Households, SMEs caught in debt trap
Households and small-scale businesses are struggling to cope with the cost of living crisis, forcing them to be caught up in debt traps, a latest Reserve Bank of Malawi (RBM) report shows.
In its Banking Lending Survey (BLS) released on Friday covering the period between January to June 2022, the RBM said all the eight commercial banks reported an increase in the demand for loans and credit lines by the households and small-scale enterprises.
The RBM report shows that all the eight banks reported an increase in the demand for loans and credit lines by the households between January to June 2022 compared to seven out of the eight banks, which perceived an increase in the demand for loans and credit lines in the period between July and December 2021.
In the SME sector, the RBM report indicated that seven out of eight banks perceived an increase in demand for loans and credit lines in the period between January to June 2022 compared to five out of the eight banks which perceived an increase in the demand for loans and credit lines between July and December 2021.
Reads the report in part: “There were continued flow constraints arising from rising cost of living due to inflationary pressures.
“This was among the leading factors that contributed to the perceived increase in demand for loans and credit lines by the household sector.”
The report further said that in terms of the SMEs sector, the factors that contributed to this perceived increase in demand for loans include increased working capital needs following increasing inflation due to Russia-Ukraine conflict, which has exerted pressure on commodity prices and the alignment of the kwacha exchange rate to the market.
It said four out of the eight banks perceived an overall increase in the non-performing loans (NPLs) while three out of the eight banks perceived that NPLs in the banking system remained unchanged and one bank perceived a decline in NPLs in the period under review.
On a sectoral basis, the majority of banks perceived an increase in NPLs in all the sectors, with a large number of banks perceiving an increase in NPLs in the SME sector compared to the other sectors.
Commenting on the survey findings on Saturday, Consumers Association of Malawi executive director John Kapito said the poor economic environment and recent global economic downturn has pushed households to extreme ends.
He said: “Most households are reeling from the harsh economic environment coupled with inflation and the rising cost of living, as such, incomes have been deteriorating over time.
“Such developments have pushed consumers to resort to accessing loans from banks and worse still after borrowing, they cannot afford to repay such loans.”
Chamber for Small and Medium Businesses Association executive secretary James Chiutsi said in an interview on Saturday that businesses are borrowing to recover from the Covid-19 shocks.
He said: “Given the decline in economic activity brought about by the Covid-19, most businesses are still rebuilding their businesses, borrowing heavily from the banks.
“This is also coupled with the fact that many financers are still not willing to give long-term financing to SME due to perceived risks and uncertainty on the market.”
Speaking separately, Indigenous Businesses Association of Malawi (Ibam) president Mike Mlombwa agreed that businesses are finding it hard to generate sufficient returns from their businesses to repay their loans instead, thereby borrowing more to sustain their businesses.
Meanwhile, Centre for Social Concern (CfSC) figures show that the cost of living, the cost of maintaining a certain standard of living within a month, rose to K271 000 for a family of six as of July.
