses for Mfis Table 4: Minimum Capital Requirements Table 5: Strength of Reasons Prompting Supervision of Mfis by Rbz

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List of Figures

Figure 1: Geographical Spread Of The Targeted Respondents Figure 2: Opinion on whether Induplum Rule Is Constraining Growth.

Figure 3: Interest Rates Charged By Mfis Per Month Figure 4: Mfis Ability To Comply With Reporting Requirements Figure 5: Frequency of Supervisory Methods Enforced By Rbz

List of Appendices

Appendix A: Cover Letter Appendix B: Questionnaire To Microfinance Institutions Appendix C: Interview Guide Appendix D: Questionnaire to the Rbz

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1.1 Introduction This chapter will form the basis of the study on an analysis of the impact of the RBZs regulatory framework on the growth of MFIs . The chapter will provide a background to the study, stating the problem, purpose of the study, research questions, significance of the study, assumptions of the study, and limitations of the study and definition of terms. 1.2 Background to the Study Kalungulungu and Moyo (2002) noted that Zimbabwe has experienced phenomenal growth in the microfinance sector in recent years owing to the increase in demand for credit. This was due to the growth of the informal sector in the country following the governments indigenisation drive in an effort to reduce unemployment. Falling of real incomes and deterioration in the standards of living of millions of people in Third World countries may have contributed in the phenomenal growth of MFIs. Ernst & Young (2006) cited that of late, the Ministry of Finance and Economic Development (now Ministry of Finance) used to issue licenses to all institutions (NGOs and private companies) that wanted to lend under the Moneylenders and Rates of Interest Act Chapter 14.14. The licenses were renewed annually and the Ministry had the power to enforce licensing and supervision measures up to December 2003.It further highlighted that during this period there was 40% increase in the number of registered MFIs from 225 as at December 2001 to 315 as at December 2003.This was a positive development since it induced credit in the informal and small to medium enterprise (SME) sector. Microfinance Monitor (2005) revealed that prior to 2003-2004 banking crisis RBZ took over the responsibility of MFI supervision from the Ministry of Finance such that the conduct of all MFIs was being governed by the banking law to curb rampart financial indiscipline in the financial sector. Various supervisory instruments were crafted such as 1

imposing lending ceiling and pegging of interest rate caps. It further highlighted that by end of December 2005 the number of registered MFIs had dropped to 295 marking a 6 % decline. As cited by Zimbabwe Association of Microfinance Institutions (ZAMFI: 2008) the RBZ introduced the Microfinance Policy in 2006 which replaced regulation of MFIs by banking law. RBZ (2008) revealed that as at 1 January 2008 there were two hundred and eighty three (283) registered MFIs comprising of five (5) banks, thirty six (36) NBMFIs, one hundred and seventy seven (177) moneylenders and sixty five (65) SACCOS in Zimbabwe. This marked a further 4% decrease in the number of registered MFIs. It is sad to note that there has been a drastic reduction in the number of visible microfinance players after the initiatives by the RBZ to enforce the regulatory framework for the microfinance sector. This poses a challenge as to whether the regulatory framework was crafted in a manner in which a majority of the players could not meet the new requirements causing exodus of a number of players from the microfinance industry. It is therefore against this background that I found it necessary to make an analysis on the impact of the RBZs regulatory framework on the growth of the microfinance sector. 1.3 Statement of the Problem The problem of the current study is that there is retarded growth in the microfinance sector. In as much as there are a number of challenges and constraints that may have hindered the growth of the microfinance sector, the regulatory and supervisory framework can be the major reason. The regulatory and supervisory framework for MFIs which substituted regulation by banking law may restrict the opportunities for MFIs to develop into sustainable institutions. 1.4 Research Objectives Main objective To establish the impact of RBZ regulation on the growth of MFIs. Sub objectives To establish the reasons for introduction of regulation of MFIs by RBZ. 2

To investigate various regulation approaches. To establish the benefits and shortcomings of regulation to both RBZ and MFIs. To make recommendations on how MFIs can respond in face of challenging regulations.

1.5 Significance of the Study This piece of work has given the researcher a chance to explore much on this important area in the operations of MFIs. Thus the researcher has been equipped with valuable Degree insight and approaches to this subject. The research added new dimensions on the topic of interest to the Universitys body of knowledge and the academic field. The study will develop recommendations, which may be useful to the various stakeholders in the microfinance sector in coming up with better ways of conducting their business transactions in the face of challenging regulations. 1.6 Assumptions of the Study In this study, the researcher took the responses provided by the respondents to be accurate information. The researcher also assumed that the sample used will be representative of the population of MFIs in Zimbabwe.

1.7 Scope of the Study The research was conducted in Harare for the period 2006-2009 in MFIs with branches within Harare, Bulawayo and Gweru. Most of the findings were obtained from the head

offices of TN Micro Finance, Pundutso Microfinance, Micro King and CBZ Microfinance which are more informed on the regulatory issues of microfinance. 1.8 Limitations to the Study Some respondents were reluctant to divulge information which they thought will be either confidential to the company or could probe the regulatory authorities. However, the researcher ensured that there was anonymity in the responses and assured them that the data would be used solely for the purposes of this study. Some of the information released by respondents was not specific to microfinance since some of the regulatory measures applied to the whole finance sector hence the researcher was entitled to use own discretion on which information to use. .

1.9 Definition of Terms Micro-finance institution: Refers to all types of MFIs unless specified in this paper.

Regulatory framework: Supervision and regulation

In this paper, this term shall refer to licensing,

Central Bank: Shall refer to the Reserve Bank of Zimbabwe Bank: Shall refer to the MFIs which are subsidiaries of formal banking institutions unless otherwise stated as commercial bank or building society. Regulatory Authority: Shall refer to the institution responsible for the review and enforcement of regulations in any mentioned sector and does not necessarily refer to the RBZ unless stated explicitly.

Induplum rule:is the rule which stipulates that a loan should cease to accumulate interest when the interest portion has reached the initial capital.

1.10 Organisation of the study This chapter provides an overview of why the study was undertaken (that is, the background to the study and the problem statement) and what the study mainly focused 5

on (that is the objectives). The chapter also highlighted the importance of the study in different dimensions (how significant the study will be) as well as giving assumptions, which enabled the studys results and conclusions to be valid. It also pinpoints the limitations and scope of the study Chapter two then looks on at both theoretical and empirical literature on the subject of regulation of the micro-finance sector by the Reserve Bank of Zimbabwe. Emphasis is placed on the implications of regulation on the growth of MFIs licensing process, the forms and depth of supervision and regulation being enforced and the compatibility of the framework with the operational procedures and subsequently the growth of the microfinance sector. Chapter three outlined the methodology used for the research on the implications of the regulatory framework of MFIs by the Reserve Bank of Zimbabwe (RBZ). The chapter describes the approach specifically adopted to gain an insight on the impact of RBZs surveillance on the sector to the sustainable growth of the microfinance sector. The chapter primarily explains the methods used to collect data, sources of data and the techniques used to analyze the data. Chapter four provides for the presentation and an analytical interpretation of raw data gathered from the field solicited through questionnaires and personal interviews. In the analysis tables, charts and graphs were used so as to reveal the salient message in the data and thus facilitate interpretation. Finally chapter five summarizes the findings, concludes, gives recommendations and highlights the suggestions for future research.

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction This chapter looks at both theoretical and empirical literature on the subject of regulation of the micro-finance sector by the Reserve Bank of Zimbabwe. Emphasis is placed on the impact of regulation on the growth of MFIs licensing process, the forms and depth of supervision and regulation being enforced and the compatibility of the framework with the operational procedures and subsequently the growth of the micro-finance sector. Literature review is being carried out to expose knowledge gaps in the literature upon which research can be carried out. This also allows increasing the breadth of knowledge in the subject area. Furthermore this allows the identification of information and ideas that may be relevant to the subject of MFIs. Finally reviewing literature also show some opposing views from others sources in the subject area and helps to identify people working in the same filed. 2.2 Implications Of The Central Banks Involvement Jansson and Wenner (1997); Berenbach and Churchill (1998) acknowledged that the regulation of MFIs by central banks requires specific skills and increased means to enforce rules. Traditional supervisory agencies in developing countries may already face difficulties regulating a small number of big banks. Moreover, they are unfamiliar with microfinance concepts and technologies and may lack training in effectively supervising new institutional types that deal with unconventional guarantees, have decentralized operations and are large in number. Consultative Group to Assist Poorest (1996) argued that implementing the regulation of all MFIs by the central supervisory authority has very seldom proved to be practicable and affordable. As a consequence of this problem, supervision is either limited to a subgroup of MFIs only or second tier institutions are commissioned. Supervision can either be financed through contributions by the financial institutions under supervision (such as is the case with the Federal Banking Supervisory office in Germany) or from the national budget. (Chavez and Gonzalez-Vega: 1992) revealed that an advantage of the 7

latter option is that the financial institutions cannot use their contributions to pressure the supervisory agency, as is the tendency in Germany for example. The central bank may abuse its legislative powers in the financial markets and charge exorbitant fees to the institutions being supervised. Similarly in Zimbabwe, RBZ (2007) revealed that all MFIs and moneylenders should pay licence fees for renewals annually and this arguably erodes the small revenue earned by MFIs. The RBZ is responsible for funding all supervisory activities and no direct contributions are expected from moneylenders and MFIs for such supervision to be carried out. The involvement of the central bank in the regulatory framework also brings in unwanted political interference on the operations of MFIs since the central banks are not independent of their governments. (Business Monitor International: 2004) alleged that whilst the RBZ is doing its best to regulate the financial sector, its task is being made difficult by government policies, which undermine its operations. The political interference is even greater in overheated economies like Zimbabwes, ZAMFI (2008) revealed that RBZ quasi fiscal operations in 2008 discriminately funded MFIs creating an uneven playing field thereby scaring away potential investors due to the prevailing unfair competition.

2.3 The Implications of Regulations on Microfinance Activities and Growth

In this study, the growth of MFIs refers to expansion in reach and scale emanating from a conducive business and legal environment. This may be in the form of wider geographical coverage, improvement in sources of capital, lesser restrictions on operations, which offers incentives for innovativeness and eventually the ability to transform into a formal financial institution. Chavez and Gonzalez-Vega (1992) pointed to the fact that MFIs can develop into sustainable and self-sufficient institutions. For example in Germany the microfinance movement started in the 17 th century with the Reiffensen Savings Movement, which later transformed into the 5 th largest bank in Germany. Micro Finance Monitor (2008) pointed out that there was marked growth in the Zimbabwean MFIs with Geldon Services a microfinance house being transformed into corporate banking wing of TN Bank where it is being managed professionally. Jansson and Wenner (1997) argued that the restrictions on permissible business activity, for example by banning foreign currency transactions or time deposit taking, rules on establishing branch offices, such as regional limits, minimum opening hours or specified services provided are frequently prohibitive for MFIs, because their target groups are often located in unlicensed regions and the costs of providing specified services are too high. The two authors therefore added that a possible innovative method is to set up small, mobile branch offices with limited services to extend a microfinance institutions outreach without incurring unreasonably high additional costs but RBZ monetary policy statement (2006) stated that all transactions in foreign currency by moneylenders and MFIs will remain to be illegal and all microfinance houses shall follow normal banking business hours.

RBZ monetary policy statement (2007) pointed out that, there is great scope to rope in the rural and marginalized communities into mainstream economy through deliberate policies to develop SMEs and promote financial inclusion particularly at growth points 9

The same monetary policy statement points out that in Zimbabwe, the extent of rural and peri-urban outreach by banks has largely remained low, to the detriment of SME promotion and growth. The per capita banking facility ratios in rural areas indicate unacceptable levels of financial exclusion of the majority of Zimbabweans. It is therefore necessary to strengthen the micro finance sector for it to play its expected role effectively. Berenbach and Churchill (1997) pinpointed that many MFIs still have a lot to learn in preparing annual financial accounts up to the standards required by the regulatory institution and for internal auditing. That is why complying with the relevant related regulations will incur high initial costs. (Christen: 1997) also added that to be able to judge the performance of a microfinance institution (against other MFIs), the figures in the balance sheets and the profit and loss accounts must be adjusted for inflation and subsidies received. On the other hand, inflation raises the face value of real assets, while reducing the value of equity capital on the other. Due to lack of expertise in preparing these financial statements, some MFIs resorted to the engagement of consultancy firms to do it for them so that they can comply with the reporting requirements of the regulatory authority. These consultancy firms often charge fees, which are not sustainable for most MFIs but ZAMFI (2008) revealed that in Zimbabwe all registered MFIs prepared standard financial statements since they are a prerequisite for borrowing from large banks as they are used to assess the financial soundness of these institutions. Zeller and Meyer (2002) argued that effective regulation that avoids rigid rules and narrow microfinance definitions could strengthen the microfinance movement and spur innovation. Models of integration such as in China, India and Vietnam, where the state seeks narrow control of microfinance development, can impede institutions financial viability and curtail the rural poors access to financial services. Madagascar and West Africa have opted for an orientation toward mutualist principles. Mutualist approaches can constrain development capacities within existing networks that are unable to fulfil 10

mutualist requirements, such as local savings mobilization or a member based ownership structure. Therefore, microfinance involvement in the development of regulatory systems can be an important means of addressing their institutional needs. Jansson and Wenner (1997) also added that legislation on usury, which still exists in many countries, is aimed at consumer protection. However, rigid interest rate ceiling that does not cater for loan amount discriminates in any case against micro-loans, which are about twice as expensive, as experience shows. This therefore limits the scale and outreach of these small institutions, given that the loan portfolios of these institutions are dominated by numerous small loans, which also pose higher administrative costs. ZAMFI (2009) indicated that all MFIs whose loans charged interest rates closer to 50% amounted to usury and such MFIs were termed loan sharks. 2.4. Regulation of Microfinance Institutions Rudjito (2002), defined regulation as the set of rules which are used to guide the business practices of suppliers of funds, while supervision refers to the activity of monitoring and enforcing the rules. Modern financial regulation includes an array of instruments designed to improve the informational efficiency of financial markets, protect consumers against fraud and malfeasance and preserve systemic stability. World Bank (2001) also indicated that the regulatory authorities in effect act as delegated monitors for depositors and investors, exploiting economies of scale to overcome information problems that would be beyond the resources of small depositors and investors. Ernest and Young (2007) indicated that prudential regulation in Zimbabwe addresses issues of capital adequacy, loan ceiling and handling of collateral. It aims at protecting the whole financial system by hedging against systemic risks which emanate from failure of one institution. Microfinance Policy (2006) which was developed by the National Taskforce on microfinance emphasised that regulation provides legitimacy and confidence in the eyes of customers and investors checking reckless lending practices. It cited that through prudential regulation the whole financial system is monitored while 11

non prudential regulation target the conduct of business through registration ,prevention of fraud and submission of returns. 2.4.1 Licensing Of Microfinance Institutions MFIs need a license from the relevant registration authority before commencing operations like any other company. Van Greuning et al (1998) emphasized that licensing is a key first step in the supervisory process and it acts as a filter to prevent bad institutions and dishonest people from entering the financial sector. The authorities assist applicants by compiling detailed requirements that should help overhaul the face of the micro financing industry. Money Lending and Rates of Interest Act [Chapter 14:14] stipulates that all moneylenders and MFIs in Zimbabwe should seek formal permission from the RBZ through registration and this measure is meant to curb usury activities and eliminate activities of money laundering and hence gives adequate ground for supervision. MFIs shall follow all the procedures by submitting required documentation and other information of particular emphasis on capital adequacy, shareholding, profitability and risk. 2.4.2 Who Should Regulate Microfinance Institutions Piccioto and Mayne (1999) noted that government regulation can play a critical role in supporting socially responsible trading. However, this role is dependent on their laws being relevant, up to date and enforced by adequately funded and staffed government agencies. At this stage, there would be a problem in relying solely on government legislation to promote socially responsible trading, since in many countries, laws regarding business conduct are ineffectively implemented and enforced. However, governments do have the prime responsibility of protecting and improving the conditions of their citizens.

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MFIs need to be governed under specific regulations and not directly by traditional banking laws. The Indonesian Banking Law (Macleod 1992; Lapenu 1996) is a prime example. The law defines only two types of institutions: commercial banks and the Bank Perkreditan Rakyat (Peoples Credit Banks or BPRs). The BPRs are much smaller than commercial banks and they are required to follow specific prudential rules. This offer a flexible framework for rural lending that has been implemented systematically through various decrees. RBZ (2006) monetary policy noted that all banks and financial institutions shall be regulated by relevant Acts and stipulated that all banks shall comply with the banking Act [Chapter 24:14].Microfinance Policy (2006) further classified supervision and regulation into tiers with MFIs and MFI banks falling under the supervision of RBZ whilst Savings and Credit Unions falling under the supervision of the Ministry of Small to Medium Enterprises. Gerard et al (1998) found that the bodies, which enforce regulatory frameworks, differ from country to country. In England (until very recently) and Italy for example, it is a central bank function. Other countries such as Canada and Switzerland have bank supervisory authorities that are separate from and independent of the central bank. Still, others like Germany and Japan have mixed systems where the central bank shares bank supervisory responsibility with other government agencies. However in countries beginning the transition to a market economy (especially in Third World Countries) like South Africa has a Microfinance Regulatory Council, Zambia in 2007 had put in place draft micro-finance regulations. Ernest and Young (2006) conducted a National Microfinance Survey which was adopted by the National Taskforce on Microfinance to draft the Microfinance Policy which is the framework being used by RBZ to regulate MFIs. Apex institutions are often claimed to be substitutes for an absent formal regulatory framework and enforcement bodies. However, as pointed out by Chavez and GonzalezVega (1994), even if apex institutions can perform important monitoring functions, they 13

are not ideal frameworks for prudential regulation, particularly where their expertise is limited, supervision fails to be neutral and supervisory activities and management tasks are not kept separate so as to deal with only a small number of clear rules. Microfinance Policy (2006) recommended that apex institutions shall be accredited to the RBZ to promote development, application of performance standards and benchmarks. 2.4.3 Why Do We Need Regulations World Bank (2001) supported that financial sector regulation and supervision are essential to limit moral hazard, as well as to ensure that intermediaries have the incentives to allocate resources and perform their other functions prudently. Financial markets are especially subject to imperfect information, owing to the characteristics of exchange. MFIs in particular need to cope with risks associated with opportunistic behaviour by clients (moral hazard), difficulty in the selection of borrowers (adverse selection), problems of lack of collateral and missing insurance markets. In Zimbabwe RBZ (2006) highlighted that due to lessons from the 2004 banking crises which emanated from reckless trading and financial indiscipline calls for strict regulation which maintains check on the conduct of all players in the industry. Regulation and supervision therefore is key to addressing the problem of regulatory arbitrage as noted in 2004 where some banks traded through their unregulated subsidiaries to avoid statutory reserve requirements and other forms of regulatory scrutiny. In addition these institutions provided conduits for money laundering. Besley (1994) also said that governments face similar problems arising from imperfect information and may have no better incentives to induce repayment within the financial market than regulation. Thus the central banks intervention may increase efficiency by facilitating improved use of collateral, such as providing clear definitions of property rights and improving access to insurance markets.

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At the level of financial institutions Chavez and Gonzalez-Vega (1992) distinguish between allocational (resources are channeled to their most productive use), operational (minimizing transaction costs) and dynamic efficiency (adaptability to changing environment). The efficiency of the financial institutions is a measure of the efficiency of the regulatory framework. However, the prime danger of regulating MFIs is restricting their dynamic efficiency, since little practical experience is available at first and the risk of inappropriate regulation is particularly high as a result. Poor information (ensuing from imperfect markets and inadequate disclosure requirements) makes it easier for lenders not just to take risks unwisely, but also to engage in deliberate related lending, which according to empirical research by La Porta, Lopez-de-Silanes and Zamarripa (2000) is characterized by much higher non-repayment rates. Developing economies are smaller and more concentrated in certain economic sectors and accordingly, they are less able to absorb or pool isolated shocks. This in part explains the greater macroeconomic volatility displayed by developing economies in different parts of the world in comparison with the industrial countries. World Bank (1997) also postulated that the need to improve equity might also justify state intervention even in the absence of market failure. Competitive financial markets can distribute capital in socially unacceptable ways so that regulation may be required to protect and assist the vulnerable. MFIs developed in this framework aim at reaching the excluded population or seek to undermine the monopoly power of local moneylenders. ZAMFI (1996) argued that setting up a viable microfinance institution in Zimbabwe for the long term requires strict financial discipline, which engenders a conflict between the imagery of capitalism and the imagery of compassion. Therefore regulation can act as a signal to prospective investors that a financial institution is financially sound and access to certain lines of refinance can be contingent on regulation. Ernst & Young (2006) emphasized that the World Summit for Social Development held in Copenhagen in 1998, underlined and called upon governments to put in place regulatory and institutional frameworks that govern access to micro-credit and strengthen the capacity of organized credit systems. 15

2.4.4 Shortcomings of regulation. ZAMFI (1999) as quoted in the Microfinance Monitor (2000) argued that regulations are drafted in a political process and made more or less binding by law and ordinance. When general conditions are changed in the financial sector, government regulatory authorities in particular are prone more to inertia than to altering their policy. A considerable time lag can also be expected before expert recommendations result in a corresponding policy shift by the responsible government agencies. Also, the regulatory agency that is supposed to protect clients as their agent and attend to the safety and soundness of the financial system is also in danger of opportunism. Its governance structure should therefore also be subjected to analysis. Keefer (2000) observed that, with greater income and ownership concentration inherent in developing countries, it is more difficult to maintain adequate independence of regulatory agencies. The author revealed that political interference in bank regulation has happened even with good checks and balances, such as in the United States of America as savings and loans had members of congress lobby for lighter regulation and reduce regulatory capital requirements. These potential problems are likely to be more pronounced where ownership concentration is greater (for example, in Republica Bolivariana de Venezuela in the early 1990s, in which a senior central bank official owned shares in a bank. In this case regulation tends to weaken the competitiveness of some financial institutions and thus monopolies may be created. Piccioto and Mayne (1999) cited that a problem of using government regulation rather than voluntary codes of conduct to promote socially responsible trading is that government regulation may be more difficult to devise than securing the cooperation and partnerships needed to implement and monitor voluntary codes of conduct in the first place. Regulation thus can tend to be costly to the nation by drawing heavily on the governments revenue earned from taxes at the expense of other productive uses of funds.

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ZAMFI (2000) argued that requiring MFIs to keep customary bank loan records for example would incur excessive costs, because they issue a large number of small shortterm loans. Similarly, the costs of supervision would be extremely high partly because of the sometimes huge number of MFIs in relation to their national economic significance and the related risk potential, so that banking supervisory bodies are often reluctant to regulate them and lack the requisite resources. 2.4 Regulatory Approaches 2.4.1 Regulation by Banking Law Coetzee and Goldblatt (1998) asserted that this type of regulation proceeds on the assumption that MFIs doing bank-type business (that is mobilizing private savings and granting loans), should be subject to existing banking legislation and government banking supervision, just like all other financial institutions. They also indicated that most developing countries lack their own regulatory framework for MFIs and do not allow them as unregulated institutions to mobilize savings from the public. So the only choice open to MFIs is to continue as credit-only institutions or meet the requirements of banking legislation. Similarly in Zimbabwe all MFIs which accept deposits shall comply with the Banking Act [Chapter 24:14] on there conduct with depositors funds while daily actives shall be governed by a special microfinance policy. A variant of this is the exemption oriented approach, where MFIs in general or after individual negotiation with the superintendence are exempted from certain rules. 2.4.2 Regulation by a Special Microfinance Institution Law Rock and Otero (1997) reviewed that in this regulatory approach, a special legal framework is set up for MFIs to account for their specific features. The adoption of MFI law presupposes sufficient interest on the part of the legislator in regulating the sector and a readiness on the part of MFIs to submit to statutory regulation. However, the two authors postulated that given the lack of experience of the legislative with the microfinance sector on the one hand and the MFIs inexperience with statutory regulation 17

on the other, the adoption of a special MFI institution law should be preceded by a prolonged process of mutual consultation and learning and provisions should be amended in an un-bureaucratic way. In Zimbabwe all MFIs are governed by the microfinance policy, the Money Lending and Interest Rates Act stipulates that all MFIs shall be registered with RBZ to create adequate ground for supervision through submission of relevant documentation at stipulated time intervals. 2.4.3 Self-Regulation Berenbach and Churchill (1997) emphasized that self-regulation is largely done without recourse to government. This can be due to lack of interest, insufficient capabilities or also inadequate knowledge of the government regulatory authority about the microfinance sector. The incentive for MFIs to collaborate is to signal their success to outsiders and thus lower their refinance costs or just to gain access to certain refinance facilities (the outsiders include donors, apex organizations and commercial investors). USAID (1997) indicated that in Zimbabwe a first step could be to adopt a code of conduct, possibly specifying binding standards for the industry. This signalling is intended to narrow the information rift between MFIs and their sources of capital, so that these can distinguish between good risks and bad risks. The task of regulation and supervision can be performed by and umbrella body which lays down the regulatory rules and supervises compliance. One or several specialized monitors, acting as a kind of rating agency, could also affect supervision. The absence of regulation in microfinance has enabled MFIs to develop innovative methods. However, self-regulation can be effective if the market place penalizes bad behaviour on its own and guard against opportunism amongst the MFIs. Self regulation in Zimbabwe compliments the existing special MFI policy through the apex body ZAMFI which also initiates some whistle blowing mechanises to curb all forms of misconduct within there their affiliated members.

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2.5 Supervision Rock and Otero (1997) described supervision as the way in which the rules of the game in the financial sector are enforced. They noted that it is easier to adopt headline regulations, but more difficult to implement the underlying procedures and to acquire the necessary supervisory skills to give teeth to these rules. World Bank (2001) revealed that in Zimbabwe, it is still more difficult to prevent a financial institution from concealing a non-performing loan simply by ever greening, that is by making a new loan to cover the repayment. One should not be dismissive of the ability of official supervisors to uncover problems. Empirical evidence exists that they can and do provide independent information that is helpful to stakeholders in the financial sector. For example, Jordan et al (1992) found for the United States of America that the release of adverse supervisory information resulted in a decrease in the financial institutions stock price, suggesting that the release did contain news. Similarly in Zimbabwe prior to the 2004 banking meltdown disclosure by MFIs enabled RBZ to identify institutions requiring fresh capital injections and measures were taken to correct such positions. 2.5.1 Supervisory Methods The Traditional Approach This approach places emphasis on the assessment of historic performance. Nevertheless, it has the disadvantage that there is limited risk management review and it is legally driven, that is, more of an auditors approach. RBZ (2006) noted that supervision of MFIs shall be based on historic performance through analysis of financial reports and statements to ensure that rules of the game are being followed. Chavez and Gonzalez (1997) stated that traditional supervision could be effected off-site or on-site as follows: Off-Site Supervision 19

This entails the analysis of published information and prudential statistical returns, submitted by MFIs to the supervisory authority according to certain criteria so that it can gain a picture of the financial performance and the risk profile of the financial institution. Important here are early warning indicators to enable a timely intervention by imposing sanctions or even by taking over business activity (Chavez and Gonzalez: 1997). The Microfinance Policy (2006) calls for an advanced management information system is essential for effective off-site control and can partially replace on-site inspections, of which most MFIs in Zimbabwe cannot afford the setting up of these systems in their operations. On-site Supervision Chavez and Gonzalez Vega (1997) cited that on-site examinations are a means by which supervisors obtain information in-situ on the conditions of an institution and its compliance with applicable guidelines and regulations as well as the verification of information submitted through prudential returns. On-site examinations enable supervisors to have a better appreciation of management capability and are an integral part of the supervisory process and compliment off-site surveillance. On-site examination can either be full-scope (routine) or targeted (crisis management).In recent years onsite supervision is no longer widely enforced since such measures are being initiated where crises is suspected or after whistle blowing by other players in the industry. RBZ (2007) indicated that all on site supervision on MFIs shall be conducted without prior notice to ensure the readiness of all players to comply with minimum regulatory measures.

Risk Based Supervision Kalungulungu and Moyo (2002) viewed this is a new development being made by supervisory RBZ, which entails focusing examinations on areas that pose the most risk, for instance loans and advances. There is a move away from the traditional approach 20

worldwide to the risk-based approach in order to ensure that supervision is more proactive and effective. This enables the building of early warning systems and the tailoring of inspections that suit the institution being examined instead of using the one size fits all traditional approaches 2.6 Summary This chapter presented the critical implications on the regulatory frameworks enforced on MFIs on their growth. It analyzed the implications of having the central bank involved in the supervision of MFIs, the need for regulation of MFIs, the forms and depth of regulation and supervision and their compatibility with the operational procedures of MFIs and the effects on their growth. The reference to the work of various authors and empirical studies carried out worldwide formed the basis upon which the research methodology that will be discussed in the next chapter was designed to deregister any players that were found flouting the regulations.

CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Introduction

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This chapter outlined the methodology used for the research on the implications of the regulatory framework of MFIs by the Reserve Bank of Zimbabwe (RBZ). The chapter describes the approach specifically adopted to gain an insight on the impact of RBZs surveillance on the sector to the sustainable growth of the microfinance sector. The chapter primarily explains the methods used to collect data, sources of data and the techniques used to analyze the data. 3.2 Research Design A research design acts as a guide so that the researcher follows a detailed plan in collecting and analyzing data thus judging the validity of the research design before any research is undertaken, as well as ensuring that the desired data is solicited from the field. In as much as good results may be obtained from the field, they may not be able to address the problem in question without the use of a proper research design. In this study, a research design was devised in such a way that it showed aspects such as sampling criteria, sample size, data collection methods and instruments as well as data analysis techniques. A survey was carried out to analyse the impact of RBZs regulatory framework on the growth of MFIs. Stratified random sampling technique was used for a sample of 31 MFIs. To investigate various regulation approaches personal interviews were conducted while questionnaires were distributed to obtain quantitative data which was then presented on graphs, tables and charts for better analysis.

3.3 Research Population Population refers the universal set of all potential elements to be included in any research .The RBZ (2008) revealed that as at 1 January 2008 there were two hundred and eighty three (283) registered MFIs comprising of five (5) banks, thirty six (36) NBMFIs, 22

one hundred and seventy seven (177) moneylenders and sixty five (65) SACCOS in Zimbabwe.It is from this population of MFIs where an appropriate sample will be selected, which as have already been alluded to, will be assumed to be representative of the population of MFIs. The RBZs division of Bank Licensing, Supervision and Surveillance has four offices situated in Mutare, Gweru, Bulawayo and Harare. 3.4 Research Sample A sample was preferred because of its cost effectiveness, timeliness and the better control that could be achieved. Thirty MFIs were selected using stratified random sampling for there to be representation from each microfinance category such as banks, non-bank MFIs, SACCOS and moneylenders. Stratified random sampling was used since it was known that the individuals or objects to be sampled provided not one population but a number of distinct sub-population or strata. The target was mainly the directors and managers of MFIs as well as RBZ officials from the Bank Licensing, Supervision and Surveillance Division. As such, the RBZs Harare office provided the sample of RBZ officials. The table below shows the composition of the targeted respondents by type: Table 1: Targeted Respondents by Type Type Of Respondent Banks NBMFIs Moneylenders SACCOS RBZ Total Source: Primary data The figure below shows the geographical spread of the targeted respondents by region: Number In Sample 5 12 8 5 1 31

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23% 45%
Harare Bulaw ayo Gw eru

32%

Figure 1: Geographical Spread of the Targeted Respondents Source: Primary data Of the total respondents in the sample, 45% were from Harare, 32% from Bulawayo and 23% from Gweru. The sample was drawn from these three major cities because the nature of the research made it necessary for the respondents to be from the head offices in the case of institutions that are established regionally. The head offices are responsible for the registration and networking of the organization as well as ensuring compliance with regulations.

3.5 Data Collection Methods and Instruments

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The study was conducted using both primary and secondary sources of data. 3.5.1 Primary Data This is data, which is collected directly from the field of concern for the first time. The data in most cases is raw and does not portray any significant meaning until it is analyzed and interpreted in relation to the problem. Primary data was collected through questionnaires as well as semi-structured personal interviews. An interview guide was used to avoid losing focus and to ensure that all relevant questions were asked. Questions were both closed and open ended. Indeed while some indicators required a brief and precise answer, it was also desirable to let information emerge from the field. Respondents were thus given the opportunity to express their thoughts on the topic of interest as freely as possible. Interviews Personal interview refers to face to face oral examination of respondents for consultation (Leek: 1995). An interview is a qualitative method commonly employed in survey research. The aim of this approach is to ensure that each interviewee is presented with exactly the same questions in the same order. This ensures that answers can be reliably aggregated and that comparisons can be made with confidence between sample subgroups or between different survey periods (Vloe: 1996). The researcher conducted interviews with management of MFIs preference being given to top management. The researcher also managed to engage the ZAMFI top officials while several heads of supervision from RBZ were also approached for comments.

Advantages of Interviews

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The interviews gave high completion rates with most respondents showing greater level of cooperation unlike on mail surveys. Interviews allowed the researcher to have practical information on the subject. The interviewer could note specific reactions and giving a better understanding by observing non verbal expressions. Personal interviews also gave more clarity as respondents could probe or ask follow up questions.

Disadvantages of Interviews The respondents had a tendency of making the interview too informal such that they could easily distort the subject question due to the sensitivity of the research topic however The researcher tried to create an environment of trust by disclosing the purpose of the study and assuring respondents that the information obtained will be used solely for the purpose of the research. Time factor was also another limiting factor for interviews since some appointments could clash demanding further reschedule for meetings with respondents. However the researcher tried to adapt to the times, which were convenient to the respondents of high priority such as Managing Directors and CEOs where possible clashes aroused. . Questionnaires These are any written instruments that present respondents with a series of questions or statements to which they are to react either by writing out their answers or selection from among answers (Brown: 2001).Best and Khan (1981 ) postulated that a questionnaire is data gathering instrument through which respondents answer questions or respond to statements in writing. The interviews also demanded more financial resources as the researcher had to physically visit the respondents.

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After establishing the information to be gathered the researcher selected the questionnaire as a main source of data due to economic reasons. The researcher used a structured questionnaire with closed and open ended questions .The questionnaires were hand delivered to MFI branches in all targeted areas within Harare while some were posted through email to branches of MFIs outside Harare. Advantages of Questionnaires The respondents were given room to respond to questions at any time that was convenient to them. Meaningful and thoughtful information was solicited and this greatly improved the validity of the research findings. Its use resulted in a savings in the cost of the survey as compared to the travelling costs for appointments for interviews. Disadvantages of Questionnaires Some questions could be left unanswered and this reduces the sample size and thus introduces sample bias, however a portion for comments was inserted in the questionnaires to allow the respondents to give any other information that they may felt was not captured in the questionnaires There was no probing of verbal messages, which could be very essential for effective communication; however on submission of the questionnaires, the researcher encouraged the respondents to answer all questions. There was low response rate, which introduced bias into the sample, however on submission The low response rate associated with this data-collecting instrument was mitigated by hand posting and later personally collecting the questionnaires from the respondents

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The combination of the questionnaires and interviews was meant to enable the researcher to gain an insight on the topic of interest, as interviews are flexible whilst at the same time soliciting information from those respondents the researcher may have been unable to arrange interviews with through the use of questionnaires. 3.5.2 Secondary Data The researcher also obtained some data from a number of publications from organizations such as the Reserve Bank of Zimbabwe, the Zimbabwe Association of Microfinance Institutions and the World Bank. Textbooks on Microfinance Institutions and journals of finance were also referred to. Advantages of Secondary Data Information was easily available and inexpensive. The information was already interpreted into meaningful sense.

Disadvantages of Secondary Data Some publications were too theoretical and based on the experience of developed countries and thus were inappropriate to explain the events in developing countries. However discretion was used to moderate the data collected to avoid being too theoretical and applying irrelevant ideas from developed countries. Most of the information is historical and as such, may be outdated. The researcher however placed more emphasis on the concept being portrayed by the historical data to avoid inapplicable and wayward examples. Some of the information was collected for other purposes with different motives irrelevant to the study, however careful selection was made on information obtained from unrelated studies.

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3.6 Data Presentation and Analysis Plan Data presentation involved a combination of tables, graphs and charts. This was meant to reveal the salient message in the data, thus facilitating interpretation. Primary data gathered through interviews and questionnaire was presented on tables, graphs and pie charts. All quantitative secondary data was also presented on tables and pie charts for analysis. Data analysis started with an in-depth study of each individual case. This entailed sifting through the data, discarding whatever was irrelevant to the study and consolidating what seemed most important. The idea was to allow the most significant observations to emerge from all the data gathered in the field, while reducing the volume of data. Data relating to the compatibility of the RBZs forms and depth of supervision and regulation with the operational procedures and the implications on the growth of the micro-finance sector was mostly critical to the study. 3.7 Reliability and Validity of the research Polit and hungler (1999:246) states that reliability refers to the stability, constancy and dependability of an instrument. An instrument which is reliable measures accurately and reflects time score of the attributes under investigation. Reliability of the research was ensured by making use of two instruments namely, the interview and a questionnaire for the respondents. The reliability of the instruments was ensured by clearly wording of the questions included in the interview as well as in the questionnaire. A pretest was done to ensure the respondents understood the questions correctly. Where the questions didnt seem clear enough, the adjustments were made before the questionnaire and the interview schedule were finalised. To ensure that the respondents understood the questions correctly, the researcher translated the questions into the language understood by the respondents; in this case the Shona language was used. 29

Validity refers to the degree to which an instrument measures what is supposed to measure and therefore an unreliable instrument can not be valid. (Polit and Hungler 1999:246; Polit et al 2001:308) The validity of the instrument was tested for face validity by the researcher and the supervisor and they concluded that the instrument appear as though it could measure the appropriate construct. Content validity was also tested; the instruments were developed after the researcher studied the literature as well as the conceptualisation which came from a rich first hand knowledge of the researcher and other professionals in the field of microfinance. The researcher and expects in the microfinance field scrutinized the questions of the questionnaire and the interview schedule and compared them with beach dimension of the objectives and what was discussed in the literature review. 3.8 Summary This chapter discussed the methodology used on this research. It emphasized on the research design, research population, research sample, sources of data, data collection techniques and a plan for data presentation and analysis, highlighting the merits and demerits for using such methodologies. The chapter forms a basis for the presentation and interpretation of data gathered by the researcher from the field, which is expected to add new dimensions to the body of knowledge on the topic of interest in the next chapter.

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CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Introduction The research sought to make an analysis on the implications of the RBZs regulatory framework on the growth of the microfinance sector. This chapter provides for the presentation and an analytical interpretation of raw data gathered from the field solicited through questionnaires and personal interviews. In the analysis tables, charts and graphs were used so as to reveal the salient message in the data and thus facilitate interpretation. 4.2 Research Findings 4.2.1 Application and Renewal of Operating Licenses Table 2: Licence application fees charged by RBZ Banks NBMFIs SACCOS Money Lenders Source: Primary Data The questionnaire from the RBZ stated that the prevalence of unregistered microfinance operators, ought to take advantage of unsuspecting investors gave rise to the need to exercise more caution by the regulatory authorities. As shown by table 2 on application of operating licenses MFIs are required to furnish the RBZ with an application fee of USD2000 (two thousand dollars) and USD1000 (one thousand dollars) for MFIs and moneylenders respectively. On renewal of the licenses a fee of USD1000 (one thousand dollars) is payable for both the MFIs and moneylenders. The MFIs are also required to provide minimum paid up capital, composition of the shareholding, board of directors and management, a business plan, appropriate corporate governance principles and structures as well as demonstration of public need on application. The RBZ added that 31 2008 Z$ 50000 Z$25000 Z$25000 Z$25000 2009 USD 2000 USD 1000 USD 1000 USD 1000

the major reasons behind the rejection of some applications were inappropriate shareholding structures, institutions owned and managed by untrustworthy individuals, lack of clear and adequate corporate governance principles and structures as well as poorly detailed and unrealistic business plans and financial projections. Questionnaires completed by MFIs revealed that all the MFIs indicated that the process of obtaining an operating license or renew an existing one from the Reserve Bank of Zimbabwe (RBZ) was too cumbersome. The average time taken by the MFIs in obtaining a license from the RBZ ranged from two months up to one year. Of the total sample, 82% of the MFIs revealed that this had an effect on their operations whilst the other 18% revealed that it had no effect on their operations. On the other hand the questionnaire to RBZ revealed that when furnished with all the information required on submission for applications for renewal of operating licenses, it would take them about a month to either approve or reject an application. Table 3: Average time taken by RBZ to renew licences for MFIs Banks NBMFIs SACCOS Money Leders 2008 Less than 2 months 2 months to 1 year 2 months to 1 year more than one year 2009 Less than 2 months 2 months to 1 year 2 months to 1 year 2 months to 1 year

As shown on table 3 above MFIs revealed that average time taken (two months to one year) to obtain an operating license may be a limiting factor on the MFIs to conduct business on going concern concept, as they would be gripped with uncertainty as to their fate in the near future. The yearly renewal of MFI licenses could reduce the commitment of the MFIs to execute long-term developmental projects or extending branch networks. The confidence of current and potential investors could also be reduced and thus limit funding in the form of additional capital injections. Personal interviews indicated that demand of up to date licenses as a prerequisite to obtain loans may also reduce the capability of the MFIs to meet the demand for loans and as such, its growth in terms of the loan book would be constrained. On the other hand, the RBZs policy of not assisting an MFI that could not meet the licensing requirements means that such an institution had to close business even if it could have sustainable and 32

realistic projections. However, the thorough vetting exercise by the RBZ on granting operating licenses could be a welcome move, as the few institutions that manage to operate officially would not be subjected to immense competition. 4.2.2 Minimum Capital Requirements Table 4: Minimum Capital Requirements Banks NBMFIs SACCOS Money Lenders Source: Primary Data As shown on Table 4 all the MFIs revealed in the questionnaire that the minimum capital requirements by 31August 2009 currently stand at USD5 000 (five thousand dollars only) for MFIs have never been a threat to their businesses. The questionnaire to the RBZ also confirmed that the minimum capital requirements to set up MFIs and also to support counter-party risks assumed are so far just token amounts. The favourable minimum capital requirements provide an opportunity for the smaller institutions to serve the ignored segments of the economy like consumer loans. In addition, since MFIs do not take deposits from the public, they would be risking their own funds thus the RBZs interests would be limited to the protection of investors stake, which could not be as crucial as depositors protection. This presented a conducive environment in which the relatively small institutions could gradually develop into heavily capitalized and sustainable institutions. 2008 Z$50000000 Z$25000000 Z$25000000 Z$25000000 2009 USD5000 USD5000 USD5000 USD5000

33

Financial institutions need capital so as to absorb shocks that is capability to sustain losses. In addition, the more money owners of a financial institution have at stake, the more closely they are likely to closely monitor the behaviour of the management. However, with small loan sizes, there may be no need for MFIs to have as large a capital requirement as commercial banks. 4.2.3 The Induplum Rule

Opinion on whether induplum rule is constraining growth

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% banks nbmfis saccos money lenders

agree strongly agree

Figure 2: Opinion on whether induplum rule is constraining growth. The completed questionnaires confirmed that majority of the MFIs strongly agree to the notion that the induplum rule was constraining their growth as shown on figure 2. Majority of MFIs revealed that the induplum rule which stipulates that a loan should cease to accumulate interest when the interest portion has reached the initial capital was a major problem in their loan portfolios would reveal that most of the MFIs growth was being constrained as their capital would be eroded by inflation, as the compounding of interest would be frozen at some stage. .This however is opposed to (Moser and Subu : 1995) who cited that most MFIs lend for short term(one month up to three months) and as such this would reduce the possibility of the interest charged to balloon beyond the capital levels even in the multicurrency environment.

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4.2.4 The Process of Recovery of Bad Loans A good process for recovering bad loans helps to reduce losses by providing incentives for the borrowers to repay as well as reducing the costs incurred by the MFIs in engaging that process. A long winded and costly process of bad loan recovery may increase the loan loss rates by failing to recover a great deal of their assets in time and at a low cost since they lend to the high risky segments of the economy. As a result, they may not achieve growth due to loss of business within the unproductive time of recovery procedures. From the sample, 24% of the MFIs cited that the legal process of recovery of bad loans was not a constraint to their growth whilst a majority of the MFIs (76%) were of the idea that this process was a constraint to their growth because of the length of time and the costs incurred to get approval from the courts to realize any assets pledged, or the engagement of debt collectors. Due to the high risk of default inherent in the microfinance sector, the loan loss rates could be high and this could impact negatively on the profitability of the MFIs since the recovery process was not vibrant. 4.2.5 Interest Rates Chargeable By MFIs

Average Interest charged by MFIs per month in 2008

Above 300 7% 250-300 54%

Average Interest charged by MFIs per month in 2009

200-250 39%

200-250 250-300 Above 300

Above 6.5 7% 5.5-6.5 54%

4.5-5.5 39%

4.5-5.5 5.5-6.5 Above 6.5

Figure 3: Interest Rates Charged By MFIs per Month Source: Primary data 35

From figure 3 above MFIs who charged interest rates in the 4.5%-5.5% category in 2009 constituted mainly the banks and the SACCOS, whilst the 5.5%-6.5% and above 6.5% categories were dominated by the NBMFIs and moneylenders. This could be so as the banks and SACCOS normally could access cheap funds (in the form of deposits and members savings) and thus could have lower operating costs as compared to NBMFIs and moneylenders. On average, the commercial banks (which are the major source of commercial funding for MFIs) were charging about 35% per annum. In this case, the constraint on the growth of MFIs was in the form of loss of competitiveness in terms of the rates charged due to the usually high costs of funds as well as high operating costs for small to medium scale MFIs compared to those of banks and large institutions and thus loses business. The playing field was not even as banking institutions that offered microfinance services normally charged market based rates of interest on loans. This would put them at an advantage in that they have a cheap source of money through deposits and government grants which they would use to compete with NBMFIs and moneylenders which do not have this source of funds. Interviews with all MFIs revealed that RBZ recently removed the interest rate caps (which were previously pegged at 35% per annum) on the lending activities of MFIs by amending the Money lending and Rates of Interest Act Chapter 14:14. It stipulated that MFIs should charge interest rates which are market based and adding a reasonable administrative charge to promote allocative efficiency. Although this move could be welcomed by the MFIs as increasing their profitability, however 84% of the MFIs argued that the new interest rate regulations were still a constraint to their growth due to their inability to charge competitive interest rates as compared to MFI banks, which have access to cheap funds. On the other hand, 16% of the MFIs stated that interest rate regulations were not a constraint to their growth as they would be able to charge higher interest rates to compensate for higher cost of funds, operating costs and higher risk than commercial banks. Therefore the interest rate regulations cannot provide a growth opportunity to the 36

MFIs unless they are adequately funded at relatively cheap costs for them to be able to recover their expenses and charging competitive interest rates at the same time. The illustration below shows the interest rates that were being charged by MFIs: 4.2.6 Supervisory Disclosure and Reporting Requirements

MFIs ability to comply with reporting requiremets (2008-2009) 120% 100% 80% 60% 40% 20% 0% 100% 80% 36% 25% 40% 29% 52% 38% 2008 2009

compliance

banks

nbmfis

saccos

money lenders

Figure 4: MFIs ability to comply with reporting requirements Source: Primary data These responses on figure 4 show that the larger institutions (Banks and NBMFIs) were in a better position to comply with the supervisory informational needs than the smaller institutions (SACCOS and moneylenders). This could be due to the ability of the larger institutions to achieve economies of scale and spread the costs over wider bases, skilled staff in records keeping and the preparation of financial statements as well as the use of compatible information systems in their administrative processes. Therefore the results point to the fact that the reporting requirements were not a restraint on the growth of these larger institutions. As supported by ZAMFI (2006), the smaller institutions claimed that these reporting requirements were stifling their growth, as the lower levels of business activity, for instance the engagement of external consultants to prepare their financial statements, could not sustain the increase in costs. Since the microfinance industry constitutes of a great deal of relatively small institutions, these reporting requirements could pose a blow 37

on the need to nurture the growth of these smaller institutions into self sustainable and capable organizations. One of the foundations for a viable regulatory framework is the collection, organization and provision of operating and financial information on a timely basis, under well organized and orderly reporting systems. If they are operating viably and prudently, MFIs have no problems in maintaining information systems, records and reports for the use of management and the supervisory board if the reporting requirements are costly and not realistic for the type of institutions (such as size and experience). They may increase the MFIs operating costs and they may jeopardize the profit drive and hence the desire for growth by the MFIs. 4.2.7 Reasons Prompting supervision of MFIs by RBZ Table 5: Strength of reasons prompting supervision of MFIs by RBZ Weak Money Laundering Corporate Governance Consumer Protection Supporting Growth ** *** **** Strong *** *** ***** ** Very strong ***** ***** ** ***

Table 5 reveals that very strong reasons prompting supervision of MFIs relates to money laundering and cooperate governance since these can impact negatively to the economy as whole .The initiative to support growth is weak due to lack of adequate financial resources to fund such projects but a strong initiative to protect consumers is there to ensure that quality products and services are being offered to the defenceless public.

4.2.8 The Effectiveness of Supervision

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frequency of supervisory methods enforced by RBZ

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% banks nbmfis saccos money lenders On-Site, 20% On-Site, 25% On-Site, 30% Offsite, 80%

Offsite, 75%

Offsite, 70% On-Site, 55% Offsite, 45% On-Site Offsite

Figure 5: Frequency of Supervisory methods enforced by RBZ Source: RBZ Supervision Report (2008) The central bank indicated that their staff has been severely hampered by the sheer volume of MFI returns (more than 250 per month) since Off-site supervision which demands for bulk of paperwork was being widely used as shown on figure 5 above. The questionnaire from RBZ revealed that it incurred costs in the form of capacity building to enable effective supervision of the large number of MFIs. This view was also supported by Piccito and Mayne (1999) where they argued that supervision can be costly to the nation by drawing heavily on the government revenue at the expense of other productive uses of funds. Personal Interviews revealed that the decline in the frequency of on-site supervision was due to the high transport costs and allowances for the staff visiting MFIs hence it was resolved that on-site supervision shall only be conducted for MFIs with branches in Harare. The effects of too much pressure on the central banks supervisory staff caused delays in the decision making process which could in turn kill the confidence of investors in the microfinance sector. However, the move made by the central bank to decentralise its operations and decision-making across regions was meant to reduce the pressure and these delays. The benefits of an appropriate regulatory framework can only be realized if the regulations are adequately enforced. Failure to enforce certain laws could result in opportunistic behaviour by some players at the expense of others who determined to 39

maintain ethical practices and abide by the law. The ability of the regulatory authorities to enforce effective supervisory methods is largely dependent on the costs involved, capacity in terms of the information systems and experience of staff in relation to the number of institutions to be supervised. 4.3 Summary This chapter entailed the presentation, interpretation and analysis of the data to come up with the findings of this study. The major findings pointed to the fact that the RBZs regulatory framework on MFIs is stifling MFIs growth by restricting the access to cheap funds in the form of government grants, the frequency of license renewals, onerous and costly reporting requirements, too much pressure on the supervisory authorities as well as an unfavourable legal process of recovery of bad loans. On the other hand, the study also found out that the minimum capital requirements and a stringent licensing process (creating a barrier to entry) provided a conducive environment in which the relatively small institutions could have the opportunity to grow with minimum competition. As such, the next chapter will focus on the summary of the study, the conclusions drawn from the study, recommendations to address the drawbacks revealed by the findings as well as suggestions for future research.

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

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5.1 Introduction The preceding chapters presented the research question, the body of knowledge in the area of the regulatory framework being instituted by the Reserve Bank of Zimbabwe (RBZ) and its implications on the growth of the microfinance sector, the methodology of the study and the findings of the present research. This chapter summarizes the findings, concludes, gives recommendations and highlights the suggestions for future research. 5.2 Summary The research sought to analyse the impact of the RBZs regulatory framework on the growth of the microfinance sector. The research pointed to the fact that the RBZs regulatory framework hindered the growth of MFIs .The excessive reporting requirements also proved to be costly and not practical for most MFIs. The frequent renewal of licences restricted access to cheap funds by scaring away investors due to lack of confidence in the industry as uncertainty on the future prospects of MFIs increase. The minimum capital requirements of USD5000 as at 31 August 2009 was viewed to have never been a threat to the business .RBZ noted that minimum capital requirements to set up MFIs and also to support counter party risks assumed are so far just token amounts. Majority of MFIs claimed that the induplum rule was a serious threat to their loan portfolios and the growth was being constrained as their capital would be eroded by inflation as compounding interest would be frozen at some stage. Research revealed that issues of corporate governance and money laundering prompted regulation of MFIs by RBZ and among the regulatory approaches used by RBZ off-site supervision emerged costly to MFIs since it demanded an advanced information system and expertise to come up with standardised reporting material .On the other hand on-site supervision which was not being widely used due to lack of sufficient resources reduced the adequacy of supervision especially to MFIs outside Harare .

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5.3 Conclusions The research findings point to the fact that the RBZs regulatory framework hindered the growth of MFIs. The rigorous reporting and supervision requirements also proved to be costly and not practical for most MFIs due to their sizes and low levels of experience as they lacked highly qualified management. The frequent renewal of licences restricted access to cheap source of funds and also blew investor confidence thereby contributing to the subdued growth of MFIs. The investors would thus be gripped with uncertainty over the long-term prospects for the MFIs as well as the failure to assess and implement realistic developmental goals. This had the effect of reducing the funding of the MFIs from private investors and thus limited scale and outreach Regulation on minimum capital requirements was viewed as being supportive of the growth prospects of the MFIs, it was also observed that the sound capital base enabled firms to venture into competitive markets and have adequate ground for risk management. The study noted that the regulatory approach used by RBZ created challenges to the regulatory capacity due to volumes generated for off-site supervision at the same time the reduced frequency for on-site supervision and the relatively large number of MFIs resulted in the lack of adequate supervision. It was observed that the laws and regulations such as the induplum rule and the legal process for the recovery of bad loans were outdated and not in the interest of the development of MFIs.

. 5.4 Recommendations

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Regulatory framework fails to take into account the different ages and sizes of the MFIs. For instance, regulation of a ten year old should be different from regulation of a transforming institution hence the period of license renewals should be extended to more than five years to allow the upcoming MFIs to execute long-term strategies with a high level of certainty and thus be committed to their implementation. To keep heads above the water upcoming MFIs should therefore commit themselves to short term objectives for survival.

The regulatory environment fails to provide all players within the financial services sector with a level playing field in the structuring of interest chargeable by MFIs. It should allow MFIs to recover the high costs of lending to micro enterprises and thus not depress their profitability. In face of the induplum rule MFIs should therefore adopt securitisation mechanism which allows them to sale their homogeneous loan portfolio to investors and issue securities upon that pool of securitised assets thus preventing there loans from being frozen.

MFIs should advocate for development of a new MFI law that should be applicable and addressing issues relating to licensing of microfinance activities. This should be developed after careful analysis of the implications of bringing in new laws and there should be adequate consultations to all stakeholders in the microfinance sector.

To facilitate the development of sustainable MFIs that meet the various demands for microfinance services in Zimbabwe, there needs to be in place a regulatory framework that facilitates increased outreach. Increased outreach can be achieved through adequate capitalisation of MFIs by increasing their ability to attract sustainable and cheaper sources of capital. The MFIs that will be able to do this will be those that can demonstrate that they are sustainable or at least have a strong potential for sustainability.

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The overriding reason for regulation and supervision of MFIs should be less of policing and more of facilitating the development of MFIs. Thus the regulatory framework should be effectively undertaken so as to benefit the MFIs with the objective of enabling as many of them as possible to reach operational and financial self-sustainability.

5.5 Suggestions for Future Research The other factors that affect the growth of MFIs, other than the regulatory framework should be analysed to have a comprehensive basis for the development of sustainable MFIs. As such, an in-depth institutional survey may be required to assess the impact of these other factors on the growth of MFIs even if a compatible regulatory framework is developed. A further study may be carried out to investigate the impact of microfinance on economic development in Third World Countries. This may assist the relevant authorities to appreciate the contribution of MFIs to poverty alleviation, reduction in unemployment and improvement in standards of living. As such this may justify if there is really a need for MFIs to be given support and preferential treatment to play their role in the best manner possible.

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REFERENCES

Bank of Uganda and Germany Technical Cooperation (1998), Proposal For Bank Of Uganda Policy Statement On Microfinance Institutions Regulation. Draft . Kampala. Uganda. Berenbach, S. and Churchill C. (1997), Regulation And Supervision Of Microfinance Institutions: Experiences From Latin America, Asia And Africa. The Microfinance Network Occasional Paper No. 1. Washington, DC. Besley, T. (1994), "How Do Market Failures Justify Interventions In Rural Credit Markets? The World Bank Research Observer, Vol. 9, No. 1. Business Monitor International (2004), Zimbabwe Business Forecast Report- Fourth Quarter, London Chavez, R. A. and Gonzalez-Vega C. (1992), Principles Of Regulation And Prudential Supervision: Should They Be Different For Micro Enterprise Finance Organizations? Economics and Sociology Occasional Paper No. 1979. Columbus, Ohio: Ohio State University. Chavez, R. A. and Gonzalez-Vega, C. (1994), "Principles Of Regulation And Prudential Supervision And Their Relevance For Micro Enterprise Finance Organizations". The New World Of Micro Enterprise Finance. Building Healthy Financial Institutions For The Poor. West Hartford, Connecticut: Kumarian Press, U.S.A Cheeseman, H. R. (1997), The Legal And Regulatory Environment: Contemporary Perspectives In Business, Prentice Hall, New Jersey.

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Christen, R. P. (1997), "Issues In The Regulation And Supervision Of Microfinance". Washington DC Coetzee, G. and Goldblatt, S. (1998), Regulation And Supervision Of Microfinance Institutions: Experiences From South Africa. Paper Presented On The CGAP Conference "Savings In The Context Of Microfinance". Kampala, Uganda, Consultative Group to Assist the Poorest (1996) Regulation & Supervision Of MicroFinance Institutions: Stabilizing A New Financial Market. Note No. 4. August 1996. Washington, DC: The World Bank. Dichter, T. W. (1996), "Questioning The Future Of NGOs In Microfinance". Journal Of International Development, Vol. 8, No. 2. Ernst & Young (2006), National Microfinance Survey, ZAMFI Gerard C. Jr., Hunter, W. C., Kaufman G. and Leipziger D. M. (1998), Preventing Bank Crises: Lessons From Recent Global Bank Failures, The World Bank, Washington DC. Jansson, T. and Wenner M. (1997), Financial Regulation And Its Significance For Microfinance In Latin America And The Caribbean. Inter-American Development Bank, Sustainable Development Department, Micro enterprise Unit. Washington DC: Inter-American Development Bank. Jordan J., Peek J. and Rosengren E. (1999), The Market Reaction To The Disclosure Of Supervisory Actions: Implications For Bank Transparency, Journal of Financial Intermediation (July) Kalungulungu P. and Moyo T. (2002), Regulation And Supervision Of Microfinance 46

Institutions, SAMCAF Keefer P. (2000), When Do Special Interests Run Rampant? Disentangling The Role Of Elections, Incomplete Information And Check And Balances In Banking Crises, Policy Research Working Paper 2543, World Bank, Washington DC. Lapenu C. (1996) Indonesias Rural Financial System: The Role Of The State And The Private Institutions, Asia Series On Sustainable Banking With The Poor, World Bank, Washington DC. La. Porta R, Lopez-de-Silanes F. and Zamarripa G. (2000), Soft Lending And Hard Lending: Related Lending In Mexico, Harvard University, Department of Economics, Cambridge. McLeod R. H. (1992), Indonesias New Banking Law, Bulletin of Indonesian Economic Studies 28. Moser J. T. and Subu V. (1996), The Economics Of Disclosure Requirements For Derivatives, Chicago Fed letter October (110) Piccioto S. and Mayne R. (1999), Regulating International Business; Beyond Liberalization, St Martins Press, New York. Reserve Bank of Zimbabwe (2006), Troubled Banking Institutions, Supplement 1 Of The Fourth Quarter 2005 Monetary Policy Review Statement, Government Printers, Harare

Robinson and Marguerite S. (2001), The Micro-finance Revolution, Sustainable Finance For The Poor, World Bank, Washington. 47

Rock, R. and Otero M. (1997) From Margin To Mainstream: The Regulation And Supervision Of Microfinance. ACCION International. Rudjito (2002), Micro-Banking Development, Regulation In The Asia Pacific Region. The Indenesian Case, The APEC Economic Committee. Van Greuning, H., Gallardo J. and Randhawa B. (1999) A Framework For Regulating Microfinance Institutions. Policy Research Working Paper No. 2061. Washington, DC: The World Bank. World Bank (1997) World Development Report. The State In A Changing World, Oxford University Press, New York. World Bank (2001) Finance For Growth, Policy Changes In A Volatile World, Policy Research Report, Oxford University, Oxford. ZAMFI (2004), The Micro-finance Monitor, September Issue Zeller M. and Meyer R. L. (2002) The Triangle Of Microfinance, Financial Sustainability, Outreach And Impact, The Johns Hopkins University Press, Washington DC.

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APPENDICES APPENDIX A: COVER LETTER Bindura University Faculty Of Commerce Department Of Banking And Finance P. Bag 1022 Bindura 28 September 2008wfr To Whom It May Concern: RE: RESEARCH PROJECT ASSISTANCE I am a fourth year student at the Bindura University, studying for a Bachelor of Business Studies Honours Degree in Banking and Finance. I am carrying out a research on, An analysis of the implications of the Reserve Bank of Zimbabwes regulatory framework on the growth of the microfinance sector, in partial fulfilment of the requirements of my degree programme. Your assistance will be greatly appreciated, if I could have your opinion regarding my research. All information will be treated with the strictest confidentiality as the study is purely for academic purposes. You are encouraged not to write your name on the questionnaire. Yours faithfully Brian Zungu

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APPENDIX B: QUESTIONNAIRE TO MICROFINANCE INSTITUTIONS

Section A Details of Respondent and History of Business 1. Position of Respondent . 2. Number of years employed in the micro-finance sector . 3. How old is the institution (if less than a year state the months). Section B Regulatory Concerns of the Institution 1. Is the process of application for a new or renewal of a micro-finance license too cumbersome? YES Less than 2 months NO 2 months to 1 year more than one year

2. How long did it take for the institution to be licensed from date of application?

3. How did this affect the institutions operations? Very strong 4. If yes, how? .. .. 5. Are the minimum capital requirements a threat to your institution? Low Threat Strong Threat NO No Threat 6. Has the institution ever accessed cheap sources of funds such as donor funding and government grants? YES Strong Weak

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7. If no, why? 8. What is the interest rate being charged by the institution 4.5-5.5 % the institutions growth? Agree Strongly Agree Disagree 5.5-6.5 % above 6.5% 9. Do you agree that the new form of governance of MFIs interest rates hindering

10. To what extent are the following the laws and regulations governing the operations of the institution, constraining the growth of your institution. Less Interest rate regulations Induplum Rule Process of recovery of bad loans Greater Extent

11. What is the level of costly burden imposed by supervision of MFIs in the provision of financial statements, returns and keeping of records to facilitate offsite supervision (that is, is the institution capable of complying with the reporting requirements)? Low high very high

12. Is there any other concern that you feel could be stifling the growth of your institution? 51

 APPENDIX C: INTERVIEW GUIDE 1. Introductions 2. The researcher sheds more light on the topic to be discussed and the essence of the research. 3. How many years of experience does the interviewee have in the business of microfinance? 4. When was the institution established? 5. The licensing process a. Is it a cumbersome process? b. How long did it take for the institution to be licensed from date of application? c. Did this have any effect on the operations of the microfinance institution? 6. Are the minimum capital requirements a threat to the institution? 7. Has the institution ever accessed cheap funds such as donor funding and government grants? a. If no, why? 8. What is the interest rate being charged by the institution? 9. Is the new form of governance on MFIs interest rates hindering the growth of the institution? 10. Are the laws and regulations governing the operations of the institution, constraining the growth of your institution such as interest rate caps, the induplum rule and the process of recovery of bad loans? 11. Is the institution capable of complying with the supervisory reporting requirements and are these requirements imposing costly burdens on the MFIs growth?

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12. Is there any other concern that you feel could be stifling the growth of your institution? 13. Any question which might not have been answered satisfactorily in the questionnaire or not answered at all 14. Vote of thanks by the researcher APPENDIX D: QUESTIONNAIRE TO THE RESERVE BANK OF ZIMBABWE 1. What is the strength of the following reasons that may have that prompted the RBZ to regulate MFIs? Weak Money Laundering Corporate Governance Consumer Protection Supporting Growth 2. What is required for the application and renewal of an MFI operating license? 3. Does the central bank offer support or preferential treatment to institutions, which may not be able to meet its requirements? Yes No 4. How long does it take for the central bank to approve or reject an application for an operating license from date of application? Less than 2 months 2months to 1 year more than 1 year Strong Very strong

5. What sorts of anomalies were inherent in the MFIs whose applications were rejected? 6. At the moment, what are the levels of minimum capital required for MFIs? 53

7. What is the level of interest rate caps set by the central bank for MFIs?

8. To what extent is the decision making process on supervisory actions and sanctions ensuing from the exercise of supervision on the MFIs decentralized across the central banks regional offices? High Low

9. On average, how many MFIs returns do you analyze and report on (monthly or quarterly)? Less than 100 200-250 above 250

10. How much pressure does this put on the staff in the Bank Licensing, Supervision and Surveillance Division given that the central bank has the prime responsibility to regulate the banking sector at large? Low High Very High

11. What is the frequently used supervisory method for each category? On-Site (%)
banks nbmfis saccos money lenders Off-site (%)

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12. How much support do you put to aspiring MFIs to transform into formal financial institutions? Weak Strong Very Strong

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