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Identifier
Created
Classification
Origin
05LILONGWE447
2005-05-26 06:33:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Lilongwe
Cable title:  

RURAL LOAN PROGRAM ENDANGERS MICROFINANCE SECTOR

Tags:   PGOV  ECON  EFIN  EAID  EAGR  KMCA  MI  BUD  FIN 
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						UNCLAS SECTION 01 OF 02 LILONGWE 000447 

SIPDIS

STATE FOR AF/S, AF/EPS
USAID FOR AFR/SA
USAID FOR AFR/DP
USAID FOR AFR/SD
USAID FOR PPC/AA
USAID FOR EGAT/PR/MD
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN

SENSITIVE

E.O. 12958: N/A
TAGS: PGOV ECON EFIN EAID EAGR KMCA MI BUD FIN
SUBJECT: RURAL LOAN PROGRAM ENDANGERS MICROFINANCE SECTOR

Sensitive But Unclassified-- Not for Internet Distribution

UNCLAS SECTION 01 OF 02 LILONGWE 000447

SIPDIS

STATE FOR AF/S, AF/EPS
USAID FOR AFR/SA
USAID FOR AFR/DP
USAID FOR AFR/SD
USAID FOR PPC/AA
USAID FOR EGAT/PR/MD
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN

SENSITIVE

E.O. 12958: N/A
TAGS: PGOV ECON EFIN EAID EAGR KMCA MI BUD FIN
SUBJECT: RURAL LOAN PROGRAM ENDANGERS MICROFINANCE SECTOR

Sensitive But Unclassified-- Not for Internet Distribution


1. Summary: Against the advice of donors and banking experts,
the GOM has launched a controversial rural loan program with
subsidized interest rates, administered by a state-owned bank
that has no experience in microfinance. The U.S. and other
donors have expressed our concerns, but the GOM is determined
to proceed with a politically popular program that fulfills
the president's promise to increase credit access to rural
smallholders. End summary.


2. As he was running for office in 2004, President Mutharika
announced his intention to launch a $5 million micro loan
program to extend credit to poor Malawians in rural areas.
The program was to be supported with funds held in a dormant
account of the Reserve Bank of Malawi. The plan later grew to
$10 million, and in February Mutharika launched the scheme,
dubbed the Malawi Rural Development Fund (MARDEF), with great
fanfare. Malawi's parliament endorsed the program during its
April session, and directed the administration to increase the
program to $50 million. The GOM does not have sufficient
resources to fund the program to that level, and most
observers assumed that the MARDEF would simply loan the
initial $10 million several times over in order to fulfill the
wishes of Parliament. The Minister of Finance has privately
promised donors that the program would not exceed $10 million
in the 2005/06 fiscal year.


3. Since the program was announced in February, major donors
and private sector microfinance experts have held regular
technical meetings with the GOM to make recommendations on the
execution of the program. USAID, DFID, UNDP, World Bank, and
various private sector institutions participated, and a number
of written recommendations were given. Among these were that
the program should employ market interest rates, that recently-
developed private sector microfinance institutions (MFIs)
should be utilized to the maximum extent possible, that loans
be disbursed quickly with minimal bureaucracy, and that
government parastatal finance institutions should have a
minimal role, mainly as "apex" lenders that would channel the
funds to the private sector MFIs.


4. Last week the GOM published its implementation plan for
MARDEF, and it appears that most of the expert recommendations
were ignored. Responding to populist demands, the MARDEF will
have a subsidized interest rate of 15 percent, far below the
market rates that the private sectors MFIs can offer. (The
current bank rate in Malawi is 25 percent, and inflation runs
at over 15 percent.) Malawi Savings Bank, a parastatal
savings institution that has no experience in microfinance,
will administer the fund. The combination of below-market
interest rates and a large guaranteed market share for
parastatal banks will create a situation where the private
MFIs will not be able to compete. If the MARDEF proceeds as
announced, it is likely that some or all of the private MFIs
will fail over the medium or long term.


5. USAID and other donors have spent millions of dollars
capitalizing and building the capacity of the private sector
MFIs. GOM officials are well aware of the potential impact of
the MARDEF on those MFIs, but they are determined to proceed
because the program will be politically popular and it will
fulfill President Mutharika's campaign pledges to increase
credit to poor rural Malawians. Embassy/USAID are talking to
other donors about sending a joint letter to the GOM to point
out the serious damage that MARDEF will cause to the nascent
private microfinance sector.


6. Comment: The GOM has already run full-page newspaper
announcements describing MARDEF's terms and structure. This
fact alone, even disregarding the prominence Mutharika has
given MARDEF from the beginning of his administration, makes
it unlikely that the GOM can be talked out of this program.
Nevertheless, the donors that have underwritten the existing
MFIs can only register their protest and ask the government to
reconsider. Certainly this is not a make-or-break decision
for the GOM's relationship with donors, nor for Malawi's
macroeconomic well-being. But it does mark a point on which
Mutharika and his finance minister are unwilling to bend. As
the GOM regains macroeconomic stability and gets money to
spend on development, it will soon become clear whether the
state-centric approach taken here indicates a wider bias.
GILMOUR