1.   CONTEXT

Access to finance is a barrier to private sector growth because without adequate funding, businesses, particularly Micro, Small and Medium-sized enterprises (MSMEs), cannot invest in expansion, research and development or hardly cover operational costs, ultimately hindering their ability to grow and contribute to economic growth. This is especially true when faced with stringent lending requirements like high collateral demands, which can be difficult for smaller businesses to meet. Domestic credit to the private sector as a percentage of GDP is less than 10 percent compared to an average of 34.2 percent for Southern Africa Development Community (SADC) countries and 28.4 percent for Sub-Saharan Africa (World Bank World Development Indicators (WDI 2023). FinScope Survey in 2019 identified that only 10 percent of medium enterprises, 5 percent of small enterprises, and 3 percent of microenterprises have credit from a commercial bank. Various papers have identified the following as some of the key factors affecting access to finance across different types and sizes of business entities in Malawi:

A. Policy and Registration Issues

1. A high interest rate reduces the business's ability to service debt due to the absence of a corresponding revenue increase to offset. As of the latest information available, the benchmark lending rate in Malawi is 26%, as set by the Reserve Bank of Malawi.
2. Unfavorable risk mitigation policy due to inadequate credit information and lack of historical credit data, credit market failure, mispricing of the credit risk, low consumer credit risk rating, and high transaction costs for clients and institutions.
3. The unpredictability of export restrictions under the Control of Goods Act (2018) has saddled Malawi’s reputation for unreliability to commodity exports, thereby aggravating the risk of agriculture financing
4. Nonbanking financial institutions are emerging, including microfinance and savings institutions. However, financial intermediation is characterized by high lending rates resulting from the government’s tight monetary policy and weak competition among commercial banks.

B. Banks and Financial Service Providers Practices:

1. Lack of identification system and Bank Know Your Customer (KYC) principle. Most Malawian Banks lack customer identification systems.
2. Unfavorable high collateral requirements hindering the ability of small and growing businesses to access credit.
3. Commercial banks’ low-risk appetite leads them to prioritize public over private lending. As a result, the private sector lending space is suffocated by the enormous public borrowing. As of the end of September 2024, the government's debt was 81 percent of the Gross Domestic Product (GDP), suffocating other sectors. Out of this, 75.8 percent are domestic creditors and private sector credit is 24.2 percent.
4. Limited financial literacy, poor credit history and lack of formal documentation.
5. Gender bias and stringent lending criteria make it difficult for businesses to secure loans from traditional banks.

C. Capacity Constraints:

1. Financial illiteracy – is a cause for exclusion from the formal financial system, negatively affecting informed decisions about savings and investing.
2. Lack of market coordination and harmonization between public and private initiatives seeking to promote better access to financial services.
3. Lack of loan information and tailored instruments for MSMEs.
4. Low levels of financial inclusion for MSMEs, especially youth and women.
5. Information asymmetry due to a lack of appropriate technological infrastructure and awareness further contributes to the perception of a high-risk portfolio for MSMEs.

D. Issues from PDU Labs :

The Presidential Delivery Unit (PDU) facilitated a private sector lab in June 2022, and access to finance was one of the workstreams. The workstream identified the following issues affecting access to finance and identified solutions to address them.

2.   DEVELOPMENT PARTNERS SUPPORT

Development Partners (DPs) are strategic in offering catalytic support to improve access to finance by the private sector, including MSMEs, without market distortions. The DPs’ support includes technical assistance, grants, guarantees, equity and quasi-equity, and loans that align with the specific Development Partner’s portfolio. Access to Finance is one of TIPDeP’s thematic priorities under UNDP and WB co-leadership. As of November 2024, Development Partners’ support specifically to unlock access to finance was about US$283 million through 41 projects. On the DCAFS/TIPDeP website, Access to Finance is one of the depository folders and it is uploaded with various documents.

The following are some of the key actions taken by the Development Partners:

1. International Finance Corporation (IFC), through Financial Inclusion and Entrepreneurship Scaling (FInES), supported a review of the Malawi Credit Reference Bureau Act (2017) and had in-pipeline staff training for two existing Credit Referencing Systems. However, the training was not rolled out because one Credit Referencing Bureau pulled out of Malawi.
2. The FInES project supports the setting up of a framework. It provides Technical Assistance to establish a public sector-led Credit Referencing Bureau, which RBM has opted for as a measure to strengthen credit referencing.
3. The FInES project supported a diagnostic study on the determinants of interest rates and charges for financial products and services. The report was submitted to the Reserve Bank of Malawi (RBM) and informed the MoF and RBM on policy positions and interventions. Some of the major contributors to the high-risk rate highlighted in the report are:
   • Policy rate approach, which the government drives
   • Credit risk because of weak credit reporting and referencing
   • The government’s appetite for getting money from the market is risky.
4. The World Bank supported the Department of the Registrar-General in the review of the Collateral Registry System. Improvements to the system following the support include an online Auto-mated Collateral Registry and Business Registration System. The registry improvement was expected to allow for using movable assets, such as vehicles, machinery, livestock, inventory and accounts receivables, as collateral for loans. However, the adoption and implementation of the use of movable assets by commercial banks have not yet been fully adopted.
5. Engaged the Bankers Association of Malawi (BAM) to understand the Business Development Service (BDS) concept, approach and tools. GIZ is engaging BAM to explore the possibility of BAM using GIZ standard tools in BDS training and then entering into a financing partnership for the process

3.   ROLLING TALKING POINTS

The Rolling Talking Points by the Development Partners aims to communicate key messages to the government, which includes applauding the government for undertaking regulatory reforms and asking it to address regulatory barriers and practices affecting access to finance.

A. Applaud

1. The Government for prioritizing Access to Finance as one of the workstreams at the PDU solutioning labs, which allowed key financial service providers to discuss and agree on actions to address the barriers.
2. The government has demonstrated commitment to increasing access to finance by Micro, Small, and Medium Enterprises (MSMEs), reviewing the Collateral Registry System and recently approving the MSMEs Bill in the September 2024 Parliament sitting. MSMEs Bill (2024) will regulate and create a conducive environment for MSMEs to thrive within. It is a milestone to regulate accreditation and training by business development service providers and develop MSMEs.

B. Concern

1. The long-standing inefficient Credit Referencing System causes mispricing of credit risk, high credit transaction costs, and low consumer credit risk rating.
2. Low uptake of the Collateral Registry System by the commercial banks
3. Inefficient ID system resulting in low rating of borrowers.
4. Slow implementation progress of agreed solutions at the Private Sector Labs, for example, implementation of the credit referencing roadmap and BDS strategy as well as an improvement of the legal recourse system to enable collateral seizure in case of default a swift and standard process.

B. Encourage

1. The government needs to speed up establishing a public sector-led Credit Referencing Bureau. The options are (a) Continue with the available Private Sector-led Credit Referencing Bureau or (b) Establish a Public Sector-led Credit Referencing Bureau.
2. The government should come up with a directive and engage commercial banks to update the reviewed collateral registry system.
3. The Reserve Bank must engage commercial banks and financial institutions in strategies to improve the functioning of the ID system as one of the measures for managing credit risks.
4. The Government should foster an enabling environment by addressing gaps in policy, legal and regulatory frameworks for mortgage finance, leasing finance and long-term finance to facilitate financial inclusion, entrepreneurship, and MSME growth
5. The government should ensure the Micro, Small, and Medium Enterprises Act is assented to and regulations developed and gazetted in a timely manner.