A financial stability report prepared by the Reserve Bank of Malawi (RBM) shows worsening levels in non-performing loans (NPLs) particularly among small and medium enterprises (SMEs).
The report, which covers the period between March and October 2016 indicates that credit risk remained a threat to the resilience of the banking system as NPLs, at 14.7 percent of the gross loans and leases, were way above the regulatory benchmark of five percent.
Reads the report in part: “In absolute terms, NPLs increased to K507.6 million in September 2016 from K403.3 million in March 2016. On the other hand, NPLs for non-deposit taking microfinance declined to K1 billion in September 2016 from K1.1 billion in March 2016.”
The majority of banks cited general economic condition as the major factor that led to the increase in NPLs across all sectors, including high interest and inflation rates and unstable exchange rates, which weighed negatively on the operations and stability of the banking system.
The report shows that the wholesale and retail sector was ranked by most banks as the sector with largest NPLs during the survey period, compared to transport which ranked highest in the previous survey period.
RBM reports show that commercial banks extend about 23 percent credit to the wholesale and retail sector and about six percent to the transport sector.
In the report, commercial banks further indicated that apart from unstable economic environment, legal challenges in enforcing loan repayments, lack of adequate information for assessing credit worthiness of borrowers, poor quality of collateral for SMEs and high costs of doing business were other key factors leading to increased NPLs.
In an earlier interview, Ben Kaluwa, economics professor at University of Malawi’s Chancellor College, argued that the increase in NPLs will make banks more risk averse making it hard for businesses to borrow from them. n