Rising default rate blamed on economy

 

A report by the Credit Reference Bureau (CRB) has shown an increasing trend in default or late payments with individual borrowers’s rate increasing by 11 percent.

The report showed that businesses’ default rate rose by 17 percent from January last year, despite the gains registered by the economy during the review period.

It was also noted that small businesses’ rate of credit access was minimal unlike the already established businesses such that the figure was less than one percent.

Banks experienced the least in terms of debt service in the financial institutions sector at 21 percent with interest rates charges ranging from 23 percent to 37 percent followed by cooperatives which experienced the second highest credit servicing at 38 percent while their interest rate ranged from five percent to 11 percent.

Microfinance institutions, on the other hand, despite offering loans at high interest rates, experienced the highest credit servicing at 45 percent while the interest rate charge ranged from 45 percent to 100 percent.

Analysts have since blamed the rising default rate on the economy’s slow response to gains made during the review period.

In an interview yesterday, CRB managing director Patricia Mwase said the economy takes a bit of time to respond to market fundamental changes that is why there has not been an immediate immediately the impact of reduced inflation and interest rate.

Economics Association of Malawi (Ecama) executive director Maleke Thula yesterday said that the development could be explained by two major sectoral shocks to agricultural and manufacturing sectors as these sectors were hit by dry spells and power outages, respectively.

“The weaker performance in the agricultural sector than earlier on anticipated, has a bearing on small-scale and individual borrowers as the majority of these borrowers rely on agriculture for their income either directly or indirectly.

‘‘This development implies that

lower production than expected in the sector would be associated with higher default rates by individual and small scale borrowers.

“Power outages on the other hand resulted in companies downsizing their production, subsequently affecting cash flows of the borrowers thus increasing the probability of default,” he said.

Dean of social sciences at the Catholic University Gilbert Kachamba observed that the economy is slow in absorbing the macroeconomic improvements as the fruits of these changing improvements are yet to be realised on the ground and people and businesses tend to be risk averse.

“The increase in defaults is because the business environment is still not conducive for many businesses to flourish, make profits and be able to pay backs the loans. The bank process of getting the loans is still cumbersome as compared to the microfinance institutions, that is to say people prefer the microfinance institutions to the banks despite the higher interests.

“The economy is not generating wealth, most businesses are into merchandise trading and not value addition. We are all sharing the already made piece of cake nobody is increasing the size of the cake,” he said.

World Bank statistics indicate that Malawi’s level of non-performing loans have risen to above the regulatory benchmark of five percent, standing at 19 percent as at July 2017, from 10.8 percent in December 2015.

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