Geared to Work with Institutional Investors Focuses on Rural finance
The Microfinance Interview is a monthly question-and-answer feature through which we engage key stakeholders of the sector such as MFIs, funders, service providers, development partners and regulators amongst others on issues of topical and mutual interest. This is in recognition of the influential role of Microfinance as one of the four pillars of the National Financial Inclusion Strategy alongside financial innovation, financial literacy and financial consumer protection. In this fifth instalment, the spotlight is on VIRL Financial Services, one of the very few women-owned microfinance institutions (MFIs) operating in Zimbabwe today.Virginia Sibanda (VS) co-founder and current CEO talks about Virl Financial Services’ business model and target market, the difficulties she has faced as a woman entrepreneur in financial services as well as the technical assistance her organisation has received and how this has impacted on operations and business goals.VS also outlines her experiences in pioneering the formalisation of the mukando/marounds concept, and how her organisation is leveraging on technology in its operations. She further outlines Virl’s position on topical issues such as the capping of interest rates and the importance of external ratings. The MFSB also asks VS about Virl’s challenges and opportunities and whether there is an intention to broaden the sources of funding by pursuing a deposit-taking licence.
MFSB: What is your business model and target market?
VS: VIRL Financial Services is a developmental microfinance institution focused on working with economically active individuals in urban, peri-urban and rural Zimbabwe. The overarching target market is women within these geographical locations as our target is to lend to 60% women.
MFSB: We have just celebrated International Women’s Day under the theme “Be Bold for Change” and your organisation is one of the few woman-owned local MFIs. What difficulties have you had to overcome (if any) in order to be where you are today?
VS: The difficulties include operating in an unstable economic environment where policy inconsistencies cause high regulatory risk. Under such circumstances, planning for the medium to long term is difficult and short term survival tactics do not necessarily align with long term objectives for the firm. Having said that, the major direct challenge is access to finance to grow the business given the uncertain environment. I have overcome these challenges by having the strong belief that as an individual I have a role to play in shaping the Zimbabwean story post-crisis. I am driven by finding solutions. VIRL provides small loans to individuals with irregular incomes and this work is now even more relevant in the Zimbabwean context where everyone is depending on their own ability to start a small business to sustain themselves and their families. Understanding that Developmental Partners like USAID, DFID and SIDA have invested a lot in rural Zimbabwe has been one of the biggest breakthroughs and VIRL business has been built on developing these partnerships with a view of providing local long term solutions to build the Zimbabwean economy.
MFSB: What’s the organisation’s size in terms of loan book, number of branches and number of customers?
VS: The business currently has a book size of just over $3m, has 7 branches supported by 4 satellite branches and a staff compliment of 56 reaching out to 5000 customers.
MFSB: As an organisation, have you received any technical assistance? If that is the case, what was the nature and source of the TA?
VS: VIRL has received Technical Assistance from CARE International Zimbabwe through training in group lending methodologies and understandingInternal Savings and Lending Scheme (ISALS). VIRL has also been given TA to reach out to youths through CARE initiatives funded by SIDA. Apart from this VIRL has also received TA through the Livelihoods and Food Security Program (LFSP) through FAO funded by DFID. This technical assistance was to build the institutional capacity through staff training, improvement in systems and processes, developing delivery channels, designing products and coming up with a solid business strategy underpinned by a strong risk management framework to scale up the business operations. The TA was done by MEDA, a Canadian-based company with local assistance from Mustard Seed Consulting. Both institutions have vast experience in building capacity for MFIs.
MFSB: What has been the impact of this TA on the furtherance of your business goals?
VS: Under MEDA TA, VIRL has been able to reach its target market and now has a good presence in rural Zimbabwe and it has developed into a better MFI with good corporate governance structures; good loan processing and accounting system as well as well trained staff. The TA has repositioned the business such that it is better configured to meet the demands of the targeted market segment. VIRL was started on a capital base of $5,000 so the growth before the TA had been just incremental as and when resources could permit and while this was necessary at the time, it also resulted in an institution that was not very strong but trying to do hard things. So this TA was instrumental in commercialising the business. Under the CARE TA VIRL was able to work with women in groups as well as reaching out to youths. VIRL was able to issue loans to youths and the repayment rate was 71% which is much better than repayment rates under other loan products targeted at youth in Zimbabwe.
MFSB: Your organisation was one of the MFIs to pioneer the formalisation of the mukando/marounds concept. Tell us more about your experience doing this.
VS: This was the first time for VIRL to collaborate with an NGO and what was amazing was that CARE took us seriously at a point we had only been in operation for 2 years. There was a meeting of minds. CARE had developed Mukando Model successfully and VIRL was looking for customers to work with. It was therefore logical for VIRL to develop products for these women in groups. This was a 16-month project back in 2012 and VIRL worked with 500 women, which was a real big deal for a small MFI. 232 women opened bank accounts and the repayment rate during the project phase was really good at 96%. More than three quarters (79%) of the ISAL clients that accessed the MFI loans realized higher productivity/profits in their IGAs as a result of increased access to capital through the linkage project when compared to the period before the linkage project where only 19% of the linked clients were realizing high profits. About a quarter (24%) of interviewed ISAL clients that received loans from the MFI realized enterprise growth and product diversification with others starting new business ventures and a similar number (24%) of linked clients managed to buy immovable assets including residential stands
MFSB: What’s your view on the capping of interest rates at 10% by the regulatory authorities? What’s the impact of this on availability of microfinance loans?
VS: This is a rather difficult question but in my opinion goes back to why people start Microfinance Institutions, how they start, what funding structure is in place, what motivates them to be in this business and most importantly what target market is the microfinance institution focusing on. If these questions have been rationalised, in my opinion one does not have to be told to cap interest rates, one does what is rational to ensure that their own business is sustainable and the people they are seeking to serve also run sustainable businesses. The reason why institutions can charge high levels of interest rates is that the demand for such priced loans is there. It boils down to demand and supply dynamics. Given the nature of the MFI that I am thriving to run it makes more sense for me to support lower rates of interests.
As for how this affects the availability of microfinance loans, a lot will depend on whether the financial institutions determine that it makes business sense to remain open at the lower interest rates or not. Regarding the effects on borrowing clients, it is my opinion that borrowers still exercise their logic on what makes sense to them depending on the purpose of the loan. This is why you see an MFI that charges 2.5% per month (which in some quarters is assumed to be too high, can open side by side with an MFI charging 15% per month). Clients do not flock to the 2.5% MFI but they go to the MFI that meets their need measured by: how soon do I get the money, what documents are needed, what do I want to use the money for, am I getting this in cash etc. This is a complex issue but market forces normally have a way with things.
MFSB: What opportunities do you see in the local market for your organisation in particular and for the microfinance sector in general?
VS:Zimbabwe is now so behind in terms of developmental microfinance therefore the country is ripe for serious players who are not just looking for making a quick return. For VIRL we are in the right place we want to be and making a difference so we feel we are well positioned to work with institutional investors targeting rural finance and women and youth in particular.
MFSB: And what are your key challenges, given the market segments you serve?
VS: The obvious one will be the economic situation but the main underlying challenge is the lack of support in terms of financial literacy for women, youth and individuals living in rural areas. Another issue is that Zimbabweans have to get back to being people who feel that their word means something – that getting a loan and not paying it back is an issue. From my experiences in lending, that social fabric seems to have been compromised.
MFSB: What in your view, is the market structure of the local microfinance sector? What can be improved?
VS: There is need to have sub-sectors in the MFI Sector. Everyone is trying to work in their space and there is no one who is better than the other but Zimbabwe needs to ensure that the reporting of the different players in the market is separated. The cost structures of pure developmental MFIs and non-developmental MFIs differ. The source of repayment mode makes the two very different. With statistics currently on hand due to the combined reporting, MFI business could be considered very lucrative and may not provide the correct indicators to the world at large.
MFSB: We understand that Virl’s current sources of funding are equity, shareholders’ loans and loans from domestic and international financial institutions (FIs). Any plans to broaden the scope of funding sources by acquiring a deposit-taking licence?
VS: Definitely VIRL is looking at broadening its scope of funding as the business is ready to scale up but the initial preference will be getting an institutional investor on-board followed by deposit taking licence. Before converting into deposit taking, VIRL has to be sure of its client’s ability to repay loans and over the past 6 years the portfolio at risk has been generally higher than preferred levels. However with the institutional capacity alluded to above, I am sure that VIRL should be able to build trust with its customers who will form the bedrock of deposits if we turn into a deposit taking institution. Zimbabwe has gone through too many failed financial institutions and when an institution takes deposits, they have to be sure that they will meet cash demands. We still need to develop a bit more as a business.
MFSB: You had a Crowdfunding Campaign running at some point. What was the objective of that initiative?
VS: The objective was to find alternative funding for the business. The campaign itself did not meet its objectives in terms of funding but incidentally, the VIRL brand got some mileage in the process and in retrospect, the structure of our crowdfunding initiative was too broad. It was a good experience for VIRL staff as we now know how to tell the VIRL story better.
MFSB: To what extend is the company leveraging on technology in its operations?
VS: To a very large extent. Our loan system Musoni has a lot of capabilities and this has helped VIRL to grow the business on the back of technology. When they are in the field, Loan Officers can use tablets which interface with the system. However despite the improvement in technology, developmental microfinance still remains high touch. Customer contact remains critical so the development in GPS might provide some possibilities I suppose.
MFSB: Virl was in late 2016 rated by MicroFinanza of Italy. What was the rationale/strategic imperative of this move? Is it something you urge other MFIs to do?
VS: This was the most logical move for a business that is trying to court investors. Getting the rating done shows that we are opening our doors to expose both the good and the bad. This was one of the good things that also came from the TA through FAO. In other countries, investors do not invest when the MFI is not rated therefore this is indeed an important journey for any MFI.
MFSB: We know Virl as primarily a development focused MFI but what’s your take on the argument that some loans acquired under the “consumer lending” banner are actually deployed for productive purposes?
VS: Ah… I do like this analogy. Microfinance has gone through a number of phases, first it was just micro credit, then it was microfinance and now we talk about financial inclusion. In between there is the fact that MFIs provide a critical service that normal commercial banks were not serving. I therefore get it that a loan is just a loan. However the essence of focusing on the source of repayment and not the usage of the loan speaks to the core of the issue. The decision making process that bases the repayment on the salary is not the same as the decision making process on a loan that has to be fully repaid by the project being funded. How many organisations who deploy salary based loans for productive purposes actually leave the office to go and assess the productive activity? How many times do they leave the office to check on the productive activity? This is a good development but it is not the same. Both can co-exist and it is about business strategy but they are not the same.
MFSB: Anything else you might want to share with our readers?
VS: Starting and running a business as a woman requires a lot of tenacity. It is important for governments to develop financing models that assist women entrepreneurs if women are to make a mark as entrepreneurs. I trust in God and I believe in having a purpose and working hard while involving others to achieve that goal.