Informal sector cuts teeth into banking sector services

 Informal sector cuts teeth into banking sector services

Informal sector cuts teeth into banking sector services.

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High interest rates and cost of doing business with commercial banks in Malawi excludes a significant portion of the country’s population and is currently pushing existing and potential clients to seek financial services from the informal financial market.

Lack of access to inclusive banking services including savings and credit has seen as a rise in the growth of community based banking services called Banki M’khonde (veranda or village bank).

A FinScope survey revealed that over half of the Malawian population requires financial services but is not served because they are considered high risks or that serving them would incur high costs

The study notes that the informal banking sector reaches out to different segments of the market than the formal sector which largely favours the middle-aged and the well educated in the population and that only a fifth of the informally served also access formal financial services.  

While access to business and agricultural credit for Malawi’s rural population, who largely depend on subsistence agriculture, like in other sub-Saharan countries, is limited and requires collateral, it is also expensive requiring high-interest rates and comes with specific conditions for borrowers.

The Integrated Household Survey (2019-2020) conducted by the National Statistical Office (NSO) observes that 42 percent of the population access loans through the village bank while only 1.5 percent are serviced by commercial banks.

Village banks are community groups, mostly formed by household individuals, who pool their savings in order to have a source of funds for periodic lending for business start-ups, building household assets, income, food security, consumption, education and empowerment.

The banks have become the simplest means for local Malawians to increase their incomes by mobilizing savings and providing loans which can be used to support the creation of small businesses in urban and rural areas. They have proved significant in reducing risks and vulnerability and in increasing the ability of Malawians to access basic services like health and education, therefore having a direct bearing on growth, employment and poverty reduction.

Economic experts agree that Malawi needs a stable, liquid, competitive and efficient inclusive financial system in order to expand agricultural production, micro and small enterprises, employment and to increase household income in a sustainable way.

As a self-sustainable and self-replicating mechanism with home-tailored by-laws, village banks operate on trust without formal registration but are fast spreading in formation in Malawi’s most remote areas as well as in urban centres.

Sensing the popularity and competition that the veranda banks have had against the formal banking industry, several major commercial banks in the country have gone on a campaign trying to rope the village banks into their fold.

But while acknowledging the substantial percent of clientele it is losing to village banks, there is less likelihood that commercial banks could themselves reach out to capture the segment that the informal service providers are serving.

Although Malawi has for a number of years introduced microfinance institutions to provide access to financial services, access in rural areas remains a major challenge because of the cost of reaching out to the rural poor.

Meanwhile, financial organizations, like the Malawi Union of Savings and Credit Cooperatives (MUSCCO), also emerged on the scene to organize and develop Saving and Credit Cooperative Organizations (SACCOs) who works alongside banks and other stakeholders with an aim to mobilize capital and meet the developmental needs of Malawians.

SACCOs exist under a regulatory environment and are registered under Cooperative Societies Act, 1998, Cooperative Societies Regulations, 2002, own bye-laws approved by Registrar with a supervisory and monitory roles given to MUSCCO.

Malawi ranks among the world’s least developed countries. Over 53 percent of its 17 million people live below the national poverty line. The economy is predominately agricultural, with about 80 percent of the population living in rural areas. Agriculture constitutes approximately one-third of the country’s GDP. 

Charles Mkula

Charles Mkula has over 15 years of working as a Malawian newsroom news reporter and editor as well as a freelance journalist for a number of international news outlets, Charles Mkula has worked as a Public Relations Officer for a Malawi/Germany urban development project. He co-founded Hyphen Media Institute, a platform for sharing information generated from policy debate and advocacy activities. Charles likes reading, writing, traveling, exercises, making friends, listening to music, watching TV, documentaries and cartoons.

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