Vicious cycle of Malawi’s credit schemes

By Chachacha Munthali, contributor:

The closure of the National Economic Empowerment Fund (Neef) office last month was more than a bureaucratic footnote; it was a déjà vu moment in Malawi’s long, troubled history of State-run microfinance.

From the Smallholder Agricultural Credit Administration (Saca) to the Malawi Rural Development Fund (Mardef), the Youth Enterprise Development Fund (YEDF) to the Malawi Enterprise Development Fund (MEDF), and now Neef, we have watched a parade of institutions rise on bold promises only to collapse under the weight of political interference, poor governance and systemic abuse.

Each new political administration rebrands the fund, hoping to shed the sins of its predecessor. But the rot runs deeper than names. It is embedded in the DNA of how these institutions are conceived, managed and manipulated.

The concept of State-led credit provision in Malawi is not new. Its origins predate independence, with the establishment in 1958 of the Nyasaland African Loans Board, which was superseded by the Central Loans Board in 1964.

The introduction of agricultural development projects in 1968 and the National Rural Development Programme (NRDP) in 1978 (which led to the creation of Agricultural Development Divisions (ADDs)) provided a framework for expanding credit facilities nationwide. These initiatives aimed to boost agricultural productivity by providing input loans to smallholder farmers. It was within this institutional and policy environment that the Saca was established under the Ministry of Agriculture in 1987.

Saca was initially highly successful, boasting repayment rates above 96 percent until the political transition of the early 1990s turned loans into campaign issues. This historical precedent is crucial, as it demonstrates that well-managed agricultural credit systems can work effectively in the Malawian context.

Saca’s model was based on farmers’ clubs with joint liability, a structure that fostered peer monitoring and accountability. However, its major flaw was its focus on ‘better-off farmers’ (farmers with landholding and access to labour), neglecting the most vulnerable smallholders. This gap led to pilot projects such as the Malawi Mudzi Fund (MMF), which focused on women and incorporated savings mobilisation. But its pilot nature (implemented in Machinga and Mangochi only) and limited reach meant it barely scratched the surface.

Fast forward to the multiparty era, and the government’s desperation to democratise credit birthed Mardef, YEDF, MEDF and, eventually, Neef.

Each iteration promised transformation. Each fell short.

The most corrosive force in this saga has been political patronage. Loans were (and still are) routinely disbursed based on party loyalty, not business viability. For instance, in the first session of Parliament in the democratic era, members of Parliament (MPs) received K50,000 grants for constituency revolving funds, but none was accounted for.

Politicians told farmers loans were gifts, sabotaging repayment culture.

This turns public funds into a tool for securing political loyalty, fundamentally distorting the purpose of the loans and destroying any culture of repayment.

This is not just mismanagement. It is systemic sabotage.

Beyond political interference, plain theft is rampant. A special audit report by the Central Internal Audit Unit in 2020 established an egregious abuse of public funds at its worst within MEDF/Neef. Its report revealed a criminal syndicate within Neef, where officers gave loans to wives, ex-wives, friends and relatives—often with falsified addresses and missing files. Some deleted emails and forged signatures to cover their tracks. Over K53 million was lost to fraud. And that is just what was uncovered. Beyond arrests, no one was prosecuted.

This is not mere mismanagement but organised looting of public resources.

Further, the combination of political patronage and internal fraud creates a fertile ground for ‘ghost beneficiaries’. Loans are disbursed to individuals who neither need them for productive enterprise nor have the capacity to repay, leading to massive default. Neef reported inheriting K26 billion in bad loans from MEDF, with a recovery rate of only 16 percent, forcing a write-off of K11.3 billion.

At its formation in 2020, Neef inherited K26 billion in unrecovered loans from its predecessors. It has disbursed K32 billion since 2020, yet K13 billion remains stuck. These figures are not just numbers; they are taxpayer losses, missed opportunities and broken dreams.

But State-owned MFIs like Neef are designed to be critical engines for inclusive economic growth. They are supposed to provide vital financial services to segments of the population (such as youth, women, persons with disabilities and smallholder farmers) deemed ‘unbankable’ by commercial banks due to a lack of collateral.

Further, micro, small and medium enterprises (SMEs) are acknowledged as drivers of the Malawian economy, accounting for about half of its gross domestic product. By providing “quality, affordable and sustainable microfinance services”, these funds are intended to fuel this sector.

In addition, by supporting aspiring entrepreneurs and established small businesses, the funds aim to stimulate economic activity, create jobs and, ultimately, reduce poverty.

In theory, injecting billions (K32 billion disbursed by Neef since 2021) into the grassroots economy should yield transformative results. The consistent failure to achieve these underscores a fundamental disconnect between intent and implementation.

• The history of these institutions is not one of linear progress but of cycl ical collapse and repackaging, often triggered by political change:
• Mardef (2005): Established under a parliamentary resolution, it was later merged with YEDF.
• MEDF (2014): Following a change in administration, Mardef was rebranded as MEDF, absorbing other initiatives such as the Farm Inputs Loan Programme (FILP).
• Neef (2020): The Tonse Alliance government, “not wanting to be associated with MEDF’s political excess baggage”, rebranded it once more as Neef.

This pattern of renaming without fundamental restructuring suggests that these institutions are treated as political assets to be claimed by incoming regimes, rather than as national development tools requiring continuity and stability.

Path to reform

To break this cycle, cosmetic rebranding is insufficient. Deep, structural reforms are necessary. Saca’s initial success (96 percent repayment) shows that a well-structured, accountable system can work. Its collapse during the political transition to multiparty democracy is a critical warning of how quickly political instability and “conflicting messages” from politicians can destroy a credit culture.

We must establish an independent, technocratic board for State-owned MFIs, with appointments based on expertise and ratified by Parliament. Remove politicians entirely from the beneficiary identification process, replacing it with a transparent, community-based or objective economic targeting system.

The Reserve Bank of Malawi, as the licencing authority, must exercise stricter, risk-based supervision. Furthermore, there must be mandatory, real-time audits by the National Audit Office, with results made public and acted upon decisively. The “punishment” for fraud and gross mismanagement must be swift and sure.

We need to redesign loan products with a clear exit strategy. Beneficiaries should receive not just capital but bundled services like business management training, with the explicit goal of “graduating” them to formal banking services within a set period. This fosters sustainability and prevents dependency.

We must also invest in building the technical capacity of these institutions. This includes recruiting and training qualified loan officers, implementing robust digital systems to track loans and prevent fraud, and ensuring lending is based on viable business plans rather than political connection.

Finally, instead of trying to do everything itself, a State-owned fund could act as a wholesaler, on-lending to proven, regulated private MFIs and Saccos that have better outreach and operational expertise at the grassroots level.

Can we trust Neef?

Neef claims an 83 percent repayment rate. If true, it is commendable. But after decades of deception, Malawians have every right to be sceptical. We have seen this movie before: glowing reports, followed by exposés, arrests and rebranding.

What we need is not another name change. We need structural reform. Otherwise, we will be trapped in a vicious cycle loot, default, rebrand, repeat