Democracy in Loans – Linking Financial Diaries with Financial Service Providers in Zimbabwe

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In Zimbabwe, L-IFT has been collecting financial diaries data and Covid-19-related experiences from 18 corner shops spread across 3 provinces since April 2020 during a countrywide lockdown to help contain the disease. The Covid-19 period presented numerous challenges to these important neighborhood suppliers of basic commodities. Supply lines were disturbed, customers had limited income at their disposal, deaths from Covid-19 were widespread across communities, business trends were unpredictable and fluctuating, and some struggled to remain open and had to innovate quickly. Today, most restrictions have long been lifted. Still, we continue to track those corner shops because it is fascinating to learn how they are developing over time. Moreover, the data is useful for the corner shops themselves.

In all our discussions with corner shop owners, they have continued to reflect on the need to get support for their businesses if they were to remain open during the tough times and to grow in the years ahead, even after the pandemic. At the beginning of the research, only 2 of the 18 diarists had taken loans. One loan was from a bank and one from a friend. All the diarists mentioned that as a goal, they wanted to grow their businesses and take loans, but only two had achieved access to finance. At first glance, the problem seemed to be the unavailability of financial services, but we were yet to dig deeper into understanding the many issues that affected these businesses in terms of financing and their own attitudes toward loans. 

In the background, L-IFT had already begun working on the FINBIT loan platform. FINBIT is the mobile application that we use to collect financial diaries data and run surveys while the loan platform is a space on FINBIT where app users and financial service providers are linked; with users being able to apply for loans and financial service providers able to disburse loans. As part of the preparations for this platform, L-IFT began to engage with financial service providers in the country that would be interested in participating in the platform and serving the entrepreneurs we were working with. After beginning conversations with one major bank in July 2020 and a smaller micro-finance institution (MFI) in September 2020, L-IFT eventually signed a Memorandum of Understanding (MOU) with the MFI in November 2022.

Timeline of activities after signing MOU:

  1. In January 2023, L-IFT had its first introductory meeting with the MFI where we went through the idea of the financial diaries and linking diarists with financial service providers.
  2. In February 2023, a larger L-IFT team of field staff and managers met with the MFI to discuss the MFI’s loan processes and how they could work in tandem with FINBIT data and diarists.
  3. By March 2023, the L-IFT field team had identified 7 corner shops that wanted to meet with the MFI to learn more about specific loan requirements and proceed to apply for loans. The meeting was held in March.
  4. In April 2023, the first client was approved for a loan of $600 repayable over a 2-month period with 15% compound interest. 

Key insights throughout the process:

  1. Micro entrepreneurs are hesitant to take on loans because:
    1. Financial service providers have varying terms and conditions on loans. This is the first hurdle faced by entrepreneurs. It can be a daunting task to meet with many until settling on one whose conditions are satisfactory for the entrepreneur.
    2. They fear collateral terms or do not have the amount of collateral demanded. Often, micro-entrepreneurs also do not have other requirements such as cash flow statements and business plans, and are unable to produce these easily and quickly.
    3. Unsteady economic operating environments create self-doubt. One corner shop owner said they were already struggling and were unsure whether a loan to boost operating capital would change their trajectory.
  2. Sometimes micro-entrepreneurs do not necessarily need additional capital in the form of loans. A thorough look into a business is required before assuming that a loan is a solution. This has been a big lesson from working with an experienced MFI that can quickly identify many other factors that affect a business.
  3. Market rates (bank and registered MFI Interest rates) were not a determining factor on whether one applies for a loan or not (in this case). An interest rate of 15% was not questioned. This is because loans in the informal sector from unregistered money lenders go as high as 35% month on month and these loans are the most easily accessible but most expensive.
  4. Micro entrepreneurs will pay back loans. In this small but thorough study, the 2 entrepreneurs who had loans at the beginning of the data collection managed to pay them back. The third entrepreneur who took a loan from the MFI has already paid back the loan within the 2-month loan period.
  5. Most businesses have no financial history and banks also fail to use the data that might be available about the businesses. FINBIT provides an opportunity to fill this gap.
  6. Financial service providers with a holistic approach towards financing can be more useful to micro-entrepreneurs. The MFI that L-IFT is working with also takes clients through a business advisory to help ensure loanees are successful and can create a long-term financing partnership. 

Throughout this whole process, L-IFT has generated rich knowledge of micro-entrepreneurs and their financial behavior. This knowledge affirms the need for an easier way to link financial service providers and micro-entrepreneurs. The FINBIT loan platform that L-IFT has developed will serve this purpose. Users can themselves decide whether to go onto this loan platform. They decide how much of their data they share with the loan platform. On the platform they can apply for loans, using a simple, short loan application. The users typically also give permission that the loan platform accesses relevant FINBIT data. The other side of the loan platform is a range of financial service providers, in some countries, this could go up to 10 or more loan providers all using the same central loan platform. The platform filters the loan applications and only forwards those applications to a financial service provider that meets that FSP’s basic criteria. So as an example, an FSP that only lends loan amounts of $500 upwards, doesn’t get any loan application for less than $500.  In the loan platform, L-IFT also offers a credit scoring mechanism. FSPs can choose to adopt this or not or they can also tailor the credit scoring in a proprietary way that it reflects their own experiences or combines with their own administrative data.