“Village banks” face winds of change
Financial institutions such as the National Bank of Malawi and the Standard Bank have been advertising in local media, offering to open accounts for lending circles and their members. Commercial banks also suggest they can provide credit to the lending circles. Commercial banks argue that entrepreneurs’ funds are safer with them than with the so-called village banks. They also note that, unlike village banks, commercial banks are regulated and can offer customers digital access to their accounts.
“Formalising village savings will protect consumers from exploitation,” says Lyness Nkungula, executive director of the Bankers Association of Malawi, in an article in Business Malawi, a publication. “If the product is well managed, the risks could be very minimal. The purpose is not to wipe out the village banks but to work hand in hand with them.”
Nkungula adds that an inclusive financial system, in which formal banking services are made available to a wider population, will promote the country’s development. About half of Malawi’s population has no access to formal financial services, according to press reports.
Nonetheless, advocates of the lending circles are putting up a furious defence of the traditional financing system, which operates mainly on trust and has deep cultural roots. They note that commercial banks refuse loan applications that lack sufficient collateral or otherwise appear risky, whereas lending circles are more welcoming. They also note that interest rates are lower with village banks.
Mary Banda, a member of a lending circle in the capital Lilongwe, says she would not deal with a commercial bank. “Village bank loans are handy,” she says. “Also, if you have a problem, the other members of the group understand, and you can access funds without difficulties.”
James Chavula, a Malawian journalist, has taken up the charge on behalf of village banks. “The financial institutions brazenly assume that village banks keep their money in a corner waiting for transactions to come along,” he posted on his Facebook page. “But village banks keep figures, not money. They leave the money to the people. If money is power, the power given to the people will help village banks overcome the assault from ultra-capitalists who always take and never give back.”
Another activist, Chisomo Gunda, says: “Commercial banks, village banks don’t want you. Village banks exist because people could not conduct business with you. Be creative and target new people, and forget about the village banks.”
Most lending circles are formed in rural areas. Since they are unregulated, their exact numbers are unknown. According to Malawi’s Fifth Integrated Household Survey 2019–2020, 45 % of borrowers get their loans from village banks, while 15 % from a relative and only 1.5 % from commercial banks. About half the borrowers used the funds as business start-up capital, while about 30 % used the money to buy inputs to raise crops.
Meanwhile, policy makers are debating ways to bring village banks into the formal financial sector and have them regulated by the country’s central bank. Laston Manja, an economics lecturer at the University of Malawi, says regulating village banks could protect their members. “More people are borrowing, and we need more intervention” to protect consumers, he told The Daily Times, a Malawian newspaper.
Raphael Mweninguwe is a freelance journalist based in Malawi.