Bankers Association of Malawi (BAM), a representative body of commercial banks, has welcomed Treasury’s plans to double credit to the private sector in the next five years, but argued that sustainability will depend on macro-economic performance.
In an interview on Tuesday, BAM president Paul Guta observed that while the interest of the banking sector is to see credit extended to the private sector grow, the economy’s resilience and productivity will be key to achieving this plan.
“In as much as we would be keen to grow the domestic private sector credit, the success of it depends on the performance of the economy and sustainability of the gains made on the macro-economic front.
“The main challenge now remains power supply which has the potential to limit or subdue this growth,” he said.
In a recently published Financial Sector Development Strategy II (2017-2021), Treasury has indicated that it wants to increase domestic credit to the private sector as a percentage of gross domestic product (GDP) to 30 percent from the current 12.3 percent.
This, according to the strategy, will see a significant amount going to the critical growth sectors such as agriculture, tourism, transport infrastructure, manufacturing, energy and mining.
Money market analyst Armstrong Kamphoni in an interview said traditionally, the banking sector has not taken risks to develop the financial sector by not providing a deliberate policy to provide cheap finance to key economic sectors.
He said banks have failed to stimulate sectors that require huge finance to grow the economy.
“Banks are comfortable to collect cheap deposits and are not willing to lend out to high risk sectors such as manufacturing, agriculture and mining because they are just not willing to take risks.
“For instance, in the just ended year, few banks posted losses because of non-performing loans as most of them had their non-performing loans books close at below five percent.
Domestic credit to private sector as a percent of GDP in Malawi remains one of the lowest in sub-Saharan Africa.
For instance, during the 12-month period (January 2017 to January 2018), credit to the private sector grew by a paltry 0.3 percent while government credit increased by 27.5 percent despite the Reserve Bank of Malawi (RBM) reducing the policy rate to 16 percent, according to the World Bank.
In the first quarter of 2018, RBM figures show that private sector credit fell by K1.8 billion from K411.61 billion recorded at the end of third quarter 2017 to K409.8 billion at the end of fourth quarter of 2017 which was explained by commercial and industrial loans and provisions for loan losses.
Access to finance, according to the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) remains one of the major obstacles to doing business in Malawi.
MCCCI president Prince Kapondamgaga said government’s continued domestic borrowing is creating competition for funds for businesses at a time production levels are dwindling due to reduced power generation.
In the next fiscal plan, government plans to borrow K176 billion domestically.
Treasury hopes to increase domestic funding to the private sector by among other things creation of Public Private Partnerships (PPPs), establishment of specialised financial institutions and increased support to the agriculture sector.