Reserve Bank of Malawi (RBM) plans to incorporate village savings and loans (VSLs) or village banks into the formal financial sector.
But Community Savings and Investment Promotion (Comsip), which is an umbrella body of VSLs, has cautioned the central bank not to compromise the informal nature of village banks.
In a move RBM argues is meant to ensure that members’ money is safe, Comsip views this as counterproductive in an economy where financial inclusion is relatively low.
A recent Finscope Survey found that 51 percent of Malawians have no access to formal financial services while only 27 percent are banked.
Comsip chief executive officer Tenneson Gondwe said in an interview last week they fear that integrating village banks into formal financial sector will require capital adequacy and capacity building which could be an issue.
He said: “We are talking about small groups of 10 to 20 members. These are informal groups that mobilise savings and lend each other. Their own money becomes a source of loans.
“They develop their own rules and regulations and very few extend to outsiders but rules regarding such transactions apply too. It is, therefore, wise to let them grow on their own as RBM regulations could only hinder their operations.”
Gondwe argued that RBM should instead mobilise village banks into cooperatives as multipurpose vehicles in financial intermediation and productive investment.
“If anything, government should establish a cooperative bank whose members should be village cooperatives. The bank’s function should focus on assisting community members in lending to cooperatives as members who can then lend to its members.”
He said in this way, RBM can then regulate the cooperative bank as a formal financial institution indirectly regulating the cooperatives which are members of the bank.
The move to incorporate VSLs in formal sector will obviously rile members of village banks because their conditions are flexible in terms of borrowing with softer interest rates ranging from 15 percent to 20 percent as compared to commercial banks interest rates which hover around 39 percent.
Apart from village banks, savings and credit cooperatives (Saccos) also offer softer terms.
Sylvester Kadzola, chief executive officer of Malawi Union of Savings and Credit Cooperatives (Muscco), the parent company of Saccos, welcomed the move, but said RBM should not impose harsh regulatory mechanisms on village banks.
“We would only want to see the RBM providing simple guidelines on how these entities are established and ensuring that security of funds deposited by individuals in these groups is enhanced,” he said.
Kadzola said the ease and convenience that allows members to access finance is what attracts many to be part of village banks; hence, this must be preserved and not stifled in the process.
Kadzola advised the central bank to encourage village banks to be linked to formal financial institutions such as financial cooperatives to build local capacity.
RBM spokesperson Mbane Ngwira said they want to protect those that keep and transact their money with village banks.
He said since village banks deal with money, complaints that rise in these entities end up with RBM, but because they are not formally recognised it becomes difficult for the central bank to support and address the complaints.