Academic journal article Academy of Accounting and Financial Studies Journal

Stock Market-Banking Sector-Growth Nexus in Zimbabwe

Academic journal article Academy of Accounting and Financial Studies Journal

Stock Market-Banking Sector-Growth Nexus in Zimbabwe

Article excerpt

INTRODUCTION

Background of the Study

Evidence from cross-country heterogeneity in Sub-Saharan Africa reveals that the interrelationship between the financial development and economic growth has not received sufficient attention in finance literature (Tsaurai & Odhiambo, 2012). Zimbabwe, which demonstrates a paradigm distinct from other Sub-Saharan African countries, has been excluded from many finance and growth studies (Ndlovu, 2013). According to the Reserve bank of Zimbabwe (RBZ) (2016), recent evidence in Zimbabwe suggests that beyond a certain threshold, banking sector and stock market development might actually have a negative effect on economic growth. A report by the Zimbabwe Stock Exchange (ZSE) (2015) showed that in undertaking their roles of being influential over the most productive economic areas, banks faced financial constraints in Zimbabwe.

In Zimbabwe, the 2003-2008 financial crises downsizing of banking sector operations compromised the effect of banking sector development and stock market liquidity on economic growth. In fact, this crippled the ability of the RBZ to perform its function as a lender of last resort. The RBZ (2015) documents that, the ZSE had by 2003 turned into an explosive source of wealth creation. This wealth was derived merely from trading of financial securities without the injection of significant cash flows into the underlying listed banking institutions. The ZSE was being used as a blue print for the pursuit of speculative activities in contrast to its fundamental function of allocating financial resources to productive sectors of the economy. The stock market has been characterized by a huge increase in transactions under the auspices of negative real interest rates (ZSE, 2010). Such negative interest rates discourage investment and growth but assist undesirable levels of speculation and in turn bring about depreciation in net worth of these banks.

The debate on the relationship between financial development and economic growth has recently received attention in both developed and developing countries (Tsaurai, 2015). The thrust of this debate has been whether financial sector development brings about economic growth (supply-leading hypothesis), or whether it is economic growth that causes financial sector development (demand-following hypothesis). A large body of studies has emerged, both at the theoretical and the empirical level that have attempted to answer these questions but no consensus has as yet been reached. Against this background of conflicting theoretical and empirical views, the direction of causality (not to mention the robustness of the relationship) between banking sector, stock market development and economic growth warrants a deeper insight. Scenarios postulated by Jecheche (2010) suggest that Zimbabwean financial sector dynamics have brought considerable arguments about banking sector and stock market relationships to the fore-front of academic debate. For this reason, greater insight into the interrelationship between stock market, banking sector and economic growth particularly in the context of the Zimbabwean economy is necessary.

Problem Statement

Zimbabwean financial sector dynamics have displayed a paradigm difference from most European and Sub- Saharan African countries (Ziwengwa et al., 2011). According to the RBZ (2009), banks faced financial constraints against a hype of skyrocketing industrial and mining indices. The International Monetary Fund (IMF) (2010) also showed that the period from 2003 to 2008, Zimbabwean stock market indices soared to unprecedented heights (595% monthly and 12000% yearly) against a backdrop of falling Gross Domestic Product (GDP) and a collapsing banking sector. This poses the question of what has really accounted for the stagnation in economic growth that has lasted for years in Zimbabwe, which therefore requires an investigation of the major constraints precluding the ZSE and banking sector from effectively allocating scarce resources. …

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