Non Perfoming Loans in Commercial Banks in Zimbabwe Is Now a Cause of Concern as It Is Threatening the Survival of Banks Bit by Bit

Journal of emergent Trends in Economics and focus Sciences (JETEMS) 3(6) 882-886 Scholarlink Research Institute Journals, 2012 (ISSN 2141-7024 jetems. scholarlinkresearch. org Economics and Management Sciences (JETEMS) 3(6)882-886 (ISSN2141-7024) Journal of Emerging Trends in Insights on Non-Performing Loans Evidence from Zimbabwean mercantile slangs in a Dollarised Environment (2009-2012) 1 Laurine Chikoko, 2Tendekayi Mutambanadzo and 3Takaiona Vhimisai 1 Department of Banking and Finance, Midlands asseverate University, P Bag 9055, Senga, Gweru. Department of Banking, National University of Science and engineering science P O Box AC939, Ascot Bulawayo. 3 Department of Banking, National University of Science and Technology P O Box AC939, Ascot Bulawayo. Corresponding Author Laurine Chikoko ___________________________________________________________________________ Abstract This reading was prompted by the gradual deterioration in asset quality in most commercial-grade m un itaryy boxs in Zimbabwe after the adoption of the triune currency exchange rate political science. The poor asset qualities were reflected by the non-performing loans triming towards the maintain inclination category.In this regard we investigated the commercial bank c rosy-cheekedit process with the accusive of misgiving the fundamental ca phthisiss of the impaired assets that ar bedeviling the Zimbabwean banking sector so that some(prenominal)(prenominal) of the mistakes are not repeated and correctional measures are put in place. The methodology adopted a eyeshot research design with use of questionnaires and oppugns with commercial banks head reference book risk, head retail and head corporeal banking division from 15 registered commercial banks in Zimbabwe.Research findings show that some banks were sitting on nonperforming loans due to poor credit analysis processes wrong results offered to the clients modify based on balance sheet strength instead of cash in flow based lending banks taking too much pacifier in security information asymmetry leading to moral imagine stinting environment and political influence. Key recommendations include an urgent put up of the Credit Bureau banks should not adjust clients request and the take away for banks to consider the economic environment and adjust their credit culture.The central bank needs to tighten its supervisory role and ensure prudential guidelines are not violated. _________________________________________________________________________________________ Keywords credit analysis, loan products, non-performing loans, Zimbabwean commercial banks, dollarised environment. __________________________________________________________________________________________ INTRODUCTION the watch list category. The implication is that Zimbabwe adopted a multiple currency regime in borrowers were struggling to repay loans leading to 2009.A multiple currency organization completelyowed trade to be the problem of banks sitting on non-performing conducted using study trading currencies, for loans. example, the United States Dollar (USD), Pound Sterling, South African Rand, and the Botswana Pula. each(prenominal) non-performing loan in the monetary sector is After the adoption of the multiple currency system, viewed as an obverse mirror image of an ailing the banking sector experient marked unprofitable enterprise.From this point of view, the improvements in the intermediary role which resulted annihilation of non-performing loans is a necessary in improved pecuniary support to the observe productive condition to improve the economic status of the sectors of the economy (Reserve Bank of Zimbabwe financial institution. Continuously rolling over non(RBZ), 2010). A research conducted by the performing loans locks up resources that could International Monetary Fund in 2010, indicated that otherwise be invested to profitable sectors of the the profitability of banks had improved following a economy.Intuitively this hinders economic growth more favourable economic environment during the and impairs economic efficiency. accordingly this new regime. While officially reported, aggregate study seeks to provide insights on Zimbabwean banking soundness indicators do not raise major red commercial banks non-performing loans. The flags, they mask vulnerabilities specific to a fully ultimate objective is to draw lessons from dollarised banking system experiencing rapid credit commercial banks lending in Zimbabwe during the growth, as well as a significant variation in prudential multiple currency regime.The paper is organised as indicators crosswise individual banks. The Reserve Bank follows. In the second segment, we present apprise of Zimbabwe (2012) also noted that there has been review of literature. In the third section we present gradual deterioration in asset quality as reflected by the research methodology in the fourth section a the level of non-performin g loans trending towards 882 Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(6)882-886 (ISSN2141-7024) interchange of the findings.Finally we present conclusions and recommendations. LITERATURE REVIEW A non-performing loan is an advance by a financial institution that is not earning income and full payment of principal. As such interest is no longer anticipated (Van Greuning, & Bratavonic, 2003). There is no global standard to define non-performing loans at the practical level. Variations exist in terms of the classification system, the scope, and contents. This pitfall potentially adds to disorder and uncertainty in the non-performing loans subject.For instance, as described by Park (2003), during the 1990s, there were three incompatible methods of defining non-performing loans the 1993 method based on banking laws the Banks Self-Valuation in March 1996 and the Financial Revival Laws-Based Debt Disclosure in 1999. These measurements soak up little by little broadened the scope and scale of the riskmanagement method in the banking industry. The literature that examines non-performing loans has increased as more researchers attempt to understand the major factors that cause financial instability.This trend has arisen due to the role played by impaired assets in financial instability as evidenced by the strong association betwixt nonperforming loans and banking crises. In most of the economies that collapsed, credit risk preceded financial crises. Khemraj (2005) revealed that the banking crises in eastern United States Asia and Sub-Saharan African countries were preceded by juicy non-performing loans. This stimulated research in trying to establish the causes of non-performing loans in banks.Caprio (1998) had earlier presented stylised evidence and put up that inadequate regulation and lack of supervision at the time of the ease could play a key role in explaining why deregulation and banking crises were so closely entwined. T he analysis of Kaminsky and Reinhart (1999) provides interesting insights on the links between financial crises with financial liberalisation. The study erect that the proxy variable for financial liberalisation which was the growth in domestic credit as a ratio of output, accelerated greatly as the crises emerged.Earliest studies to examine the causes of loan losses were by Keeton and Morris (1987). The study showed that local economic conditions along with the poor implementation of certain sectors explain the variation in loan losses record by the banks. The study also reports that commercial banks with greater risk proclivity tend to record higher losses. Garey (1991), also concur with the early studies of Keeton and Morris. Garey (1991) found that loan lossexperience of large commercial banks in the US was influenced by both internal and external factors.This study found a significant validatory relationship between the loan-loss rate and internal factors such as 883 high interest rates, excessive lending, and volatile funds. Non-performing loans were influenced by gross domestic product growth, high real interest rates, lenient credit terms and excessive lending by commercial banks (Goacher, 2002 Howells and Bain, 2002 Heffernan, 2005 Freixas, 2007 and Machiranju 2008). Despite the abundant literature on non-performing loans, to the researchers knowledge, no study has been done on causes of non-performing loans on Zimbabwean commercial banks after dollarisation in 2009.METHODOLOGY A analyse research design was apply in this study. The survey allowed the collection of large amount of data in an economical way (Saunders et al, 2003). Data obtained through use of questionnaires was standard which allowed elementary comparison. The limitation to the survey strategy was the fact that data collected may not be as wide-ranging as those collected by other research strategies. There is a limit as to the identification number of questions that any questi onnaire can contain if the goodwill of the respondent is not to be presumed on too much. To mitigate this weakness, personal interviews were utilize in the survey strategy.Data was collected from 15 registered commercial banks in Zimbabwe. The key informants were departmental heads of credit risk, retail and corporate banking divisions. In addition account relationship managers were randomly selected in the survey. The study was carried out in Harare mainly because that is where all commercial banks are headquartered. Data from the survey was analysed using STATA version 11. Tabulations were used to show percentages and frequencies of respondents in each response category, with cross-tabulation tables showing percentages and frequencies between two given categories.Crosstabulations were computed together with correlation test between two variables by using Pearson chisquare. LIMITATION OF THE STUDY The issue of non-performing loans is a sensitive and mystical issue since it has a bearing on bank performance and reputation. To this end, we had challenges in getting a detailed account from some of the respondents. However, to overcome this we had to interview many respondents from the same institution in order to fill in the missing details. EMPIRICAL FINDINGS On average the banks were in business for xxx seven years but varied from five up to one hundred and eighteen years.Table 1 summarises the ages of the fifteen commercial banks. Table 1 Tabulated Zimbabwe Commercial Banks Years in Business Variable Years in business Observation 15 Mean 37. 5333 Std Dev 40. 2347 Min 5 sludge 118 Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(6)882-886 (ISSN2141-7024) From the survey, age had null to do with the problem of non-performing loans as reflected by a? statistic of 5. 86 (P=0. 210). Of the banks surveyed, 20% were internationally owned banks and 80% were locally owned banks.It was evident from the survey that locally owned banks ha d the problems of non-performing loans while internationally owned banks did not have problems of non-performing loans. This was shown by the observed differences in ownership and non-performing loans which were statistically significant as shown by the of 17. 26 (P