Transformation of the Zimbabwean Banking Industry: Evidence from the Lifecycle Model

By Sibanda, Mabutho; Mhlanga, Richard | Journal of Global Business and Technology, Spring 2013 | Go to article overview

Transformation of the Zimbabwean Banking Industry: Evidence from the Lifecycle Model


Sibanda, Mabutho, Mhlanga, Richard, Journal of Global Business and Technology


ABSTRACT

The Zimbabwean economy has undergone economic and financial transformation over the past two decades which has been accompanied by multiple changes in the banking sector. The country embarked on financial reforms in the 1990s which subsequently led to a twofold growth in the number of banks in the system. However, the growth in the number of banks exacerbated competition in the sector which subsequently led to an unprecedented collapse of banks between 1998 and 2005. This study uses the lifecycle model to ascertain behavior of banks between the period 1990 and 2008. The results show that the majority of banks that collapsed in Zimbabwe between 1998 and 2008 were, on average, at their start-up phase. However, the collapse of these banks was propelled by different circumstances ranging from bank specific to general market factors. The study provides some policy recommendations regarding the licensing of banks in emerging markets economies.

Key words: Zimbabwe, corporate lifecycle, start-up phase, growth phase, banking sector

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

This paper employs the lifecycle model to investigate the lifecycle behavior of banks in Zimbabwe between 1990 and 2008. The lifecycle model refers to the way in which "products move from launch to growth to a mature and ultimately to a decline phase" (Bender and Ward, 2002:30). This model may be used to explain the behavior of firms or products during their life. Zimbabwe went through some rough times between 1990 and 2008 that were mainly driven by socio-political and economic challenges. These challenges subsequently had adverse effects on the performance and behavior of the financial sector. The financial sector in Zimbabwe comprises the banking industry, non-bank financial intermediaries and the stock market. From 1990 to early 2000, the country's banking sector seemed to outperform other economic sectors. However, in spite of the gains realized by the banking sector during this period, the country was subsequently characterized by numerous economic, political, humanitarian and financial crises (Moss, 2007; Ncube, Richards, & Yau, 2009). During this period, inflation skyrocketed from 18 percent in 1990 to 133 percent in 2005 leading to speculative practices in the banking sector (RBZ, 2005). Some of the challenges included: first, the one size fits all Economic Structural Adjustment Programme (ESAP) of 1991 led to company closures and the beginning of perennial socio-political and economic problems (Ranga, 2004); and second, the accumulation by dispossession through privatization of state enterprises led to the mushrooming of numerous financial institutions which resulted in sophisticated but volatile financial markets (Njanike, 2010). The resultant structural changes in the political economy led to rapid privatization of state owned enterprises like the agricultural marketing boards and financial institutions (Godana & Hlatshayo, 1998). The banking industry on the other hand benefited from these economic activities through the provision of advisory services to the privatization processes (Tambudzai, 2003). Moreover, financial liberalization in the 1990s, exacerbated by increased foreign exchange and stock markets volatility, ensured increased profitability in the banking sector as banks realized foreign exchange gains from offshore investments. Consequently, the banking sector whose history dates back to the early 1890s experienced a revolution as competition increased. Competition was mainly driven by the profitability in the banking sector amid the country's declining Gross Domestic Product (GDP). Increased competition led to the collapse of some newly established banks in the late 1990s. Some banks were later closed due to insolvency and financial mismanagement in mid 2000s (RBZ, 2006). The crises that plagued the country over a period of two decades subsided in 2009 when a new political platform was initiated and the country adopted a multiple currency system which stabilized prices. …

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