Is Malawi banking sector in crisis?


On October 5 2017, the Reserve Bank of Malawi (RBM) released Financial Institutions Supervision Annual Report for 2016. This is a report that provides information on the supervisory activities conducted by RBM and an assessment of the performance of the financial system and potential risks to financial stability. The report also gives information on the nature and types of reforms to the regulatory framework undertaken during the year.

The 104-page report provides a detailed assessment of the financial sector in Malawi and it is the most important indicator of the financial sector’s health status. This report covers 10 important aspects of the financial sector in Malawi, namely legal and regulatory developments, banking, general insurance, life insurance, pension, capital markets, microfinance, financial cooperatives, consumer protection and anti-money laundering.

The most interesting part of this report is the statement by the Registrar of Financial Institutions in Malawi who is also RBM Governor.


He says: “In 2017, focus will be on continuous improvement of the supervision function so that the financial industry attains the efficiency that will foster development of the economy. The ultimate objective is to ensure that consumers are protected from abusive tendencies of financial institutions. In this regard, efforts will be made to promote the financial intermediation role of the financial industry. I am hopeful that the financial sector will continue to grow in 2017 and play an even greater role in the country’s economic development. I therefore urge all financial service providers to strive to operate with the highest integrity and desire to support growth of the Malawi economy. As Registrar of Financial Institutions, I will endeavour to continue to provide a conducive legal and regulatory framework and all the necessary support to financial sector players.”

This statement summarises the nature and role of financial institutions in the country.

What caught The Nutcracker’s attention in the report is one aspect of the banking sector, the Non-Performing Loans (NPL). This was because there has been a substantial rise of NPLs in 2016.


The level of NPLs can be a silent indicator of a financial sector that is heading for trouble or is already in trouble. The role of banks in Malawi’s economy is very important; banks play the intermediately process of mobilising savings, providing investment advice to investors as well as safekeeping services. However, in performing this dynamic role, the loan creation function can lead to extreme losses and instability within the financial system if not prudently managed.

The ratio of NPLs to gross loans can provide a clear insight into the credit risk among banks. The concern is that persistently high NPLs lock in the economy from growth. For borrowers, delays in debt repayment make obtaining further credit more difficult, which often leads to a second round of debt default and firm bankruptcy. For lenders, it means a bank with a high stock of NPLs is likely to focus on internal consolidation and improving asset quality rather than providing new credit. A high NPL ratio requires greater loan provisions, which reduce capital resources available for lending, and dent bank profitability.

In fact, economic theory suggests that high NPL stock is a significant predictor of bank failure, and distorts banks cost structure and efficiency. NPLs are among the most important threat that a bank can face.

According to the report, NPLs increased by 69.9 percent, from K43.8 billion in 2015 to K74.4 billion in 2016.

Consequently, the ratio of NPLs to gross loans and leases deteriorated from 10.7 percent in 2015 to 17.0 percent in 2016. As a result, the industry set aside K18.9 billion specific provisions covering 25.4 percent of NPLs.

Why is the issue of NPL important in Malawi? This is because the main business of banks is to advance credit to customers and the inability of clients to repay their loans as per the agreed repayment schedule can create instability in the banking sector. A robust banking sector should be able to withstand negative economic shocks and contribute to the general stability of the financial sector and the wider economy.

Unfortunately, NPLs can threaten this role of banks. The good news is that Malawi’s banking sector is not yet in a crisis and it is important for all involved to ensure that the situation is contained.

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