A bank’s profitability is of utmost concern in the modern economy, commercial banks are in the business of receiving deposits (liabilities) and to issue debt securities on one hand and create or invest in assets on the other hand during these transactions banks incur costs for their liabilities and earn income from their assets. Asset – liability management is therefore very critical for the sound management of the finances of any organisation that invests to meet its future cash flow needs and capital requirements. An efficient asset-liability management requires maximising the bank’s profits as well as controlling and lowering various risks. The ultimate goal is to identify the best possible strategy to manage the composition of financial institution’s assets and liability by controlling the various types of business strategies to maximise profitability. Thus profitability of banks is directly affected by management of their assets and liabilities.
BACKGROUND TO THE STUDY
The instability of the financial sector and the fact that it keeps upgrading to keep up with the demand for better products and services by clients puts operators in the industry under considerable pressure to improve upon their profit margins by finding effective strategies for managing their asset and liability portfolios. An efficient asset –liability management deals with the optimal investment of assets in view of meeting current goals of future liabilities, maximising firms profit as well as controlling and lowering various risks. The rewards from such improvements in the asset liability management techniques will spread across firm, industry and economic levels. At the national level for example the financial services sector is of central importance to the overall Zimbabwean economy as it influences, directs and engineer growth. Thesector provides market, liquidity, reduces transaction costs, provide investment opportunities and ensure competition in economic activities. This study will seek to examine some of the best practices in the management of asset and liability portfoliosgiven the Zimbabwean economy and culture.
The landscape of Asset –Liability Management for the financial sector is ever changing. Various academic and practicing financial professionals have even questioned the strengths of the traditional methods of identifying, measuring and managing risk. Several attempts have been and continue to be in the area of exploring up to date risk measurement, management and control in financial institutions and how the credit process integrates with the overall strategy of the firm in order to increase its profitability Although impact of the management of banks' asset and liability on their profitability has been studied by a number of researchers including Kosmidouet et al,2004 and Asiri,2007,the issue of banks’ profitability in developing countries has not received much attention from those researchers. This study is an attempt to close this gap to bring the issues of banks’ assets and liabilities management in developing countries squarely into focus for assisting better performance of underperforming banks in these countries. In developed countries a variety of sources and use of funds are available for banks allowing them to diversify asset and liability portfolios, but in a developing economy like Zimbabwe banks are constrained by the low breadth and depth of financial market and as such their asset and liability-base are narrower than those of their counterparts in developed countries therefore the efficient management of these portfolios is more critical than ever. For example, banks in developed countries such as USA and Australia, can invest their excess cash reserves in short term trading and investment securities unlike Zimbabwe where there is limited existence of short term trading securities such as government bills and bonds, Commercial banks have not been able to invest their...