US embassy cable - 05LILONGWE447

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