Effect of Micro and Macro-Economic Factors in Financial Performance of Commercial Banks in Malawi

Abstract

The general objective of the study was to investigate the effect of micro and macro-economic factors on the financial performance of commercial banks in the Malawian banking sector. The specific objectives were to establish the effect of micro and macro-economic factors which include Asset Quality as measured by the Non-Performing Loan (NPL) ratio, Cost Efficiency (CE), Cash Reserve Requirement (CRR) and Lending Interest Rate (LIR) on the financial performance of commercial banks in Malawi. An additional objective was to examine the effect of Economic Growth (GDP) as a moderating variable. The study used secondary data covering a fifteen-year period from 2000 to 2014. The population for the study was made up of all the commercial banks licensed by the Reserve Bank of Malawi (RBM), Malawi’s central bank. The target population of the study constituted the ten commercial banks, except one, in the Malawian banking sector as licensed by the RBM. The study used census technique and analyzed data obtained from the commercial banks. The data collected was in form of audited financial reports which were collected from each of the banks and from Bankscope, an international database for financial statements for commercial banks. Additional data, particularly in respect to Economic Growth, was obtained from publications prepared by the RBM and the World Bank. The study used mixed research design encompassing both descriptive and correlational research techniques. Under the descriptive statistics, important metrics including the mean, standard deviation and variance of each of the key variables were obtained and analyzed across the commercial banks. A series of diagnostic tests were conducted including tests for normality, stationarity, multicollinearity, autocorrelation and heteroscedasticity. Hausman test for random and fixed effects was also undertaken. Generalized Least Squares model was used for the quantitative analysis based on its suitability in dealing with panel data and in resolving problems of autocorrelation and heteroscedasticity which were detected. The study found that independent variables: Asset Quality and Cost efficiency, and Lending Interest Rate had the expected signs xx and were statistically-significant at the 5% level, hence, it was concluded that they had an effect on the financial performance of commercial banks in Malawi. Cash Reserve Requirement was, however, found not to be statistically significant at the 5% level. The study also found that the moderating variable, Economic Growth had a significant influence on the effect of the four independent variables based on the analysis of F-statistic and R-square of the moderated and unmoderated models. Various recommendations were made, the main ones being that the regulatory framework in Malawi should ensure that commercial banks have strong credit risk management practices for the identification, measurement and monitoring of credit risk. The study also recommends that commercial banks in Malawi should institute robust credit risk management systems in order to achieve high asset quality through the minimization of incidence of non-performing loans on their books so as to enhance their respective banks’ financial performance.