The study is premised on the central hypothesis that high market concentration in the banking sector can facilitate collusive pricing outcomes which can adversely impact the low-income and important but low-return segments of the economy and activities. The empirical results reported here are based on the period from January 2005 to March 2014 i.e. long after financial sector liberalization and after much new bank entry. From a policy and regulatory perspective there is no support for the expectation that market de-concentration would moderate margins as a result of competitive pricing on both the lending and deposit sides. The two-bank dominance in the sector and non-requirement for posting maximum lending rates have facilitated collusion on lending rates through price-leadership while smaller banks seeking market footholds have been leading the competition on deposits rates. In this context an environment of already high bank rates has moderated margins from the deposit side, which is good for the low-income. Other results also suggest non-price “monopolistic” competitiveness service provision and extension which would also be beneficial to consumers. But even the trend on lending rates is breaking away from leadership-followership as banks are compelled towards the Basel II standards and their tougher risk management and transparency requirements. Although margins do not appear to respond to inflationary tendencies, the actual spreads do so positively, inflicting a double blow on consumers through higher lending rates and/ suppressed deposit rates. From the banks’ side the major hurdles are seen as lack of a long-term securities market to provide bench marking especially for deposit rates and that the push towards the Basel II is itself unnecessary at this stage as it raises both costs and liquidity risk.

1. Competition and banking
industry regulation in Malawi: to
whom it may concern
Ben Kaluwa and Gowokani Chirwa
Department of Economics
Chancellor College

2. The Issues
• Market concentration can facilitate collusive
monopolistic pricing
• For the banking industry this can mean high lending
rates and low savings deposit rates
• High lending rates and low deposit rates hurt the low-income,
MSMEs and low-return but important
activities like agriculture and manufacturing
• Can there be a consumer protection perspective?

3. Objective
• Investigate whether there has been collusive pricing in
the banking industry in Malawi
• If there has been collusive pricing conduct, the extent
to which this can be attributable to market structure or
other factors

4. Methodologies: Based on Structure-conduct-
performance framework
a) Preliminary data analyses of:
• Concentration ratios and market shares trends
• Maximum lending rates and savings deposit rates
behaviour and trends
b)Econometric
• Bank-specific, industry-specific and macroeconomic
determinants of interest business (lending and deposits)
• Use six bank panel-largest two, two middle-ranking and
two among smallest, with monthly observations from
January 2005 to March 2014

5. Data sources
• Individual commercial banks, Reserve Bank of Malawi
and National Statistical Office

6. Findings 1: Market structure:two-bank
dominance, declining concentration
Largest 2
Year Deposits Loans HHI(D)** HHI(L)**
2001 75 72 0.301 0.286
2002 74 71 0.301 0.277
2003 66 68 0.251 0.258
2004 61 62 0.228 0.234
63 51 0.245 0.205
2005
2006 62 55 0.237 0.214
2007 58 52 0.218 0.19
2008 56 48 0.2 0.172
2009 66 60 0.297 0.267
2010 59 53 0.273 0.245
2011 53 51 0.223 0.213
2012 55 51 0.223 0.208
2013 56 48 0.222 0.193
Note:* average of NBM and Standard
** Hirschman-Herfindhal Index (HHI) of concentration for
deposits (d) and loans (l).

7. Findings 2: Asymmetric Conduct a)
lending rate collusion 2005-2011
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
y2005 y2006 y2007 y2008 y2009 y2010 y2011 y2012 y2013
NBM
STD

8. Findings 2: Conduct b) competitive
savings deposit rates
16
14
12
10
8
6
4
2
0
Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jan-14 Feb-14 Mar-14 2014Q1
Largest
Middle
Small

9. Findings 3: Performance c) spreads
positively influenced by bank rate with
duality, higher for largest and lower for
middle and small
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
NBM
STD
NBSFMB
NEDINDE
Bank rate

10. Econometric model
it j         
t it
m
m
t m
i
n
n
it n
i
j
j
i
1 1 1
1

11. Behavioural assumption
For profitability and risk mitigation performance banks
are motivated by “margins” which reflect management
quality and efficiency while spreads will capture
differences in sources and direction of tension between
downstream (lending) and upstream (deposit) pricing.

12. Econometric model cont
• it= alternatively the Lerner index as a margin =(Maximum
lending rate-MLR less Savings Deposit Rate)/MLR and
nominal Spreads
• Xj
it= vector of bank specific factors including risk response
capability and capacity
• Xn
it= vector of industry- specific factors such as monetary
policy and regulation (bank rate, liquidity and capital
adequacy) market structure and conduct including
monopolistic competition,
• Xm
it= vector of economy wide (systemic/macroeconomic)
factors such as the business cycle in Malawi reflected in the
inflation rate and foreign exchange reserves

13. Econometric model specification
Dependent variables= Dependent Lerner, Spreads
variables= Lerner, Spreads
Determinants Determinants Detail I Detail I Detail Detail II II Variable
Bank-specific Bank-Market specific power Market power Size Size depshare
Management Management quality quality Efficiency Efficiency incstaffcost
Credit risk Credit risk Govt/pvt Govt/lending pvt lending Tb/tassets
tassets
Standards Standards Ownership Ownership foreignown
(Standards) (Standards) govtshr
Liquidity risk Liquidity risk (Standards) (Standards) capadqcy
Monopolistic Monopolistic competition competition Outreach Outreach staff
Diversification Diversification of prods of prods prodmix
Industry Industry Market structure Market structure Industry Industry concentration concentration hhi
Industry Industry Regulation/policy Regulation/policy Directives Directives fxtrans
branches
Monetary policy br
Monetary policy Macroeconomic External sector reserves
Macroeconomic External sector Inflation inflation
Inflation

14. Econometric model estimation
• To take account of a censored (limited) dependent
variable (the Lerner index), first-order serial correlation
and heteroscedasticity and time-invariant variables
(annual observations or dummies)
• Lerner model uses random effects censored Tobin
• Spreads uses Feasible Generalised Least Squares

15. Estimation results
Determinants Detail I Detail II Variable Lerner Spreads
Bank-specific Mkt power Size depshare 0.167*** 7.160***
Managt Efficiency incstaffcost 0.000578*** -0.006
Credit risk Govt/pvt Tb/tassets 0.000459*** -0.00229
Standards Ownership foreignown 0.0707** 2.931***
(Standards) govtshr 0.00139*** 0.0336**
Liquidity risk (Standards) capadqcy 0.00213*** 0.00457
Mono comp Outreach staff -0.0000388** 0.00214**
branches 0.00886*** 0.136**
Diversiftn prodmix 0.0949*** -0.799
Industry Mkt structure Conc hhi -0.268*** -19.32*
Industry Reg/policy Directives fxtrans 0.0302*** -0.00896
M/policy br -0.0130*** 0.254***
Macroeconomic External reserves -0.00016 0.00165
Inflation inflation -0.000384 0.0637
N 666 666
Wald chi2(14) 2265.74*** 110.06***
Note: *, **, ***, means significance at 5%, 10% and 1%

16. Results
Lerner:
• Market share has positive influence, concentration a negative
one i.e. consistent with asymmetric collusive price leadership in
lending and competitive savings deposit
• All bank specific “comfort zone” variables, apart from staff,
positive and significant effects on Lerner and relate to absence
lack of competitive pressure especially in lending
• Foreign exchange market and performamnce was intervened in
favour of banks and also reduced competitive pressure
• Raising an already high bank rate moderated margins from
relative lending and deposit responses though not necessarily
to the net benefit of consumers

17. Results
Spreads
• A number of bank-specific factors become irrelevant
apart from market share, foreign ownership, state-ownership
with similar signs to Lerner
• Staff now positive, signifying a push (cost) effect as has
the bank rate

18. Interpretation
Banks tendency for collusive price-leadership in lending has
been facilitated institutionally by
• a) non-illegality of collusive behaviour,
• b) exclusion of all but two largest banks from supplying
applicable maximum lending rates,
• c) risk-raising environment involving high inflation and
bank rates,
• d) pressure for competitive lending rates weakened by high
profitability in non-interest business like lending to
government and favourably intervened foreign exchange
market and transactions.

19. Indications for the future
• The institutional framework is weak with respect to
direct consumer protection
• Emerging greater lending rate competitiveness from
transparency requirements of new Basel II standards
e.g. for all banks to indicate maximum lending rates
• Increasing competitiveness in deposit rates for market
shares
• Questions still remain regarding the conduct of
monetary policy and the profile of the bank rate and
its directional links to the inflation rate