Credit Risk Management in Zimbabwe

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European Journal of Business and Management ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol 4, No.1, 2012

www.iiste.org

An Analysis of the Challenges Faced by Banks in Managing Credit in Zimbabwe Severino Mavhiki1 Denver Mapetere1* Christopher Mhonde,1 1. Faculty of Commerce, Business Management Department, Midlands State University, P bag 9055 Gweru, Zimbabwe

* E-mail of the corresponding author: mapetered@msu.ac.zw

Abstract
The purpose of the study is to analyse the challenges facing banks in managing credit in Zimbabwe in the wake of the multicurrency regime that was introduced in the year 2009. The study is relevant considering that banks have an important role of financing the undercapitalised productive sectors .The chi-square is used to establish the relationship between the banks' lending decisions and the level of exposure. The results of the study suggest that increasing lending by banks exposes them to high risk of failure. The findings of this study have important implications for policy makers and banks in Zimbabwe. Keywords: risk, credit management, multicurrency, level of exposure 1. Introduction The study examines the challenges faced by banks in managing credit in Zimbabwe. This subject has become a contentious issue given the low lending levels by banks to the country's productive sector, as measured by lending capacity of about 65.01% of the available deposits as at 31 December 2010 against international standards of between 70-80%. The multicurrency regime has incapacitated the Reserve Bank and is no longer in a position to inject liquidity through the banks for onward lending to the productive sector. A number of studies have attempted to explain how various governments and central banks tackled the financial crisis in other countries. Goddard et al (2009) provided an account of the 2007-2009 global financial crises in Western Europe and he detailed measures that were enacted by governments and central banks to deal with toxic assets and recapitalize through injection of liquidity into the banking system. On the Greek financial crisis, the European Union (EU) created a legal instrument- The European Financial Stability Facility (EFSF) which was aimed at preserving financial stability to troubled Euro zone states (Goss 2010) and the International Monetary Fund (IMF) and the EU also gave Greece a bailout of US$146 billion, which was a stop gap measure to reduce the ensuing contagion from the Greek debt crisis on other European markets. In the USA, the government responded to the 2007-2009 mortgage crises by bailing out troubled banks through capital injections (Mazumder et al 2009). Countries such as Zimbabwe have lost currency and have no bailout capacity due to the use of the multicurrency regime and the international community is not willing to provide lines of credit has left researchers wondering how banks in Zimbabwe are managing credit and by extension risk in such an operating environment. 1.1 Statement of the Problem Commercial banks have a role to play in the recapitalisation of the country's productive sectors. While there is lot of theoretical and empirical research which shows that most governments and central banks injected liquidity into their ailing banks and other countries such as Greece received bailout assistance from the IMF and the EU member states such as Germany to ease their crisis, there is an information gap on how banks in countries such as Zimbabwe which lack bailout capacity as the central bank can no longer print money due to loss of currency, and the international lenders are unwilling to provide lines of credit, are able to manage credit an risk in such a highly unstable financial environment. The study thus seeks to bridge the information gap in existing literature on how the banking system in Zimbabwe can manage credit and increase their lending capacity the wake of lack of bailout capacity by the government and the unwillingness by the international...
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