An investigation of the sufficiency of credit risk management in the banking sector:The case of Zimbabwe

Abstract

This study sought to investigate the sufficiency of credit risk management in the banking banking sector in Zimbabwe, and reviews the existing literature on the sufficiency of credit risk management in banking sector in developing countries by studying the case of the Zimbabwean financial sector, which experienced severe banking crisis mainly because of poor credit risk management in the period between 2000 to 2011.

The study adopted a qualitative research design approach. The population of this study consisted of players in the banking sector in Zimbabwe. To ensure uniformity and because of their role the main focus on extending loans to clients, commercial banks only were considered for this survey. A total of seventeen (17) questionnaires were administered commercial banks to senior risk managers. Interviews were carried out with senior management from the Reserve Bank of Zimbabwe and the commercial banks.

Results of the study showed that while the banking sector had credit risk management systems in place these were considered to be insufficient as to ensure banking sector stability in Zimbabwe. Governance systems were also weak to support a robust credit risk management system. Failure to adopt Enterprise Risk Management means that a number of banking institutions are managing some risks in isolation, which in many cases lead to underestimation of total risk the institution faced. Major issues that the study unearthed include the issue on Non Performing Loans management, inadequate provisioning and poorly performing insider loans. Further there were issues of management overriding systems put in place to ensure to manage credit risk in the banking institutions. Regulatory authorities have also been lax in managing sector wide credit risk.

The study recommends that the banking sector adopt a new credit risk management framework that addresses risks holistically. Governance systems also need to be strengthened as they underpin a stronger risk management culture. Institution supporting credit risk management like credit bureaus should be established and regulatory authorities should rethink bank supervision.