Reserve Bank of Malawi
* The move reflects improving inflation dynamics and the central bank’s intention to stimulate investment, production, and job creation across the economy
By Duncan Mlanjira
Chifipa Mhango, Chief Economist of Don Consultancy Group maintains that the decision by the Reserve Bank of Malawi (RBM) to reduce the policy rate to 24% “marks an important step toward easing financial conditions and supporting economic recovery”.
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“The move reflects improving inflation dynamics and the central bank’s intention to stimulate investment, production, and job creation across the economy,” says Mhango in his further reaction to the announcement made by the RBM’s Monetary Policy Committee that it has reduced the policy rate, which bankers-association-welcomed-as-steps-towards-easing-interest-rate-thresholds/.
However, says Chief Economist Chifi Mhango, “for this monetary policy adjustment to translate into meaningful economic growth, it is essential that commercial banks expand access to credit for the productive private sector, particularly small & medium enterprises (SMEs).
“Currently, Malawi’s credit landscape remains heavily skewed toward the public sector. Estimates indicate that nearly 90% of commercial bank lending is directed toward Government and state-owned enterprises, while only about 10% reaches the private sector.
“This imbalance continues to constrain business expansion, industrial development, and entrepreneurship,” says Mhango adding that the RBM’s policy easing “provides a timely opportunity for commercial banks to gradually rebalance their lending portfolios”.
“The reduction of the policy rate to 24% creates room for commercial banks to lower borrowing costs and expand credit to productive sectors. However, the current lending structure, where the majority of bank financing is concentrated in Government instruments limits the country’s ability to stimulate private sector-driven growth.”
Chifipa Mhango
Mhango further emphasised that “the current situation is not entirely a function of the present high-interest rate environment” and that “even during periods of relatively lower interest rates several years ago, commercial bank lending still remained heavily tilted toward Government borrowing”.
“For instance, during the period around 2018–2019, when monetary authorities had reduced the policy rate to around 13.5%, the structure of credit allocation did not significantly change. Private sector credit remained below 10% of GDP, highlighting limited financial intermediation toward businesses despite a relatively more accommodative monetary policy environment.
“Similarly, recent financial sector statistics show the magnitude of the imbalance. By early 2025, public sector borrowing from the banking system stood at approximately K6.5 trillion, compared to about K1.5 trillion in private sector lending, demonstrating the continued dominance of Government in the domestic credit market.”
Chief Economist Mhango further highlighted that “this historical pattern suggests that interest rate reductions alone may not be sufficient to redirect credit toward businesses, unless structural changes are introduced within the banking sector and broader financial ecosystem”.
“Commercial banks often cite high default rates, weak financial documentation, and limited collateral among SMEs as key reasons for their cautious lending posture.”
While these concerns are valid, Mhango argues that risk management should not translate into systematic exclusion of productive enterprises from formal finance, as the private sector should not simply be viewed through the lens of risk.
“Instead, the financial sector must develop innovative mechanisms to manage and distribute that risk while supporting economic growth.”
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To improve private sector access to credit, Mhango advises commercial banks in Malawi to adopt several new strategic structural interventions, that includes:
1. Modernising SMME credit assessment models—Banks should adopt cash-flow-based lending models and alternative credit evaluation methods that assess business viability beyond traditional collateral requirements;
2. Expanding risk-sharing mechanisms—Partnerships with development finance institutions and credit guarantee schemes can reduce exposure while encouraging lending to SMEs and productive sectors;
3. Strengthening business support services—Providing financial advisory support and capacity-building programs for SME clients can improve loan performance and reduce default risks;
4. Promoting sector-focused lending—Commercial banks should develop specialised financing frameworks for agriculture value chains, agro-processing, manufacturing, and export-oriented industries, which are critical to Malawi’s industrialization agenda; and
5. Leveraging financial technology—Digital financial records, mobile transaction histories, and improved credit information systems can enhance banks’ ability to evaluate borrowers and reduce operational lending costs.
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Mhango emphasises that “the private sector remains the primary driver of employment creation, productivity, and economic diversification. Without adequate access to finance, businesses struggle to expand operations, invest in technology, or scale production.
“A gradual shift toward greater private sector lending will stimulate investment, strengthen industrialisation, and support long-term economic growth. The banking sector therefore has a critical role to play in unlocking Malawi’s development potential.”
Mhango concludes by encouraging Malawi’s policymakers and financial institutions “to complement the current monetary easing cycle with stronger credit guarantee frameworks, improved credit information systems, and targeted industrial financing instruments”. “Strengthening financial intermediation toward productive sectors will be essential in building a resilient and inclusive economy in Malawi.”
* The Don Consultancy Group (DCG) Chief Economist, who is DCG Director of Economic Research & Strategy, is a seasoned financial sector expert with extensive experience in credit and development finance, having played key roles in lending and risk assessment within the private sector and industrial financing environments at Nedbank and the Industrial Development Corporation (IDC) in South Africa
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