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Home Business Business News

The profitability of banks

by Johnny Kasalika
05/04/2013
in Business News
3 min read
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Recent financial results for Malawian banks, published as a regulatory requirement, have stirred mixed reactions. The historic economic recess of 2012, despite causing severe liquidity pressures in the financial sector, has after all, rendered triumphant victors of its own in the shape of profit-making banks.

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While some players in the economy have marvelled enviously at the success of the banking sector amidst the rot and stench that continues to characterise our economy, others have cried foul to the extent of calling for a stiffer visitation of tax upon the high yielding sector. The only way, so the argument goes, banks walked away with decent returns given the adverse circumstances we were all subjected to, was through unfair overpricing of their services and should thus be compelled to remit more tax.

Whether or not the relatively high profit margins attained by the banks were to some extent the result of milking customers, the outcome of ingenious acumen on the part of the banks or indeed just a fortuitous stroke of luck befalling the industry like manna from heaven in times of extreme hardship, will be a topic for debate by experts in that field another day, another forum.

One thing is unmistakably clear, the banking sector is a pivotal and integral part of the broader financial system and constitutes a key provider of finance to the private sector widely heralded as a linchpin for spurring economic growth. A well-functioning banking system facilitates smooth exchange of goods and services, provides incentives for savings and efficiently channels them towards productive investments. Banks can only deliver such noble ideals to the economy if they are, at the very least, profitable. When their balance sheets are continually burdened with non-performing loans, banks may not be able to provide loans to productive businesses. The marriage bond between banks and economic growth in modern day economies is well avowed and the last thing Malawi needs in its quest for economic recovery is an ailing financial sector.

Which is why the fact that our banks have conveniently made profits, within the same year of liberalising the foreign exchange simultaneous to a massive devaluation of the kwacha and its continued depreciation, should be hailed rather than wailed about. Elsewhere, it took an unprecedented government bail-out to rehabilitate a crumbling financial sector that had threatened to bring an entire super economy down on its knees. If Malawi expects to achieve any semblance of economic stability as a launch pad for swift economic recovery, the financial sector must, first and foremost, be up and running. Profitability boosts the credibility of the banking industry and arouses a surge of confidence at a time when patronage of banking services is momentarily at its lowest ebb thanks to rising interest rates, inflationary pressures and its attendant commodity price increases.

That said, it is unwise to dismiss completely the sharp cynicism with which some sectors have reacted towards an otherwise welcome profitability of banks. Such sentiments engender an unhealthy perception towards a key sector of the economy and all matters in banking need to be acquitted of such (mis)conceptions. As a fiduciary and pivotal partner in social-economic development, it is essential as well as strategic for banks to carve a more endearing reputation rather than a repulsive one. Moving towards economic recovery, we could do without any tags of the banking sector synonymous with a monster hell-bent on exploitation or maximising profitability for its own sake.

It is imperative for all players in the economy to look up to the banking sector as a highly responsible partner, one that thrives on adequate corporate governance practices and sound risk management policies, one that is responsive to the changing needs of its customers and one adherent to the prudential supervision of the regulators. When the banking sector posts decent returns, one hopes to see the ultimate beneficiaries of its services namely, depositors and borrowers, on whose money and goodwill the profits are made, joining the toast to the success of a friendly partner for economic growth that the sector truly and deservedly is. How that is done is the noble call of our profit-making banks.

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