An assessment of the impact of inflation on banking sector performance in Zimbabwe (2000 -2008) and (2009 - 2012): The case of CBZ Bank Limited

Abstract

The study evaluates the impact of inflation on banking sector performance in Zimbabwe. The research was a case study for CBZ Bank Limited for the period 2000 to 2012. The period was further split into a period of sustained inflation and hyperinflation (2000 – 2008) and a period of low and stable inflation (2009 - 2012).

Research participants were 55 employees drawn from the bank’s four regions. Stratified-random sampling method was used to choose the sampling units. Data were collected using questionnaires and structured interviews. The list of questions comprised of closed-ended questions, scale format questions and open-ended questions. Qualitative data were analysed using mainly Content Analysis.

Results show that there is a critical inflation threshold above which additional increases in inflation lead to adverse performance of the banking sector. At this point credit market frictions become binding, credit rationing intensifies and there is a discrete drop in financial sector performance and economic growth.

Adverse effects of inflation to the financial sector in Zimbabwe include and are not limited to the following: financial intermediation becomes more difficult when inflation rates are very high, flow of information about investment projects and returns that is used by intermediaries becomes more uncertain and less readily available, planning becomes very difficult for economic agents and returns on investments are rendered unpredictable. The proposition was validated and proven to be correct. The financial regulatory authorities and the government are recommended to formulate policies that prevent inflation from gaining strength and/or mitigate against the adverse effects of inflation.