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Micro, Small and Medium Enterprises in Malawi

1.   CONTEXT

1.1.   MSMEs Sector Overview

From Malawi’s independence in 1964 onwards, the Government concentrated its efforts on the development of a large-scale enterprise sector. Then in the late 1970s and early 1980s, the Government pivoted to embark on several initiatives supporting the Micro, Small, and Medium Enterprises (MSMEs) sector. It recognised that the potential of the MSME sector had not been fully exploited due to the absence of a concise policy to guide the development and promotion of the sector.

In the present era, most MSMEs in Malawi are agriculture-related micro-enterprises. The sector distribution of MSMEs is Agriculture (50%); Retail (25%); Manufacturing (15%); and Services (5%). Many MSMEs are in rural areas, family-run, operating only on a part-time basis outside of the agricultural production cycle, and are largely stagnant. They arise mostly from a decline in formal employment and other incomes, rather than a response of opportunities in times of economic growth. Many such businesses lack longevity and thus do not benefit from economies of scale and experience accumulated over time.

The National Export Strategy II (2021 – 2026) uses an MSME three-indicator-based definition which consists of:

ItemEmployment SizeAnnual TurnoverMaximum of Assets (excluding land and building – for manufacturing enterprises)
Micro1 - 4⩽ MK 5 million⩽ MK 1 million
Small5 - 20⩽ MK 50 million⩽ MK 20 million
Medium21 - 99⩽MK 500 million⩽ MK 250 million
Table 1: Three-three-indicator based definition

The FinScope MSME Survey 2019 reported that there are 1,600,739 MSMEs and 100,000+ mobile money agents in the country. Micro enterprises comprise 74% of total MSMEs, small enterprises comprise roughly 23%, and medium enterprises comprise 3%. About 42% of MSMEs are youth aged below 35. In addition, 84% of women business owners operate in the micro-enterprise category, mostly in the informal sector, less than 15% in the small enterprise segments, and only 1% in the medium enterprise category.

1.2.   Challenges hindering MSMEs’ Growth

The MSME sector faces several critical challenges hindering its growth and development, including poor access to finance and markets, poor infrastructure, unfavourable policy and regulatory environment, bureaucracy, and inadequate capacity to do business and meet quality standards. The table below lists those critical challenges.

No.Critical Challenges
1Low Capital
2Limited access to technology
3Non-participation in policy-making
4Restricted management skills & capacity
5Predominantly operating in the informal sector
6Compliance with market norms, standards, and technical requirements
7Gender-based constraints undermining women entrepreneurs' access to resources & facilities
8Limited mobility
9Low brand identity
10Access to markets is difficult.
11Lack of export promotion support
12Limited access to credit and finance
13Institutional and regulatory weaknesses
14Inadequate access to information and business networking
Table 2: Summary of Critical Challenges faced by MSMEs
Source: National Export Strategy II (2021-2026)

1.3.   Limited Financial Inclusion from Financial Service Providers

Although MSMEs are recognized as the backbone of economic development, finance inaccessibility and knowledge on the enabling role of financial inclusion in improving their performance is scant. Malawi’s financial sector has limited outreach and is relatively small and concentrated. Financial intermediation is characterised by high lending rates resulting from the government’s tight monetary policy and weak competition among banks. High lending rates not only pose a risk to loan portfolio quality but have also compounded the credit access problem, especially for small-scale borrowers including MSMEs.

It should be noted that the Financial Service Providers (FSP) allocation of funds towards MSMEs remains below the demand due to several factors, including increased Government borrowing in 2024Q1. The total public domestic debt reached MK1.16 trillion (92% of the planned borrowing for the year). FSPs prefer to lend to the Government because the loan is deemed most secure. Additionally, MCCCI’s Economic and Business Review for 2024 quarter 3 reports that the Reserve Bank of Malawi has resolved to maintain the policy rate at 26.0% to assist in containing inflationary pressures. High interest rates and high levels of public debt have increased the cost of financing and placed restraints on the availability of medium- and long-term financing solutions, negatively affecting an MSME’s capacity to borrow.

In spite of this, FinScope MSME Survey 2019 reported that MSME’s access to affordable financial products and services has slowly grown over the past decade. The FinScope Consumer Survey 2023 stated that 9.8 million Malawians (88%) are financially included, contributing approximately 38% to the country’s GDP. The informal service sector is critical to household financial access, linked to savings and credit groups and burial societies. Uptake and usage of formal products and services have mainly contributed to reducing financially excluded adults in 2023. However, these adults may borrow from friends and family, save at home, or remit funds through a friend or family member.

The uptake of mobile money also plays a crucial role in increasing financial inclusion, increasing from 3% (2014) to 69% (2023). Other formal (non-bank) financial services cover a broad range of services, including microfinance, mobile money operators, insurance companies, pension funds, money transfer agencies, and others. A significant increase from 18% (2014) to 73% (2023), was largely attributed to adults using mobile money.

2.   POLICY AND LEGISLATIVE ENVIRONMENT MSMES IN MALAWI

2.1.   Micro, Small and Medium Enterprise Policy (2019)

The Micro, Small, and Medium Enterprise Policy (2019) aimed to create a modern and effective framework to guide the development of vibrant, competitive, and sustainable MSMEs. Despite its implementation, MSME growth and development remained volatile due to regulatory and institutional weaknesses, policy inconsistencies, poor coordination of business development service providers, and rapid changes in the business environment (local and international).

The MSME Policy had nine priority areas: Policy Priority Area 1: Legal, regulatory, and institutional environment which would review and amend all sectoral laws, develop new sectoral laws, and enhance policy coherence. The table below is an extract from the monitoring and evaluation plan, which illustrates the Government’s progress in action on the listed outputs.

Specific ObjectiveOutputsPerformanceTargetBaselineSource of Verification
To create a conducive legal, institutional, and regulatory framework for MSMEsMSME Act1. Number of Bills Passed10Gazette
2. Number of sector policies reviewed21Reports on Reviews of Sectoral Policies
By-laws impinging on MSMEs growth developed and reviewedNumber of LGAs with their by-laws reviewed or developed100Reports on Reviews
Under Policy Priority 1: Promote an enabling institutional, legal, and regulatory framework for MSMEs. Outcome 1: Enhanced policy coherence
Table 3: MSME Policy (2019) Extract from Annex 2: Monitoring and Evaluation Plan
Source: Micro, Small and Medium Enterprise Policy (2019)

2.2.   Micro, Small, and Medium Enterprises (MSME) Bill 2024

Five years on from the MSME Policy (2019), The Micro, Small, and Medium Enterprises (MSME) Bill 2024 was approved by the Malawi Parliament on 19 September 2024 (pending assenting by the President of the Republic of Malawi) after a long journey of drafting and reviews since 2018 when it was last submitted to the Ministry of Justice. Key provisions of the bill include:

  1. Establishment of the Small and Medium Enterprises Development Corporation (SMEDICO) as the regulatory body for MSMEs, outlining its functions and powers. It will replace the Small and Medium Enterprises Development Institute (SMEDI).
  2. Registration framework for MSME stakeholders, including enterprises and associations.
  3. Regulation of accreditation and training conducted by business development service providers.
  4. Measures and incentives to promote and develop MSMEs.

This landmark bill is expected to boost entrepreneurship and innovation, enhance access to finance and markets, improve competitiveness and productivity, and create employment opportunities. Following the approval of the MSME Bill, developing and gazetting the regulations is another critical step to ensuring effective implementation. It is, therefore, in the interest of various stakeholders including Development Partners to see the Ministry of Industry and Trade come up with a roadmap for the finalization and gazetting of regulations.

2.3.   Micro, Small, and Medium Enterprises (MSME) Order 2020

Order 2020 is a directive issued by the Public Procurement and Disposal of Assets Authority (PPDA) in Malawi. This order aims to promote the participation of MSMEs and marginalized groups in public procurement processes for goods, works, and services, creating a more inclusive and equitable procurement environment in Malawi that benefits both small businesses and marginalized communities. Specifically, it prescribes preferences and reservations for marginalized groups including the youth, women, and people living with disabilities. The order aims to ensure their active participation in public procurement processes by providing preferential treatment and set-asides.

Despite the Order, MSMEs were yet to fully benefit from Government business due to capacity issues (as of February 2024). Procedures require businesses to be registered with the registrar of companies, PPDA, and Malawi Revenue Authority to gain certificates to be allowed to participate in government procurement. MSMEs are facing stiff competition from big players monopolising most economic sectors.

2.4.   Malawi Financial Inclusion Strategy (2024-2028)

The Government of Malawi has, since 2010, implemented three National Strategies for Financial Inclusion: the first one covering the years 2010-2014 (NSFI II); the second one covering the years 2016-2020 (NSF II); and the current one for 2024-2028 (NSF III). NSFI III aims to increase access to at least one formal financial service to 95% of the country’s adult population by 2028 and reduce financial exclusion from 12% to 5% to achieve sustainable and inclusive growth and support job creation. NSFI III intends to include all players in Malawi’s economy with financial inclusion as an essential instrument for increasing agriculture and small enterprises production and eventually increasing household income, reducing poverty, increasing resilience, and accelerating economic growth.

3.   DEVELOPMENT PARTNERS SUPPORT

3.1.   Actions Taken in Supporting MSMEs in Malawi

Development Partners (DP) have demonstrated a commitment to supporting MSMEs' access to finance through various projects. Total DP funding for access to finance and related interventions is US$283 million. The table below presents the number of projects and key interventions as of 29 July 2024.

No.Development PartnerNumber of ProjectsTotal Estimated Funding (US$)
1German Development Cooperation (GDC)17120,445,000.00
2International Finance Corporation (IFC-WB)1066,480,000.00
3European Union Delegation (EUD)342,162,543.00
4US Agency for International Development (USAID)331,800,000.00
5International Fund for Agricultural Development (IFAD)1420,454,173.72
6Government of Flanders51,318,900.00
7UN Development Programme (UNDP)11550,000.00
Estimated Total63283,210,616.72

4.   ROLLING TALKING POINTS (KEY MESSAGE FROM TIPDeP)

4.1   Applaud

TIPDeP would like to applaud the Government on the following:

  1. Micro, Small and Medium Enterprises Bill (2024)

    The Malawi Parliament approved the Micro, Small, and Medium Enterprises Bill (2024) to 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 incentives to promote and develop MSMEs.

  2. Malawi 2063 and MIP-1 Implementation Plan

    The Malawi 2063 and MIP-1 Implementation Plan recognizes that the current structure of the private sector is associated with a lack of graduation from MSMEs to large companies leading to Malawi’s missing middle enterprise. As such, MSMEs' development is part of Enabler 4: Private Sector Dynamism, which aims to have a dynamic and vibrant private sector that effectively delivers on the industrialised upper middle-income status within the shortest time possible.

    The Government recognised that a non-conducive environment for the growth of MSMEs contributes to industrialisation stagnation, among other challenges. MSMEs inclusion under Pillar 2: Industrialisation—a strong manufacturing industry driven by productive and commercially vibrant agriculture and mining sectors commits to supporting MSMEs' development agenda.

4.2.   CONCERNS AND ENCOURAGEMENTS

From the above observations, TIPDeP would like to bring to the Government’s attention the following concerns and recommendations:

I.   Legal Frameworks and Policies:

  1. The Government should accelerate the development of regulations for the MSME Act (2024), review and update microfinance regulatory frameworks: the Financial Services Act 2010 and the Financial Cooperatives Act 2011, and finalize the Microfinance Act 2020 (a draft has been under review since 2020).
  2. 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. These are critical drivers in increasing production and processing capacity, thereby increasing export volumes.

   Business Environment (Quarter 3 of 2024):

  1. The DPs are concerned that the domestic economy is currently facing several significant risks that limit the participation of MSMEs. Following the 44% currency devaluation in November 2023, forex scarcity persists and continues to impede productivity by inhibiting raw materials and machinery importation. The Malawi Kwacha continues to lose value against Malawi’s trading partners i.e. MWK1,200 in November 2023 to MWK1,810.50 per US dollar at the end of October 2024. According to the Malawi Business Climate Survey conducted by MCCCI in 2023, the three top key challenges are fuel scarcity, unavailability of forex, and increasing exchange rate volatility. It was reported that 63% of businesses were not impressed by the business environment.
  2. The macroeconomic environment remains volatile. Inflation increased to 33.9% (September 2024) from 33.3% (June 2024). The acceleration was on account of rising food prices emanating from demand and supply imbalances during the agriculture lean period. The imbalance between higher inflation and rising interest rates is not conducive to MSMEs’ growth and participation in the business. The government needs to make bold reforms to stabilize the economy so that MSMEs can operate. Otherwise, the economy will continue to struggle to find solid footing amidst global and domestic challenges.
  3. Most MSMEs in Malawi cite cost and availability of financing as key challenges to business growth and development. High interest rates, stringent collateral requirements (a rigorous process is involved in off-loading the collateral), and onerous documentation requirements by commercial banks before providing credit facilities are some of the critical challenges affecting MSMEs' access to finance. Considering the huge number of MSMEs and the potential market/profitability it presents the Government to come up to boldly engage the banks and financial institutions to re-strategies their approach to cater to the MSMEs segment. Some of the quick wins include (a) Reduced turn-around time, (b) Relaxed collateral requirements, including revision of the policy on collateral requirements, and (c) Investing in non-financial support services.
  4. MSMEs cite the red tape in accessing services from public offices. As such, MSMEs are locked in a downward-spiral growth and upward-spiral inequality trap in business development. TIPDeP encourages the creation and promotion of a deliberate enabling environment for small businesses in Malawi. Simplifying administrative processes around registering and running a new business is one strategy that the Government should prioritise. The administrative simplification strategy should address the burden introduced by new and existing burdensome regulations.
  5. The Africa Continental Free Trade Area presents an opportunity for the Government to formulate trade facilitation measures that harmonise and simplify the current burdensome customs documentation and procedures. In addition, the Government should address the costs and complexities small businesses face at border posts in the export and import process. This includes improving efficiency and slashing the costs and time needed to export and import goods.

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