World bank facility unlocks key imports

Reserve Bank of Malawi (RBM) Governor MacDonald Mafuta Mwale says local banks are now able to secure letters of credit for importation of strategic commodities despite the deepening economic crisis.

Before the World Bank’s Investment Project Financing with Deferred Drawdown Option Instrument, he said it was difficult for local banks to secure letters of credit despite no local bank ever defaulting on its payment obligations.

In a published World Bank blog, Mafuta Mwale said: “The project is the cornerstone of restoring international confidence in the stability of the banking sector in Malawi.

“It is especially critical since no Malawian bank has ever defaulted on its payment obligations and despite that history, we were not able to secure letters of credit, something this project helps us do.”

The project came at a time local firms were facing challenges to import strategic commodities such as fuel, fertiliser and medical drugs due to the reduced access to foreign exchange, a situation that has made it difficult for them to access letters of credit.

In Malawi, the guarantee is provided by the Reserve Bank of Malawi and wholly backstopped by the International Development Association (IDA).

It works through a partnership of local issuing banks and international confirming banks.

According to the World Bank, in October 2024, the instrument was used to fund the first transaction of $1 million (about K1.7 billion) to import 1 500 metric tonnes of fertiliser.

Since then, several more transactions, ranging from $45 000 (about K79 million) to $10 million (about K15.5 billion), have covered imports of fertiliser and pharmaceuticals.

At the start of the project, the initial allocation was $60 million (about K105 billion).

The RBM said, so far, five local lenders and three international confirming banks, which guarantee letters of credit issued by other banks, have signed up.

World Bank Malawi country manager Firas Raad is quoted as having said the innovative use of the instrument demonstrates how the multilateral bank can help countries maintain financial flows in times of macroeconomic difficulties.

“In Malawi, we have seen how rapidly low foreign exchange reserves can disrupt trade financing, which threatens the importation of essential commodities,” he said.

Use of the instrument has since been extended to other southeast African countries, including Comoros and Mozambique, where it provides pre-arranged financing to create a swift, flexible and sustainable mechanism for climate-disaster response.

“The initiative has proven exceptionally versatile for developing economies,” said Miguel Navarro, manager of financial products and client solutions at World Bank Treasury.

“It serves as an effective risk management tool capable of addressing a variety of financial challenges.”

World Bank East Africa lead specialist on finance, competitiveness and Isfandyar Zaman Khan and its senior private sector specialist Qursum Qasim, publishers of the blog, said the use of the instrument has since been benefificial to countries in need of foreigne exchange for importation of strategic commodities.

Malawi’s import bill is dominated by food, fertiliser and fuel whose prices rose sharply in the first quarter of 2023.

This three-year project, according to the World Bank, builds upon existing World Bank, its private sector arm International Finance Corporation and Government of Malawi programmes on enhancing access to trade finance, including the Global Trade Finance Programme and lessons learned from prior projects, including the Financial Inclusion and Entrepreneurship Scaling Project.

The project will also help local financial institutions establish working partnerships with correspondent banks and increase their credit lines and reduce cash collateral requirements, eventually enabling the continued flow of trade credit into the market at a time when imports are critical.