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Why access to capital is limited . . . solution?

Today we turn our attention to Micro-finance, and how it can be relied upon as an effective tool for breaking the cycle of poverty for unemployed individuals, households and emerging entrepreneurs.

We explore, during the next few episodes in this series, how the average individual, household, or community might benefit from the wide range of micro-finance options available, including traditional group-based systems, bank-supported micro-finance, and schemes funded by international development partners and financial intermediaries.

We also propose how micro-finance can be used as a platform for exploiting financial intermediation opportunities for investors in the micro-finance sector in Zimbabwe.

Many of us have good business ideas. They keep us awake at night, as we remain haunted by the quest to bring them to life. Alas, our strong work-ethic, dedication, and passion are not enough. The most common hindrance is that we need adequate and appropriately structured funding to support our “big” ideas. Good micro-finance can provide the solution

In general, micro-finance takes the form of micro-credit, micro-savings and micro-insurance, which have generally been developed as products for the unbanked, the marginalised or the under-developed.

Traditional financial and capital markets often avoid the risks associated with these fledgling markets, leaving them largely unbanked or under-serviced. The greatest hindrances limiting access to capital are:

 Inadequate collateral security

We observe that most lenders demand collateral cover of at least twice the value of the loans required by their customers. It goes without saying that many potential borrowers in these unbanked markets are eliminated from the market by this requirement as most do not own any assets at all, or in cases where they do own assets, their “goats and sheep” are often considered unacceptable for purposes of collateral. All three dimensions of micro-finance (credit, savings, and insurance) offer ways to address this problem.

High cost of debt

Many private micro-finance investors, particularly in urban areas, are often labelled as “loan-sharks”, and aptly so in many cases, when you consider that the average lender in Harare offers loans at rates of between 5 percent and 12 percent per month, including charges. Yes, that means you have to multiply this rate by 12 to get an approximate annualised rate. Not even the most profitable businesses can sustain borrowings at rates between 60 percent and 144 percent per annum. So we need a solution for this.

Multi-lateral institutions, international development partners and other financial institutions provide low cost funding for the sector.

While the supply of low cost micro-finance products is extremely low in comparison to demand, it is still good advice for prospective customers to shop around for good rates, and negotiate terms before signing for loans.

Short term nature of funding

Most “urban” micro-finance loans are limited to 90 days. While some consumer loans can be structured successfully as short term facilities (particularly where the repayment source is adequate to cover the loan in a short period of time), in general borrowers require much longer repayment periods than a couple of months in order for their projects to perform. The risk associated with longer term loans is considered too high by the micro-finance investor, so the intervention of long term investors is also essential here

Inadequate markets and off-take arrangements

Unless the borrower can explain how the loan will generate revenue, the lender is often sceptical. The lack of reliable markets and solid off-take arrangements often makes it difficult to the borrowers to access loans. This is why more and more interventionist investors will now support the borrower’s entire production cycle, including the establishment of new markets.

Failure to demonstrate track record and historical performance 

Without training, most borrowers will approach the lender with little to no historical performance or financial records. Needless to say, this does not help the case for access to capital.

This is where structured finance in the field of micro-finance can be relied upon as a financial inclusion solution to bridge the gap between conventional finance and interventionist finance, by reducing risk and enhancing feasibility. This article was compiled by Felix Kumirai a transformational strategist and resource mobilisation consultant at GENESIS GLOBAL FINANCE.

source: the herald

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