This study provides empirical evidence on the existence of a long run equilibrium relationship between the effects of monetary policy on stock market performance in Malawi using the ARDL bounds testing approach to cointegration. The study uses monthly data for the period November, 1996 to April, 2012. The study reveals that in the short run it is the lagged values of money supply, exchange rate, treasury bills yields and of stock returns that play a dominant role in influencing the short-term volatility of returns on the Malawi Stock Exchange. The study also establishes that the bank rate and treasury bills yields influence stock returns in the long run. The study concludes that the conduct of monetary policy in Malawi affects the stock market. It also establishes that monetary policy reacts as “firefighting device” to the developments on the fiscal front, which reflects orientation of political regimes. Instead of supporting effective fiscal policies that enhance economic growth and stimulate investment, monetary policy in Malawi during the period of this study endeavored to correct the problems created by ineffective fiscal policy conduct.

This dissertation presents essays on the Malawian banking sector. The first essay examines Malawian business cycles and banks’ asset allocation strategies. The analysis indicates that banking sector shocks from public debt financing explain short- and long-term output changes in Malawi. This research shows that domestic banking sector public debt shocks of between 1%-20% affect investments by 5%–15%, consumer loans by 2%–10%, corporate loans by 1%–5%, bank capital by 5%–15%, and bank financing by 1%–5%. The second essay examines changes in banking regulations and how their adoption impact bank lending activities. The non-risk weighted asset Basel III leverage ratios have significant and negative impacts on Malawi’s bank sector lending growth. The liquidity coverage ratio (LCR) had a positive and significant effect in explaining variability in lending in Malawi’s banking overall; whilst the introduction of a stable funding ratio (SFR) has a positive and significant impact on banking sector-wide lending growth effects. The study also found that the Basel III Capital and Liquidity rules have different effects on firm-level lending for the eight (8) banks in Malawi. The third essay studies the determinants of financial sector reforms in Malawi. Our study finds that macroeconomic, monetary and fiscal drivers such as the ratio of external debt stock to gross national income ratio, broad money to GDP ratio, domestic credit to GDP ratio, short term debt to export and non-export revenues, short term debt to external debts, changes in inflation, changes in GDP and total reserves to external debt have a negative and significant impact in accelerating financial sector reforms in Malawi. The analyses do not only contribute to the existing limited literature on banking, but also demonstrate how applied econometrics methodologies can be used in the field of banking studies in Malawi.