The Reserve Bank of Malawi (RBM) says the country’s banking system is sitting on substantial liquidity, but less than 40 percent of deposits are being converted into loans.
But economists have said this scenario exposes a financing paradox that reflects government borrowing, expensive credit and weaknesses that make private businesses risky to finance.
In its June 2026 Financial Stability Report, RBM said that daily average excess reserves increased to about K351.5 billion during the first half (H1)of this year while banks remained well capitalised and profitable enough to withstand prevailing risks.
On the other hand, financial intermediation, measured by the loan-to-deposit ratio, remained below 40 percent while annual private sector credit growth slowed to 31.3 percent from 44.7 percent in December 2025. In real terms, private credit grew by 10.2 percent.
The central bank has largely attributed the low financial intermediation to tight lending standards for short and long-term credit.
“With constrained access to credit for borrowers, especially small and medium enterprises [SMEs], investments and the economy’s ability to sustain growth are curtailed,” reads the report in part.
This comes against strong demand for credit from households, SMEs and large enterprises as inflation, currently at 20.8 percent, foreign exchange shortages and difficult economic conditions increase financing requirements.
However, banks maintained tight lending standards due to heightened credit risk and risk aversion, favouring low-risk and foreign exchange-generating sectors.
In an interview on Wednesday, Scotland-based Malawian economist Velli Nyirongo said the low loan-to-deposit ratio does not mean that banks lack resources to lend, but reflects difficulty finding borrowers offering an acceptable balance between risk and return.
He said the reduced government borrowing has compounded the problem because Treasury securities provide relatively predictable returns at substantially lower credit risk than many businesses.
“Ultimately, Malawi needs an environment in which productive private investment becomes more attractive to banks than simply financing government,” said Nyirongo.
RBM estimates that financial sector holdings of government securities account for about 23.5 percent of total assets, while public debt stood at 82.6 percent of gross domestic product (GDP), which is above the 60 percent benchmark.
The central bank warned that continued reliance on domestic borrowing could deepen the sovereign financial sector nexus, potentially causing liquidity shortages and losses while reinforcing the crowding out of private investment.
University of Malawi economics lecturer Edward Leman agreed that government borrowing is part of the problem, but said expensive credit and lending requirements also constrain businesses.
“The cost of borrowing is so high that it discourages businesses from accessing the credit they need for investment,” he said.
Leman said SMEs also struggle with collateral, documentation and other lending conditions, meaning cheaper credit alone would not resolve the financing problem.
“This means that even if interest rates were reduced, many businesses would still struggle to access formal credit,” he said.
The policy rate was reduced by two percentage points to 24 percent in March, helping lower the reference rate to 20.4 percent by June, but RBM said borrowing costs remained elevated.
RBM recommends containing the sovereign financial sector risk through fiscal consolidation, including moderation in domestic borrowing, austerity measures and stronger domestic revenue mobilisation.
The central bank also recommends continued monitoring of banks’ and non-bank financial institutions’ exposure to government to tame immediate risks.
