Lately, the market has seen various initiatives aimed at improving liquidity.
At face value, these may appear to be addressing liquidity concerns only, yet they also have salutary implications in terms of financial inclusion.
While the effects of illiquidity are likely to be short-term in nature, those of financial exclusion tend to linger, with harmful consequences on financial health.
But there is hope yet because as former United States Federal Reserve (central bank) chairman Alan Greenspan once said: “Sharp financial adversity brings deep depression.
But people not otherwise psychologically incapacitated rebound with time.
Their smile returns.” This is why most developing countries have financial inclusion as a goal, since financial exclusion is increasingly seen as both a symptom and cause of poverty.
This week, without underestimating their impact on market liquidity, Financial Sector Spotlight (FSS) reviews some of these initiatives through a financial inclusion lens, strictly from a development perspective.
Broadly speaking, financial inclusion is all about giving people access to appropriate financial products and services, such as savings, transaction banking, credit and insurance.
ReNaissance Merchant Bank Limited/NORSAD US$3 million Line of Credit In early June 2010, ReNaissance Merchant Bank Limited announced that it had secured a US$3 million line of credit for SMEs and Rural and Peri-Urban Businesses from NORSAD, a joint Nordic and Sadc Development Finance Institution (DFI) established to contribute to private sector development through extension of loans and guarantees on commercial terms for the operations of viable enterprises in the Sadc region.
“The objective of the line of credit is to capacitate small to medium enterprises which generally in the Zimbabwean market have struggled to access reasonably priced funding and end up with viability challenges,” ReNaissance said in a statement.
Clearly, the aim of this four-year facility to “enhance businesses that are traditionally not catered for but play a significant role in employment creation” – SMEs and rural and peri-urban businesses – makes it one of the foremost focused attempts at financial inclusion in recent times.
Reports that the facility has attracted applications amounting to US$20 million demonstrate beyond all reasonable doubt the hunger for affordable and long-dated financing for the SME sector.
It also demonstrates that there is room for more players to join the fray. The market imperative for such financing becomes all the more important when viewed in the context that the informal sector now accounts for about 60% of Zimbabwe’s overall economic activity and reportedly accounts for about 90% of the country’s employment.
National Social Security Authority (NSSA) US$1 million SME Fund The crying need for SME financing has not been lost on NSSA, which budgeted US$1 million for that purpose in 2010 and has disbursed the funds in quarterly tranches of US$250 000.
A total of US$500 000 was disbursed in March and June. The last disbursement of the year is expected in December 2010 and NSSA is contemplating increasing the amount to US$2 million next year.
The Small Enterprises Development Corporation (Sedco) is the intermediary charged with on-lending the funds and therefore receives and processes applications from prospective borrowers, disburses the loans and receives loan repayments.
The basis of NSSA’s financing is steeped in the law of causality – all effects have causes. Instead of waiting for things to happen by themselves, NSSA expects that by taking the initiative to finance the growth of SMEs, this will result in employment creation, which will in turn broaden the Authority’s catchment area for pension contributions.
If this works as planned, this intervention will create a virtuous cycle of financial inclusion as more and more people become absorbed into the formal financial system and make contributions to NSSA, which can in turn release more funds for SME financing.
This would also have apositive impact on the tax revenues.
NSSA’s financing model is premised on the sustainable harnessing of national savings and channelling them towards where they are needed most in line with the theory of the efficient allocation of resources.
State-Sponsored Women’s Bank Deputy Prime Minister Thokozani Khupe recently announced that plans to register a state-sponsored Women’s Bank were at an advanced stage.
The bank, which will lend money without insisting on collateral security, will operate at microfinance level and is expected to open its doors to the banking public by the end of 2010.
The intention to set up this institution has all the hallmarks of financial inclusion – affordability, convenience, suitable tenors and the fostering of a savings culture, if pronouncements by DPM Khupe are anything to go by.
Branches would be opened “everywhere including the rural areas where the majority of women stay”, and “interest rates will be very low and the repayment period longer so as to afford people to pay back what they would have borrowed”, she said. The bank will also aim “to inculcate a culture of saving in order to help the future generations”.
The Financial Inclusion Spectrum
The initiatives outlined above have been chosen not because they are the only ones of their nature in the market – there are many other microfinancing initiatives with a financial inclusion agenda, some of which have been in existence for much longer.
These have been chosen because they are representative of the spectrum of financial inclusion; they are different colours of the same rainbow.
ReNaissance’s facility, on the one hand, combines the primary mission of delivering a return to shareholders with a sense of social mission; in other words, business sustainability comes first while the development benefits are a by-product.
The Women’s Bank, on the other had, is a pro-poor project which is more focused on the developmental aspects of banking hence deliberately seeks to empower though poverty reduction.
The profit motive, while important, is secondary. NSSA’s intervention is the middle-of-the road option, balancing the desire to earn a return on pension funds and the need to finance market development, perhaps in equal measure.
For all the good intentions of these initiatives, it must be noted that populism, especially in the area of pro-poor finance, often leads to financial initiatives that can be very damaging to microfinance.
When DPM Khupe noted that everyone in government was supporting the idea of the Women’s Bank and everybody wanted to see it succeed, hopefully she wasn’t taking this support as a guarantee that the project would succeed.
Successful financial innovation is not only about introducing new ideas – the nuts and bolts of proper banking must be firmly in place if sustainable success is to be assured.
Additionally, it must be noted that too many activities in too many places too soon can make any endeavour vulnerable to a variety of external shocks.
To its credit government, through the DPM’s Office, has identified the need to “come up with a business training module aimed at assisting women with the technical knowledge on how to run a business”.
They are dead right. Hopefully this includes a fair dose of financial literacy training as well, because poor financial literacy is perhaps the biggest challenge for the development of financial markets in most of the developing world.
Omen Muza is a banker and Managing Director of TFC Capital Zimbabwe. He writes in his personal capacity. Feedback: email@example.com