Are Banks a Source of Socio-economic Development in Malawi?

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It is evident that Small Medium Enterprises (SME’s) are playing a vital role in the social –economic development of Malawi. One simply has to go around the trading centres, the markets and the streets in our four cities to appreciate the expansion in economic activities being handled by SME’s.

The 2012 Malawi financial scoping survey on SME’s indicates that Malawi has about 760,000 small business owners generating an annual revenue of about US$ 2 billion{around to K500 billion}.

However, the survival of Malawi’s SME’s has been the issue of great concern and worry to the nation in the past few years as the country’s economic condition has not been friendly enough to nurture growth and expansion evidenced in the closure and downsizing of many private entities due to shortage of foreign exchange, fuel, taxation policy, banking policies among others.

Malawi has one of the lowest rates of financial inclusion in Africa. According to a recent survey conducted by the ministry of trade, only 22 percent of small businesses have or use products or services offered by commercial banks

High lending rates from commercial banks, collateral requirements, lack of business and financial management skills and the culture of aversion are some of the reasons that hinder the growth of SME’s in Malawi.

In its findings, the national statistical office {NSO} says the micro, small and medium enterprises {MSME’s} survey shows that financial exclusion of the sector is costing billions of kwacha. The report says even though the sector contribute substantial annual revenue to the country, yet about 66 percent of the sector does not have access to banking services, while 13 percent use formal but non-bank financial institutions.

Analysts’ say the banks could be using the interest rates to discourage borrowing. They say banks fear a lot of individuals and firms risk defaulting on the loans while others will have their businesses closed down or reposed.

“Actually, banks are afraid to borrow the SME’s because most of them borrow to default and not to repay, hence creating a credit risk to the banks,” says Professor Mathews Chikaonda, one of the well-known economists in the country.

The NSO reports say about 71 percent of businesses owners borrow to pay back debts and 54 percent borrow to grow their businesses. The survey established that the smaller the businesses, in terms of number of employees, the less likely that the owner has or uses banking services to manage the finances of their businesses.

“Three quarters of small business owners do not borrow because they are wary of their ability to repay the loans. The largest source of credit for small businesses is friends and family, followed by village bank of cooperatives,” reads the statement about the survey.

According to records, currently, Malawi has over 12 commercial banks trading in the country. In Malawi, it is reported that the top four banks, NBM, Standard Bank, NBS and FMB control nearly 90 Percent of the deposits, leaving the small banks to scramble for the rest.

“There is also competition for quality customers to lend and transact with. Where quality customers are scarce banks then tend to either, take thinner margins and attract the priced clients of a lesser quality. The latter leads to more defaults and provision,” adds chikaonda, himself a board chairman for national Bank of Malawi {NBM}.

However, Reserve Bank of Malawi governor Charles Chuka expressed surprise at banks’ insistence to lend money to government and corporation alone when, he says, it is clear that capital Hill is heavily riddled with debts.

“Maybe, the only way banks in Malawi can make money is through government businesses. And, I think if that is the case, it’s unfortunate state of affairs,’” says Chuka, adding, “If the banks have nothing to lend out, they end up rising their base lending rates.

Chuka says banks classified the SME’s as ‘the risky borrowers ‘with no collateral or guarantee from their companies so they had to put the bank lending rates high.

The consumers Association of Malawi {CAMA} executive director John Kapito describes the high bank lending rates as ‘prohibitive and quite depressing”.

“It will stop people from borrowing money and consumers will have no money and this will decrease consumption pattern by many Malawians,” he says

Kapito notes that high interest rates by commercial banks will likely fuel inflation rate rise as manufacturers borrowing from the banks will be forced to pass on the consumers.

The consumer rights activist also argue that the move could retard the inflow of foreign direct investment {FDI} into the country, saying investors look for destination where interest rates are low, among other factors.

Financial Analysis say because banks are borrowing at a high rate from RBM, they have also raised their base lending  rates to a higher percentage, making borrowing for both working capital and expansion prohibitive; forcing some businesses to close shop of down-size as access to capital takes a knock. This has left a trail of ‘delinquent loans’.

The increase in the bank rate came just days after the RBM had devalued the local currency by nearly 50 percent and subsequently floated it to be controlled by forces of demand and supply. Since the shock devaluation of the kwacha, local depositors’ demands. The lending rates above 40 percent, makes credit out of reach for most firms and individuals.

“Financial inclusion or being “banked “can be transformative, as it allows poor people to build a more secure future. The ability to save and borrow allows them to build their assets, start a business, invest in education, establish a credit rating, and eventually own a home, “says the World Bank report of 2012. But for local entrepreneur Banda, he is not amused at all.

“I would rather borrow from friends or Katapila [money loskers] than trouble myself borrowing from the bank at that high risk lending rates, and collateral issue, “he says.

Minister of trade Josephy Mwanamveka says no country can hope to achieve sustainable economic growth without expanding and diversifying trade with small businesses.

“A vibrant small and medium enterprises sector can become a catalyst for accelerated economic development for Malawi,” he says.

Indeed, the banking system is the heart of any country’s economy. It is the major savings vehicle for the population and, at the same time pumps the money required for the economy to grow and for business to develop. This role for the banks is particularly true for developing countries such as Malawi, as they typically do not have developed capital markets. In this scenario, bank credit or loan makes up most of funds businesses and individuals need to grow.

Thus, without those of the funds or borrowed at a high-rate, companies and individuals cannot develop and the much-needed jobs cannot be created.