Table of Contents LIST OF ABBREVIATIONS AND ACRONYMS... 5 FOREWORD FROM DIRECTOR BANK SUPERVISION 9. Chapter One Chapter Two...

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1 Table of Contents LIST OF ABBREVIATIONS AND ACRONYMS... 5 FOREWORD FROM DIRECTOR BANK SUPERVISION 9 Chapter One Macroeconomic Conditions in Introduction Gross Domestic Product Inflation Exchange Rates Interest Rates Balance of payments Future Prospects Chapter Two Overview of the Banking Sector in Malawi Introduction Composition and Ownership of the Banking Sector Balance Sheet Structure of the Banking Sector Asset Structure Market Share Chapter Three Performance of the Banking Sector Introduction Capital Adequacy Asset Quality Earnings Analysis Liquidity Analysis Financial Soundness Indicators Chapter Four Activities of the Bank Supervision Department in Introduction Supervisory Activities Bank Supervision Department- Annual Report

2 4.2 Off-Site Surveillance On Site Examination Anti-Money Laundering Examinations Licensing and Compliance Review Licensing Compliance Review Review of Banking Regulations Consumer Complaints Handling Training and Staff Development Chapter Five Current Issues in Bank Supervision Introduction Risk Based Supervision BASEL II and the Way Forward for Malawi Consolidated Supervision Anti Money Laundering and Combating of Financial Crime Mobile Banking and E- Commerce Financial Stability Bank Supervision Application Solution Deposit Insurance Scheme Islamic Finance Agent Banking Stress Testing Chapter Six Regional and International Cooperation Introduction IMF East Africa Regional Technical Assistance Centre (East Afritac) Macroeconomic and Financial Management Institute of Eastern and Southern Africa East and Southern Africa Anti Money Laundering Group (ESAAMLG) Alliance for Financial Inclusion APPENDICES Appendix 1: Malawi Banking Institutions Shareholding Structure as at 31 st December Appendix 2: Organisational Structure of Bank Supervision Appendix 3: List of Licensed Banking Institutions as at 31 December Appendix 4: Bank Staff Compliment & Branch Network Data as at 31 st December Appendix 5: Number of banks per CAMEL rating category as at December Appendix 6: Directives in force during STATISTICAL TABLES TABLE 1: COMPOSITION OF BALANCE SHEET: LIABILITIES TABLE 3: COMPOSITION OF BALANCE SHEET DEPOSITS TABLE 4: TRENDS IN CAPITAL ADEQUACY TABLE 5: COMPOSITION OF INCOME STATEMENT: SELECTED ITEMS TABLE 6: PROFITABILITY: SELECTED RATIOS TABLE 7: ASSET QUALITY TABLE 8: LIQUIDITY

3 LIST OF ABBREVIATIONS AND ACRONYMS AFI - Alliance for Financial Inclusion AML/CFT - Anti Money Laundering and Combating Financing of Terrorism BIS - Bank for International Settlement CAMEL - Capital, Asset Quality, Management, Earnings, and Liquidity and Funds Management CDD - Customer Due Diligence CDH - CDH Investment Bank East AFRITAC - IMF East Africa Regional Technical Assistance Centre ECOBANK - ECOBANK Malawi Limited ESAAMLG - East and Southern Africa Anti-Money Laundering Group FDH BANK - FDH Bank Limited FDH - First Discount House Limited FIU - Financial Intelligence Unit FMB - First Merchant Bank FSI - Financial Stability Institute FSVC - Financial Services Volunteer Corps GOVT - Malawi Government ICAAP - Internal Capital Adequacy Assessment Process ICB - International Commercial Bank IMF - International Monetary Fund INDEBANK - Indebank Limited ICT - Information Communications Technology LFC - Leasing and Finance Company Limited MSB - Malawi Savings Bank NBM - National Bank of Malawi NBS - NBS Bank NEDBANK - NEDBANK Malawi Limited NPL - Non-performing loans OD - Overdraft OBM - Opportunity Bank of Malawi RBM - RBS - Risk Based Supervision ROA - Return on Asset ROE - Return on Equity STANDARD BANK - Standard Bank Malawi Limited QIS - Quantitative Impact Survey USAID - United States Agency for International Development Mission Statement As Bank Supervision Department of the, we aim at ensuring the existence of a sound and stable banking industry in Malawi, in line with international supervisory standards. This will be achieved through entry and exit control, off-site surveillance, on site examinations, and timely submission of report of findings to Executive Management of the Reserve Bank of Malawi, commercial banks and registered financial institutions. In pursuance of our goal, we will endeavour to perform our work with professionalism, integrity, impartiality, and in a friendly and cooperative manner but with no compromise to our authority. 4 5

4 MESSAGE FROM THE REGISTRAR OF FINANCIAL INSTITUTIONS In pursuance of Section 18 of the Financial Services Act 2010, I am pleased to present the 2011 Bank Supervision Annual Report. This report highlights the key developments in the Malawi banking sector during the year 2011, and the various activities that were undertaken by Bank Supervision Department in its continued effort to serve the best interests of the economy. During the year, the Malawi banking sector remained financially sound both in terms of profitability and capitalisation, despite a challenging macroeconomic environment that was characterised by acute shortage of foreign exchange, intermittent electricity power generation and supply, and low performance in most sectors of the economy except agriculture. Against this backdrop, growth in real GDP slowed down compared with the preceding year. For further enquiries and feedback, please contact Bank Supervision Department on the following address: The Director Bank Supervision Department 10 Hannover Avenue P O Box 565 Blantyre Telephone: (265) Fax: (265) BASU@rbm.mw Website: On aggregate, the sector recorded an after tax return on assets of 3.2 percent; a decline from 4.2 percent in December 2010 and 4.6 percent in December Deposits grew by 31.6 percent vis-a-vis 35.6 percent growth in credit. The loan book of the banking sector was well distributed across sectors, with agriculture constituting a relatively larger share, reflecting the agro-centric nature of the country s economy. All banks remained well capitalised with tier 1 capital adequacy ratio of 16.7 percent in December 2011, comparing favourably with the regulatory minimum of 8.0 percent. During the year, the RBM continued to undertake activities aimed at strengthening the safety and stability of the banking system. Notably, significant strides were made with regard to preparatory work for the implementation of Basel II; consolidated supervision; financial inclusion; anti money laundering drive; deposit insurance scheme; the review of bank regulations and directives and the licensing of two operators to offer credit reference bureau services. I wish to commend the Board of Directors and Executive Management of our banking institutions for steering innovation in the banking sector and for the efforts taken in ensuring that their institutions adhere to prudential requirements and sound risk management practices. Charles S. R. Chuka REGISTRAR OF FINANCIAL INSTITUTIONS 6 7

5 FOREWORD FROM DIRECTOR BANK SUPERVISION Welcome to this edition of the 2011 Annual Report for Bank Supervision Department. The report chronicles the performance of the banking sector and the major activities that were undertaken by Bank Supervision Department during the year ended 31st December The report is part of our continued effort to engage with stakeholders by way of updating them on the performance of the banking sector and the progress made with regard to creating an enabling regulatory framework that supports the best interests of the sector and the economy. We believe that the report will strengthen public understanding of issues pertaining to the supervision of banking institutions and of the RBM s role as the Regulator. We also hope that the report will bolster public confidence in the soundness of the banking system and contribute to the accountability of the RBM to the public. The report is organised as follows: Chapter 1 presents an overview of some of the macroeconomic indicators that were key to the performance of the banking sector in 2011, while Chapter 2 provides a general overview of the Malawi banking sector in terms of composition, ownership, balance sheet structure and market share. Chapter 3 discusses the sector s performance focusing on the four key indicators namely; capital adequacy, asset quality, earnings and liquidity analysis. Overall, all banks remained well capitalised and profitable throughout the year under review. Both, core capital and total capital ratios increased from 15.6 percent and 20.3 percent in December 2010 to 16.7 percent and 20.7 percent in December 2011, respectively. The quality of the loan book in the sector as measured by percentage share of non-performing loans to gross loans remained satisfactory with a NPL ratio of 3.9 percent in December 2011, same as that recorded in December In addition, all banks were considered liquid. Chapter 4 outlines the key activities that the Department carried out as part of its supervisory and regulatory mandate. Following the passing of the financial sector laws in 2010, the year saw the review of directives to realign them with the new laws. During the year, one discount house was granted approval to convert into a bank. The year also saw the licensing of two Credit Reference Bureaus. Chapter 5 outlines the current issues in bank supervision covering inter-alia, financial stability issues, AML/CFT, agent banking, progress with regard to preparatory work for the implementation of BASEL II, consolidated supervision and scope for the establishment of a Deposit Insurance Scheme. Chapter 6 recognises the various interventions from cooperating partners, aimed at motivating the agenda to meet the expectations of various stakeholders. Let me avail myself of this opportunity to thank the RBM Executive Management for the support and strategic guidance provided to the Department in its day to day operations. I further wish to commend the members of staff in my Department for their professionalism and dedication in discharging their supervisory mandate and creating an enabling environment for the conduct of banking business in Malawi. Finally, I wish to reaffirm our commitment in ensuring the existence of a sound and stable banking system, as a key contributor to sustainable growth and development. In keeping with our mission, we shall remain receptive and encourage feedback from all stakeholders on how best we can make the regulatory framework more effective and supportive of the development needs of the country. We shall also continue to enhance the report to ensure that it provides sufficient information to enable users make informed decisions, without compromising on our commitment to safeguard individual bank specific data. Noel L Mkulichi DIRECTOR, BANK SUPERVSION 8 9

6 Chapter One Macroeconomic Conditions in

7 1.0 Introduction During 2011, the Malawi economy continued to grow at a reasonable pace in an environment of relatively stable inflation and low interest rates. However, sustainability of these aggregates became undermined by acute influences in the external sector which resulted in shortage of critical inputs including petroleum products. External payments arrears accumulated against the background of a fixed exchange rate regime. On the domestic front, the drop in foreign exchange earnings from tobacco sales, as already alluded to above, negatively impacted the strength of the Malawi Kwacha. All the more reason authorities devalued the local currency by 10.0 percent in August 2011, resulting in the Malawi Kwacha losing 8.6 percent against the US Dollar, closing the year at K per US dollar from K recorded at the end of Interest Rates 1.1 Gross Domestic Product During the year under review, real GDP grew by 4.3 percent comparing unfavourably with the 6.7 percent growth recorded in Growth in most sectors of the economy was subdued; notably Mining and Quarrying declined by 4.5 percent, Construction also declined by 2.4 percent and Public Administration and Defence by 1.8 percent. Nonetheless, there was improved performance in the agricultural sector which expanded by 6.4 percent (2.0 percent in 2010) at the back of a bumper crop harvest during the 2010/2011 growing season bolstered by favourable weather conditions and the Farm Input Subsidy Program. Information and Communication sector grew by 6.5 percent; Electricity, gas and water supply by 4.4 percent. 1.2 Inflation Throughout the year 2011, the bank rate remained constant at 13.0 percent as authorities pursued a monetary policy accommodation aimed at spurring economic activity. As commercial bank interest rates mirror movements in the bank rate, the prime lending and savings rates remained at an average of percent and 3.75 percent, respectively throughout Balance of payments The country s overall balance of payments position as measured by the change in net foreign assets of the banking system recorded a deficit of K6.2 billion in 2011 from a surplus of K22.4 billion in This outturn was largely attributed to low tobacco foreign exchange earnings and insignificant donor support that characterised the year Inflationary developments during the first half of 2011 were somewhat mixed, with headline inflation decelerating from 7.6 percent compared to an annual average of 7.4 percent in The increase in inflation emanated from both food and non- food factors and was experienced in both urban and rural areas following developments that took place during the latter part of the year including the devaluation of Malawi Kwacha in August 2011, the fuel pump price hike in November 2011 and scarcity of maize grain particularly in the Shire Valley. Inflation closed the year at 9.8 percent compared to 6.3 percent in December Food inflation averaged 3.1 percent in 2011 down from 5.0 percent in The drop in average food prices was explained by lower food prices during the first eight months of the year. During the last four months of 2011 food prices began to soar as maize stocks began to dwindle and effects of the August 2011 devaluation and petroleum pump price hike affected prices of other food stuffs. The Current Account balance recorded a deficit of K152.6 billion, translating into 12.0 percent of GDP. The deficit mirrors the poor performance of the merchandise trade account that registered a deficit of K156.3 billion in The improvement in the current account balance was due to an improvement in trade balance which stood at negative K156.3 billion from negative K166.2 billion in the previous year. On the other hand, the capital account balance is estimated at negative K148.0 billion in 2011, up from a revised estimate of K132.0 billion in the preceding year. The improvements were on account of shortterm private capital which is estimated at K18.2 billion from K94.4 million in The long term balance, conversely, marginally K129.9 billion during the year from K131.9 billion in the preceding year. 1.6 Future Prospects Non -food inflation averaged 12.2 percent in 2011 up from an average of 9.9 percent in Non- food inflationary virtually increased in all the months of the year as a result of pump price hikes in January 2011 and November 2011, the devaluation of the Kwacha in August 2011 and inflationary expectation created by exchange rate policy uncertainties. Looking forward into 2012, the Malawi economy is expected to grow by 4.3 percent. Positive growth is forecast in all sectors notably, Mining and Quarrying by 13.9 percent, Financial and Insurance Services by 8.7 percent, Information and Communications by 7.5 percent, Accomodation and Food Services activities by 6.0 percent and Wholesale and retail Trade by 5.0 percent. 1.3 Exchange Rates The Malawi Kwacha staged mixed performance against major trading partner currencies during the year 2011, reflecting developments prevailing on the domestic and international scenes. On the international scene, the rising global fuel prices brought about inter-alia by the political unrests in the Middle East and North African countries, and the steady performance of the United States Dollar against other currencies created a current account deficit for Malawi

8 Chapter Two Overview of the Banking Sector in Malawi 14 15

9 2.0 Introduction This Chapter gives an overview of the Malawi banking sector in terms of its composition and ownership, assets and funding structures as well as market share. National Bank of Malawi and Standard Bank Limited continued to dominate the industry s market share. The year saw International Finance Corporation acquiring 18.1 percent stake in NBS Bank. Opportunity International (UK) increased its ownership stake in Opportunity Bank Malawi Limited. Aggregate balance sheet of the banking sector continued to register steady growth on account of a 31.1 percent growth in loans. Despite the economic slowdown characterised by challenges in foreign exchange and fuel supplies, banks continued to lend to the private and public sectors. Only one bank controlled the growth of its loan book during the year. On the liability side, total deposits grew by 35.6 percent. TABLE 2.1: AGGREGATE BALANCE SHEET (TOTAL ASSETS) Period K Billion Percentage Change % % % % % 2.1 Composition and Ownership of the Banking Sector As at 31st December 2011, the banking sector comprised eleven commercial banks, namely: National Bank of Malawi, Standard Bank, First Merchant Bank, NBS Bank, Malawi Savings Bank, Indebank Limited, NEDBANK Malawi Limited, Opportunity Bank of Malawi, ECOBANK Malawi Limited, FDH Bank and International Commercial Bank; one leasing company (Leasing and Finance Company) and two discount houses (Continental Discount House and First Discount House). During the year, Registrar s approval was granted to Continental Discount House to convert into CDH Investment Bank and was granted a banking licence. In terms of ownership structure, the year under review saw a change in ownership structure of NBS Bank following the acquisition by International Finance Corporation of 18.1 percentage stake in the bank. Under the new scheme, NICO Holdings Limited remains the major shareholder with 50.1 percent as at 31st December 2011 from 60.0 percent as at 31st December There was also change in ownership structure of Opportunity Bank of Malawi following reduction of equity by Opportunity Transformation Investment (USA) from 60.5 percent as at 31st December 2010 to 51.2 percent as at 31st December Consequently, equity stake for Opportunity International (UK) in Opportunity Bank increased from 22.9 percent as at December 2010 to 45.4 percent as at December There were no changes in the shareholding structure of the rest of the banking institutions. Appendix 1 presents a breakdown of shareholding structure of the Malawi banking institutions as at 31st December Balance Sheet Structure of the Banking Sector During the year under review, the aggregate balance sheet of the banking sector in Malawi continued to register steady growth. The balance sheet grew from K282.3 billion in 2010 to K371.9 billion in 2011, representing a 31.7 percent growth rate. This compares favourably with the 22.5 percent recorded in the preceding period. The balance sheet growth was mainly attributed to a 31.1 percent growth in loans which went up from K148.0 billion in 2010 to K194.0 billion in Despite the economic slowdown, significant lending was extended by banks to the agriculture sector, financial services and government. On the liability side, growth was mainly recorded in deposits which increased from K206.4 billion in 2010 to K279.9 billion in Data on aggregate balance sheet growth spanning the period is presented in Table 2.1, with trends depicted in Figures 2.1 and

10 2.2.1 Asset Structure The banking sector s total assets grew by 31.7 per cent from K282.3 billion in 2010 to K371.9 billion in Much of this growth emanated from the following: i. A 43.7 percent increase in Cash, Balances with the and other banks from K39.8 billion as at 31st December 2010 to K57.2 billion as at 31st December These balances constituted 15.4 percent of total assets; ii. A 37.6 percent growth in Securities and investments from K52.4 in 2010 to K72.1 billion in Securities and Investments accounted for 19.4 percent of total assets in iii. A 31.1 percent growth in Loans and advances from K148.0 billion as at 31st December 2010 to K194.0 billion as at 31st December Loans and advances constituted 52.2 percent of the total assets; Data on Asset Composition is summarized in Table 2.2 and graphically presented in Figures 2.3 and 2.4 for ease of reference. TABLE 2.2: ASSETS COMPOSITION (Figures in K billions) Assets 10-Dec % Total Assets 11-Dec % Total Assets Growth Cash and due from banks % % 43.7% Securities and investments % % 37.6% Total loans and advances % % 31.1% Other assets % % 15.4% Total assets % % 31.7% Funding Structure As at 31st December 2011, the banking industry s aggregate funds stood at K371.9 billion, representing a 31.7 percent growth from the K282.3 billion as of 31st December Total deposits grew by 35.6 percent from K206.4 billion as at end December 2010 to K279.9 billion as at 31st December Total Deposits constituted 75.2 percent of the total funds. The sector s capital, which comprised 14.7 percent of total funding, rose from K45.2 billion in December 2010 to K54.5 billion in December Other funding sources included inter-bank borrowings, discount window borrowing, and foreign lines of credit. A summary of data on the funding trends and funding composition from 2007 to 2011 have been presented in Tables 2.3 and 2.4, and graphically presented in Figures 2.5 and

11 TABLE 2.3: FUNDING TREND (Figures in K billion) Item Dec Dec Dec Dec Dec Year on Year %Change /07 07/08 08/09 09/10 10/11 Deposits % 39.3% 28.2% 22.4% 35.6% Liabilities to other banks % 50.0% -29.8% 118.5% -8.0% Other Liabilities % 36.4% 18.2% -11.9% 43.5% Total Capital % 56.3% 31.3% 23.6% 20.7% Total Funding % 41.8% 25.2% 21.6% 31.7% TABLE 2.4: FUNDING COMPOSITION Item Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Deposits 72.8% 71.5% 73.2% 73.1% 75.2% Liabilities to other banks 4.3% 4.5% 2.6% 4.5% 3.2% Other liabilities 9.3% 9.0% 8.5% 6.3% 6.9% Total Capital 13.6% 15.0% 15.7% 16.0% 14.7% Total Funding 100.0% 100.0% 100.0% 100.0% 100.0% 2.3 Market Share During the period under review, National Bank of Malawi and Standard Bank Limited continued to dominate the industry s market share, as measured by their volume of total assets, deposits, gross loans and capital base. Excluding discount houses, National Bank of Malawi and Standard Bank Limited combined constituted 45.0 percent of the industry s aggregate assets (49.0 percent in 2010), 51.0 percent of total capital (53.0 percent in 2010), 45.4 percent of total deposits (52.0 percent in 2010) and 44.2 percent of total gross loans (46.0 percent in 2010). Table 2.5 below depicts market share of category of banks in terms of total assets, loans, deposits and capital. TABLE 2.5: MARKET SHARE SUMMARY (AS PERCENTAGE OF TOTAL) Market share Assets Loans Deposits Capital Two largest banks Next four largest banks Next four banks The least two banks Footnote: The statistics relate to 11 banks and one leasing Finance Company

12 Chapter Three Performance of the Banking Sector 22 23

13 3. 0 Introduction This Chapter analyses the financial performance of the banking sector during the period ended 31st December, Guided by the CAMEL rating system, the analysis covers five broad areas namely: Capital, Asset Quality, Earnings and Liquidity. The Chapter also gives a summary of selected key Financial Stability Indicators for the banking industry. During the year 2011, the banking sector was characterised by low nonperforming loans and the underperformance of the foreign exchange market. The foregoing notwithstanding, the banking industry was resilient and remained stable and sound during the year to 31st December Capital Adequacy The main function of capital is to support the banks operations by absorbing losses as well as changes in asset values, thereby maintaining solvency. Thus, a comfortable capital level boosts depositors confidence and provides protection to creditors in the event of liquidation. In assessing capital, the Registrar follows BASEL 1 regulatory requirements, with adjustments to suit Malawi s prudential demands and risk profile. Against this background, the set out a 6.0 percent ratio for core capital to risk-weighted assets (4.0 percent for Basel I), and 10.0 percent for Total Capital to riskweighted assets (8.0 percent for Basel I). Core capital comprises paid up capital, share premium, retained earnings and 60.0 percent of current year profits (if it is not yearend audited figures). An addition of revaluation reserves, general provisions, hybrid debt capital and other subordinated debt to core capital amount to total capital. As at 31st December, 2011, the overall capital position of the banking industry remained over and above the regulatory minimums of 6.0 percent and 10.0 percent respectively, with core capital ratio rising by 1.1 percentage points from 15.6 percent in December 2010 to 16.7 percent in December 2011, whilst the total capital ratio marginally increased to 20.7 percent in December 2011 from 20.3 percent in December In absolute terms, the industry s core capital stood at K40.4 billion in December 2011, rising by 24.6 percent from K32.4 billion in December The growth mainly emanated from a rise in retained earnings from K25.8 billion in December 2010 to K31.6 billion in December Paid-up share capital also rose from K4.5 billion in December 2010 to K4.9 billion in December 2011, owing to fresh capital injections in some of the banks during the year. Risk weighted assets grew by 19.4 percent, from K202.5 billion in December 2010 to K241.7 billion in December Total capital grew from K40.9 billion in December 2010 to K49.9 billion in December Figure 3.1 gives a graphical presentation of capital adequacy trends. 3.2 Asset Quality In assessing Asset Quality, of key importance is the diversification of the bank s asset structure, the level of nonperforming loans and adequacy of impairment provisions. The diversification of the loan portfolio also comes paramount as it has significant bearing on the overall credit risk associated with the loan book. In addition to Risk Management guidelines that have been laid down for banks, the is guided by the Asset Classification Directive, Directive on Large Exposures and Directive on Foreign Currency Lending Ratio, as major tools in assessing asset quality of the banking institutions. As at close of year 2011, the banking industry s loan book was considered fairly healthy in view of marked improvements in provisioning on nonperforming assets, and a low ratio of nonperforming assets to gross loans. Notwithstanding the low levels of impairment, a substantial growth in nonperforming assets during the year under review signifies some lapses in underwriting practices by banks in order to grow the loan book and meet set targets. The loan book of the banking industry remained well spread across the various sectors of the economy, with agriculture constituting the largest share at 19.4 percent, followed by transport at 11.7 percent and manufacturing at 10.3 percent of the total disbursed loans. The Pie Chart in Fig 3.2 below shows the percentage distribution of the loan book by sector

14 The lending ratio declined from 73.2 percent in December 2010 to 70.9 percent in December However, at 3.9 percent, the ratio of nonperforming assets to gross loans still remains acceptable, albeit window dressed by a higher proportionate growth in gross loans as opposed to non performing assets. Specific provisions increased from K1.8 billion in December 2010 to K3.2 billion in December 2011 which covered 41.5 percent of nonperforming loans (31.5 percent in December 2010), following a huge growth in the levels of nonperforming loans. 3.3 Earnings Analysis Earnings play a vital role in building up of capital buffer to cushion banks in the event of losses. During the year to 31st December 2011, the banking sector reported a net profit after tax of K11.2 billion, albeit a marginal decline of 1.2 percent from K11.4 billion reported in December Total income for the banking sector grew by 19.8 percent to K59.2 billion in December 2011 from K49.1 billion in December Interest income, which remained the core source of revenue in the banking sector, rose from K30.9 billion in December 2010 to K35.6 billion in December On the other hand, interest expenses rose by 21.7 percent from K6.6 billion in December 2010 to K8.0 billion in December Operating expenses rose by 21.1 percent from K24.9 billion in December 2010 to K30.1 billion in December A decline in earnings of 3.6 percent was reported on the foreign exchange trading from K15.3 billion in December 2010 to K14.9 billion in December While other non-interest income (fees and commissions) increased from K3.2 billion in December 2010 to K8.8 billion in December 2011, there was a drop in earnings realised from foreign exchange trading income, thereby pushing total non-interest income earnings to K23.6 billion in December 2011, from K18.5 billion in December Figure 3.4 below depicts a diagrammatic presentation of the Income Statement Composition. The aggregate loan book grew by 31.1 percent to K194.0 billion in December 2011 from K148.0 billion in December Nonperforming loans mirrored the growth in loans as they grew by 32.7 percent to K7.8 billion in December 2011, from K5.9 billion in the corresponding period in Consequently, the ratio of nonperforming assets to gross loans of the banking industry stood at 3.9 percent in December 2011, same as in December Fig 3.3 below illustrates the trends in share of NPL to Total Loans and Total Assets from January 2010 to December

15 The industry s efficiency ratio reported a marginal increase to 50.9 percent in December 2011, from 50.4 percent in December Efficiency Ratio measures the proportion of revenues and fee income spent on overhead expenses, hence an indicator of management s ability to contain overhead costs to low levels. During 2011, net interest margin dropped to 11.2 percent from 12.9 percent in December Fig 3.5 shows trends in net interest margin vis-a-vis efficiency ratios. confidence. Similarly, profitability and capital can also be affected and may lead to insolvency. For these reasons, banks are required to maintain adequate liquidity at all times. Liquidity position of the banking sector in Malawi was considered satisfactory, The liquidity ratio grew from 40.7 percent in December 2010 to 42.9 percent in December The rise in the ratio is attributed to 40.3 percent growth in liquid assets from K89.2 billion in December 2010 to K125.1 billion in December Figure 3.7 overleaf shows the trends in the lending ratio and the ratio of liquid assets to total deposits and short term liabilities. The growth of the banking sector earnings notwithstanding, Return on Assets (ROA) and Return on Equity (ROE) ratios dropped from their December 2010 positions on account of a higher proportionate rise in both average total assets and average capital than net profit after tax. ROA dropped by 1.0 percentage points to 3.2 percent, while ROE declined by 4.7 percentage points to reach 24.2 percent in December Trends in ROA and ROE are depicted in Fig 3.6 below. The banking sector s funding book registered a growth of 35.6 percent to K279.9 billion in December 2011, from K206.3 billion in December Demand and time deposits formed the major base of the funding source as they comprised 37.7 percent and 38.7 percent of the book as at 31st December 2011, respectively. Interest rate sensitivity ratio, expressed as the percentage of interest earning assets to interest earning liabilities, slightly fell from 98.5 percent in December 2010 to 97.4 percent in December An illustration of the relationship between interest rate sensitive assets and interest rate sensitive liabilities is presented in Fig 3.8 overleaf. Given these ratios, it can be inferred that the industry s balance sheet was liability sensitive, making it prone to losses in the event of a rise in interest rates. 3.4 Liquidity Analysis Liquidity and funds management is the process of ensuring that a licensed institution is able to meet all of its funding obligations. Ceteris paribus, a bank with adequate liquidity is able to fund its obligations (such as deposit withdrawals and liabilities maturing in the normal course of business) at reasonable cost. Inadequate liquidity has the potential to lead to failure by a bank to settle its maturing obligations, culminating into loss of public 28 29

16 3.5 Financial Soundness Indicators The table below contains three years financial soundness indicators (FSIs) for the banking system up to 31st December The indicators attest to the fact that the Malawi banking sector remained stable and sound in 2011 with generally strong key stability indicators. However, the ratio of foreign loans to total loans went down to 6.1 percent in 2011 from 19.6 percent and 9.9 percent in 2009 and 2010 respectively. This was due to acute shortage of foreign exchange in the country. Further, liquid assets to total assets ratio also went down in 2011 to 33.3 percent from 48.9 percent and 40.7 percent registered in 2009 and 2010 as a result of higher growth in total assets than liquid assets. Chapter Four Activities of the Bank Supervision Department in 2011 Table 3.1: SUMMARY OF FINANCIAL SOUNDNESS INDICATORS Ratios Dec Dec Dec Regulatory Total Capital to Risk Capital Weighted Assets Adequacy Regulatory Tier 1 Capital to Risk Weighted Assets Total Capital to Total Assets Total loans and advances to Asset Total Assets Composition Foreign Loans to Total loans and Quality Non-performing Loans to Gross Loans Non-performing Loans Net of Provisions to Capital Return on Assets Earnings and Return on Equity Profitability Interest Margin to Gross Income Non-interest Expenses to Gross Income Personal Expenses to Non Interest Expenses Liquid Assets to Total Assets Liquidity Liquid Assets to Total Short Term Liabilities Total Loans to Total Deposits Foreign Exchange Liabilities to Total Liabilities

17 4.0 Introduction Bank Supervision Department is responsible for ensuring safety and soundness of the banking system in Malawi. This is achieved through, inter-alia, controlling entry into the banking system through vigilant licensing process of banking institutions, orderly market exit, continuous review of laws and enforcing compliance with laws and directives for the industry. The Chapter highlights the major activities undertaken by the Department during the year including full scope examination of two banks, AML-CFT examinations of six banks, approval of conversion of one Discount House into a ank, licensing of two credit reference bureaux and the realignment of directives with the newly enacted financial services laws. 4.1 Supervisory Activities Bank Supervision Department currently uses the offsite surveillance and onsite examination as the major tools for carrying out its supervisory role of the banking system. Offsite surveillance is the primary tool for monitoring the financial performance of the banking industry and is used as the first test for detecting problems or areas that require further review or scrutiny. Onsite examination involves visiting the licensed institutions to examine their books of accounts in order to assess the adequacy of management, internal controls as well as the risk management systems in place, financial performance and compliance with applicable banking laws. 4.2 Off-Site Surveillance Off-site surveillance remains one of the key supervisory tools in assessing the financial performance and soundness of licensed financial institutions. It involves use of information obtained from prudential returns submitted by the respective licensed financial institutions to generate key quantitative prudential ratios on capital adequacy, asset quality, earnings and liquidity. Particular focus is placed on the levels, trends and comparison with benchmarks and industry ratios. In addition, off-site surveillance covers monitoring and verification of compliance with existing laws, directives, prudential regulations and guidelines that are issued by the from time to time. Where non-compliance is observed, consultations with management and board of directors of the concerned institutions are done with the view to ironing out the anomalies and impress on the need for compliance. Depending on extent of the non-compliance various penalties as prescribed in the relevant laws are invoked. The financial performance of banks is assessed through analysis of off-site reports which are produced on a quarterly basis. to adequately assess management s ability to identify, measure, monitor, and control risks. Added to that, the examiners employed core assessment and expanded procedures aimed at assessing the extent to which risks of an institution were appropriately identified and managed. The main risks that emerged during the year were frauds and weaknesses at the macro level which were largely attributed to exogenous factors arising from fragility in the real sector. It is therefore expected that the proposed amendments to the minimum capital requirements under Basel II should help provide adequate cushioning against potential risks arising from the unfavourable economic developments like those witnessed during Anti-Money Laundering Examinations During the year ended 31st December 2011, full scope Anti-Money Laundering/Combating Financing of Terrorism (AML-CFT) on-site examinations were conducted at six commercial banks. Three of these examinations were conducted by Bank Supervision Department while the Financial Intelligence Unit complemented the exercise by conducting inspections at the other three commercial banks. The examinations covered AML/CFT Compliance Program, Internal/External Audit, Customer Identification Program and Due Diligence, Suspicious Activity Reporting, Correspondent Banking and Wire Transfers. The exercise conducted by Bank Supervision revealed that the three banks had not conducted ML/CFT Risk Assessments based on the required categorises namely: Customers, Products & Services, Delivery Channels and Geographical Regions. However, strides have been made in appointing designated officers responsible for the Compliance Function. In terms of planned action to be taken in this regard, Bank Supervision Department intends to develop AML/CFT Guidance notes to assist banks to conduct thorough ML/TF Risk Assessment. The results of these assessments will assist banks to identify areas that require enhancement of resources. 4.5 Licensing and Compliance Review Licensing During the year 2011, the Department produced all offsite quarterly reports. The reviews showed that the banking industry continued to record impressive financial performance. Major supervisory concerns that were noted in some banks during the period under review included declining liquidity levels, growing non-performing assets and high deposit concentrations. 4.3 On Site Examination During the year ended 31st December 2011, the Department conducted two full scope on-site examinations of INDEBANK and FDH Bank. The examinations embraced the risk-based supervision methodology with the view to ensuring that all risks assumed by the banking institutions were evaluated and measured. In performing the examinations, Examiners were guided by the risk based examination procedures and risk rating indicators. Examination procedures were tailor made to the varying characteristics of each institution, in terms of size, complexity and risk profile. The procedures focused on developing appropriate documentation The licensing regime that the Department has adopted seeks to ensure that only credible players with sound financial standing are permitted to conduct banking business in Malawi, in the process help to safeguard depositors interests and promote confidence in the banking system. During the year under review, the Department processed one application which culminated in granting a banking licence to CDH Investment Bank (formerly Continental Discount House). The Registrar also granted licences to two credit reference bureaus (Credit Data CRB Limited and CRB Africa (Mw) Limited). The rationale is to provide a mechanism for banks to share credit information in order to reduce information asymmetry between lenders and borrowers, thereby promoting risk based pricing of loan facilities and improve credit repayment culture. The banking sector continued to grow in terms of branch network and product range. In terms of footprint, the year under review registered a total of 77 branches and 266 agencies/kiosks and mobile vans as at 31st December 2011, from 70 and 192, respectively as at 31st December The total number of new branches and agencies/ kiosks/mobile vans opened during the year was 7 and 34 respectively. Appendix 4 shows a distribution of bank branches per institution

18 Banking innovation took various dimensions including platinum/premiere customer service where targeted executives are offered banking services right at their doorstep as well as the extension of banking service access hours to include even Sundays in some selected branches. The sector also saw introduction of electronic banking products as a move towards cheaper alternatives to branches. These electronic banking services allow customers to use their computers and cell phones to carry out limited transactions outside the confines of a normal bank branch. The year also saw the piloting of ZAP e-wallet service (later branded as Airtel Money) for the provision of mobile money transfer service. Moving forward into 2012 and the medium term, Agent banking and Mobile phone banking should form significant agenda for financial inclusion following the development of the Agent Banking Guidelines and the Guidelines on Mobile Payment Systems Guidelines Compliance Review Compliance review covers an evaluation of the operations of each licensed institution to determine level of compliance with the financial sector laws, policies, directives and regulations. on Annual Audits, Directive on Premises Inspection, Directive on Supervisory Fees and Directive on Related Party Transactions. The Department also issued Guidelines on Introduction of New Products by Banking Institutions. The Guidelines provide the minimum requirements that banking institutions must follow prior to introducing a new product or service to their customers and the general public. Not only is this tailored to ensure consistency in terms of risk management practices relating to introduction of new products/services but most importantly, it helps reinforce the confidence in the banking system so that bank customers and the general public are not subjected or exposed to undue risks that threaten the safety of their funds. The Department also drafted the Directive on Consolidated Supervision of Banking Groups during the year. The proposed directive seeks to aid the Registrar in the process of evaluating banking groups to which a bank belongs, mindful that certain risks that such banks may face to a great part emanate from the parent holding company, its associates, affiliates or subsidiary. 4.6 Consumer Complaints Handling A review of the 2011 offsite and onsite reports reflects that there was general compliance with directives, policies, regulations and banking laws currently in force. However, there were few instances of non compliance with the Directive on Submission of Call Reports by Banks, Directive on New Directors, Audit Committee Members and Senior Management Officials of Banking Institutions, Foreign Currency Lending Ratio Directive and Foreign Currency Exposure Directive. Accordingly, the concerned institutions were alerted to regularise their positions. Complaints handling is an important emerging tenet of the oversight process to the extent that it helps ensure that the banking customers derive maximum benefits for which the sector was established, while at the same time providing a user friendly help desk for customers to be educated on their rights and obligations as consumers. It is hoped that this process will go a long way in complementing other supervisory efforts to enhance confidence in the financial sector Review of Banking Regulations In terms of review of banking regulations, the year 2011 witnessed several activities including the issuance of new directives that had been developed in the preceding year, the realignment of all directives with the newly enacted financial services laws and the issuance of regulatory framework to support the Credit Reference Bureau Act. The Foreign Currency Lending Directive and the Directive on Disclosure of Information by Banking Institutions came into force on 14th January 2011, upon publication in the Gazette as required under the Financial Services Act The Directive seeks to ensure that every banking institution maintains a level of transparency that is adequate and relevant to enable depositors and the general public to make informed decisions, in the process help promote and maintain public confidence in the Malawi banking industry through enhanced transparency. The Directive on Foreign Currency Lending, on the other hand, aims to provide a consistent and uniform mechanism whereby the Registrar of Financial Institutions may implement monetary policy objectives to protect the external value of the national currency and ensure that licensed banking institutions adhere to prudentially accepted liquidity standards. The regulation on credit reference bureaus was published in the Government Gazette on 21st October 2011, and covers the licensing, supervision and operation of credit reference bureaus. The coming into force of this regulation thus paved way for the licensing of the two credit reference bureaus in Malawi, namely Credit Data Limited and CRB Africa Limited. During the year, the following existing directives were reviewed with the aim of aligning them to the new Financial Services laws: Directive on Call Reports, Directive on Capital Adequacy, Directive on Asset Classification, Directive on Customer Due Diligence, Directive on Fit and Proper Test, Directive on Large Exposures, Directive During the year, the Registrar received several complaints from consumers of financial services. Broadly, the complaints point to a general lack of understanding of the available financial services and products by the consumers. This to a large part stemmed from limited disclosure of information such that most customers were not availed with sufficient and/or clear information at the point of commitment. The complaints also revealed that while most customers lodged their complaints to the Registrar, the issues were either already being handled by the courts through their lawyers, or were already concluded in the courts and had gone against the customer s favour. In this regard, procedures for lodging complaints need to be developed and structures put in place at the licensed institutions. Once developed, it will be vital that these procedures and structures are made known to the public and bank customers through various channels to enhance transparency and certainty. On his part, the Registrar has set up a Consumer Education and Complaints Handling Division within the Supervision of Financial Institution Function of the with the broad mandate to coordinate the protection and empowerment of financial services consumers through consumer education, provision of complaints redress mechanisms and promoting fair market conduct. A National Steering Committee, drawing membership from all relevant sectors of the economy, was also instituted to oversee the formulation of a National Financial Literacy and Financial Education Strategy. The formulation of this Strategy is being supported by the United Nations Development Program and the UN Capital Development Fund. The financial literacy initiative was also allocated significant resources under FSTAP for the purpose of conducting a baseline survey in January 2012, as well as developing and implementing the National Strategy. A roadmap has been drawn outlining activities with timelines. As part of capacity building, knowledge exchange visits were arranged to Ghana and Kenya. The key objective of the visits was to appreciate what the two countries are doing on financial literacy. The experiences and lessons acquired from the visited countries enabled the National Steering Committee to endorse the methodology to be used for the development of the National Financial Literacy and Financial Education Strategy

19 4.7 Training and Staff Development As at end 2011, the Department had a staff compliment of twenty-four. The year 2011 saw some members of staff attending various conferences and training workshops including FSI High Level Workshop on the Emerging Framework to Strengthening Banking Regulation and Financial Stability, IMF East AFRITAC Workshop on Consolidated Supervision, MEFMI Intermediate Banking Supervision Course, FINSCOPE Workshop on Financial Inclusion, FSI-SADC Seminar on CAPITAL Adequacy, World Bank 11th Annual Seminar on Policy Challenges for The Financial Sector, MEFMI Risk Management and Internal Controls Workshop, Regional Bank Leadership Seminar on Dealing with Problem Banks, AFI Workshop on Ensuring Integrity in Promoting Financial Access, MEFMI Workshop on Data Requirements for Economic Management, Toronto Banking Leadership Seminar on Regulatory Challenges Post the Financial Crisis and the Federal Reserve System Bank Analysis and Examination School. Chapter Five Current Issues in Bank Supervision The Department continued to utilise the FSI Connect which is an interactive web based information resource and learning facility for bank supervisors hosted by the Basel Financial Stability Institute. FSI Connect tutorials provide the most up-to-date information on key supervisory issues. One member of staff in the Department was awarded a scholarship by the RBM to pursue a Masters Degree in Business Analysis and Finance at the University of Newcastle

20 5.0 Introduction (v) Conduct ad-hoc on-site inspections on various aspects of implementation of Basel II in all banks to enable the RBM ascertain the progress each bank is making in the implementation of Basel II. The Malawi banking industry has continued to grow in innovation and level of sophistication, bringing with it new opportunities and challenges. It is therefore imperative for bank supervisors not only to prudentially respond to such risks, but perhaps most importantly to have foresight for effective oversight function. During the year under review, several activities were lined up in this regard, including strides towards Basel II preparedness, development of framework and systems to institute consolidated supervision, risk based supervision, regulation of credit reference bureaus, regulation of electronic banking services, measures to prevent the financial system from being conduit for money laundering and progress towards further automation of system for reporting and managing financial institution data through the Bank Supervision Application Solution (BSA). 5.1 Risk Based Supervision Bank Supervision Department formally adopted the Risk Based Supervision Framework in Since its adoption, no independent review of the implementation process has been undertaken. During 2011, the Department contacted IMF East AFRITAC for technical assistance aimed at undertaking the independent review of the implementation of the Framework. The independent review was planned for BASEL II and the Way Forward for Malawi During the year, the Department made significant progress with regard to preparedness towards implementation of Basel II in The following key activities were undertaken: (i) Meetings by Sub Committees and the National Steering Committee continued to dominate in 2011 focusing on resolving technical matters on Basel II; (ii) (iii) Capacity building for both examiners and banks were enhanced. Separate workshops were organized targeting external auditors, Board of Directors and Senior Management Officials of banking institutions; Basel II templates were developed on the basis of which the Department conducted the first QIS. The results of the QIS showed that capital ratios for two banks fell short of the regulatory minimum. The results also showed that all banks, except two, reported a decline in risk weighted assets for credit risk due to credit risk mitigations applied under off-balance sheet items which were assumed to be cash collaterised. Most banks made errors when completing the QIS template due to insufficient management information systems; (iv) A project charter was signed committing each bank to Basel II Implementation by 2014; (v) Building on the RBM Basel II Preparedness Committee, the Department dedicated two of its examiners to concentrate on the coordination of the Basel II implementation activities. This direction was premised on the need to accelerate progress with regard to the implementation, a sentiment that was also alluded to by banking institutions and the Financial Services Volunteer Corps (FSVC) during consultations on Capital Adequacy for Basel II Implementation. 5.3 Consolidated Supervision The Department undertook to implement consolidated supervision in line with the recommendations of the 2007 Financial Sector Assessment Program (FSAP) in Malawi that was conducted under the auspices of the IMF and the World Bank. Implementation of consolidated supervision has been necessitated by various developments that have taken place with regard to the ownership structure of most financial institutions in the country, namely: the increase in the number of foreign entities acquiring licences to operate financial institutions in Malawi; financial holding companies investing in non bank financial institutions; local banks acquiring and/or investing in subsidiaries abroad; conglomerates owning banks and other financial institutions with some conglomerates having in their structures entities which have no formal supervision. Undertaking non financial business in subsidiaries, associates or affiliates can mean that activities which could affect the soundness of the financial institutions are not under the direct oversight of the supervisory authority. In the absence of consolidated supervision, the above developments can create various risks to financial institutions belonging to conglomerate groups. The passing into law of the Financial Services Act 2010 and Banking Act, 2010 respectively provide the Registrar of Financial Institutions powers to supervise, call for information from subsidiaries, associates or affiliates of supervised institutions. Further, the two pieces of legislation also provide the Registrar with powers to share information with other monetary and financial regulatory authorities at home and abroad. During the year 2011, the Department with Technical Assistance from IMF East AFRITAC drafted Consolidated Supervision Directive and revised the existing prudential returns to facilitate reporting on solo and consolidated bases. The Mission also provided advice on measures that may be needed for further development and strengthening of existing laws and regulations as well as advice on how RBM could proceed with implementation of consolidated supervision before necessary amendments to existing laws are finalised. The challenges that lie ahead as the Department implements the framework include (i) the process of receiving consolidated information from financial groups, (ii) analyzing such information and determining on a group basis, (iii) compliance with relevant prudential standards such as related party transactions, large exposures and concentrations and most importantly the adequacy of group capital. The Department will inevitably need continued support as it develops the necessary staff capacity in these areas. 5.4 Anti Money Laundering and Combating of Financial Crime Moving forward, the following activities form the agenda for 2012: (i) Develop and issue a new Call Report to introduce capital charges for credit risk, market risk and operational risk, deploying the basic standardized approaches in Basel II; (ii) (iii) Develop and issue guidelines for Market risk, Operational risk and IT, Credit risk, Stress Testing, and ICAAP; Conduct the second QIS to ascertain the impact of the new directives as well as the full adoption of the Accord; (iv) Organise in-country training workshops on specific aspects of Basel II under Credit risk, Market risk, Operational risk, Liquidity risk, Supervisory Review Process and Market Disclosures; The Department, in conjunction with the Financial Intelligence Unit, continued to enhance the AML/CFT framework through participation in the development of the Money Laundering, Proceeds of Serious Crime and Terrorist Financing Regulations of The Regulations, which were gazetted on 2nd September 2011, provide detailed information on how financial institutions should implement obligations under the Money Laundering, Proceeds of Serious Crime and Terrorist Financing Act Cap 8:07 of the laws of Malawi. In addition, the Regulations prescribe requirements for identifying various categories of customers namely: Malawi Citizen, Foreign Nationals, Public Officials and Legal Entities. The Regulations are however sensitive to the financial inclusion agenda adopted by the Malawi Government. As such, they include reduced customer identification requirements for customers whose average monthly income or monthly withdrawals does not exceed K50,000. However, banks are expected to update all information within eighteen months for customers whose business relationship with financial 38 39

21 institutions was established prior to implementation of the regulations. During the year, the Department received technical assistance from IMF East AFRITAC to assist in the development of Anti Money Laundering/Combating of Terrorist Financing off-site supervisory tools and practices. A working group was therefore set up within the Department to work with the Mission. In trying to understand financial industry approach and managing ML/TF risks, the Mission and the working group held meetings with three sampled banks, a stockbroker, an insurance company and microfinance institutions. At the end of the Mission, the working group designed an AML/CFT Off-site Supervisory Tool to assist in assessment of inherent risks faced by institutions on the basis of products, services, customers, geographical locations and delivery channels. Another AML/CFT Off site Supervisory Tool was also developed to assist the Registrar of Financial Institutions to determine supervisory priorities across financial institutions. To enhance AML/CFT knowledge, the Department participated in a workshop organised by the Australian Transaction Reports and Analysis Centre, AUSTRAC (FIU, Australia) in Lilongwe which enabled the development of skills in drafting guidelines for typologies for reporting institutions. The Department also participated in National AML/CFT Steering Committee meetings and RBM/FIU joint meetings. 5.5 Mobile Banking and E- Commerce for off-site supervision, a decision was taken in November 2011 to resuscitate BSA as the Department prepares for Basel II implementation. BSA Technical and Steering Committees were therefore formed to spearhead the resuscitation of the BSA project. Membership to these Committees was drawn from Bank Supervision and ICT Departments. Going forward the Department intends to progress with data migration, conduct a parallel run of BSA and the current database in Deposit Insurance Scheme With technical support from FSVC, a diagnostic assessment of the country s readiness to establish a Deposit Insurance Scheme (DIS) was done in The overall conclusion was that important pre-conditions for an effective DIS are being met in Malawi, despite some short comings which could be easily addressed by the authorities. Following the survey recommendations, the Department formulated a Concept Note on DIS that outlined the set up options, objectives and benefits of deposit insurance. Being a policy issue, guidance was sought from the Ministry of Finance on the set up options i.e. whether the DIS should be established as a stand-alone entity or as a Division within the Reserve Bank. A no objection in principle was granted by Ministry of Finance to proceed setting up a DIS. However, the Department is currently awaiting formal feedback from Government on the set up option. The Department is a member of the RBM e-banking Taskforce which draws membership from other departments within the RBM. The Taskforce was engaged in drafting Mobile Payment Guidelines that have since been issued to mobile network operators. The Taskforce has been instrumental in conducting risk evaluation of e-banking products and services introduced in the market. Paramount to this innovation is Airtel Money, which is a phone based payment system involving a mobile phone company, a bank and agents. The applicant is now piloting the product while awaiting formal regulatory approval. It is hoped that the scheme will go a long way in supporting Government s Financial Inclusion Agenda. 5.6 Financial Stability Meanwhile, an in house workshop on DIS was conducted to all supervision staff to raise awareness on this policy initiative. More sensitization meetings with other stakeholders are planned for 2012 including learning visits to jurisdictions that have registered successful role out of DIS. 5.9 Islamic Finance During the year 2011, the Department received enquiries from the banking sector and investing public on the possibility of allowing local banks to offer Islamic or Shari ah compliant products and services. Bank Supervision Department is a member of the Financial Stability Taskforce. The role of the Taskforce is to assess financial stability issues and produce financial stability reports biannually. In the meantime, the Department is in the process of building capacity in the area of stress testing to enhance the offsite surveillance and also to feed into analyses for the financial stability reports. The official launch of the first report is slated for Bank Supervision Application Solution Bank Supervision Application Solution (BSA) is a web based reporting tool that was adopted by a number of SADC Central Banks to replace Microsoft Excel Spreadsheet-based databases in carrying out financial analysis of banking institutions. The Application contains two modules namely; the Risk Analysis Automation System (RAAS) which contains the quantitative tools for off-site surveillance and the Business Support System (BSS) that is used as a Supervisory Information System (SIS) for automating workflows as well as acting as an electronic filing system. The Application is supported by the BSA Support Office (BSO) based at the Banco de Mocambique, the Central Bank of Mozambique. To date usage of the BSA has been limited and full adoption has been slow due to some technical glitches. Islamic banking relates to a system of banking or banking activity that is consistent with the principles of the Shari ah (Islamic rulings) and its practical application through the development of Islamic economics. Shari ah prohibits the payment or acceptance of interest charges (riba) for the lending and accepting of money, as well as carrying out trade and other activities that provide goods or services considered contrary to its principles. Being a new phenomenon and having legal connotations, the Department sought and awaits policy direction from Government Agent Banking The Department pioneered the implementation of agent banking as a direct response to the Government s policy of increasing financial access. With grant support from the Alliance for Financial Inclusion (AFI), a study tour to Kenya, Colombia and Mexico was done on agent banking. The Department then developed Regulations on Agent Banking which were circulated to all banks for their comments before they could be gazetted. The Regulations were also shared with AFI Mobile Financial Services Working Group where valuable input and suggestions that would make the Regulations more robust and effective are expected. An internal workshop to sensitize staff in the Department was also carried out during the last quarter of the year. Bearing in mind that a robust Management Information System that can process large quantities of data is essential As at 31st December, 2011, the Department had granted conditional approval to three banks to roll out agent 40 41

22 banking on a pilot basis. Full roll out is planned for Stress Testing Two Missions to RBM on stress testing took place in The Missions were under the technical cooperation program agreed between the RBM, IMF and Norges Bank with supervision of IMF through the Monetary and Capital Markets Department. Chapter Six Regional and International Cooperation A stress testing spreadsheet containing individual data for all banks in Malawi was developed. Weaknesses and limitations relating to the spreadsheet, input data and the underlying assumptions were explored. In addition, RBM staff were trained on the mechanics of stressing the banking sector using various plausible scenarios. During the year 2012, the Department plans to issue Stress Testing Guidelines to assist banks on how to develop their own stress testing frameworks. Further, RBM plans on building further capacity with regard to development of meaningful stress testing scenarios, interpretation of stress testing quantitative results vis-a-vis application of qualitative judgement, stress testing application under Pillar II of Basel II (ICAAP) and review of stress testing frameworks developed by individual banks

23 6.0 Introduction During the year, the Department continued to cooperate with other stakeholders in the region including IMF East AFRITAC, MEFMI, AFI and ESAAMLG. APPENDICES 6.1 IMF East Africa Regional Technical Assistance Centre (East Afritac) During the year 2011, Bank Supervision Department benefited from East AFRITAC technical assistance covering inter-alia, the drafting of consolidated supervision directives; the revision of existing prudential returns to facilitate reporting on solo and consolidated basis; the development of legal and regulatory framework to support consolidated supervision and advice on measures for further development and strengthening of existing laws and regulations; advice on how RBM can proceed with implementation of consolidated supervision before necessary amendments to existing laws are finalised and development of Anti Money Laundering /Combating of Terrorist Financing Off Site Supervisory Tools and Practices. 6.2 Macroeconomic and Financial Management Institute of Eastern and Southern Africa The Department continued to benefit from training programs offered by MEFMI, including Bank Leadership Seminar on dealing with Problem Banks, training on Risk Management and Internal Controls, Workshop on Data Requirements for Economic Management and Intermediate Course in Banking Supervision. 6.3 East and Southern Africa Anti Money Laundering Group (ESAAMLG) Malawi is one of the founding members of ESAAMLG and has continued to support all efforts of the grouping by attending all plenary meetings. Meetings of this group are attended by Government officials from all the relevant government arms i.e. Ministry of Finance, Ministry of Justice, (through Bank Supervision, Pensions and Insurance Supervision and Microfinance and Capital Markets Supervision, Exchange Control and Legal Departments), Financial Intelligence Unit, Anti Corruption Bureau, Immigration Department, Director of Public Prosecutions and Malawi Police Service. Malawi handed over the presidency of ESAAMLG on 8th September 2011 after reigning for one year. Several achievements were registered during the tenure of Malawi leadership, including (i) the completion of Mutual Evaluation Reports for Mozambique, Kenya and Lesotho; (ii) the effective monitoring of the implementation of FATF Standards (iii), the completion of first round of evaluations of member countries using the 2004 methodology of evaluating anti- money laundering and combating the financing of terrorism (AML/CFT) regimes. 6.4 Alliance for Financial Inclusion During the year, the Alliance for Financial Inclusion (AFI) provided grant support towards a study tour on agent banking to Kenya, Colombia and Mexico. The Department also benefited from AFI workshop on Ensuring Integrity in Promoting Financial Access. The Department has members in the AFI s Financial Inclusion Data Working Group and Financial Integrity Working Group

24 Appendix 1: Malawi Banking Institutions Shareholding Structure as at 31st December 2011 Appendix 2: Organisational Structure of Bank Supervision Banking Institution Shareholder Stake Ecobank Malawi Limited ECOBANK Transnational Incorporated 90.28% Loita Capital Partners International 9.72% FDH Bank Limited FDH Financial Holdings Ltd % First Merchant Bank Limited Zambezi Investments Ltd 44.94% Simsbury Holdings Limited 22.47% Prime Bank Limited (Kenya) 11.24% Prime Capital and Credit Limited (Kenya) 11.24% General Public 10.11% Indebank Limited ADMARC Investments Holding Company 25.67% Press Trust 30.0% Employment Share Ownership 2.95% The Government of the Republic of Malawi 41.38% International Commercial Bank ICB Global Financial Holdings 99.99% Lee Ooi Kim 0.01% Malawi Savings Bank Malawi Government % National Bank of Malawi Press Corporation Limited 51.60% Old Mutual 24.60% General Public 22.30% Employee Share Ownership Scheme 1.50% NBS Bank Limited NICO Holdings Ltd 50.10% General Public 26.60% National Investment Trust Limited 5.20% International Finance Company 18.10% Nedbank Malawi Ltd MN HOLDINGS 97.10% Employee Share Ownership Scheme 2.90% Opportunity Bank of Malawi Opportunity International Limited (UK) 45.40% Opportunity Transformation Investments (USA) (OTI) 51.20% Africap Microfinance Fund Ltd 2.60% Trust for Transformation 0.80% Standard Bank of Malawi Limited Standard Bank Africa Holdings Limited 60.18% NICO Holdings Ltd 20.00% General Public 19.82% Continental Discount House TRANSAFRICA HOLDING LIMITED: 84.00% PRESS TRUST 15.00% Employee Share Ownership Scheme 1.00% First Discount House Limited FDH Financial Holdings Ltd % Leasing and Finance Company First Merchant Bank % 46 47