Non Perfoming Loans in Commercial Banks in Zimbabwe Is Now a Cause of Concern as It Is Threatening the Survival of Banks Bit by Bit

Journal of acclivitous Trends in Economics and Management Sciences (JETEMS) 3(6) 882-886 Scholarlink Research Institute Journals, 2012 (ISSN 2141-7024 jetems. scholarlinkresearch. org Economics and Management Sciences (JETEMS) 3(6)882-886 (ISSN2141-7024) Journal of Emerging Trends in Insights on Non-Performing Loans Evidence from Zimbabwean Commercial Banks in a Dollarised Environment (2009-2012) 1 Laurine Chikoko, 2Tendekayi Mutambanadzo and 3Takaiona Vhimisai 1 section of Banking and Finance, Midlands State University, P Bag 9055, Senga, Gweru. Department of Banking, National University of Science and Technology P O lash AC939, Ascot Bulawayo. 3 Department of Banking, National University of Science and Technology P O Box AC939, Ascot Bulawayo. Corresponding origin Laurine Chikoko ___________________________________________________________________________ Abstract This study was prompted by the gradual deterioration in summation quality in near technical asserts in Zimbabwe after the adoption of the octuple currency exchange rate regime. The poor addition 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 accusatory of grounds the fundamental causes of the impaired assets that are bedeviling the Zimbabwean banking empyrean so that some of the mistakes are non perennial and correctional measures are put in place. The methodology adopted a survey research physical body 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 nonperforming loans due to poor credit abridgment processes wrong products offered to the clients lending based on balance sheet strength instead of cash light based lending banks taking too much comfort in security information dissy mmetry leading to moral hazard economic purlieu and political influence. Key recommendations include an urgent desktop 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 prudent guidelines are not violated. _________________________________________________________________________________________ Keywords credit analysis, loan products, non-performing loans, Zimbabwean commercial banks, dollarised environment. __________________________________________________________________________________________ INTRODUCTION the watch list category. The synthesis is that Zimbabwe adopted a multiple currency regime in borrowers were struggling to repay loans leading to 2009.A multiple currency system allowed trade to be the worry of banks sitting on non-performing conducted using major transaction currencies, for loans. exa mple, the United States Dollar (USD), Pound Sterling, South African Rand, and the Botswana Pula. Each non-performing loan in the financial sector is After the adoption of the multiple currency system, viewed as an obverse mirror image of an ailing the banking sector experience marked unprofitable enterprise.From this point of view, the improvements in the intermediary role which resulted eradication of non-performing loans is a necessary in improved financial support to the key productive condition to improve the economic status of the sectors of the thrift (Reserve Bank of Zimbabwe financial institution. Continuously rolling over non(RBZ), 2010). A research conducted by the performing loans locks up resources that could International M 1tary Fund in 2010, indicated that otherwise be invested to profitable sectors of the the profitability of banks had improved following a economy.Intuitively this hinders economic growth to a greater extent favourable economic environment during th e and impairs economic efficiency. Consequently this modern regime. While officially reported, aggregate study seeks to provide insights on Zimbabwean banking soundness indicators do not raise major red commercial banks non-performing loans. The flags, they mask vulnerabilities specific to a fully ultimate objective is to draw lessons from dollarised banking system experiencing rapid credit commercial banks lending in Zimbabwe during the growth, as well as a significant variation in prudential multiple currency regime.The paper is organised as indicators across individual banks. The Reserve Bank follows. In the second section, we present brief of Zimbabwe (2012) in addition note that there has been review of literature. In the third section we present gradual deterioration in asset quality as reflected by the research methodology in the fourth section a the level of non-performing loans trending towards 882 Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(6)882-886 (ISSN2141-7024) discussion of the findings.Finally we present conclusions and recommendations. LITERATURE REVIEW A non-performing loan is an advance by a financial institution that is not earning income and full payment of principal. As much(prenominal) interest is no longer anticipated (Van Greuning, & Bratavonic, 2003). There is no global stock to unsex non-performing loans at the practical level. Variations exist in terms of the classification system, the scope, and contents. This pitfall potentially adds to disorder and indecision in the non-performing loans subject.For instance, as described by Park (2003), during the 1990s, there were three different methods of defining non-performing loans the 1993 method based on banking laws the Banks Self-Valuation in March 1996 and the Financial Revival Laws-Based Debt Disclosure in 1999. These measurements have gradually broadened the scope and scale of the riskmanagement method in the banking industry. The literature tha t examines non-performing loans has increased as more researchers attempt to understand the major factors that cause financial instability.This trend has arisen due to the role played by impaired assets in financial instability as marchd by the strong association amidst nonperforming loans and banking crises. In most of the economies that collapsed, credit risk preceded financial crises. Khemraj (2005) revealed that the banking crises in East Asia and Sub-Saharan African countries were preceded by uplifted non-performing loans. This stimulated research in trying to establish the causes of non-performing loans in banks.Caprio (1998) had earlier presented stylised evidence and found that inadequate regulation and lack of supervision at the time of the liberalization could play a key role in explaining why deregulation and banking crises were so closely entwined. The analysis of Kaminsky and Reinhart (1999) provides interesting insights on the links amidst financial crises with fi nancial liberalisation. The study found that the proxy variable for financial liberalisation which was the growth in domestic credit as a ratio of output, accelerated greatly as the crises emerged.Earliest studies to examine the causes of loan losses were by Keeton and Morris (1987). The study showed that local economic conditions along with the poor act of certain sectors explain the variation in loan losses recorded by the banks. The study also reports that commercial banks with greater risk appetite tend to record higher losses. Garey (1991), also concur with the early(a) studies of Keeton and Morris. Garey (1991) found that loan lossexperience of large commercial banks in the US was influenced by both internal and outside(a) factors.This study found a significant positive relationship between the loan-loss rate and internal factors such as 883 high interest rates, excessive lending, and volatile funds. Non-performing loans were influenced by gross domestic product growth, hig h real interest rates, lenient credit terms and excessive lending by commercial banks (Goacher, 2002 Howells and Bain, 2002 Heffernan, 2005 Freixas, 2007 and Machiranju 2008). condescension the abundant literature on non-performing loans, to the researchers knowledge, no study has been done on causes of non-performing loans on Zimbabwean commercial banks after dollarisation in 2009.METHODOLOGY A survey research design was used in this study. The survey allowed the sight of large amount of data in an economical way (Saunders et al, 2003). data obtained through use of questionnaires was standard which allowed easy comparison. The curtailation to the survey strategy was the fact that data collected may not be as wide-ranging as those collected by other research strategies. There is a limit as to the number of questions that any questionnaire can contain if the goodwill of the respondent is not to be presumed on too much. To mitigate this weakness, personal interviews were used in t he survey strategy.Data was collected from 15 registered commercial banks in Zimbabwe. The key informants were departmental heads of credit risk, retail and corporate banking divisions. In addition account relationship managers were randomly selected in the survey. The study was carried out in Harare mainly because that is where all commercial banks are headquartered. Data from the survey was analysed using STATA version 11. Tabulations were used to show percentages and frequencies of respondents in each response category, with cross-tabulation tables showing percentages and frequencies between two given categories.Crosstabulations were computed together with correlation test between two variables by using Pearson chisquare. limitation OF THE STUDY The issue of non-performing loans is a sensitive and confidential issue since it has a bearing on bank performance and reputation. To this end, we had challenges in getting a detailed account from some of the respondents. However, to ov ercome this we had to interview umpteen respondents from the same institution in order to fill in the missing details. EMPIRICAL FINDINGS On middling the banks were in business for thirty seven years but varied from five up to one hundred and eighteen years.Table 1 summarises the ages of the fifteen commercial banks. Table 1 Tabulated Zimbabwe Commercial Banks Years in Business Variable Years in business Observation 15 Mean 37. 5333 Std Dev 40. 2347 Min 5 Max 118 Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(6)882-886 (ISSN2141-7024) From the survey, age had nothing to do with the problem of non-performing loans as reflected by a? statistic of 5. 86 (P=0. 210). Of the banks surveyed, 20% were internationally own banks and 80% were locally owned banks.It was evident from the survey that locally owned banks had the problems of non-performing loans while internationally owned banks did not have problems of non-performing loans. This was shown by the obser ved differences in ownership and non-performing loans which were statistically significant as shown by the of 17. 26 (P