The Impact of Interest Rate Spreads on Profitability of Commercial Banks in Malawi

Abstract

This study sought to establish the impact of interest rate spread on the profitability of commercial banks in Malawi by examining the annual financial reports of eleven banks for a period of twenty one years (1994 to 2014). Malawi’s economy measured by GDP has remained stagnant for the twenty one years while its interest rates have remained high compared to other SADC countries. Interest rate spreads on the other hand which were expected to be decreasing because of the financial liberalization in 1989, have continued to rise. Commercial banks have been charging high lending rates whilst giving customers low saving rates which has discouraged savers and also crowded out private investments. Using the system dynamic generalized method of moments, Arellano and Bond estimation, this study finds that there is a positive impact of interest rate spread on the profitability of commercial banks. The positive impact is established through the interest rate spread and it’s determinants on the return on assets (banks’ profits). As a measure of profitability, the study used the return on assets as the dependent variable and net interest margin which is the interest rate spread and its determinants as the independent variables in order to establish the link. The study therefore concludes that in the face of the dwindling economy, commercial banks whose largest source of income are interest revenues are yielding great profits.