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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)

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

Suggested Citation

  • Ephraim W. Chirwa & Montfort Mlachila, 2004. "Financial Reforms and Interest Rate Spreads in the Commercial Banking System in Malawi," IMF Staff Papers, Palgrave Macmillan, vol. 51(1), pages 1-5.
  • Handle: RePEc:pal:imfstp:v:51:y:2004:i:1:p:5
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    Cited by:

    1. Cecilia Maigua & Gekara Mouni, 2016. "Influence of Interest Rates Determinants on the Performance of Commercial Banks in Kenya," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(2), pages 121-133, April.
    2. Tarron Khemraj, 2008. "Excess liquidity, oligopolistic loan markets and monetary policy in LDCs," Working Papers 64, United Nations, Department of Economics and Social Affairs.
    3. Osuagwu, Eze, 2014. "Determinants of Bank Profitability in Nigeria," MPRA Paper 60948, University Library of Munich, Germany.
    4. Khemraj, Tarron, 2010. "The simple analytics of oligopoly banking in developing economies," MPRA Paper 22266, University Library of Munich, Germany.
    5. Apergis, Nicholas & Cooray, Arusha, 2015. "Asymmetric interest rate pass-through in the U.S., the U.K. and Australia: New evidence from selected individual banks," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 155-172.
    6. Florian LEON, 2015. "What do we know about the role of bank competition in Africa?," Working Papers 201516, CERDI.
    7. 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.
    8. Pierre-Richard Agénor & Peter J. Montiel, 2006. "Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 76, Economics, The Univeristy of Manchester.
    9. Chance Ngamanya Mwabutwa & Nicola Viegi & Manoel Bittencourt, 2016. "Evolution Of Monetary Policy Transmission Mechanism In Malawi: A Tvp-Var Approach," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 41(1), pages 33-55, March.
    10. repec:gam:jjrfmx:v:10:y:2017:i:2:p:9-:d:96046 is not listed on IDEAS
    11. 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.
    12. Abdul Latif Alhassan & Michael Lawer Tetteh & Freeman Owusu Brobbey, 2016. "Market power, efficiency and bank profitability: evidence from Ghana," Economic Change and Restructuring, Springer, vol. 49(1), pages 71-93, February.
    13. 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.
    14. John Serieux, 2008. "Financial Liberalization and Domestic Resource Mobilization in Africa: an Assessment," Working Papers 45, International Policy Centre for Inclusive Growth.
    15. Valentina Flamini & Liliana B Schumacher & Calvin A McDonald, 2009. "The Determinants of Commercial Bank Profitability in Sub-Saharan Africa," IMF Working Papers 09/15, International Monetary Fund.
    16. Hesse, Heiko, 2007. "Financial intermediation in the pre-consolidated banking sector in Nigeria," Policy Research Working Paper Series 4267, The World Bank.
    17. Grant P. Kabango & Alberto Paloni, 2010. "Financial liberalisation and industrial development in Malawi," Working Papers 2010_08, Business School - Economics, University of Glasgow.
    18. Laura Valderrama & Wendell A. Samuel, 2006. "The Monetary Policy Regime and Banking Spreads in Barbados," IMF Working Papers 06/211, International Monetary Fund.
    19. Simpasa, Anthony, 2010. "Characterising market power and its determinants in the Zambian banking indudstry," MPRA Paper 27232, University Library of Munich, Germany.
    20. repec:dau:papers:123456789/3369 is not listed on IDEAS
    21. 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.
    22. 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.
    23. Koffie Ben Nassar & Edder Martinez & Anabel Pineda, 2014. "Determinants of Banks' Net Interest Margins in Honduras," IMF Working Papers 14/163, International Monetary Fund.
    24. repec:sgm:jbfeuw:v:1:y:2017:i:7:p:5-27 is not listed on IDEAS
    25. Joe Crowley, 2007. "Interest Rate Spreads in English-Speaking African Countries," IMF Working Papers 07/101, International Monetary Fund.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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