Credit Risk and Profitability of the Banking Sector in Zimbabwe (2009Q1 to 2015Q4).

Abstract

The main aim of this study was to empirically examine the impact of credit risk on profitability of the banking sector in Zimbabwe. In so doing, panel data collected from financial statements of five listed banks for the period 2009 Q1 to 2015 Q4 were used. STATA version 12 was used for the estimations. The study adopted the Random Effects Model and found that there is no significant relationship between credit risk (as measured by non-performing loan ratio and loan advance ratio) and profitability (as measured by return on assets). As expected, the coefficient of non-performing loan ratio had a negative but statistically insignificant relationship with profitability while the coefficient of loan advance ratio had a positive but statistically insignificant relationship with profitability. Bank age was found to have a negative impact on bank profitability whilst economic growth positively affects bank profitability. Coefficients of variables such as bank size, market share and inflation were found to be statistically insignificant. The study found that coefficients of some variables other than nonperforming loans, and loans and advances impact on profits, for instance bank age and economic growth were significant at 5% level of significance. Hence, banks should do away with old business methods and ideas that are cost inefficient. Also banks that are keen on making high profits should concentrate on other factors for example trading financial instruments such as stocks, bonds, options, futures and swaps than focusing more on the amount of nonperforming loans and loans and advances. Fiscal and monetary policies that are aimed at promoting output stability and sustainable growth should be formulated as they are good for financial intermediation.