Academic journal article Journal of Emerging Trends in Economics and Management Sciences

Insights on Non-Performing Loans: Evidence from Zimbabwean Commercial Banks in a Dollarised Environment (2009-2012)

Academic journal article Journal of Emerging Trends in Economics and Management Sciences

Insights on Non-Performing Loans: Evidence from Zimbabwean Commercial Banks in a Dollarised Environment (2009-2012)

Article excerpt


This study was prompted by the gradual deterioration in asset quality in most commercial banks in Zimbabwe after the adoption of the multiple currency exchange rate regime. The poor asset qualities were reflected by the non-performing loans trending towards the watch list category. In this regard we investigated the commercial bank credit process with the objective of understanding the fundamental causes of the impaired assets that are bedeviling the Zimbabwean banking sector so that some of the mistakes are not repeated and correctional measures are put in place. The methodology adopted a survey research design with use of questionnaires and interviews with commercial banks head credit risk, head retail and head corporate banking division from 15 registered commercial banks in Zimbabwe. Research findings show that some banks were sitting on non- performing loans due to poor credit analysis processes; wrong products offered to the clients; lending based on balance sheet strength instead of cash flow based lending; banks taking too much comfort in security; information asymmetry leading to moral hazard; economic environment and political influence. Key recommendations include an urgent setting up of the Credit Bureau; banks should not adjust clients request and the need for banks to consider the economic environment and adjust their credit culture. The central bank needs to tighten its supervisory role and ensure prudential guidelines are not violated.

Keywords: credit analysis, loan products, non-performing loans, Zimbabwean commercial banks, dollarised environment.


Zimbabwe adopted a multiple currency regime in 2009. A multiple currency system allowed trade to be conducted using major trading currencies, for example, the United States Dollar (USD), Pound Sterling, South African Rand, and the Botswana Pula. After the adoption of the multiple currency system, the banking sector experienced marked improvements in the intermediary role which resulted in improved financial support to the key productive sectors of the economy (Reserve Bank of Zimbabwe (RBZ), 2010). A research conducted by the International Monetary Fund in 2010, indicated that the profitability of banks had improved following a more favourable economic environment during the new regime. While officially reported, aggregate banking soundness indicators do not raise major red flags, they mask vulnerabilities specific to a fully dollarised banking system experiencing rapid credit growth, as well as a significant variation in prudential indicators across individual banks. The Reserve Bank of Zimbabwe (2012) also noted that there has been gradual deterioration in asset quality as reflected by the level of non-performing loans trending towards the watch list category. The implication is that borrowers were struggling to repay loans leading to the problem of banks sitting on non-performing loans.

Each non-performing loan in the financial sector is viewed as an obverse mirror image of an ailing unprofitable enterprise. From this point of view, the eradication of non-performing loans is a necessary condition to improve the economic status of the financial institution. Continuously rolling over non- performing loans locks up resources that could otherwise be invested to profitable sectors of the economy. Intuitively this hinders economic growth and impairs economic efficiency. Consequently this study seeks to provide insights on Zimbabwean commercial banks non-performing loans. The ultimate objective is to draw lessons from commercial banks lending in Zimbabwe during the multiple currency regime. The paper is organised as follows. In the second section, we present brief review of literature. In the third section we present the research methodology; in the fourth section a discussion of the findings. Finally we present conclusions and recommendations.


A non-performing loan is an advance by a financial institution that is not earning income and full payment of principal. …

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