Malawi: Directive on Credit Concentration for Financial Institutions

This directive, issued by the Reserve Bank of Malawi, applies to all financial institutions operating in the country. It is divided into the following parts:

Part I - 'Preliminary', provides information on the short title of the law, the application and authorization of the law, and the definitions of various terms that the law contains.

Part II - 'Statement of Policy' explains the:

• Objectives of the law, which are to ensure that:
  • Financial institutions follow the practice of credit diversification;
  • Credit is not concentrated in a small number of borrowers;
  • Losses incurred by borrowers do not impair the soundness of the financial institution.
• The rationale of the law:
  • Concentration of credit risk in a large borrower/group of borrowers, impairs the viability of a financial institution;
  • Shared credit facilities among financial institutions reduce risk;
  • Credit concentration limits encourage shared risk.

Part III - 'Implementation of section 30 of the Banking Act of 1989' specifies requirements in terms of:

• • General limits on credit concentrations;
  • Existing concentrations;
  • Prior approvals by the Reserve Bank;
  • Computation of large exposures and credit concentrations.

Part IV - 'Remedial Measures and Administrative Sanctions':

• Explains the circumstances under which the Reserve Bank can impose sanctions;
• Lists the administrative sanctions that the Reserve Bank may impose on a financial institution that does not comply with this directive.

Part V concludes by stating the date of effectiveness of the law.