An analysis of factors leading to rising credit risk in the Zimbabwe banking sector

Abstract

The global financial crisis and increasing vulnerability of banking institutions has created a lot of interest on the analysis of problems banking crisis can have in an economy. Of great interest has been the factors that could cause a crisis in the financial sector, of which credit risk ranks high among other factors. A number of financial institutions in Zimbabwe have collapsed due to negative impact emanating from high credit risk and poor corporate governance practises. Though a lot of research work has been done to analyse factors that influence credit risk in an economy, the majority of the research work in this area has been undertaken in other economies and not much research has been done for the Zimbabwe economy that has gone through economic cycles that were not experienced in other countries.

The main objective of the study was therefore to establish the external and internal factors that influence credit risk in the Zimbabwe banking sector. Macroeconomic factors were considered under external factors while bank specific factors and industry specific factors were classified within internal factors category. An explanatory research design was undertaken to establish the cause and effect relationship of the factors and credit risk. The data collected was analysed using the quantitative methods to obtain descriptive statistics. The study was conducted using correlation and regression techniques for the analysis of data on factors influencing credit risk in Zimbabwe’s banking sector ,upon which statistical inference were made.

The research findings revealed that credit risk in the Zimbabwe banking sector was significantly influenced by gross domestic product growth rate, interest rates, unemployment, stock market performance and management efficiency. Analysis of the determinants established that the macroeconomic factors significantly influenced credit risk, followed by the bank specific factors, both at a significance level of p<0.05,while banking industry specific factors have less impact on credit risk.

The research findings will assist the regulatory authorities and management of banking institutions in setting credit policies and taking necessary actions to mitigate the adverse effects credit risk has on banking institutions and overall financial industry performance.