Capitalizing on the RBM Surplus: Strategic Opportunities for Malawi’s Business Leaders
Key Business Points
- Banks hold large excess reserves but are lending less than 40 percent of deposits, limiting credit to small and medium enterprises.
- Government borrowing absorbs a significant share of bank assets, crowding out private investment and increasing risk for lenders.
- High interest rates and strict collateral requirements prevent many entrepreneurs from accessing formal financing.
The Reserve Bank of Malawi (RBM) published its June 2026 Financial Stability Report, noting that excess liquidity in the banking system remains high, with daily average excess reserves reaching about K351.5 billion in the first half of the year. However, the loan to deposit ratio stayed below 40 percent, indicating that banks are not converting deposits into loans at a sufficient pace. The central bank attributes this to tight lending standards for short term and long term credit, which particularly affect small and medium enterprises.
Economists explain that the low ratio does not reflect a lack of funds but rather difficulty finding borrowers that offer an acceptable balance between risk and return. Reduced government borrowing has made Treasury securities more attractive, because they provide relatively predictable returns with lower credit risk than many private businesses. As a result, banks allocate about 23.5 percent of total assets to government securities, while public debt stands at 82.6 percent of gross domestic product, above the 60 percent benchmark.
The report warns that continued reliance on domestic borrowing could deepen the sovereign financial sector nexus, potentially causing liquidity shortages and losses while reinforcing the crowding out of private investment. University of Malawi economics lecturer Edward Leman agrees that government borrowing is part of the problem, but he also notes that expensive credit and lending requirements constrain businesses. He says that the cost of borrowing is so high that it discourages firms from accessing the credit they need for investment.
Small and medium enterprises also struggle with collateral, documentation and other lending conditions, meaning that cheaper credit alone would not resolve the financing problem. Even if interest rates were reduced, many businesses would still struggle to access formal credit. The policy rate was lowered by two percentage points to 24 percent in March, which helped bring the reference rate to 20.4 percent by June, but borrowing costs remain elevated.
The RBM recommends containing sovereign financial sector risk through fiscal consolidation, including moderation in domestic borrowing, austerity measures and stronger domestic revenue mobilisation. It also advises continued monitoring of banks and non bank financial institutions exposure to government to tame immediate risks.
The Mphamvu of the private sector and the Mphaka for new ventures remain strong, but unlocking them will require reforms that make lending to local entrepreneurs more attractive than financing government debt. Business owners should consider diversifying funding sources, exploring alternative finance such as peer to peer lending, and strengthening their credit profiles to meet bank requirements.
Looking ahead, the government plans to introduce incentives for banks to increase lending to local businesses, and the central bank may adjust the policy rate to stimulate credit growth. Stakeholders hope clearer guidelines on collateral acceptance will encourage more financial institutions to extend loans to small and medium enterprises. The Mankhwala sector awaits these reforms, seen as essential for sustained economic expansion. By improving the business climate, Malawi can attract more domestic and foreign investment, creating new Mphaka for future entrepreneurs.
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