An assessment of the impact of reforms in bank regulations and supervision on the performance of banks in Malawi

Abstract

It has been noted worldwide that there has been substantial change in the banking industry which has necessitated the changes in bank regulations and supervisory approach. These changes are also applicable in Malawi. Malawi has witnessed an increase in the number of banking institutions from two in the 1980s to eleven in 2008. Likewise there have also been changes in regulations and supervisory approach in response to the changes in the banking system. Reforms in bank regulations and supervision are carried out in order to keep pace with changes in banking system and to improve the effectiveness of the banking supervisory process. In the case of Malawi, the changes in regulations included the revision of the Banking Act and the Reserve Bank Act in 1989, introduction of various regulations (directives) such as the Asset Classification, Large Exposure, Minimum Capital Ratios and Liquidity Reserve Requirement in 1993. In the case of supervisory approaches, the Reserve Bank of Malawi introduced CAMEL in early 1990 and Risk Based Supervision approach in 2008. This research has investigated the relationship between the reforms in regulations and supervisory methodologies on one hand and the performance of banks in Malawi on the other hand. In addition, this study has assessed the impact of bank regulatory and supervisory reforms on the performance of the banking system. The performance of banking system was looked at in terms of profitability, efficiency and stability. The study was based on qualitative and quantitative data obtained through exploratory field research. It covered the period between 1990 and 2008 during which the country witnessed changes in the number of banks and regulatory changes. The research covered nine banks which had been in operation for more than a year as at 31st December 2008. Based on the empirical analysis of the impact of the regulatory and supervisory reforms on performance of banks, it is evident that the results did not skew on positive impact only but also negative impact. This means that there was little basis to comfortably conclude that the performance of banking institutions have been positively impacted by the regulatory and supervisory reforms.