Financial regulations and lending practices of Commercial banks in Malawi

Abstract

Many researchers in Western and European countries have paid considerable attention to how financial regulations have influenced lending behaviour of commercial banks. Unfortunately, there is little literature for bank behaviour in sub-Saharan countries including Malawi. The absence of similar studies influenced the researcher to assess how financial regulations have influenced lending behaviour of commercial banks in Malawi. The overall aim of this study was to establish the impact of financial regulations on bank’s lending practices/behaviour in terms of asset allocation/substitution strategy, lending techniques and strategy and pro-cyclicality of commercial bank lending. Specifically, the first objective of the study was to investigate any desirable or undesirable lending practices. The second and third objectives were to evaluate the implications of financial regulations on lending practices and commercial banks’ perception of financial regulations. A descriptive study was conducted by gathering data from stakeholders at different levels: bank regulators or supervisors from Reserve Bank of Malawi, credit analyst and internal auditors from top five commercial banks in Malawi and external auditors from top audit firms – KPMG and Deloitte. Through a stratified simple random technique, a questionnaire was sent to 70 respondents from stakeholders and semi-structured interviews were also conducted to 10 respondents from the sample frame. The study adopted a triangulation mixed methods approach where the findings of one method were used to compare with the other. Data was analysed using an excel sheet. The findings of the research are diverse. The study has identified that some Banks in Malawi are into strategic lending alliance due to financial regulations while others have changed their asset-holding portfolio structures. The study has also revealed that financial regulations have not controlled undesirable lending practices by commercial banks and they have encouraged banks to shift between different types of credit assets. The study vi has also established that financial regulations have not eliminated cyclicality of lending behaviour and they do not control commercial bank’s excessive risk. However, the study has established that financial regulations are playing a role in controlling bank failure in Malawi. In addition, the study also looked at the effects of introducing Basel II Accord in the banking industry and it has been revealed that the introduction of the accord will lead banks to decrease holding certain type of assets while increasing other assets however, it will not lead to decline in loan portfolio but a change in portfolio structure of banks. Based on the finding above, the study has recommended that Reserve Bank of Malawi must continuously improve supervision and regulatory framework of financial markets to safeguard the markets from emerging risks as well as undesirable lending practices by commercial banks.