Malawi: Financial Sector Development Strategy

The Malawi Financial Sector Assessment Program (FSAP) was completed in December 2007 and concluded that while progress had made in building a privately-owned and managed banking sector, a considerable development agenda remained to be addressed. The report included 25 main recommendations for financial sector of which 10 (40%) were listed as “immediate” priorities and the remainder as “medium term.”  Many of these recommendations were couched in general terms.

In addition to the FSAP, Malawi benefited from a 2008 FinScope demand side study that confirmed the magnitude of the challenges facing Malawi: 55 percent of the population is financially excluded and among those with some financial access only 26 percent were formally banked.  A complimentary supply side study identified the key barriers to financial access as: (i) limited accessibility of financial service points (branches and outlets; (ii) high transaction costs; (iii) capacity constraints; (iv) crowding effect of the public sector, and; (v) the lack of market coordination and harmonization between public and private initiatives seeking to promote better access to financial services.

Malawi’s financial sector authorities, including the Ministry of Finance and the Central Bank (Reserve Bank of Malawi) recognized the real challenges identified by the FSAP and FinScope studies, and were ready to move ahead on significant financial sector reforms. However, key questions remained, namely: how to define and prioritize the various steps, and how to fund the necessary implementation work.  On the recommendation of the World Bank’s Africa Financial Sector team, the Malawi authorities approached and successfully submitted a request for a FIRST-funded Financial Sector Development Strategy (FSDS).  The resulting strategy was completed in 2010 on the basis of the FSAP and other analytical work, and included a clear and prioritized roadmap of actions and measures to contribute towards a sound, efficient and inclusive financial sector.

On the basis of this action plan and the demonstrated commitment of the Malawian authorities, the completed strategy resulted in significant funding mobilization for implementation. First, the World Bank assisted the authorities in structuring a Bank-financed Financial Sector Technical Assistance Project (FSTAP).The reforms supported by this project align directly with the priorities and actions identified during the FSDS, as well as Malawi’s larger economic development strategy which aims to put in place a foundation for longer term economic growth through improved infrastructure and investment climate. The main areas to be financed under the project include: 1) assisting the Reserve Bank of Malawi to strengthen regulation and supervision of banking, microfinance, insurance, and pension industries; 2) financial infrastructure upgrades - including a legal review of the payment system, an upgrade of its infrastructure, and assistance in enabling microfinance institutions to utilize the system for small-value payments; 3) technical assistance to strengthen the legal and regulatory framework for financial consumer protection including developing a consumer awareness / financial literacy program; and 4) technical assistance to the Ministry of Finance on financial management and state interventions in the financial sector.

In addition to the FSTAP, the World Bank, USAID, and DFID have mobilized to support Malawi’s FSDS implementation through the development of a Multi-Donor Financial Sector Deepening Trust (MFSDT) in which funds will be pooled for supporting commonly agreed development objectives and activities alongside conventional project components supervised by the World Bank. All told, more than US$ 28 million have been catalyzed by FIRST’s initial investment of US$ 245,000 towards the implementation of the Malawi FSDS.