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APPROVAL FORM
The undersigned certify that they have supervised the student B1542606. Dissertation entitled:
The impacts of interest rate on financial performance of commercial banks. A survey of
ZB commercial bank in Zimbabwe (2013-2017) submitted in partial fulfilment of the
requirements of Bachelor of Commerce Honours Degree in Banking and Finance at Bindura
University of Science Education.
…………………………………....... ……/………/…………/…………
STUDENT DATE
…………………………………….. …/…………/……………/……….
SUPERVISOR DATE
……………………………….. …/…………/…................/.............
CHAIRPERSON DATE
ii
RELEASE FORM
NAME OF STUDENT: Kambuyu Tendai
DISSERTATION TITLE: The impacts of interest rate on financial performance.
A survey of ZB financial holdings in Zimbabwe.
DEGREE TITLE: Bachelor of Commerce Honours Degree in Banking
and Finance.
YEAR THIS DEGREE IS
GRANTED: 2019
Permission is hereby granted to the Bindura
University of Science Education Library to produce
single copies of this dissertation and to lend or sell
copies for private, scholarly or scientific research
purpose only. The Author reserves other publication
rights and neither the dissertation nor extensive
extracts from it may be printed or otherwise
reproduced without the author’s written permission
SIGNED: ………………………………………………...
PERMANENT ADDRESS: 3839, Tynwald North, Westgate
Harare, Zimbabwe
CELL: 0784 001 809/ 0715 677 536
iii
DEDICATIONS
To my family, friends and relatives. You are an amazing family ever!
iv
ABSTRACT
The study aimed to empirically investigate the impacts of interest rates on financial
performance of commercial banks in Zimbabwe, taking into consideration other factors that
affect financial performance of commercial banks in Zimbabwe banking sector. The study
results revealed that interest rate do have a weak positive impact on financial performance of
commercial banks in Zimbabwe. The study also revealed that money supply is the major factor
that influence financial performance of banks as supported by findings from primary sources
(questionnaire). In the study, primary data was collected through interviews and questionnaires
instruments for presentation in chapter four. According to findings (regression analysis),
interest rate and financial performance positively relate in the short run and a negative
relationship co-exists in the long run. The study concluded that interest rate has an influence
on financial performance and hence the researcher rejected null hypothesis (H0). The study
also recommended the government of Zimbabwe through the RBZ to put interest rate ceilings
and floors to protect customers and commercial banks. Therefore, there is need for the central
bank (RBZ) to regularize, control and review the interest rate policy so as to restore customers’
confidence in the banking sector and to promote a good environment in the banking sector.
Keywords: Interest rate, financial performance, commercial banks, monetary policy, return on
assets, return on equity
v
ACKNOWLEDGEMENTS
First and foremost, I would like to thank the Lord for the strength and knowledge he poured
for the success of this research. Secondly, I would like to express my gratitude to all people I
have met during the period I was undertaking the study in the field. I would also like to express
my indebtedness to my supervisor for guidance and the unwavering support throughout the
study, RBZ personnel and ZB Financial Holdings for furnishing me with necessary information
which led to the success of this study. My special thanks also goes to all Banking and Finance
lectures for assisting me with guidance. To my dad, mum, brothers, sisters and my lovely
girlfriend, I would like to say thank you for infinitely supporting me with prayers, courage and
financial support which contributed to the success of this study. You have been a motivating
force to the success of this research.
vi
Table of Contents
APPROVAL FORM .............................................................................................................................. i
RELEASE FORM ................................................................................................................................. ii
DEDICATIONS ................................................................................................................................... iii
ABSTRACT .......................................................................................................................................... iv
ACKNOWLEDGEMENTS ................................................................................................................. v
List of tables.......................................................................................................................................... ix
List of figures ......................................................................................................................................... x
List of Abbreviations and acronyms .................................................................................................. xi
List of Appendices ............................................................................................................................... xii
CHAPTER I .......................................................................................................................................... 1
INTRODUCTION ................................................................................................................................. 1
1.0 Introduction ................................................................................................................................. 1
1.1 Background of the study....................................................................................................... 1
1.2 Financial performance ................................................................................................................ 3
1.2.1 The financial performance of ZB Bank from 2012-2017 .................................................. 4
1.3 Problem statement ...................................................................................................................... 5
1.4 Research objectives ..................................................................................................................... 5
1.5 Research questions ...................................................................................................................... 6
1.6 Research hypothesis .................................................................................................................... 6
1.7 Assumptions of the study ............................................................................................................ 6
1.8 Significance of the study ............................................................................................................. 6
1.8.1 The researcher ...................................................................................................................... 6
1.8.2 Academics ............................................................................................................................. 7
1.8.3 The banking sector in Zimbabwe ....................................................................................... 7
1.8.4 The Bindura University ....................................................................................................... 7
1.8.5 The regulator ........................................................................................................................ 7
1.9 Delimitations of the study ........................................................................................................... 7
1.10 Limitations of the study ............................................................................................................ 8
1.11 Definition of terms .................................................................................................................... 8
1.12 Chapter Summary .................................................................................................................... 9
CHAPTER II ......................................................................................................................................... 9
LITERATURE REVIEW .................................................................................................................. 10
2.0 Introduction ............................................................................................................................... 10
2.1 Zimbabwe current interest rate ............................................................................................... 10
vii
2.2 Theoretical review ..................................................................................................................... 10
2.2.1 Loanable funds theory ....................................................................................................... 10
2.2.2 Expectations theory ............................................................................................................... 11
2.2.3 Loan pricing theory ........................................................................................................... 11
2.2.4 Credit market theory ......................................................................................................... 12
2.3 Conceptual framework ............................................................................................................. 12
2.4 Empirical review ....................................................................................................................... 13
2.5 Other Determinants of Financial performance of commercial banks ................................. 16
2.5.1 Lending interest rate .......................................................................................................... 16
2.5.2 Leverage or gearing ratios ................................................................................................ 16
2.5.3 Firm’s size ........................................................................................................................... 16
2.5.4 Economics factors .............................................................................................................. 16
2.6 Financial performance indicators ............................................................................................ 17
2.6.1 Return on Equity (ROE) ................................................................................................... 17
2.6.2 Net Interest Margin (NIM) ................................................................................................ 17
2.6.3 Return on Assets (ROA) .................................................................................................... 17
2.7 Gap Analysis .............................................................................................................................. 17
2.8 Chapter Summary .................................................................................................................... 18
CHAPTER III ..................................................................................................................................... 18
RESEARCH METHODOLOGY ...................................................................................................... 19
3.0 Introduction ............................................................................................................................... 19
3.1 Research Design ........................................................................................................................ 19
3.2 Population and sample ............................................................................................................. 19
3.2.1 Population of the study ...................................................................................................... 20
3.2.2 Sample of the study ............................................................................................................ 20
3.2.2.1 Cluster sampling ............................................................................................................. 20
3.2.2.2 Convenience sampling .................................................................................................... 20
3.2.2.3 Stratified random sampling ........................................................................................... 20
3.3 Research instruments and data collection procedures .......................................................... 21
3.3.1 Primary Data ...................................................................................................................... 21
3.3.1.1 Questionnaires ................................................................................................................. 22
3.3.1.2 Personal interviews ......................................................................................................... 23
3.3.2 Secondary Data ...................................................................................................................... 23
3.4 Validity and reliability .............................................................................................................. 24
3.4.1 Pilot test of Instruments .................................................................................................... 24
viii
3.5 Model Specification and Parameter estimation ..................................................................... 24
3.6 Justification of the variables for the model............................................................................. 25
3.6.1 Demand for loanable funds (DLF) ................................................................................... 25
3.6.2 Interest rates (RIR) ............................................................................................................ 25
3.6.3 Inflation ............................................................................................................................... 25
3.6.4 Money supply growth (M2) ............................................................................................... 25
3.7 Data Presentation and Data Analysis procedures .................................................................. 26
3.8 Chapter summary ..................................................................................................................... 27
CHAPTER IV......................................................................................... Error! Bookmark not defined.
DATA PRESENTATION, ANALYSIS AND DISCUSSION .......................................................... 28
4.0 Introduction ............................................................................................................................... 28
4.1 Response rate ....................................................................................................................... 28
4.2 Analysis and Presentation of responses to questions ............................................................. 31
4.2.1 Factors affecting financial performance of commercial banks ...................................... 31
4.2.2 response on customers who have ever applied for a loan ............................................... 33
4.2.3 factors considered by customers when applying for a loan. ........................................... 34
4.2.4 Responses on clients who switched banks regarding to loan issues ............................... 35
4.2.5 Period while the respondents were employed at ZB Financial Holdings ...................... 38
4.2.6 Response on the relationship between interest rates and performance of commercial
...................................................................................................................................................... 39
4.2.7 Responses on the type of relationship that exist between interest rates and financial
performance. ................................................................................................................................ 40
4.3 Analysis and presentation of data from interview questions ............................................ 42
4.4 Analysis of results from secondary data ................................................................................. 43
4.4.1 Correlation and regression Analysis ................................................................................ 43
4.5 Chapter summary ..................................................................................................................... 47
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ..................................................... 48
5.0 Introduction ............................................................................................................................... 48
5.1 Summary of findings ................................................................................................................. 48
5.2 Conclusions ................................................................................................................................ 49
5.3 Recommendations ..................................................................................................................... 50
5.4 Suggestions for further studies ................................................................................................ 50
5.5 Chapter Summary ....................................................................... Error! Bookmark not defined.
REFERENCES .................................................................................................................................... 51
ix
List of tables
Table 3.1 Likert scale………………………… ……………………………………………...23
Table 4.1 Summary of responses of questionnaires………………………………...………...29
Table 4.2 Factors affecting financial performance …………………………………...............32
Table 4.3 Factors considered when applying for a loan………………………….....................34
Table 4.4 reasons for switching banks ………………………………………..........................36
Table 4.5 period at work………………………………………………………………............38
Table 4.6 type of relationship between interest rate and financial performance………............40
Table 4.7 ROA for ZB Bank (2013-2017) ……………………………………………............43
Table 4.8 ROE for ZB Bank (2013-2017) ……………………………………………………44
Table 4.9 Annual interest rates………………………………………………………………..45
Table 4.10 descriptive statistics………………………………………………………………45
Table 4.11 Regression results of interest rate and ROE……....………………………………46
Table 4.12 regression results interest rate and ROA…………………………………………..47
x
List of figures
Fig 1.1 Finance performance of ZB Bank……………………………………………………..4
Fig 4.1 Response rate on questionnaires…………………………………………………......30
Fig 4.2 Response rate on interviews…………………………………………………………31
Fig 4.3 Factors influencing financial performance…………………………………………..32
Fig 4.4 Level of influence of each factor…………………………………………………….33
Fig 4.5 Customers who have applied for a loan……………………………………………...34
Fig 4.6 Factors considered when applying for a loan………………………………………...35
Fig 4.7 Number of customers who switched banks………………………………………….36
Fig 4.8 Reasons for switching banks…………………………………………………………37
Fig 4.9 Experience at work…………………………………………………………………...39
Fig 4.10 Relationship between Interest rate and financial performance……………………..40
Fig 4.11 Type of relationship between interest rate and financial performance……………..41
Fig 4.12 Relationship between interest rate and interest income………………………….....42
Fig 4.13 Trend analysis of ZB’s ROA……………………………………………………….44
Fig 4.14 Trend analysis of ZB bank’s ROE…………………………………………………45
xi
List of Abbreviations and acronyms
RBZ……………. …………………………...Reserve Bank of Zimbabwe
IMF………………………………………......International Monetary Fund
SADC ………………………………………. Southern African Development Community
MPS…………………………………………. Monetary Policy Statement
ROA…………………………………………. Return on asset
ROE …………………………………………. Return on Equity
OMO…………………………………………. Open Market Operations
GDP…………………………………………...Gross Domestic Product
MS…………………………………………......Money Supply
ZIMSTAT………………………………….......Zimbabwe National Statistics Agency
ANOVA………………………………………. Analysis of Variance
RIR……………………………………………. Real Interest Rate
NIM…………………………………………….Net interest Margin
xii
List of Appendices
Appendix 1: Research questionnaires………………………………………………………..57
Appendix 2: Research Interview Questions………………………………………………….62
Appendix 3: Interest rate, ROA and ROE……………………………………………………63
1
CHAPTER I
INTRODUCTION
1.0 Introduction
Interest rate has been identified as one of the major tools used to drive economic performance
for any given country. In most countries, monetary policy is placed in the hands of the Central
Bank under the supervision of the governor. Since interest rate influence the supply and
movement of money in the economy, its effects are of great concern to the banking sector in
Zimbabwe (Kariuki & Ngahu, 2016). This therefore portrays that the ineffective controlling of
money using interest will pose some dangers to the bank’s financial performance. This calls
the need for effective and sound interest to improve efficiency and financial performance of
commercial banks in Zimbabwe. This research provides a review on the resulting effects of
interest rates on banking sector in Zimbabwe –specifically to ZB Financial Holdings
commercial bank. The chapter 1 covered background of the study, statement of the problem,
purpose of the study; objectives, research questions; hypothesis statement, assumptions,
delimitations of the study, limitations, definition of terms and the chapter summary.
1.1 Background of the study
According to Sayedi (2013), Interest rate is the cost of borrowing normally expressed as a
percentage over given time period. Over the last two decades’ different significant changes
took place in the global economy with effects for the international macroeconomics variables
like the bank discount rates. These developments comprise some more integrated international
economies like India; United States of America and China which were undertaking approaches
to the monetary policy by central banks following the worldwide financial crisis (GFC).
Interest rate policy implemented by central banks show circumstances within economies with
respect to economic development and growth. According to Bernake & Blinder (1995) central
banks behaviour globally on interest rate is seized by fluctuations in price (inflation) relative
2
to target and by output departures from potential. Global interest rate is initiate to rise
significantly when aggregate international output, international prices and prices of oil are also
increasing (Juvenal & Petrella, 2014).
In Zimbabwe; the interest rates were fluctuating due to macroeconomics instability (Mzumara,
2006). The standard interest rate in Zimbabwe was last logged at 9.32%. The rate of interest
was averaged 12.28% from 2011 up to 2018; getting an all-time extreme of 16.04% in March
2012 due to dollarization that have been implemented in 2009 and the lowermost rate of 8.86%
in September 2017 (source RBZ). The Central bank of Zimbabwe does not have an official
discount rate, but they use the weighted lending rate (RBZ). Weighted lending rate is the
addition of lowest nominal lending rates weighted by specific bank’s loan book sizes and
issued by the Reserve bank of Zimbabwe (RBZ reports).
Zimbabwe has been characterised by high volatility of interest rate in the recent past years due
to economic surges on commercial banks performance remains unknown (Mzumara, 2006).
Commercial banks in the Sub Saharan remained high as compared to those in the rest of the
world (IMF,2001). Zimbabwe is dominated by commercial banks in its financial sector and
any failure would result in bank runs as a result of the contagion effect which could implicate
the financial crisis (IMF,2001). There are 13 commercial banks in Zimbabwe (the mid-
monetary policy statement of 2018). In the recent years; a large number of developing
countries especially African countries like Zimbabwe have been deregulating and reforming
the financial systems to liberate them so that they will provide viable financial services to their
general populace (Seibel, 2001).
Commercial banks in Zimbabwe during the era of 2000 to early 2009 were having challenges
of hyperinflation in the volatile environment (RBZ BLSS; 2009). According to the monetary
policy statement (2009), inflation rose to 231 150 889% in 2008 and this obstacle most
commercial banks performance (Source: ZIMSTAT). During this crisis period in Zimbabwe,
commercial banks had no choice other than charging 100% interest rates on loans and paid
approximately 40% on deposits (World bank). In the SADC region, interest rate spread (the
difference between interest charged on loan and interest paid on deposits) was averaged at
10.15% at the same time as in Zimbabwe was higher at 144.60% (World Bank indicator,
2015).
In 2009, the RBZ dollarized the economy with new stable currency which created a friendly
3
environment for both investors and commercial banks (Monetary Policy Statement; 2009). In
this era, the government of Zimbabwe abandoned the Zimbabwean dollars (bearer cheques)
and adopted the multicurrency regime system specifically the United States Dollar and South
African Rand and to a lesser extent of British Pound and Botswana Pula (Mzumara, 2012).
Interest rate cap was removed in this year and the interest rate was now determined by the
market forces of demand and supply (Monetary Policy Statement, 2009). This affected the
economic units as they were reluctant to save their money with the commercial banks as they
would receive low rates of interest and the deficit units were also reluctant to borrow at high
rates from Commercial banks in Zimbabwe (Njanike, 2008). Some international commercial
banks like Barclays (now First Capital Bank), Stanbic, Standard Bank, to mention but a few
remained inactive in their lending approach as they increase their ratios of loan to deposits by
increasing their loans and advances between 2009 to 2012 (Monetary Policy Statement, 2012).
Financial performance of commercial banks was low during these years. In 2013, the financial
crisis rocked the commercial bank sector due to non-performing loans increase and misuse of
depositor’s funds (RBZ, 2014) and two banks were forced to close in 2014 due to this
challenge (liquidity). Most commercial banks made some net losses during the year 2014 as
the clients lost confidence in the system due to bank overruns as the central bank was failing
to perform its function as a lender of last resort. However, the bank’s financial performance
increased from 2015 to 2017.
Commercial banks in Zimbabwe have been making remarkable profits although some were
declaring loses like the Time bank, Kingdom bank and Trust bank. The studies researched
suggest indicating that, provided the importance of commercial banks in the continent of
Africa, the understanding of the factors that hinder the financial performance of commercial
banks is important.
1.2 Financial performance
Financial performance is the degree of the change in financial terms of a firm’s financial
outcomes that emanates from decisions of the management (Woods & Sangster, 2005).
Financial performance of a commercial bank in Zimbabwe is mirrored in the drifts of returns
from investments and share prices from an investor’s perspective (Randal, 1996). Commercial
banks also monitor performance through the accounting measures like Return on Investments,
4
return on assets, return on equity (Woods & Sangster, 2005) and operating profit margin
(Gilchris, 2013). CAMELS (Capital adequacy, Asset Quality, Management competency;
Earnings; liquidity and market risk sensitivity) rating system is one of the tools used by central
bank to evaluate the financial performance of commercial banks in Zimbabwe (Pearson, 2012).
Other financial management accounting methods used to measure financial performance are
Return on Average assets (ROA), Return on capital employed; net profit margins and Return
on Equity (Lerner, 1993); to mention but a few commonly used. Asset quality provides the
quality of loans and how well resources are used. The accounting measures have the benefit of
being measuring absolute performance (Randal, 1996). In the study, the measures of financial
performance will dwell much on accounting principles and measures rather than the returns
from stocks.
Analysis of financial performance of commercial banks has been of huge interest to academic
study since the Great depression of 1940’s. The study indicated that Sub-Saharan Africa’s
commercial banks have better financial performance in the last two decades as compared to the
rest of the whole world due to their better Return on Assets (ROA).
1.2.1 The financial performance of ZB Bank from 2012-2017
Figure 1.1
Source: figures extracted from ZB website (www.zb.ac.zw).
-3,00%
-2,00%
-1,00%
0,00%
1,00%
2,00%
3,00%
4,00%
2012 2013 2014 2015 2016 2017
RO
A I
N %
YEARS
Financial perfomance as measured by return fomance as measur
on assets (ROA)
ROA
5
As shown above the return on asset from the financial statements of ZB financial Holdings
were fluctuating from 2012 to 2017. In 2012 there was a ROA of 2.92% which then declined
to 0.82% in 2013 and then to a negative ROA of -2.68% in 2014. The ROA rose to 2.16% in
2015 and increase at a decreasing rate in 2016 to 2.32%. The Return on Asset further increased
to 2.98% in 2017 by a greater margin. All these changes show fluctuations in financial
performance and it is to the researcher’s attention to research on the impacts of interest rates
on this performance (Source: www.zb.ac.zw)
1.3 Problem statement
The commercial banks in Zimbabwe are continually affected by interest rates which are high
on bank loans, high charges of banking transactions and low for client’s deposits. Exorbitant
charges make it difficult for commercial banks to perform their intermediary role of mobilizing
funds from surplus units to deficit units. The financial performance of commercial banks has
been fluctuating in recent years and it is to the attention of the researcher to assess on how
interest rates impact this financial performance. The researcher was motivated by the
fluctuations in bank performance and decided to research on the effects of interest rates to the
overall financial performance holding other factors that affect financial performance to be
constant. In Zimbabwe, very few studies have been taken to examine the degree to which
interest rates affects financial performance of commercial banks prior to other determinants
that impact in the financial performance of banks. The different studies on financial
performance of commercial banks in Zimbabwe have not been fully researched regarding
interest rates as the major determinant and it is vital that the gap be filled by the researcher’s
study to answer the following question. What is the effect of interest rates policy on the
financial performance of commercial banks in Zimbabwe?
1.4 Research objectives
Main objective
Ø To investigate the impacts of interest rate policy instrument on the financial
performance of commercial banks in Zimbabwe
Other Objectives
Ø To determine the effects of interest rate on net interest income of commercial banks in
Zimbabwe.
6
Ø To analyse other factors that impact the financial performance of Commercial Banks in
Zimbabwe.
1.5 Research questions
Ø What are the impacts of using interest rate policy instrument by the central bank (RBZ)
on the Financial performance of commercial banks in Zimbabwe?
Ø What are the implications of interest rates on net interest income of commercial banks
in Zimbabwe?
Ø What are other factors apart from interest rate that influence the financial performance
of commercial banks in Zimbabwe?
1.6 Research hypothesis
Null hypothesis (H0): The actions of Reserve Bank in manipulating the interest rate policy do
not have significant impacts on the financial performance of commercial banks in Zimbabwe.
Alternative hypothesis (H1): The actions of the Reserve bank in manipulating the interest rate
policy do have major impacts on the performance of commercial banks in Zimbabwe.
1.7 Assumptions of the study
Ø Findings reflected the problems which were being faced by ZB commercial bank and
how interest rate policy instrument influenced the financial performance of the
commercial bank.
Ø The fairly stable political and economic environment was to prevail in the foreseeable
future.
Ø The limitations encountered by the researcher did not negatively impact the validity of
the findings.
1.8 Significance of the study
The researcher did the research to help:
1.8.1 The researcher
7
Carrying out this research on the effects of interest rate on financial performance of commercial
banks will help the researcher to be fully equipped with ideas and technical knowhow of how
monetary policies affect financial performance of banks. It will also assist the researcher to
attain an honours degree in Banking and Finance since it is a requirement for one to graduate.
1.8.2 Academics
It will also assist other students to get information for literature review. It will assist other
academics to acknowledge the notion that interest rate policy has significant effects on the
financial performance of commercial banks in Zimbabwe.
1.8.3 The banking sector in Zimbabwe
This research will help many banks in Zimbabwe to appreciate the effects of interest rate by
the RBZ on their financial performance and how they should comply with the policy to increase
their lending capacity.
1.8.4 The Bindura University
This piece of research will be of paramount importance to the Bindura University as it will
increase the quantity of thesis therefore provides students with knowledge for their literatures.
1.8.5 The regulator
This study will assist the Reserve bank of Zimbabwe as the regulator of commercial banks in
formulating policy to control and regulate interest rates so as to achieve its macroeconomics
objective like stable prices, balance of payments equilibrium; exchange rate stability and high
employment rate.
1.9 Delimitations of the study
This research was based on commercial banks in Harare specifically to ZB financial holdings
commercial bank. Both primary and secondary data was used. Trends between 2013 to 2017
was used. The research used both quantitative data and qualitative data to support the figures;
graphs; pie charts and tables. The study was concentrating on the secondary information
extracted from Zimbabwe National Statistics Agency (ZIMSTAT) and the Reserve Bank of
Zimbabwe (RBZ) publications for the period under study. Primary data was extracted from
8
questionnaires and interviews. It was set to investigate if interest rates have an impact on the
financial performance of commercial banks in Zimbabwe.
1.10 Limitations of the study
1.There was lack of coordination from selected and targeted groups. Workers and customers
were wary of the intension of the study. However; to minimise this challenge; the researcher
highlighted on the significance of the study and guarantee confidentiality which means no
names was to be published in the study. To coordinate the selected group; the researcher
communicated effectively so as to enhance participation by every member selected.
2. Though there is time period given; reference to data and information from previous years
made as the researcher instituted and tried to use current and past data on interest rate and
financial performance. In addition, the data gathered tend to scatter or made it very difficult to
pass an objective judgement because a lot of things happened economically or politically in
this turbulent environment of the economy.
3. Getting access to undertake the research within the bank was not an easy task as banks feared
that their confidentiality would be tempered with. To reduce this limitation so as to access
information easily, the researcher used a letter from the University seeking permission to
undertake the study.
1.11 Definition of terms
1.11.1 Financial performance- is the bank’s capacity to generate new resources, from its
operations on daily basis over a given time period and it is determined by net income and cash
from operations (Poudel, 2012). It is a gauge of how a firm is profitable in relative to its total
current and fixed assets (McConnel, 2009). Performance is the capacity to sustain growth and
stability over given period (Mzumara, 2006).
1.11.2 Interest rate- According to Crowley (2007), interest rate is defined as the funds a
borrower paid on borrowed funds from a financial institution. It is the price in monetary value
in percentages compensated to lenders for borrowing (Chandra, 2005).Interest rate is the cost
of borrowing borne by borrowers (Beardshaw, et al., 2001).
1.11.3 Lending rate- The amount of interest that borrowers pay to the banks when they get
money from the banks (Beardshaw, et al., 2001).
9
1.11.4 Financial intermediation- It refers to the provision of financial services and products
that is savings and credit (Njanike, 2008).
1.11.5 Dollarization- the adoption of another official currency of another country to use as the
local currency to facilitate trade of goods and services. In Zimbabwe the Reserve Bank of
Zimbabwe adopted the US$ in 2009 (Mzumara, 2006).
1.11.6 Money supply- It is the total amount of currency in an economy that is circulating in a
given time period (Mzumara, 2012)
1.11.7 Inflation- It is a persistent rise in general price level of services and goods in an
economy for a specified time period (Mzumara, 2012)
1.12 Chapter Summary
This chapter focused on introduction of the topic. It also signified the objectives, research
questions, research hypothesis as the backbone of this research. Other issues taken note of are
scope of the study, justification of the study and limitations of the study. This chapter act as
the foundation of the research in which the whole research will rely on. As the introduction
chapter, it outlines the objectives to be achieved in the research and the research questions that
should be answered by the research in the study. All other chapters that is chapter 1 to 4 rely
on this chapter as their foundation. The next chapter outlines the literature review of the study
through theoretical review and empirical review and the gap to be filled was also identified in
the next chapter of the study.
10
CHAPTER II
LITERATURE REVIEW
2.0 Introduction
The focus of this chapter was the exploration of existing literature on the topic of study. In as
far as existing literature is concerned, researchers have conducted their researches assessing
the impacts of interest rate policy on the broader economy. This researcher was paying
attention on how the manipulation of interest rate as a monetary policy has implications on the
performance of commercial banks in Zimbabwe. The idea of this chapter was to gather the
available evidence on how the actions of Reserve bank in altering the interest rate policy
impacts the playground of commercial banks in executing their roles of serving the clients.
The monetary policy used by the Reserve Bank of Zimbabwe (RBZ) include Required Reserve
Ratio (RRR), Open Market Operations (OMO), Moral Suasion, Bank lending rate, and interest
rate (RBZ Act) but the researcher was focusing on interest rate policy specifically. The chapter
comprised of the introduction, empirical review, theoretical review, other determinants of
financial performance, indicators of financial performance, gap analysis and chapter summary
2.1 Zimbabwe current interest rate
The standard interest rate in Zimbabwe was last recorded at 9.32% (RBZ). The rate was
averaged 12.28% from 2011 up to 2018; getting an all-time maximum of 16.04% in March
2012and the lowest rate of 8.86% in September 2017 (source RBZ). The Central bank of
Zimbabwe does not have an official discount rate, but they use the weighted lending rate.
Weighted lending rate is the sum of lowest nominal lending rates weighted by specific bank’s
loan book sizes and issued by the Reserve bank of Zimbabwe (World Bank, 2017).
2.2 Theoretical review on interest rate and financial performance
2.2.1 Loanable funds theory
Under this, the rate of interest is calculated based on supply and demand of loanable funds in
the capital market (Beardshaw, et al., 2001). The nominal interest rate is determined by the
equilibrium amid demand and supply of loanable funds (Mzumara, 2006). This means that an
11
increase in demand for loanable funds would lead to rise in rate of interest and an increase in
supply would result in reduction of the rate of interest. Thus, monetary policy influences
economic activity through their implications on interest rate and investment. On more logical
note, if the economic activities are at equilibrium and there is open market purchase of state
securities by the central bank of Zimbabwe, this OMO will rise the commercial banks reserve
and increase the banks reserves (Beardshaw, et al., 2001). An increase in money supply causes
the general level of interest to fall and affects the commercial banks financial performance and
in turn spearhead investment given businessman anticipated profit (Mzumara, 2006). Loanable
funds theory postulated that a decrease in supply of money lead to rise in interest rate thereby
increasing banks’ profits (Ekpang & Uwalaka, 2015). The rising in loanable funds supply
would result in a decrease in interest rate. If both (demand and supply) for loanable funds
change, the resultant rate of interest would hinge on much on the direction and magnitude of
movement of supply and demand of loanable funds (Bernake & Blinder, 1995). The demand
for loanable funds is also produced from the government (Bernake & Blinder, 1995)
The loanable funds theory has some similar characteristics with the Keynesian theory of
liquidity-preference Theory of interest as both indicate the significance of the cash balance
preferences and the functions undertaken by the banking industry to enable safety of
investment funds (Keynes, 1936).
2.2.2 Expectations theory
The theory was developed by Lutz in 1940. He indicated that the theory is grounded on the
premise of expectations that people will have regarding the future circumstances (Lutz, 1940).
If investors predict future interest rates to be low; they would prefer to hold short term
securities and when they predict high interest rates; they will prefer to hold long term securities
(Lutz, 1940). The theory is built on the assumptions that investors have perfect knowledge
about the future short-term interest rates; there are no taxes or any other holding costs involved
and investors as profit maximises (Beardshaw, et al., 2001). Lutz concluded that a long-term
interest rate is an average of the expected future rates on short period bonds. If the long interest
rate is an average of short-term interest rates, if the short-term interest rates rise, the long-term
interest will also increase as the average will also increase (Bekaert, 1998).
2.2.3 Loan pricing theory
According to this theory; Banks cannot all the time set the high rate of interest so as to try to
maximise income from interest (Beardshaw, et al., 2001). The theory states that commercial
12
banks should consider the challenges of moral hazard and adverse selection as it is very hard
to predict the borrower type at the inception of bank rapport (Chodechai, 2004). If the bank
has decided to put too high rates of interest; it may trigger adverse selection challenges since
borrowers who are risk lovers are willing to accept the high interest rates and this may induce
the challenge of moral hazard behaviour by clients as they are likely to engage on high risky
investments (Chodechai, 2004). According to Stiglitz & Weiss (2001); it is usual that in some
instances we may not find that the rate of interest fixed by banks is commensurate with the
borrower’s risk.
2.2.4 Credit market theory
This is the neoclassical credit market theory which claims that the terms of credits clear the
market (Bernake & Blinder, 1995). If covenants are hold constant; the interest rate is the sole
price mechanism (Bernake & Blinder, 1995). In this scenario; if the credit demand increases
and a given customer supply; the rate of interest may rise and if the credit demand falls; the
interest rate will fall. According to (Bernake & Blinder, 1995) the interest premium will likely
to be higher if the risk of failure by the borrower is higher also. This may lead to depreciation
of the local currency and the central bank (RBZ) must regulate the rate of interest to increase
the borrowing cost, and the commercial banks also must act to improve their financial
performance by increasing their rates and thus lowering lending as credit becomes costly
(Mzumara, 2006)
2.3 Conceptual framework on interest rates and financial performance
Interest rate is defined as the cost of borrowing (Beardshaw, et al., 2001). The difference
between interest earned from loans and interest paid for bank deposits is called interest spread
or net interest income (Njanike, 2008). In most developing countries in Africa such as
Zimbabwe, the major driver of interest rate is the changes in price levels (inflation) (Mzumara,
2012). As the rate of inflation increases, the commercial banks try to pass the cost to the final
consumers that is clients by charging high interest rate so as to offset the inflation cost (Keynes,
1936). Inflation erodes the purchasing power parity of money, so commercial banks use
interest rate as compensation tool (Mzumara, 2012).
In addition, it is also noted that in most developing countries, interest rate is controlled and
determined by the central bank. The reason being weak market forces of demand and supply,
so the need to control the interest rates to be charged to the consumers and to protect
depositors’ interest. For example, in Kenya and Zimbabwe the government determine the
13
lending and deposit rates of the financial institution. This is because interest rate induces
investment prospects and drive economic activities, so there would be needed to control and
regulate its operations. The major function of interest rate is to mobilize scarce financial
resources to where they could be used most efficiently.
According to the RBZ Monetary Policy Statement (2017), interest rate was pegged below an
annual average of 12%. The lending interest rates were fluctuating for the past five years which
also negatively impacted the financial performance of commercial banks in Zimbabwe.
In this research, interest rate was used as the independent variable and financial performance
as the dependent variable. Financial performance was measured by the ZB’s average return on
assets (ROA) and return on equity (ROE).
2.4 Empirical review on interest rates and financial performance
Basically, commercial banks are there to play a pivotal role in the functioning of the economy.
Adebayo (2003) in Dogarawa (2012) noted that commercial banks exist to play the role of
money and financial service providers as well as credit and payment intermediations. The
Banking Act of Zimbabwe Chapter 24 subsection 6(1)(a) states that the main functions of
commercial banks are acceptance of deposits; honouring of cheques and keeping of accounts
on behalf of customers. However, the roles of commercial banks have heightened to offering
of medical aids, insurance services, assurance covers, offering of custodial services just to
mention but a few. Interest rates as a monetary policy instrument is the key primary drivers of
financial performance by financial institutions including commercial banks (Kariuki & Ngahu,
2016).
As Delfiner et al (2006) noted, lower interest rates negatively impact the performance of
commercial banks since they mainly rely on interest income as their source of revenue. If
commercial banks charges lower rates on borrowed loans, it means lower revenue which in
turn will threaten their existence and viability resulting in poor financial performance.
However, Milson (2013) argued that lower interest rates give the borrowers the appetite to
repay their loans therefore reduces the risk of non-performing loans as well as defaults in
repayment. Therefore, if the commercial banks have no non-performing loans, it means the
banks can relend to other clients thus increasing capability of expanding business hence good
financial performance of the banks.
In contrast, Flannery (1980) opined that when interest rates rise because of the actions of
14
Reserve bank (central bank), the performance of commercial banks may be affected in two
separate ways: the first one being that the banks are likely to make huge profits margin given
that customers are borrowing at the increased rate (Flannery, 1980). He further proposed that
at increased lending rates, the clients would find it difficult to borrow in the open market thus,
they proceed to demand more loans which therefore increase the loan interest rate. The
increase in the borrowing of loans would therefore affect the asset side of the balance sheet
for commercial banks as well as ultimately increasing the interest earned from these loans
thereby impacting the return on assets of commercial banks. By so doing, the performance of
commercial banks will be positively affected (Flannery, 1980). He further pointed out that
when bank rates changes, the effect on revenues or costs of commercial banks that is which
one outweighs the other depends on which side of the bank’s balance sheet is large and the
maturity rates differentials between the assets and liabilities (Flannery, 1980). For example, if
the asset side compose of items that have a short maturity period whilst the liability side have
long maturity period, it means the commercial bank will benefit from the increased bank rates
(Flannery, 1980).
According to Gilchrist (1994) banks’ lending does not decline when policy is constricted. He
concluded that total lending reduction is a result in reduction consumer and real estate loans.
However, according to Sergius (2015), lending may respond to a constriction and tightening
of monetary policy as they postulated that total loans and business loans at small commercial
banks while at large commercial banks remain unaffected.
According to Amidu (2006), for monetary policy to function through a credit channel, not only
must there be dependent debtors, but monetary policy must also directly affect banks readiness
to lend. He added that impact of monetary policy on lending behaviour is stronger for banks
with less liquid balance sheets. Tightening of monetary policy means bank transactions
deposits fall directly leading to fall in bank loans thereby affecting the financial performance
of commercial banks negatively (Amidu, 2006).
By depressing the interest rates, the commercial bank could hope to encourage economic
activity by reducing the borrowing cost and hence increasing the demand for loanable funds;
whilst, in opposition; rising interest rates discourage borrowing (Beardshaw, et al., 2001). This
means that the bank can make huge profits when interest rate is low as many people will be
able to borrow and when the interest rate is high; customers will be scared away hence the
bank will perform badly financially. They further (Beardshaw, et al., 2001) argued that higher
15
interest rates may attract foreign funds inflows thus making it more problematic to control the
money supply by the central bank as this will increase demand for currency and makes
importing cheaper meaning that exporting will be expensive ; accordingly creating a current
account deficit on the balance of payments and this will negatively affect the performance of
commercial bank.
Interest rates changes impact the banking institution’s earnings by shifting the sensitivity of
the interest income and costs (Njanike, 2008). He further added that these changes also
influence the underlying value of a bank’s liabilities, assets, and off-balance sheet instruments
as the present values of cash flows will also change (Njanike, 2008).
In addition, regardless of interest rate, good management of commercial banks improve
performance of the bank while poor management will result in failure and collapse of many
banks (Njanike, 2008). Good management lead to good corporate image and goodwill and
hence the ability to lure deposits form surplus units in the economy (Njanike, 2008). Moreover,
good track record of management mean that the bank will not face the challenge of hard capital
rationing. Hard capital rationing is when a bank finds it difficult to raise funds from external
sources such as from International Monetary Fund (IMF) and World bank or from the central
bank. Thus, improve the financial performance of commercial banks in Zimbabwe.
According to Enyioko (2012), the interest rate of commercial banks sometimes may not be
necessarily being an indicator of financial stability hence financial performance. This means
that interest rate is not the major determinant of financial health and wellness of the bank. He
further added that for banks to be effective and efficient, the interest rates should be determined
by the market forces of demand and supply (Enyioko, 2012).
Mwangi (2014) undertook a research on the effect of lending interest rates on financial
performance of deposit taking micro finance institutions in Kenya where he found out that
loan interest and advances had a significant effect and is positively correlated to interest
income. This means that in economic environments where lending interest rate is characterised
by rapid increase as compared to the interest paid on deposits, the interest rate spread will
widen. Then reason being the quicker sensitivity of lending rates to any changes in the
turbulent macro environments. Lending rates tend to be elastic while deposits rates tend to be
inelastic. By doing so, the commercial banks tend to yield high profits due to interest rate
spreads in terms of Return on Equity and Return on Assets. Thus, this would improve and the
interest income of commercial banks. (Mwangi, 2014)
16
In increase addition, there is an inverse relationship between interest rates and demand for
loanable funds in Zimbabwe since Independence (Makochekanwa, 2009). According to his
findings, they indicated that interest rates and inflation are major factors behind variations in
the demand for loanable funds which determine the financial viability of commercial banks.
.
2.4.2 Other Determinants of Financial performance of commercial banks
The financial performance of commercial banks in Zimbabwe is influenced by different factors
like interest rates; gearing; firm size; economic factors and risk, to mention but a few. The
study was focusing on lending interest rate factor on commercial banks.
2.4.2.1 Lending interest rate
The highest revenue of commercial banks is being generated from interest income bank
lending thus commercial banks with quality portfolios of loans incline to have an upward
growth because of good financial performance (Amidu, 2006). According to (Saunder,
1995)lending interest rate affect the overall economic activity of the country including the
movement of financial services, goods and financial assets. Interest rates relates to the present
value to the future value of money.
2.4.2.2 Leverage or gearing ratios
Gearing also has an implication on financial performance of commercial banks as indicated
by (Rasheed, 2010)that firms (commercial banks) with higher profit rates would remain low
geared because of their ability to use their own sources of finance (Randal, 1996). However;
commercial banks which relies mostly on debt funding have the high risk of financial risk and
bankruptcy of the bank (Woods & Sangster, 2005). Total assets of the banks positively affect
the banks financial performance as a result of low financial risk exposure.
2.4.2.3 Firm’s size
Large companies have financial benefits hence have a positive impact on financial
performance of commercial banks as they have high access to labour, capital, entrepreneurship
and land (factors of production) and cheaper funding (Saunder, 1995). However; small firms
do not have enough access to funds and usually they get funds at higher rates thereby exposing
the firm to financial risk hence poor financial performance of the firm.
2.4.2.4 Economics factors
The economic factors like inflation, balance of payments; employment rate, exchange rate and
economic growth have an impact on financial performance of commercial banks (Mzumara,
17
2012). Stable economic factors result in positive and sound financial performance of
commercial banks. However, if there is economic meltdown (such as cash crisis) the
commercial banks may likely to face challenges hence negatively affect the financial
performance as it would be difficult to lend funds (Mzumara, 2012).
2.5 Financial performance indicators
2.5.1 Return on Equity (ROE)
It is an investment financial ratio that determine how much profit a bank can recoup as
compared to the total equity employed by shareholders of the firm (Randal, 1996). Banks with
high ROE are better company in terms of profit hence high performance. It is calculated as
Net Income after taxes divided by Total capital employed (Randal, 1996).
2.5.2 Net Interest Margin (NIM)
This is the interest spread which is the difference between interest income obtained by
commercial banks and the amount of interest paid by banks such as the one on deposits (Gul,
et al., 2011). This measure and depicts the gap between income received from interest on loans
the cost of the borrowed money. It can be calculated as interest income divided by total
earnings (Gul, et al., 2011). Banks with high NIM indicates high performance and those with
low shows low performance (Ongore & Kusa, 2013).
2.5.3 Return on Assets (ROA)
This financial ratio is also the most important measure of bank’s financial performance in
terms of profitability (Khrawish, 2011). It can be calculated as Net Income divided by Total
assets. The bank with high ROA indicates high performance as they will be efficiently utilising
company’s assets to generate income (Randal, 1996). This will help to measure the bank’s
financial performance.
2.6 Gap Analysis
Many researchers have done their studies assessing the impacts of interest rate policy on the
performance of banks focusing on many issues of financial performance but some of them
have little conceptual contribution on the Zimbabwe case. Many researchers did their study in
the broad economy and in stable economies. This motivated the researcher to study more on
the interest rate policy impacts on financial performance of banks in an unstable economy with
volatile markets. It was to the attention of the researcher to study this topic as interest rates
were fluctuating hence the need to examine how this can affect the financial performance of
18
commercial banks in Zimbabwe as some research on this topic were undertaken where macro-
economic environments were stable. Thus, the purpose of this study shall be to find the impacts
interest rate brings to the banking industry, commercial banks particularly.
2.7 Chapter Summary
As indicated by the literature review above, there are so many factors that influence the
financial performance of commercial banks. The chapter also looked at other researches that
have been done by others to explain the relationship between interest rates and financial
performance, and the different theories of interest rate that explain the relationship between
interest rate and financial performance of commercial banks. It also covered the gap analysis
of the study which was filled by the research findings. This chapter also explored the indicators
of financial performance which the researcher used to measure financial performance such as
return on equity and return on assets. The next chapter outlines the research methodologies
that is how to collect data and sampling techniques.
19
CHAPTER III
RESEARCH METHODOLOGY
3.0 Introduction
The aim of this chapter was to provide information and data in reference to the methodology
through which was collected and analysed. The chapter was much centred upon data collection
methods used to gather information for this dissertation to provide the solutions to the
population and sampling, hypothesis testing, research design, and the methods of research
applied. Methodology mean the theory of ways research must be done (Saunders, et al., 2016).
This chapter is a foundation to chapter four as it outlined the research instruments to collect
data and procedures to analyse the data.
3.1 Research Design
In order to effectively investigate the relationship between interest rate and financial
performance of commercial banks, the researcher decided to employ use of more of
quantitative information. Quantitative research is defined as numerical values got from data
analysis procedures (Saunders, et al., 2016). Some aspects of qualitative information were
used to support quantitative information gathered, for example responses from bank teller on
how they carry out their work to improve financial performance. The researcher used the Likert
scales to accurately measure the variables under research by the researcher since Likert scale
enables the gathering of information at once for different variables and hence produces multiple
outcomes. The collected qualitative data was translated in descriptive statistics. To effectively
measure the relationship between interest rate and bank performance, the researcher used the
regression analysis method to find the relationship with interest rates as the independent
variable and financial performance as the dependent variable.
20
3.2 Population and sample
3.2.1 Population of the study
Population refers to the aggregate number of units from which one can collect data such as
artefacts, individuals or organisations (Kothari, 2008). The research was conducted focusing
on ZB bank financial holdings in Harare Central Business District.
3.2.2 Sample of the study
A sample is a set of population and it therefore fully represent the whole population under study
(Kothari, 2008). The sample of the study of the researcher was comprised of ZB bank clients
and workers as well as the management of the bank. The research sample was selected from
ZB commercial bank. The researcher used different sampling techniques which comprises of
probability and non-probability sampling to select a sample size. These methods include the
following;
3.2.2.1 Cluster sampling
This is the technique where members of the population are subdivided into unique subgroups
before a sample has been undertaken (Cohen, et al., 2011). From the subgroups, a whole cluster
is then picked randomly to represent the sample thus in the case of the researcher, ZB bank
Financial Holdings in Harare CBD has been chosen to represent the population under the
research.
3.2.2.2 Convenience sampling
This method uses the participants which are readily available and those that are willing to take
part in the study (M.S.MacNealy, 1999). This method falls under the non-probability group.
Its main benefits to the researcher was that of likely reduction in costs and the proximity of the
respondents.
3.2.2.3 Stratified random sampling
This refers to the splitting of the population into different layers or strata which are not similar
to each other and cover the whole population (Cohen, et al., 2011). The researcher also used
this sampling technique so as to suit the two different groups of bank clients and its employees
21
and as a result of this samples were drawn from two distinctive strata and were combined to
have one sample for the study of 70 respondents in which 60 managed to reply.
3.3 Research instruments and data collection procedures
Research instruments can be referred to as the tools and different ways used by the researcher
to have access to the information under the study (Mugenda & Mugenda, 2003). It would be
difficult for the researcher to get data without using these mechanisms and ways. The most
common used instruments were the research interviews to get first-hand information and the
questionnaires to obtain the opinions of respondents on interest rates and financial performance
of commercial banks. The researcher used both the quantitative and qualitative methods of
collecting data as the qualitative methods were used to support the quantitative one in form of
explanation.
The researcher also collected data from different sources to improve the authenticity of the data
gathered. The data was collected from primary and secondary sources. Primary data can be
defined as first hand data which can be directly and firstly collected from the respondents
targeted for the study of the researcher (Saunders, et al., 2016). On the other hand, secondary
data is the one obtained from second hand sources like publications such as newspapers,
televisions and journals (Saunders, et al., 2016).
3.3.1 Primary Data
This is the source that provide first-hand information, and this can be achieved through
interviews (personal) and self-administered questionnaires with different arms of the
commercial bank such as with ZB Bank Retail Branch Management, Credit Departmental
heads, Corporate Banking and Queries department, to mention but a few. The main reason for
using primary data was to improve the accurateness of research as primary data is up to date
and subject to any changes thus made it very reliable to the researcher to use as the data was
directly obtained from targeted population like in those department that deals with interest rate
risk management. On the other side of the coin, primary data proved to be costly and difficult
to obtain from Banks because of its confidentiality as the researcher had to travel for interviews
but in order to curb this challenge, the researcher equipped himself with money so that his
findings were not affected. The primary data can be obtained from a questionnaire and personal
interviews.
22
3.3.1.1 Questionnaires
These are lists of questions that are extended to the research respondents for feedback to the
researcher on respondent’s opinions (Clough & Nutbrown, 2012). There are different authors
which defined questionnaires. Questionnaires are primary data collections techniques where a
single person is instructed to answer a set of predetermined questions in the order (Saunders,
et al., 2016). The questionnaire includes the closed questions and open questions which has to
be attempted by the respondents. It is where an individual record their answers on their own
(Clough & Nutbrown, 2012)whereas Cohen et al (2011)indicated that a questionnaire
encompasses interviews through either face to face or through a telephone.
The researcher decided to use the questionnaire to obtain primary data because of its
convenience to the respondents as it provides enough time for them to attempt all questions
and hence reduces the chances of bias as the quality of responses improves as the respondents
get enough time to read and understand all questions (Clough & Nutbrown, 2012). In addition
to this, questionnaires can also be used for future references as they keep records. In this
research, selected respondents from ZB financial holdings were tasked to answer the questions
through airing out their opinions, feelings, perceptions and views regarding the effects of
interest rates on commercial bank’s financial performance. The questionnaires were drafted in
accordance and in reference to the research objectives and questions so that the researcher
would not go astray and be able to achieve the research objectives outlined earlier.
Questionnaires were also administered to the different ZB Holdings stakeholders such as loan
officers, bank tellers, supervisors and clients, to mention but a few. For ratings questions, the
researcher used the Likert scale.
Use of Likert scale
This can be defined as the psychometric response scale used in questionnaires to get the extent
of agreement or disagreement with a supposition or a blend of suppositions (Cohen, et al.,
2011). It consists of a list of statements in which the respondent is required make his or her
opinion on every question (Nisbert, et al., 2005). Each category of response is represented by
a given code on the Likert scale with 5 meaning the highest rank of the statements of strongly
agree whereas 1 as the least rank representing or denoting that the respondents strongly
disagree with a given question or statement (Cohen, et al., 2011). The classification of the
responses is shown below in table 3.1.
23
The Likert scales
Table 3.1
Response category Code allocated
Strongly agree 5
Agree 4
Neutral 3
Disagree 2
Strongly disagree 1
3.3.1.2 Personal interviews
It can be defined as a purposeful discussion two or more people (Clough & Nutbrown, 2012).
Interviews can be categorized into three that is structured interview, semi-structured and
unstructured interviews (Cohen, et al., 2011). However, in this research the researcher was
using structured interview as it gives the possible and good responses which will be easily
analysed as compared to the semi-structured and unstructured interviews. The interviews were
done face to face with the managers to get their opinions on the impacts of interest rate and
financial performance of commercial banks. These managers were booked in advance for
interviews to conduct the interviews when they were free.
3.3.2 Secondary Data
Secondary data is obtained from publications like the Reserve Bank of Zimbabwe’s
publications and the annual reports from the commercial banks in noting trends in profitability
and interest rates from the period under study (2013-2017). The types of secondary data
variables collected are interest rates, return on asset and return on equity. The researcher used
this source of data to have more data for analysis to give accurate findings (Clough &
Nutbrown, 2012). However, the main challenge of secondary data is that it is subjective. This
is because it is not the first-hand information, so it could be written in a biased way which will
hinder the accuracy of the research. However, to counter this challenge, the researcher red
extensively wide from secondary sources like textbooks so as to be fully equipped with relevant
information before application in the study.
24
3.4 Validity and reliability
3.4.1 Pilot test of Instruments
The researcher employed different instruments to gather data for the study and all the
instruments were successful as the instruments complemented each other in information
gathering. The researcher did a pilot test before dispatching of questionnaires to respondents.
Pilot test can be defined as the situation when the researcher investigates on the time lag that
respondents would require to complete checking all the questions on the Questionnaire (Cohen,
et al., 2011). The researcher took a sample of 6 questionnaires and handed to selected Banking
and Finance students to check and test the time lag needed by respondents to complete all the
questions and this helped the researcher to determine the validity and reliability of the
questionnaire. Thus, it helped the researcher to remove some data which were not valid, reliable
and relevant.
3.5 Model Specification and Parameter estimation
With reference to the suggestions and views in chapter 2 regarding to the empirical and
theoretical review on the impacts of interest rates on financial performance of commercial
banks in Zimbabwe, the researcher utilized the following linear regression model. The model
indicated that financial performance as measured by return on asset is affected by interest rates,
real gross domestic product (GDP) and growth of money supply.
The model is given by the following equation;
ROA=β1RIR+ β2MSG+ β3INFL+ µ
Where:
ROA: Return on Asset
RIR: Real interest rates
MSG: Money supply growth
INFL: Inflation
µ: The random error term
where;
25
β1, β2, β3 and are regression coefficients
3.6 Justification of the variables for the model
3.6.1 Return on asset (ROA)
The data for this variable was extracted from ZB financial statements and was used as a
proxy to represent financial performance.
3.6.2 Interest rates (RIR)
This is the second variable in the regression equation model. It can be defined as the cost of
borrowing loanable funds or capital over a specified time period (Njanike, 2008). High interest
rates proved to have negative effects to investments as it makes borrowing to be costly and this
scares away borrowers (Beardshaw, et al., 2001). However, it would be attractive for the
depositors as they would get higher income in terms of interest for their deposits. This denotes
that there is a negative relationship between interest rates and financial performance of
commercial banks. The researcher also obtained the data from the ZIMSTAT and RBZ. The
researcher used the interest rate as the variable that affect financial performance because the
interest rates were fluctuating in Zimbabwe, so it motivated the researcher to investigate if
these changes has an impact on the financial performance of commercial banks in Zimbabwe.
3.6.3 Inflation
This can be defined as the general rise in price levels in an economy (Beardshaw, et al., 2001).
The researcher used the consumer price index (CPI) as a proxy for inflation (Makochekanwa,
2009). During inflationary periods, banks increases the cost of borrowing to cater for the
lending cost and by doing so reduces the commercial bank financial performance as few
borrowers would be able to gets loans (Mzumara, 2012). The data for inflation used was also
obtained from ZIMSTAT price section between 2013 to 2017. Inflation was used as the factor
that influence financial performance in Zimbabwe because the country was experiencing
deflationary and inflationary during the period under study and thus it was to the attention of
the researcher to use this proxy as a variable as inflation both determines interest rate and
bank’s performance.
3.6.4 Money supply growth (M2)
26
This is the aggregate money in circulation injected by the central bank (RBZ) through its
policies like interest rates, Open market operations, moral suasion, to mention but a few
(Beardshaw, et al., 2001). The main objective of the government in this scenario is to equate
the money supply and the money demand in an economy, other things being equal (Mzumara,
2012). There is a positive relationship between loanable funds and growth of money supply as
it would be cheaper to borrow if there is excess money in the economy (Beardshaw, et al.,
2001). In this study, the researcher opted to use the M2 to represent the money and quasi-
money supply. The data were obtained from RBZ publications between the period under study
that is 2013 to 2017. The money supply growth used was broad money that is M2. M2 is an
important statistical proxy because it depicts and clearly shows the underlying strengths and
stability of the economic activities in a country like Zimbabwe (Mzumara, 2006). The
justification of this variable as argued by Favero & Spinelli (1999) is the general price level
has a strong relationship with broad and wider monetary aggregates like M2 thus it is the best
proxy for the researcher to use money supply growth (M2) in this study.
3.7 Data Presentation and Data Analysis procedures
This study consisted of data obtained from primary and secondary sources. To provide an
extensive analysis and presentation, the researcher makes use of the Excel, word and IBM
SPSS for statistical presentation of the research. IBM SPSS was used to represent regression
and correlation analysis and other variables.
In addition, the researcher also used tables to depict the relationship between data obtained for
evaluation purposes. The researcher also applied in the next chapter the pie charts and graphs
for better illustration of the 2 variables under study that is interest rates and financial
performance of commercial bank (Mugenda & Mugenda, 2003).
In reference with the research design above, data was evaluated and analysed using the
regression and correlation model from the secondary data that is publications from ZB
Financial Holdings (financial statements) and RBZ publications in form of monetary policies
(to get average annual interest rates). These data were presented in tables in the next chapter in
forms of matrix (correlation) for good presentation.
In qualitative analysis, the researcher was analysing the findings in terms of other services that
cannot be quantified like customer services in the banking hall. The researcher was thus mainly
27
focusing in descriptions, hypothesis testing and comparisons so as to prove whether interest
rates improve financial performance of commercial banks in Zimbabwe.
3.8 Chapter summary
The purpose of this chapter was to lay out the methods and techniques that were used to
successfully conduct this research. The chapter comprises of research design, sample and
population under the study, sampling techniques and the procedures and instruments that were
used to in collection of data. The information from this chapter was then used for presentation,
analysis and discussion of data in chapter four.
28
CHAPTER IV
DATA PRESENTATION, ANALYSIS AND DISCUSSION
4.0 Introduction
This chapter is focusing on presentation, analysis and discussion of the research findings
gathered from the case study under study that is ZB financial holdings through questionnaires
and interviews. The presented data was analysed through use of pie charts, line graphs, bar
graphs and tables. The regression analysis and correlation used interest rate as the independent
variable and financial performance as the dependent variable.
4.1 Response rate
The researcher targeted a total population of seventy with thirty-five bank employees and
thirty-five customers respectively to produce accurate results represented by the population.
There were also eight interviews undertaken and scheduled for managers and departments
heads of the bank.
1.Questionnaire response rates
A total of seventy questionnaires were administered to employees and customers and sixty-
three of them were responded to translating to 90% response rate and a non-response rate of
10%. Thirty-five of the questionnaires were administered to bank customers and thirty-two of
them were collected translating to a response rate of 91.43% and a non-response of 8.57% rate.
The other thirty-five which were distributed to bank employees resulted in thirty-one of them
being returned which is 85.57% response rate and non-response rate of 11.43%. These rates
(response) reflect the true representation of the whole population as the response rate should
be above 50% (Bryman & Bell, 2003).
The following table, table 4.1 provides a detailed summary of the response rate to the
questionnaires.
29
Table 4.1
Respondents Questionnaires
send
Questionnaires
answered
%
response
Loan officers and tellers 20 17 85%
Supervisors and accounts staffs 15 14 93.33%
Individual clients 25 22 88%
Company clients 10 10 100%
Total 70 63 90%
N=63
Source: Primary data (Questionnaires) 2018
Out of seventy questionnaires administered, sixty-three were answered completely. This
indicates an approximate response rate of 90%. The contribution of each category to overall
percentage is shown below.
30
Source: Primary data
Figure 4.1
2 Interview response rate
The researcher also had the change to interview some branch managers and other credit
managers who had an understanding and appreciation of the effects of interest rates on their
financial performance. Out of eight interviews scheduled, seven were successfully interviewed
resulting in 87.5% response rate. This has been diagrammatically shown below.
100%
88%
93,33%
85%
75% 80% 85% 90% 95% 100% 105%
company clients
individual clients
supervisors and accounts staffs
loan officers and tellers
% RESPONSE
RE
SP
ON
DE
NT
SResponse rate on questionnaires
Response rate on questionnaires
31
Fig 4.2
Source: Primary data (Interviews)
4.2 Analysis and Presentation of responses to questions
This section seeks to explore the primary data gathered via a questionnaire. The researcher
used the approach of question-to-question to analyse the gathered data. The participants from
ZB financial holdings were issued with questionnaires comprising of closed and open questions
to attempt basing on their own independent judgement, insight and mind of each given
question.
4.2.1 Factors affecting financial performance of commercial banks
To conclude this research, the researcher must determine the major determinants that influence
financial performance of commercial banks in the economy. These factors were according to
the weight assigned to each factor by respondents. This can be shown by the table below.
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
60,00%
70,00%
80,00%
90,00%
100,00%
managers
% r
esp
on
se
category
% response
32
Table 4.2
Factor Total respondents % of total
Interest rate 18 28.57%
Gearing level 8 12.70%
Money supply 23 36.51%
Inflation 14 22.22%
Total 63 100%
Figure 4.3
Source: Primary data
As portrayed above on the pie chart, 36% of the total respondents of 63 believed that money
supply poses a great influence on the financial performance of commercial banks whereas
interest rate (29%) is the second factor with greater impact on commercial bank’s performance.
Inflation has also a major impact on financial performance of commercial banks whereas
gearing ratio and firm size poses little impact on the performance of commercial banks.
According to these primary findings, it can be safely concluded that interest rate has a major
influence on financial performance of commercial banks in Zimbabwe as the cash crisis is
looming in the country and distorted exchange rates leading to fluctuations in interest rates
which negatively affect financial performance of commercial banks.
money supply
36%
interest rate
29%
inflation
22%
gearing level
13%
Factors affecting financial performance of
gearing level
s affecting financial performa
commercial banks (n=63)
money supply interest rate inflation gearing level
33
As shown below, money supply has the greatest impact on financial performance of
commercial banks, followed by interest rate and inflation respectively. Firm size has least
impact on financial performance among the factors listed in the questionnaires followed by
gearing ratio. This analysis helped to find the objective of the researcher of analysing other
factors that impact the financial performance of commercial banks.
Figure 4.4
4.2.2 response on customers who have ever applied for a loan
According to the research findings on number of people who have once applied for loans in
commercial, 25 out of 32 customers indicated they have once applied translating to 78.13%
and 21.87% have never applied. This was undertaken to determine the credibility, reliability
and validity of the study. The findings proved to be effective as 78.13% denoted that they have
applied before for a loan. Findings of this study are depicted below.
0%
10%
20%
30%
40%
50%
60%
70%
80%
money supply interest rate inflation gearing ratio firm size
level of influence for each factors affecting of influence for each factors affe
financial performance (n=63)
greatest impact greater impact great impact significant impact least impact
34
Fig 4.5
4.2.3 factors considered by customers when applying for a loan.
In his study, the researcher investigated on possible factors customers (both individual and
company) consider before applying for a loan in a commercial bank. Out of 32 customers, 13
of them consider interest rate charged on the loan which could also determine their benefit
yielded from the loan. 9 considers economic situation whereas 5 and 2 considers quality of
loans and repayment period respectively. This can be shown below by the table in percentages.
Table 4.3
Factor considered Total respondents % of total
Interest rate 13 40.63%
Time period 3 9.38%
Economic situation 9 28.13%
Quality of loans 5 15.63%
Other 2 6.25%
Total 32 100%
Source: Primary data
These findings can be clearly depicted by the diagram below,
applied
78%
never applied
22%
responses on customers who have applied on customers who ha
for a loan (n=32)
applied never applied
35
Figure 4.6
Source: Primary data
From the findings above, it can be concluded that most customers are now considering cost of
borrowing due to the turbulent environment in the economy before take loans. This help them
to choose banks with low interest rates. This means that interest rates have an influence on
financial performance since it determines the amount to be borrowed by customers hence a
positive relationship with performance as borrowing depends on cost of borrowing according
to individual customers. In addition, some customers (company) listed other factors they
consider which were not given by the researcher such as the amount to be advanced as loan,
capital adequacy of the bank and its management.
4.2.4 Responses on clients who switched banks regarding to loan issues
The researcher undertook a study on number of clients who switched from one bank to another
commercial banks on loan grounds so as to determine the factors which drives or pull them to
choose another bank and to assess if interest rate bear an influence in these switches. According
to the findings 24 switched the banks translating to a higher percentage of 75% whereas those
which did not switch only constitute 25% (only 8 in the population). Thus interest rate has an
impact on the financial performance of commercial banks in Zimbabwe. This can be shown by
the bar graph below.
0,00%
20,00%
40,00%
60,00%
80,00%
100,00%
120,00%
interest rate time period economic situation quality of loans other
Response on factors to consider when onse on factors to consider w
applying for a loan (n=32)
individual customers companies
36
Figure 4.7
Source: Primary data
In the questionnaire, the researcher provided possible reasons for switching to other
commercial banks and the other option to choose “other” as some were outlining other reasons.
The findings of this were shown below in the table.
Table 4.4
Reason individual % of
individual
Company % of
company
% of
total
reason
Interest rate 10 66.66% 5 33.33% 46.87%
Time to repay 1 50% 1 50% 6.25%
Non-availability of loans 5 50% 5 50% 31.25%
Other 3 60% 2 40% 15.63%
Source: Primary data
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
60,00%
70,00%
80,00%
switched never switched
75,00%
25,00%
N U M B E R O F C U S TO MER S W H O S W I T C HE D
B A N KS ( N = 3 2 )
number of customers who switched banks
37
Source: Primary data
Figure 4.8
According to the findings from a questionnaire, 15 out of 32 have been switched from their
previous banks as result of high cost of borrowing. Some indicated that they switched from
prestigious banks like Barclays bank (now First Capital bank) and Standard Chartered bank
between 2013-2017 as a result of high interest rate of borrowing as they could not afford and
hence switched to ZB bank which they believed they charge low rates of interest. 10 indicated
that they switched because their banks were failing to issue out loans hence, they opted to
choose viable bank that is ZB Holdings. In addition, 5 other customers specified other reasons
apart from the ones provided in the questionnaire. Some indicated that they switched as a result
of little or insufficient funds in their accounts as they could not meet the minimum cash
requirements prescribed by the bank. On the other hand, some clients noted that they switched
in search of hard currency to sustain their living so as avoid the three-tier pricing system which
charges high prices on mobile money or electronic transfer than cash hence clients opted for
ZB Holdings where they believe they can easily access hard cash in this cashless economy.
From this finding, the researcher can safely indicate and conclude that in Zimbabwe interest
rate is a major determinant of bank’s financial performance. This is because high interest rates
result in mass exodus of customers to other banks hence negatively impact the return on
investments of commercial banks as indicated in the findings above. Low interest rates lures
customers as evidenced by large percentage of customers who switched to ZB bank in search
66,67%
50% 50%
60%
33,33%
50% 50%
40%
HIGH INTEREST RATE LONG REPAYMENT PERIOD NON AVAILABILITY OF
LOANS
OTHER
% R
esp
on
se
reseaons for switching
response on why customers switched banks
(n=32)
individual customers company customers
38
for greener pastures that is low cost of borrowing. This argument and finding on low interest
rates on profitability is in line with the findings and empirical review of Milson (2013) who
also argued that low rates of interest increases the profitability of commercial banks as the bank
would able to retain all its customers and able to acquire new customers. This can also help to
conclude that financial performance is affected by interest rate fluctuations.
4.2.5 Period while the respondents were employed at ZB Financial Holdings
The researcher gathered data on number of years the employers were at work so as to determine
the experience and knowledge of the workers about the effects of interest rates on financial
performance of commercial in Zimbabwe. Out of 31 respondents, 15 had an experience
between 5-10 years, 9 had experience of more than 10 years and 7 had experience of less than
5 years. The statistics of this study is well presented in the table below in percentages.
Table 4.5
Experience (Years) Respondents % of respondents
0-5 7 22.58%
5-10 15 48.39%
10+ 9 29.03%
Total 31 100%
Source: Primary data
The findings were further analysed and simplified by the pie chart below.
39
Figure 4.9
Source: Primary data
As indicated above, about 77.42% of the respondents have been employed with ZB bank for a
period of at least 5 years whilst 22.58% have been employed by the company for less than 5
years. Since most of the employees have been with the bank for at least 5 years, this denoted
that the data obtained was relevant and valid as these respondents had a vast experience to
observe the impacts of interest rates on financial performance of commercial of commercial
banks.
4.2.6 Response on the relationship between interest rates and performance of
commercial
This was undertaken so as to observe what respondents think about on the relationship that
exist between interest rates and financial performance. Out of 63 respondents, 53 (84.13%)
shared the same sentiments that a relationship does exists while 10 (15.87%) respondents
disagree with the notion as they believe that financial performance is driven by money supply
in the economy. This can be clearly shown below diagrammatically.
As depicted below, it can be concluded that interest rate affects financial performance of
commercial banks as it determines the cost of borrowing. According to the survey, 84.13%
agreed with the notion that interest rate is a major factor of determining bank’s performance.
0-5 years
23%
5-10 years
48%
10+ years
29%
Response on experience at work (n=31)
0-5 years
5-10 years
10+ years
40
Figure 4.10
Source: Primary data
4.2.7 Responses on the type of relationship that exist between interest rates and
financial performance.
The researcher listed on his questionnaire whether interest rate has a negative consequence on
financial performance of commercial to assess their views. The findings of this study whether
they agree with the statements is shown below in the table.
Table 4.6
Decision respondents % to total respondents
Strongly agree 34 53.96%
Agree 16 25.40%
Neutral 1 1.59%
Disagree 5 7.94%
Strongly Disagree 7 11.11%
Total 63 100%
Source: Primary Data
This table can be further interpreted by a way of diagram as indicated below;
0,00%
20,00%
40,00%
60,00%
80,00%
100,00%
agree disagree
Responses on the relationship between Responses on the relationship between
interest rates and financial perfomance and financi
(N=63)
Responses on the relationship between interest rates and financial perfomance
41
Figure 4.11
Source: Primary data
As graphically depicted above, 53.96% strongly agree that interest rate bear a negative
influence on financial performance, 25.40% agree while only 1.59% was neutral. About
11.11% strongly disagree whilst 7.94% disagree. Those who disagreed and strongly disagreed
believe that there is a positive correlation between interest rates and bank’s financial
performance as financial performance improve if rates of interest increase. Those who disagree
or strongly disagree were sharing the same thoughts with (Flannery, 1980) as already indicated
in literature review that he believed that interest rates had a positive relationship with financial
performance. His argument was that, if customers borrows at higher interest rate, the bank’s
interest income will also increase leading to better financial performance. However, most of
the respondents agreed that interest rates have a negative relationship with bank’s financial
performance. This means as interest rates increases, few customers borrow money leading to
decline in bank’s return on assets (ROA) and investments (ROI). From these findings, the
researcher can safely conclude that the relationship between interest rate and financial
performance does exist and its negative meaning interest rate (independent variable) negatively
correlate with bank’s financial performance (dependent variable). This notion agrees with the
findings of Beardshaw et al (2001) who also believed that interest rate is negatively correlate
to financial performance. The argument was that rising lending rates increases the cost of
borrowing hence discourages bank customers from taking out loans. In other words, they
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
60,00%
strongly agree agree neutral disagree strongly disagree
% O
F R
ES
PO
ND
EN
TS
CATEGORIES OF RESPONDENTS
responses on whether interest rates has a
,00%
responses on whether interest rates has a
negative effect on bank performance (n=63)
respondents
42
argued that as interest rates increases, customers will find it difficult to borrow hence the
interest income will be reduced.
4.3 Analysis and presentation of data from interview questions
As previously alluded in the research objectives that one of the objectives of this study is to
investigate the impacts of interest rates on income of commercial banks in Zimbabwe, the
researcher resorted to interview to have accurate answers in relation to the fluctuations in ZB’s
attributable income from 2013-2017.
All interviewed managers and loan officers have the same thoughts and sentiments about the
impacts of interest rates on commercial banks of Zimbabwe. They believed that interest rate
increases the interest income of the bank and hence improves its net income flows leading to
high profit margins. As the customers borrows more loans, the interest income will also
increase but they said however in the current situation customers are nomads meaning they are
now easily switching to other banks where there is low rate of interest. They pointed out that
in the long run increase in interest rate will subsequently decreases the interest income as clients
will opt for other banks. This is in conventional line with the findings of Mwangi (2014 who
also found out that interest rate is positively correlated to interest income. He found out in his
research that interest rate spread increases the interest income of the commercial banks hence
its profitability and this drew the same conclusion with this topic under the study.
The relationship between interest rate and income of the bank is clearly depicted by the graph
below.
Fig 4.12
Interest income
interest rate
43
As shown above, as interest rate increases, the interest income initially increase but started to
decrease as consumers would switch to other banks with low borrowing cost. The demand for
loans is hence elastic as consumer quickly respond by a large proportion to any changes in
interest rates.
From the interviews again, the researcher found out that banks consider different factors when
advancing loans such as capital of the borrower; economic conditions and purpose of the loan
and the amount to be borrowed. The researcher also noted that banks could increase their
performance even if interest rates fluctuates by use of advanced technology which help to cut
administration and operational costs and to withstand competition. This was found out from
the interviews undertaken.
4.4 Analysis of results from secondary data
4.4.1 Correlation and regression Analysis
The correlation of the dependent variable (financial performance as measured by its Average
Return on Assets and Return on Equity) and independent variables (interest rate which is the
interest charged on loans) are shown below. The researcher used return on assets and return on
equity to measure the financial performance. The return on assets for ZB bank from 2013-2017
is shown by the trend below.
Table 4.7
Year Average ROA
2013 0.82%
2014 -2.68%
2015 2.16%
2016 2.32%
2017 2.98%
Source: Zb bank websites (www.Zb.ac.zw)
As indicated below, the Average return on assets (ROA) of ZB bank was fluctuating in the
under the study. The highest return was in 2017 of 2.98% and the lowest of -2.68% was
recorded in 2014. These fluctuations motivated the researcher to find out if interest rates have
any influence and hence the use of regression and correlation analysis to find out the
relationship that co-exist between these 2 variables.
44
Figure 4.13
Source: Secondary data
Trend analysis of return on equity (ROA)
Table 4.8
Year Return on Equity (ROE)
2013 -0.42%
2014 -13.40%
2015 12.55%
2016 13.44%
2017 16.28%
Source: www.zb.ac.zw
As shown above, financial performance of ZB bank was fluctuating during the period under
study as shown by return on equity. In 2013 ROE was -0.42% and it further decreased in 2014
to -13.40%. The ROE then increased to 12.55% and further to 13.44% in 2016. ROE was high
in 2017 where it reached 16.28%.
These findings from publications can be further detailed in the trend graph below,
-3,00%
-2,00%
-1,00%
0,00%
1,00%
2,00%
3,00%
4,00%
2013 2014 2015 2016 2017
% o
f R
OA
Years
trend analysis of ZB's Average Return on Assets (ROA)
trend analysis of ZB's Average Return on Assets (ROA)
45
Fig 4.14
Annual lending interest rates
Table 4.9
Years Interest rates
2013 9.74%
2014 9.47%
2015 8.54%
2016 7.11%
2017 10.61%
4.4.1.1 Descriptive statistics
Table 4.10
N Range Minimum Maximum Mean
Std.
Deviation Variance Skewness
Statistic Statistic Statistic Statistic Statistic Std. Error Statistic Statistic Statistic
Std.
Error
ROA 5 6 -3 3 1.12 1.013 2.264 5.127 -1.637 0.913
ROE 5 30 -13 16 5.69 5.572 12.460 155.258 -1.122 0.913
Interest
rates
5 4 7 11 9.09 0.596 1.332 1.775 -0.735 0.913
Valid N
(listwise)
5
Source: IBM SPSS statistics
-15,00%
-10,00%
-5,00%
0,00%
5,00%
10,00%
15,00%
20,00%
2013 2014 2015 2016 2017
RO
E I
N %
YEARS
Trend analysis of ROE for ZB bank
46
As shown above, the table shows the detailed presentation of the type of the data under study.
The data is normally distributed across the whole range hence credible and accurate
representation of data. By using coefficient of skewness, it can be safely deduced and
concluded that the secondary data used for regression analysis are distributed normally as all
ROA, ROE and interest rates are close to zero. Kurtosis should be close to 3 and from the table
above, we can deduce that the variables are smoothly distributed except for ROE and interest
rates which are not close to 3.
4.4.1.2 Regression results
The researcher used interest rate as the independent variable and financial performance as the
dependent variable and financial performance was measured by ROA and ROE. For the
purpose of clarity and reliability, the researcher found out the relationship between interest rate
and ROA and interest rate and ROE separately to find out if they came to the same conclusion.
The results of the regression analysis of interest rate and financial performance is shown by the
table below.
Table 4.11
Regression results of Interest rate and ROE
Model Summary
Model R
R
Square
Adjusted R
Square
Std. Error of
the Estimate
1 .215a .046 -.272 14.053
a. Predictors: (Constant), Interest rates
Source: SPSS
n=5 x (mean)=9.094 y (mean)=5.69 ∑x=45.47 ∑y= 28.45
x2= 420.6043 y2= 782.9109 a=23.94 b=-2.01
r=0.215
As shown by the findings above, a positive correlation coefficient of (0.215) indicates that there
is a weak positive relationship between interest rate and financial performance (represented by
ROE). The relationship is not strong and as concluded from the primary sources that the
positive relationship exists in the short run, the researcher can also safely point out that in the
long run the relationship will be negative. The reason being that consumers will start to switch
47
for other banks, as indicated above the adjusted R square became negative of (-0.272)
indicating that as time goes, interest rate increase would result in poor financial performance
as customers could easily switch to other banks. This regression finding is in line with some
scholars and researchers cited in chapter 2 (literature review) who also believe that positive
relationship exists. For example, Flannery (1980) also denoted that there is a positive
relationship between interest rates and financial performance if customers borrow at high rates
and in the long run they could switch to low rates leading to a negative relationship.
Table 4.12
Regression of interest rate and ROA
Model Summary
Model R
R
Square
Adjusted R
Square
Std. Error of
the Estimate
1 .146a .021 -.305 2.587
a. Predictors: (Constant), Interest rates Source: IBM SPSS
As shown above, both indicators of financial performance came to the same conclusions. From
the table, a positive correlation coefficient of 0.146 exist between interest rates and ROA
indicating a positive relationship between two variables. Some of the researchers strongly
disagree with this finding as they believe that a negative relationship co-exists. Beardshaw et
al (2001) believed that there is a negative relationship as they argued that low rates encourage
borrowing hence increase profits as opposed to high rates of interest which scares away
customers to borrow loans.
4.5 Chapter summary
This chapter was mainly focusing on presentation, analysis and discussion of research findings.
The researcher represented data using tables, pie charts and graphs and also the IBM SPSS
package was used for regression analysis of secondary data from publications such as ZB
financial holding’s financial statements and monetary policy statements. According to
regression and correlation analysis findings, the researcher found out interest rates and financial
performance positively correlate in the short run and in the long run the relationship will
become negative as consumers would switch to other banks with low rates of interest (weak
positive relationship.
48
CHAPTER V
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.0 Introduction
The chapter covers the summary of the research findings, conclusions and the
recommendations. It also covers the suggestions for further research on the topic in the future.
The findings summarised covers the whole research and the conclusions made were for the
whole project.
5.1 Summary of findings
The researcher was investigating the impacts of interest rate on financial performance of
commercial banks in Zimbabwe. The researcher also explored the various factors that affect
the financial performance of commercial banks. Financial performance was measured by
financial ratios like return on asset (ROA) and return on equity (ROE). Chapter one dealt with
the research objectives, questions and hypothesis testing. Chapter two explored the existing
literature to come up with the best research methodologies about interest rate impacts on
financial performance of commercial banks and this chapter also established the research gap
left by previous researcher which motivated this study to be undertaken on effects of interest
rate on the financial performance of commercial banks. Chapter three went on to detail the
research methods, instruments and data collection methods to be used in the study. The
chapter’s aim was to direct the research on the methods to be followed in chapter four of the
study. Chapter four dealt comprehensively with the presentation, analysis and discussion of
research findings from primary sources and secondary sources through use of diagrams, graphs,
tables and pie charts. The main aim of chapter four was to attain the objectives from chapter
one and to answer all the research questions.
According to the findings from primary sources (questionnaire and interviews); money supply
emerged as the major determinant of financial performance in Zimbabwe’s banking sector. The
monetary supply policies have a bearing influence on bank’s financial performance through
49
either contractionary measures or expansionary measures and thus the research shows that a
positive correlation exists between financial performance and money supply in circulation.
This means as the economy have more money in circulation, it signifies that more money will
be available for lending by commercial banks and this will drive interest rate down and thus
more loans will be demanded by customers and therefore increase in financial performance in
terms of return on assets and return on equity.
5.2 Conclusions
The main objective of this research was to investigate and find out the impacts of interest rate
on financial performance of commercial banks. The main conclusions drawn from the findings
are as follows;
· According to the findings from primary sources, the researcher found out that a negative
relationship exists between financial performance and interest rates, therefore null
hypothesis (H0) is rejected and alternative hypothesis (H1) accepted concluding that
financial performance function is sensitive and impacted by fluctuations in interest rate.
However, according to the regression and correlation analysis, a weak positive
relationship between interest rate and financial performance exist which in the long run
could be negative as customers would switch to banks with low borrowing costs.
· Basing on primary findings, money supply was viewed as the major determinant of
financial performance as the central bank (RBZ) failed to perform its function of
controlling money supply due to use of other country’s currency for the period under
the study. The current situation of cash crisis in Zimbabwe mean that the central bank
will fail to adopt the expansionary policies to broaden money supply as they are not
currently printing any money, and this is creating shortages thus affecting the bank’s
ability to issue out withdraws leading to poor financial performance. Shortage of hard
currency in circulation and mushrooming of black markets are surging up interest rates
in Zimbabwe.
· According to the findings, interest income has a positive relationship with interest rate.
This means that the interest income increases as interest rate also increases (lending
rate) as compared to the deposit rate.
· Financial performance of commercial banks is negatively affected by many factors in
Zimbabwe such as inflation, size of the firm, economic situation; to mention but a few.
50
· There is high borrowing cost in Zimbabwe. Commercial banks are charging exorbitant
lending rates to customers on loans. However, on the other hand commercial banks are
paying low deposit interest rates to depositors leading to high interest spreads by
commercial banks in Zimbabwe.
5.3 Recommendations
With reference to the findings and conclusions drawn by the researcher, there are many
measures that should be taken by central bank and commercial banks to revive the banking
sector in Zimbabwe so as to have stable interest rates in Zimbabwe.
· The RBZ should re-dollarize the United States Dollar (USD) so as to improve the
liquidity challenges faced by the banking sector and to stabilise the economy by getting
rid of the bond note. This will help to stimulate economic activities and hence more
investments as the interest rates will stabilise. As the economy stabilises, the RBZ
should then adopt its own currency (Zimbabwean dollar) to have control on money
supply in circulation.
· The monetary authority should put an official uniform lending rate to be used by all
commercial banks as well as the legal framework to control the interest rate. This will
reduce burden to customers who are being charged high rates by banks. This can be
effectively achieved by putting the interest rate ceiling on bank loan rate so as to protect
customers and interest rate floor in bank deposits rates so as to protect the commercial
banks in Zimbabwe and to have a viable and sound interest rate in the sector.
· Commercial banks should venture into financial innovation and financial engineering
to keep costs at minimum and to have access to new customers so as to widen
profitability and survival even in times of fluctuations in interest rates.
5.4 Suggestions for further studies
It is highly expected that this study will help other financial institutions such as ZB bank in the
banking sector in reviewing the interest rate. It is envisaged to undertake further studies in the
following topics on bank’s performance.
· Investigate effects of the 2 percent tax rate on electronic transfers on lending
performance of commercial banks in Zimbabwe.
51
· Strategies that can be adopted by the central bank to restore confidence in the banking
sector.
· Effects of black exchange rate markets on financial performance of commercial banks.
52
REFERENCES
Amidu, M., 2006. the link between monetary policy and banks lending behaviour, the
Ghananian Case, banks and bank systems. 1(1).
Banking Act (Zimbabwe)
Baughn, W. & Donald, R., 2003. The International Banking Handbook. Homewood: Dow
Jones-Irwin.
Beardshaw, J., Brewster, D., Cormack, P. & Ross, A., 2001. Economic: A student's guide.
Edinburgh Gate; Harlow; Essex: Pearson Education Limited.
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APPENDIX 1: QUESTIONNAIRES
BINDURA UNIVERSITY OF SCIENCE EDUCATION
Dear sir/ madam
I am a final year student at Bindura University of Science Education, doing a Bachelor of
Commerce Honours Degree in Banking and Finance (BCOM.BAF). As a requirement to my
degree program from Bindura University, I am undertaking a study on the topic, “The impact
of interest rates on financial performance of commercial banks in Zimbabwe”, The case
study of ZB financial holdings (2013-2017).
May you kindly help by answering the questions on the questionnaire to the best of your
judgements and knowledge. The opinions you give shall be only used for academic purposes
and shall be handled with confidentiality. For confirmation on the use of data, I kindly refer
you to conduct Bindura University of Science Education.
Your cooperation is always greatly appreciated.
Yours faithfully
……………………………….
+263 784 001 809/ +263 715 677 536
57
Instructions
1. For the purpose of guaranteeing your privacy and confidentiality, please do not write
your name on the questionnaire provided.
2. Respond the questions through ticking in the applicable box and kindly write some
comments of your views in the space provided therein.
SECTION A
Personal information
1. Name of branch……………….............................
2. Position held in the bank…………………………
3. Gender: male female
4 Highest level of Academic qualifications
O Level
A Level
National Diploma
Degree
Any other (specify)………………………
5 For how long have you been working for ZB bank………………….
SECTION B
This section relates to the impacts of interest rates on financial performance
1. Do you think the following factors influence the financial performance of commercial
banks in Zimbabwe?
Factor yes no
Interest rate
Firm size
Gearing level
Economic factors
58
Competition
2. Among the following determinants, which factor do you think has the greatest effect
on financial performance of commercial banks?
(Tick 1 being the least and 5 being the most)
Scores 1 2 3 4 5
Interest rates
Money supply
Inflation
Firm size
Gearing ratio
Interest rates and financial performance
NB (Key: SA= strongly agree, A= Agree, N= Neutral, D= Disagree, SD= Strongly
disagree)
Opinions SA A N D SD
3. “Commercial banks prefers to charge low interest
when taking deposits” Do you agree?
4. “Borrowers consider interest rate as the major
determinant when seeking loans from banks”. Agree?
5. “Financial performance of commercial banks increases
if low interest rates are charge”. Do you agree?
6. Are there any relationship between interest rate and
financial performance of commercial banks?
7. “Interest rates have negative consequences on the
financial performance of commercial banks”. Do you
agree?
8. In your own views, what do you think commercial banks in Zimbabwe should do to
lure more clients to take loans?
59
i…………………………………………………………………………………………
………………………………………………………………………………………….
ii…………………………………………………………………………………………
iii………………………………………………………………………………………
…………………………………………………….
9. Were there any fluctuations in bank’s financial performance in the last 5 years?
Yes NO
10. If yes, what do you think might be the cause?
…………………………………………………………………………………………
…………………………………………………………………………………………
………………………………………………………………………………
SECTION C
Questionnaire for customers
1. Type of customer
Individual customer
Company
2. Did you ever apply for a loan? Yes No
3. Which factor do customers consider most when applying for a loan?
Interest rate
Time period to repay
Economic situation
Quality of loan
Other (specify)……………………………………………………………………….
4. Did u ever switch the bank on matters regarding to loans?
Yes No
5. If yes, what was the reason for switching?
High interest rates
Long tenure period
Non availability of quality loans
Other (specify)……………………………………………………………….
60
6. Specify the factor you think has a greater impact on financial performance of
commercial banks in Zimbabwe……………………………………………........
Any other comments on effects of interest rates on financial performance of commercial
banks.
Comments………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
Thank you for your time
61
APPENDIX 2: RESEARCH INTERVIEW QUESTIONS
Interview questions for bank managers
1.What is your understanding on interest rate within your organisation?
2. What factors do you think can be considered by borrowers when taking out loans?
3. What are the impact of interest rate on financial performance of commercial banks?
4. What are the determinants that influence the financial performance of commercial
banks in Zimbabwe?
5. From the factors outlined above, which factor do you think has the most influence on
financial performance of commercial banks?
6. What type of relationship do you think exists between interest rates and interest
income of commercial banks?
Any comments,
Comments…………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
Thank you for your contribution.
62
APPENDIX 3: ANNUAL INTEREST RATES, ROA AND ROE
Year Interest rate Return on Asset Return on Equity
2013 9.74% 0.82% -0.42%
2014 9.47% -2.68% -13.40%
2015 8.54% 2.16% 12.55%
2016 7.11% 2.32% 13.44%
2017 10.61% 2.98% 16.28%