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Programme Name : Masters of Business Administration

Year No. : One

Module Title : Managerial Finance

Assignment No. and Title : MACROECONOMIC VARIABLES AFFECTING FDH BANK

Semester No. : One

Student Name. : Ennia Mtengezo

Student Registration No. : MBA/BT/P/C10/63/22

Module Tutor : DAYMATTER MIKISHON

Student Signature :

Date of Submission : 12th November, 2022

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Date Received : ----------------------------------------

Introduction
This write-up aims explains how inflation, interest rate and unemployment has affected
operations of FDH bank. Financial sector is the main source of financing productive economic
projects in any economy in the world (Batayneh and Salamat 2021). They play a major role in
the functioning of the economy through financial intermediation. Simply, the role of banks lies
between savers and borrowers: it takes money from savers (in the form of deposits) and lends it
to those who wish to borrow, such as companies, governments, or individuals. The banks
promote economic growth through capital accumulation and technological progress by
increasing the saving rate, providing information about investment, and improving capital
allocation (Batayneh and Salamat 2021).

Macroeconomics entails the study of the overall economy as a whole rather than individuals and
companies (Muller and Grimsley 2022). Andrew Bloomenthal defines macroeconomic variables
as influential fiscal, natural, or geopolitical event that broadly affects a regional or national
economy.

Inflationary
Inflation is the rate at which the prices for goods and services increase. Inflation often affects the
buying capacity of consumers. Inflationary rates are general factors that cause the increase of
prices in all essentials that are important for a business (Muller and Grimsley 2022).

Effects of the events that maybe regarded as causes of inflation include increases in the quantity
of money, velocity changes, and reduction in physical stocks, draughts, plaques, wars and many
other events. Here we highlight how inflation has impacted the bank.

1) Bank Profitability
According to Batayneh et al (2021), inflation rate has negative effect on bank profitability,
banking industry and real return on financial assets. They further suggest that inflation leads to a
decline in financial sector performance, which in turn harms economic growth especially by
harming the operations of financial markets. In economies with high inflation, intermediaries
will lend less thereby reducing revenues for the bank. Inflation is unwanted by any country and
high inflation is considered to be one of the main macroeconomic challenges face by a country.
Money supply is believed to be the main cause of inflation in every country in the globe (Derick
et al 2016). The rise in inflation to certain levels reduce returns on savings, which in turn leads to
a decline in number of savers and savings alike; therefore, credit becomes scarce in such an
economy. (Batayneh and Salamat 2021). The negative effects are however most pronounced and
comprise a decrease in the real value of money as well as other monetary variables over time. As
a result, uncertainty over future inflation rates may discourage investment and savings (Derick et
al 2016).

2) Higher Running cost

High levels of inflation result in high costs of running the bank as a result of a reduction in
consumer buying power. High inflation resultant is increased chance of defaulters which causes
rise in expenses to due to increased loan loss allowances and bad debts written off. As the high
rate of inflation causes price of goods and services to be expensive, banks pay more on its
supplies. The higher rate of inflation leads to decrease the real value of long-term returns through
imposing cost representing in losses that reducing the real value of cash balances. Furthermore,
the real value of bank’s individuals’ deposits and projects as well as the monetary reserves of the
banking system will be reduced as a result of high inflation and hence reduces financial depth
(Batayneh and Salamat 2021)

3) Liquidity Problem
According to Batayneh et al (2021), increasing inflation increases the cost of maintaining liquid
cash balances which leads individuals and projects transferring money into real commodities.
Institutions in the banking sector, such as retail banks, commercial banks, investment banks,
insurance companies, and brokerages have massive cash holdings due to customer balances and
business activities (HALL 2021). Individuals withdraw their funds to convert it into goods when
there is continous high level of inflation or anticipated high rate of inflation.

4) Higher taxes
Increased taxes may be used to reduce inflationary pressures as taxes lower disposable income
which reduces demand, for instance the introduction of VAT on certain bank charges. While this
is helpful for the economy, it could be horrid to the bank because banks tend to be less and have
a lower chance of surviving in the long run to the benefits of this ant-inflationary approach.
Again as this approach lowers disposable income, income for the bank is also affected because
its income is generated from individuals and corporations once their earnings are minimal their
capacity to borrow or capacity to save is reduced.

Interest Rate
The interest rate is the price of the use of money expressed in percent for a certain period of time
(Farras and Wijaya 2021). According to Boediono (2014) the interest rate is: "The price of the
use of investment funds (loanable funds). The interest rate is an indicator in determining whether
a person will invest or save.

While interest rate has a positive impact on all banking sector indicators, this relationship
weakens at higher interest levels, showing a concave relationship between interest rate and
banking sector development. The bank`s profitability increases with interest rate hikes. “When
interest rates are higher, banks make more money, by taking advantage of the difference between
the interest banks pay to customers and the interest the bank can earn by investing” (HALL
2021). When rates rise, this spread increases, with extra income going straight to earnings.
According to Mary Hall (2021), Interest rate hikes increase profitability for the banking sector
if the hikes tend to occur in environments in which economic growth is strong, and bond yields
are rising. In these conditions, consumer and business demands for loans spike, which also
augments earnings for banks.

As interest rates rise, profitability on loans also increases, as there is a greater spread between the
federal funds rate and the rate the bank charges its customers. The spread between long-term and
short-term rates also expands during interest rate hikes because long-term rates tend to rise faster
than short-term rates. Nevertheless, when interest rates rise too high, it can start to hurt bank
profits as demand from borrowers for new loans suffers and refinancing drops.

Employment
Unemployment rate of a country offers an indication of the economic health of a nation. The
unemployment rate indicates the number of unemployed individuals actively seeking a job but
unable to secure any (Muller and Grimsley 2022). A higher employment rate versus those
unemployed indicates a stronger economy. When majority of citizen are employed, their
spending increases the amount of money in circulation and boosts the economy. Cash that bank
holds it originates from employment, which is either the client is either self employed or
employed by the company. Higher level of employment signifies high income to the bank as the
bank expects more investments from high income earners through which the bank earn more
profit.

High rate of unemployment country like Malawi contribute to performance of the bank as it
provides the banks with cheap labor. The bank take advantages of situation by hiring skilled and
competent workers at low pay and un-attracted and poor working conditions which help them
reduce wage bill and earn more profit at the expense of their employees (Gitman and Zutter
2015). With cheap labor, the bank employs several employees thereby improves its efficiency
and gain a competitive advantage in the industry as well as contributing to the country`s
economic growth as many households will have income to cater to their basic needs. This may
decrease cases of insecurity due to theft, making the country unappealing to prospective
investors.

Conclusion
In conclusion, the bank of FDH is affected by three macroeconomic variables namely; inflation,
interest rate and total employment. Results indicate that low inflation rate has a weak positive
effect on financial activity, but high rate of inflation has a negative effect (Batayneh and Salamat
2021). Inflation result in increased profitability of the bank, increased running cost and liquidity
problems. High interest rate enables the bank to earn more profit but when the rate is too high it
can start to reduce bank profits as demand from borrowers for new loans suffers and refinancing
drops. The bank benefits from the unemployment variable Malawi is facing as it maximizes its
profit and able sustain in the industry at the expense of its employees.
References
Batayneh, Khaled, and Wasfi Al Salamat. "The impact of inflation on the financial sector development."
FINANCIAL ECONOMICS, 2021: 1-15.

Bloomenthal, Andrew. "Macroeconomic Factor: Definition, Types, Examples, and Impact."

Macroeconomic Factor, 2022.

Derick et al, Taylor Adu. "Is Inflation a Threat on Financial Sector Performance?" European Journal of
Business and Management, 2016: 1-13.

Farras, Naufal Raihan, and John Henry Wijaya. "The impact of inflation, interest rate and exchange value
on." TECHNIUM SOCIAL SIENCES JOURNAL, 2021: 222-227.

Gitman, Lawrence J., and Chad J. Zutter. Principles of Managerial Finance. Boston: Pearson Education,
2015.

HALL, MARY. "How Interest rate Changes Affect the Profitability of Banking." PERSONAL FINANCE-
BANKING, 2021.

Muller, Mitchell, and Shawn Grimsley. "Macroeconomic Factors Affecting Business." Economic Factors,
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