IMPLICATIONS OF FIELDWORK RESULTS FOR THE DEVELOPMENT OF THE SECTOR

In this section, possible implications of the fieldwork and documentary review findings for developing the DMFIs in Namibia are discussed. These are issues that need to be taken into consideration as Namibia develops its regulatory framework for MFIs in order to ensure that it designs an appropriate regulatory framework that can facilitate the development of the sector envisaged by policy makers. This is important, especially in view of the fact that the country views regulation as an enabler in this process. The key issues identified by this thesis are discussed below.

5.4.1 A lack of official definitions of microfinance and microfinance providers

The fieldwork results pointed to the lack of definition of microfinance in Namibia as having caused confusion and a lack of understanding among stakeholders. As discussed under Section 5.3.5.2, the interviewees were not sure as to which institutions are supposed to be MFIs and which not; some associated microfinance with only credit provision, while others felt credit-only microlenders are not to be considered as MFIs. Another related concern raised by the stakeholders is the lack of distinction between consumption-driven microlending and micro-enterprise lending, which they considered to be more developmental-focused. They considered providers of micro-enterprise lending as the appropriate institutions that should be referred to as MFIs and not those involved in lending for consumption purposes, such as those in the majority in Namibia at the time of this research.

Considering that the policy objective for wanting to develop the microfinance industry in Namibia has been expressed by the country’s Financial Sector Strategy as part of financial inclusion and aims to facilitate increased access to micro-enterprise loans and other financial services such as microsavings and micro-insurance, it is important for the country to get the intra-definitional issue sorted and be able to determine which activities are to be considered as microfinance activities and hence which institutions are MFIs and which not. According to CGAP (2012: 11), “an appropriate regulatory definition must be based on a clear articulation of the country- and situation-specific objectives the regulation is meant to serve”. In the case of Namibia, therefore, and in order to design an appropriate regulation and enforce it with a financial inclusion objective achieved (through microfinance), regulators need to understand

the distinctive characteristics of microfinance, including clients and their needs, products and services, and institutions providing those products and services (CGAP, 2012). This will also eliminate the current confusion among stakeholders which the researcher observed during the interviews, and enable both current and potential industry players to make out what they are into and/or getting into. For instance, the aspects of consumer microlending and micro- enterprise lending should be clarified, i.e. whether both are to be considered as microfinance or not.

Furthermore, because of the existence of many institutions that offer financial services to the poor alongside products targeting more affluent clients, and not necessarily as a primary business activity, there is a need to make that distinction, because often the risks that regulation and supervision are intended to address will be different in the context of a diversified financial service provider (CGAP, 2012: 6). As such, where banks are involved in the provision of microfinance, there should also be a clear distinction between microfinance business and pure banking business, such that only the microfinance operations of banks should be included in the definition. Currently, any small loan provided by commercial banks, regardless of the purpose it is taken for, seems to be considered as microfinance. Clarification is necessary to ensure proper monitoring and evaluation of the progress and impact made by the sector going forward, in terms of serving the poor and SMEs, a role which the country expects these institutions to play.

In the process of defining microfinance, it will be important to learn from other countries’ definitions of microfinance and adapt relevant ones to the Namibian situation. For example, Uganda under the same Act referred to earlier (the Micro FinanceDeposit-taking Institutions Act 2003) defines microfinance business as the acceptance of deposits and the whole or partial employment of such deposits in the provision of short-term loans to small or micro- enterprises and low-income households, usually characterised by the use of collateral substitutes, such as group guarantees or compulsory savings. The key elements contained in all of these examples relate to micro-enterprise lending with the typical characteristics of group-lending methodology, collateral substitutes and greater client interaction, as opposed to consumer lending, which seemed to dominate in Namibia.

It is however important to note that the microfinance sector is evolving. While microfinance initially was about extending loans of small and smallest amounts to the rural poor for income-generating activities, it has evolved into a tool for supplying access to financial services for the unbanked (i.e. it has become a tool for financial inclusion) in the emerging

and developing economies (Ledgerwood et al., 2013; Lützenikirchen & Weistroffer, 2012). This has not only come with a widening product range and a changed base for microfinance customers, but also with larger average loan sizes and an increased share of finance for household needs (for consumption, but also education and medical care) other than just for investments. For instance, the share of household needs financing is estimated at an average of 25 per cent of MFIs’ total lending volume, though the actual number could be higher given that it is difficult for MFIs to control what the loans are actually used for (Lützenikirchen & Weistroffer, 2012). There has therefore been an increase in the number of those served by the sector, and this has called for a more financially efficient sector. As such, the sector has transformed into a more commercialised sector as MFIs seek to be sustainable so as to be able to continue providing their much-needed services. Literature therefore suggests that the key consideration should be for the definition to be flexible enough so as not to deter desirable market entrants and innovation in terms of product offering, while at the same time not losing the social purpose and typical clientele of microfinance. The above should therefore guide the process of Namibia coming up with its definition of microfinance and MFIs.

5.4.2 Interest rate limits

The researcher learnt from the survey and documentary review about the existence of interest rate limits that are currently imposed on microlenders based on the Usury Act and the Exemption Notice provisions that regulate them. As discussed earlier in this chapter, the issue of interest rate ceilings, i.e. the limits on the level of interest rates that financial institutions are allowed to charge, such as the caps imposed by the Usury Act in Namibia, is among the debated issues in literature, especially in as far as the case of MFIs is concerned. CGAP (2006) quotes the findings of a study conducted by the UK Department of Trade and Industry that assessed the impact of imposing interest rate ceilings in countries such as the USA, Germany and France, which found that interest rates ceilings had a negative effect on low-income people. Despite the fact that the ceilings are meant to protect low-income people from high predatory lending practices and excessively high interest rates, the study findings revealed that when ceilings are imposed, the choice of loan products offered by financial institutions become narrow and less appropriate to the needs of the poorer clients (CGAP, 2006).

In the case of MFIs, while the argument of the high cost of loans and predatory lending practices could be valid and applicable, it is argued that high fees and charges keep MFIs

afloat (CGAP, 2006) and are needed for their sustainability, especially considering the high transaction costs involved in their lending processes. Further, Helms and Reille (2004) argues that imposing interest rate ceilings also makes it difficult for MFIs to cover their costs, and this could have the effect of either driving them out of the market or even becoming an entry barrier to potential MFIs. When this happens, it can lead to a lack of access to financial services by poor clients as MFIs retreat from the market due to their inability to cover operating costs. A resulting consequence of this lack of access would be for the poor clients to revert to informal credit markets, which are even more expensive, such as money lenders (Helms & Reille, 2004).

It is clear from the above that imposing interest rate ceilings might not necessarily be advantageous for any of the stakeholders of microfinance (i.e. neither providers nor the clients). It is therefore important for regulation to take into consideration both the cost of credit and the sustainability of MFIs in determining the optimal interest rate to be charged by MFIs. In fact, the job of regulation should be to provide an enabling legal environment that encourages entry and enhances competition so that competition would eventually bring down interest rates and make credit more affordable for the poor.

5.4.3 Conditional selling

The fieldwork outcome also revealed a practice of term lenders offering credit life insurance as a condition for providing loans to clients, i.e. a loan is only disbursed if a client takes out such insurance. This could be considered as forced insurance and an unfair practice from a consumer protection perspective, as discussed earlier in this chapter. However, the vastly increasing literature on the need for micro-insurance to accompany microcredit suggests that micro-insurance not only serves as security of the lender, but that the borrower also receives huge advantages from being insured. In fact, Shand and Angove (2013) view credit life insurance as having the potential of playing a significant role in supporting access to finance and therefore a stepping stone to economic development across a broad base, given the reduction in risk that it provides to credit providers. The downside, however, lies in the evidence of the often associated misselling, misrepresentation, misuse and/or abuse by some providers found in some countries such as in South Africa, Australia and the UK. In South Africa, Shand and Angove (2013) found credit life insurance to be expensive relative to life insurance, with insufficient disclosure while it also offered low value to customers. Cases of misleading representations and pressure tactics and harassment used to induce consumers to purchase these policies were among the anomalies reported in Australia,

while the UK had cases of consumers paying excessive prices for their credit life insurance, called Payment Protection Insurance, as well as cases of high pressure and unfair sales tactics (Shand & Angove, 2013). These are all factors that can hamper any advantages that this type of insurance can have for the consumers. The microfinance regulatory framework for Namibia should therefore ensure a balance in terms of having these insurance programmes to meet the needs of low-income and poor people, enhancing their affordability and accessibility as well as ensuring regulatory compliance in that insurers and/or other intermediaries conduct their business honestly and fairly.

5.4.4 Sector performance

The microfinance sector of Namibia was found to be relatively small and undeveloped. In terms of performance, though, the outcome of the survey discussed under Section 5.3.4.6 showed that participating term-lending MFIs have performed well, have been efficient and productive and are profitable. However, the focus on urban salaried people has hampered their outreach, leading to question marks over their contribution to poverty reduction, as this approach has left an unfulfilled demand for credit in the rural areas of the country.

An important aspect to consider going forward, in the spirit of the policy objective of growing the sector to address the unmet demand, therefore, is to ensure that the envisaged regulatory framework will be an enabler that will boost the sector and lead to its development, instead of curtailing its outreach through the process of MFIs struggling to comply with the regulatory requirements. It is therefore important for the regulatory framework to devise appropriate regulatory provisions that will avoid burdening the MFIs unnecessarily.

An approach used by some other countries is to have a tiered approach of regulation that has differentiated regulatory requirements for the different tiers of regulated institutions. Although the researcher established through interviews with the regulator that this is actually the intention with the draft amended act, in that the draft microfinance regulations stipulate a differentiated regulatory approach between traditional banks and microfinance banks, the researcher argues that it is necessary for Namibia to properly scan its own environment and determine what regulatory requirements and approach would be appropriate for its market and an enabler for the achievement of its goals.