Abstract
This paper used complementary panel data models that are fixed effect regression model and panel vector auto regression model. The study was motivated by the hypothesis that both macroeconomic and microeconomic variables have an effect on the loan quality. The first part of the research was to determine the specific macro and microeconomic variables that give rise to the non-performing loans (NPLs) using fixed effect regression model. The empirical findings of this study provide evidence that nonperforming loans depends on macro and micro economic variables, the trend analysis of Zimbabwean commercial banks’ shows an upward movement of over the period of study. The study found out that Gross domestic product (GDP), Inflation, loan deposit ratio and bank size had a statistical significant effect on the level of non-performing loans (NPLs). The second part was mainly to model the dynamic relationship of all the variables that were found to affect non-performing loans (NPLs); this was done through impulse response analysis based on PANEL VAR model. One standard shock to credit growth will be greatly felt in the sixth year, whereas of size of the bank will have a great negative impulse in the seventh year.
Highlights
The deterioration in the quality of the loan portfolio of banks is the main cause of problems in the banking system of developed as well as developing economies (Jouini and Messai, 2013)
During the last half of 2014 the non-performing loan ratio dropped by 453 basis points to 15.91%, the decline in the non-performing loans (NPLs) ratio noted over the quarter was largely attributable to the closure of Interfin and Allied banks’ and general improvement in loan quality in a few banks
While NPLs were found to respond to macroeconomic conditions, such as Gross domestic product (GDP) growth, unemployment, and inflation, the analysis indicates that there are strong feedback effects from the banking system to the real economy, suggesting that the high NPLs that many CESEE countries currently face adversely affect the pace economic recovery
Summary
The deterioration in the quality of the loan portfolio of banks is the main cause of problems in the banking system of developed as well as developing economies (Jouini and Messai, 2013). The challenges being faced by the Zimbabwean banking sector largely mirror the macroeconomic constraints in the economy. Reserve Bank of Zimbabwe (January 2015 Monetary Policy Statement) revealed that credit risk and liquidity constraints remains the most significant challenge facing the banking sector. Zimbabwe banking sector has been experiencing a perennial problem of high non-performing loans since the dollarization of the economy in 2009. During the last half of 2014 the non-performing loan ratio dropped by 453 basis points to 15.91%, the decline in the NPL ratio noted over the quarter was largely attributable to the closure of Interfin and Allied banks’ and general improvement in loan quality in a few banks. The Reserve Bank closed two banking institutions, namely, Capital Bank Limited and Interfin Banking Corporation It cancelled Allied Bank Limited’s banking licence on 8 January 2015. With the prevalence of high NLP ratio these banks continued to experience some liquidity and solvency challenges. (January 2015 Monetary Policy Statement)
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