By Fraser Harrison Mdwazika
September 2008
The past decade has witnessed major innovations in payment systems mainly due to advancements in information and communication technology and deregulation of financial markets. The innovations have brought about the extended use of various retail payment instruments as alternative to cash. Individuals nowadays have a wide range of choices on payment instruments such as credit cards, debit cards, cheques, direct debits, electronic cash cards and mobile phones.

Malawi embarked on the payment systems reform programme in 1993 and to date, the following modern payment, clearing and settlement facilities are operational: the real time gross settlement (RTGS) system, Electronic Cheque Clearing House (ECCH), smart card scheme, electronic bidding system for Government securities and credit ceiling authority system for Government payments. The ECCH and the smart card scheme provide an alternative payment mechanism to cash in effecting retail payment transactions at point of sale.

The study covers the period 1981 to 2007 and is based on data and information sourced from various publications of the Reserve Bank of Malawi, International Monetary Fund, interviews and questionnaire answered by banks, payment service providers (in particular, the Malawi Switch Centre), the Malawi Post Corporation and relevant departments within the Reserve Bank of Malawi. Minutes of the Malawi National Payments Council Steering Committee Meeting have also been used wherever necessary.

One of the objectives of the modernisation programme was to reduce the reliance on cash as a payment instrument by 40% by 2004. Using three indicators of cash usage, it is however observed that the modernisation programme has had little impact on the role of cash as a payment instrument. From 1998 to 2007, maintenance of the cash payment stream consumed 27% to 38% of the General and Administrative Budget of the Reserve Bank of Malawi and 20% to 37% of the central bank’s overall budget.
Although cash plays a dominant role in retail payments, the general public does not prefer coins as a medium of payment. In addition, the highest denomination of MWK500 registered higher circulation figures than lower denominations of MWK200 and MWK100.

Factors that hinder the adoption of electronic based retail payment instruments in Malawi include, among others, cost of acquiring smart cards, bank charges, limited access to banking facilities and weak legal and regulatory framework. In the absence of the National Payment Systems Act, participants resorted to legal agreements. The agreements have however never been tested in a court of law to ascertain their legal validity. The smart card scheme, which is best suited for the un-banked population, is nonetheless mainly used by bank clients at fuel service centres.
In order to ensure that banking services are easily accessible by the general public, there is need to promote transformational branchless banking in Malawi. This should be supported by rural electrification and the introduction of national identification system. There is also need to amend the Banking Act to enable non-bank financial institutions to participate in the payments market either on their own or as agents. The operations of the microfinance institutions also need to be supported by appropriate legislation. In order to capture a critical mass of users, the Malawi Government should speed up the payment of salaries to civil servants through the smart card scheme. Acquisition cost of smart cards, POS devices and ATMs can be reduced if the Malawi Government considers duty waivers on the importation of the same.