news - Lack of credit for the poor hampers development

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Lack of credit for the poor hampers development
July 26, 2010

Harare, July 26, 2010 (Microfinance Africa) - A large segment of Zimbabwe’s population has no access to financial services and is forced to rely on informal systems which charge usurious rates of interest and are often risky, a new report by the United Nations Development Programme (UNDP) shows.

The situation works against poverty reduction strategies as the poor have no access to capital to break the poverty cycle.

The report, the last in UNDP’s series of documents on Zimbabwe, sought to draw from the global experience and highlight some of the key issues concerning state effectiveness, and the importance of this variable in terms of explaining both rates of economic growth and poverty reduction in developing economies.

The report, State Effectiveness, Economic Recovery and Poverty Reduction: Some Evidence from the Global Experience for Zimbabwe, said the growing recognition of the importance of micro-level analysis in the designing of pro-poor growth strategies has led to a new field of endeavour aimed at analysing how the poor interact with markets.

It has also led to the development of proposals that enhance the ability of the poor to benefit from the strategies.

The report says renewed international interest in the phenomenon of both informal economies, and the role of micro, small and medium enterprises (MSMEs) that tend to be owned by the poor, are a reflection of an interest in understanding the variables that currently impinge on poor people’s capacity to increase their output and productivity.

In the case of Zimbabwe, the report said, the need to factor in such variables into the design process of national policy in a post-crisis situation “are self-evident given both rising levels of poverty and the growing informalisation of the economy that have taken place over the last decade”.

“To this must be added the downsising and disappearance of many previously viable SMEs, due largely to the collapse of purchasing power in their former domestic markets as a result of extremely high levels of macroeconomic instability, the rupturing of previously robust value-chains, added to the physical destruction of many of their assets in the context of government ‘slum clearance’ operations,” it said.

An estimated 70% of the economically active population in Zimbabwe does not have access to formal financial services, and are forced to rely on informal systems which are both riskier and often charge high interest rate.

The UNDP added that a chunk of the 70% had, up to 2003, been served by Microfinance Institutions (MFIs), of which there were an estimated 1,700 filling a gap left by the large-scale commercial banking sector.

But the number of the MFIs went down dramatically as a result of inappropriate and sub-economic lending rates they were forced to charge by the central bank during the hyperinflationary period.

However, the report said that decision-makers should exercise caution in interpreting this existing ‘market failure’ as indicating a need for open-ended, subsidised state credit to the poor through MFIs given that one key feature of the focus of approaches to building inclusive financial systems is precisely that of financial sustainability.

“Zimbabwe’s own experience in this regard translates into a need for extra caution given that the worst performing MFIs in terms of loan repayment rates were precisely those operated by government, namely the Small Enterprise Development Corporation and the Social Development Fund,” the report said.

It added “where such government assistance is given on the grounds that there are sufficient ‘public goods’ characteristics involved, this should be subjected to intense ex-ante scrutiny at the risk of such assistance both falling prey to patronage and introducing damaging distortions into the market to the long-term detriment of the poor”.

“Experience both globally, and in the case of Zimbabwe, shows that consistently poor repayments rates rapidly undermine the capital base of MFIs and turn such actors into debt collection agencies rather than providers of both investment and working capital to the poor,” UNDP said.

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