Malawi’s microfinance sector is grappling with the harsh economic environment, as borrowers struggle to service loans, leading to a surge in non-performing loans to 11.2 percent from 7.9 percent last year, latest data show.
Highlighted in the Reserve Bank of Malawi (RBM) Financial Sector Annual Report of 2024, the widening non-performing loans (NPL) mean the asset quality, especially for non-deposit-taking microfinance
institutions remain a concern as the ratio is more than double the five percent regulatory benchmark.
Reads part of the report: “Gross loans increased to K70.7 billion from K42.8 billion in 2023 while NPLs rose to K7.9 billion from K3.4 billion in 2023.”
For Martha Madengu, a single
mother of three who sells charcoal in Area 25 in Lilongwe, it has been a challenge to service the loan she obtained from one of the savings and credit cooperatives (Saccos) because of high interest rates.
“I borrowed K300 000 which I used to boost my business capital, but with an interest rate of above 30 percent, it
is a big challenge. Sometimes I think it is way better to borrow from village banks,” she said.
However, despite consumers struggling to service their loans, the subsector reported a profit of K6.6 billion compared to a loss of K1.4 billion in 2023 while total assets also
grew by 53.2 percent to K93.1 billion according to the report.
Reads the report in part: “The improvement was mainly driven by an improvement in earnings for institutions which registered trading losses in 2023 emanating from exposure to foreign exchange liabilities.
“Consequently, return on asset and return on equity improved to seven percent and 19.4 percent respectively as compared to negative 8.1 percent and negative 60.2 percent in 2023.”
Financial analysts have since attributed the increasing NPLs to lagged effects of 44 percent kwacha devaluation in November 2023, which resulted in rising inflation and dampened the value of money.
Said economic consultant Booker Matemvu: “The economy is showing all the signs of distress and more and more people are falling deep into poverty with no room to maintain repayments for loans as they struggle just to survive.”
He said the non-deposit taking microfinance institutions are able to declare profits because demand for loans has gone up and the collateral demands are compensated for by higher interest rates.
In a separate interview, financial expert Brian Kampanje described the high NPLs in the microfinance sector as worrisome while attributing the increased loan demand to small and medium enterprises (SMEs) preference to borrow from microfinance institutions than commercial banks.
He said: “The increase in profits in the subsector of the economy also means that individuals and SMEs are finding it much easier to access credit from this sector than the traditional banking system, perhaps due to flexibility in the lending process.
“The increase in NPL is very worrisome. This might be attributed to the high inflation rate which in part is due to the 44 percent devaluation in November 2023 but whose real impact was felt in 2024, the borrowers have less net take home pay leading to default on loans they can escape.”
Malawi Union of Savings and Credit Cooperatives chief executive officer Fumbani Nyangulu said that bad loans have weighed negatively on microfinance institutions.
He said: “While it was expected that the harsh economic environment would negatively affect savings and credit cooperatives, the fact is our operations have been affected specifically in terms of liquidity due to the bad loans.
“We have, however, adopted coping mechanisms which among others include switching to short and medium-term loans from long-term loans to allow for our members to access loans given the liquidity challenges.”
MFIs play a critical role in boosting entrepreneurship, providing access to capital for small business and promoting economic development
