US embassy cable - 05LILONGWE924

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, Economic Issues 
SUBJECT: MODEST IMPROVEMENT TO MALAWI'S MICROLENDING FUND 
 
REF: LILONGWE 447 
 
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SUMMARY 
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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. 
 
 
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ADVICE SOLICITED AND IGNORED 
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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. 
 
 
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FORMAL CRITICISM BRINGS A RETHINK 
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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. 
 
 
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COMMENT: BETTER, BUT STILL NOT GREAT 
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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