Understanding Legal Framework and Best Practices around Money Lending in Zimbabwe

RUTENDO MANHIMANZI

Giles, a 38-year-old entrepreneur, owns a small but thriving bakery in Harare.

After five years of building a loyal  customer base, he is eager to expand by opening  a new branch.

However, he faces a major hurdle- securing US$100 000 to  cover rental costs, new equipment and additional staff.

The challenge

Although Giles has a solid credit  history,he unsure where to obtain the loan. Each options comes with  advantages and risks and navigating Zimbabwe’s lending landscape requires an understanding of both legal frameworks and best practices.

Options

Giles considers the following options:

1.          Bank Loan – Giles can approach a commercial bank for a loan. However, he is worried about the high interest rates, and the consequences of the strict repayment terms when he fails to meet his monthly obligation.
2.  Microfinance Institution – Giles can also approach a microfinance institution, which offers smaller loans with more flexible repayment terms. However, the interest rates may be higher than those offered by commercial banks.

iii.         Informal Money Lender – Giles knows someone who can lend him the money informally, but he is worried about the high interest rates, the lack of formal agreements and brutal debt collection measures and may end up losing his house.

 

 

Decision

After careful consideration, Giles decides to approach a microfinance institution for the loan. He is willing to pay a slightly higher interest rate for the flexibility and convenience offered by the microfinance institution.

 

 

Introduction

As we navigate the complexities of financial planning, it’s essential to consider the various tools at our disposal. One such tool is money lending, which can be a vital source of capital for individuals and businesses alike.

Money lending has become a vital component of Zimbabwe’s financial sector providing individuals and business with access to capital. Money lending plays a critical role in facilitating economic growth, entrepreneurship, and financial inclusion. Money lending can promote financial inclusion by providing access to credit for underserved populations

 However, there are a lot of challenges faced including high interest rates, regulatory hurdles and a fragile economy.

 There exist, however, several pieces of legislation that each attempt to address these hurdles, however they are not comprehensive enough to offer comprehensive regulation.

 What is money lending

Money lending can be defined as the act/ business of lending or loaning money to individuals or businesses for an interest.

Types of money lenders

Money lending is by formally registered banks, microfinance institutions and informal individuals, registered and unregistered and online lenders.

Definition of a moneylender

Moneylender means any person who carries on a business of moneylending or who advertises or announces himself or holds himself out in any way as carrying on such business.

The act further defines a lender as;

any person making a loan of money, the cessionary of any right arising under any contract of loan of money and the holder of any instrument of debt and includes a moneylender.

Definition of microfinance

Microfinance is the provision of financial services to unbanked and underbanked households and small to medium enterprises.  The main objective of microfinance is to facilitate access to financial services by the poor and marginalized members of the community.  Microfinance targets those community members who would ordinarily not be able to open a bank account or access loan facilities in the mainstream banking sector due to the stringent requirements.

Legal requirements

 Microfinance Institutions are governed by the Reserve Bank of Zimbabwe. The Reserve Bank of Zimbabwe Act empowers the central bank to regulate and supervise financial institutions, including money lenders.

To operate as a moneylender/microfinance in Zimbabwe one needs;

1.          To be registered with the Registrar of Microfinanciers in terms of the Microfinance Act.  Further obtain a license from the Reserve Bank of Zimbabwe and meet the minimum capital requirements.
2.           to obtain a license to operate as an individual, a partnership or association in respect of every location they carry out their business in terms of the Act.

             iii.         A comprehensive business plan is a prerequisite to be submitted to the Registrar for approval.

 Regulation of money lending

money lending in Zimbabwe is regulated by several statutes;

1. The Money Lending and Rates of Interest Act [chapter 14:14] regulates and governs individuals who are registered as money lenders. Regulates money lending activities, including licensing, interest rates, and debt collection practices. Regulate the activities of money lenders. Protect the interests of borrowers and prevent exploitation of borrowers.
2. Microfinance Act [Chapter24:29] – governs registered companies that operate as microfinance businesses.
3. Bank Use and Suppression of Money Laundering Act [chapter 24:24] – To deal with the unlawful dealing and cash and the amounts moneylenders must keep.
4. Consumer Protection Act [chapter 14:14] – Protects consumers from unfair business practices, including those related to money lending.

Due diligence on the borrower by the lender

Due diligence should consist of an investigation carried out by the lender on the borrower to verify information submitted in a loan application. The following are some of the considerations before lender decides to a loan application.

1.          Verify identity document – (fingerprints as well to rule theft of identity);
2. Background checks to enquire their repayment history;

iii.         Assessment of assets offered as security, their ownership and status e.g. whether there are any already existing bonds or encumbrances, any previous bonds registered and how they were paid off,

1. Criminal records;
2. For companies or family trust one must scrutinize their earnings, assets, liabilities, cashflow, debt and management and
3. Capacity to pay off the loan.

Prohibited conduct

The law is clear on who is prohibited from carrying out a moneylending business.

1. The Microfinance Act prohibits individuals from conducting microfinancing business unless they are registered as a company. Where there is contravention of the Microfinance Act, the individual shall be guilty and liable to a level fourteen fine or to five year imprisonment.
2. The Money Lending and Rates of Interest Act prohibits individuals who are not registered from lending money.

iii.    The Bank Use and Suppression of Money Laundering Act prohibits people other than a financial institution or moneylender from exchanging any negotiable instrument for cash at a premium. Failure to comply results in loss of both the capital loan advanced and interest charged

Legal architecture of the moneylending industry

1. There are basically two types of microfinances institutions provided for by the Microfinance Act, that is;
2.          Credit-only Microfinance Institutions.
3.          Deposit-taking Microfinance Institutions
4. There are basically three types of moneylenders provided for by the Money Lenders and Rate of Interest Act, that is
5. individuals;
6. partnerships; and,

iii.    associations

Interest charged

In terms of the Money Lending and Rates of Interest Act lenders cannot charge interest above the prescribed rate of interest, if they do then no interest shall be payable on the loan or advance; and the capital sum of the loan or advance shall not be recoverable from the borrower unless a competent court, on application by the lender, has condoned the lender’s failure to comply with law.

 Whereas in terms of the Microfinance Act interest can be charged above the prescribed rate provided it is evidenced by bond or other instrument registered with Deeds Office.

Recovery by moneylender

Money lenders must comply with fair debt collection practices, including respecting borrowers’ rights and avoiding harassment.

In the event of default by the borrower, the lender can:

1.          enforce a security interest or guarantee through the courts; and
2.          have a hypothecated security declared executable.

These proceedings are known as foreclosure proceedings. Once the lender obtains a court order, they can execute upon the collateral. Self-help for the purpose of enforcing security is not permitted at law.

Challenges Facing Money Lending in Zimbabwe

1.          Economic Instability- Zimbabwe’s economic instability, including high inflation and currency fluctuations, affects the money lending industry.
2. Regulatory Challenges- Money lenders face regulatory challenges, including licensing requirements, interest rate caps, and debt collection regulations.

iii.         Competition- The money lending industry in Zimbabwe is competitive and complex, with many formal and informal lenders operating in the market.

1. High interest rates -there is lack of transparency and exploitation of borrowers.
2.  Limited access to credit for low-income individuals and entities.

Conclusion

In conclusion, the money lending industry in Zimbabwe is a complex and dynamic sector faced with various regulatory challenges. However, the industry also presents several opportunities for innovation, economic growth, and financial inclusion. Key takeaways are that money lenders should comply with regulatory requirements, treat borrowers fairly, and be transparent in their dealings. Borrowers likewise ought to conduct due diligence before engaging any money lender.

Rutendo Manhimanzi is a registered Legal Practitioner and practices under the law firm Ruzvidzo Legal Counsel. She can be reached on +263 773 589 263 or email rmanhimanzi@yahoo.com