Borrowing from a local commercial bank for a start-up is close to impossible.
This is a lamentation from Blantyre-based 30-year-old businessperson, Tendai Kaduya.
In 2019, her desperate attempt to raise K200,000 for capital boost in her kaunjika [second-hand clothes] business from one of the country’s top banks proved futile.
“They demanded an arm and a leg,” she says. “There are times you need the money urgently and the procedure and requirements appear prohibitive. That is what I encountered.”
She cited the need for collateral in form of fixed assets as well as the cost of loan repayment plus interests among the impediments.
If she were to borrow from the bank, she would have to part ways within about K300,000, factoring in interest, which was then pegged at 25.5 percent, probably the highest in the region.
Instead, she resorted to joining a 15-member village savings and loans group or village bank—a modern way of group savings.
“Within a month, I borrowed the money I needed, with an interest of less than 15 percent. Apart from that, there has been a sense of ownership of the money in the group as we allot shares accordingly,” she says.
The concept is gradually gaining momentum in the country, especially among small-scale businesses, who for a long time have felt being left out of the formal financial sector.
Village banks are gradually becoming main source of borrowing for not just small and medium entrepreneurs (SMEs) but also households across the country.
Findings of a survey by the National Statistical Office show that about 42.1 percent of households borrow from village banks, 15.1 percent from relatives, 12.7 percent from neighbours, 9.0 percent from loan sharks (katapila) and 6.1 percent from other sources.
Commercial banks continue to perceive SMEs as too risky, a situation that has rendered them destitute for capital for some years now.
World Bank figures show that in Malawi, micro, small and medium enterprises constitute 60 percent of businesses, providing jobs to 1.6 million people.
However, only 10 percent of medium enterprises, five percent of small enterprises and three percent of micro enterprises have credit from commercial banks.
Chamber for Small and Medium Businesses Executive Secretary James Chiutsi claims commercial banks do not offer SME-friendly product-portfolios.
He said this has led to the formulation of what they call peer-to-peer financing and village banks.
“Banks favour dealing with the government because they find that to be less risky. They find the SMEs market too risky and less lucrative. Also, the banks’ requirements are very strenuous, not commensurate with the sizes and economic activity of SMEs on the ground,” Chiutsi said.
And Bankers Association of Malawi (Bam), an umbrella body for commercial banks, says distribution of banking sector loans is heavily skewed towards wholesale and retail, and agriculture, forestry, fishing and hunting, controlling about 42.3 percent of total loans while the manufacturing sector controls only around 13.9 percent of the total loans.
Bam Chief Executive Officer Ryness Nkungula said in an interview last week that the sector is accommodative, except that, like in every business, terms and conditions apply.
“Village banks have indeed mushroomed and are everywhere. Even village banks have stringent measures but because these are done at an informal level, people accept them as a norm.
While between 2019 and now, most businesses seem to be almost on their knees due to the Covid pandemic, the sector has remained afloat, touted by some players as the most resilient.
Almost all the six Malawi Stock Exchange-listed companies are poised to post profit 20 percent higher in the year ended December 2020, than the corresponding period.
According to Nkungula, this is attributed to the fact that banks have better business risk management profile and there is diversification of products and technology has helped to intensify the resilience to most shocks.
“Banks deal with all kind of people and entities and it is only prudent to have measures to mitigate risks. The money in banks is for customers; banks are only custodians and the monies need to be protected at all costs, hence the need to know the customers better before establishing a meaningful relationship,” she says.
But other commentators feel the sector could in the interim still be in business even if it completely left SMEs out of the equation.
They say the banks have a reliable customer in the government, as they yield on the State’s insatiable appetite for domestic borrowing.
Recent figures from the Reserve Bank of Malawi show that domestic debt stock surged by K104.6 billion between November and December 2020 to K1.103 trillion.
The Malawi Confederation of Chambers of Commerce and Industry (MCCCI), an umbrella body for the private sector, feels public debt surge is stifling the country’s economic growth strides as it could push interest rates upwards.
“The situation could crowd out private sector investment due to the increased cost of borrowing, a development that would stagnate private sector investment and growth and that of the economy as a whole— as the private sector is the engine of economic growth,” states MCCCI in its recent Economic Review.
As it appears a foregone conclusion, banks are in a comfort zone while people like Tendai are grappling for a financial breakthrough.
Nonetheless, their ganging up for the common good could, not today, but one day, wake the industry from its slumber.