Determinants of Banking Non-Usage among Micro, Small and Medium Enterprises in Malawi: Evidence from a Convergent Mixed-Methods Study

Abstract

Despite sustained efforts to expand financial inclusion across Sub-Saharan Africa, many Micro, Small and Medium Enterprises (MSMEs) continue to operate outside the formal banking system. Limited participation in formal banking constrains enterprise growth by reducing access to savings, credit, payment services, and other financial products that support business development. While previous studies have identified several determinants of financial inclusion, evidence explaining banking non-usage among MSMEs in low-income countries remains limited and has largely relied on either quantitative or qualitative approaches in isolation. This study examined the determinants of banking non-usage among MSMEs in Lilongwe City, Malawi, using a convergent mixed-methods design.
Quantitative data were collected from 434 MSME owners through a structured questionnaire and analysed using descriptive statistics, Chi-square tests, and hierarchical logistic regression. Qualitative data were obtained through in-depth interviews with 30 purposively selected entrepreneurs and analysed thematically. Integration of the two datasets enabled statistical findings to be interpreted alongside entrepreneurs’ lived experiences.
Overall, 81.4% of MSMEs did not use formal banking services. Financial literacy was the most consistent predictor of banking participation across all regression models. Enterprise registration and business size were also associated with increased banking use, whereas collateral requirements were the only institutional barrier independently associated with non-use of banking. Gender, trust in banks, and bank charges were not statistically significant in the final model. Qualitative findings confirmed that entrepreneurs generally perceived banks as safe institutions but identified collateral requirements, complex documentation procedures, and limited understanding of banking processes as major barriers. Many, therefore, relied on informal financial mechanisms, including village savings groups, supplier credit and family networks, to meet short-term business financing needs.
The study concludes that banking exclusion among MSMEs is primarily shaped by the interaction among financial capability, enterprise formalisation, and institutional lending practices, rather than by demographic characteristics or distrust of financial institutions. The study recommends the need for financial literacy interventions, collateral reform, MSME-responsive banking products and stronger enterprise formalisation initiatives.