Why do banks make supernormal profits?
Section 13 (1) of the Banking Act stipulates that every bank shall submit to the Registrar all information and data on its operations in Malawi including periodic returns, among other things.
This is one of the reasons commercial banks publish financial statements at the end of their financial year.
In recent years, profits posted by most commercial banks, as reflected in their respective financial statements, have attracted widespread condemnation from the public for the simple reason that the sector is seen to be thriving when economic conditions are deterring other sectors from such a privilege.
For example, four out of five players in the banking sector that have issued financial statements for the year ended December 31 2022 registered ‘huge’ profits while only one reported a loss.
National Bank of Malawi registered a profit after tax of K45.94 billion representing a 34 percent increase from K34.21 billion reported in 2021.
NBS Bank registered a record profit after tax of K18.9 billion in 2022 compared to a profit after tax of K7.7 billion reported in a similar period of 2021, representing an increase of 146 percent.
Similarly, FDH Bank posted a profit after tax of K22.932 billion up from K11.658 billion in 2021 while Standard Bank reported a profit after tax of K39.2 billion representing a 58 percent rise.
It is paramount to understand that commercial banks’ major role is ‘mediation.’
It would be difficult, if not impossible, for someone acting alone to find either a potential borrower who needs exactly K10 million for a year or a lender who can spare K50 million for five years.
Thus, the commercial banks’ primary role is to take in funds, called deposits, from those with money, and lend them to those who need it.
Seasoned banker who is also Managing Partner for Nest Business Consult, Pharison Chiphinga Mwale, believes depositors are not adequately compensated for the sacrifice they make.
He adds that the purpose of an overdraft account is to help the account owner to smooth out cash shortfalls and excesses.
However, technically, when an overdraft facility is used too often or for extended periods, the bank considers this to be hardcore debt and therefore risky and increases the interest rate on the account.
“The logic behind this is that if the account is going to be overdrawn for an extended period, a longer tenure loan should be used,” Chiphinga Mwale said.
Economist from the Malawi University of Business and Applied Sciences Betchani Tchereni, said the profits are coming from the insatiable appetite for borrowing by the government.
He said the government continues to borrow from the commercial banks, which crowds out the private sector.
“Even if you are going to put interest rates at 100 percent right now, the government is still going to borrow,” Tchereni said.
President of the Financial Market Dealers Association Leslie Fatch says there is a need for banks to continue to facilitate and intermediate transactions even when the economy is struggling.
He says this puts such entities at an advantage.
“It also depends on the lenses one wears. In the same light, we also have to consider the level of capital employed by banks and how this compares with the returns on such capital employed and compare it with other sectors that have employed lesser values of capital but make relatively high profits.
“Similarly, we also have to consider the level of risk taken by the financial sector as opposed to other sectors. As such, looking at absolute figures may be misleading and it would make sense if such scrutiny of bank’s profits takes into account the other perspectives,” Fatch said.
President of the Bankers Association of Malawi McFussy Kawawa said banks are well capitalised, which makes them more resilient.
He added that with digitalisaion, there has been more agility and creativity that enables them to come up with solutions for customers and earn transactional revenue.
“You will find that even in times of hardships transaction volumes remain high, thereby sustaining income levels. The spread has to be read in the context of the Malawi operating environment. High operating costs, default rates and other factors mean that spreads have to be maintained at a certain level for bank businesses to remain profitable. Remember shareholders need a fair return,” Kawawa said.
When all is said and done there is a need for some soul-searching to allow for the performance of the commercial banks to be reflected in other sectors of the economy.
Whether it is controlling the spread or ensuring that productive sectors are given priority in access to financing, something must be done and must be done fast.