Abstract
This study evaluated the nexus between cost efficiency and non-performing loans (NPLs) in the Zimbabwean banking sector for the period 2009–2014. The study was motivated by the increase in NPLs in the banking sector while banks have been accused of profiteering through excessive bank charges and interest rates. The study contributes to the literature on the relationship between efficiency and NPLs, which is a controversial area. The study established that the average cost efficiency was 81%. It increased from 70% to 88% between 2009 and 2014. It declined in 2012 and 2013 because of slowdown in economic activity. The study established that cost efficiency negatively Granger-causes NPLs, supporting the bad management hypothesis implying that the low level of efficiency was a result of poor credit management which led to a deterioration in the quality of banks’ loan books. Although poor credit policies might look lucrative in the short run, they have detrimental effects on the quality of the loan books of banks in the long run. The policy recommendation drawn from the results is that credit managers should adhere to the international best practice in managing credit.
Highlights
The study of non-performing loans (NPLs) has gained increasing attention in the literature of the banking sector (Batra 2003; Clementina & Isu 2014; Diawan & Rodrik 1992; Sethi & Bhatia 2007; Vatansever & Hepsen 2013)
The study established that cost efficiency negatively Granger-causes NPLs, supporting the bad management hypothesis implying that the low level of efficiency was a result of poor credit management which led to a deterioration in the quality of banks’ loan books
The results showed that banks were encountering a 19% level of inefficiency, implying that banks could have produced the same amount of output by using 19% less resources if they had performed as the most efficient bank in the sample
Summary
The study of non-performing loans (NPLs) has gained increasing attention in the literature of the banking sector (Batra 2003; Clementina & Isu 2014; Diawan & Rodrik 1992; Sethi & Bhatia 2007; Vatansever & Hepsen 2013). The Basel Committee defined NPLs as any loan that is overdue for more than 90 days (Alton & Hazen 2001; Guy 2011). Fofack (2005) defined NPLs as those loans which have ceased earning income for the bank for a long time, that is, the principal and the interest have not been paid for more than 90 days. Vatansever and Hepsen (2013) argued that NPLs are a good measure to ascertain the performance of financial institutions, the economy and the stability of the financial sector. Understanding the evolution of NPLs is important because they provide a good measure of the success of the banks whose measurements depend on the profitability and quality of assets
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