Malawi banks hold excess liquidity as lending lags

That matters economically because credit is still one of the main channels through which households and companies finance consumption, inventory and expansion. When banks keep lending standards tight, firms face a double squeeze: borrowing costs remain high even after the central bank cut the policy rate by 200 basis points to 24% in March, and access remains limited for borrowers that cannot offer strong collateral or foreign-currency earnings. The result is slower investment, weaker job creation and less support for growth in an economy already grappling with inflation of 20.8% and foreign exchange shortages.

The central bank’s Financial Stability Report shows private sector credit growth slowed to 31.3% in June from 44.7% in December 2025, though real credit growth was still positive at 10.2%. Banks remain well capitalised and profitable enough to absorb current risks, but they are choosing safety over expansion, directing lending toward lower-risk, often foreign-exchange-generating sectors. That posture reflects not only caution over borrower quality but also the relative appeal of government securities, which offer predictable returns with lower credit risk than many private firms.

Economists say the situation exposes a classic crowding-out problem. RBM estimates financial sector holdings of government securities account for about 23.5% of total assets, while public debt stood at 82.6% of GDP, well above the 60% benchmark. As the state leans on domestic borrowing, banks can earn steady income from Treasury paper rather than take on the operational, collateral and repayment risks associated with SMEs and other companies. In that sense, the excess liquidity in the system is not a sign of a healthy lending cycle; it is evidence that balance sheets are being parked in sovereign assets instead of funding the real economy.

For investors, the implications are mixed. Bank earnings and capital buffers may stay resilient as long as sovereign paper remains attractive and credit losses remain contained. But the longer liquidity is trapped in government claims, the more exposed the financial system becomes to sovereign risk, and the weaker the outlook for private-sector-led growth. That is a negative for domestic borrowers, a constraint on broader earnings growth across the economy, and a warning flag for anyone assessing Malawi’s long-term credit trajectory.

RBM’s prescription is fiscal consolidation, lower domestic borrowing and stronger revenue mobilisation, alongside closer monitoring of banks’ exposure to the state. The key question now is whether government financing needs ease enough to free banks to lend more to productive borrowers, or whether Malawi’s financial system stays locked in a cycle where easy funding for the state comes at the expense of private investment.