“FIs are just too risk averse and would rather keep money than lend to the productive sector.”
The Monthly Financial Sector Bulletin (MFSB) publishes The Microfinance Interviews a monthly question-and-answer feature through which we engage key stakeholders of the sector such as MFIs, funders, service providers, development partners and regulatory authorities on issues of topical and mutual interest. In this instalment, the spotlight is on the Zimbabwe Agricultural Development Trust (ZADT), which provides funding to the microfinance sector through partner financial institutions (FIs). Godfrey Ruramai Chinoera (GRC), the trust’s chief executive officer recently talked to NewsDay financial columnist, Omen Nyevero Muza (ONM) about a wide range of issues including the rationale of setting up the ZADT, the terms and conditions of the “Create Fund”, which it manages, as well as the Trust’s current challenges and opportunities. Below are excerpts of the interview:
Financial Sector Spotlight: OMEN MUZA
ONM: What was the rationale or imperative of setting up the ZADT, and who set it up?
GRC: The ZADT was formed by SNV and Hivos as a vehicle to mobilise both financial and non-financial resources for the development of the smallholder farming sector.
ONM: The ZADT manages the Credit for Agricultural Trade and Expansion (CREATE) facility which was set up in 2012. Can you tell us more about this facility? What is it all about?
GRC: The credit facility provides loans to support the working capital and capital expenditure requirements of smallholder farmers and the value chain actors that are commercially linked to smallholder farmers. The ZADT has partnered with local financial institutions — banks and microfinanciers — for the disbursement of the Fund. Under the partnership the Financial Institutions’ (FIs) role is to carry out the credit assessment of qualifying borrowers whilst the ZADT provides oversight to ensure that the money is loaned out to the targeted beneficiaries and that smallholder farmers are benefiting.
ONM: Is the funding available under the CREATE facility targeted at a specific sector of the economy? In other words who are the eligible borrowers?
GRC: All crop and livestock value chains are eligible except tobacco and cotton.
ONM: Can you explain why tobacco and cotton are excluded?
GRC: The two are excluded because the very essence of ZADT’s establishment is to develop the poor rural smallholder farmers into commercial agricultural activities that would improve their livelihoods and incomes – and in the process also guarantee food security. The tobacco and cotton value chains were already mature and well established at the time the Fund was set up. In fact, the models in tobacco and cotton would provide learning opportunities for the ZADT.
ONM: Do the FIs have to meet certain minimum criteria in order to qualify to be your partners?
GRC: The ZADT takes risk on the FIs and so for them to be contracted by the ZADT, they must be financially sound and with a demonstrated track record in lending to smallholder farmers and agribusinesses that support the smallholder farmers.
ONM: How many such FIs are currently partnering the ZADT?
GRC: Currently the ZADT is in partnership with 11 FIs — eight commercial banks and three micro finance institutions.
ONM: What are the terms and conditions of the loans available under the CREATE Fund?
GRC: Working capital loans have a tenure of up to 12 months and capital expenditure loans have a tenure of up to 36 months. Banks lend to beneficiaries at an interest rate of no more than 12% per annum whilst microfinance institutions lend to beneficiaries at no more that 24% per annum.
ONM: From your experience working with lenders in the microfinance space, what is the biggest issue facing MFIs today?
GRC: In my view, the biggest challenge is getting funding at a reasonable cost. Most MFIs do not have sufficient capacity to borrow based on asset base and so in most cases cannot even provide adequate collateral when seeking funding. As a result they are considered risky and borrow at high cost.
ONM: What has been your experience working with FIs in the recent past, in terms of their risk appetite? Is there any discernible risk aversion, and if so, how can it be managed?
GRC: There has been an incidence of high non-performing loans in the country due to the adverse macro-economic environment and the droughts in agriculture. As a result FIs naturally become risk averse and also have to operate within certain thresholds as guided by the central bank, for example within a non-performing loans ratio of 5%.
However, sometimes FIs also put a blanket cap on all opportunities and this unfortunately affects good opportunities that could be funded. There is, therefore, a dual need to train/capacitate potential borrowers and also to point FIs towards the good business cases that are there. Sometimes technical assistance is needed at the level of FIs for this to happen.
ONM: What role if any, is ZADT playing in providing such capacity building/technical assistance to either partner FIs or the ultimate beneficiaries of your funding?
GRC: The ZADT provides limited technical assistance to FIs and the potential beneficiaries of the Fund. FIs are trained on the modalities of the Fund, including at times in areas such as general credit delivery for smallholder farmers and SME agribusinesses. On the other hand potential beneficiaries are assisted in putting together business proposals for accessing loans from FIs.
ONM: We understand that the Trust has been funding green growth initiatives on a pilot basis for eligible agribusinesses. What progress have you made in setting up a fully-fledged Green Funding facility?
GRC: The Trust has recently developed two products to respond to green growth initiatives and these are the Access to Clean Technology (ACT) and the Climate Smart Agriculture (CSA) facility. The CSA is a direct credit facility to Smallholders through Participating Financial Institutions (PFIs) to access funding for adapting climate-resilient agricultural practices and technology to improve productivity and incomes, preferably on the back of structured capacity building initiatives and support by an aggregator for the produce.
The ACT is a credit facility for the adoption, access or installation of “green” technologies such as economic solar power generation systems, solar water pumps, solar driers, energy efficient heat-stoves/boilers, biogas digesters, promotion and adoption of efficient and conservation farming and production systems by qualifying agricultural value chain actors (VCAs) that are commercially linked to smallholder farmer operations. The two products are still under pilot study, as the ZADT looks at establishing a fully-fledged Green Fund in the future
ONM: What has been the impact of your funding programmes, in quantitative terms?
GRC: Since inception in 2012, the ZADT has cumulatively disbursed $70 million and that has benefited 140 000 smallholder farmers directly and indirectly.
ONM: What’s your view on the capping of interest rates by the regulatory authorities and the likely impact of such action on the availability of microfinance loans for instance?
GRC: This matter is debatable and can be better articulated by the microfinance institutions. However, there has to be a balance between capping interest rates (to ensure the viability of borrowing businesses) and ensuring that the microfinance institutions remain sustainable.
ONM: As a financier, what is your biggest challenge at the moment?
GRC: FIs are just too risk averse and I would rather keep money than lend to the productive sector.
ONM: Do you see any opportunities for the Trust in this environment?
GRC: As a facilitator, the ZADT sees a greater role in facilitating partnerships among players in agriculture, finance and the development field, to ensure that there is a win-win situation where financial resources are channelled into smallholder agriculture whilst risk is shared.
Omen N. Muza is the founder and editor of the MFSB. You can view his LinkedIn profile at zw.linkedin.com/pub/omen-n-muza/30/641/3b8 or initiate contact on firstname.lastname@example.org.