Economic outlook
The poor 2019/2020 agricultural season and then the COVID 19 pandemic’s disruption of the global economy due to the prolonged lockdowns adversely affected every sector of the economy, particularly tourism and the informal sector which are major drivers of the Zimbabwean economy as resources had to be mobilsed for food imports, COVID 19 mitigation Personal Protective Equipment (PPE) and drug procurement, construction and refurbishment of isolation and treatment centers, establishment of quarantine facilities and welfare of returning residents in quarantine and other social protection schemes to cushion citizens affected by the lockdown an lost sources of income. The economy is now forecasted to contract by up to -8% for 2020 and rebound to about 3% for 2021.
The continued currency depreciation kept pushing the inflation rate closing at 348% as at 31 December 2020 having peaked at 837.53% in July 2020, unfortunately incomes could not keep up with the inflation rate thus affecting the overall aggregate demand in the economy greatly slowing all economic activity. This combined with loss of incomes due to the lockdown meant very few loans were being underwritten while at the same time the Portfolio quality was deteriorating
The introduction of the foreign currency auction system on 22 June 2020 helped to stabilise the exchange rate and gradually prices are also stabilizing. Further relaxation of lockdown regulations allowing most small and Medium Scales Enterprises (SMEs) and informal traders to resume economic activity have also seen a gradual increase in demand for our products and the repayment rate for loans.
Future Plans
In the short term the company intend to continue on a cost containment strategy to ensure sustainability of operations. If the current relative stability obtaining in the operating environment is sustained for the next twelve months and there is enough liquidity in the economy, the company would gradually dispose its holdings of non-current assets held for sale to increase the working capital and ability to underwrite more loans which would enable the company to also gradually review the lending rates downwards to support its clients more meaningfully.
The shareholding structure of the company will also be altered firstly to comply with regulatory requirements and to raise additional capital which is the only viable route to sustained growth of the enterprise in the long term. An external injection of new capital financing will allow volumes to increase without resorting to expensive borrowings.
Eventually the company will proceed with the geographical expansion of its operations to district centers were we are not able to fully cover at the moment due to limitation of funds and also fully digitize operations to reduce costs while increasing reach and efficiency.
Financial Analysis Year Ending 31 December 2020
The year 2019 saw the discontinue of the multicurrency system, change of functional currency to Zimbabwe Dollar and a spike in the inflation rate which all changed the market dynamics. The structural changes of the economy continued into 2020 and the outbreak of the COVID 19 pandemic with the subsequent lockdown brought about additional challenges to the operating environment. Overall the country has remained under hyperinflation therefore all financial figures have to be restated to take into consideration effects of inflation to come up with a credible analysis and comparability.
Operational Self Sufficiency
For the year ending 30 December 2020 the ratio was 373%% down from 703%% for the same period in 2019. The company continued to be able to sustain its operations despite the myriad of challenges obtaining in the economy. A deliberate decision was taken to contain operational costs at the barest minimum in an environment where prices were rapidly changing.
Activity Ratios
The average tenor of all loans for the period under review was strictly 30 days, a position that the company decided on from the second half of 2019 due to the volatility of the exchange rate driven inflation. The loan tenure had to be made as short as possible in order to properly manage credit risk due to falling disposable incomes.
Profitability
The ratio deteriorated from 3.6% for the same period for year ending 31 company. All avoidable Operational costs were eliminated or curtailed. December 2019 to 9% inflation adjusted and 2% in historical terms during the year under review. In as much as total sales actually went down compared to the same period in 2019 the profitability went up mainly because the cost containment strategy adopted by the
Liquidity
The liquidity ratio plummeted to 6:1 by 31 December 2020 from 82:1 for the same period in 2019 reflecting the changes in the cash flows of the institution and the financing structure of the company. It has been a challenge to fully liquidate all payables unlike in previous periods. The institution is now taking much longer to honor its obligations to creditors.
Working Capital
The effects of the high inflation in the economy led to a 75% reduction of working capital in real terms from the 2019 levels of ZWL$224023 (USD$14 934) to ZWL$310 775 (USD$ 3813) by 31 December 2020. The low working capital has become a serious impediment to the operations of the company. At any interval during the period under review the institution has been unable to fully disburse funds to all qualifying applications on hand because of funds limitation. As at 31 December 2020 only 52% of eligible applicants had funds disbursed. The low levels of working capital have become a threat to the profitability and sustainability of the institution because operational costs keep rising by the month. An injection of fresh liquidity in to the institution is the only viable option available to ensure continued growth and survival of the institution.
Bad Debts
The bad debts ratio spiked for the month of July 2020 to 37% mainly as a direct consequent of the lockdown when major clients who are in the SME sector had virtually no income for almost four months and the institution had to write off those loans which were 90 days past due as per policy. It should however be noted that by 31 August 2020 70% of the bad loans reported the previous month were paid up as the business sector gradually reopened. For the full year to 31 December 2020 the bad debt ratio closed at 16%.
Gearing Ratio
The Institution had no debt prior to the year 2020. However by 31 December 2020 had a gearing ratio of 10%. The structure of the debt is exclusively made up of short term shareholder loans advanced to the institution for working capital purposes. The licence renewal process was only completed in June 2020 therefore no changes to the capital structure could be authorized during this period hence the injection of liquidity in the form of loans.
Classification of Loans
A grand total of loans amounting to ZWL$ 1 340 812 were disbursed during the period under review with 74% (ZWL$ 986 750) being productive loans for SMEs and 26% (ZWL$ 354 062) being consumptive loans.
Portfolio at Risk (PAR)
The average monthly portfolio at risk was 27%, peaking at a high of 76% in June 2020. The ratio was driven by the lockdown induced loan rescheduling. The year closed with a rate of 7% following the gradual improvement in the operating environment.
Distribution
Women borrowers constituted 45% of the total loan book as at 31 December 2020.