Why loan defaulting is rampant in Malawi?

‘Financial education expert unpacks reasons, grounds for rambling loan default rate in Malawi’

Growing up in a just-about-managing squatter slum of the populous Ndirande Township there was zero chance she would develop an interest in finance.

Then, for her 16th birthday, her father gave her a present of K1,000 cash. She started a small business, selling flitters popularly known as Mandasi, and, for months afterwards, she struggled to keep up with her business as she was making losses.

Eventually, she lost everything. Her business died.

This is a story of Dorothea Mtimawina Banda, 39, a resident of Ndirande Township, A township located three kilometres from the centre of Blantyre, the second city of Malawi.

Ndirande crawls up from Makata Road to the slopes of the 1,800 meter high Mount Ndirande.

Halfway, you cross Ndirande Ring-road, the commercial and manufacturing centre of Ndirande. On both sides you will find timber sellers, minibus repairers, pubs, take-away’s and producers of burglar bars, cooking stoves and comfortable couches.

Between Makata Road and Ndirande Ringroad, Ndirande has a reasonably ordered street pattern, but anyone who leaves the Ringroad and walks up towards Ndirande Mountain, ends up in a myriad of backstreets and alleys. Some are not wider than trenches where the water flushes through in the rainy season.

Ndirande is a very busy high-density township and a hub for business – You can buy or sell anything or anyone, anytime. And there is no reason why one can fail to flourish in running a business.

Dorothea’s story is not an isolated case. Many people have failed to run or sustain a business not because there is no market for their products but because they don’t have the know-how to run a business.

In the same vein, many people like Dorothea, take loans without any financial knowledge and in the end, end up blowing up all the money they borrowed in the air.

Then, they get stuck in a financial rut like a rat.

One of the country’s financial literacy educators Theana Msolomba has said lack of institutional capacity in conducting proper loan assessments, poor financial or business knowledge as well as political meddling in the work of lending institutions are three major factors leading to increased cases of loan defaulting by Malawians.

Msolomba has said this in the context of revelations that the National Economic Empowerment Fund (NEEF), which has threatened to arrest individuals that have defaulted on loans.

As of last week, out of K6.4 billion that was disbursed across the country by the institution, only K539 million had been recovered, representing a meagre eight percent national recovery rate.

Responding to our questionnaire, Msolomba said causes of loan defaults or non-repayment in lending institutions are either organisational or client based.

In Malawi, she said it is usually a combination of both.

Msolomba who is popularly known as Kuwala, is a Financial Educator and a holistic wellness advocate which also encompasses financial wellness – and she specialises in financial education with a special focus on developing an ongoing savings culture and building wealth through wise investments.

She takes pride in empowering young people with financial knowledge, skills and behaviour that can promote economic citizenship and greatly improve their lives and the national economy.

She enjoys giving seminars on personal finance and holistic wellness to organisations and groups of people interested in pursuing a productive, fulfilling and purpose driven life. And these include the army and the police.

Msolomba operates from an abundance mindset seeing herself as a channel borrowing in the philosophy of Maya Angelou ” I learn to teach and I get to give”.

She holds an MA in International Relations and Development- University of Pavia, Italy, Bachelors of Education majoring Social and Economic History-Chancellor college, Unima, YALI fellowship in Business Management and Entrepreneurship(RLC-SA)
In Malawi, she said it is usually a combination of both.

Msolomba explained that NEEF needs to learn from the past and refrain from politicising the loan facility because once politics creeps in, the situation becomes irreversible as now people get loans not because they qualify, but because they are politically connected.

“While there is a greater need to put proper mechanisms on loan collection by the lenders, clearly stipulating the boxes eligible people need to tick to be able to be granted such loans, the beneficiaries seriously need financial education in order for them to be able to manage their finances and moves their lives forward,” explained Msolomba.

she said that Malawi’s poverty levels are high, that is an indisputable fact, a lot of people do not have resources much that it is the wish of everybody to have capital and start businesses, but at the end of the day this is a revolving fund.

“This means the funds have to be given back so that many others can also benefit too. There is absolutely no point and logic in giving loans to people will can only afford to borrow but not pay back,” said Msolomba.

‘Viable businesses’

Msolomba said the institutional based defaults arise from several operational and human resources shortfalls within an organisation, citing lack of institutional capacity in conducting proper loan assessments especially on viability of a existing business or business idea and group or individual capacity to repay, weak or no collaterals, lack of post disbursement monitoring of loan clients or loan utilisation, complex loan repayment processes and procedures, low staff morale.

She said such factors compromise quality loan assessments or monitoring, stressing that limited usage of data from previous loan cycles to provide future loans to clients also contribute to increased cases of loan defaulters.

On political meddling in the work of lending institution, Msolomba said this often leads to loan non repayments as constituents recommended by politicians often default because they regard these loans as gifts from the politician.

“Provision of Credit without first inculcating a Savings culture and relevant trainings in business and financial management will definitely lead to loan defaults. You can’t give a person seeds whilst withhold practical farming knowledge or skills and expect bumper harvest.

“Secondly Some common reasons for client based defaults include; poor financial or business knowledge and skills, poor sales, sickness, spending on unnecessary things (liabilities) or redirecting funds to unintended purposes,” she said.

She advised that lending institutions can mitigate the institutional and client-based loan non-payment by understanding the causes of loan defaults, and defaulter types.

Some of the suggestions to reduce the number of defaulters, according to Msolomba, include linkage and utilisation of credit reference bureau data to ascertain credit worthiness of clients, strengthening capacity of credit reference bureau to carry out its operations, strengthening organisation capacity of lending institutions (human and capital resources) and perfecting loan client assessment process, among others.

She added: “Non repayment of loans or defaulting also exists in many African countries, it is therefore important to understand that Malawi as a country can benefit from exchange programs or visits with neighbouring countries such as South Africa, Tanzania, Rwanda, among others.”

NEEF Public Relations and Marketing Officer, Whyghtone Kapasule, told Nyasa Times Monday in an interview that in order to recover the remaining chunk of money, they have also embarked on intense sensitisation campaign.

“The clients need to be informed of the need to repay the loans. On this, we have sent messages on all community radios and the national ones, informing them that Neef inherited all Medf loans and as such, Neef is responsible to collect all the loans. Secondly, we have deployed loan officers and intensified client tracing, and have involved authorities in the districts,” he said.

According to Kapasule in some situations, they are issuing demand letters to clients with outstanding loans, engaging debt collectors and even opting for formal legal redress.

The K6.8 billion was borrowed from Export Development Fund.

He could neither confirm nor deny that a former cabinet minister under the previous regime was among those failing to service their loans with NEEF.

It had been alleged that former minister Henry Mussa had been entangled in the NEEF loans.

However, another source at NEEF pointed out that Mussa had not taken any loan.

“Mussa did not take any money he was simply a guarantor for a certain group in his constituency. The group started paying the money and they are remaining with around K3 million,” our source said.

Currently, Neef is also disbursing loans, an exercise that started in February 2021.

As of May 7, 2021, NEEF had disbursed K5.8 billion to 2438 clients, which represents about 24380 individual clients going by the minimum membership of group loans which is 10 people.

According to Kapasule they have so far collected K596 million as loans that were disbursed in February, whose due time was March and some in April against a collection target of K613 million.

“That represents a recovery rate of about 97 percent and by extension, this means we have K17 million that is yet to be collected for the loans that were due March and April 2021.”

‘Financial entity’

NEEF is the rebranded successor of Malawi Enterprise Development Fund (MEDF) Limited.

Medf Limited, Neef’s predecessor, was registered under the company’s Act as a Company in 2014.

It succeeded Malawi Rural Enterprise Development Fund [Mardef] established by the government with the approval of Parliament to disburse revolving loans to groups.

However, like its predecessor revolving funds, the fund faced a high rate of default as most beneficiaries were politically-linked; hence, felt the money was free.

In some cases, because of the politicisation, unqualifying beneficiaries received loans, but never undertook viable businesses.

The Malawi Enterprise Development Fund (MEDF) Limited was registered under the Company’s Act as a Company that is limited by guarantee in 2014.

MEDF Ltd is successor of the Malawi Rural Development Enterprise Fund [MARDEF] which was established by the Government of the Republic of Malawi with the approval of Parliament.

MARDEF was launched by a Presidential decree on January 29, 2005.

Thereafter the Malawi Parliament passed a resolution to set up MARDEF on 11th April, 2005 where it was envisaged that MARDEF would eventually be established by either an Act of Parliament or under the Companies Act as a company limited by guarantee in the year 2014.

As a result of this, MEDF was formed and inherited the assets and liabilities of former MERDEF and FILP.

Malawi Enterprise Development Fund (MEDF) was then registered under Company Act 2013 as a company limited by guarantee and has a Reserve Bank of Malawi licence as a Microfinance Institution in the non-deposit taking category.

MEDF Is also governed by the Financial Services Act 2010 and Public Finance Management Act.

MEDF is 100% owned by Malawi Government through the following ministries, Ministry of Finance and Economic Planning with a stake of 25 percent, while Ministry of Agriculture, Water and Irrigation, the Ministry of Labour, Youth, Sports and Manpower Development and Ministry of Industry, Trade and Tourism all have 25 percent.

Malawi Enterprise Development Fund (MEDF) was then registered under Company Act 2013 as a company limited by guarantee and has a Reserve Bank of Malawi licence as a Microfinance Institution in the non-deposit taking category.

National Economic Empowerment Fund (Neef) has only recovered K400 million out of the K6.5 billion that was disbursed nationwide when it was operating as Malawi Enterprise Development Fund (Medf).

The amount represents 5.7 percent, which has pushed the government financial entity to set aside May and June 2021 as recovery months.

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