Determination of optimal bank lending rates under the multi-currency regime in Zimbabwe

Abstract

The beginning of 2009 saw the ushering in of the multi-currency system in Zimbabwe. The banking sector was resultantly affected, mainly in the area of determination of optimal lending rates. The purpose of the research was to investigate the determination of optimal bank lending rates under the multi-currency regime in Zimbabwe. The study investigated the drivers/variables of bank lending rates, perception on average lending rates and the models to be used in the determination of bank lending rates under the multi-currency era. This study used the survey research strategy. Key players involved in lending practices notable the Ministry of Finance, Reserve Bank of Zimbabwe, Borrowers, and Banking Sector institutions were the population of the study. Consideration was given to both empirical and theoretical literature review to identify determinants of bank lending rates. For the purposes of the research, convenience purposive sampling was employed. The Researcher distributed questionnaires to a sample of 80 that comprised of the key players involved in lending activities. Interviews were also used as a research instrument to aid in research data collection. The collected data was analyzed using SPSS version 18 software.

Findings from the research showed that the general perception on nominal bank lending rates in Zimbabwe under the multi-currency is that they are excessive with a weighted average rate of around 17% per annum. Although the bank lending rates are excessive, a number of factors justify this position. The research project main conclusion is that the determination of bank lending rates should be based on the cost of funding plus a margin where administrative costs directly associated with raising of deposits are also factored in. Recommendations were provided based on the key players in the credit market which are Reserve Bank of Zimbabwe ,banking institutions and Ministry of Finance with a view to improve liquidity in the economy through getting international financial support, attracting foreign direct investment and promoting high corporate governance principles.