FACULTY OF COMMERCE

STUDENT NAME: NGOMBE TALENT

REG NUMBER: N0173473L (CONVENTIONAL)
DEPARTMENT: FINANCE
YEAR: 2021
RESEARCH PROPOSAL: IMPACT OF CREDIT RISK
MANAGEMENT ON PERFORMAMANCE OF COMMERCIAL
BANKS IN ZIMBABWE
RESEARCH OVERWIEW

The research comprises five chapters, which are structured as follows:

Chapter 1 provides a background to the study and also highlights the research problem. It lays
the foundation of the study through setting up of the objectives of the study, research
questions and study preposition. The researcher also outlined justification and the assumption
of the research in this chapter. Chapter Two gives an extensive account of relevant literature
on the subject of credit risk. Chapter two discusses some relevant literature pertaining to
credit risk. In this chapter, the researcher looks at some of the theoretical underpinnings of
credit risk. Chapter 3 outlines and justifies the research methodology, which includes
selection of research philosophy, approaches and strategies. It also covers the data collection
methods used in the study. Chapter four provides the presentation and analysis of the study’s
findings. Chapter five gives conclusions of the research in relation to the objectives of the
study as laid down in Chapter One. The researcher proposes recommendations in this chapter.

1.0 Introduction

This chapter provides an introduction into the study`s focus areas. It starts with the
background of the study, and the statement of the problem highlighting why the research area
was chosen. The objectives of carrying out the study are also included together with the
research questions to be answered. The research`s significance to various stakeholders in the
economy is also detailed herein. Subsequently, the hypotheses of the study are stated as well
as a brief overview of the ensuing chapter.

1.1 Background of the Banking Sector

The Zimbabwean banking sector has been through a tumultuous period over the last decade.
(Makoni, 2010) observes that in the late 1990s and at the turn of the 21th century, the
Zimbabwean economy was troubled by hyperinflation, resulting in declining savings from
depositors and forcing many banks to use other sources to fund their lending. With the
deepening of the crisis and imminence of the collapse of the banking sector, a temporary
withdrawal of its function as the lender of last resort was announced by the central bank in
December 2003. (Mambondiani, et al., 2013) opine that the departure of the central bank
from its previous approach of forbearance put a number of banks into liquidity crisis.
Subsequently, 13 banking institutions collapsed, all of which were indigenous, licensed after
the financial liberalisation of 1991. Since then there has been at least one banking crisis each
year up to 2009 when dollarization was introduced; caused by poor corporate governance
practices, inadequate supervision and monitoring by the central bank, liquidity constraints
and a generally tough operating environment (Mambondiani, 2012)

1.2 Statement of the Problem

There has been observed cases of banks that have recorded losses attributable to credit
impairments and high loan-loss provisioning. For instance, (RBZ, 2014) observes that a total
of 12 banks recorded profits for the period ended 30 June 2014 and that the losses suffered by
the other banks were among other factors, attributable to high levels of NPLs. As more and
more companies default on their loan obligations, banks are prejudiced as they are deprived
of financial resources that could otherwise have been profitably invested in other key sectors
of the economy. No senior management of today's financial institutions can perform their
functions without a vastly expanded understanding of the dimensions of risk and the various
tools to manage it (Haneef, et al., 2012). Consequently this study seeks to establish the link
between effective credit risk management, and the profitability of banks using a sample of
selected banks in Zimbabwe and assess how active credit risk management can be used as a
tool for enhancing efficient banking operations.

1.3 Objectives of the Study

The main objective of the study is to see the impact of credit risk management on
performance of commercial banks in Zimbabwe.

Other objectives includes:

1.To determine if imprudent lending practices by banks sparked the high incidence of Non-
performing loans in Zimbabwe.

2. To analyse if rising Non-performing loans are always an indicator of weak credit risk
management practices by banks.

3. To recommend debt recovery strategies that Zimbabwean banks affected by high Non-
Performing loans can employ.
4. To identify strategies that can be used to curb the problem of rising Non-performing Loans in
the Zimbabwean context.

1.4 Research Questions

i. Do Zimbabwean banks have effective credit risk management policies?

ii. Is the any relationship between effective credit risk management practices and the
improved profitability of banks?

iii. To what extent did imprudent lending practices by Zimbabwean banks contribute to
high Non-performing loans?

iv. What are the effects of high Non-performing loans on the profitability of Zimbabwean
Banks?

v. What are the strategies that Zimbabwean banks can use to recover delinquent loans?

1.4 Research Hypothesis

H01: Zimbabwean banks does not have effective credit risk management policies.
H02:Non-performing loans have no significant effect on the profitability of Zimbabwean
banks.

1.5 Assumptions of the study

The research will be done basing on the following assumptions

o All the participants will answer the interview questions in an honest and truthful
manner
o All the answers and information produced by the participants will remain confidential
o All the participants will be professionals and will have information required in the
study

1.6 Significance of the study

The credit risk departments of the bank try as much as possible to offer calculated risks and
come up with a proper analysis of anyone who wants to borrow. However, at the end of the
day, banks still struggle with bad debt which leads to growth of NPLs of the bank. If the risks
posed by NPLs are not tamed, a bank can go under (Rzehak, et al., 2011). This research will
be of interest to several stakeholders within and outside the banking sector.

1.6.1 Banking Institutions

Like most financial institutions, banks are involved in the business of risk. They face many
risks that if not adequately analysed and mitigated against, these risks can affect the financial
performance of the banking institutions. In Zimbabwe, as the trend of rising Non-Performing
Loans has been on the rise, banks have seen their performance adversely affected as they
have had to see potential earnings being written down as bad debts. This study will therefore
help banking institutions manage credit risk effectively in their operations such that they meet
their set business objectives.

1.6.2 Regulatory Institutions

The research will be of particular importance to Zimbabwean regulatory authorities such as
the central bank (RBZ) as it will help them come up with more effective credit risk
management frameworks that can be employed by market partakers. Furthermore, their
supervisory function will be enhanced as an increased understanding of the risks that
commercial banks are exposed to in light of the dynamic financial services sector will be
analysed in the study. Potential areas of firming the banking sector credit risk management
regulatory framework will also be identified by the information in this research.

1.6.3 Government
A healthy financial services sector underpinned by sound banking institutions is a vital
component for sustained economic growth and development. (Haneef, et al., 2012) posits that
it is a fact that NPLs are steadily causing lesser profitability of banking sector, as the spread
of banks is shrinking due to the lower recovery of loans and decreasing yield on lending. It
holds that as banks cut back on lending, economic growth will be stifled as the key engines of
growth will not be funded. Government will thus benefit from this by gaining a better
appreciation of the credit risks banks face, so as to be guided when making certain market
interventions like directing banks to lend to a particular industry as it has done in the past.
Hence government will gain from more knowledge of the full evidences of directing bank
lending to specific economic sectors as well as the risks thereof through, a full understanding
of credit risk management and how it affects bank viability (performance). The net result is
government will have a compact platform on which to pursue its economic growth and
recovery policies.

1.6.4 Public
Over the years, Zimbabwe`s banking sector has been assailed by a massive confidence
discrepancy the public has on the banking sector as a whole. As rising Non-Performing Loans
loom the stability of banks by affecting profitability and growth, any bank failures as a result
of this will further corrode public confidence. Hence the public will benefit from this study
through acquiring an enhanced understanding of the stability, credit standing, riskiness and
overall health of banking institutions which they are clients of. This knowledge will equip the
public to make informed decisions on which banks to use and which ones to avoid basing on
their levels of NPLs and profitability.

1.7 Brief Literature

1.8 Research Methodology

1.9 Scope of the study

1.10 Limitation of the study

1.11 Research ethics and data credibility