Digital financial services and risk management in Zimbabwe: a case of the microfinance industry.

Abstract

The main objective of the study was to establish the nature and types of risks that are faced by microfinance service providers using Digital Financial Services (DFS) as well as to analyse how different types of microfinance institutions using DFS assess risk and implement risk management tools. A descriptive research design was adopted. The study adopted a mixed methodology which utilised both primary and secondary data as well as both qualitative and quantitative research approaches. The questionnaire was used as the main research instrument. The study was based on a population of 80 respondents in the form of employees of Microfinance Institutions, digital financial services practitioners and RBZ officials. Through descriptive statistics, the study used Factor analysis to analyse the findings. The findings revealed that the major types of risks in the use of DFS are strategic risks, regulatory risks, operational risks, technology risks, financial risks, fraud risks and agent management risk with fraud risk being the most frequent risks. The findings also established that the use of internet and information technology (IT) products, digital banking and fintech products exposes organisations to losses from human and systems errors, such as double repayments, double disbursements, or identity theft, posing threats to clients’ funds and or organisations’ funds. The findings revealed that most microfinance institutions assess risks through 5 basic ways; a risk management checklist, a risk register, the use of a risk database, risk framework review, and through assessments by risk engineers. The findings on strategies for mitigating DFS risks and best practices for DFS risk management revealed that strategies for mitigating DFS risks include senior management involvement in risk processes, efficient business processes integration, developing Internal controls, regular reconciliations, regular system review (audits, operational reviews), staff and agent training on DFS risks, segregation of duties, incentives for departments with less risk profiles and developing risk management frameworks. The study recommends that MFIs using DFS should frequently conduct risk reporting and reassessment of their risk management frameworks. This should also include constant reviews of the business processes to curb DFS risks. The study recommends that MFIs embracing the use of DFS should have a good understanding of the types of risks to which their businesses are susceptible to. This is important to ensure that comprehensive risk identification is enabled and relevant steps for mitigating these risks are taken. The study recommend that further studies should be conducted with a focus on the various types of risks in the financial services sector, inclusive of the banking and insurance industries. Moreover, there is need to establish the relationship between DFS risks and top and bottom line in organisations.