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Inadequate information is often cited a key barrier for banks to provide credit to the rural poor. Difficulties to assess the potential riskiness of clients lead to high transaction costs and often times, an inability to secure loans at any price. As a result, the poor and small entrepreneurs often remain outside the formal credit structure. In 2000, only 2% of start-up businesses used financing from a credit institution as their primary source of capital. The solution offered by the Bankers Association of Malawi (BAM) was to open a credit reference bureau (CRB). In February, parliament approved a law, mandating information sharing among banks.
While some microfinance-watchers are getting starry-eyed at this development, it is difficult to assess whether or not this will deepen credit access among the poor.
CRB’s structure and mandatory participation fees seem to target the commercial banks. Since 1992, commercial banks have disbursed less than 15% of their total loan volume to small businesses (less than 30 customers). The focus has repeatedly been on larger (often formerly state-owned) enterprises with established credit records. CRB will doubtfully change lending trends if it is not extended to semi-formal MFIs that target the rural poor. Moreover, since many semi-formal organisations remain without internet access and are far from CRB’s offices, it will be difficult in any case for these actors to benefit from the creation of CRB.
Secondly, CRB alone will not create incentives for first time loaners. The overwhelming majority of Malawians remain without any sort of credit access and would be naturally, outside the scope of CRB. As a result, CRB may increase information about established credit recipients but will provide little in the way of expanding access.
However, provided that CRB does not limit itself to commercial banks and their clients this is could be a positive development for the future of MFIs in Malawi. If group-lending organisations and credit co-operatives can gain access and actively contribute to the database, transaction costs associated with poor information could often be avoided. Likewise, reliable borrowers that are often shunned by commercial banks could increase their chances of attaining formal finance through a CRB record. However, financial actors in Malawi will have to tread carefully to ensure that CRB does not create a vicious circle excluding those outside of its database.
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