Multiple Currency and Non-Performing Loans on The Performance of Commercial Banks in Zimbabwe

Abstract

The purpose of this study is to establish the impact of non-performing loans on the performance of commercial banks in Zimbabwe, during the multiple currency era for the 2009-2017 period. Understanding the role played by banks in the Zimbabwean economy, it is essential to carry out a study of this nature to point out key banking areas impacted by bad loans. The study make use of secondary data from a survey of 13 commercial banks through the Reserve Bank of Zimbabwe. Data for this study was collected from the Reserve Bank of Zimbabwe (RBZ) published financial accounts, Bank Licensing Supervision and Surveillance (BLSS) quarterly reports and the International Monetary Fund (IMF) Annual Article IV consultation reports. The Johansen Cointegration test was employed to analyze data, to examine the existence of a long-run relationship between the variables. The results revealed a negative impact of credit risk on banks return on equity. Management efficiency and loan loss provision ratios has a positive long-run effect on bank performance whilst interest income and loans and advances ratios has an adverse long-run effect. This is a reverse of the prior expectations and it is a result of the underlining macroeconomic conditions in the Zimbabwean economy that causes banks to misbehave in anticipation of the future risks. Furthermore, the study make use of the Vector Error Correction Model (VECM) to check for short-run dynamics and found out a negative in the coefficient value of the error correction term. This implies existence of forces that restores back the long-run equilibrium of the model from short-run movements. A conclusion was drawn that non-performing loans are a major cause of concern to changes in liquidity and banks’ lending behavior.