Micro-finance sector Profit declines 500%
High operating and interest rate expenses coupled with trading losses dampened half-year profit of deposit-taking microfinance institutions (MFIs) by 500 percent, putting their survival at risk, according to the Reserve Bank of Malawi (RBM).
In its Financial Stability Report, the RBM indicated that despite the sector, which caters for small-scale businesses led by women and youths, remaining fairly sound and relatively stable during the first six months of this year, profit dropped to K186 million at the end of June from K1 billion during the same period last year.
Reads the report in part: “As a result, return on assets and return on equity decreased to 0.3 percent and 1.6 percent, respectively, which were both significantly below the inflation of 33.3 percent.”
During the half-year under review, non-performing loans (NPLs) or loans in default due to the borrower not making scheduled payments for a specified period, increased by 7.8 percent to K1.4 billion.
However, the central bank noted that despite both core capital and total capital ratios being above the regulatory minimums of 10 percent and 15 percent, respectively, one out of six deposit-taking institutions was significantly undercapitalised and is currently under close supervision.
Reads the report: “Consequently, there was a slight improvement in credit risk with the NPL ratio dropping from 4.5 percent in December 2023 to four percent in June 2024 and registered below the five percent recommended ceiling.”
Speaking in interview yesterday, National Association of Business Women executive director Barbara Banda described the weak profit of the sub-sector as a risk to micro, small and medium businesses, particularly those led by women and youths who seek financing from the sector.
She said: “Currently, the situation is not favourable to the business community, especially
our members who mostly could not access credit facilities from commercial banks because of collateral and high interests.
“We fear the situation could keep on worsening because our members’ enterprises are not thriving due to rising inflation, among others, which has affected demand.”
Inflation rate is currently at 33.9 percent, according to the National Statistical Office, while the RBM policy rate is at 26 percent, but commercial bank’s charge interest rates ranging from 25 percent to 36 percent.
In a separate interview yesterday, finance expert Brian Kampanje said micro-finance institutions are not posting strong profits due to rising cost of business due to adverse macroeconomic
conditions such as rising interest rates for borrowed funds, among others.
“Unlike banks, the deposit-taking micro-finance institutions are not well capitalised and do not have a wide range of business opportunities with the public sector; hence, their resilience to current economic challenges is limited,” he said.
Kampanje said unless the non-deposit taking MFIs recapitalise or increase interest rate on loans, most of them will likely close shops, which will affect livelihoods of women and youth-led enterprises that access credit facilities.
Meanwhile in its assessment of the sector’s risks, RBM outlined high interest rates, persistent credit risk and solvency risk which has already seen one deposit-taking institution and three savings and credit cooperatives (Saccos) under-capitalised.
Malawi Union of Savings and Credit Cooperatives chief executive officer Fumbani Nyangulu said in an interview yesterday that bad loans have affected most microfinance institutions.
“While it was expected that the harsh economic environment would negatively affect savings and credit cooperatives, our operations have been affected sdue to the bad loans,” he said.
Meanwhile, RBM Governor Wilson Banda has indicated that the central bank will continue to work closely with MFIs and take some supervisory actions to mitigate the liquidity risks
