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AfricaJuly 2 2019

Improving Malawi banks face credit conundrum

Malawi's banking system is generally sound but lenders face questions over the availability of credit, predatory lending and bad loans, while consolidation looms on the horizon. Jason Mitchell reports.
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Nat Bank Malawi

A fierce debate is raging in Malawi, one of the world’s poorest countries, about whether commercial banks’ interest rates should be capped, and if this would improve access to credit.

Mmicrofinance institutions (MFIs) have been charging customers interest of up to 25% a month. However, in 2018 the Reserve Bank of Malawi (RBM), the country’s central bank, and the MFIs agreed to limit the maximum to 6% a month, or 36% a year. Despite this, experts say MFIs have been slow to implement the agreement and that many of them continue to charge excessively high interest.

Some political leaders believe the central bank needs to be much tougher. A group of members of parliament are trying to introduce a new law, the Financial Services Act (Amendment) Bill 2018, which would cap the interest rate that banks can charge at 2% above the inflation rate if that rate is less than 10%, or at 10% above it if inflation is more than 10%.

Credit critics

“It is true that the availability of credit is an issue in Malawi,” says Reserve Bank governor Dalitso Kabambe. “A few years ago, non-performing loans became a big problem here and banks have been reluctant to provide credit because they think that many people will not pay it back.

“There certainly was a problem with some MFIs that were charging interest of up to 320% a year. They were loan sharks but we are now trying to limit what they can charge to up to 6% a month. If they do not follow our rules, we can remove their licence to operate.”

The central bank puts current annual inflation at 9.2%, and the International Monetary Fund forecasts this will decline to 8.3% in 2019. At the start of May, the central bank reduced its monetary policy rate from 14.5% to 13.5%. The Lombard rate, the effective base lending rate, was also cut by 100 basis points to 13.9%. 

At that time, the RBM also ordered all commercial banks to be more transparent about their lending rates and to publish details about the maximum interest that they charge. All the banks have now indicated that their maximum rate is below 26%.

Many experts say it is extremely difficult for Malawians to access personal loans, and for small and medium-sized enterprises (SMEs) to obtain credit. This is underlined by the fact that the total stock of personal loans declined by 4.7% to K92.8bn ($121.8m) at the end of 2018 from K97.4bn in December 2017 (credit cards and microcredit are included under the RBM’s personal loans category).

However, commercial loans surged by 12.5% in 2018 to a total stock of K383.8bn, up from K341.3bn in December 2017. 

Reverse effect 

Chancellor Kaferapanjira, chief executive officer at the Malawi Confederation of Chambers of Commerce and Industry, says: “We have always said interest rates are very high and they need to go down, especially in an environment where inflation has ebbed. How that should happen is what is controversial. We believe that risk premiums, particularly those charged by commercial banks, must go down.”

However, his association does not believe that interest rates should be capped through a new law. This could have the reverse effect of choking SMEs of credit rather than helping them to access it, he says.

Corrie Mulder, chairman of the Microfinance Association of Malawi Network, also cautions against caps. “We need to be careful when we institute this; issues of sustainability of the microfinance institutions must also be taken into account,” he says. “A lot of Malawians will lose access to finance if companies that cater to them cannot survive. We are not here to rob people. There are no big profits to be made and [people] do not consider us as predators.”

Standard Bank, which has 27 branches in the country and K357bn in assets, says that the maximum interest it charges clients is 25.9% and that the average interest rate on its personal loans is 24% to 25%.

“There is a general acknowledgement in the country that interest rates are too high,” says William le Roux, chief executive officer at Standard Bank in Malawi. “The debate is about the reasons why. The RBM has worked very hard to bring interest rates down. It would be a great shame if interest rate capping was introduced at the very moment when rates are coming down naturally in response to a consistent monetary policy.”

Interest rate capping is not a new phenomenon in Africa; it is used in 24 sub-Saharan countries. Its main justification is to protect customers from usury. For example, it was adopted in Kenya in September 2016 but many experts say it is not working well in the country and that Malawi must learn lessons from that experience.

Malawian economist Donasius Pathera says: “Following the introduction of the interest rate capping law in Kenya, some banks started exploiting existing approval limits to increase non-interest charges on loans. Capping interest rates has resulted in banks exploiting the space in approved limits to shore up their incomes.” In many instances in Kenya the appraisal fees for loans to SMEs were hiked to 3% of the value of the loan and costly loan insurance was introduced.

Tackling NPLs

Meanwhile, the Malawian banking industry’s average non-performing loan (NPL) ratio peaked at 19.9% in January 2018 but had declined to 6.1% by December 2018. The central bank said it was still above the acceptable level of 5%.

National Bank of Malawi (NBM), the country’s biggest bank with 32 branches and K450bn in assets at the end of 2018, now has an NPL rate of 4%. It has had to write off K4bn in bad debt; only two clients – one in the agriculture sector and one in manufacturing – accounted for K2bn of the bad debt.

“Sadly, Malawians have a poor credit culture,” says Macfussy Kawawa, chief executive officer at the NBM. “They look for opportunities not to repay loans. I hope that the recent introduction of national identity cards and of a credit reference bureau will improve that culture. It’s true, however, that in the past banks have put their eggs in too few baskets; they should have lent more broadly. Previously, our emphasis has been on lending to corporate clients but we are now shifting to the lower end of the market.”

Standard Bank says its NPL level peaked at about 14% to 15% but is now down to 3.5% after the bank wrote off the equivalent of $10m in bad debt. A high proportion of the bank’s bad loan book was associated with a single customer in the agriculture sector.

Under central bank rules, after 18 months, a NPL must be regarded as unsecured and as a consequence must be fully provisioned for on the bank’s balance sheet. “We have had cases in the courts but they have not been resolved as quickly as we would have liked and not within the 18-month period,” adds Mr le Roux.

Access to finance 

Malawian businesses cite a lack of access to finance as the main obstacle to doing business. In the latest edition of the World Bank’s Enterprise Survey, published in 2014, 30% of Malawians businesses said it was their biggest concern. High interest rates, collateral requirements and complex application procedures were given as the main reasons for not taking out a loan. While 79% of 'large' firms (those with more than 100 employees), had taken out credit, only 63% of firms with fewer than 100 staff had done so. In the case of small firms with fewer than five employees, the figure was only 33%.  

“Commercial banks offer only a narrow range of financial instruments and do not offer long-term financing schemes,” says Greg Toulmin, World Bank country manager for Malawi. “Smaller firms mostly source their working capital from within their business or owners use private assets as collateral when taking up credit. Limited wealth and capital form a further constraint for the rural poor.

“Malawi’s financial sector is small and shallow. Financial illiteracy is high. Village loan systems continue to be popular, especially in rural areas, together with a growing non-bank microfinance industry.” 

The World Bank says financial literacy programmes are needed to encourage Malawian people, especially in rural areas, to benefit fully from innovations in mobile banking and e-money. The subscriber base for mobile network operator-led payment schemes is expanding. However, the active agent ratio and the rural spread of agents remains relatively low.

The RBM says one of the biggest problems has been the amount of lending to the government, which has ‘crowded out’ credit to the private sector. The banking industry’s total assets stood at K1670bn at the end of 2018, 10.3% up on the previous year. However, these are highly concentrated in government securities and investments, which accounted for K680bn of the total, up from K616bn at the end of 2017. Gross loans totalled K513bn, of which K31.4bn were designated as non-performing.

“The situation remained worrisome as it implied that the bulk of funds were just locked in the government securities and not channelled to productive activities,” says Mr Kabambe. “Credit concentration risk also posed some level of concern as the industry’s gross loans and leases remained concentrated in a few sectors, namely wholesale, agriculture and manufacturing.

“Commercial banks have been considering ways of de-risking their lending and one of these could be some form of payment protection insurance. Farmers suffered bad harvests a couple of years ago and were not able to pay back their loans. There was also a collapse in global commodity prices, which did not help at all. Some form of insurance could mitigate the risk of lending to farmers.”

Competition and consolidation

Malawi's banking system is made up of nine commercial banks: NBM, Standard Bank, First Capital Bank, FDH Bank, Ecobank, NBS Bank, Nedbank, CDH Investment Bank and New Finance Bank. Eight out of the nine banks are profitable. At the end of December 2018, the top three banks – NBM, Standard Bank and FDH Bank – accounted for 62.2% of the industry’s total assets, 61.5% of total deposits and 73.3% of total loans.

“Competitiveness of the banking sector in Malawi is generally low as the market is dominated by three banks,” says Mr Kabambe. “However, if we consider that only 30% of the population is banked, meaning 70% is not banked, [such] competition is artificial because there is a [bigger market to target].”

NBW's Mr Kawawa believes the industry is ripe for consolidation. “We need fewer but bigger banks. These would become more efficient. I think six or seven banks in total would be enough. If the right bank came up for sale, we would acquire it. Consolidation would give us greater muscle.”

He adds that 2018 was a disappointing year for his bank, as lending volumes did not pick up significantly. “Last year witnessed a big reduction in interest rates and there was a lot of pressure on banks to reduce interest rate spreads,” he adds. “This should have triggered a lot more borrowing but it did not happen. The manufacturing industry was severely hampered by power cuts; sometimes factories could only operate three days a week. Firms just did not require the credit.”

For its part, Standard Bank says it has three strategic objectives for its banking operations in Malawi: first, a greater focus on clients; second, improving digitalisation; and third, providing universal banking services.

“Our strategy for the Malawian market is pretty simple,” says Mr le Roux. “We see ourselves as an engine for economic growth. We consider what we do, whether it be lending or providing financial services, as a means to help the economy run smoothly.”

Backing the banks

The RBM says Malawi's banking sector is adequately capitalised, has a satisfactory level of asset quality, is profitable, and has adequate liquidity levels. The industry registered a core capital ratio of 15.4% and a total capital ratio of 18.8% at the end of December 2018 against regulatory benchmarks of 10% and 15%, respectively.

The average liquidity ratio was 63.3%, way above the regulatory minimum of 25%. The industry’s total profit after tax was K46.5bn in 2018, up from K36.8bn the previous year. Return on equity stood at 17.4% at the end of 2018 against 15.7% at the end of 2017, while returns on assets remained stable at about 2.3%.

An expansion of mobile banking is the main priority of Malawian banks. At the end of 2018, 528,000 people were reported as users of mobile banking services against 372,000 at the end of 2017.

“Banking is leaning towards digitalisation and transaction banking,” says Mr Kabambe. “Most banks are now focusing on having state-of-the-art management information systems to promote digitalisation and transaction banking. In the future, we expect stability through well-capitalised banks, strong performance, improved asset quality and increased intermediation. The future of both the country and banking is bright.”

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