Project Everest

Problem

[Problem Segment]: SoCon Malawi - The Capital Problem - July 2018

This post outlines the fundamental problems in the financial space in Malawi, and are detailed further in other posts. The two fundamental issues are that there is a huge lack of access to capital, and a huge lack of financial/business education. 

Malawi remains one of the poorest countries in the world, with 90% of the population living on less than $2/day, and 75% living below the lowest poverty threshold of $1.25/day (Human Development Report, 2011). The majority of Malawians are alienated from formal financial services: our own research into the Blantyre and Limbe markets have found that while ~60% of small business owners had access to a bank account, only ~7% had acquired a loan from a formal institution. Access to financial services is even more limited in rural Malawi, with only 18% of adults having access to a bank account, with 6% having access to formal lending. Savings is also a major issue: 54% of Malawians don’t have savings, with the major cause due to lack of money after expenses.

Not having a bank account makes it more difficult to get access to a loan. However the more imposing reason that people don't take loans, is that they simply can't afford the high  interest rates. Another reason is that people often won't have the confidence to the a loan, or may even have a fear of taking a loan because of these high interest rates. The most common pain points identified in acquiring loans were identified as a lack of collateral, high interest rates, and a fear of indebtedness.

There are organisations which are trying to provide finance in these current conditions but the problem is that charity models are not scaleable in these conditions as they require monitoring and high selection costs, and business models have to accomodate the systematically high risk factors. 

This all culminates into a violent circle. People do not have access to funds currently because of high interest rates. Because people do not have access to funds, they cannot develop a credit history to gain access to funds. On the other side, lenders cannot not model risk so they must charge high interest rates due to a high risk premium. this means that only 7% of the population can afford their products, so they don't get credit information from potential customers. 

Financial education is a major issue among the community. A loan granted to an individual who doesn’t properly utilise it (by spending it on ‘bad debt’ such as for paying expenses) can pose a serious risk to an individual through the negative effects of indebtedness. Rates of higher education in Malawi remain low: 78% of Malawi have a primary education or lower.

While some organisations provide basic education services to their clients seeking a loan, village banks lack the facility of providing financial training to its customers completely. Businesses aren't necessarily managed optimally, and thy aren't making the money and profits they could be if they did have more knowledge in that context.  This adds to the unavailability of finances.

edited on 5th September 2018, 23:09 by Justin Hakeem

Mallory Dobner Jul 27, 2018

I know it is left of field of the problem, but do you think the rise of mobile money and alternate banking systems will affect the ability of individuals to gain a credit score? If someone were to pay a loan using mobile money or cash, they would only be able to gain a credit history with that institution e.g. their village bank or PEV. Do you think there is a way to extend these localised credit histories into a more systematic approach that can be applied and accepted by larger institutions?

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Andrew Vild Aug 6, 2018

Status label added: Problem

This needs to be fleshed out a little more clearly to define the problem - that said it is a valuable post and well written, so it is being given this status until another supercedes it.

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