DIVERSIFICATION IN THE BANKING SECTOR: IMPACT OF NON-INTEREST INCOME ON BANK PERFORMANCE IN MALAWIAN COMMERCIAL BANKS

Abstract

Malawi has witnessed a tremendous increase in dependency on non-interest income by Commercial Banks as a way of diversifying risk and improving on bank performance. This has been mainly due to the fact that non-interest income is associated with low risk and hence has had a positive significance on the banks profitability. This Study examines the impact of non-interest income on Commercial bank profitability in the Malawian banking sector. The study adopts an Allerano and Bover General Methods of Moments of panel data estimation technique and it’s more suitable because of the inclusion of a lagged term in the model which may lead to inefficient and inconsistent estimates. The study focuses on a period from 2008 to 2013 for 6 Malawian Commercial banks which for the purposes of the study, were grouped into largest, medium and smallest in terms of assets. The study finds that there has been a positive statistically significant impact of non-interest income on Commercial bank profitability with large banks reaping more as compared to medium banks and medium banks reaping more than the small banks in terms of profits. One important policy implication from this study is that the Government of Malawi should come up with policies that promote small banks to grow their assets as well as their capital base to help boost their diversification into non-interest income which is less risky as compared to interest income and has capabilities of avoiding unforeseeable circumstances such as bank and financial crises.