The Donor Committee on Agriculture and Food Security has said there are economic structural issues that are not being tackled, urging the government to devise prudent fiscal management measures to address persisting economic challenges.
In its update on agriculture lending and grants in Malawi, the donor committee observes that high interest rates and ever-increasing domestic debt have caused affected industries to experience a dampening effect.
Reads the update in part: “Businesses that qualify for commercial loans only work hard to service them and derive no real benefit for their business.
“In addition, sectors sensitive to interest rates such as investments and borrowing-dependent industries, are experiencing a dampening effect.”
It said high interest rates reduce a business’s ability to service debt due to non-corresponding increases in revenues to offset.
The benchmark lending rate set by the Reserve Bank of Malawi is at 26 percent, an increase from 23.6 percent in February 2024.
The donor partners say they continue to observe a misalignment between the government’s agricultural initiatives stemming from the country’s long-term strategy Malawi 2063 and commercial banks’ lending philosophy towards the agriculture sector.
Reads the update: “Some commercial banks primarily focus on lending to trading businesses because they have short-term period returns,while other banks deal with solid businesses, not small-scale enterprises [SMEs], due to low-risk appetite.
“Agriculture SMEs find themselves moulding their business models to fit financial products and services on the market to qualify for a credit loan; otherwise, they seek alternative fund sources.”
Ironically, published data show that although agriculture continues to be a cornerstone of Malawi’s economy, its contribution to the gross domestic product has declined to around 22 percent in 2023 from 30 percent in 2016, accounting for 85 percent of export earnings (of which 40 percent is from tobacco alone) and 76 percent of total employment.
This is despite the sector having comprehensive sectoral policies and high budget allocation.
According to the World Bank, only five percent of small enterprises and three percent of micro-enterprises in Malawi have credit from commercial banks as commercial banks and microfinance institutions skew financial lending towards non-trade and non-agriculture activities.
Lilongwe University of Agriculture and Natural Resources Centre for Agricultural Research and Development director Innocent Pangapanga-Phiri observed that limited access to finance could lead to reduced Investment in inputs, resulting in lower yields.
He said: “Without financing, small-scale farmers rely on manual labour, leading to lower efficiency and reduced output. Without financial support, farmers cannot invest in insurance or savings, making them vulnerable to losses from droughts, floods and pests.
Phiri said farmers without finance are unable to transport their produce to better markets or invest in processing, resulting in lower profits and productivity.
In an interview, SME Chamber executive secretary James Chiutsi said banks do not favour SMEs despite the pressing capital needs of the sector.
“It is difficult for the SMEs that are in production and need funds to buy equipment because we can’t access loans to purchase productive machinery to locally manufacture and value-add products and contribute to import substitution,” he said.
According to the Reserve Bank of Malawi’s Monthly Economic Review, the agriculture, forestry, fishing and hunting economic sector accounted for 20.1 percent, the third in the sectoral composition of private sector credit.
The MW2063 recognises agriculture finance as a critical catalyst to deepening agriculture productivity and commercialisation.
However, in its Financing Opportunities for a Highly Productive and Commercialised Agriculture Sector Policy Brief, the National Planning Commission said despite several credit guarantee schemes, financial institutions’ appetite for lending remains low, suggesting a structural failure which shows that lending is unattractive even in instances where surety is provided.
The Donor Committee on Agriculture and Food Security was set up to strengthen the harmonisation of investment in agriculture and food security in Malawi.
