Recent reports indicate that the National Economic Empowerment Fund (Neef) has recovered only K400 million out of the K6.5 billion disbursed when it was known as Malawi Enterprise Development Fund (Medef).
This represents just six percent repayment rate. Neef reports set aside May and June to recover the outstanding sums. I look forward to the next update, hoping it will recover at least 95 percent of the loans.
Any loan recovery below 95 percent will indicate a dismal failure of Medef.
Globally, donor and government-funded microfinance institutions (MFIs) in developing countries mushroomed from 1997. By 2005, the institutions increased from 618 to 3 133 worldwide. In 2013, the global MFI industry served approximately 155 million people.
International development agencies and governments sponsored the initial MFIs to replace foreign aid with access to financial services. The grants and subsidies had failed to reduce poverty among the recipients, so the new approach through MFIs was to stimulate entrepreneurial growth.
The strategies of the two systems differ because they focus on two different deliverables. The grants and subsidies emphasise on the number of recipients and the amounts disbursed while microfinance operations focus on loan recovery because its existence depends on it.
As such, the MFIs do not give loans willy-nilly. They carefully vet the applicants to demonstrate a sound entrepreneurial spirit. According to Guha and Chowdhury (2013), when repayment rate falls below 95 percent of the loans given, the microfinance institution ‘dies’.
Clearly, a grant-giving institution does not become an MFI because it has changed its name as did Neef. A change of approach in its operations is essential.
Neef started its loans-giving as a reconstituted MEDF in February 2021. By May, the State-funded fund reported that it had disbursed K5.8 billion to 2430 groups.
By April, Neef had collected K596 million against a repayment target of K613 million, representing a recovery rate of 97 percent. This is appreciable.
However, it is unlikely that the loan repayment rate will be maintained or improved for several reasons.
The first reason is that Neef still wears a political face—a government microfinance institution. The fund inherited Medef, which was wholly owned by the government though registered under the Company Act in 2013 as a company limited by guarantee. It was licenced by the Reserve Bank of Malawi as a microfinance institution in the non-deposit taking category.
According to different MFI professionals worldwide, MFIs do not succeed when stakeholders see them as government or political institutions.
A study in Jamaica by Hossein in 2016 found that political meddling in the work of MFIs led to loan default. The researcher recounted that when MFIs allowed politicians to recommend constituents for microloans, many borrowers defaulted on the repayment because they regarded the loans as gifts or a ‘thank you’ from the politicians for electing them into office.
In Malawi, it is an open secret that politicians promise party loyalists loan priority during elections or by-elections.
The second weakness that Neef has inherited is that one of the primary qualifying criteria for obtaining a loan is to be in a group.
As argued, MFIs need to prioritise candidates who demonstrate entrepreneurial skills and have a vision of what they will achieve with what they borrow.
In Strategies for Reducing Microfinance Loan Default in Low-income Markets, my MFI study done in 2017 in Rwanda, I found that in most cases, people do not fail to reduce their poverty levels because there is a shortage of loans. Instead, they fail because they lack the entrepreneurial skills to use the loans profitably.
So, the terrain in Malawi needs to change considerably for Neef to achieve its objectives. Otherwise, it is bound to fail.