Identifier
Created
Classification
Origin
05LILONGWE924
2005-10-25 05:26:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Lilongwe
Cable title:  

MODEST IMPROVEMENT TO MALAWI'S MICROLENDING FUND

Tags:  ECON EFIN EINV MI 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 LILONGWE 000924 

SIPDIS

SENSITIVE

STATE FOR AF/S MELINDA TABLER-STONE
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN
STATE FOR EB/IFD/ODF LINDA SPECHT
STATE PLEASE PASS TO MCC FOR KEVIN SABA
PARIS FOR D'ELIA

E.O. 12958: N/A
TAGS: ECON EFIN EINV MI
SUBJECT: MODEST IMPROVEMENT TO MALAWI'S MICROLENDING FUND

REF: LILONGWE 447

-------
SUMMARY
-------

UNCLAS SECTION 01 OF 02 LILONGWE 000924

SIPDIS

SENSITIVE

STATE FOR AF/S MELINDA TABLER-STONE
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN
STATE FOR EB/IFD/ODF LINDA SPECHT
STATE PLEASE PASS TO MCC FOR KEVIN SABA
PARIS FOR D'ELIA

E.O. 12958: N/A
TAGS: ECON EFIN EINV MI
SUBJECT: MODEST IMPROVEMENT TO MALAWI'S MICROLENDING FUND

REF: LILONGWE 447

--------------
SUMMARY
--------------


1. (SBU) The GOM recently responded to concerns about its new
microfinance program by announcing that it was offering
something slightly closer to commercially viable interest
rates. The program has been the subject of heated political
debate, on the assumption that the loans will be political
handouts. While the new pricing is an improvement, it is
still about half the prevailing microfinance rate, and
Malawi's fragile credit culture depends on careful
implementation. End summary.


2. (SBU) In a meeting with foreign diplomatic and development
missions, the GOM announced that it has reconsidered the
pricing of microloans offered by the Malawi Rural Development
Fund (MARDEF). The GOM had publicly advertised and begun
lending with a 15 percent interest rate on the loans, which
are to be offered to rural borrowers in amounts ranging from
MK10,000 to MK100,000 ($83 to $830). With Malawi's inflation
running at about 15.5 percent, this amounts to a negative
real interest rate.


--------------
ADVICE SOLICITED AND IGNORED
--------------


3. (SBU) The GOM consulted with its development partners as
it was designing the fund (which originated in a campaign
promise by President Bingu wa Mutharika),and it consistently
heard two concerns: that the fund should offer commercial
pricing, and that it should limit the involvement of
parastatal banks by offering apex (wholesale) funding to
existing microfinance institutions (MFIs). The concern was
that this MK1 billion ($8.6 million) fund would grossly
distort the donor-funded commercial MFIs, which are just now
achieving commercial viability (see reftel). As MARDEF was
rolled out last summer, though, it became clear that the GOM
had ignored everyone's advice. The fund offered the heavily
subsidized 15 percent rate, less than half the commercial
rate, and the program was to be executed entirely through the
parastatal Malawi Savings Bank. As it happens, MSB tried to
interest commercial MFIs banks in the retail level but found

no takers with the subsidized rates.


--------------
FORMAL CRITICISM BRINGS A RETHINK
--------------


4. (SBU) Embassy mustered support within the other diplomatic
and development missions to express our concerns formally to
finance minister Goodall Gondwe, who responded last week by
calling a meeting with the heads of mission. In that
meeting, the head of MARDEF announced that he had decided to
use a "flat-line" interest calculation, i.e., to use the 15
percent nominal rate for the entire principal (not just the
outstanding balance) for the life of the loan. This, he
said, would bring the effective rate to between 27 and 31
percent. Commercial microlending rates here are generally
40-60 percent--still up to twice MARDEF's proposed rate.
Over time, the goal would be to bring the rate to 5 percent
over the base rate. Embassy emphasized in response that our
concern is that MARDEF operate on true cost-based pricing so
as not to distort the market.


5. (SBU) Meanwhile, MARDEF has been the target of vitriolic
attacks in Parliament. The political concerns are first,
that Parliament was not consulted in establishing the fund,
and second, that the loans were being made according to the
political allegiance of the recipients. The GOM has argued
against the first concern on a technicality: MARDEF is off
budget because it uses dormant central bank accounts for
funding. As long as it lends but does not spend the money,
it does not need parliamentary approval. The second point is
mainly hypothetical, since only 3 percent of the fund has
been lent, and the opposition dealt with it using
spectacularly perverse logic: it enjoined the government to
increase the fund five-fold, to MK5 billion ($41 million).
Government agreed, but privately told us it will reach the 5
billion figure by revolving the original 1 billion.


--------------
COMMENT: BETTER, BUT STILL NOT GREAT
--------------


6. (SBU) With the new pricing, MARDEF moves closer to
commercial sustainability and further from a crippling market
distortion. The new pricing still undercuts commercial rates
significantly, but commercial microlenders believe they can
withstand the competition. Perhaps more importantly,
parliamentarians' concerns arise from an unspoken problem
with the lending scheme: everyone in Parliament (and
arguably, nearly everyone in the country) seems to assume
that MARDEF is a handout. Indeed, in the context of Malawi's
credit culture, the great appeal of loans is that they are
viewed as windfalls, with only a vague obligation of eventual
repayment. Even more tenuous is the distinction between
spending and investing. Commercial MFIs have been carefully
building a healthier credit culture among their clients, and
the biggest potential downside of MARDEF is the damage its
careless implementation may inflict on the country's nascent
credit culture.
EASTHAM