Malawi: Strenghtneing NBFI Framework and Advice on Pension Reform

Non-bank financial institutions (NBFI) cover the entire financial sector other than banking: insurance, pensions, capital markets, building societies, savings co-operatives, burial funds and so on. Regulation of this entire sector is perhaps more appropriate where the financial sector is almost entirely dominated by banking and the rest exists to varying levels but is mostly at an early stage and not contributing a significant proportion of financial sector assets or capital. Some of the economies in Sub-Saharan Africa fit into this category.

In 2006, FIRST has engaged with NBFI regulation and supervision in several sub-Saharan African countries in cooperation with the IMF: Namibia, Swaziland, Botswana, Zambia, Sierra Leone and Malawi.

Whilst the NBFI sector was still at a relatively early stage of development in Malawi, and to varying degrees some of the other countries mentioned, growth in the NBFI sector was likely to accelerate. Insurance tended to be the next area for financial sector growth once banking has become fully developed; many countries were also looking to expand and reform their pension schemes and encourage the development of private schemes. Access to finance is a critical factor for some of the poorest segments of the population and, whilst the aggregate financial numbers may not be large, the development of savings cooperatives and credit institutions in rural areas could provide a vital way of improving such access.

The Reserve Bank of Malawi (RBM) was given legal powers to regulate and supervise much of the financial sector but the empowering legislation lacked clarity in some respects and needed updating. The NBFI sector in Malawi included discount houses, savings and credit co-operatives (“SACCOs”), insurance (Life and non-Life), pension funds, development finance institutions, medical aid societies and micro-finance organizations.

The consultants made over 25 recommendations which addressed bringing some of these NBFI organizations into the regulatory and supervisory net (e.g. SACCOs, micro-finance, medical aid etc.) for the first time, amendments to legislation, capacity building, resource and organizational change at the RBM, among others.

The purpose of the project was to identify the institutional capacity needs for NBFI regulation and supervision and to develop a medium-term strategy for building RBM's capacity in light of current and future NBFI market development. At the purpose level the project is outstandingly successful. Nevertheless, the goal of the project, namely 'create the foundation from which strong NBFI regulation and supervision can be developed' can only be judged once the recommendations and the proposed strategy are implemented. It is encouraging that RBM fully agreed with 25 of the 26 recommendations and is currently considering the remaining recommendation, namely the establishment of a separate Division of Financial Supervision within RBM. In addition, RBM started implementing some of the regulatory and human resources recommendations itself and applied for further support from FIRST for implementing the recommendations in the pensions and capacity building areas.

Lessons learned:

· The unified structure for the financial sector regulator is quickly becoming the structure of choice around the world, especially in small developing countries. In the past two years alone, the number of countries adopting this model has increased from 13 to 25. That does not make it the automatic model of choice but it is strong evidence that the model has credibility. Certain conditions should be in place before adopting a certain model and the countries should consider the strengths and weaknesses of the various models available before making a decision.

· It is important to follow-up on the implementation of the consultants’ recommendations even after the consultants complete their TORs. In the case of this project, the Governor of the RBM was replaced just as the consultants’ recommendations were agreed with the previous Governor. FIRST considered it to be important to present the final report and consultants’ recommendations to the new Governor and the consultant undertook a trip, supported by FIRST, for this purpose. That trip enabled getting the new Governor’s buy-into consultants’ recommendations, discussing the steps taken by RBM to implement those recommendations and the future TA required.

· Many of the countries of the SADC region maintain close contact with each other and share information. The success of the Malawi project was presented at the relevant CISNA meeting. More requests for TA in this area arose from this meeting, which facilitated the roll out of the NBFI supervision strategy within the region.

· NBFI regulation and strengthening is an area which tends not to be covered in a comprehensive manner. FIRST was introduced to this gap in financial sector technical assistance by the IMF about 7 years ago. This is an area which FIRST may claim to have led the way in some respects and this effort can continue, especially in Sub-Saharan Africa.


The two reports disseminated here are fairly long but contain useful material for other countries looking into strengthening (or even introducing for the first time) regulation and supervision of their NBFI sector.

  • The first report: Capacity building strategy contains a 5 year business plan for the development of the regulator (in this case the Reserve Bank of Malawi). The entire report runs to 118 pages but the 26 recommendations are all contained in the executive summary of 13 pages.
  • The second report deals with the legal framework for NBFI regulation and on strategic issues for pension reform. Both these topics are covered in the first 81 pages and the balance of the report covers advice on draft laws tailored to the situation in Malawi (although these drafts could be tailored to the circumstances in other similar stage countries without too much difficulty):
    • Financial Services Law
    • Retirement Funds Law
    • Reserve Bank of Malawi Amendment Law
    • Consequential Amendments to other Laws