Project by d Tiki 1

7/31/2019 Project by d Tiki 1

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BINDURA UNIVERSITY OF SCIENCE EDUCATION

FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTANCY

AN ANALYSIS OF THE IMPACT OF LIQUIDITY CRUNCH ON BANKPROFITABILITY. (THE CASE OF ZBFHL 2009 TO 2011)

BY

DAVID TIKI

B0823657

SUPERVISOR: MR. CHIRISERI

A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THEREQUIREMENTS OF THE BACHELOR OF ACCOUNTANCY (HONOURS)

DEGREE OF BINDURA UNIVERSITY OF SCIENCE EDUCATION

Bindura: Zimbabwe, August 2012


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APPROVAL FORM

The undersigned certify that they have read and recommended to the Bindura

University of Science Education for acceptance, a research project entitled, an analysis

of the impact of liquidity crunch on bank profitability. A case study of ZB Financial

Holdings Limited, submitted by David Tiki in partial fulfillment of the requirements of

Bachelor of Accountancy Honours Degree (BACC)

______________________________

Supervisor

_______________________

Chairman

DATE: ______________________


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RELEASE FORM

NAME OF AUTHOR: DAVID TIKI

TITLE OF RESEARCH: AN ANALYSIS OF THE IMPACT OFLIQUIDITY CRUNCH ON BANKPROFITABLITY. A CASE STUDY OF ZBFINANCIAL HOLDINGS LIMITED (2009 TO2011)

DEGREE FOR WHICH THEPROJECT WAS SUBMITTED: BACHELOR OF ACCOUNTANCY HONOURS

(BACC)

YEAR THIS DEGREE GRANTED: 2012

Permission is hereby being granted to theBindura University of Science EducationLibrary to produce single copies forprivate scholarly or scientific researchpurposes only. The author reserves otherpublication rights neither, the thesis norextensive extracts from it may be printedor otherwise produced without the

authors written permission.

SIGNED: ____________________

PERMANENT HOME ADDRESS: House No 1117PROSPECT PARKSUNNINGDALE 3

Harare

DATE: August 2012


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DEDICATION

This research is dedicated to my parents Mr. and Mrs. Tiki, my uncle Messrs G and L

Maweni for their continued support. May the Lord bless them.


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ABSTRACT

The study primarily sought to analyse the impact of liquidity crunch on bank

profitability. A case study of ZBFHL for the period 2009 to 2011. This research isimportant to the boards, management and staff of the institution to educate about themajor challenges faced during liquidity crunch situation and recommendations given.The literature reviewed the theoretical and empirical aspects of liquidity crunch.Descriptive research was used in the study. Attention was devoted to the retaildepartment which comprises the commercial bank, the building society and the financedepartment as the sample population for the study upon which non probabilitysampling was employed. Thirty Questionnaires were sent out and an overall responserate of 83.3% was achieved. Data was presented and analysed using pie charts and bargraphs. The study found out that the main cause of liquidity crunch for the financialinstitution is the inadequate cash supply since dollarization that resulted in liquidity

challenges. The study also found that the bank is being affected by the liquidity crunchdue to its failure to carry out foreign transactions that will contribute positively to bankprofitability. The research concluded that the bank is greatly being affected by theeffects of liquidity crunch. Recommendations were made on the government to sell itsshares to other investors so as to improve the cash resource for the bank since it is oneof the major shareholders and also that the bank should reduce its interest rate on loanto lure clients and to maintain the existing ones. The researcher suggested theimplementation of the new Basel II accord in Zimbabwe as areas for further researchsince there are no signs of preparatory efforts for its implementation.


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ACKNOWLEDGEMENTS

This comprehensive project could not have been possible without the effort of my

hardworking supervisor Mr. Chiriseri, an accountancy lecturer at Bindura University.

His effort is greatly appreciated. Measureless credit further goes to my loving father

Mr. Tiki for his financial support and the rest of the family members for the continued

support they gave me during the course of the project. I wish you the best in life.


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TABLE OF CONTENTS

APPROVAL FORM ..................................................................................................... i

RELEASE FORM ....................................................................................................... iiDEDICATION ...........................................................................................................iii

ABSTRACT ............................................................................................................... iv

ACKNOWLEDGEMENTS.......... ................................................................................ v

TABLE OF CONTENTS................................................................................................vi

LIST OF TABLES..........................................................................................................xi

LIST FIGURES..............................................................................................................xii

APPENDIX...................................................................................................................xiii

CHAPTER I ............................................................................................................... 1INTRODUCTION ..................................................................................................... 1

1.0 Introduction....................................................................................................... 1

1.1 Background ....................................................................................................... 1

1.2 Statement of the problem ................................................................................... 3

1.3 Objectives of the study ...................................................................................... 3

1.4 Main Research Questions .................................................................................. 3

1.5 Significance of the study ................................................................................... 4

1.6 Assumptions ..................................................................................................... 4

1.7 Delimitations of the study.................................................................................. 4

1.8 Limitations ........................................................................................................ 5

1.9 Definition of terms ............................................................................................ 5

1.10 Summary ........................................................................................................... 6


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CHAPTER II ............................................................................................................. 7LITERATURE REVIEW .......................................................................................... 7

2.0 Introduction ..................................................................................................... 7

2.1 Liquidity ......................................................................................................... 7

2.2 Credit .............................................................................................................. 8

2.3 Credit Risk ...................................................................................................... 8

2.4 Causes of Credit Risk ...................................................................................... 8

2.4.1 Credit concentration ........................................................................................ 8

2.4.2 Ineffective credit granting and/or monitoring process ...................................... 9

2.4.3 Credit exposures in the market and liquidity sensitive sectors .......................... 9

2.5 Liquidity Crunch ............................................................................................. 9

2.6 Model of liquidity crisis ................................................................................ 10

2.7 Determinants of bank profitability ................................................................. 11

2.7.1 Internal determinants ..................................................................................... 12

2.7.1.1 Statement of Financial Position ..................................................................... 12

2.7.1.2 Statement of Comprehensive Income............................................................. 13

2.7.2 External Determinants ................................................................................... 14

2.7.2.1 Macroeconomic variables .............................................................................. 14

2.7.2.2 Financial Structure Variables ......................................................................... 15

2.8 Bank Lending ................................................................................................ 15

2.9 Challenges commonly facing Zimbabwean Banks ......................................... 16

2.10 Empirical reviews.......................................................................................... 20

2.11 Justification of the study ................................................................................ 23


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2.12 Summary ........................................................................................................ 23

CHAPTER III .......................................................................................................... 24RESEARCH METHODOLOGY ............................................................................ 24

3.0 Introduction .................................................................................................. 24

3.1 Research design ............................................................................................ 24

3.2 Population .................................................................................................... 25

3.3 Sample Chosen ............................................................................................. 25

3.4 Sampling techniques used in the study .......................................................... 26

3.4.1 Non Probability sampling ............................................................................. 26

3.4.2 Convenience Sampling ................................................................................. 26

3.4.3 Judgmental Sampling ................................................................................... 27

3.5 Advantages of using sampling methods ........................................................ 27

3.5.1 Disadvantages of using sampling methods .................................................... 27

3.6 Conclusive Research .................................................................................... 28

3.7 Survey Research ........................................................................................... 28

3.8 Case Study Research .................................................................................... 28

3.9 Sources of Data ............................................................................................ 28

3.9.1 Primary Data ................................................................................................ 29

3.9.2 Secondary data ............................................................................................. 29

3.9.2.1 Limitations of Secondary Data ..................................................................... 29

3.10 Data collection instruments .......................................................................... 29

3.10.1 Questionnaires .............................................................................................. 30


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3.10.1.1 Advantages of questionnaires ....................................................................... 30

3.10.1.2 Disadvantages of questionnaires ................................................................... 30

3.10.2 Interviews .................................................................................................... 30

3.10.2.1 Advantages of interviews ............................................................................. 31

3.10.2.2 Disadvantage of interviews ........................................................................... 31

3.11 Data Presentation and Analysis Procedures................................................... 31

3.12 Validity ........................................................................................................ 32

3.13 Reliability .................................................................................................... 32

3.14 Summary ...................................................................................................... 32

CHAPTER IV .......................................................................................................... 33DATA PRESENTATION, ANALYSIS AND DISCUSSION................................. 33

4.0 Introduction .................................................................................................. 33

4.1 Analysis of Response Rate ........................................................................... 33

4.2 Level of Education ....................................................................................... 35

4.2.1 Respondents Length of service in the Department ....................................... 36

4.3 Training and skills development on Lending and Risk Management ............. 37

4.4 Causes of liquidity crunch ............................................................................ 38

4.5 Contributors of bank profitability ................................................................. 39

4.6 The extent to which the bank is being affected by the crisis .......................... 40

4. 7 Number of loan applications on a daily basis ................................................ 41

4.8 Is the bank able to meet the loan demand against the supply of cash? ........... 41

4.9 Reasons why some of the clients are not applying for loans .......................... 42


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4. 10 Loan turnaround time ................................................................................... 43

4.11 Effects of loan default on the profit component of the bank. ......................... 44

4.12 Challenges currently being faced by the bank ............................................... 45

4.13 Loan interest rate .......................................................................................... 46

4.13 Loan repayment period ................................................................................. 46

4.14 Summary ...................................................................................................... 47

CHAPTER V............................................................................................................ 47SUMMARY, CONCLUSION AND RECOMMENDATION ................................ 48

5.0 Introduction .................................................................................................. 48

5.1 Summary ...................................................................................................... 48

5.2 Conclusion ................................................................................................... 48

5.3 Recommendations ...........................................................................................50

5.4 Further Research study ......................................................................................51

REFERENCES .......................................................................................................... 52


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LIST OF TABLES

Table 3.1 Sample chosen..............................................................................................27

Table 4.1 Summary of Response Rate: Questionnaire.................................................36

Table 4.2 Response Rate on Interviews.......................................................................36

Table 4.3 Number of Loan Applications per day.................................................... ......43


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LIST OF FIGURES

Figure 4.1 Level of Education...................................................................................37

Figure 4.2 Length of service......................................................................................38

Figure 4.3 Training and Skills Development.............................................................39

Figure 4.4 Causes of Liquidity crunch.......................................................................40

Figure 4.5 Contribution of Bank Profitability............................................................41

Figure 4.6 Extent to which the Bank is affected by the crisis......................... ...........42

Figure 4.7 Ability of the Bank to meet loan demands...............................................43

Figure 4.8 Reasons why clients are reluctant to apply for loans................................44

Figure 4.9 Loan Turnaround time..................................................................... .........45

Figure 4.10 Effects of Loan defaults................................................................ ............46

Figure 4.11 Challenges currently being faced by the bank................................ ..........47

Figure 4.12 Loan Interest rate............................................................................. .........47


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LIST OF APPENDICES

1 Questionnaire introductory letter...................................................................... ....56

2 Questionnaire for management.............................................................................57

3 Questionnaire for clients.......................................................................................61

4 Interview questions for Management....................................................................63

5 Interview questions for clients..64


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Also in any dollarised economy, whether partially or officially, the monetary authority

do not have direct control over liquidity management in the economy. The parent

countries whose currency will be in use are the ones who determine money supply and

hence other dynamics that follow. Thus, in most instances, the total liquidity in the

market is not sufficient to cater for all the requirements of the economic agents in the

economy.

According to Muchemwa (2011), he postulated that the economy is controlled by big

money market depositors who dictate the rates when they make money market

placements and prescribe who gets that money they would have deposited. He went on

further that, this is a clear sign of market that is maturing. These big depositors request

for Bankers Acceptances (BAs) for security when placing their money market

investments with the bank and they are benefiting from the lucrative return on cash.

ZBFHL was incorporated in May 1989, as the holding company for the group of

companies which have been providing commercial banking, merchant banking and

other financial services since 1967. The institution has seven subsidiaries and associate

companies under its arm and it has grown too big to such an extent that they are

encountering management problems resulting in further retrenchments and closure of

some building societies that were formerly Intermarket Building Society.

Although there are several challenges, the institution is striving to provide loans to its

clients. The organization provide several categories of loans including: salary based

loans and the micro finance that offer loans to existing small to medium enterprises

(SMEs). The micro finance offer loans on collateral basis known as collaterised debt

security, which is a restriction to many clients since they do not own houses to

surrender as collateral.

Due to the credit crunch within the country and failure by International banks like

Barclays to provide loans to the locals, the burden is directly on the local banks to at


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least do something of which some of these are under sanctions and not able to transact

from abroad. So using the locally available cash these banks are now taking advantage

of the struggling population that are in urgent need of cash by providing them with

loans at very high interest rates that range from 10-30% per annum.

1.2 Statement of the problem

Much has been written about the liquidity situation in Zimbabwean economy, coupled

with the delays in the processing of loan application and high interest rates offered by

some financial institutions and the Central Bank having lost its lender of last resort.

Banks are struggling to deal with this short supply of cash resource and are not able to

meet demand on loan, since demand is higher than supply. The main issue here is who

will finance the financer as this resource is in short supply. This research sought to

establish the determinants of bank profitability in relation to liquidity creation.

1.3 Objectives of the study

The main objectives of this study are:

To analyse the possible causes of liquidity crunch.

To identify the challenges being faced by the bank

To identify the determinants of bank profitability.

To determine the effects of liquidity crunch on the profitability of financial

institutions.

1.4 Main Research Questions

What are the causes of liquidity crunch in financial institutions?

What are the challenges that you are currently facing as a result of liquidity

crunch?

What are the determinants of bank profitability?

How is the bank affected by the liquidity crunch on bank profitability?

What strategies are in place to counter the liquidity crunch?


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1.5 Significance of the study

To the researcher

The researcher is likely to benefit in that, the research will expose him to various

researches and thereby enhances his expert knowledge and also it is a requirement in

partial fulfilment of the bachelor of Accountancy honours degree of Bindura University

of Science Education.

To the organization

Areas that need to be rectified are highlighted and the organization will be in a position

to further implement strategies that are beneficial to them and to their clients and also

on how to prevent a possible future crunch.

To the University

The research is provision for review in future by other researchers who may wish to

undertake a research to the topic.

1.6 Assumptions

The researcher will assume the following:

The respondents will give honesty responses that will facilitate reasonable

deductions.

Primary and secondary data relevant to the study will be accessed.

1.7 Delimitations of the study

The study was confined to ZB Financial Holdings Limited, and focused from February

2009 to 2011 when the theme of liquidity crunch gathered momentum in Zimbabwe.

The study was concerned about liquidity crunch and its impact on bank profitability.

Reference was also made to well-developed banking systems so as to compare the


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domestic effects with other external ones. This enabled the researcher to investigate if a

gap exists and how best can the gap be reduced or closed.

1.8 Limitations

The target population of this research involved senior members of the

institution who found it difficult to spare time to respond to the research

questions. Therefore the researcher had to keep constant contact with

respondents as to remind them about appointments and the questionnaires.

Confidentiality. This research will require sensitive information about the

financial statements of the bank and the trend in the issuance of loans. However

the researcher had to deal patiently with managers until some information

required were disclosed and used for academic purposes.

Secondary data was subject to some form of bias thus the researcher sought

more reliance on primary data.

1.9 Definition of terms

Liquidity is a function of volume and activities. It is the efficiency and cost

effectiveness with which positions can be traded and order executed,

or the ability of bank to fund increases in assets and meet obligations as they come due,

without incurring unacceptable losses.

Liquidity crunch- is defined as the time when cash resources are in short supply and

demand is high, or a tightening of the conditions required in obtaining a loan from the

bank.

Leverage - means borrowing to finance investments.

Bank run is the sudden and unexpected increase in bank deposit withdrawals.


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1.10 Summary

This chapter as an introduction to the research gave an overview of the whole study. It

covered the following main areas which are the background of the study, the statement

of the problem, the research objectives, research questions, significance of the study,

problems likely to be faced by the researcher, definition of terms that will be used in

the study. The next chapter is titled literature review that analyses what the renowned

authorities who have studied the topic before say on the relevant areas of concern.


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CHAPTER II

LITERATURE REVIEW

2.0 Introduction

This chapter will look at various perceptions on the subject of the impact of liquidity

crunch on bank profitability. The major purpose of conducting a review is to sample

current opinions in the text books and professional journals thereby gaining insight into

the aspects of the research questions and objectives to spell out what the impact of

liquidity crunch on bank profitability are. It will entail the components, the processes

and the results.

2.1 Liquidity

Bank for International Settlements (2008) defined liquidity as the ability of bank to

fund increases in assets and meet obligations as they come due, without incurring

unacceptable losses.

Persaud (2001) defined liquidity as the degree to which an asset or security can be

bought or sold in the market without affecting the assets price. It is characterised by a

high level of trading activity, or the ease with which investments can be converted to

cash at their present market value. It is a condition of an investment that shows how

greatly the investment price is affected by trading. A corporation is liquid if it has

ready access to cash; a market is liquid if participants can easily convert positions into

cash and an asset is liquid if it can easily be converted to cash. The liquidity of an

institution depends on;

The institutions short term need for cash;

Cash on hand;

Available lines of credit;

the liquidity of the institutions assets;


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The institutions reputation in the market-how willing will counterparties be to

transact trades with or lend to the institution.

2.2 Credit

Joseph (2006:4) defined credit as a transaction between two parties in which one (the

creditor or lender) supplies money or monetary equivalent goods, services in return for

a promise of future payment by the other (debtor or borrower). Such transactions

normally include the payment of interest to the lender.

2.3 Credit Risk

Is defined by Joseph (ibid) as the probability of loss (due to non-recovery) emanating

from the credit extended, as a result of the non-fulfilment of contractual obligations

arising from unwillingness or inability of the counterparty or for any other reason.

Basel Committee, defined it as the potential that a borrower or counterparty will fail to

meet its obligations in accordance with agreed terms.

2.4 Causes of Credit Risk

For any organisation, especially one in the banking-related activities, losses from credit

risk are usually very severe and not frequent (Bagchi, 2006:41). He stipulated that there

are three sets of causes: credit concentration, credit granting and or monitoring process

and credit exposure in the market and liquidity-sensitive sectors.

2.4.1 Credit concentration

Bagchi (2006) argued that, any kind of concentration has its limitations. The cardinal

principle is that all eggs should not be put in the same basket. He stipulated that, in the

case of banking or allied functions, the extent of concentration is to be judged

according to the following criteria:

The institutions capital base (paidup capital + reserves and surplus)

The institutions total tangible assets.


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The institutions prevailing risk level.

2.4.2 Ineffective credit granting and/or monitoring process

A strong appraisal system and pre-sanction care are the basic requisites in the credit

delivery system. This again needs to be supplemented by an appropriate and prompt

post-disbursement supervision and follow-up system (Bagchi, 2006:42)

2.4.3 Credit exposures in the market and liquidity sensitive sectors

Foreign exchange and derivative contracts, letters of credit and liquidity back-up lines,

while being remunerative, create sudden hiccups in the organizations financial base.

To guard against any rude shock, the organisation must have in place a Compact

Analytical System to check for the customers vulnerability to liquidity problems. The

Basel Committee states that, Market and liquidity-sensitive exposures, because they

are probabilistic, can be correlated with credit-worthiness of the borrower.

2.5 Liquidity Crunch

According to www.businessdictionary.com liquidity crunch is defined as the time

when cash resources are in short supply and demand is high. During a liquidity crunch,

businesses and consumers are charged high interest rates on loans which are more

difficult to obtain. It is also known as liquidity crisis.

www.wordwebonline.comdefined liquidity crisis as a state in which there is a short

supply of cash to lend to business and consumers and interest rates are high, credit

crunch, and squeeze.

A liquidity crunch is often caused by a sustained period of careless and inappropriate

lending which results in losses for lending institutions and investors in debt when loans

turn sour and the full extent of bad debt becomes known. These institutions may then

reduce the availability of credit, and increase the cost of accessing it by raising interest

rates. In some cases lenders may be unable to lend further, even if they wish, as a result

of earlier losses.
http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.wordwebonline.com/http://www.wordwebonline.com/http://www.wordwebonline.com/http://www.businessdictionary.com/


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According to the Bankers Association of Zimbabwe (2010),a liquidity crunch usually

occurs when there is a lack of confidence in the Banking system leading to a reduction

in the level of deposits and the disappearance of credit. Its symptoms are lack of cash.

Usually this is accompanied by a sharp increase in interest rates and a decrease in

credit granting. This phenomenon leads to a decline in business activity as businesses

fail to restock, pay for day to day operations and meet debt obligations when due even

resulting in default. Zimbabwe is currently experiencing a liquidity crunch due to a

number of factors;

The introduction of a multicurrency regime when the country had low US

dollar reserves.

Difficulties of sourcing offshore lines of credit because of country

risk/sanctions.

The world economic crisis low export volumes and subdued commodity

prices.

Undercapitalisation of the Central Bank making it fails to play its role as a

lender of last resort.

2.6 Model of liquidity crisis

DiamondDybvig model

One of the earliest and most influential models of liquidity crisis and bank runs was

given by Diamond and Dybvig in 1983. The DiamondDybvig model demonstrates

how financial intermediation by banks, performed by accepting assets that are

inherently illiquid and offering liabilities which are much more liquid (offer a smoother

pattern of returns), can make banks vulnerable to a bank run. Emphasising the role

played by demand deposit contracts in providing liquidity and better risk sharing

among people, they argue that such a demand deposit contract has a potential

undesirable equilibrium where all depositors panic and withdraw their deposits

immediately. This gives rise to self-fulfilling panics among depositors, as we observe

withdrawals by even those depositors who would have actually preferred to leave their
http://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_modelhttp://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_modelhttp://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_modelhttp://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_modelhttp://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_modelhttp://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_modelhttp://en.wikipedia.org/wiki/Financial_intermediationhttp://en.wikipedia.org/wiki/Bank_runhttp://en.wikipedia.org/wiki/Demand_deposithttp://en.wikipedia.org/wiki/Demand_deposithttp://en.wikipedia.org/wiki/Bank_runhttp://en.wikipedia.org/wiki/Financial_intermediationhttp://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_modelhttp://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_model


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deposits in, if they were not concerned about the bank failing. This can lead to failure

of even healthy banks and eventually an economy-wide contraction of liquidity,

resulting in a full blown financial crisis.

Diamond and Dybvig demonstrated that when banks provide pure demand deposit

contracts, we can actually have multiple equilibriums. If confidence is maintained, such

contracts can actually improve on the competitive market outcome and provide better

risk sharing. In such an equilibrium, a depositor will only withdraw when it is

appropriate for him to do so under optimal risk sharing. However if agents panic,

their incentives are distorted and in such an equilibrium, all depositors withdraw their

deposits. Since liquidated assets are sold at a loss, therefore in this scenario, a bank will

liquidate all its assets, even if not all depositors withdraw.

2.7 Determinants of bank profitability

Healthy and sustainable profitability is vital in maintaining the stability of the banking

system. Even if solvency is high, poor profitability weakens the capacity of a bank to

absorb negative shocks, which will eventually affect solvency.

Profitability is a reflection of how banks are run given the environment in which they

operate (Gisher and Juttner, 2001). It should mirror the quality of a banks management

and the shareholders behaviour, the banks competitive strategies, efficiency and risk

management capabilities. High profitability is good but too high is dangerous. In fact,

very high profitability could stem from strong market power and hamper the efficient

intermediation of savings. In turn, very low profitability might discourage private

agents from conducting banking activities. In as far as profitability considerations

determine investors interest in financial institutions and, thus, the possibility to have

enough capital to continue operating.

The determinants of bank profitability can be divided into two main categories, namely

internal factors and external factors.
http://en.wikipedia.org/wiki/Competitive_markethttp://en.wikipedia.org/wiki/Competitive_market


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2.7.1 Internal determinants

Internal determinants of bank performance can be defined as factors that are influenced

by management decisions and policy destination (Mendes, 2000). Such profitability

determinants are related to the level of liquidity, provisioning policy, bank size, capital

adequacy and expenses management. Such management effects will definitely affect

the operating results of banks. Although a quality management leads to good bank

performance, it is difficult to assess management quality directly. As such, it is not

uncommon to examine a banks performance in terms of those financial variables

found in those financial statements. The statement of financial position and statement

of comprehensive income are the two principal ones.

2.7.1.1 Statement of Financial Position

Vong and Chang, University of Macao asserted that Statement of Financial Position is

an integral part of financial statements that highlights the financial position of a bank at

a single point in time. It reflects the banks management policies and decisions in the

allocation of resources. Statements of Financial Position items are direct indicators of

earnings power and the cost of banks. From the financial statement, a variety of

variables capable of influencing the banks performance can be discerned. The

determinants that receive most attention in the banking literature are bank

capitalisation, costs, asset and liability composition and size. As a measure of bank

costs, the capital ratio has been a valuable tool for assessing capital adequacy and

should capture the general safety and soundness of banks.

Bank capitalisation, there are several reasons to believe that capitalisation should

foster profitability: first, capital can be considered a cushion to raise the share of risky

assets, such as loans. When market conditions allow a bank to make additional loans

with a beneficial return or risk, this should imply higher profitability. Second, banks

with a high franchise value, measured in terms of capitalisation have incentives to

remain well capitalised and engage in prudent lending. Third, although capital is

considered to be the most expensive bank liability in terms of expected return, holding


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a relatively large share of capital is an important signal of creditworthiness. When

depositors exert market discipline, banks with more capital should be able to lower

their funding costs. Finally, a well capitalised bank needs to borrow less in order to

support a given level of assets.

Asset quality, poor asset quality should reduce profitability in as far as it limits the

banks pool of loanable resources.

The statement of financial position structure of a bank is also bound to affect

profitability. On the asset side, a larger share of loans to total assets should imply more

interest revenue because of higher risk. Loans also have higher operational costs

because they need to be originated, serviced and monitored. Profitability should

increase with a larger share of loans to assets as long as interest rates on loans are

liberalised and the bank applies mark-up pricing. Demirguc- Kunt and Huizinga (1999)

reported that banks with a relatively high share of non-interest earning assets are less

profitable.

Bank size is generally considered a relevant determinant of profitability but there no

consensus on the direction of influence. A bank of large size should reduce costs

because of economies of scale. More diversified opportunities should allow

maintaining or even increasing returns while lowering risk on the other hand, large

size can imply that the bank is much harder to manage or it could be the consequence

of banks aggressive growth strategy. Goddard et al (2004) showed that very large

banks in the industrial countries tend to be more profitable.

2.7.1.2 Statement of Comprehensive Income

Measure the success of operations for a given period of time. Ratios obtained from the

income statement are known as operations ratios because they illustrate the

management efficiencies in generating revenue and at the same time controlling cost.

The most important factor from the income statement is the efficiency in the expenses

management, the higher the expense of the bank, the lesser the banks profitability will


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be (Bourke, 1989 and Jiang et al, 2003). An important determinant which could be

derived from the income statement is the non-interest income ratio. A bank earns

revenue from many sources and prominent of these are interest income, service fees and

commissions from its assets and income from using liabilities (Hester and Zoellner, 1966)

in the Traditional model. When banks are more diversified, they can generate more

income sources, thereby reducing its dependency on interest income which is easily

affected by the adverse macroeconomic environment.

2.7.2 External Determinants

According to Guru et al (2002) external determinants of bank profitability are factors

that are beyond the control of a banks management. They represent events outside the

influence of the bank. However, the management can anticipate changes in the external

environment and try to position the institution to take advantage of anticipated

developments. The two major components of the external determinants are

macroeconomic factors and financial structure factors.

2.7.2.1 Macroeconomic variables

Macroeconomic conditions may affect banking performance in a number of ways.

Firstly, there will be higher demand for bank credit in times of economic boom than in

times of recession. A high aggregate growth rate may strengthen the debt servicing

capacity of domestic borrowers, and therefore, contribute to less credit risk. Bourke

(1989) presented evidence that economic growth, if particularly, associated with entry

barriers to the banking market, would potentially lift banks profits.

Secondly, it is generally believed that a rising interest rate should lead to higher

banking sector profitability by increasing the spread between the saving and the

borrowing rates. Hanweck and Kilcollin (1984) found that this relationship is

particularly apparent for smaller banks in the USA during the 1976-1984 periods. They

noticed that falling interest rates during recession lead to slower growth in loans and

increase in loan loss.


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Finally, the effect of inflation is also another important determinant of banking

performance although this variable is not applicable in Zimbabwe due to dollarisation.

In general, high inflation rates are associated with high loan interest rates and thus high

income. Perry (1992), however, asserts that the effect of inflation on banking

performance depends on whether inflation is anticipated or unanticipated. If inflation is

fully anticipated and interest rates are adjusted accordingly, a positive impact on

profitability will result. Unexpected rise in inflation cause cash flow difficulties for

borrowers, which can lead to premature termination of loan arrangements and

precipitate loan losses. Studies by Guru et al (2002) in Malaysia and Jiang et al (2003)

in Hong Kong showed that higher inflation rate leads to higher bank profitability; this

is contrary to the study by Abreu and Mendes (2000) that reported a negative

coefficient for the inflation variable in European countries.

2.7.2.2 Financial Structure Variables

Is defined as the relative importance of banks and plays a role in determining banking

performance. A high bank asset-to-GDP ratio implies that financial development plays

an important role in the economy. This relative importance may reflect a higher

demand for banking services which in turn, attracts more potential competitors to enter

the market. When the market becomes more competitive, banks need to adopt different

strategic moves in order to sustain their profitability. Demirguc-Kunt and Huizinga

(1999) presented evidence that financial development and structure variables are very

important. Their results showed that banks in countries with more competitive banking

sector, where bank assets constitute a large portion of GDP, generally have smaller

margins and are less profitable.

2.8 Bank Lending

The availability and price of bank lending are important contributors to the smooth

running of the Zimbabwean economy. Under conditions of financial market instability

banks may become unwilling or unable to lend, leaving other banks, firms or

households facing tighter terms and availability of credit that can hinder investment or


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spending plans. The amount and price of bank lending can adversely impacted in a

number of ways, PricewaterhouseCoopers UK Economic Outlook March 2008:

Firstly, bank lending is generally funded through some combination of customer

deposits and finance from the capital markets. Any re-assessment of the risk on capital

markets can raise funding costs or reduce the amount of funds banks are willing to lend

at a given interest rate.

Secondly, banks tend to keep their capital ratios, (that is, the ratio of banks capital to

assets) well above levels required by regulatory regimes in order to protect against

unexpected changes in their balance sheets and to secure high credit ratings. Any

significant fall in bank capital ratios can reduce the amount of available funds as banks

rebalance the ratio of assets, or increase the cost of raising finance as credit ratings

deteriorate.

Lastly, the financial position of borrowers, that is, their level of collateral impacts the

price and quantity of loans made available to them by banks. Falling asset values, that

is, real estate or equity prices and the subsequent weakening of the borrower balance

sheets can lead to a rise in risk premier, which again can restrict the volume of lending

or increase the interest rates charged on loans.

2.9 Challenges commonly facing Zimbabwean Banks

Bonga (2010) had identified the following as the challenges commonly facing local

banks under this liquidity crunch:


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Financial Challenges

The Zimbabwean banks are currently failing to get enough finance to enable them to

run its business operations at the full capacity. The banks are struggling to meet the

minimum capital requirement set by the RBZ, even under a phased plan given by the

central bank. As of this year, 21 out of 25 banking institutions had complied by end

May. Paid-up capital requirements were set as US$12, 5 million for commercial banks

and US$10 million for merchant banks and building societies 4 banks failed to pay up

according to the phased plan. Low level of capitalisation has also been identified by

Brownbridge (1998), as a common challenge that is always faced by banks in

developing nation especially locally owned banks.

Liquidity challenges

To expand operations banks need adequate cash, and this can be found through many

ways and it is these ways that are currently unavailable. Getting loans from other

banks, foreign companies, the Central bank and deposits from individuals and

institutions are possible ways to raise finance. Foreign currency is very scarce in the

economy due to poor export performance and lack of international capital flows. Even

solvent banks may not survive a run on deposits as they are also struggling to mobilise"less liquid assets to meet liquidity needs".

Volatility of deposits

The deposits to banks are very volatile and hence low profits out of them. He asserted

that, this is mainly caused by a very high marginal propensity to consume of various

economic agents who are earning low salaries and hence unable to save, this causes

people not having money staying in their bank accounts except minimum balances.

This has left banks having no money to invest and earn a profit. Major deposits are

done by companies as salaries and wages of their employees who will then withdraw

almost all of their salaries. The majority of workers are earning far less than the


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Poverty Datum Line especially those in the Public Service, making it difficult for them

to save.

High Overhead Costs

Due to the low-income generation ability of the banking institutions, their earnings

cannot match the overhead costs they are facing, especially salaries and wages given

that they are not operating at full capacity. The cost of paying workers salaries that are

in line with the cost of living is too heavy for the banks as they are not operating at full

capacity and level of profitability is low. Even if they opt for retrenchment, the

packages to be given to the retrenched workforce will be a challenge.

Cash-based Transactions Prevailing

Due to the foreign currency shortages in the economy, and the unavailability of

alternative payments to business transactions, a lot of cash is in the hands of economic

agents and they are not willing to have it banked. Most of the trade taking place is on

cash basis.

Lack of available lines of Credit

As banks like any other companies are willing to borrow elsewhere so that they expand

business, the lines of credit are not available. The few that are there are of short term

nature and hence very costly. The supply then cannot meet the demand. Small banks

are the most affected as they cant meet the requirements for getting credit even in the

foreign market.

Central Banker not performing all its roles- Lender of last resort

Due to the fact that Zimbabwe has no currency of its own, it has adopted the

multicurrency use and mainly South African rands and the United States dollars are

used for transactions, the Central bank can no longer perform all its roles especially

being a lender of last resort. This gives banks a hard time to find sources of finance.


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RBZ's problems also meant that banks would not be able to obtain a refund of their

statutory reserves for which they are entitled in case of a possible decline in their

deposits because these reserves are not backed by international reserves. In normal

environment, if liquidity tightens banks approach the RBZ for accommodation, then

RBZ reserves the right to grant assistance on its own terms.

No active Interbank Market

Currently there is no active interbank market, implying that those banks with no

collateral to the required conditions find it difficult to borrow so that they cover

liquidity gaps. Lack of finance remains a big challenge to the banking sector, as they

are not able to expand their business in line with current economic conditions and

public demand for their services to be appreciable and internationally competitive.

Insider lending

Insider lending also has contributed to bank failures and still remains a challenge to the

Zimbabwean banking sector and this often lead to bad debts. As an example most of

the larger local bank failures in Kenya, such as the Continental Bank, Trade Bank and

Pan African Bank, involved extensive insider lending, often to politicians,

Brownbridge (1998). This is the same scenario with Zimbabwean banks which have no

choice but to perform insider lending.

Lending to high-risk borrowers through Adverse selection and Compliance to

National Policies

Due to lack of investment opportunities, banks are now lending to high-risk borrowers

through adverse selection and compliance to national policies. Various government

bodies have negotiated with the banks to offer loans as part of Empowerment

programmes to the youth and woman who have no collateral securities. He indicated

that of such groups have failed to return the loans as prescribed and hence are having

losses. As the economy is from the depression, it is now difficult to distinguish and


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losses, mainly from credit positions in the Baltic countries. These results were also

related to the use of the guarantee program imposed by the central bank, which have

shifted the banks from facing liquidity risk towards credit risk. The time period faced

banks with decreasing interest rates, which in turn contribute to a decreasing funding

spread. They agued that, in order to compensate themselves banks must increase their

income from other sources, such as fees, commission, their operating efficiency or their

risk taking on lending. However, they found that the banks are not using any of these

factors to increase their profits, even though they manage to increase their profit

margin. This can relate mainly to an increased credit spread on lending rates and a

higher reliance on the financial leverage, which mainly relates to the banks interest

rate risk. They then concluded that in real terms, this implies that banks were financing

their long-term borrowing with cheaper short term credits, a deviation that declined

during the end of 2009 when customers moved towards a larger share of short-term

loans.

Bordelean and Graham (2010) examined the Impact of liquidity on bank

profitability, Bank of Canada. In their paper, the authors analysed the impact ofliquid

asset holdings on bank profitability for a sample of large U.S. and Canadian banks.

Their results suggest that profitability is improved for banks that hold some liquid

assets, however, there is a point at which holding further liquid assets diminishes a

banks profitability, all else equal. Their empirical evidence also suggests that this

relationship varies depending on a banks business model and the state of the economy.

Pasiouras & Kosmidou (2007) examined how banks specific characteristics and the

overall banking environment affect the profitability of commercial domestic and

foreign banks operating in the 15 European Union countries over the period 1995-

2001. They found that all explanatory variables employed significantly affect the bank

profitability although their impacts are not always uniform for domestic and foreign

banks. The utilised internal determinants are equity to total assets, cost to income ratio,

loans to customers and short term funding, and total assets. While the used external


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determinants were inflation rate, GDP (Gross Domestic Product) growth, concentration

level (bank total assets to GDP ratio, the ratio of stock market capitalisation to bank

total assets, and the ratio of stock market capitalisation to GDP.

Interbank liquidity crunch and the firm credit crunch: evidence from the 2007-

2009 crisis. Lopes et al (2010)

They analysed the effects of the 2007-09 banking crisis on the supply of credit to

businesses. They used loan level data for the entire banking sector from Portugal,

matched with firm and bank information. They exploited a shock to bank liquidity

induced by the unexpected freeze of the European interbank market in August 2007.

Using a difference-in-difference approach, they compared lending before and after the

crisis by banks with different susceptibility to the shock, based on their exposure to the

interbank market prior to the onset of the crisis. In addition, they used firm fixed-

effects to control for unobserved heterogeneity in firm loan demand and risk. For the

same borrower, banks that rely more on interbank finance before the crisis decrease

their lending more severely during the crisis. The credit supply reduction is stronger for

smaller, younger firms, with weaker banking relationships. Moreover, they showed that

these firms cannot compensate the reduction in supply via obtaining credit from other,

less affected, banks, nor from other sources of debt. They finally found no reduction in

credit supply for large firms. Their results suggested that the liquidity shock at the

onset of the financial crisis of 2007-09 affects entrepreneurial firms most severely,

while larger more established firms were less affected.

Garcia-Herrero et al (2009) analysed the main determinants of profitability for

Chinese banks by employing a panel data set for 87 banks from 1997-2004. They

found that better capitalised banks, a relatively larger share of deposits, and more X-

efficient banks tend to be more profitable. Hence, a less concentrated banking system

as well as lower government intervention increases bank profitability. Furthermore,

from the macroeconomic variables included, higher real interest rates on loans and

inflation appear to foster profitability while the volatility of interest rates reduces it.


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Sufian & Habibullah (2010) examined the impact of financial crisis on bank

performance in Indonesia, by employing an unbalanced panel of 404 bank year

observation for the period 1990-2005. The empirical results suggested that the Asian

financial crisis exerts negative and significant impact on Indonesian banks

profitability. In addition, income diversification and capitalisation are positively related

to bank profitability, while size and overhead costs have negative impacts.

Furthermore, economic growth and banking sector concentration were positive during

the pre-crisis and crisis periods.

2.11 Justification of the study

There is relatively little research that has been done specifically on the impact of

liquidity crunch on bank profitability. Most studies have focused on the determinants

of bank profitability and were mainly based on developed countries. To fill the

knowledge gaps on the impact of liquidity crunch on bank profitability, this study

looks to provide new empirical support on the topic, using the locally available data

since dollarisation. This research will recommend ways of resolving the effects of

liquidity crunch on bank profitability and the possible ways that the responsible

authority involved in providing liquidity should do to minimise the possibility of loan

default.

2.12 Summary

The chapter looked at the purposes of the literature review, key concepts and

definitions, which included the definition of liquidity and liquidity crunch. It also

highlighted the theoretical determinants of bank profitability. The next chapter,

research methodology outlines how the research is going to be carried out.


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CHAPTER III

RESEARCH METHODOLOGY

3.0 Introduction

The chapter gives a description of how the research was carried out in order to meet the

objectives of the study. It touches on the research methodology and process used by the

researcher to collect information or data from the sample selected. It also encompasses

the research design, the research instrument, and the data collection procedures. This

chapter also gives the population that was selected for investigation. These componentsdetermine the effectiveness and representativeness of the research results. The merits

and demerits of the data collection methods and research techniques used in the

research are also discussed in this chapter.

3.1 Research design

A research design can be defined as a deliberately planned arrangement of conditions

for analysis and collection of data in a manner that aims to combine relevance to the

research purpose with the economy of procedure. According towww.wikipedi.edu, a

research design is defined as the planning of any research from the first to the last step,

alternatively it is a program for guiding the research in collecting, and analysing and

interpreting observed facts. It includes the nature of the evidence gathered and from

what source. It also includes the methods used to interpret data that is used to provide

answers to the basic research questions.

There are various research designs that could be used and they all differ according to

the objectives of the study undertaken and relevant information required. These types

according to Russell A (1996:01) include exploratory and descriptive method. The

research design of this research can be best described as descriptive. It is descriptive as
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it aims at describing the fundamental aspects that analyse the impact of liquidity crunch

on bank profitability that will be highlighted at the data presentation and analysis

section of the study. It enables the researcher to gather more information using

questionnaires and interviews.

3.2 Population

Frame or target population is that part of the population or universe to which the study

is based. According to www.continuumbooks.com, population is that group which the

researcher is interested in gaining information and drawing conclusions. The

population in this research is specifically limited to ZB Financial Holdings. The

personnel to be involved are the branch managers who are the management of the retailbanks and are involved in the issue of loans.

3.3 Sample Chosen

Table 3.1

Description Number

Management

Financial Accountant 1

Cost and Management Accountant 1

Branch Manager 10

Other

Personal Banker 10

Transactions Controller 5

Clients 3

Interviews

Staff 3

Clients 7

Total 40


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The researcher chose a sample that was well balanced to include all the stakeholders

involved in the quest to get properly researched conclusion. According to Ferber

(1974), a sample is a subset of the whole population that is chosen to represent the

whole population.

3.4 Sampling techniques used in the study

3.4.1 Non Probability sampling

Non probability sampling techniques used were the convenience and judgmental

sampling. According towww.statpec.com non-probability sampling is when members

are selected from the population in some non-random manner.

Non probability sampling relies on the judgment of the researcher and is only

representative as far as the researchers skill permits Martins (1995). In non-probability

sampling each member does not have known non zero chance of being included.

Schindler (2003)

3.4.2 Convenience Sampling

According to Gay (1992:126) convenience sampling involves using as the sample

whoever happens to be available. It is used in explanatory research where the

researcher is interested in setting an inexpensive approximation of the truth. As the

same implies, the sample is selected because they are convenient since not every

person is ready to respond to any questionnaire for example a person like the Group

Chief Executive is very important to the research under study but it is very unlikely

that he will find time to respond to a questionnaire thus it renders convenient sampling

relevant in this case.
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3.4.3 Judgmental Sampling

The researcher employed the non-probability sampling technique because it is cheaper,

involves less planning and less call backs are contacted. It is also faster and less time

consuming.

Gay (1992:127) refers judgement sampling as purposive sampling and basically

involves selecting a sample that is believed to be representative of a given population.

This method applies to situations where the specific subjects are already known and

deliberately selected. The researcher was confident that the chosen sample was a true

representative of the entire population.

3.5 Advantages of using sampling methods

The use of sampling techniques comes with several pros and cons. According to

www.wikipedi.edu the following are the advantages and disadvantages of using

sampling methods in research. Sampling lowers the cost of the research as it is done on

a specific group and also allows data to be obtained rapidly for quicker analysis.

Follow-ups on non-respondents are also made easy.

As such, the fact that sampling is faster, efficient and less costly the researcher used

sampling methods given a limited time and financial budget.

3.5.1 Disadvantages of using sampling methods

The major disadvantage of using sampling methods is that there is the risk of getting a

biased response if the sample is not carefully selected.
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3.6 Conclusive Research

The researcher made use of a conclusive research approach as both primary and

secondary researches were being carried out. According to www.ryerson.ca ,

conclusive research is meant to provide information that is useful in recording

conclusions or decision-making. It relies both on secondary and primary research.

3.7 Survey Research

The researcher also made use of a survey research in the study. According to Hutton

(1980:8) survey research is the method of collecting information by asking a set of pre-

formulated questions in a predetermined sequence in a structured questionnaire to a

sample of individuals drawn so as to be representative of a defined population.

3.8 Case Study Research

Research on a Financial Institution proved to be very costly and time consuming hence

the researcher made use of the case study method. According to www.wikipedi.edu ,

case study research is the in-depth investigation of one unit, for example, an

organisation. It involves an intensive study of a relatively small number of the whole

group. The researcher used case study research in order to focus research resources,

time and finances on the departments selected so as to cut costs and also to have

adequate access to conduct a valid research.

3.9 Sources of Data

The researcher made use of primary data and little of secondary data.
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3.9.1 Primary Data

This refers to the original data collected from the targeted respondents on the subject

under review. It provided valid and specific information and the data was current as an

advantage to the researcher. This data was collected through the use of questionnaires

3.9.2 Secondary data

This is the data collected for other purpose other than the researcher is using it for

Saunders et al (2009:256). Internal and external sources of secondary data were used

by the researcher. Internal sources were in the form of month end branch profits

reports.

External sources included journals from various educational institutions and text books

by various authorities in relation to liquidity crunch. Secondary data was also gathered

through the desk research technique. The major advantage was that the data was readily

available and as such its collection involved low costs and effort.

3.9.2.1 Limitations of Secondary Data

Some of the data available did not suit the research purpose and objectives as some of

it was outdated to meet the requirements of the study. Also it was difficult to assess the

accuracy of the data resulting in the researcher gathering and processing secondary data

at his own discretion.

3.10 Data collection instruments

Refers to the methods used to collect data for analysis in the research. The following

methods were used


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3.10.1 Questionnaires

Questionnaires were used to gather information from personnel who were qualified to

give a true and fairly representative opinion based on their level of experience. Baxter

(2000:68) noted that questionnaires are the ideas of formulating precise written

questions for those whose opinions or experience you are interested in.

3.10.1.1 Advantages of questionnaires

They are completed by respondents during spare time and also respondents

have enough time to reflect on issues raised in the questionnaire.

They are semi-structured thereby making data coding, sorting and analysis

easier.

Questionnaires also allow for confidentiality because the respondents do not

write their names and there is no influence or bias from the researcher as the

respondents will complete the questionnaires in the absence of the researcher.

3.10.1.2 Disadvantages of questionnaires

It does not allow the researcher to probe further.

There is lack of control over who actually complete the questionnaire.

It is not possible to observe the respondents' non-verbal communication such as

facial expressions.

3.10.2 Interviews

A structured interview was used and the procedure was determined in advance.

According to www.answers.com, interviews are structured interaction between a
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researcher and a subject who is identified as potential source of information. Weber

(2001) defines interviews as face to face meeting between the interviewer and the

interviewee.

3.10.2.1 Advantages of interviews

Interviews enable the interviewer to establish rapport with the respondents.

They also allow the interviewer to observe as well as listen.

More questions to be asked than in other types of data collection

3.10.2.2 Disadvantage of interviews

Respondents may not be able to meet their scheduled appointments and there is

usually eagerness of a respondent to please the interviewer.

There is also a tendency of the interviewer to seek out the answers that support

his preconceived notions.

3.11 Data Presentation and Analysis Procedures

The researcher analysed the data collected thoroughly so as to check for completeness,

accuracy and consistency. The data contained in the questionnaires were represented in

the form of numbers which were suitable for further processing and analysis. The aim

was to improve on the reliability and validity of the data. The researcher presented and

analysed data according to logical themes which emerge from the study. In presenting

data and analysing it, both qualitative and quantitative techniques were used and that

includes tables, pie charts, graphs and percentages. Percentages and tables were used

because they were easy to construct, interpret, and understand as compared to other

methods of presenting data. Pie charts were also used because they display relative

proportions of multiple classes of data, require minimal additional explanation and they

summarised a large data set in visual form although they do not easily reveal exact

values.


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The method used for analysing the data was a qualitative approach. Given the nature of

the problem and research type, this was the most ideal type of data analysis as the

research was conducted using a qualitative approach

3.12 Validity

According to Ghauri (2005) validity is the extent to which a test measures what it is

supposed to measure and also the appropriateness with which inferences can be made

on the basis of the test results.

3.13 Reliability

Ghauri (ibid) define reliability as the extent to which a specified procedure such as a

measure yields consistent observation of the same facts from one tune to another. It is

also referred to as the accuracy and honesty of the information provided (ibid). To

ensure reliability of the instruments, internal consistency has been used to evaluate the

reliability of the instruments. Internal consistency refers to the use of different

questions demanding the same answer in the same questionnaire to test truthfulness of

information provided by respondents. This consistency gives the researcher confidence

that the results actually represent what the researcher intends to study.

3.14 Summary

This chapter dealt with the methods used in this study to collect both primary and

secondary data and also outlined the merits and demerits of these methods. The

research methodology presented, is deemed to be effective and is believed to minimise

research errors making the study well representative. The next chapter presents and

analyses the findings obtained through this research methodology.


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CHAPTER IV

DATA PRESENTATION, ANALYSIS AND DISCUSSION

4.0 IntroductionThe chapter looks at the key research findings with the intention of drawing

conclusions on the impact of Liquidity crunch on Bank Profitability. The chapter will

present and analyse the findings of the research, and it will focus on the responses

obtained from the questionnaires. The findings obtained will be linked to the research

questions and objectives of this research study

4.1 Analysis of Response Rate

Both questionnaires and interviews were used in the collection of primary data. A total

of thirty questionnaires were dispatched to respondents. A response rate of 83.3 % was

achieved and was considered to be excellent by the researcher and it justifies the use of

the findings as a basis for making conclusions and recommendations on the impact of

liquidity crunch on Bank profitability. As postulated by Bell (1993:55), a well designedquestionnaire has a 7080 % positive impact on the response rate.

The following table represents the distribution and the responses obtained from the

questionnaires and interviews that were administered in the research.


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Table 4.1 Summary of Response Rate

Source: Primary data

Department Questionnaires

sent

Questionnaires

Returned

Response

Rate

%

Financial Accountant 1 1 100

Cost and Management

Accountant

1 1 100

Branch Manager 10 8 80

Personal Banker 10 8 80

Transaction controller 5 4 80

Clients 3 3 100

Total 30 25 83.3

Table 4.2 Response rate on interviews

Source: Primary data

Number of interviews

conducted

Response rate

%

Management 3 100

SMEs 3 100

General account holders 4 100

Total 10 100


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4.2 Level of Education

The table below shows the level of education amongst ZB finance and retail bank

department workers in order to establish whether reliance can be placed upon the

responses from them.

Level of education

12%8%

32%

8%

40%

Masters

First degree

Diploma

Professional

qualification

Other

Figure 4.1

Source: Primary Data

Figure 4.1 above indicates that most of the respondents are degree holders as theyrepresented 40% of those who responded to the questionnaires. 32% are holders of

professional qualifications, another 12% have Masters, 8% are Chartered Accountants

and the remaining 8% are diploma holders. As such, the statistics allows the researcher

to assume that the respondents are somehow knowledgeable about the subject of

liquidity crunch. As a result their views will be deemed to be the most appropriate in as

far as the research questions and objectives are concerned.


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4.2.1 Respondents Length of service in the Department

In a bid to determine the reliability of data, respondents were asked on the time they

had spent serving in ZB Financial Holdings.

0%

10%

20%

30%

40%

Less than 4yrs 46 years 610 years 10+

Length of service

Figure 4.2


The figure 2 above indicates that 28% of respondents, that is, employees and

management had served ZB for more than 10 years and these respondents form the

most important part of the research. 12% had served for 6 years and more, 20% had

served for 4 to 6 years whist 40% had served for less than 4 years.


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4.3 Training and skills development on Lending and Risk Management

n=25

Training and skills development

36%

64%

Yes

No

Figure 4.3


In ascertaining whether there is enough training with regards to lending and risk

management, 64% of the respondents indicated that they had received internal and

external training. 36% indicated they had received no training at all. The management

also indicated that due to huge costs associated with staff training and financial

constraints, they had reduced the number of external training and focused more on

internal training programs per year.


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4.4 Causes of liquidity crunch

n=25

0% 10% 20% 30% 40% 50% 60%

absence of lines

of credit

inadequate cash

supply

Political

environment

Causes of liquidity crunch

Figure 4.4


Figure 4.4 above shows that of those who responded to questionnaires, 60% cited

inadequate cash supply in the economy since the introduction of the US dollar; this is

supported by Bonga (2010) as the main cause of liquidity crisis. 24% cited absence of

lines of credit, this is in line with the Bankers Association of Zimbabwe (2010) and the

remaining 16% attributed this to the political environment in which the bank is

operating which is not very friendly to external investors. Of the 24% who cited

absence of lines of credit from external sources, they indicated that the variable have

negatively impacted on the nation as a whole since demand is greater than supply.

They also talked of the environment in which they are operating as not very conducive

as most of the businesses and potential investors have not yet gained confidence in the

banking sector which is characterised by the abuse ofdepositors money as recently

evidenced by the Renaissance Financial Holdings case.


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4.5 Contributors of bank profitability

Contributors of bank profitability

40%

32%

28%

Account service fees

Loan interest rate

Monthly withdrawal fee

Figure 4.5


Figure 4.5above is in line with Hester and Zoellner (1966), were they indicated that a

bank earns revenue from many sources and prominent of these are interest income, service

fees and commissions from its assets and income from using liabilities. 40% cited account

service fees as one of the contributors of profitability; this is also supported by Garcia-

Herrero et al (2009). It is said that the fee is deducted automatically from the account

both from deposits made and salary deposited every month. The management also

highlighted that a large proportion of deposits increase profitability as they constitute a

more stable and cheaper funding. This conforms to the study carried out by

DermirgucKuntand Huizinga (1999). 32% indicated that loan interest rates are also

contributors and are regarded as the main source of revenue although loans are

considered to be risk investment. This is supported by Abreu and Mendes (2000) in

their study in which they documented that, loans are sources of revenue that are

expected to affect profits positively. 28% of the respondents cited monthly withdrawal

fees, with some arguing that due to the size of the bank these fees are contributing to

the bank profitability significantly. This is against the studies carried out by Naceur

(2003) in Tunisia and Jiang et al (2003) in Hong Kong.


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The management also highlighted that deposits by clients are below 20%, and the

larger part of the deposits are from companies when they deposit money for their

employee salaries and they are all withdrawn once leaving nothing in the account.

4.6 The extent to which the bank is being affected by the crisis

n=25

0% 10% 20% 30% 40% 50% 60%

Lesser extent

Neutral

Greater extent

Figure 4.6


Figure 4.6 above indicates that the financial institution is being negatively affected by

the effects of liquidity crunch as indicated by 56%, 24% remained neutral and 20%

said it is affected to a lesser extent. The reason being that the institution is being faced

by a shortage of a strong capital base since the introduction of the multi-currency as

capital is considered a cushion to raise the share of risky assets such as loans; this is

supported by Vong and Chang. They also indicated that the institution is facing

challenges in meeting all its obligations since 2009 that resulted in retrenchments as

overheads were higher than income earned. However there are indications that the

management is trying to position the institution to take advantage over others by the

adoption of SMS banking, e-wallet and the internet banking. These are set to reducethe payment of goods and services by cash thats therefore reduce the problems

associated with the cash-based transactions. These also improve the liquidity position

of the bank as all the transactions are electronically based.


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4. 7 Number of loan applications on a daily basis

Table 4.3

Less than 20 20 More than 20

16 5 4

64% 20% 16%


Table 4.3 indicates the number of people applying for loans on a daily basis. The

respondents indicated that 64% of their clients that is a number less than 20 are

applying for loans daily. This was attributed to the fact that the institution only offers

loans to existing account holders only and not to everyone as what POSB is doing to

civil servants. This was also an indication that clients are not contended with the

interest rate offered. The remaining 20% and 16% for 20 and more than 20 respectively

of the applicants are said to be applying for loans daily.

4.8 Is the bank able to meet the loan demand against the supply of cash?

44%

56%

Yes

No

Figure 4.7


Figure 4.7 Illustrates that 44% of the respondents indicated that the bank is able to

meet its client demand for loan. They pointed out that the bank is only catering for

those clients with decent employment, on a fixed term contract, that is, permanent

clients only and those with collateral security for SMEs. 56% indicated that the bank is


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at times not able to meet loan demands as a result of low cash reserves, for example,

the period May-July 2011 when employee salaries were being effected, loans were

suspended. This was a result of the bank trying to raise enough deposits since they are

regarded as a cushion to raise loans. The current findings are in line with

PricewaterhouseCoopers UK Economic outlook 2008, were they emphasised that bank

lending is financed through some combination of customer deposits and finance from

the capital market.

4.9 Reasons why some of the clients are not applying for loans

0%

10%

20%

30%

40%

50%

60%

High interest rate

Delays in loan

processing

No collateral

Figure 4.8


Figure 4.8was analysed based on data from questionnaires and interviews conducted

for a group of clients bot

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