Dynamic Research Journals (DRJ)

Journal of Economics and Finance (DRJ-JEF)

Volume 5 ~ Issue 1 (September, 2020) pp: 15-20
ISSN (Online): 2520-7490
www.dynamicresearchjournals.org

An Assessment of the Inherent Weaknesses in the Development of

the Financial Institutions in Zimbabwe
Leonard Mudimba
*Faculty of Commerce and Law, Department of Accounting and Auditing, Zimbabwe Open University, Harare, Zimbabwe

Abstract:- This study sought to assess the inherent weaknesses in the development of financial institutions in Zimbabwe with
references to Savings and Credit Cooperative (SACCOs) in Harare. The researcher used the descriptive survey method
where questionnaires and interviews were used in the collection of data. Secondary data was collected by use of
archival research where the institution’s records and reports, journals and websites were perused. The total
population was 688 comprising of 680 members of the SACCOs, 4 Ministry of Youth Officials and 4 National
Association of Credit Savings and Cooperatives Union of Zimbabwe (NACSCUZ) officials from which a sample
of 40 was drawn. Stratified sampling and the purposive sampling methods were used to obtain the sample size.
Major findings include that, over indebtedness of the SACCOs, poor appraisal of loan credit and subsequent poor
loan monitoring mechanisms led to high default rates hence depletion of institutional funds.
Key terms:- Financial Institution, Risk, Delinquency, Liquidity

I. INTRODUCTION/BACKGROUND OF THE STUDY

The liberalization of the financial sector by the Government of Zimbabwe and Its policy of “prosperity
for all” led to establishment of SACCOs (Ayana I et al 2003). The Government had adopted the strategy of
supporting these SACCOs in a bid to bolster the level of savings mobilization and investment among the poor
with potential to expand into rural areas. The objective was to assist communities to start and operate these
institutions for financial service delivery at the local and subsequently at the national level by supporting creation
of new SACCOs where they were absent, revitalizing and restructuring existing but weak SACCOs, and
supporting SACCOs that had attained financial sustainability and that are willing to decentralize their services to
other parts of the country. In Zimbabwe, SACCOs are registered in accordance with Zimbabwe laws under the
Co-operative Act Chapter 24:05. This Act regulates SACCOs formation, registration and details of its objectives
as well as how they are managed. SACCOs are regulated and supervised by the Ministry of Youth Development,
Employment Creation. According to the RBZ Survey (2006), SACCOs are monitored by the National Association
of Credit Savings and Cooperatives Union of Zimbabwe (NACSCUZ) depending on the categorisation of these
SACCOs. SACCOs with a larger membership are regulated by ZIMFREG, medium size SACCOs are also
regulated by the same regulatory authority whereas those SACCOs with at least 50 members are the ones regulated
by NACSCUZ. According to RBZ Survey (2006), smallest SACCOs in terms of membership and share
capital/saving structure are outside any regulatory framework. The reason is that there is no need to put them
under unnecessary reporting pressures due to its size.
A Survey by the RBZ in conjunction with Ernest & Young (2006) showed that two out of three SACCOs
collapsed in the first or second year due to poor governance, fraud and mismanagement, failure to balance between
social and commercial missions and inadequate loan capital. Kairu (2009) agreed with the survey by RBZ adding
that governance challenges existing among SACCOs in Zimbabwe stemmed from the fact that these SACCOs
were faced with numerous operational hurdles as well as regulatory issues as several of them had collapsed only
a year and half after inception. Many SACCOs have fallen victim to poor management. Ssemwanga (2009)
concurs by adding that in the past, management of many SACCOs in Zimbabwe were so poor that most of them
collapsed. Vices like conflict of interests, over politicization were a common practice and a lot of members’
savings were lost. Were (2009) points out the same cause of SACCO collapse as to the RBZ (2006). Kairu (2009)
observed that the increase in number of SACCOs collapse is coupled with the fact that their formation is driven
by membership and mutual benefit, leading to wrong elements in the community taking the advantage to establish
SACCOs under unclear procedures, and disappearing with the mobilized savings resulting into loss of confidence
in SACCOs from the poor. The RBZ Survey (2006) generally put it that SACCOs have had a history of instability,
often supervised by the same government agency that is responsible for all kinds of non-financial cooperatives,
including agricultural and marketing. Such agencies do not have the financial skills and political independence
needed to oversee financial intermediaries effectively. It is against this background that the study sought to assess
the inherent weaknesses of these institutions in Zimbabwe with special emphasis to savings and credit
cooperatives.

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 An Assessment of the Inherent Weaknesses in the Development of the Financial Institutions in Zimbabwe

1.1 STATEMENT OF THE PROBLEM

A Survey by the RBZ in conjunction with Ernest & Young (2006) showed that two out of three SACCOs
collapsed in the first or second year due to poor governance, fraud and mismanagement, failure to balance between
social and commercial missions and inadequate loan capital. Kairu (2009) agreed with the survey by RBZ adding
that governance challenges existing among SACCOs in Zimbabwe stemmed from the fact that these SACCOs
were faced with numerous operational hurdles as well as regulatory issues as several of them had collapsed only
a year and half after inception. Savings and Credit Cooperatives in Harare have been experiencing cash-flow
problems with financial positions weak that they cannot meet costs. The SACCOs are also faced by high level of
delinquency on loans it advances to its members. As a result of the problems, SACCOs face, there is an outcry
from members that they are not able to access loans from their SACCOs defying the major objective of their
existence. The situation as such prompted this study to assess the inherent weaknesses in the development of the
financial institutions in Zimbabwe with reference to Savings and Credit Cooperatives

1.2 OBJECTIVE
To access the inherent weaknesses in the development of the financial institutions in Zimbabwe with
reference to Savings and Credit Cooperatives in Zimbabwe.

II. LITERATURE REVIEW

According to Brogi (2008) the governance system of financial intermediaries is more important because
these institutions are mainly in the business of risk acceptance. However, many firms are yet to implement
practices for better risk management (Kleffner et al, 2003). Tandelilin (2007) maintains that implementation of
good corporate governance is not only concerned about better expected return but is also concerned about better
managing of risk. The most important types of operational risk involve breakdowns in internal controls and
corporate governance (Vrajlal, 2006). In survey on the status of missing SACCOs in Zimbabwe, 80% of the
SACCO collapse was explained by fraud and mismanagement by board executives and management (RBZ report,
2007). Governance challenges still existed, particularly among SACCOs where risk was highest, given that they
collected and intermediated members’ savings (RBZ Report, 2008). This confirmed earlier studies by RBZ in
2007 which discovered that poor management of the loan portfolio, poor appraisal of loan applications and
subsequent loan monitoring by SACCO management had led to depletion of institutional funds due to high default
rates.

Loan Portfolio
According to the IMF Report (2001) most SACCOs in worldwide had large portfolios in arrears, with
overdue loan repayments stretching back into the distant past mainly because lending policies were usually poorly
enforced and systems to track and manage arrears hardly existed. Many if not all SACCOs had experienced
considerable difficulties realizing collateral. Allen & Makhumbi (2009) maintained that the loan evaluation
system and ability of members to repay within a specified timeframe had not always been considered sufficiently
in the loan application process and that the cooperative model of finance relied to a certain extent on the common
bonds shared by members, which fostered a trust between members. The IMF report (2007) indicated that there
had been problems of over indebtedness as well as poor management of the loan portfolio. Loan application
appraisals and subsequent monitoring by SACCO were all poor leading to high default rates.
Ocowun (2010) however, explained the causes of high default rate from another perspective. He pointed
out that defaulting amongst SACCO members resulted from wrong public perception that the prosperity for all
money was from donations or from their own savings. Kairu (2009) highlighted political interference as a possible
threat to the quality of the loan portfolio pointing out that whereas politicians were very crucial at the mobilization
and starting stages of the SACCOs, some were frustrating the program as they take loans from these SACCOs
with a feeling that they are not obliged to pay back. Dandapani, Karels & Lawrence (2008) observed another
challenge in respect of the loan portfolio. They asserted that managers were constrained in their ability to rapidly
change the riskiness of the loan portfolio as loan opportunities were limited to members only. The issue of
collateral pauses another challenge most often the common bond between the members and knowledge for each
other’s credit worthiness substitutes for absence of collateral (Goddard, McKillop, & Wilson, 2008)
According to the IMF report (2001) delinquency in SACCOs had increased. Kyazze (2010) maintained
that most SACCOs were challenged with overcoming delinquency in the loan portfolios as techniques of
measuring and controlling delinquency were not strictly adhered to in various SACCOs. Kyazze (2010)’s findings
followed those of Allen & Maghimbi (2009) who stated that under normal circumstances, delinquency rates of
SACCO loans could appear high, although much of this was due to delinquent loans associated with the
agricultural cycle, thus in the Agricultural SACCOs, members preferring paying for the loans once in a year after
harvesting. This indicated a shift in the trends earlier observed by Kiwalabye (2008) that some SACCOs in Rural
Development SACCO located in an internally displaced camp had good loan recovery rate of about 80%. Studies
carried out by Deshpande (2006) on a small number of co-operatives selected for a donor-funded technical

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 An Assessment of the Inherent Weaknesses in the Development of the Financial Institutions in Zimbabwe

assistance had initially found them to have a collective portfolio at risk. In Zimbabwe, the average reported
portfolio at risk which is normally greater than 30 days in SACCOs reached as high as 42%, compared with single
digits for regulated institutions. However, an analysis of loan portfolios for some selected SACCOs indicated an
increasing trend (IMF Report, 2008).

Liquidity
Liquidity is crucial for financial institutions because they are particularly vulnerable to unexpected and
immediate payment demands. To stay in business, a SACCO must be able to pay out legitimate withdrawals and
credit requests instantly (Bald, 2007). The AMT report (2008) stated that often almost all SACCOs with highly
volatile liquidity levels did not have adequate ways of managing liquidity. Deshpande (2006) observed that excess
liquidity in financial institutions limited incentives to mobilize additional deposits especially poor people’s
deposits, which tended to be perceived a priori as short term, unstable, and costly.
At the institutional level, excess liquidity may be caused by a lack of suitable lending opportunities (real
or perceived). According to the IMF Report (2001) SACCOs in Zimbabwe often lent out both share capital and
savings, leading to frequent liquidity management problems mainly because most members are generally net
borrowers, thus seek to minimize their interest rate charges on loans resulting in inadequate incentives to save and
insufficient revenues to run the SACCO as an organisation. This is coupled with the fact that demands for credit
in SACCOs overweighs mobilization of savings (Kyazze 2010). Allen & Makhumbi (2009) agrees with the IMF
report (2001) adding that managing liquidity and capital levels, while meeting the needs of members for finance,
has been one of the major ongoing challenges for SACCOs in Africa. Some SACCOs have insufficient funds to
lend making some members to wait for some time before they get money (Kiwalabye, 2008). However, the RBZ
Report (2006) disagrees to some extent with the IMF report, (2001) claiming that some SACCOs are over liquid.
This is explained by the fact that some have access to wholesale lending which appears inexpensive financing
though criticized for discouraging deposit mobilization.

Risk and Financial Performance

According to Wenner, et al (2007) adequately managing credit risk in financial institutions is critical for
their survival and growth. Young (2006) adds that when organizations have structured platforms for effective risk
management, it may lead to the effectiveness of overall performance. Tandelilin (2007) agrees with Young (2006)
confirming that financial institutions get the benefit of increased performance when they manage their risks better.
According to Bald (2007) the key to success lie in not entirely avoiding the risks, but to properly balance the risks
against the rewards from potential profits. Wenner et al (2007) adds that failure to control risks, especially credit
risk, can lead to insolvency. SACCOs have highly variable performance illustrated by the wide gap in delinquency
rates as opposed to the relatively solid nature of regulated institutions (Staschan, 2003).
According to the Microfinance network report (2000), financial losses may result when risks are poorly
managed. However, Goddard, McKillop & Wilson, (2008) agrees with the Microfinance network report of 2000
and they state that over the period 1993–2001 an increased reliance on fee income generating activities was
associated with increased risk. SACCOs with more highly concentrated income streams tended to have higher
risk and returns. After the SACCOs were formed, many people largely the rural based peasants joined a host of
SACCOs as a requirement to qualify for the loan scheme. Little did they know that some of these SACCOs could
turn out to be a source of more poverty and misery as SACCO managers are faced with conflicting objectives.
The issue becomes to what extent their social objectives and responsibilities can be allowed to jeopardize their
long-term viability. If the primary objective of lending is to make trouble free advances, the financial capacity
and previous borrowing experience of a loan applicant and their determination to repay their debt is more
important. However, if the primary objective of lending is society based then the lending criteria which
discriminates against certain high-risk borrowers constrains the achievement of this objective (Weaver, 1994).
However, Ralston & Wright (2003) warns that SACCOs need to monitor carefully the risk return profile of their
lending portfolio to ensure long term survival since unlike banks; their objective is not to maximize profits but
maximize services to their members some of whom may be high risk borrowers.

III. METHODOLOGY
The researcher used the descriptive survey method where questionnaires were used in the collection of
data. The descriptive survey is a practical and cheapest method to conduct a research study. The total population
was 688 comprising of 680 members of SACCOs, 4 Ministry of Youth Officials and 4 NACSCUZ officials from
which a sample was drawn. In some cases, it is not easy to investigate the whole population due to expenses or time
constraints. Considering this, the researcher selected a sample. In this study a representative sample of 40 was drawn
from the population of 688. Stratified sampling and the purposive sampling designs were used to obtain the sample
size. Data was collected by use of the questionnaire and interviews. The drop and pick technique was adopted to
ensure a higher response rate for the research to be successful. Secondary data was collected by use of archival

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 An Assessment of the Inherent Weaknesses in the Development of the Financial Institutions in Zimbabwe

research where SACCO records and reports were perused, internet cites visited and journals visited to draw the
requisite information from the accurate sources.

IV. DATA PRESENTATION, ANALYSIS AND INTERPRETATION

Response Rate Analysis
Table 1: Results for study’s response rate
Respondents Sample size Actual Actual Non- Non-
respondents respondents as respondents respondents
a percentage of as a
sample size percentage of
sample size

SACCO Management and 40 35 72.92% 5 10.42%

members issued with
questionnaires
Ministry of Youth and 8 4 8.33% 4 8.33%
NACUZ officials
interviewed
Total 48 39 81.25% 9 18.75%
Source: Research data

The researcher had administered 40 questionnaires to respondents and 35 completed questionnaires were
returned. The study had also targeted 8 officials from the Ministry of Youth and NACSCUZ but only 4 were
interviewed resulting in a total of 39 actual respondents who responded to the Questionnaires and interview
respectively. The 39 participants represented a response rate of 81.25% while 9 participants who did not return
the questionnaire and also not interviewed represented a none-response rate of 18.75%. According to Leeds (1986)
the response rate of above 60% renders the research to possible. The response rate of 81.25% enables the study
to have a general overview of the characteristics of the whole population under study.

Responses on portfolio risk in the SACCOs

120 plus 20

30days
90days 7
60days
90days
60days 5
120 plus days

30days 3

0 5 10 15 20 25

Figure 1: Portfolio risk in the SACCO.

Source Research data

In Figure 1 above, out of 35 respondents, 3(6 percent) pointed out that any loans that had surpassed
a period of 30days posed as a portfolio risk, 5(10 percent) indicated that, those loans that had gone over 60 days
were a risk to the SACCOs, 7(15 percent) of respondents pointed that, those loans over 90 days were a risk to the
SACCOs while 20(42 percent) said that, loans which were 120 days plus were the greatest portfolio risk to the
SACCOs. The results on Figure 1, appears to suggest that, loans for 30 days could be recovered. However, the
rest of the loan portfolios had the greatest risk of default. Portfolio Risk greater than 30 days measures the value
of all loans outstanding that have one or more instalments of principal past due. From the study, any loans over
30 days were at risk of default. These findings concurs with the IMF Report (2001) that most SACCOs worldwide

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 An Assessment of the Inherent Weaknesses in the Development of the Financial Institutions in Zimbabwe

had large portfolios in arrears, with overdue loan repayments stretching back into the distant past mainly because
lending policies were usually poorly enforced and systems to track and manage arrears hardly existed.

Responses on the level of delinquency within the SACCO

4%
6%
2% Not sure
Low
17% Very low
44%
High
Very high

Figure 2: Level of delinquency with the SACCOs.

Source: Research data

In Figure 2, out of the 35 respondents, 2(4 percent) were not sure of the level of delinquency within the
SACCOs, 3(6 percent) stated that it was low, 1(2 percent) very low, while 8(17 percent) and 21(44 percent)
concurred that the level of delinquency in the SACCOs was high and very high respectively. The delinquency
ratio measures the institutional weakness. It is the ratio of the total value of loans that have not been repaid by
their due date to the total value of loans outstanding. The results reveal that, the level of delinquency of the
SACCOs studied was very high meaning that, there were high chances of not recovering fully the money lent out.
The findings agree with the IMF report (2001) who established that delinquency in SACCOs had increased.
Kyazze (2010) also maintained that most SACCOs were challenged with overcoming delinquency in the loan
portfolios as techniques of measuring and controlling delinquency were not strictly adhered to in various
SACCOs. Kyazze (2010)’s findings followed those of Allen & Maghimbi (2009) who stated that under normal
circumstances, delinquency rates of SACCO loans could appear high.

Responses on the liquidity position of the SACCOs

35% 31%
30%
25% 21% Agree
20% Strongly agree
15% 13% Disagree
10% 8% Strongly disagree
5%
0%
Agree Strongly agree Disagree Strongly
disagree

Figure 3: Responses on liquidity position.

Source: Research data

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 An Assessment of the Inherent Weaknesses in the Development of the Financial Institutions in Zimbabwe

Out of the 35 respondents in Figure 3, 4(8 percent) stated that, they do agree that the liquidity position
of their organisation was in a health position, 6(13 percent) strongly agree that it was in sound position while
10(21 percent) disagreed and 15(31 percent) strongly disagreed. The results on Figure 3 reveals that, the SACCO’s
does not receive timely deposits as shown by those who indicated that, they strongly disagree that liquidity
position of their organisation was in a healthy position. This implies that the SACCO was experiencing liquidity
problems. This agrees with the AMT report (2008) who found out that often almost all SACCOs with highly
volatile liquidity levels did not have adequate ways of managing liquidity. Deshpande (2006) observed that excess
liquidity in financial institutions limited incentives to mobilize additional deposits especially poor people’s
deposits, which tended to be perceived a priori as short term, unstable, and costly.

V. CONCLUSION AND RECOMMENDATIONS

The SACCOs should re-evaluate systems in order to discover the weaknesses that can increase both
operational and credit risks and then improve controls in these areas within the systems. This would go a long
way into reducing cases of mismanagement of funds, poor loan appraisal procedures as well as poor monitoring
and administration of funds. SACCOs should begin to diversify its membership base to include members engaged
in activities that yield a daily income and/or a regular income from other economic activities as this is critical to
minimize liquidity problems and this would diversify the cash flow sources. Also, effective management of loan
portfolio would reduce high levels of delinquency.

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