Malawi 2063 Policy Brief Series
September 2022
FINANCING OPPORTUNITIES FOR A HIGHLY PRODUCTIVE AND
COMMERCIALIZED AGRICULTURE SECTOR
Key messages
• Agriculture finance is a critical catalyst to deepening of agriculture productivity and
commercialization in Malawi.
• Despite efforts promoting access to finance among farmers, the majority still experience
access challenges.
• Financial service providers still consider lending toward agriculture risky due to price
volatility, climate shocks, limited access to markets and absence of insurance services.
• Commercial banks and microfinance institutions skew financial lending towards non-
trade and non-agriculture activities.
• To deal with agriculture finance bottlenecks, policy interventions should focus on among
other things:
• Creating awareness for utilization of existing credit guarantee facilities
• Piloting of infrastructure finance
• Strengthening credit reference bureaus
Background
The much-desired shift from the current subsistence orientation of agriculture production to
commercial as espoused in Malawi 2063 requires sustained financial investment key to optimum
and sustainable utilization of natural resources, technology and infrastructure development,
improved extension services delivery and the participation of youth and women in the agriculture
sector (National Planning Commission, 2020).
FINANCING OPPORTUNITIES FOR A HIGHLY PRODUCTVE AND COMMERCIALIZED AGRICULTURE SECTOR
However, financing for agricultural investments in Malawi is scarce and unbalanced, even for large-
scale investors. Currently, less than 12% of commercial lending goes to the agriculture sector, low
primarily because of the risk profile of the sector compared to others in Malawi’s economy. Among
other factors, dependency on highly variable rainfall for farming, persistent occurrence of climate
shocks, volatile prices of agriculture products and inputs, limited access to markets and absence of
insurance services and products are faulted for this status quo (CARD, 2014; Vuntade and Mzuza,
2022; IDI,2021). This foregoing deprives the sector’s potential to increase production, processing,
and marketing, against the aspiration of a highly productive and commercialized agriculture
sector, towards the lower middle income status pursuit as espoused in Malawi 2063 first 10-year
implementation plan (MIP-1). This policy brief examines agriculture financing issues, proposes
policy and programmatic options for consideration, towards the goal of a highly productive and
commercialized agriculture sector.
Context of Agriculture Finance in Malawi
Agriculture finance concerns funding of farm activities for production of agriculture products,
especially financial resources required for the farm unit, either at micro or macro level. Macro-
finance deals with different sources of raising funds for agriculture, concerned with lending
procedures, rules, regulations, monitoring and controlling of different agricultural credit institutions.
Hence macro-finance is related to financing of agriculture at aggregate level. Micro-finance refers
to financial management of the individual farm business units.
Farmers in Malawi access finance from microfinance institutions, cooperatives, village banks
and commercial banks that offer a range of formal and informal agricultural financial services.
However, these have not been sufficient in meeting the needs of farmers (Lindsjo, 2021). Part of this
insufficiency is attributable to lack of segmentation of the market, where financial institutions fail
to offer financial products (primarily loans) that reach the full range of rural and agricultural clients
interested in credit. Such inefficiencies limit farmers’ access to farm inputs, which contributes to
low farm productivity.
Beyond government’s direct intervention in agricultural lending, financial institutions’ (commercial
banks in particular) lending towards the sector ranged between eight to twelve percent from 1996
to 2018, largely attributed to the risks associated with farm activities (Diagne, 2001). Several factors
frustrate the development of solid financial services in rural and urban areas. Firstly, transaction
costs in rural areas are higher than in urban areas due to poor road infrastructure, low access to
mobile financial services and low presence of financial service providers (Allie and Demiryurek,
2020). Commercial banks consider lending to the agricultural sector a risky investment and
prefers to lend to non-farm sectors (Malawi Government, 2017). Products and input markets for
agricultural growth are still functioning poorly in the country. With respect to product markets,
most smallholder farmers are poorly organized and lack of bargaining power over pricing of
produce (AICC, 2016:14). As a result, transaction costs remain high due to low traded volumes of
agricultural produce and lack of agriculture financing (Malawi Government, 2017).
FINANCING OPPORTUNITIES FOR A HIGHLY PRODUCTVE AND COMMERCIALIZED AGRICULTURE SECTOR
Geographically, commercial banks in Malawi are also biased towards urban areas and town centers,
thereby denying the service to the agricultural value chain activities which are predominantly
undertaken in the rural areas by rural dwellers (Malawi Government, 2017:32). Secondly, the risk
factors inherent in agriculture often inhibit financial institutions from lending. Among such are
natural hazards (such as droughts, floods, and pests), farmers´ weak ability to provide collateral
(either because the farmer lack title to land to offer as a loan guarantee or the value of the land
may be too low) and volatility of prices. Thirdly, the financial sector is not developed enough in
developing countries like Malawi, limiting access to financial resources among smallholder farmers
in an extreme case, even large-scale ones.
Again, with poorly defined land rights in Malawi, the ability of rural farmers to offer collateral
to commercial banks as a condition for accessing credit is greatly hampered (AICC, 2016:21).
Further for Malawi, even if financial services may be available, they may not be suitable for all
types of agricultural activities, which have diverse needs and timing for disbursements, different
amounts and risks. For example, in seasonal farming, funding may be needed in particular
stages of the production process. However, the offer may only be available to large scale farming
operations with quality records. Since few farmers have quality farm records that would meet
lending requirements, it makes assessment of credit suitability challenging for financial providers.
Consequently, farmers fall out of favour with lending institutions, thereby undermining profitable
investment in the agriculture sector.
Agriculture financing policy and programmatic problems in Malawi
Liquidity Management is one policy option in which the Reserve Bank of Malawi plans to stimulate
liquidity creation for private sector financing and even agriculture lending. The bank has been
reducing liquidity reserve ratio (LRR) to below 4%, as a way of creating liquidity and stimulating
lending to the productive sectors of the economy. However, this has not translated into increased
lending to the agriculture sector, as high interest and inflation rates exacerbate low agriculture
lending.
As highlighted in the National Agriculture Policy (NAP), agricultural financing initiatives involve
numerous interconnected activities, to ensure different financial instruments must be connected
to different needs of the sector. Admittedly, agriculture encompasses a broad range of activities
from farming to infrastructure projects, research, and development. As such, any policy trying
to address agriculture finance, must accommodate these key clusters in order to address the
demands of the sectors, amongst which are needs of farmers and entrepreneurs, transactions
among actors along the value chain, infrastructure (production and marketing) and generating
knowledge (through research and innovations) to support the sector.
Besides the formal financial lending institutions like commercial banks, cooperatives and micro
financial institutions, development partners such as USAID and UNDP through the (Malawi
Innovation Challenge Fund) as well as Agriculture Commercialization (AGCOM) project have been
administering matching grants and credit guarantee as a way of stimulating access to credit in
the sector, albeit with mixed results. Figure 1 shows financial flow in the sector, originating from
development partnerships.
FINANCING OPPORTUNITIES FOR A HIGHLY PRODUCTVE AND COMMERCIALIZED AGRICULTURE SECTOR
Figure 1. Total disbursements for agriculture from development partnerships (US$)
Source: UN food and agriculture organization (FAO), 2019
The partial credit guarantee facility remains largely untapped due to continued low risk appetite for
lending by the banks, while matching grants have not been fully up taken by smallholder farmers
due to lack of matching resources or collateral. Further, in the case of programs such as AGCOM,
excessive focus on smallholder farmers has evidently left out medium scale-farmers and private
entities in the financing of agriculture investments. In the case of Malawi Innovation Challenge Fund
(MICF), there has been an increased perception that the key beneficiaries have been companies
not owned by indigenous Malawians, who were the prime targets, because they often times have
no collateral. Instead, Malawians of other origins have veered their way to access such finances
for their investments in the sector. Policy considerations in this area need to ensure that interests
of smallholder farmers who have no collateral with which to access loans are ably supported with
favourable financing conditions for their agricultural investments.
Among other financing options for Malawi’s development are initiatives such as the export
development fund (EDF) and the Malawi Agriculture and Industrial Investment Corporation (MAIIC),
which were established to act as catalysts for agricultural finance. The latter was to operate on
syndicated finance, a condition which has affected its operations and growth. The low capital
adequacy levels have contributed towards its low lending levels. For EDF, perceived politicization
in its lending decisions have hindered potential beneficiaries from making use of the facility.
Promotion of Village Savings and Loans (VSLs) by different ministries as well as strengthening
implementation of Financial Corporative Act have also yielded results below expectation, where
proceeds are rarely channeled towards agriculture investment and inputs by beneficiaries. Other
experiences regarding Malawi’s agriculture financing include:
FINANCING OPPORTUNITIES FOR A HIGHLY PRODUCTVE AND COMMERCIALIZED AGRICULTURE SECTOR
a. Skewed lending towards Agriculture Trading and not production
Agriculture is a conduit of several value chain actors and processes. It entails a sequence of
interlinked activities, transactions in a chain that starts from the supply of seeds and fertilizers
and finishes in the mouth of the consumers. There have been minimal financial instruments
specifically designed to strengthen these links between the actors along the value chain.
Excessive focus has been on lending towards agriculture trading, presumably because of its
low risk level.
b. Minimal lending towards Rural infrastructure
Financing needs to be concentrated on the infrastructure needed to carry out agricultural
activities. The agriculture sector depends heavily on infrastructure such as rural transport
systems, irrigation systems, water supply, sanitation, electricity, storage and telecommunication
facilities. Implementing projects in such sectors of infrastructure development is costly and
require significant financing. Currently, rural infrastructure deficit stands at 90 percent, but the
policy and programme instruments available have not focused on ensuring that investment
towards such infrastructure development is increased, enough to reduce the rural infrastructure
deficit.
c. Minimal Investment towards Research and Development (R&D)
The financial sector has not developed instruments that would finance research and development
in the agriculture sector. Major funding for research comes from government and large seed
companies. As of 2021, funding towards research stood at 13% of total funding requirements,
indicating that there is more funding requirement in the sector’s investments.
Policy Recommendations
The policy that supports agriculture finance needs to enhance local financial institutions; foreign
banks, development banks, governments and other actors, and promote innovative finance
packages with sustainable and vibrant risk sharing elements. Some issues to be considered
include:
a. Stimulating increased usage of Credit guarantee schemes
As earlier indicated, despite several credit guarantee schemes, financial institutions appetite
for lending is still low. This suggest a structural failure which shows that lending is unattractive,
perhaps even in instances where surety is provided. A deliberate incentive to financial institutions
that provide agriculture lending would therefore be crucial. There is need for government and
relevant stakeholders to collaborate on efforts towards creation of a policy and programmatic
environment that would stimulate lending, especially to small-scale farmers.
FINANCING OPPORTUNITIES FOR A HIGHLY PRODUCTVE AND COMMERCIALIZED AGRICULTURE SECTOR
b. Piloting Infrastructure Finance
A well-functioning agricultural sector needs appropriate infrastructure such as road networks,
to link isolated rural areas to markets; irrigation technology to reduce farmers’ dependence
on rainfall; storage facilities to protect harvests from weather and pests; telecommunications
to ensure efficient trading, water supply and energy; among others. However, infrastructure
such as roads in the rural areas are under-financed in Malawi. Traditionally, large-scale
infrastructure is largely funded by the public sector. However, governments have increasingly
been experimenting with different funding options to finance infrastructure, by enlisting the
active participation of private sector partners and financial institutions. The participation of the
financial sector in these initiatives requires a completely different set of skills from other types
of lending, because it entails financing public assets, which could have high risks. Therefore,
government might consider reviewing the policy environment to ensure pilot of agriculture
finance that will include public, private sector and development banks. In the present gap,
MAIIC should be further capitalized to assume a more infrastructure funding role.
c. Improving capacity on demand and supply side of agriculture finance
To access finance from financial institutions, farmers are supposed to have proven track
record of banking. Engaging the farmers in banking activities and transactions will be critical
in creating tract record of banking. This could be achieved by support efforts towards financial
inclusion of smallholder farmers and creation of banking tract records. This will require that
commercial banks in Malawi become innovative enough to produce financial services and
products that reach out to farmers in the rural areas. In this regard, the use and integration
of mobile banking and other digital finance initiatives will accelerate efforts towards building
banking tract records. Government should therefore enhance its incentives towards financial
institutions through tax exemption (among others) that are introducing innovative digital
services which can increase farmers knowledge and awareness, thereby stimulating demand
for banking services and products.
d. Improving credit supporting facilities
Farmers need to have enough requirements to qualify for a bank loan. This requires deliberate
efforts by government by among others increasing capacity of credit bureaus. The current
scope of credit reference bureaus is still narrow. Government and development partners need
to invest and develop initiatives that support capacity of the credit assessment institutions
by developing a policy and legal environment that will ensure relevance of the credit bureau.
On the other side, access to finance depend on farmers’ ability to posses’ collateral to access
financial services and products. Government and development partners should therefore
implement initiatives that will support farmers access to collateral efforts towards registration
of assets with office of the registrar. This can largely be done through improving orientation of
farmer cooperatives and associations on importance of asset registration to farmers’ access
to finance.
FINANCING OPPORTUNITIES FOR A HIGHLY PRODUCTVE AND COMMERCIALIZED AGRICULTURE SECTOR
Conclusion
Access to finance is a vital part of any developed agriculture sector. Drawing farmers and small
entrepreneurs in Malawi into the financial system needs collaboration from public, private sector
and development partners including civil society organizations. This requires a combination of
good laws, a specialized financial sector and profitable businesses of small and large farmers and
companies in the agriculture sector. A requisite policy needs to ensure credit guarantee is fully
utilized by farmers, foster adequate rural infrastructure development, access and registration of
collateral, and create demand for agriculture finance. Innovation in finance to solve the needs of
the rural sector should not be limited to financial institutions. The government can play a proactive
role by promoting laws and regulations with new financial instruments or even raising awareness
of existing ones, to bring them to the attention of the financial and agricultural sectors. There is
need for government and private sector to specialize in agricultural finance through strengthening
of existing institutions, research, and relevant policy interventions.
Selected References
• AICC, (2016). The Future of Malawi’s Agriculture. Lilongwe: AICC.
• Chirwa, E. W., & Mlachila, M. (2004). Financial Reforms and Interest Rate Spreads in the Commercial Banking System
in Mala. IMF Staff Papers, 51(1), 96-122. Retrieved from ttps://www.jstor.org/stable/30035865
• FAO. (1990). Agriculture Finance Revisited: Agricultural Finance: Getting the Policies Rights. FAO.
• Food and Agriculture organisation. (2022, May 19). World in Data. Retrieved from Agriculture finance: https://
ourworldindata.org/
• H. J. Tomkins. (1992). Comparative Table of Banking Legislation in Africa. Journal of African Law, 19, 163-170.
Retrieved from https://www.jstor.org/stable/744929
• Holden, S., Deininger, K., & Ghebru, H. (2009). Impact of low-cost land certification on investment and productivity.
American Journal of Agricultural Economics, 91(2), 359-373.
• IFC. (2011). Scaling Up Access to Finance for Agricultural SMEs Policy Review andRecommendations. Washington,
D.C. 20433: International Finance Corporation. Retrieved fromhttps://www.gpfi.org/sites/gpfi/files/documents/
G20_Agrifinance_Report
• Malawi Government (2017). National Agricultural Policy. Ministry of Agriculture, Irrigation and Water Development.
Lilongwe: Government Press.
• Malawi Government, (2020). Malawi Vision: An Inclusively Wealthy and Self-reliant Nation. National Planning
Commission: Lilongwe.Malawi National Planning Commission, (2021). The Malawi 2062 First 10-Year Implementation
Plan (MIP-1) 2021-2030: Transforming Malawi into a Middle-income Economy. National Planning Commission:
Lilongwe.
• Malawi Standard Bank. (2016 to 2018). Malawi Standard Bank Reports. Lilongwe: Standard
• Bank of Malawi. https://www.standardbank.co.mw/static_annuaL Report.pdf
• Nkuna, O., Faith Lapukeni, A., & Kaude, P. (2018). The Role of Commercial Banks on Financial Inclusion in Malawi.
Open Journal of Business and Management, 812-832.
• Olufemi , A. A., & Ajayi, M. A. (2018). Determinants of banking sector development: Evidence from Sub-Saharan.
Borsa Istanbul Review, 18(2), 122-139. doi://doi.org/10.1016/j.bir.2017.11.002
• Reserve Bank of Malawi . (2022, May 19). Reserve Bank of Malawi. Retrieved from Reserve Bank of Malawi: https://
www.rbm.mw/Home/GetContentFile/?ContentID=50445
• Ruete, M. (2015). Financing for Agriculture: How to boost opportunities in developing countries. IISD. Retrieved from
https://www.iisd.org/system/files/publications/financing-agriculture-boost-opportunities-devloping-countries.pdf
• Shawa, K. (2014). Finance-growth nexus: Evidence from Malawi. Journal of Economics and International Finance,
6(2), 28-37. doi:0.5897/JEIF12.103
• Tauringana , V., & Chithambo, L. (2016). Determinants of risk disclosure compliance in Malawi: a mixed-method
approach. Journal of Accounting in Emerging Economies, 6(2), 111-137
• International Fund for Agriculture Devleopment (2014). Youth and agriculture: key challenges and concrete solutions.
Rome: IFAD.
FINANCING OPPORTUNITIES FOR A HIGHLY PRODUCTVE AND COMMERCIALIZED AGRICULTURE SECTOR
FURTHER INFORMATION
National Planning Commission (NPC)
The National Planning Commission was established through an Act of Parliament in 2017 with
two main mandates.
1. To coordinate the development of long and medium term national development plans for
Malawi including the flagship projects that would operationalise them.
2. To oversee the implementation of those plans and coordinate the efforts of different
stakeholders in achieving common objectives defined in the overall national development
agenda.
Foresight and Anticipatory Governance project
This is an initiative that seeks to introduce and mainstream innovating ways of development planning
by making sense of events occurring and likely to occur in the country’s development space, and
scanning the horizon of global, regional and local trends on key development issues in order to
build agility among planning agencies, with which to respond to unforeseeable events taking place
in the country’s development space. The project relies on data and information generated through
sustained research across economic and social development spheres. The policy briefs series are
produced to provide information for consideration in government planning units.
For more informaton contact: Funded by UNDP, under the Foresight and Anticipatory
Governance Project implemented by the National Planning
The Director General
National Planning Commission
Commission in collaboration with the Department of
P/Bag B316, Capital City, Lilongwe Economic Planning and Development, in the Ministry of
email: [email protected] Finance and Economic Affairs (MoFEA)
