Competition and banking industry regulation in Malawi: to whom it may concern

Ben Kaluwa and Gowokani ChirwaDepartment of Economics

Chancellor College

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?

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

Methodologies: Based on Structure-conduct-performance frameworka) Preliminary data analyses of:• Concentration ratios and market shares trends• Maximum lending rates and savings deposit rates

behaviour and trendsb)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

Data sources• Individual commercial banks, Reserve Bank of Malawi

and National Statistical Office

Findings 1: Market structure:two-bank dominance, declining concentration

Largest 2 Year Deposits Loans HHI(D)** HHI(L)**

2001 75 72 0.301 0.2862002 74 71 0.301 0.2772003 66 68 0.251 0.2582004 61 62 0.228 0.234

63 51 0.245 0.20520052006 62 55 0.237 0.2142007 58 52 0.218 0.192008 56 48 0.2 0.1722009 66 60 0.297 0.2672010 59 53 0.273 0.2452011 53 51 0.223 0.2132012 55 51 0.223 0.2082013 56 48 0.222 0.193

Note:* average of NBM and Standard

** Hirschman-Herfindhal Index (HHI) of concentration for deposits (d) and loans (l).

Findings 2: Asymmetric Conduct a) lending rate collusion 2005-2011

y2005 y2006 y2007 y2008 y2009 y2010 y2011 y2012 y20130.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

NBMSTD

Findings 2: Conduct b) competitive savings deposit rates

Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jan-14 Feb-14 Mar-14 2014Q10

2

4

6

8

10

12

14

16

LargestMiddleSmall

Findings 3: Performance c) spreads positively influenced by bank rate with duality, higher for largest and lower for middle and small

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

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

NBMSTDNBSFMBNEDINDEBank rate

Econometric model

ittm

m

imt

nn

init

jj

ijit

111

1

Behavioural assumptionFor 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.

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

Econometric model specification

Dependent variables= Lerner, Spreads

Determinants Detail I Detail II Variable

Bank-specific Market power Size depshareManagement quality Efficiency incstaffcost

Credit risk Govt/pvt lending Tb/tassets

Standards Ownership foreignown

(Standards) govtshr

Liquidity risk (Standards) capadqcy

Monopolistic competition Outreach staff

branches

Diversification of prods prodmix

Industry Market structure Industry concentration hhiIndustry Regulation/policy Directives fxtrans

Monetary policy brMacroeconomic External sector reserves Inflation inflation

Dependent variables= Lerner, Spreads

Determinants Detail I Detail II Variable

Bank-specific Market power Size depshareManagement quality Efficiency incstaffcost

Credit risk Govt/pvt lending Tb/tassets

Standards Ownership foreignown

(Standards) govtshr

Liquidity risk (Standards) capadqcy

Monopolistic competition Outreach staff

branches

Diversification of prods prodmix

Industry Market structure Industry concentration hhiIndustry Regulation/policy Directives fxtrans

Monetary policy brMacroeconomic External sector reserves Inflation inflation

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

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%

ResultsLerner:• 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

ResultsSpreads• 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

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.

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