Making Access Possible (MAP) Malawi

Cenfri, in partnership with FinMark Trust presented the key findings and recommendations from Making Access to Financial Services Possible (MAP) Malawi diagnostic report at the Stakeholder Workshop in Lilongwe, Malawi in April 2015. The workshop provided an opportunity for the MAP diagnostic team to test key findings with stakeholders and for stakeholders to provide feedback and comment on the findings for the final diagnostic report. 

The findings and recommendations were derived from a demand, supply and regulatory analysis based on the methodology developed by Cenfri, FinMark Trust and UNCDF as part of the global MAP initiative. The demand-side analysis draws from quantitative data provided by the Malawi FinScope Consumer Survey 2008, the Malawi FinScope Consumer Survey 2014, the Malawi MSME Survey 2012 and primary qualitative research. 

Malawi has had financial inclusion related policies in place since 2002 and is set to compile its third financial inclusion strategy within the next year. Concurrently, a number of donors have invested in a variety of financial inclusion-related projects. The result is that, whilst a number of interventions have been implemented, there is limited coordination and focus. MAP endeavours, by conducting a comprehensive diagnostic of the entire sector, to pinpoint those priority areas that will provide the greatest return on resources invested, for future inclusion strategies.

 

The presentation of the findings of MAP Malawi provided an overview of the financial provision landscape in Malawi (supply side), a regulatory analysis for the provision of financial services and financial inclusion, and used FinScope data to identify and describe 5 distinct target markets for financial inclusion in Malawi (demand side). The target markets were identified firstly based on main source of income, and secondly based on key parameters as they influence the nature of the groups' demand for financial services (income, gender, geography, age, education levels, use of mobile phones and take-up of financial services). The following provide a short overview of the 5 distinct target markets identified in Malawi.

 MAP Malawi graphic

  • Farmers – are adults that obtain their income from farming or fishing activities. They are the biggest target market (33%) and mainly consist of small scale, non-commercial farmers.
  • MSMEs – are adults that derive their main source of income from owning and running a business. They are the second wealthiest target market and comprise approximately one sixth of the adult population.
  • Salaried employees – are adults whose main source of income is salaries from a private or public institution. They are the wealthiest target market and live mostly in urban areas. This target market has the highest education levels, but is also the smallest in size.
  • Dependents – are adults whose main source of income is from family and friends. This group mainly consists of adults who are dependent on a household member to pay their expenses or to give them money.  Also included in this target market are adults that receive money from friends or family outside of Malawi.  This group typically include housewives, students and seniors. 
  • Ganyu – are adults that engage in piecework for their main source of income.  Similar to farmers, ganyu live mostly in rural areas.

The construction of target markets allowed a unique new demand side perspective for the financial inclusion agenda and allowed for the identification of key priority areas for future extension of financial services as well as tailored supply side and regulatory recommendations that incorporates the needs of the various target markets.

 

The overall analysis highlighted the following four key contextual factors relevant to financial inclusion:

  1. Contextual challenges drive low levels of financial access. Formal financial access in Malawi is very limited and has seen little improvement over the past five years, over half the population remains excluded, despite a number of initiatives to develop the market. Informal financial service use has significantly increased in response to these challenges. Macro-economic, infrastructural, and political challenges are key drivers of this result and will need to be addressed to make substantial sustainable inroads into financial inclusion. These challenges are largely beyond the control of financial service stakeholders, but have a direct impact on the cost of provision, value of products to consumers and consumers’ needs.
  2. Rural provision restricted by poverty, rural population and reliance on rain fed agriculture. Lack of proximity to financial services is the key barrier to inclusion in Malawi. However the business case to serve rural people is limited given high levels of poverty, uncertain agricultural incomes and a high cost of distribution given limited infrastructure. The World Bank (2013) estimates that 72% of Malawians live on less than USD 1.25 (PPP) a day. 85% of Malawian adults live in rural areas and 88% of Malawians rely on farming to provide or supplement their income.
  3. Priority needs relate to reliable payments, consumption smoothing and finance for MSMEs and farmers. Across the target markets, access to reliable and accessible payments and consumption smoothing tools are the key emerging financial service needs. Farmers and MSMEs would also benefit from access to finance to enhance their productivity. 
  4. Banks dominate, but focus on credit not transactions for revenue. Banks in Malawi dominate the financial services market, providing 92% of total credit and holding 89% of total deposits. Across the industry, banks primarily focus on interest and forex to drive revenue, with just 6% of revenue earned from fees and commissions. Low cost products are widely available, but distribution infrastructure is very limited, even in urban areas, which drives up the effective cost of access. There are 2.5 ATMs and 1.6 bank branches per 100,000 people. High infrastructure costs, low fee revenue on transactions and a lack of interoperability has limited banks’ incentives to expand their distribution footprint. The new national switch (Nat-switch) can change this environment if appropriate interchange fees, that incentivise infrastructure investment by banks, are set.

Five priority areas emerge from the analysis of consumer needs and provider realities within the Malawi-specific context:

  1. Expanding the reach of payments critical. 99% of transactions still occur in cash at significant expense to providers. Digitisation will require improved cash networks as an interim step. The lack of payments infrastructure makes it costly and time-consuming to access and use formal financial services. For most Malawians the cost to access bank infrastructure far outweighs the direct cost of a bank account (17% vs 2% of average income). Mobile money agents, the other major payments provider, also rely on payments infrastructure to maintain liquidity. Improving the payment eco-system is required to overcome the proximity barrier to financial inclusion and address affordability concerns across financial services. This requires revisiting bank incentives and partnerships, appropriate interchange fees, improvements in agent models and finalisation of the National Payment System regulation (including a requirement for interoperability).
  2. Leveraging VSLAs to enable savings. Savings are critical in Malawi where formal credit interest rates can exceed 70% per annum. Savings are used to smooth consumption, mitigate risk or build capital for investment (housing or a business). VSLAs (Village Savings and Loan Associations) have had the greatest success in encouraging savings given the limited footprint of other providers. VSLAs are typically made up of 15-30 members, who meet on a regular basis, most commonly weekly. Members make savings contributions at each meeting. The savings pool is then lent out to members who must repay with interest (20% on average). Membership grew by over 1 million adults between 2008 and 2014. In comparison, the number of adults saving in a bank grew by only 115,000 during the same period. Supporting and leveraging VSLA savings addresses proximity and affordability concerns. It also improves rural availability of credit to micro businesses and farming.
  3. Targeted finance for MSMEs and farmers. MSMEs and farmer businesses are hampered by lack of affordable finance. Capital market development, macro-economic stability and judicial process reform relating to collateral realisation are required to bring down the cost of credit. In the interim, credit should be carefully targeted as only the most productive farmers and MSMEs can successfully absorb and use credit without becoming over-indebted. MFIs, as the main providers of such finance, should be further enabled. The credit reference bureaus can also play a role to reduce the cost of information on borrowers, but will be hampered by lack of national ID. Improvements to the MSME and agricultural support environment are key to enable more MSMEs and farmers to become sufficiently productive to benefit from credit. This includes finalising the MSME bill and a focus on agricultural value chain development with related financing for farmers.
  4. Niche insurance opportunities to reduce vulnerability. Low income levels, reliance on rain fed agriculture and limited social safety nets make Malawians particularly vulnerable to risks. Savings will likely remain the primary tool to mitigate risks, given the cost of credit and lack of awareness of insurance. However there are specific opportunities to expand insurance usage, including health and life cover for salaried employees, insuring MFI loan portfolios against disaster risk, and raising insurance awareness. Microinsurance and health finance frameworks are needed to create an enabling environment. Some product and partnership innovations can also improve insurance use.
  5. Effective consumer empowerment and education. Financial literacy levels are very low. Whilst this does not necessarily indicate low levels of financial capability, it does make it more challenging for consumers to engage with formal providers. A number of financial education initiatives have already been undertaken by both government and donors. The primary focus should therefore be to improve the coordination of existing programmes, refine their effectiveness and leverage gateway products such as remittances and VSLAs for education. 

Additional Info

  • Country: Malawi
  • Institution: Cenfri, FinMark Trust, UNCDF
  • Date Published: 2015
  • Document Type: Presentations
  • Author/s: Jeremy Gray, Catherine Denoon-Stevens, Mia Thom, Albert van der Linden, Tyler Tappendorf
 

Making Access Possible (MAP) Malawi

Cenfri, in partnership with FinMark Trust presented the key findings and recommendations from Making Access to Financial Services Possible (MAP) Malawi diagnostic report at the Stakeholder Workshop in Lilongwe, Malawi in April 2015. The workshop provided an opportunity for the MAP diagnostic team to test key findings with stakeholders and for stakeholders to provide feedback and comment on the findings for the final diagnostic report. 

The findings and recommendations were derived from a demand, supply and regulatory analysis based on the methodology developed by Cenfri, FinMark Trust and UNCDF as part of the global MAP initiative. The demand-side analysis draws from quantitative data provided by the Malawi FinScope Consumer Survey 2008, the Malawi FinScope Consumer Survey 2014, the Malawi MSME Survey 2012 and primary qualitative research. 

Malawi has had financial inclusion related policies in place since 2002 and is set to compile its third financial inclusion strategy within the next year. Concurrently, a number of donors have invested in a variety of financial inclusion-related projects. The result is that, whilst a number of interventions have been implemented, there is limited coordination and focus. MAP endeavours, by conducting a comprehensive diagnostic of the entire sector, to pinpoint those priority areas that will provide the greatest return on resources invested, for future inclusion strategies.

 

The presentation of the findings of MAP Malawi provided an overview of the financial provision landscape in Malawi (supply side), a regulatory analysis for the provision of financial services and financial inclusion, and used FinScope data to identify and describe 5 distinct target markets for financial inclusion in Malawi (demand side). The target markets were identified firstly based on main source of income, and secondly based on key parameters as they influence the nature of the groups' demand for financial services (income, gender, geography, age, education levels, use of mobile phones and take-up of financial services). The following provide a short overview of the 5 distinct target markets identified in Malawi.

 MAP Malawi graphic

  • Farmers – are adults that obtain their income from farming or fishing activities. They are the biggest target market (33%) and mainly consist of small scale, non-commercial farmers.
  • MSMEs – are adults that derive their main source of income from owning and running a business. They are the second wealthiest target market and comprise approximately one sixth of the adult population.
  • Salaried employees – are adults whose main source of income is salaries from a private or public institution. They are the wealthiest target market and live mostly in urban areas. This target market has the highest education levels, but is also the smallest in size.
  • Dependents – are adults whose main source of income is from family and friends. This group mainly consists of adults who are dependent on a household member to pay their expenses or to give them money.  Also included in this target market are adults that receive money from friends or family outside of Malawi.  This group typically include housewives, students and seniors. 
  • Ganyu – are adults that engage in piecework for their main source of income.  Similar to farmers, ganyu live mostly in rural areas.

The construction of target markets allowed a unique new demand side perspective for the financial inclusion agenda and allowed for the identification of key priority areas for future extension of financial services as well as tailored supply side and regulatory recommendations that incorporates the needs of the various target markets.

 

The overall analysis highlighted the following four key contextual factors relevant to financial inclusion:

  1. Contextual challenges drive low levels of financial access. Formal financial access in Malawi is very limited and has seen little improvement over the past five years, over half the population remains excluded, despite a number of initiatives to develop the market. Informal financial service use has significantly increased in response to these challenges. Macro-economic, infrastructural, and political challenges are key drivers of this result and will need to be addressed to make substantial sustainable inroads into financial inclusion. These challenges are largely beyond the control of financial service stakeholders, but have a direct impact on the cost of provision, value of products to consumers and consumers’ needs.
  2. Rural provision restricted by poverty, rural population and reliance on rain fed agriculture. Lack of proximity to financial services is the key barrier to inclusion in Malawi. However the business case to serve rural people is limited given high levels of poverty, uncertain agricultural incomes and a high cost of distribution given limited infrastructure. The World Bank (2013) estimates that 72% of Malawians live on less than USD 1.25 (PPP) a day. 85% of Malawian adults live in rural areas and 88% of Malawians rely on farming to provide or supplement their income.
  3. Priority needs relate to reliable payments, consumption smoothing and finance for MSMEs and farmers. Across the target markets, access to reliable and accessible payments and consumption smoothing tools are the key emerging financial service needs. Farmers and MSMEs would also benefit from access to finance to enhance their productivity. 
  4. Banks dominate, but focus on credit not transactions for revenue. Banks in Malawi dominate the financial services market, providing 92% of total credit and holding 89% of total deposits. Across the industry, banks primarily focus on interest and forex to drive revenue, with just 6% of revenue earned from fees and commissions. Low cost products are widely available, but distribution infrastructure is very limited, even in urban areas, which drives up the effective cost of access. There are 2.5 ATMs and 1.6 bank branches per 100,000 people. High infrastructure costs, low fee revenue on transactions and a lack of interoperability has limited banks’ incentives to expand their distribution footprint. The new national switch (Nat-switch) can change this environment if appropriate interchange fees, that incentivise infrastructure investment by banks, are set.

Five priority areas emerge from the analysis of consumer needs and provider realities within the Malawi-specific context:

  1. Expanding the reach of payments critical. 99% of transactions still occur in cash at significant expense to providers. Digitisation will require improved cash networks as an interim step. The lack of payments infrastructure makes it costly and time-consuming to access and use formal financial services. For most Malawians the cost to access bank infrastructure far outweighs the direct cost of a bank account (17% vs 2% of average income). Mobile money agents, the other major payments provider, also rely on payments infrastructure to maintain liquidity. Improving the payment eco-system is required to overcome the proximity barrier to financial inclusion and address affordability concerns across financial services. This requires revisiting bank incentives and partnerships, appropriate interchange fees, improvements in agent models and finalisation of the National Payment System regulation (including a requirement for interoperability).
  2. Leveraging VSLAs to enable savings. Savings are critical in Malawi where formal credit interest rates can exceed 70% per annum. Savings are used to smooth consumption, mitigate risk or build capital for investment (housing or a business). VSLAs (Village Savings and Loan Associations) have had the greatest success in encouraging savings given the limited footprint of other providers. VSLAs are typically made up of 15-30 members, who meet on a regular basis, most commonly weekly. Members make savings contributions at each meeting. The savings pool is then lent out to members who must repay with interest (20% on average). Membership grew by over 1 million adults between 2008 and 2014. In comparison, the number of adults saving in a bank grew by only 115,000 during the same period. Supporting and leveraging VSLA savings addresses proximity and affordability concerns. It also improves rural availability of credit to micro businesses and farming.
  3. Targeted finance for MSMEs and farmers. MSMEs and farmer businesses are hampered by lack of affordable finance. Capital market development, macro-economic stability and judicial process reform relating to collateral realisation are required to bring down the cost of credit. In the interim, credit should be carefully targeted as only the most productive farmers and MSMEs can successfully absorb and use credit without becoming over-indebted. MFIs, as the main providers of such finance, should be further enabled. The credit reference bureaus can also play a role to reduce the cost of information on borrowers, but will be hampered by lack of national ID. Improvements to the MSME and agricultural support environment are key to enable more MSMEs and farmers to become sufficiently productive to benefit from credit. This includes finalising the MSME bill and a focus on agricultural value chain development with related financing for farmers.
  4. Niche insurance opportunities to reduce vulnerability. Low income levels, reliance on rain fed agriculture and limited social safety nets make Malawians particularly vulnerable to risks. Savings will likely remain the primary tool to mitigate risks, given the cost of credit and lack of awareness of insurance. However there are specific opportunities to expand insurance usage, including health and life cover for salaried employees, insuring MFI loan portfolios against disaster risk, and raising insurance awareness. Microinsurance and health finance frameworks are needed to create an enabling environment. Some product and partnership innovations can also improve insurance use.
  5. Effective consumer empowerment and education. Financial literacy levels are very low. Whilst this does not necessarily indicate low levels of financial capability, it does make it more challenging for consumers to engage with formal providers. A number of financial education initiatives have already been undertaken by both government and donors. The primary focus should therefore be to improve the coordination of existing programmes, refine their effectiveness and leverage gateway products such as remittances and VSLAs for education. 

Additional Info

  • Country: Malawi
  • Institution: Cenfri, FinMark Trust, UNCDF
  • Date Published: 2015
  • Document Type: Presentations
  • Author/s: Jeremy Gray, Catherine Denoon-Stevens, Mia Thom, Albert van der Linden, Tyler Tappendorf
 

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