The Role of Commercial Banks on Financial Inclusion in Malawi

Financial inclusion is said to be a panacea for lowering poverty and income inequality. In most developing countries, commercial banks are considered to be the traditional channel of including the unbanked into the formal financial system. This study aims to investigate the role of commercial banks in financial inclusion in Malawi. The study used both primary and secondary data in which a qualitative questionnaire was administered to all banks. Using a combination of stratified and judgement sampling methods, data were collected from 16 bank branches. The results of the study reveal that over the past years there has been dismal performance in terms of expansion of commercial banks’ branch network, though the number of ATMs has significantly increased. The study also reveals that agent banking has significantly expanded even in the rural areas suggesting that banks have significantly contributed to reaching the unserved population. The study further finds that most banks provide financial literature to their customers, set very low minimum or zero balance requirements for certain categories of accounts, have consumer protection mechanisms and are also engaged in various initiatives aimed at enhancing financial inclusion. Nonetheless, the study finds that customer fees and charges, distance to bank outlets, Know Your Customer (KYC) requirements and low literacy levels, in that order are perceived by most banks as major barriers to financial inclusion.


Introduction
Developing countries are promoting financial inclusion in their economies due to the potential benefits associated with financial inclusion. Vast literature is  [8]. Meanwhile, more than half of the adult population are reliant on income from agriculture, which makes them vulnerable to economics shocks. In view of this, and considering that the majority of the population have lower levels of education but also living in remote areas, it is obvious that the majority of the population have limited access to formal financial services. As such, the need to promote financial inclusion which is said to have the potential of alleviating poverty but also promoting economic growth need not be overemphasized. The Government of Malawi also recognizes that the provision of financial services, particularly to the excluded, would increase social inclusion, inclusive growth and generally increase income in the wider economy by mobilizing savings and providing loans which can be used to support the creation of small businesses in urban and rural areas [9].
Commercial banks are considered to be the traditional channel of including the unbanked into formal financial system in most developing countries. Some researchers like [10] [11] [12] [13] [14] found that commercial banks enhanced financial inclusion through a number of channels, particularly branch expansion. In Malawi, the Government of Malawi and the central bank has been undertaking a number of initiatives aimed at enhancing financial inclusion in the country. Meanwhile, the banking system dominates the Malawian financial system and accounts for 92 percent of total credit and holds 89 percent of total deposits [15]. This demonstrates their crucial role in the financial inclusion agenda, but only if they can provide suitable financial products. However, a number Despite the importance of assessing the role of commercial banks in financial inclusion in Malawi, most of the existing research work has focused on the demand side factors, like [16]- [23]. There is therefore limited research that has been done for the supply side. A key contribution of this paper is that it provides an in-depth understanding of the commercial banks activities that enhances financial inclusion and also identifies barriers to financial inclusion that would help in the formulation of policies and programmes aimed at improving financial inclusion in Malawi.
The rest of the paper is organized as follows; Section 2 outlines the Malawi's financial sector and regulation, Section 3 provides literature review, Section 4 describes the methodology and data, Section 5 provides findings of the research; Section 6 outlines conclusion and policy implications.

Malawi's Financial Sector and Regulation
The legal and regulatory framework for the banking sector was first stipulated in the Reserve Bank of Malawi Act and the Banking Act of 1965. Entry requirements for commercial banks included paid-up capital of K500,000 (US$663.79) and banks were not allowed to have liabilities of more than ten times their paid-up capital. Further, entry and extension of branch network was subject to ministerial approval [24]. The market was dominated by two banks. The Act was very restrictive to entry thus largely contributing to a bigger population being unbanked. Further, interest rates were administered by the Government, who also set credit ceilings, preferential rates were extended to the agricultural sector and other Government-favoured activities. Whilst this repressed the economy, on the other hand, it encouraged people to borrow and also aided the agriculture sector (which is usually shunned in terms of credit extension as it is a risky sector) to increase its loan uptake.
Malawi implemented economic reforms in the late 80s among which included the financial sector reforms. In 1989 a number of reforms occurred and this included liberalization of interest rates to influence and encourage borrowing and which also raised the cost of funds to all financial institution [24]; decontrol of lending and deposit rates; abolishing of preferential interest rates to the agricul-

Other Initiatives Related to Financial Inclusion
There are quite a number of initiatives that the Government and RBM have im- Currently, the RBM is reviewing existing laws and drafting new laws aimed at improving the regulatory and supervisory framework that would enhance inclusion. These include the Credit Reference Bureau Act, the Financial Services Act, the Insurance Act, the Securities Act, the Microfinance Act, the Pensions Act, the Financial Cooperatives Act, the Payments Systems Bill and the RBM and Banking Act. The Bank in collaboration with other stakeholders is also in the process of drafting the National Strategy for Financial Literacy.
On the other hand, there is very scanty literature on the supply perspective of financial inclusion. Nonetheless, proponents of this view put a lot of emphasis on the role of banks in financial inclusion. [10] in their study for India, noted that banks could enhance financial inclusion through the following channels; branch expansion, no frills services or products, simplified Know Your Customer (KYC) requirements to the vulnerable groups and low income earners, mobile banking, agent banking, and financial literacy, among others. Similarly, [13] found evidence that credit costs and branch proximity were important determinants of financial inclusion in Brunei. Consistent with these two studies, [11] found evidence that branch density had a significant impact on financial inclusion in India. Moreover, [14] found evidence that banking is a key driver for financial inclusion but a large proportion of the population excluded from the formal financial system also shows higher poverty ratios and higher inequality.
Further, [11] assessed commercial Bank's performance on the Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme. The PMJDY was a Government financial inclusion scheme whose objective was to ensure access to various financial services like availability of basic savings bank account, access to need based credit, remittances facility, insurance and pension to the excluded sections (the weaker sections and low income groups). They concluded that, the PMJDY scheme had created an impressive result in the banking sector with regard to eradication of "financial untouchability" in the country. Also [29] results suggest that branch network has unambiguous beneficial impact on financial inclusion.
Meanwhile, [23] in experimenting the impact of expanding access to back ac- completely subsidized, the majority of individuals in the unbanked, rural households found them unappealing, suggesting that high account balance was not a barrier but some other factors. They further found some suggestive evidence that barriers such as transaction costs and distance also limit usage of accounts. In line with the [23] results, [30] in exploiting reasons for dormancy in no frills account found that it was mostly distance that was a major barrier as the respondents were willing to pay for convenient banking services closer to home.
Other studies to financial inclusion on Malawi include [31] [32] [21] though from demand perspective, and [33], to mention a few.
From the foregoing literature, the role of commercial banks in Malawi in financial inclusion in terms of enhancers and barriers has not been fully investigated. As such, this study aims to investigate the role of commercial banks in financial inclusion in Malawi.

Methodology and Data
In order to assess the role of commercial banks in financial inclusion in Malawi, the study used both primary and secondary data. Primary data was obtained through conducting a qualitative survey on banks. The overall objective of the survey was to assess banks' perception regarding their role on financial inclu-

Results and Discussion
To investigate the role of commercial banks on financial inclusion, the study used both secondary and primary data. Section 5.1 analyses the role of banks on financial inclusion using secondary data. Section 5.2 analyses the role of banks in financial inclusion using survey results. Section 5.3 analyses the perception results from the survey on barriers to financial inclusion.   (Table   1). As such, with a proportion of the rural population of 85 percent, it is no surprise that about 64 percent of adults in Malawi have never heard of an ATM, while 58 percent have never heard of a savings account [34]. The performance is dismal compared to the Sub-Saharan African countries average of around 5.3

Role of Banks on Financial
branches per 100,000 [35]. Similarly, in other countries branch network is the major avenue to expanding financial services. For instance, [11] found that branch density had a significant impact on financial inclusion in India. Therefore, considering that a number of reasons might be hampering banks to expand the branch network, this therefore calls for banks to continue innovating other channels that would be viable but reaching the large unbanked population.
On the other hand, ATMs access points increased from 334 in 2012 to 485 in 2016. However, this performance is also dismal when compared to other countries in the Sub Saharan African region with higher averages.

Branchless Banking in Malawi: Agent Banking and Bank-on-Wheels
Following the introduction of supportive legislation that enable banks to cost effectively increase their distribution network, agency banking services have rapidly increased. As at end-2016, the total number of recruited agents was at 426 from 12 in 2013. Out of this total, 234 of them were active of which half were in the rural areas (Table 1)  Of the two one bank was not charging monthly charges, and clients could open an account using voter's registration card, or a letter from the chief of the village. Open Journal of Business and Management (Table 1). Agency banking therefore has a great potential to reaching out to the unbanked and hence accelerating financial inclusion process in Malawi.

Bank-Led Mobile Services and Partnership with MNO's
There has been a notable increase in the use of bank-led mobile banking services, as the number of subscribers increased from 176,739 in 2012 to 503,198 in 2016 ( Table 2). Despite this increase, only 4.9 percent adults were subscribed to bank-led mobile banking services as of December 2016 [36]. This low level coupled with the fact that this channel serves only those that are already banked has limited impact to financial inclusion, except one may be attracted by the availability of convenient services.

Survey Results on the Role of Banks in Financial Inclusion
This section analyses results from the survey undertaken on banks on their perception regarding their role in financial inclusion.

No Frills Accounts
It is widely believed that increasing access to accounts that could be opened with zero or minimum balances (no frills accounts) is a way of bringing the unbanked population into the formal financial sector. Banks were asked the required minimum balance for a regular savings account. Our findings indicate that five out of ten banks reported that they have minimum balance of K200 (about a quarter of a dollar), as in Figure 2. The findings further reveal that most of the  others encouraged banks to introduce no frills accounts as part of financial inclusion drive [38]. However, [23] in a study for Malawi, Uganda, and Chile found that even when bank accounts were completely subsidized banks were unappealing to the unbanked, rural households.

Financial Literacy
Making information readily available is one of the ways banks can ensure that the masses are financially included. Banks were asked the kind of information

Consumer Protection
A lot of steps have been undertaken, more especially at institutional level to improve consumer confidence in the Malawian financial institution. As such, banks were asked if they have a written down strategy to resolving customer complaints. All banks, except for two representing 80 percent of the banks stated that they have written down strategies to resolving complaints ( Figure 3). It is, however, likely that most consumers are not aware about these procedures within their banks or existence of institutions that they seeking redress from whenever they are in conflict with banks. [39] found that of the 8% of adults that had conflicts with financial service providers, most did nothing about it and those that acted opted to stop using the service and approached the service providers through community elders. As such, the banking industry should ensure that there is consumer protection aspect in their financial literacy programs so as to improve consumer confidence in the Malawian banks.

Special Initiatives
Banks are engaged in an array of initiatives aimed at reaching out to the underserved. Banks were asked whether they help or have transactions with the following; village banking or village and savings loans associations, farmers' clubs, village meetings and others. The results of the survey show that all banks except one indicated that they have transactions with farmers' clubs. This is encouraging considering that Malawi is an agrarian economy. Further, seven out of ten banks indicated that they have relationships with village banking or village and savings loans associations. However, only three banks indicated that they conduct meetings or advertisements specifically targeting the rural masses.
Meanwhile, the survey results also reveal that six out of ten banks (60 percent) reported to have special products for the rural people ( Figure 3). The schemes mainly target the rural farmers except for one bank that has a scheme targeting low income earners in general. Further analysis reveals that both large and small banks were engaged in these products. However, it is interesting to note that most banks that had lower minimum balances were not engaging in these special schemes. Two of the ten banks had embraced the agency banking model and recruited merchants to provide basic banking services in the rural areas.

Results on Barriers to Usage of Bank Services
Banks were asked what they perceive to be barriers to using formal financial  Figure 4 summarises the findings on the percentage of banks that perceived the listed factors as barriers to financial inclusion. Each barrier is discussed in detail below.

Physical Distance
A majority of banks perceive distance as one of most important barrier to access of banking services by low income earners. From the survey results, seven out of ten banks cited distance as a crucial barrier to accessing banking services. The results are similar to [22] who found that taking less than an hour to get to the nearest bank increased the probability of having a bank account by 83 percentage points. This is in line with findings of [13] who found branch proximity to be an important determinant of financial inclusion in Brunei. Similarly, [23] also found some suggestive evidence that barriers such as transaction costs and distance also limit usage of accounts too.

Bank Fees and Charges
Similar to results above, seven out of ten banks stated that they perceive bank charges to be a significant barrier. This is consistent with [23] study in which they found that bank charges are quite high in Malawi such that it requires for an individual to have a balance of US$702 to yield a positive value on account, and yet most Malawian cannot save that much. [22] also found that in Malawi individuals that feel that bank charges are reasonable increase their probability of having a bank account by 68 percentage points than those who feel that bank charges are unreasonable. Bank charges are exorbitantly high in most African countries relative to rural population income. For instance, it was found that bank charges alone can exclude 50 percent of the population of most African countries like Kenya, Malawi and Uganda [40].

Literacy Levels
In our study literacy levels also scored relatively high among banks as five out of ten banks indicated that high illiteracy level was one of the major barriers to usage of banking services. The results are similar to [41] who found that among others, low education reduced the likelihood of individuals using financial products in Peru. On the other hand, other studies like [42] found a large variation in correlation between literacy and financial inclusion among states in India. Some states had very low value of the usage dimension despite high literacy rates, whilst others that had high usage levels with very low literacy rates. They further found very low correlation at national level.
Illiteracy is often a hidden hurdle to bringing financial inclusion to the unbanked. Most people in the rural areas are illiterate and the fact that they cannot read nor write they fear visiting any formal institution as they feel intimidated.
And for those who can read and write they cannot understand most of the transactions as instructions are written in English for all banks except for one that indicated that instructions are also provided in Chichewa (the local language). In this regard, banks therefore have a role to play in ensuring more people are financially literate and therefore included. This can be done through support of financial literacy programs. Banks can also adopt usage of biometric ATMs which would not necessarily require one to be literate. This notwithstanding, there is need for Government to enhance literacy levels that would increase the likelihood of being formally included. This may be pursued through the formal and informal education systems through adult literacy education.

Financial Illiteracy
Survey results show that only three out of ten banks indicated lack of knowledge and relevant information to be a crucial barrier to access banking services. The results are somewhat consistent with results of [31] [32]. However, considering the high illiteracy levels in the country it is also obvious that most people are also financially illiterate. [39] confirms that there is generally high financial illiteracy across population segments and educational levels in Malawi. [43] also asserts that lack of understanding and awareness of products is one of the main reason why most people do not use financial products in Malawi. Despite that a few banks indicated this as a barrier, there is still need to intensify financial education programs for financial inclusion whose ultimate goal will generally be to support positive behavioral change. Banks should also continue to lobby for inclusion of financial literacy programs in primary and secondary school curriculum.

KYC Requirements
As part of enforcing the AML/CFT Act banks are supposed to comply with prescribed measures and this includes comprehensive due diligence process. This entails, among others, the customer providing valid identification which can be a passport or driving license. In absence of these two, a voter registration certificate or a letter from the village chief with a passport size photograph of the po-Open Journal of Business and Management tential customer but this has to be endorsed by the District Commissioner. Evidently, this requirement is quite complicated to ordinary Malawian thereby deterring a lot of the underserved to access banking services.
Survey results reveal that five out of ten banks highlighted complicated Know Your Customer (KYC) requirements as one of the main barriers. The regulatory authorities should therefore consider allowing banks to apply some differentiated measures relating to KYC requirements. Thus relaxed and simplified measures could be applied according to the (potential) customer's profile.

Low Income Levels
Three out of ten banks reported low income as one of the key barriers. This result is however contrary to common wisdom as most households in Malawi have low and unstable incomes often relying on self-employment and agriculture. The common argument is that with very low income most rural people have nothing left to save hence no incentive to seek banking services. The results are also in contrast with [23] whose evidence was suggestive that income level was one of the key barriers to usage of accounts in Malawi, Uganda and Chile. Similarly, [33] analysing from the supply side, also reported that a number of multiple structural obstacles such as limited access to credit, unreliable electricity supply, and high transportation costs are some of the reasons that have led to stagnation in financial inclusion in the past years. Though from a demand perspective, [21] also cited income to be the major constraint (with 63 percent contribution).

Conclusion and Recommendations
This paper investigates the role of commercial banks in Malawi. Specifically, the paper assesses the role of branch expansion, no frills services or products, Know Your Customer (KYC) requirements, mobile banking, agent banking, financial literacy, and consumer protection in promoting financial inclusion in Malawi.
Secondly, the paper assesses perceptions regarding barriers to financial inclusion in Malawi.
The study reveals that banks' branch network has not expanded, though

Limitations of the Study
Although the research had met its intended objectives, the research had its limitations. Firstly, it was observed that some questionnaires were responded from the headquarters and not the targeted branches, hence this might have somewhat biased the results. Nevertheless, all ten banks operating in the country had responded, this implied that responses were representative of the targeted population. Further, the study did not support the findings from the qualitative survey with an econometric investigation to ascertain the significance of the enhancers and barriers financial inclusion in Malawi, due to data limitations. This is an area for future research. Open Journal of Business and Management