K9 billion down the drain
Neef writes off Medef bad debts
National Economic Empowerment Fund (Neef) has written off K9 billion disbursed by its predecessor, Malawi Enterprise Development Fund (Medef).
Finance Minister Sosten Gwengwe made the revelation in an interview with The Daily Times on the sidelines of the signing ceremony of the 2023- 24 Shareholders Letter of Expectations with Malawi’s 72 state-owned enterprises (SOEs).
Gwengwe was responding to Times’ further probing into Treasury’s ranking of Neef among the worst-performing SOEs when fellow players in the financial sector were basking in hefty profits.
When debts are written off, they are removed as assets from the balance sheet because the company does not expect to recover payment.
Financial institutions prefer to never have to write off bad debts since their loan portfolios are their primary assets and source of future revenue.
However, toxic loans—loans that cannot be collected or are unreasonably difficult to collect—reflect very poorly on financial statements and can divert resources from more productive activities.
According to Gwengwe, the bad debts were affecting Neef’s accounts, hence the decision to write them off.
He said going forward, Capital Hill expects Neef accounts to compare favourably with other microfinance institutions.
“Now that we have allowed them to write off the debts, Neef has clean books. Our expectation is that they will put their house in order so that they can effectively compete with other players in the industry,” Gwengwe said.
Neef Chief Executive Officer Humphrey Mdyetseni was not immediately available for a comment on whether the defaulters are off the hook following the writing off of the bad debts.
Centre for Social Accountability and Transparency Executive Director Willy Kambwandira said the challenge with government loans is that they are highly politicised with identification of beneficiaries mostly being based on political affiliation and patronage.
Kambwandira said in the end, responsible entities tolerate lack of accountability.
He said the government should come out clear on what criteria and justification have been used to write off the loans.
“Otherwise this sounds like putting taxpayers’ money to organised fraud. Sadly, this sets a bad precedence as other beneficiaries may be compelled not to pay back the loans they have obtained with the expectation that the government will also write them off.
“The problem is that these initiatives are largely abused by politicians who pretend that the initiatives are loans when in fact they aim at using them for gaining political mileage. Government should just come out clear and tell Malawians that these are grants,” Kambwandira said.
According to the Malawi Government Annual Economic Report for 2023, Neef registered an after-tax loss of K13.6 billion in the 2021-22 fiscal year.
As of September 2022, which was mid-year for the 2022-23 fiscal year, the firm recorded a slight improvement of a K6.03 billion loss and had prospects of closing with a profit after tax of K808 million in March 2023.
According to the annual economic report, the poor performance has been attributed to weak Management Information System operating System-Banker’s realm, poor quality of loan portfolio as a result of high default rate which resulted into high provisions for bad debts and lack of capacity in good credit management skills and integrity.
Gross loan portfolio registered a 16 percent growth from K41 billion in March 2022 to K47 billion in September 2022, owing to disbursements of K13 billion in the period.
These disbursements were financed by a shareholder capital injection of K7 billion and a K6 billion loan.
K7.6 billion loan repayments were recorded in the period, representing a 63 percent average collection rate which is below the regulator’s benchmark of 80 percent.
“Net loan portfolio registered a growth of 23 percent from K8.9 billion recorded in March 2022 to K10.9 billion in September 2022.
“However, loan impairment provisions registered an increase of 14 percent from K32 billion in March 2022 to K39 billion in September, indicating that the percentage of non-performing loans is increasing,” the report reads.
In 2021, Mdyetseni said most of the pre-Neef beneficiaries were not credit-worthy, claiming they were not adequately assessed and given the necessary guidelines to service the loans.
“As a consequence, we have had so many delinquent loans, in the process, eroding the capital base of the institution,” he said.
In 2005, government obtained a loan from the Indian Export and Import Bank to procure equipment for Medef to facilitate value addition for youth start-ups.
However, it later transpired that the equipment was misprocured.
Mdyetseni said the equipment was distributed by politicians to undeserving people who were not even registered by Medef.
He said that in the process, the equipment, including goats and cattle, distributed during the 2014 election campaign, disappeared.
In October 2021, the Office of the Ombudsman instituted investigations over allegations that Neef flouted loan procedures every now and then.
In November 2020, an audit report by Central Internal Audit Unit uncovered that Neef loan application and assessment procedures were weak and that K64 million was disbursed to beneficiaries that could not be traced by the audit team.