Microfinance bad loans drop ease pressure on MFIs

Reduction in non-performing loans (NPLs), loans in which the borrower is not repaying the interest, for microfinance sector has eased pressure, bolstering the sector’s profitability and liquidity.

The Reserve Bank of Malawi (RBM) December 2018 Financial Stability Report shows that the sector recorded an improvement in the levels of bad loans for both deposit-taking and non-deposit taking while liquidity for the entire sector remained satisfactory compared to a previous survey.

The RBM data show that bad loans for deposit-taking institutions decreased to K436.3 million as at December 2018 from K545.9 million as at June 2018.

As a percentage of gross loans, bad loans decreased to 4.7 percent as at December 2018 from 6.1 percent in June 2018, which is below the five percent acceptable benchmark for the sub-sector.

Over the years, bad loans have become risky for the microfinance sector, with institutions under the sector highlighting that they have been facing challenges to recover from the toxic loans.

An earlier study conducted by RBM in June last year indicated that bad loans in the sector were high in the period largely due to the decrease in gross loans.

But in the review period, the sector has registered satisfactory capital levels for deposit-taking which were recorded above the minimum regulatory capital requirement of K250 million.

Total equity for deposit taking microfinance stood at K3.8 billion as at December 2018 from K3.7 billion in June 2018.

Reads the report: “Tier one and total capital ratios for deposit taking microfinance rose to 22 percent and 32.4 percent in December 2018 from 20.1 percent and 30.1 percent as at June 2018, respectively. The ratios were above the recommended regulatory benchmarks of 10 and 15 percent, respectively.”

On the other hand, the deposit-taking sub-sector recorded a profit of K387.6 million as at December 2018 compared to K113.4 million in December 2017 on account of an increase in interest income from loans as well as decrease in interest expenses following a drop in time deposits.

Malawi Microfinance Network board chairperson Corrie Mulder on Thursday confirmed the development, saying it has helped to improve the performance of the sector.

He said: “We have always strived to keep NPLs to a minimal and the figures are a reflection of our efforts. This is a good development and we intend to continue keeping NPLs to a minimum.”

Mulder said in the just- ended year, performance of Savings and Credit Cooperatives (Saccos) has been good with almost all of them posting profits which are better than the previous year.

Meanwhile, RBM governor Dalitso Kabambe said the central bank will continue to work closely with MFIs to create a mutual understanding and manage expectations of the financial sector.

 In his commentary on the performance of the sector, he said: “The levels of NPLs are expected to moderate further with the expected continued improvement in the macroeconomic environment.”

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