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Financial Reforms and Interest Rate Spreads in the Commercial Banking System in Malawi

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  • Ephraim W. Chirwa

    (International Monetary Fund)

  • Montfort Mlachila

    (International Monetary Fund)

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    Abstract

    This study investigates the impact of financial sector reforms on interest rate spreads in the commercial banking system in Malawi. The financial reform program commenced in 1989 when both the Reserve Bank Act and the Banking Act were revised with the easing of entry requirements into the banking system, and indirect monetary policy instruments were subsequently introduced in 1990. The adoption of a floating exchange rate in 1994 marked the end of major policy reforms in the Malawian financial sector. Using alternative definitions of spreads, our analysis shows that spreads increased significantly following liberalization, and panel regression results suggest that the observed high spreads can be attributed to high monopoly power, high reserve requirements, high central bank discount rates, and high inflation. Copyright 2004, International Monetary Fund

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

    Volume (Year): 51 (2004)
    Issue (Month): 1 ()
    Pages: 5

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    Handle: RePEc:pal:imfstp:v:51:y:2004:i:1:p:5

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    Cited by:
    1. Hossain, Monzur, 2012. "Financial reforms and persistently high bank interest spreads in Bangladesh: Pitfalls in institutional development?," Journal of Asian Economics, Elsevier, vol. 23(4), pages 395-408.
    2. Hesse, Heiko, 2007. "Financial intermediation in the pre-consolidated banking sector in Nigeria," Policy Research Working Paper Series 4267, The World Bank.
    3. Chance Mwabutwa & Manoel Bittencourt & Nicola Viegi, 2013. "Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR Approach," Working Papers 201327, University of Pretoria, Department of Economics.
    4. Khemraj, Tarron, 2010. "The simple analytics of oligopoly banking in developing economies," MPRA Paper 22266, University Library of Munich, Germany.
    5. Simpasa, Anthony, 2010. "Characterising market power and its determinants in the Zambian banking indudstry," MPRA Paper 27232, University Library of Munich, Germany.
    6. Grant P. Kabango & Alberto Paloni, 2010. "Financial liberalisation and industrial development in Malawi," Working Papers 2010_08, Business School - Economics, University of Glasgow.
    7. Tarron Khemraj, 2007. "What does excess bank liquidity say about the loan market in Less Developed Countries?," Working Papers 60, United Nations, Department of Economics and Social Affairs.
    8. Tarron Khemraj, 2008. "Excess liquidity, oligopolistic loan markets and monetary policy in LDCs," Working Papers 64, United Nations, Department of Economics and Social Affairs.
    9. Beck, Thorsten & Hesse, Heiko, 2009. "Why are interest spreads so high in Uganda?," Journal of Development Economics, Elsevier, vol. 88(2), pages 192-204, March.
    10. Joe Crowley, 2007. "Interest Rate Spreads in English-Speaking African Countries," IMF Working Papers 07/101, International Monetary Fund.
    11. Laura Valderrama & Wendell A. Samuel, 2006. "The Monetary Policy Regime and Banking Spreads in Barbados," IMF Working Papers 06/211, International Monetary Fund.
    12. Boutillier, Michel & Kierzenkowski, Rafal & Rousseaux, Phillipe, 2005. "Banks’ Portfolio Choices and Interest Rate Premiums : Some Exploratory Analyses," Economics Papers from University Paris Dauphine 123456789/3369, Paris Dauphine University.
    13. John Serieux, 2008. "Financial Liberalization and Domestic Resource Mobilization in Africa: an Assessment," Working Papers 45, International Policy Centre for Inclusive Growth.
    14. Kabango, Grant P. & Paloni, Alberto, 2011. "Financial Liberalization and the Industrial Response: Concentration and Entry in Malawi," World Development, Elsevier, vol. 39(10), pages 1771-1783.
    15. Valentina Flamini & Liliana Schumacher & Calvin A. McDonald, 2009. "The Determinants of Commercial Bank Profitability in Sub-Saharan Africa," IMF Working Papers 09/15, International Monetary Fund.
    16. Brown, Martin & Maurer, Maria Rueda & Pak, Tamara & Tynaev, Nurlanbek, 2009. "The impact of banking sector reform in a transition economy: Evidence from Kyrgyzstan," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1677-1687, September.

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