Credit Risk in a Volatile Environment: A Case of Zimbabwe Commercial Banks

Abstract

This research study the credit risk in a volatile environment: a case of Zimbabwe commercial banks was undertaken because non-performing loans within Zimbabwean commercial banks have been increasing for the past 3 years. This research study was guided by objectives such as 1) to analyze the effect of credit risk in a volatile environment on banks in Zimbabwe, 2) to identify challenges in credit risk management that arise from the volatile marketing environment in Zimbabwe and 3) to determine measures that can be taken to mitigate against high credit risk in a volatile environment in Zimbabwe. The research study adopted positivism research philosophy and quantitative research strategy. The research study used a population of 800 employees and managers of commercial banks such as FBC, CBZ Bank, ZB bank, Nedbank, Steward, Nmb, First, Capital Bank, Standard Chartered bank, Stanbic, BankAbc, Metbank and Ecobank. To obtain a figure of 800 as a target population of this research study, the researcher visited the human resources department of every mentioned bank and asked for the number of employees and managers who are at the organization’s head office. In the research study the researcher used a sample size of 260. To determine the sample size of 260 employees, the researcher adopted Raosoft online sample size calculator. It was the finding of this research study that poor business viability and attainment of low net income and cash from operations is the major effect of credit risk in a volatile environment on banks in Zimbabwe. It was also established that credit risk has a strong negative relationship with bank performance, measured as the return of bank index and bank stocks, that is banks such as FBC bank, CBZ Bank, ZB bank, Nedbank, Steward, Nmb, First Capital Bank, Standard Chartered bank, Stanbic, BankAbc, Metbank and Ecobank. Credit risk is the most influential risk exposure on the bank profitability for the Zimbabwean banking sector but it changes at the bank level, that is some banks may effected by changes in interest rate. It was also established that credit risk also has significant negative effect on return volatility. Therefore less credit risk means high profit with less volatility for banks, in other words, less credit risk means stronger and stable growth for banks. It was established that banks face challenges such as inefficient data management. It was established that credit risk management solutions require the ability to securely store, categorize and search data based on a variety of criteria. Any database needs to be updated in real time to avoid potentially outdated information, as well as be keyword optimized to ensure easy location of information. The study established that having the Board which articulates credit risk management policies, procedures, aggregate risk limits, review mechanisms and reporting and auditing systems can act as a measure that can be taken to mitigate against high credit risk in a volatile environment in Zimbabwe. In reality, a bank can only adjust for risks through a variety of conventional mechanisms and strategies, but still there are no certainties. Hence, risk managers are constantly obliged to consolidate reliable risk profiles and refined mitigating processes suiting every rate of change within the environment. The other challenge is of understanding the potential risks associated with new credit products in a given business line which is heightened when firms attempt to see how those risks intersect with the risks from its other business lines. The study further recommend that the management of banks should adopt a strategic risk management so that their employees will view credit risk in a more positive manner. Banks in Zimbabwe should adopt a strategic approach to credit risk activities. This is possible when banks in Zimbabwe creates a risk department that creates and implements strategic risk plans. Strategic risk means adopting a risk policy and reporting all credit risk practices in the media. This arrangement would assist banks in Zimbabwe to generate more information on credit risk global practices and to clearly understand the meaning attached to credit risk by other partners in business.