1.  CONTEXT OF THE AGRICULTURE LENDING IN MALAWI

1.1   Agriculture Sector and Financing Options in Malawi

• Agriculture continues to be a cornerstone of Malawi’s economy, contributing around 22 percent to the Gross Domestic Product (GDP) in 2023, down 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. The sector has comprehensive sectoral policies and high budget allocation (no less than 10% CAADP target for the past 10 years).
• However, production and productivity remain low, emanating from persistent challenges such as susceptibility to weather shocks; inadequate management of land, water, and soil resources; limited adoption of technology; and relevant to this thematic discussion, insufficient access to financial services.
• Among other financing options for Malawi’s development are initiatives such as the Export Development Fund (EDF) and the Malawi Agriculture and Industrial Investment Corporation (MAIIC), which were established as catalysts for agricultural finance. In addition, the National Economic Empowerment Fund (NEEF) has expanded its loan products to agricultural development loans aimed at farmers and agribusinesses to finance agricultural inputs, equipment purchases, and land development.

1.2   Agriculture Lending Context

• Most farms exist outside of the formal economy and often lack the collateral required to access loans. According to the World Bank report, only 5 percent of small enterprises and 3 percent of micro-enterprises in Malawi have credit from commercial banks.
• The Mw2063 policy brief recognizes that Agriculture finance is a critical catalyst to deepening agriculture productivity and commercialization. However, it identifies that financial services providers still consider lending toward agriculture businesses risky due to price volatility, climate shocks, limited market access, and the absence of insurance services. Commercial banks and microfinance institutions skew financial lending towards non-trade and non-agriculture activities.
• Several factors frustrate the development of solid financial services in rural and urban areas. These include high transaction costs in rural areas due to poor road infrastructure, low access to mobile financial services and low presence of financial service providers.

2.  POLICY RECOMMENDATIONS

The National Planning Commission (NPC) published a paper titled, ‘Financing Opportunities for a Highly Productive and Commercialised Agriculture Sector’ under the Malawi 2063 Policy Brief Series (September 2022). The paper gave four key policy recommendations that support agriculture lending needed to enhance local financial institutions and other actors:

A.  Stimulating increased usage of credit guarantee schemes

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 government and relevant stakeholders need to collaborate on efforts to create a policy and programmatic environment that would stimulate lending, especially to small-scale farmers.

B.  Piloting infrastructure finance

Infrastructure, such as roads in the rural areas, is under-financed in Malawi. Traditionally, large-scale infrastructure is largely funded by the public sector. However, governments have increasingly been experimenting with different funding options to finance infrastructure, by enlisting the active participation of private sector partners and financial institutions. The financial sector's participation in these initiatives requires a completely different set of skills from other types of lending because it entails financing public assets, which could have high risks. Therefore, the government might consider reviewing the policy environment to ensure a pilot of agriculture finance, including public, private sector and development banks.

C.  Improving credit-supporting facilities

Farmers need to have enough requirements to qualify for a bank loan requiring deliberate efforts by the government to increase credit bureau capacity. The current scope of credit reference bureaus is still narrow. The Government needs to develop a policy and legal environment that will ensure the relevance of the credit bureau. On the other side, access to finance depends on farmers’ ability to possess collateral to access financial services and products. Thus, the Government could implement initiatives that will support farmers' access to collateral efforts towards registration of assets with the office of the registrar. This can largely be done through improving the orientation of farmer cooperatives and associations on the importance of asset registration to farmers’ access to finance.

3.  ACTION POINTS TAKEN BY DEVELOPMENT PARTNERS FOR AGRICULTURE LENDING

Development Partners (DPs) are strategic in providing catalytic support to increase agriculture productivity through supporting agriculture lending and grants without market distortions. The DPs’ support includes technical assistance, grants, agriculture loans, guarantees, equity, and quasi-equity in line with the program's specific Development Partner portfolio. The following are some of the key actions taken by the Development Partners:

1. Development Partners agreed to have agri-lending and grants as one of the thematic priorities for 2024/2025. The thematic discussion is to allow an understanding of NEEF agri-lending products, share lessons from DP-funded projects on agri-lending, explore how to strengthen collaboration with other institutions in agriculture lending (EDF , MAIIC and NEEF), and identify policy and/or legislative factors in agriculture lending.
2. Development Partners support agriculture lending by providing matching grants, Line of Credit guarantees and Insurance to stimulate access to credit in the sector, albeit with mixed results. The DPs currently supporting these ag-lending are WB (through AGCOM 2.0); FCDO and UNDP (through the Malawi Innovation Challenge Fund); IFAD (through NBS Bank, NSO, TRADE Programme, FARMSE and SAPP II projects); the EU through two main projects (the new AGCOM-MDTF co-financed with Flanders Government, Norway and Ireland; and the new UCHI project implemented and co-financed with UNDP); AGRA (YEFFA/CIAT Project & MAIIC partnership); and Flanders Government (through the Building Markets for Prosperity project). Additionally, GIZ (through the Agri-Finance project project) supports capacity building for micro-finance institution staff to facilitate improved access to appropriate financial services for smallholder farmers and agri-based entrepreneurs. Furthermore, the USAID (through NBS Bank, FCB Bank, Business Acceleration for Youth/CIAT) provide credit guarantee financing.
3. The partial credit guarantee facility remains untapped mainly due to the banks' continued low-risk appetite for lending. Smallholder farmers have not fully embraced matching grants due to a lack of matching resources or collateral. Policy considerations in this area need to ensure that the interests of smallholder farmers with no collateral to access loans can be supported by favourable financing conditions for their agricultural investments.

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.

APPLAUD

The Government instituted the National Economic Empowerment Fund (NEEF) as a registered state-owned microfinance institution under the Companies Act of 2013 dedicated to fostering economic empowerment and financial inclusion. NEEF provides farmers and agribusinesses with loans to assist in financing agricultural inputs, equipment purchases, and land development, contributing to increased agricultural productivity and food security.

CONCERNS AND RECOMMENDATIONS

a. High Interest Rate

There are economic structural issues that are not being tackled. A high interest rate reduces a business's ability to service debt due to non-corresponding increases in revenues to offset. As of the latest information, the benchmark lending rate in Malawi is 26% set by the Reserve Bank of Malawi (increased from 23.6 percent in February 2024). 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.

The government shall devise prudent fiscal management so as to reduce the ever-increasing domestic borrowing by the public sector, particularly the central government

b. Collateral Registry System

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 the use of movable assets such as vehicles, machinery, livestock, inventory and accounts receivables, as collateral for loans. With the WB support, the collateral registry system was reviewed under the office of the Department of the Registrar-General. 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. The DPs urge the government through RBM to enforce the implementation of the mobile collateral registry. This can be achieved through the government’s directive and by engaging commercial banks to update the reviewed collateral registry system.

c. Farmer Graduation Criterion from AIP to NEEF to MAIIC

There is a need for the Affordable Inputs Programme (AIP), National Economic Empowerment Fund (NEEF), and Malawi Agricultural & Industrial Investment Corporation plc (MAIIC) to develop a formal joint farmer graduation criterion to track the productive farmers who receive assistance (AIP) or apply for agriculture loans (NEEF and MAIIC) to tighten gaps in the system. The current system utilising loan amounts as a qualifier for loans is not sufficient enough. As it stands, AIP 2024/25 is only targeting 1,054,945 productive farmers covering farm inputs below K150,000; NEEF loans range between K150,000 to K250 million; and MAIIC supports clients from K250 million and above.

In view that NEEF and MAIIC operate within the same space and likely with an overlap of borrowers, it is important for these institutions to consolidate their product pricing for agriculture and non-agriculture loans to ensure improving operational efficiency, reduce confusion for customers and enhance price transparency.

Commercial Banks’ Lending Philosophy towards the Agriculture Sector

DPs continue to observe a misalignment between the Government’s agricultural initiatives stemming from the Malawi 2063 strategy and commercial banks’ lending philosophy towards the agriculture sector. According to the Reserve Bank of Malawi’s Monthly Economic Review (November 2024), the Agriculture, Forestry, Fishing & Hunting economic sector accounted for 20.1 percent, third in the sectoral composition of private sector credit. 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 MSMEs, due to low-risk appetite. Agriculture MSMEs 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.

To improve agriculture lending, the government and partners must promote and invest in agricultural insurance, structured market and Warehouse Receipt System (WRS). In addition, it is important to intensify supply and demand side capacity-building and scale out financial literacy programs and support loan restructuring programs.

In a regulatory environment, the government must develop and enforce prudential regulations impacting agricultural lending (asset-based versus cash-flow loans) and promote financial infrastructure (e.g. credit bureaus and moveable collateral registries).

References

1. National Planning Commission. "Financing Opportunities for a Highly Productive and Commercialized Agriculture Sector." National Planning Commission, Sept. 2022.
2. DCAFS & TIPDeP Coordination Office. "Access to Finance Brief" DCAFS & TIPDeP Coordination Office, 17 Dec. 2024.
3. Reserve Bank of Malawi. November 2024 Monthly Economic Review . Reserve Bank of Malawi, Dec. 2024.
4. World Bank: Agricultural Finance and Agricultural Insurance As part of National Financial Inclusion Agendas.
5. MCCCI Policy Brief (2024): TIGHTENING OF THE MONETARY POLICY.