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| Features |
| Loans on a perilous road |
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by
Jacob Jim, 03 January 2005
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15:38:37
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In a typical Bakili Muluzi style, many loan schemes were launched with pomp and ceremony. And true to form, they beat a quet and hasty, if not undignified, retreat from the stage.
But in between their entry into and exit from the public sphere lies a story which Muluzi’s successor, Bingu wa Mutharika, had better read if his own loan programme is to avoid the same embarrassing fate.
Information and Tourism Minister, Ken Lipenga, announced recently that the much-touted K1 billion loan scheme will be launched on January 21, 2005, as a New Year gift from the President to the people of Malawi.
“Of course, special emphasis will be placed on projects to do with agro-processing and production to be able to exploit the international market,” said Lipenga.
For the record, the loan scheme was initially pegged at K500 million during the campaign for the May 20 general elections. The figure went up to K800 million after Bingu assumed the Sanjika seat. In an upward swing, the figure has been revised to K1 billion.
Quite a winding and tortuous road indeed for the loan scheme. And equally winding will be Bingu’s road if he does not tread carefully on this politically-rewarding but damaging initiative. Far from being a New Year’s gift to the people of Malawi, it could be a New Year’s spit into the President’s face.
And here is the story.
Once upon a time there was a populist president called Muluzi who initiated a number of loan schemes under the rubric of poverty alleviation programme. Barely five months into his reign, Muluzi dished out K50,000 to all UDF and Aford MPs, ostensibly for the honourable members to disburse to their constituents. Whether any constituent benefitted from the loans no-one really knows. Not surprising, the loan initiative was a stillborn, with a 100 percent default rate.
With a bang, the K70 million Youth Development and Credit Scheme was launched in 1998. The National Association of Business Women (Nabw) was charged with the task of administering the project.
Blinded by the penchant for political mileage, the Muluzi government failed to put in place strong and effective admininstrative mechanisms for running the programme. Political colouring, rather than merit, was used in determining the beneficiaries of the loan. Not surprising, default rates were so high that the scheme was no longer sustainable. In disgrace it used the backdoor to leave the stage. Up to now no-one knows where it was buried.
Not that it was the biggest of the flops though. In 1995 the massive K200 million Small and Medium Enterprise Fund (Smef) was launched. The programme was administered by the Development of Malawian Enterprise Fund (Demat), Women’s World Banking (WWB) and Small Enterprise Development Organisation of Malawi (Sedom).
The business ideas for which people borrowed from the fund included oil extraction, stock feed manufacturing, egg production, poultry raising, tailoring and baking.
Against a background of a high political investment by Muluzi, the project hit a snag from which it never recovered. Government was forced to suspend the scheme and ordered an audit into the whole process.
An audit process instituted into the organisations administering the loans by the coordinator of the scheme, Reserve Bank of Malawi, showed a recovery rate of less than 30 percent.
The then acting general manager for Demat, Douglas Katopola, told Weekend Nation in 1999 that his organisation had managed to recover only 26 percent (about K8,320,000), of the K32 million it disbursed.
“Loanees’ resistance to repay has made it difficult for our organisation to recover the money. Many thought the fund was a government grant,” he said.
The story was not rosy either for the other organisations running the fund. By the same time WWB had managed to recover only K4 million out of the K24.9 million disbursed, representing a 16 percent recovery rate. The organisation cited political interference, organisational capacity, lack of credit culture, low interest rate and administrative costs as some of the problems faced in recovering the loans.
Nabw and Sedom were singing the same song that only 30 percent or less of the loans disbursed had been recovered.
Talking of high default rate, even Muluzi himself conceded that the problem had a huge potential of jeopardising the success of the programme.
“I ask those of you who borrowed money from Sedom, Demat, Nabw and other institutions to repay the loan to enable other people to borrow the same money to start businesses,” appealed Muluzi when he was opening Bvumbwe Telephone Exchange in Thyolo in March, 1999.
Being an election year, the appeal was delivered with customary kid gloves — only meant to hoodwink donors and other people into believing that the loan was run from a purely nonpolitical platform. People knew better, though.
And people know better today that the K1 billion Bingu loan scheme was launched from a political platform during the campaign for elections which ushered him into Sanjika. Whether the President will not seek to reap some political capital out of the issue remains as easy guess.
As a way of enhancing repayment of the loan, Lipenga says applicants will be asked to organise themselves into groups “to ensure there is peer pressure to repay the loans.”
Former Commerce and Industry deputy minister late Dr Mekki Mtewa warned in 2000 that the rationale of organising people into groups as a way of encouraging loan repayment is a fallacy which any credible credit organisation should avoid. Mtewa argued that even groups of people can connive to deceive the lending organisations.
“Banking on peer pressure as a loan recovery philosophy is treacherous,” he warned.
The Malawi Savings Bank (MSB), which will be running the Bingu loan scheme, complained in 2002 that it was worried by widespread loan defaulting. The bank’s general manager, Ian Bonongwe, warned that the credit system in the country was facing a critical danger from very high default rate. How prepared then is the bank this time round to handle this massive programme?
Bonongwe says his bank’s role in the programme will be to disburse and monitor the scheme. He says MSB will sub-contract the process of scrutinising the eligilility of the applicants to specialised microfinance agencies which have not yet been identified. He says the prospective agencies must have a track record of loan recovery and audited accounts, among other requirements.
According to Bonongwe, after processing the application forms, the microfinance agencies will submit them to a secretariat which will in turn take them to a board. It is the board which will take the applications to MSB for the disbursement of the loans.
However, Bonongwe says the whole range of modalities like the function and structure of the secretariat and other organisational systems for running the scheme are yet to be finalised.
“My only appeal is that the message that goes out there should be that this is a loan and that it has to be paid back. It is my hope that politics will be kept out of this,” appeals Bonongwe, adding that there is a tentative proposal that people will be allowed to borrow a maximum of K100,000 and a minimum of K10,000.
The line which applications will go through is quite dazzling; from microfinance agencies to secretariat, to the board and then to MSB. Inevitably, along the way, politics and other vices like corruption might creep in. Indeed, what kind of people will be in the board and the secretariat?
And then the costs. All the bodies involved like the microfinance agencies, secretariat, board and MSB itself will have to be paid. At the end of the day we may end up incurring costs which exceed the loan itself. Quite a mockery of the whole process.
Not that the scheme will or should fail. The bottom line is that neglecting the thorny issues that failed prevoius schemes poses a big danger not only to the scheme itself, but to Bingu’s image as well.
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