Market structure, liberalization, and performance in the Malawian banking industry

Abstract

Financial sector reforms in Malawi began in the late 1980s as a continuation of structural adjustment programmes sponsored by the International Monetary Fund and the World Bank. Prior to liberalization, the financial system was highly repressed, with heavy government intervention in the banking sector through credit and interest rate controls. Furthermore, the banking sector was highly oligopolistic: two banks dominated commercial banking activities. Financial sector reforms led to the removal of credit ceilings and interest rate controls and opened the banking system to new competition. This study examines the effect of financial sector reforms on market structure, financial intermediation, savings mobilization and commercial bank profitability in the Malawian banking industry. The evidence in this study shows that some signs of financial repression still exist, although some positive developments have taken place. The results show that financial liberalization has significantly increased financial depth and savings mobilization, increased credit to the manufacturing sector, and reduced the monopoly power in the Malawian banking system. However, real interest rates have fallen, intermediation margins have increased, credit to the public sector has increased and that to the private sector has fallen. Using the market structure-performance hypothesis, the study finds a significant relationship between monopoly power and commercial bank profitability, but rejects the efficient market hypothesis. Thus, although interest rates were under control for most of the study period, other bank services that generate income for commercial banks were subject to monopoly power abuse.

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