Financial sector remained stable in 2022 -report

The country’s financial sector has remained stable and resilient despite last year’s hostile macro-economic environment including deterioration in asset quality.

A Reserve Bank of Malawi financial stability report released this week, notes that the banking sector remained sound and resilient throughout the last half of 2022 as measured by capital, earnings and liquidity.

However, according to the report, the None Performing Loans (NPL) ratio rose by 0.2 percentage points to 6.3 % resulting in a slight decrease in the Banking Stability Index.

“Notably however, the NPL ratio increased to 6.3 % in December 2022, comparative to 6.1 % in the first half. Resultantly, the Banking Stability Index (BSI) decreased to 0.71 in the period under review from 0.74 in June 2022.

“In the near term, sectoral credit concentration risk and single name concentration risk remain the key risks that may affect the soundness of the banking sector and consequently financial stability,” it says.

Meanwhile, the recent Registrar of Financial Institution’s stress testing exercise of the banking sector has noticed its resilient to shocks relating to haircuts on liquid assets, interest rate risk, foreign exchange rate risk and income risk shocks.

“The stress scenarios focused on five main risks namely: credit, liquidity, interest rate, foreign exchange rate, and income risks; and measured the impact against capital, earnings and liquidity positions of banks,” it says.

The stress test however also indicated the sector to be vulnerable to default of credit facilities by economic sectors and top largest borrowers. The sector also succumbed to a simulated deposit run as measured by number of days afloat.

On microfinance, the subsector also remained fairly sound and resilient as evidenced by adequate capital and profitability for both deposit and non-deposit taking subsectors, despite a decline in asset quality.

However, the subsector continued to encounter liquidity challenges due to liquidity and fund management practices.

In terms of the life insurance, the sector remained stable according to the report, despite increased market hazards caused by deteriorating economic conditions during the second half of 2022.

“Claims experience was favourable and the overall trend of claims decreased attributable to a drop in mortalities related to COVID-19 pandemic in the country reported by life insurers under group risk business lines,” reads the report in part.

Meanwhile, analysts believe the financial sector’s resilience is fueled by treasury’s continued borrowing appetite which makes the banking system’s lending business vibrant despite private sector’s inactivity.