Pricing of loan products by Microfinance Institutions (MFIs) in Zimbabwe and effect on their portfolio performance: A case study of MFIs funded by the Zimbabwe Microfinance Wholesale Facility (Private) Limited (2009-2014)
Majattha, Baven Svunurai
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The downturn in Zimbabwe’s economic performance in the late 1990s saw a surge in micro-finance activities to provide funding to start or grow informal income generating activities and other micro and small sized enterprises as unemployment and poverty levels rose. However, the mention of micro finance in Zimbabwe is synonymous with greediness as MFI practitioners have historically and presently, been charging very high prices on their loan products. This study therefore sought to establish factors driving these supposedly high loan prices by MFIs by focusing on a portfolio of eighteen (18) institutions funded by the ZMWF. Furthermore and most importantly, it sought to establish the relationship between these loan prices and the respective MFIs’ portfolio performances. The study found out that most MFIs under the ZMWF portfolio do not have loan pricing frameworks but showed that the prices that they charge are largely driven by the need to cover operating and administration costs. This is in addition to the need to also cover cost of funds that they use to grow their loan books and the need for profitability and sustainability to ensure their going concern status. Thus, factors that drive such loan prices are largely internal to the MFIs relative to the role played by external factors such as client credit ratings, regulatory pressure and political risk. The study also showed that MFI loan prices have a positive relationship with portfolio performance indicators such as PaR, write off and arrears ratios meaning that the higher the loan price, the higher the ratios relating to these indicators partly confirming the prevailing high ratios on these indicators in Zimbabwe. On the other hand, the research established that loan prices have a negative relationship with portfolio performance indicators such as collection rate, number of clients served and loan book sizes meaning that an increase in loan prices leads to a decrease in the respective ratios as clients fail to repay loans, with fewer clients coming to borrow hence leading to reduced loan book sizes. The study concluded by coming up with recommendations that hinge upon effective operating cost management by MFIs, innovativeness as well as capacity building and technical support to MFIs to promote operational efficiencies with the aim of pushing loan prices to reasonable levels.