the impact of multi-currency (dollarization) regime adoption on the liquidity challenges banks

Dhliwayo Takudzwa P0114070B i

DEDICATIONS

To my late mother Ms Rungamai Hove and Mrs Nyoni, this one is for you.

Dhliwayo Takudzwa P0114070B ii

ABSTRACT

The research study was aimed at analysing the impact of multi-currency (dollarization) regime

adoption on the liquidity challenges of Zimbabwean Banks (2009-2014). Secondary objectives of

the study were: to determine the causes of liquidity crisis in the Zimbabwean banking sector, to

evaluate the impact of liquidity crunch on economic growth; to examine the liquidity risk

management procedures that are deployed by commercial banks; to ascertain the impact of

capitalization on the liquidity of commercial banking institutions; and to determine the possible

corrective measures that can be instituted by the RBZ and the banking sector in combating

liquidity crunch in Zimbabwe‟s banks. The research study adopted a cross sectional survey

research design which focused on eleven commercial banks, economists, as well as the RBZ.

Primary data was gathered from the three aforementioned entities using well-structured

questionnaires and conducting personal interviews. Secondary data was obtained from relevant

published journals, the internet, RBZ website and other related texts on bank liquidity crisis to

fill data gaps that primary data could not address. The results of the analysis are presented

diagrammatically and expressed in percentages for ease of assessment and Bar charts, pie charts

and tables were employed to present the findings of the research. The research study results

revealed that the major causes of liquidity crisis were mostly the absence of lender of last resort

function by the RBZ, non-performing loans, diminished public confidence, maturity mismatches

and undercapitalization of the banks. Other than the aforementioned causes, they also deduced

from that banking malpractices due to laxity in proper and sound bank regulation and supervision

by the RBZ have a hand in the banking sector liquidity crisis. The study recommends that the

RBZ should instil back public confidence within the banking sector, should adopt stringent and

robust bank regulation and supervisory techniques and should establish a credit reference bureau.

Bank were urged to adopt the Basel Committee recommendations on capital adequacy liquidity

risk management, should consider restructuring their non-performing loans. The study also

further recommended government expedite the capitalization of the RBZ to resuscitate the lender

of last resort facility in the banking sector.

Dhliwayo Takudzwa P0114070B iii

ACKNOWLEDGEMENTS

I offer my utmost gratitude to the Almighty God, if it were not His mercy and grace, I would

have not been where I am today. I would like to express my profound gratitude to my supervisor

Miss.S.Chaibva for mentoring me throughout this research study relentlessly. Thank you, for not

giving up on me. Special thanks go to the Dhliwayo, Musekwa, Makandise and Ndaba families

for their financial and emotional support and also for being there for me all the time when I

needed them the most. Thank you very much, I am what I am because of you. Many thanks go to

my friends and my fellow banking students who have been there also giving me advise and

cheering me on even when the odds seemed insurmountable.

Dhliwayo Takudzwa P0114070B iv

LIST OF ABBREVIATIONS

RBZ - Reserve Bank of Zimbabwe

BCBS - Basel Committee on Bank Supervision

ECB - European Central Bank

CEBS - Committee of European Banking Supervisors

FSA - Financial Service Authority

NBR - National Bank of Rwanda

NRB - Nepal Reserve Bank

NPLs - Non-Performing Loans

LLR - Lender of Last Resort

CBZ - Commercial Bank of Zimbabwe

MPS - Monetary Policy Statement

ALCO - Asset and Liability Committee

ABC - Activity Based Costing

MIS - Management Information Systems

ZAMCO - Zimbabwe Asset Management Company

IMF - International Monetary Fund

BFIs - Banking Financial Institutions

Dhliwayo Takudzwa P0114070B v

TABLE OF CONTENTS

DEDICATIONS ......................................................................................................................................... i

ABSTRACT .............................................................................................................................................. ii

ACKNOWLEDGEMENTS ..................................................................................................................... iii

LIST OF ABBREVIATIONS .................................................................................................................. iv

LIST OF FIGURES ................................................................................................................................. ix

LIST OF TABLES .................................................................................................................................... x

CHAPTER ONE ....................................................................................................................................... 1

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

1.1 Background to the Study ..................................................................................................................... 1

1.2 Statement of the Problem .................................................................................................................... 2

1.3 Research Objectives ............................................................................................................................ 3

1.3.1 Primary Objectives ........................................................................................................................... 3

1.3.2 Secondary Objectives ....................................................................................................................... 3

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

1.5 Justification of the Study .................................................................................................................... 4

1.6 Scope of the Study .............................................................................................................................. 4

1.7 Study Limitations ................................................................................................................................ 5

1.9 Organisation of the Study ................................................................................................................... 6

CHAPTER TWO ...................................................................................................................................... 7

LITERATURE REVIEW ......................................................................................................................... 7

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

2.1.0 THEORETICAL LITERATURE .................................................................................................... 7

2.1.1 Causes of the Liquidity Challenges ................................................................................................. 7

2.1.1.1 Bank Runs ..................................................................................................................................... 7

2.1.1.2 Competition ................................................................................................................................... 8

2.1.1.3 Financial Liberalization ................................................................................................................ 9

2.1.1.4 Moral Hazard ................................................................................................................................ 9

2.1.1.5 Poor Asset Quality Assessment .................................................................................................. 10

2.1.1.6 Non-Performing Loans (NPLs) ................................................................................................... 10

2.1.1.7 Maturity Mismatches .................................................................................................................. 11

2.1.1.8 Absence of a Functional Lender of Last Resort Role ................................................................. 11

Dhliwayo Takudzwa P0114070B vi

2.1.1.9 Diminished or Low Customer Banker Relationship ................................................................... 12

2.1.2 Impact of Liquidity Crisis on Economic Growth ........................................................................... 12

2.1.2.1 The Credit Crunch Hypothesis .................................................................................................... 13

2.1.2.2 Diminished or Reduced Consumer Confidence .......................................................................... 13

2.1.2.3 Information Costs ........................................................................................................................ 14

2.1.2.4 Limited Long-term Credit Lines ................................................................................................. 14

2.1.2.5 Output Losses .............................................................................................................................. 14

2.1.3 Liquidity Risk Management Procedures and Policies adopted by Banks ...................................... 14

2.1.3.1 Transparency ............................................................................................................................... 15

2.1.3.2 The Cash-Flow Constraint .......................................................................................................... 15

2.1.3.3 Liquidity Management Policies Instated by Banks ..................................................................... 15

2.1.3.4 Analysis of Liquid Assets ........................................................................................................... 16

2.1.3.5 Liquidity Management Strategies ............................................................................................... 16

2.1.3.5.1 Contingency Liquidity Planning .............................................................................................. 16

2.1.3.5.2 Limits on Maturity Mismatches ............................................................................................... 16

2.1.3.5.3 Maintaining Stock of Liquid Assets ......................................................................................... 17

2.1.3.5.4 Diversification of Liabilities .................................................................................................... 18

2.1.3.5.5 Intra-Group Liquidity ............................................................................................................... 18

2.1.3.5.6 Foreign Currency and Other Markets ...................................................................................... 19

2.1.4 Impact of Capitalization on Banks Liquidity ................................................................................. 19

2.1.4.1 Enhanced Bank‟s Liquidity Position ........................................................................................... 20

2.1.4.2 Protection of Depositors and Creditors in Times of Failure ....................................................... 20

2.1.4.3 Enhanced Lending Abilities ........................................................................................................ 21

2.1.5 Central Bank‟s (RBZ) Possible Corrective Measures of Combating Liquidity Crisis .................. 21

2.1.5.1 Failure Reduction ........................................................................................................................ 21

2.1.5.2 Adequate Capital ......................................................................................................................... 21

2.1.5.3 Longer Debt Maturities ............................................................................................................... 22

2.1.5.4 Deposit Insurance ........................................................................................................................ 22

2.1.5.5 Borrowing and Lending in the Same Currency........................................................................... 22

2.1.6 Possible Solutions to Liquidity Crisis Instated by Banks .............................................................. 23

2.1.6.1 Cash Forecasting ......................................................................................................................... 23

2.1.6.3 Tackle the Roots of the Liquidity Crisis ..................................................................................... 23

Dhliwayo Takudzwa P0114070B vii

2.1.6.4 Rebuilding of Confidence and Trust in the Banking Sector ....................................................... 23

2.2.0 EMPIRICAL EVIDENCE ............................................................................................................. 24

2.2.1 Causes of Liquidity Crisis .............................................................................................................. 24

2.2.2 Impact of Liquidity Crisis in Economic Growth............................................................................ 25

2.2.3 Liquidity Risk Management Processes and Policies Adopted by Banks ....................................... 25

2.2.4 Impact of Capitalization on Bank Liquidity .................................................................................. 26

2.2.5 Possible Solutions to Liquidity Crisis ............................................................................................ 26

2.3 Conclusion ........................................................................................................................................ 27

CHAPTER THREE ................................................................................................................................ 28

RESEARCH METHODOLOGY ............................................................................................................ 28

3.0 Introduction ....................................................................................................................................... 28

3.1 Research Design ................................................................................................................................ 28

3.2 Study Population ............................................................................................................................... 28

3.3 Research Sample ............................................................................................................................... 29

3.4 Data Collection Methods .................................................................................................................. 29

3.5. Primary Data .................................................................................................................................... 29

3.5.1 Questionnaires ................................................................................................................................ 30

3.5.2 Questionnaires Justification ........................................................................................................... 30

3.5.3 Questionnaires Shortcomings ........................................................................................................ 30

3.5.4 Personal Interviews ........................................................................................................................ 31

3.5.5 Personal Interviews Justification ................................................................................................... 31

3.5.6 Personal Interviews Shortcomings ................................................................................................. 31

3.6 Secondary Data ................................................................................................................................. 32

3.7 Data Analysis .................................................................................................................................... 32

3.8 Conclusion ........................................................................................................................................ 32

CHAPTER FOUR ................................................................................................................................... 34

ANALYSIS, PRESENTATION AND DISCUSSION OF RESULTS ................................................... 34

4.0 Introduction ....................................................................................................................................... 34

4.1.0 Response Rates Analysis ............................................................................................................... 34

4.1.1 Questionnaire Response Rate ......................................................................................................... 34

4.1.3 Personal Interviews Response Rates .............................................................................................. 35

4.2 Does Multicurrency Regime Adoption have Impact on Liquidity of Zimbabwe Banks .................. 36

Dhliwayo Takudzwa P0114070B viii

4.3 Causes of Liquidity Crisis in Zimbabwean Banks ............................................................................ 38

4.4 Liquidity Risk Management Procedures Deployed by Zimbabwean Banks ..................................... 41

4.5 Does Recapitalization have an Impact on the Liquidity of Zimbabwe‟s Banks ............................... 42

4.6 Possible Measures that can be Instituted by RBZ and the Banking Sector in Combating Liquidity

Crisis ....................................................................................................................................................... 43

4.7 Conclusion ........................................................................................................................................ 45

CHAPTER FIVE .................................................................................................................................... 47

SUMMARY OF FINDINGS, CONCLUSIONS AND ........................................................................... 47

RECOMMENDATIONS ........................................................................................................................ 47

5.1 Introduction ....................................................................................................................................... 47

5.2 Summary ........................................................................................................................................... 47

5.3 Conclusions ....................................................................................................................................... 48

5.3.1 Does Multicurrency Regime Adoption have Impact on Liquidity of Zimbabwe Banks ............... 48

5.3.2 Causes of Liquidity Crisis in Zimbabwean Banks ......................................................................... 48

5.3.3 Liquidity Risk Management Procedures Deployed by Zimbabwean Banks .................................. 48

5.3.4 Does Recapitalization have an Impact on the Liquidity of Zimbabwe‟s Banks ............................ 49

5.3.5 Possible Measures that can be Instituted by RBZ and the Banking Sector in Combating the

Liquidity Crisis ....................................................................................................................................... 49

5.4 Recommendations ............................................................................................................................. 50

5.5 Suggestions for Areas of Further Research ....................................................................................... 51

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

APPENDICES ........................................................................................................................................ 56

APPENDIX 1: COMMERCIAL BANKS QUESTIONAIRE ................................................................ 57

APPENDIX 2: RESERVE BANK of ZIMBABWE QUESTIONAIRE ................................................ 61

APPENDIX 3: ECONOMISTS QUESTIONAIRE ................................................................................ 63

APPENDIX 4: INTREVIEW QUESTIONS .......................................................................................... 64

Dhliwayo Takudzwa P0114070B ix

LIST OF FIGURES

Figure 4.1: Distribution of Questionnaires Respondents………………………………………...35

Figure 4.2: Distribution of Interviews Respondents……………………………………………..36

Figure 4.3: Respondents on the Impact of Multicurrency Regime on Bank Liquidity………….36

Figure 4.4: Impact of Multicurrency regime adoption on banks‟ liquidity……………………...37

Figure 4.5: Causes of Banks Liquidity Challenges……………………………………………...38

Figure 4.6: NPL's Trend from 2009 to December 2014…………………………………………39

Figure 4.7: Distribution of Liquidity Challenges Causes in Zimbabwean Banks……………….40

Figure 4.8: Do Banks Deploy Liquidity Management Processes and Strategies………………..41

Figure 4.9: Respondents that say Banks deploy Liquidity Management Strategies……………..42

Figure 4.10: Impact of Recapitalization on Banks‟ Liquidity………………………………..….43

Dhliwayo Takudzwa P0114070B x

LIST OF TABLES

Table 4.1: Questionnaire Response Rates………………………………………………………34

Table 4.2 Interview Response Rates…………………………………………………………….35

Table 4.3: The New Capital Requirements……………………………………………………...44

Table 4.4: Banks Capital as at 30 September 2014…………………………………………...…45

Dhliwayo Takudzwa P0114070B xi

Dhliwayo Takudzwa P0114070B 1

CHAPTER ONE

1.0 Introduction

Multi-currency regime (dollarization) is a situation where the citizens of a country officially or

unofficially use a foreign country's currency as legal tender for conducting transactions. The

main reason for dollarization is because of greater stability in the value of the foreign currency

over domestic currency. The downside of dollarization is that the country gives up its right to

influence its own monetary policy by adjusting the money supply. The researcher will seek to

analyse and assess the impact of the multi-currency regime (dollarization) adoption in February

2009 on the liquidity crisis facing the Zimbabwean commercial banks. This chapter of the

research study, the researcher will enlighten on the background of the study, statement of the

problem, research objectives, research questions, justification of the study, scope of the study,

limitations and organization of the study.

1.1 Background to the Study

It is an undisputable fact that the banking sector plays a pivotal and indispensable role in

economic growth through the efficient allocation of resources via financial intermediation in any

economy. The intermediary role of banks in an economy can be effectively played in an

environment epitomized by adequate liquidity.

The stabilisation of the economy post multi-currency regime brought about a level economic

playing field, a welcome relief from the ravaging and tumultuous hyper-inflation at 230 million

percent. However in the contrary, the relief from hyper-inflation also came with the price of

liquidity challenges that is hounding the banking sector as a whole.

The Zimbabwean banking sector experienced an unprecedented period of stability, since the

introduction of the multicurrency regime in February 2009 (Banks & Banking Survey 2010).The

hyperinflation and subsequent adoption of the multi-currency (dollarization) regime in February

2009 which was not backed by enough foreign currency reserves virtually wiped out the capital

of banks. The value for money, assets and liabilities all vanished and the only valuable assets

banks were left with were probably buildings, vaults, technology equipment, furniture and

fittings.


The introduction of the multi-currency system has been accompanied by persistent liquidity

shortages and failures of meeting capital adequacy requirements which has seen several banks

being placed under curatorship, surrendering and cancellation of licences by the Reserve Bank of

Zimbabwe (RBZ). The banks involved include Interfin Bank (under curatorship in 2012), Royal

Bank and Genesis Investment Bank (all surrendered their bank licences in July 2012) and Trust

Bank (its licence cancelled in December 2013). This has resulted in the number of operating

banks from 27 banking institutions in December 2009 to 21 as at 31 December 2013 (Monetary

Policy 2014).

From over 5 million active bank accounts prior to dollarization, unverified reports put the

number of active accounts to less than 1 million as of 2011 (Banks & Banking Survey 2010).

Despite the total banking sector deposits, including interbank deposits gradually rising to $6.7

billion, as at December 2013, depicting a 45.5% increase from $3.05 billion as at December

2011 (The Monetary Policy 2014) and the loans to deposit ratio increased from 37.33% in June

2009 to 78.29% as at 31 December 2013, there has been a decelerating deposits throughout the

yesteryear.

As at 31 December 2013, total banking sector deposits amounted to $4.73 billion while loans and

advances were $3.70 billion. This is consistent with the economic slowdown experienced over

the period of analysis.

In a nutshell, the banking sector has remained generally stable over the years since dollarization

despite the various underlying macroeconomic challenges, but vulnerabilities in the banking

sector are continually rising amidst rising levels of non-performing loans (15.9% by December

2013), low liquidity levels (27.8% by December 2013) and rising credit risks especially in low

tier banks, has seen the RBZ intensifying the monitoring of the sector (World Bank 2014).

1.2 Statement of the Problem

The multi-currency adoption in February 2009 brought about a new platform for Zimbabwean

commercial banks to lend and to revive their other core operations, but there has been evidence

of disorderly unwinding of vulnerabilities in the Zimbabwean banking sector post multi-currency

era. Banking Halls in Zimbabwe have been characterised by long queues, queuing for their salary

deposits during the festive seasons and month ends. This has evidenced that liquidity crunch has


been hounding almost every banking institution post hyperinflation era. This resulted in RBZ

intensifying closely monitoring of the banking institutions. This has resulted in some banks

collapsing, some being placed under curatorship; and these developments have driven the motive

of this research.

1.3 Research Objectives

The objectives of the study will be split into two, namely primary and secondary objectives.

1.3.1 Primary Objectives

1. To analyse the impact of multi-currency (dollarization) regime adoption on the liquidity

challenges of Zimbabwean Banks, (a case of Bulawayo Commercial Banks (2009-2014).

1.3.2 Secondary Objectives

1. To determine the causes of liquidity crisis in the Zimbabwean banking sector.

2. To evaluate the impact of liquidity crunch on economic growth.

3. To examine the liquidity risk management procedures that are deployed by commercial

banks.

4. To ascertain the impact of capitalization on the liquidity of commercial banking institutions.

5. To determine the possible corrective measures that can be instituted by the RBZ and the

banking sector in combating liquidity crunch in Zimbabwe‟s commercial banks.

1.4 Research Questions

1. Does the multicurrency (dollarization) regime affect the liquidity crisis the banking sector in

Zimbabwe?

2. What are the causes of liquidity crunch in Zimbabwe‟s banking sector?

3. Are there liquidity risk management procedures deployed by commercial banks?

4. Does capitalization have an impact on liquidity of banking institutions?

5. What are the possible measures that can be instituted by the RBZ and the banking sector

itself in combating the liquidity crunch?


1.5 Justification of the Study

The researcher will seek to perform a post-mortem and unearth the causes of liquidity crunch

that is hounding the Zimbabwean banking sector since the adoption of the multi-currency regime

(dollarization) in February 2009, and come up with the findings with regards to liquidity

challenges which would give a detailed insight and also be helpful to the following:

The Researcher

The research will be submitted to the university in partial fulfilment of the National University of

Science and Technology (NUST) requirements so as to attain my Bachelor of Commerce

Honours Degree in Banking. The research will also give the researcher an insight of liquidity

crisis faced by Zimbabwean commercial banks

Banking Institutions

The research will be aimed at unveiling the impact of the multi-currency regime (dollarization)

on liquidity challenges they are encountering as commercial banks. Thereby it will also enlighten

the commercial banks to consider appropriate measures they can adopt with regards to the

prevailing liquidity crunch.

Bank Regulators

It is also hoped that the study will also act as a provision of directional guidelines which will

help the banking sector alertness to the Central Bank in implementing measures and strategies

that concern liquidity challenges. The research will also assist in the on-going improvement of

banks for their continued success.

Other researchers

The research will be useful to researchers who will study this field of research or any related

field to this research. That is, the study should add value to existing literature and may also be

useful as reference to other fellow scholars and researchers in this area of research.

1.6 Scope of the Study

The researcher chose Bulawayo as area under study and the aforementioned time period due to

both limited financial and time resources. The study research will seek to examine the liquidity


challenges hounding the Zimbabwean commercial banks post the adoption of the multicurrency

regime in February 2009, since it is the period were liquidity crunch hit the Zimbabwean banking

sector. The researcher is going to be visiting banks, mainly those which are situated in

Bulawayo, although their headquarters are in Harare due to financial and time constraints.

Researcher will also try to visit the Reserve Bank of Zimbabwe (Bulawayo Branch) and have

brief chat with the economists so as to gather relevant information pertaining to the study.

Because of the limited financial and time resources, the researcher will have to visit a few of the

top tier commercial banks and gather information from them about liquidity and will also visit a

few of the low tier banks, were the problems of liquidity crunch is most prominent. The research

is mainly focused on liquidity challenges experienced post dollarization that is, from 2009 to

2014.

1.7 Study Limitations

The researcher firmly anticipated difficulties in accessing some information not yet made public

by the monetary authorities for example issues pertaining to the going under of Interfin and

sketchy information available from monetary authorities about Royal and Genesis Investment

Bank. Furthermore the researcher anticipated to face challenges that would improvise the

reliability of the study in the form of:

i. Accessing information in form of questionnaires sent to banks‟ top management, RBZ, and

the economists proved difficult for the researcher to execute, given the sensitivity of the

topic to some parties mentioned therein.

ii. The time available for the research was limited since the researcher did strike a balance

between the research and other pressing college commitments.

iii. Financial constraints also limited the size of sample population consulted which negatively

impact the reliability of the research findings.

iv. This research required a lot of communication via the telephone and through the use of

email which was not always as effective personal interviews because the majority of the

financial institutions Head Offices are located in Harare, which was far from the place of

study thereby limiting the availability of the information needed by the researcher.


1.9 Organisation of the Study

The foundation for the entire research project has been constructed in this chapter. This chapter

has presented the research problem, various research questions, scope and justification of the

study has also been explained and explored. The remainder of the project is structured as

follows:

The second chapter outlines both theoretical and empirical evidence of the study. It gives

different opinions from different authors pertaining to the subject in question. The chapter gives

an in depth analysis of the bank and non-specific bank factors that lead to bank failures from

related literature available.

Chapter three will outline the research methodology that was used in the study to obtain all the

results from the study. This chapter shows in detail the tools that were used for gathering all the

data necessary for the research and how it was conducted generally.

The fourth chapter shows all the data that was gathered in the third chapter in form of tables,

charts and bar graphs for analysis purposes that is generally data presentation and analysis.

Finally, the last chapter gives research findings, conclusion on all the findings that were obtained

and possible recommendations for banks.

In summary the paper is organised as follows: the next section discusses pertinent literature on

the subject matter. This is followed by a discussion of the methods which were employed in

conducting the study. Results are then presented and discussed. The paper ends by drawing

conclusions.


CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter involves an analysis of authorial literature and evidence with regards to the impact

of multi-currency (dollarization) on commercial bank liquidity challenges. In this chapter there

is a review of theoretical and empirical literatures by authors from various sources, textbooks,

published journals and articles from the internet and the like. The roots of liquidity crunches, the

impact of it on economic growth, concepts involved in the process of liquidity management, the

pillars of bank liquidity management are explored. Though every effort has been made to

broaden the literature and material, it is by no means exhaustive.

2.1.0 THEORETICAL LITERATURE

2.1.1 Causes of the Liquidity Challenges

Driessen (2010), alluded that liquidity crisis refers to institutions‟ inability to fund increases in

assets and meet obligations as they come due, without incurring high losses. Borio (2009) also

defined liquidity crisis as the sudden and prolonged evaporation of both market and funding

liquidity, with potentially serious consequences for the stability of the financial system and the

real economy. Williamson (2008), viewed liquidity crisis as the hindered flows of funds among

the agents of the financial system, with a particular focus on the flows among the central bank,

commercial banks and markets.

2.1.1.1 Bank Runs

Diamond-Dubvig model (1993) viewed liquidity crisis on banks may come as a result of bank-

run. A bank-run may occur because banks assets, which are liquid but risky, no longer cover the

nominal fixed liability (demand deposits) and depositors therefore withdraw quickly to minimize

their potential losses. Allen and Gale (2000), bank runs change fundamentals, as there will be

excess demand for liquidity.


De Grauwe (2008) argued that if depositors are gripped by a collective movement of distrust and

decide to withdraw their deposits at the same time, banks are unable to satisfy these withdrawals

as their assets are silliquid. Hence a liquidity crisis erupts in that banking institution.

A “run on the bank” can kill even sound financial institutions if they cannot readily find the cash

to cover short-term demands. Further, scrambling to find cash can force some players to sell

assets at distressed prices and this, in turn, may trigger liquidity challenges, insolvencies and

even failures at worst case scenarios (Brookings Business and Public Policy, 2014)

Taylor (2009) also viewed that insolvency and bank runs can be the roots of illiquidity in a

financial system. The transformation of deposits to loan reduces liquidity in the financial system

and also it potentially milks part of the liquidity from the rest of the system. Banks will be

holding illiquid assets to maturity, thus it will result in the reduction of liquidity that would be

availed to other banks, if one bank defaults (through a contagion effect). This is because banks

have deposits with each other.

2.1.1.2 Competition

Smith (2008) argues that competition can be a driving force of liquidity crisis. The link between

competition and liquidity crisis is mainly expressed through the interbank market. The degree of

competition in the banking sector can affect hedging decisions, both in terms of overall liquidity

provisioning and in terms of dispersion of hedging strategies. Banks may compete more

aggressively ex ante, so as to lock in a large number of customers, whose future liquidity needs

constitute future income. Higher competition tends to increase the volume of capital dedicated to

illiquid loans. This mechanically reduces the optimal share of liquid assets (Banque de France,

2008).

Banque de France (2008) further argued that through this negative effect, competition tends to

worsen the risk profile of the pool of liquidity applicants. Banks that are short of liquidity make

fewer monitoring efforts as they reinvest less of their own liquidity in risky projects. If the risk

profile of the pool of liquidity applicants continues to deteriorate, banks with excess liquidity

may prefer to hoard their liquidity with the central bank, than to lend it in the interbank market.

Some banks may be reluctant to lend short term liquidity in order to restore their own marketing


power by weakening their competitors. Thus competition may participate in creating the

preconditions of a liquidity crisis.

2.1.1.3 Financial Liberalization

Kaminsky and Schmukler (2003) defined financial liberalization as the deregulation of the

foreign sector capital account, the domestic financial sector, and the stock market sector viewed

separately from the domestic financial sector.

Saunders and Cornett (2003) postulated that most of banking crisis emanates from financial

liberalization. Both casual observation and formal econometric work suggest the existence of

important links between financial liberalization and financial crisis. Lowering reserve

requirements on banks is another common liberalization move. The rationale is to improve

efficiency of financial intermediation.

However, lower reserve requirements increases banks vulnerability to bank runs. Another

liberalization move is to lower barriers to entry into the banking sector, either by domestic or

foreign banks. This move is meant to increase competition and efficiency in the banking sector.

However Calomiris and Mason (2000) argued that competition results in greater risk taking by

banks. Demirguc-Kunt and Detragiach (2002) also suggested that in most cases, fewer and

monopolistic banks are less prone to bank runs and crisis as compared to those in a competitive

financial system.

2.1.1.4 Moral Hazard

De Grauwe (2008), viewed moral hazard as when agents who are insured will tend to take fewer

precautions to avoid the risk against which they are insured. The insurance provided by central

banks and governments in the form of lender-of-last-resort and deposit insurance gives financial

institutions strong incentives to take more risks.

If banks anticipate generous support from the Lender of Last Resort (LLR) during a crisis, they

are likely to undertake lower precautions against a crisis and imprudent liquidity management

practices. Mishkin (2006) argued that when bank management, starts operating for their own

benefit, and not for the benefit of shareholder, it becomes a problem.


Connected lending is a practice, where loans are given to owners of financial institutions,

relatives, managers and friends. Banks are less likely to affectively monitor loans given to

familiar people, which may encourage borrowers to take on risks they would not otherwise take.

This is known as moral hazard and has adverse outcomes as it brings more losses to banks

(Mishkin 2006).

2.1.1.5 Poor Asset Quality Assessment

Barrell et al (2009) stated that the main activity of bank management is not deposit mobilization

and giving credit. Effective credit administration reduces the risk of customer default. The

competitive advantage of a bank is dependent on its capability to handle credit risk valuably.

Improper or poor asset quality assessment lead to bad loans which in turn results in banking

institutions experiencing liquidity problems as they failing to match their assets and liabilities

and even bank failure at worse case scenarios.

Glass, Davidson, and Blumberg, (2009), noted that the liquidity challenges of a bank mainly

emanates from the mismanagement because of bad lending decisions made with respect to wrong

appraisal of credit status, or the repayment of non-performing credits and excessive focus on

giving loans to certain customers. Bessis et al (2010) also stated that poor credit control, which

results in undue credit risk, causes bank failure.

2.1.1.6 Non-Performing Loans (NPLs)

Bratavonic (2003) defined a non-performing loan as sum of borrowed money upon which the

borrower has not made his or her scheduled payments in for at least 90 days. A non-performing

loan is either in default or close to being in default. In other words a loan is non-performing, the

odds that it will be repaid in full are considered to be substantially lower.

Chikoko, Mutambanadzo, and Vhimisai (2012) also viewed a non-performing loan as an advance

by a financial institution that is not earning income and full payment of principal and its interest

income is no longer anticipated. The literature that examines non-performing loans has

increased as more researchers attempt to understand the major factors that cause instability.

This trend has arisen due to the strong association between non- performing loans and

banking crisis.


Sanderson Abel (2014) postulated that if a bank‟s amount of disposal of non-performing loans

continues to exceed their profits, it will result in reduction of bank net worth and lower their risk-

taking capacity, making it difficult to invest funds in risky projects and realize potentially

productive businesses. In this manner, the problem of non-performing loans lowers the bank‟s

liquidity position hence consequently it will encounter liquidity challenges.

Recent research study of Kerman (2005), unearthed that the banking crises (due to liquidity

challenges) in Eastern Asia and part of Sub-Saharan African countries were preceded by a level

of high non-performing loans.

2.1.1.7 Maturity Mismatches

Mismatches refer to the inability by banks to match their assets to their liabilities. Commercial

banks that engage in insider lending and poor corporate governance, will likely experience bank

failures (Rajan and Graham, 2001). They pointed out that liquidity crisis can result from maturity

mismatches that they reflect the outcome of self-interested optimizing behavior by commercial

banks.

Hiroyuku (2009) alludes that maturity mismatches covers the behavior of banks assets and

liabilities cash flows where there is some (real or perceived) problem with a bank, including

operational problems, doubts about the solvency of a bank or adverse ratings changes. It would

represent a “worst case” for a bank. A bank that fails to telepath the behavior of its assets and

liabilities under scenarios is prone to liquidity challenges overtime.

2.1.1.8 Absence of a Functional Lender of Last Resort Role

Lender of Last Resort (LLR) is an institution, usually a country's central bank, which offers loans

to banks or other eligible financial institutions that are experiencing financial difficulty or are

considered highly risky or near collapse.

Calomiris and Kohn (2014) postulated that a key role of central banks is to be a “lender of last

resort” in times of crisis to prevent liquidity problems from triggering a full-fledged financial

crisis. A resilient financial system needs rules to ensure financial institutions maintain adequate

liquidity and that the central banks provide a backstop for crisis situations.


However like any other policy, the Lender of Last Resort role has its own shortcomings too. De

Grauwe (2008) argued that the inception of this role by central banks leads to moral hazard in the

banking sector. The insurance provided by central banks and governments in the form of lender-

of-last-resort and deposit insurance gives bankers strong incentives to take more risks and leads

to growth of banking malpractices which in turn results in liquidity crisis.

2.1.1.9 Diminished or Low Customer Banker Relationship

Chijoriga et al (2008) alludes that the banking business is about confidence with the financial

institutions, thus, for bank customer relationship to exist, confidence in the banking industry

should prevail first. A marginal loss of confidence, instantaneously results in the diminished

banker customer relationship withholding other forces at play. And consequently diminished

relationships results in a financial institution experiencing severe bank runs as aforementioned

above, hence bank crisis and the liquidity challenges looms within the bank.

Smith and Ongena (2002,) also added that a good banker customer relationship is an essential

asset in banking business and a sudden loss of it leads to banking crises, which often force banks

into bankruptcy and encounter liquidity challenges.

2.1.2 Impact of Liquidity Crisis on Economic Growth



economy by channelling funds from surplus units to deficit units (Gono, 2012). The intermediary

role of banks in an economy can be effectively played in an environment epitomized by adequate

liquidity.

Adebayo et al (2011) argued that liquidity management is an important aspect of monetary

policy implementation, while the other integral component of monetary policy, that is, economic

management, involves promoting sustainable economic growth over the long term by keeping

monetary and credit expansion in step with an economy‟s non-inflationary output potential,

liquidity or reserve management as a shorter time horizon. In order to maintain relative macro-

economic stability, reliance is placed on liquidity management to even out the swings in liquidity

growth in the banking system hence resulting in the growth of the economy as whole.


2.1.2.1 The Credit Crunch Hypothesis

Demirgüc-Kunt and Detragiache (2005) argued that liquidity crisis in an economy can result in

credit crunch. During banking crises, banks may decrease credit to firms which in turn lower

expenditure and investment in an economy. This decrease lowers consumption, aggregate

demand and employment and possibly drives firms into illiquidity. These implications suggest

that distressed banks hinder the growth rate of the economy

Demirgüc-Kunt and Detragiache (2005) postulated that banking crises increase agency problems

and lending relationships become more complicated as banks may abandon risky borrowers or

raise spreads. Output and bank credit may decline during banking. However, inflation and

exchange rate effects may mix up credit valuations as well as credit restructurings with off-

balance sheet vehicles, thus appearing as a deeper decline of credit than in reality.

Rajan, Detragiache and Dell„Ariccia (2008) observe that more financially dependent sectors

indeed lose about percentage point of growth more in each crisis year, compared to industries

that are less dependent on external finance. This effect becomes even stronger in developing

countries where private sectors may have less access to foreign capital, thus amplifying the credit

crunch.

2.1.2.2 Diminished or Reduced Consumer Confidence

Liquidity is largely about confidence. A sudden loss of confidence, whether rational or irrational

will result in liquidity difficulties. Smith and Ongena (2002) sum it all up, that the right

relationship is everything. Banking crises often force banks into bankruptcy. Mergers or

downsizing result in the loss of valuable bank-to-customer relationships and knowledge is lost.

Arestis, Demetriades, Panicos and Luintel (2001) postulated that many bank employees, credit

officers and bank managers might have changed departments, banks or the industry as a

consequence of mergers or downsizing. Banks are providers of liquidity by granting loans and

are supposed to lean against the wind to accommodating debtors during difficult times. Hence,

valuable bank relationship, bank services and information get lost during banking crises.


2.1.2.3 Information Costs

Ratnovski (2013) says a new bank relationship requires the new bank to accumulate information

which comes at a cost. Bank crisis can create deadweight costs as the loss of customers can

damage the reputation of the bank, thus it decreases future borrowing ability (de Lange, 2002).

Soludo (2009) and Aluko (2008) also argued that a decrease in the bank„s market value upon

announcement of its closure. Besides bank defaults, dispositions of failed or failing banks or

voluntary bank mergers will cause temporary disruptions in banking services (Jiangli, Unal and

Yom, 2006).

2.1.2.4 Limited Long-term Credit Lines

The Global Outlook (2009) alludes that liquidity constrained banking sector might hinder

economic activity as banks reduce credit. This may result in firm closures, reduced consumption,

lower aggregate demand and higher unemployment. Calomiris, Kinglebiel and Laeven (2004),

however, argue that the correlation between bank credit and economic activity can also reflect

expectations of poor conditions which may reduce the demand for loans. Some authors find only

a weak relationship between bank deposits and banking crises.

2.1.2.5 Output Losses

Acaravci, Ozturk and Acaravci (2007) alluded that the ultimate cost of a financial crisis is the

reduction in welfare it imposes on consumers of the current, and any subsequent generation that

may bear the costs. The output foregone, when there is a crisis is another possible indicator of its

cost. Kremers (2006) also observed that this measure synthesizes both the loss of consumption of

the current generation, and the reduction in investment and or wealth of the next generation.

2.1.3 Liquidity Risk Management Procedures and Policies adopted by Banks

Ratnovski (2012) says liquidity risk management is a key banking function and an integral part

of the asset and liability management process. The fundamental role of banks is the maturity

transformation of short-term deposits (liabilities) into long-term loans (assets) making banks

inherently vulnerable to liquidity risk. Borio (2009) defined liquidity risk management refers as

the management of mismatches on the balance sheet with available liquidity be it internal or

external. He also went on to view banking liquidity represents the capacity of a bank to finance


its transactions efficiently. Failure in liquidity risk management may result in a bank becoming

unable to meet its obligations.

2.1.3.1 Transparency

Leuz et al (2003) and Doidge et al (2009) say a bank can adopt transparency. Transparency is an

ex-ante decision that enables a more effective communication of bank asset values to outsiders.

In case of a negative signal, a transparent solvent bank, can communicate its solvency to

investors and obtain funding. If the bank is still unable to “prove” solvency and it cannot obtain

refinancing. Even for a bank that has put in place all the necessary preconditions, the

communication may sometimes be ineffective, and then the refinancing will not be forthcoming

(Ratnovski, 2012).

2.1.3.2 The Cash-Flow Constraint

Horne and Wachowicz (2000) say liquidity risk arises because inflows and outlays are not

synchronised. The timing of cash inflows and outflows is the crucial driver of funding liquidity

risk. A bank is liquid if it is able to settle all obligations with immediacy (Drehmann and

Nikolaou, 2012). In every period, if cash outflows are smaller than cash inflows, the bank will be

able to meet its short term obligations as they fall due.

2.1.3.3 Liquidity Management Policies Instated by Banks

Sarr and Lybek (2002) say liquidity management, is considered from the perspective of working

capital management. Managing liquidity can be challenging primarily because the underlying

factors that drive exposures can be dynamic and unpredictable. Although measurement

techniques differ from bank to bank, there are some common liquidity measures including

liquidity ratios, cash flow gaps and market liquidity measures such as, bid and ask spread and

turnover ratio.

Subhanij (2010) postulated that liquidity ratios convey a banks position by measuring items on

the balance sheet, income statement and statement of cash flows to determine sufficiency of

resources. Cash flow gaps focus on estimated cash inflows and outflows over horizons to

determine surpluses or deficits.


2.1.3.4 Analysis of Liquid Assets

Glass, Davidson, and Blumberg (2009) argue that liquidity management policies are mainly to

do with the management of the investments and capital portfolios of the banks. This is done

under direction of Asset Liabilities Committee (ALCO). The policies ensure that banks

maximize the revenue generating possibilities of the local and foreign exchange markets, ensure

that interest rate and foreign exchange rate risk is in line with market risk mandate as delegated

by local and group ALCO and also ensuring that the bank is adequately funded at reasonable

cost.

2.1.3.5 Liquidity Management Strategies

2.1.3.5.1 Contingency Liquidity Planning

Tembo (2013) postulated that a bank should put in place a formal liquidity plan approved by its

board of directors for dealing with major liquidity problems. The plan should outline course of

action for alternative assets and liabilities strategies e.g. plans to market more aggressively, raise

deposits etc. Liquidity management is usually delegated to ALCO.ALCO is responsible for

coming up with appropriate strategies to manage the bank`s mix of assets and liabilities.

Brevoort and Wolken (2009) also observed that the contingency funding plan outlines a list of

potential risk factors, key reports and metrics that are reviewed on an on-going basis to assist in

assessing the severity of, and managing through, a liquidity crisis and or market dislocation.

Carlson (2004) also added that the contingency funding plan also describes in detail the bank‟s

potential responses if the assessments indicate that the firm has entered a liquidity crisis, which

include funding the potential cash and collateral needs as well as utilizing secondary sources of

liquidity.

2.1.3.5.2 Limits on Maturity Mismatches

Tembo (2013) alluded that banking institutions should always place limits on the cumulative

funding position. Control over maturity mismatches for the next five business days should

receive particular attention. Landier, Sraer, and Thesmar (2013) argued that banks that set

maturity mismatches an on average normally experiences increased profits overtime as it results

in a bank operates with a positive maturity mismatches, thus its assets have longer maturities and

reprice less frequently than its liabilities, hence less prone to liquidity challenges.


The Financial Stability Forum (2009) called for banks to consider a joint research programs to

measure funding and liquidity risk attached to maturity transformation, enabling the pricing of

liquidity risk in the financial system and it also recommended that the Bank of International

Settlement (BIS) and International Monetary Fund (IMF) to avail to authorities all the

information on leverage and maturity mismatches on a system-wide basis.

2.1.3.5.3 Maintaining Stock of Liquid Assets

Gulde, Nascimento and Zamalloa (2001) defined liquid asset stock as the obligation of

commercial banks to maintain a predetermined percentage of total deposits and certain liabilities

in the form of liquid assets. Adequately designed stocks of liquid assets have merits in less

banking systems or when used flexibly as indicators in conjunction with other liquidity

measures, moreover it can make the banks more resilient in the contexts in which the monetary

authority has limited lender-of-last-resort capabilities.

Tembo (2013) observed that it‟s important for banks to ensure adequate stock of liquid assets in

order to meet unforeseen future demand. A high stock of liquid assets provides the bank with

flexibility in its balance sheet management. An adequate stock of high quality liquid assets can

provide a bank with the capacity to meet its obligations while any underlying problems affecting

liquidity are addressed. Glass, Davidson, and Blumberg (2009), postulated that a bank‟s liquidity

policy should clearly identify such assets, define their role and establish minimum holdings.

Maintaining a stock of high quality liquid assets lowers the likelihood of a bank needing to

undertake an urgent sale of illiquid assets. It also reduces a bank‟s reliance on liability

management which can result in the purchase of liabilities at a higher cost than is sustainable

over the medium term.

However he also noted that without liquid assets, a bank would be forced to borrow at expensive

rates or access funds from the central bank, which comes at a penalty, that is, high interest rates.

Noscimento (2001) also added that the maintenance of liquid assets stocks can mostly efficiently

accomplished in an economy stable macroeconomic environment in the context of sound fiscal

policy and if necessary in a broad financial sector reform package.


2.1.3.5.4 Diversification of Liabilities

Diamond and Rajan (2001) postulated that as part of its liquidity management strategies, a bank

should seek to maintain a diversified and stable funding base and establish strong and lasting

relationships with depositors and other liability holders. Sundararajan and Balino (2011) also

discussed about banks liability diversification and volatility. They alluded that a bank with a

widely diversified, stable funding base is less exposed to changes in the perceptions of a narrow

group of depositors.

The ECB (2012) also recommended that banks should establish a policy regarding concentration

of sources of funding so as to avoid an excessive reliance on anyone counterparty (including

relateds) or any one product or funding market. It should also undertake regular statistical and

behavioural analysis of its liabilities, for instance to detect any signs that the bank‟s deposit base

was becoming more volatile.

2.1.3.5.5 Intra-Group Liquidity

Mukesh and Khanal 2011) say that a bank‟s liquidity management strategies should address any

regulatory or legal impediments to accessing liquidity on a group basis. Excess liquidity in

subsidiaries and overseas branches may not be readily available to the bank or other subsidiaries

when needed.

They further went on to say where a bank decentralises or partially delegates‟ liquidity

management amongst operating units, it should clearly document the policies and limits

established for those units as well as any internal liquidity support arrangements provided to

those units. It should address how the liquidity of these units is monitored and controlled by head

office management in that country.

The Committee of European Banking Supervisors (CEBS, 2008) also postulated that where a

locally-incorporated bank provides significant funding and other liquidity support to subsidiaries

and associates, the regulatory authorities should be satisfied that such support is appropriately

captured in the measurement of its liquidity position and may require a bank to place limits on

such support.

The CEBS also stated that the branches and subsidiaries of foreign banks may have lines of

liquidity support available to them from an overseas parent (or associates). This support would


be of particular value in the event of a crisis affecting only local operations, but could prove

ineffective in the event of a crisis impinging upon the group as a whole. Foreign bank

subsidiaries are expected to manage their liquidity in their own right. It may, however, be

appropriate to look at the liquidity of foreign bank branches in a global context.

2.1.3.5.6 Foreign Currency and Other Markets

Ratnoviski (2013) observed that bank which is actively involved in multiple currencies and/or

where positions in specific foreign currencies are significant to its business, its liquidity policy

should address the measurement and management of liquidity in these individual currencies. For

instance, a bank needs to assess the convertibility of individual, the timing of access to funds,

and the impact of potential disruptions to foreign exchange markets, and exchange risks before

presuming that surplus liquidity in one currency can be used to meet a shortfall in another

currency.

Sigauke, Maposa and Chagwiza (2012) added that bank‟ s liquidity policy statement should

include a back-up liquidity strategy for circumstances in which its normal access to funding in

individual foreign currencies is disrupted. Similarly, where a bank is active in securities and

other markets it needs to have regard to the impact on its liquidity management of disruptions in

those markets.

2.1.4 Impact of Capitalization on Banks Liquidity

Federal Reserve Bank of Illinois (2003) defined banks capitalization as the re-adjustments of the

cushion that protects banks and their customers and shareholders from potential losses emanating

from the assumption of risks in the banking business.

Pandey (2005), postulated that capital is needed to support business so therefore, the importance

of adequate capital in banking cannot be overemphasized. Capital is an important element which

enhances confidence and permits a bank to get involve or engage in banking. A very important

function of capital in a bank is to serve as a means of absorbing losses and curbing of liquidity

risk. Capital serves as a buffer between operating losses and being unable to settle its short-term

obligations when they fall due (liquidity) and even paying its debt (insolvency).

Drehmann and Nikolaou (2012) also correctly observed, the more capital a bank has, the more

losses it can sustain without running into bankruptcy. Capital thus, provides the measure for the


time a bank has to correct for lapses, internal weakness or negative developments. The larger

size and capital a bank has, the longer the time the bank has before being exposed to liquidity

risk and incurring losses that will completely erode its capital.

Jagtiani et al (2000), argue that under or inadequately capitalized banking institutions are

exposed to liquidity challenges and liquidity risk, thus the lower the bank‟s capital, the higher the

probability of it being prone to liquidity crises. Goodhart et al, (2002) agreed with this statement

and added that as bank‟s capital decreases, the higher the motivation for actions to combat the

looming liquidity problem.

However the research studies of Glass, Adam Davidson, and Alex Blumberg, (2009) have

suggested that recapitalization of banks has its own counter effects. In general, management

tends to offset increases in capital with increases in liquidity risk, but also these tradeoffs are

significantly affected by regulatory pressure. In particular, regulatory pressure, as reflected in the

new liquidity risk-based bank capital requirements seems to have been effective in offsetting

tendencies for banks with low capital to increase their risk taking and to engage in moral hazard

behavior.

2.1.4.1 Enhanced Bank’s Liquidity Position

Demirgüc-Kunt and Detragiache (2005) suggest that the larger the liquidity of a bank, the less

the bank is exposed to risk. The difficulty, however is that little skill is rewarded with return in

line with observation in finance theory of positive linear relationship between liquidity risk and

return. Thus while inadequate liquidity will destroy a bank‟s reputation, excess liquidity will

retard earnings. In view of its significance, the regulatory authorities consider capital adequacy a

primary index to monitor bank. The traditional measures of capital adequacy ratio are ratio of

equity funds to risky assets and ratio of capital funds to risk assets (De Serres et al, 2006).

2.1.4.2 Protection of Depositors and Creditors in Times of Failure

Recapitalization strengthens the banking system and ensures a diversified, strong and reliable

banking sector which will guarantee safety of depositors‟ money and shareholders‟ funds play

active developmental roles in an economy and global financial market (Soludo, 2004).


2.1.4.3 Enhanced Lending Abilities

Bank capitalization may also influence the way lending supply reacts to output shocks. Calomiris

and Mason (2000), postulated that bank capitalization is linked to risk taking behavior and then

to banks portfolio choices. It means that lending of banks reacts to the degree of capitalization.

Adequate bank capitalization results in the improvement in a bank‟s overall liquidity position

and the lending ability, and thus through channeling funds (by lending) to real or the productive

sectors of the economy and through multiplier effect, hence it results in the economic growth and

development (Acaravci, Ozturk and Acaravci 2007). Various empirical studies conducted

revealed that recapitalization of banks gingers and revives the economy. Banks have pivotal roles

in an economy and are the main drivers of economic activity by playing the financial

intermediation role.

2.1.5 Central Bank’s (RBZ) Possible Corrective Measures of Combating Liquidity

Crisis

2.1.5.1 Failure Reduction

Davies (2003) says that failure is an inherent, competitive, innovative part of the capitalist

system. Eliminating the possibility of failure will distort incentives, and in effect penalise

success. A regulator should not attempt to reduce the number of failures, or deal properly with

their consequences. The Financial Service Authority (FSA) 2014 devoted considerable

supervisory resources, to attempt to reduce the number of failures, and to mitigating the

consequences of failure when it occurs. There are four principal tools that are used for failure

reduction, which are international market surveillance, market discipline, corporate governance

and prudential supervision.

2.1.5.2 Adequate Capital

Goodhart (2008), points out that, prevention of market failures could be made in favour of

stronger capital base than liquidity requirements. It is not clear that bigger liquidity cushions

would help in times of a crisis, as the potential demand for liquidity is almost infinite in those

circumstances. However a stronger capital base can save banks from a full blown crisis, as the

capital will absorb the loss. Apart from strengthening liquidity cushions, it may appear


appropriate to limit the probability of liquidity shortages incurring in the future (Banque de

France, 2008).

Berger and Bowman (2009) observed that adequately capitalized banks that are well managed

are better able to withstand losses and provide credit to consumers and businesses alike

throughout the business cycle including during downturns. Adequate capital therefore, helps

banks to absorb liquidity challenges and also to promote confidence in the banking system.

2.1.5.3 Longer Debt Maturities

The European Central Bank (ECB, 2004) and Bindseil (2005) viewed that given that short term

debt is a potential cause for liquidity problems, there may be a case for policies that lengthen the

maturity of that debt. Brunnemeier and Pedersen (2007) and Strahan (2008) estimated that a shift

towards longer foreign debt maturities is precisely what is needed. The key to abate liquidity

crisis is to avoid the real costs associated with it, which are liquidation and others (imposed by

earlier repayment of loans). Hence, a simple suspension of payments preserves the creditors‟

present value and makes everyone better off.

2.1.5.4 Deposit Insurance

Vento and Ganga (2009) say that if domestic deposits were guaranteed by government,

depositors would not run on commercial banks. Deposit insurance funds may indeed eliminate

crises, provided they are of sufficient size. Insurance funds must be kept in liquid form, an

insurance fund large enough, would eliminate the possibility of runs. Duffie and Singleson

(2003) also argue that the insurance fund must be large enough to cover a generalized banking

panic, not only bank specific risk.

2.1.5.5 Borrowing and Lending in the Same Currency

Anas and Mounira (2008) alluded that forcing domestic banks to borrow in dollars and lend in

dollars, is a popular way to minimize risk. One possibility is to restrict domestic banks to only

borrow from domestic lenders. This works if national savings are high and domestic market

capital is deep. Lynch (2007) observed that poor capital economies still need to maintain current

accounts and import capital from abroad. An alternative is to encourage foreign lenders to lend in

domestic currency, and hence share with the local borrowers, some exchange rate risk.


2.1.6 Possible Solutions to Liquidity Crisis Instated by Banks

2.1.6.1 Cash Forecasting

Benson (2008) says that cash forecasting can be facilitated if some of the peripheral cash related

processes are automated. While big companies are using more and more integrated systems and

implementing solutions like e-invoicing and supply chain financing, simple tools such as online

bank statements can also help forecast cash. Management accounting techniques such as Activity

Based Costing (ABC) can also be helpful to cash forecasting model.

ECB (2004) argued that implementing rolling cash forecasts is an evolving process. Getting the

forecast right on the first attempt is less important than initiating a baseline and continuing to

apply improvements in both accuracy and user effectiveness. Cash forecasting can help curb a

liquidity crisis, by planning your cash resources ahead, and preparing for future deficits.

Liquidity risk is said to be assassin of banks. This risk can adversely affect both bank‟s earnings

and the capital. Therefore, it becomes the top priority of a bank‟s management to ensure the

availability of sufficient funds to meet future demands of providers and borrowers by practicing

cash forecasting regularly (Fiscal Policy Research Institute, 2011).

2.1.6.3 Tackle the Roots of the Liquidity Crisis

Kremers (2006) says that normally, a liquidity crisis is only the last symptom of pre-existing root

issues such as strategic or profitability crises such as losing one key customer contract,

misalignment of product portfolio and market, accompany overstretching itself by entering too

many markets. Ferguson et al (2007) also postulated that liquidity crisis needs to be addressed

right away, but ignoring the crisis‟ root causes will merely postpone the next liquidity crisis. In

these times of urgency, the support of external advisers can bring highly needed extra resources,

experience of crisis management, and an independent perspective.

2.1.6.4 Rebuilding of Confidence and Trust in the Banking Sector

Kremers (2006) says that regaining the trust of banks, shareholders, and other stakeholders is a

prerequisite to maintaining, or raising external funding. This requires communicating robust and

realistic plans, delivering on these plans and building relationships. Strahan (2008) observed that

the main tool for trust building is a bullet-proof rolling liquidity forecast on which you will


deliver in a liquidity crisis, a company‟s usual banking relationship can be replaced by a workout

banker with different expectations and greater experience of liquidity crises.

2.2.0 EMPIRICAL EVIDENCE

2.2.1 Causes of Liquidity Crisis

2.2.1.1 Case Study: Rwanda

Sanya, Mitchell and Kantengwa (2012) say that in late 2008, a number of factors caused a

reversal in Rwanda‟s liquidity situation and plunged the banking system into a liquidity crisis

that lasted for a few months. The longstanding liquidity surplus on banks‟ balance sheet

combined with high economic growth and inflation in the first half of 2008, fuelled credit

expansion. The sharp increase in credit growth also occurred within the context of the National

Bank of Rwanda‟s (NBR) increased capital requirements from RwF 5 billion to RwF 15 billion.

Compliance with this new regulation, mainly through mergers, and acquisitions by foreign banks

increased competition and led to more aggressive lending by banks as they attempted to gain

market share. Concurrently, low real interest rates encouraged some wholesale depositors to seek

better returns from the banking system leading to the significant reduction in systemic liquidity.

The high credit growth in 2008 combined with lower deposit growth, led to short-term liquidity

problem and some banks under stress accessed the National Bank of Rwanda‟s lender-of last

resort facilities.

2.2.1.2 Case Study: Russia

Vedev (2008) says over the past three years, the Russian banking system has become “over

borrowed”, that is the ratio of loans to the non-financial sector to domestic deposits increased

from 95% at the beginning of 2004 to 120% at the beginning of 2008. Although liquidity

remained at an acceptable level, investment in securities fell from 11.5% to7.5% of assets during

the same period. The reasons are that there is a deficit of low-risk highly liquid financial

instruments and their real yield is negative.

This has resulted in unreasonably high growth in lending, segmentation of the interbank market,

and rising interest rates, raising the likelihood of bankruptcy for certain banks and threatening

destabilization of the entire banking system. The shrinking of banking liquidity to a potentially

dangerous level again underscores systemic problems in the banking system, i.e. alack of internal


resources and proper risk management to ensure economic growth and maintain financial

stability.

2.2.2 Impact of Liquidity Crisis in Economic Growth


Sanya, Mitchell and Kantengwa (2012) say that the liquidity crisis and the fast deteriorating

external environment of Rwanda have significantly impacted the real economy. Private sector

credit growth collapsed from over 70 percent in 2008 to6 percent in 2009. This was a

contributing factor to the decline in real GDP growth from11.2 percent in 2008 to 4.2 percent in

2009.

2.2.3 Liquidity Risk Management Processes and Policies Adopted by Banks

2.2.2.1 Case study: Nigeria

Olayiniet.al (2011) argued that liquidity management in Nigerian commercial banks surrounds

both sides of the prospective needs for liquidity at any giving time. Liquidity is measured as a

stock or as a flow. Liquidity management requires an appraisal of holdings of assets that may be

turned into cash with expected liquidity needs. The flow concept views liquidity not only as the

ability to convert liquid to assets into cash but also the ability of the economic units to borrow

and generate cash from operators. Financial ratios used in Nigeria, such as liquidity ratios. The

liquidity ratios are composed of current ratio, quick ratio, and liquid assets to total deposits;

loans and advances to deposits.


Sanya, Mitchell and Kantengwa (2012) say that Rwanda‟s liquidity crises occurred in a relative

regulatory vacuum as the Central Bank Act of 2005 did not have an explicit regulation on

commercial banks‟ liquidity management. Rather, the NBR‟s liquidity risk for off-site

supervision was conducted within a broad risk assessment framework called the CAMELS rating

system. Under this system, banks were obliged to comply with one indicator of liquidity - the

liquid assets to liquid liabilities ratio which had a threshold of 80%. Over the 4-year period our

estimates show banks would have encountered difficulties in respecting the liquidity requirement

since the ratio remained below the threshold minimum. The recent crisis illustrated how quickly

and severely liquidity problems can materialize as sources of funding evaporate and highlighted

the need for a liquidity risk management framework. In October 2009 the NBR introduced a new


regulation, Regulation No 10/2009on commercial banks‟ liquidity management, which amends

and sets out the parameters for liquidity regulation and supervision.

2.2.4 Impact of Capitalization on Bank Liquidity

2.2.4.1 Case Study: Indonesia

Keeley (1990); Laeven and Levine (2009) findings from leveraging unique bank-level

population data from Indonesia over the Asian financial crisis, including formal information

regarding selection criteria into recapitalization, difference-in-differences estimates suggest that

recapitalization increases lending (and more so for larger banks), while simultaneously

increasing bank risk in the long term. Results remain robust to consideration of cross-sectional

differences between banks (political connections, business group affiliation, ownership type),

and time trends (changes in macroeconomic conditions, capital requirements, accounting

regulations, and public credit registry coverage).

Altogether, the results suggest that while bank recapitalization is typically implemented as a

short term solution to banking sector stability, unintended consequences in terms of overall bank

risk may also persist in the long run. The Indonesian government implemented recapitalization

programs inorder to stabilize the banking sector and stimulate lending by providing solvency

assistance to banks with emergency capital. By ensuring that banks are able to lend, these

programs are typically constructed with the aim of containing crises to the banking sector,

thereby minimizing the negative real growth impacts that transmission to real side sector may

cause (Calomiris et al., 2004).

2.2.5 Possible Solutions to Liquidity Crisis

2.2.5.1 Case Study: Nepalese Banking Sector

Khanal (2011) says for the short term, the NRB should use all its tools to increase liquidity so

that anxious depositors are calmed down. The Nepali banking industry has to go back to

oligopoly, which is characterized by few banks but many depositors and borrowers market

structure, if things are to get normal. Few but strong BFIs with tight supervision would lead to

reduction in operating expenses, healthy competition, economics of scale and innovation in the

banking industry. For a long term solution, Nepal should have something like a “Troubled BFI


Relief Program”, to rescue and restructure troubled BFIs. It would consolidate the banking

sector, and potentially lead to fewer but healthier BFIs that are innovative in providing services

to the public, and also not take excessive risks to derail the entire economy.

2.2.5.2 Case Study: Bangladesh

Amin (2012) says commercial banks have recently launched fund-collection campaigns by

offering new saving schemes with higher interest rates in a bid to tackle the prevailing liquidity

crisis. Bankers said they were offering higher interest rates to lure people to keep their savings in

the banks. Funds are needed to ward off liquidity crisis the banks are currently facing.

2.3 Conclusion

This chapter discussed both theoretical and empirical literature review on causes of banks

liquidity challenges, the impact of the liquidity crunch on the economic growth, impact of

capitalization of banks on their liquidity positions and also the possible measures that can be

instated by both the central bank and the banks themselves in combating the liquidity challenges.

Effort was made to ensure the applicability of these postulations to the context of commercial

banks in Zimbabwe. Different authors have argued their points of view regarding different

aspects of liquidity challenges that have hounded the banking sector. The following chapter will

look at how the research was carried out, that is the research methodology to be used to carry-out

the relevant field research for collection of primary data and secondary. The chapter also gives

justifications on the methodology adopted to carry out the research.


CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

This chapter focuses on the research design, population samples, research tools and the

procedures in which data was gathered. It outlines the vehicles that were used to steer the

research objectives as highlighted in the previous chapter, thus the framework within which this

research was carried out. This chapter also clearly outlines how the data collection instruments

were administered, the reasons for using them and basically the challenges that were faced in

collecting the data. The fundamental objective of this chapter is to outline the research plan that

was used and how it was administered.

3.1 Research Design

A cross sectional survey was conducted due to the nature of the research topic and the targeted

population. This method was done to gather relevant information from mainly three

constituencies, the commercial banks management, the RBZ and the economists. This survey

design was adopted, because the main objective of the study was to find out the impact of

multicurrency regime on bank liquidity challenges. The method also allowed for an overall

appreciation of all the financial players that are represented in this sector and results that are not

biased can therefore be obtained. The major shortcoming of this design was that most banks

under study were reluctant to divulge their information and they seemed not to have enough

knowledge of the bank liquidity challenges causes.

3.2 Study Population

The study population was made up of 11 commercial banks in Zimbabwe from the year 2009 to

2014 namely ZB Bank, CBZ, Barclays, Stanbic, Standard Chartered, MBCA, MetBank,

EcoBank, BancABC, AgriBank and Steward Bank, the banks‟ regulatory authority (the RBZ),

and the economists. Due to time and financial constraints, the banks that were surveyed were in

the city of Bulawayo and hence the population under assessment was confined to one city to

represent all the other branches. The researcher mainly targeted the banks‟ operations and branch

managers. Selection of respondents was on the basis of their knowledge, flexibility, availability


and convenience. Information was also sourced from economics academics and lecturers and for

the regulatory authority, the researcher visited the RBZ offices in Bulawayo.

3.3 Research Sample

The research sample included 11 Zimbabwean commercial banks, that is, the ZB Bank, CBZ,

Barclays, Stanbic, Standard Chartered, MBCA, MetBank, EcoBank, BancABC, AgriBank and

Steward Bank. To gather the primary data the researcher administered 2 questionnaires per bank,

2 to the RBZ and 4 to economists totaling to 28 questionnaires administered. All items were

enclosed and uppermost accuracy of information was likely to be acquired, thus, dependable

inferences to the area of study, conclusions and recommendations were drawn. The researcher

considered this sample size as optimum, that is, one that accomplishes the requirements of

efficiency, representativeness, reliability and flexibility.

Judgmental sampling was used in selecting the individuals to interview. This involved the

selection of key informants within the banking institutions and the stakeholders in the banking

sector. Key informants are people with the information or the know-how of what is being

investigated. They included branch managers, back office staff, supervisors, credit analysts, the

RBZ personnel and the economists. These people were selected because they are in a better

position to know about the economic performance of the banks since they are involved in routine

running of the institutions they work for.

3.4 Data Collection Methods

This section specifies how the researcher collected primary data and secondary data. For the

research to fully deliberate on the impact of multi-currency (dollarization) regime on the

liquidity challenges of Zimbabwean banks, pertinent material was required and to get hold of the

data, the researcher used both primary and secondary sources of data.

3.5. Primary Data

Primary data was collected by use of questionnaires and carrying out personal interviews. The

questionnaires were hand administered to banks‟ branch supervisors or the operations managers

for onward submission to the branch managers. The personal interviews were carried out on the

branch managers of the selected banks depending on their availability.


3.5.1 Questionnaires

The questionnaire was made up of both open and closed-ended questions. Respondents were also

asked to justify their answers to closed-ended questions to increase the information quality of the

response. A total of 22 questionnaires were administered to banks and regulatory authorities

while questionnaires numbering 5 to the economists.

3.5.2 Questionnaires Justification

Questionnaires were easy to administer as they had a wider coverage without having to supervise

completion of questions in your presence. The targeted population was easy to control through

the use of questionnaires, as they give guidelines to the respondents. Self-completion of

questions also formed part of confidentiality, which therefore generated more reliable and valid

information, taking into account the sensitivity of information revealed by financial institutions.

The questionnaire also had the advantage of having close ended questions that allowed for swift

responses towards the researcher‟s questions. Few open ended questions allowed for open

mindedness in finding the actual impacts, causes and possible solutions of multicurrency regime

on bank‟s liquidity crisis. They were also economic in terms of time management and financial

costs, as mostly were drop- and-pick instruments.

3.5.3 Questionnaires Shortcomings

Although this instrument is vital in data collection, a number of drawbacks were experienced.

Some of the questionnaires were not even returned by respondents, as other respondents feared

that the data required was so sensitive according to the Confidentiality section they signed in

their employee contracts. Other questionnaires were even misplaced by the respondents maybe

because of ignorance. All these negatively affected the response rate of questionnaires. Some

respondents gave their related partners/ staff to complete the questionnaires on their behalf

resulting in some questionnaires being completed by some respondents without having proper

knowledge pertaining to bank failure. By posing some closed ended questions it somehow

limited the respondents‟ free expression

However, the targeted respondents were persuaded to reveal the intended data, based on the fact

that the data will be used for academic purpose only. The research objectives and hypothesis


statement formed the backbone element in questionnaire structuring, so as to reduce the

ambiguity involved in questions setting.

3.5.4 Personal Interviews

Questions asked were those covered by the questionnaire survey, and other additional questions

were incorporated to add value to the interviews. This was meant to manage the response errors,

which otherwise would have arisen if the questionnaire approach alone had been employed in

data collection. The researcher managed to set-up personal interviews with 3 banking

institutions, namely BancABC, MBCA and Steward Banks. Interviews were also held with three

economics lecturers at NUST.

3.5.5 Personal Interviews Justification

Interviews enabled clarifications of questions that may have sound ambiguous to the respondent

on the questionnaires. This improved the quality of response, as it gave a better understanding to

the respondent on what is being really asked by the questions. They also opened discussions of

other questions that may not have been included in the questionnaire. This increased the

coverage of the data gathered related to the analysis of multi-currency regime impact on the

liquidity challenges faced Zimbabwean banks (2009-2014) and the effects of liquidity crisis on

the general economy well-being. The interviewer was in a position to check the eligibility of the

interviewee before any interview commences which improved the nature of targeted respondents.

This is because only those who are well versed with bank management practices, RBZ functions

and the general economy were chosen. The researcher was able to get spontaneous responses

from the informants interviewed. In addition, emotions and facial expressions were easily noted

from the interviewee, unlike the use of questionnaires that are completed in the absent of the

researcher.

3.5.6 Personal Interviews Shortcomings

Although, the aforementioned benefits were derived from the use of personal interviews, it had

also had its fair share of shortcomings too. Interviewer and interviewee bias, as the researcher

may somehow get confused by the nature of responses and questions asked by the interviewee

that will then result in further distortion to the actual quality of data. Interviews were time

consuming thus coverage was limited. The coverage was also limited as compared to


questionnaires, since the of the questionnaires were easily administered, unlike the use of

interviews they were difficult to set up required one to travel to that place, but because of time

and financial constraint some stakeholders were not interviewed.

The interviewer however, pronounced the parameters and frameworks upon which the responses

and research questions will be asked, so as to reduce bias. To promote a certain degree of

accuracy the researcher ensured that there is anonymity in the responses and assured the

respondents that the data would be used solely for academic purposes.

3.6 Secondary Data

To gather secondary data the researcher made use of RBZ publications, World Bank/IMF

publications. References were also made to textbooks and relevant journals on banks liquidity

crisis which were available during the time of the research. Secondary data was used by the

researcher to fill data gaps that primary data could not address. However because of the limited

information available in Zimbabwe even on the banks‟ liquidity crisis experienced in the country

the researcher had also to rely greatly on the internet articles even for information that should

have been readily available within the country. The internet availed information on causes and

possible remedies of banks‟ liquidity crisis in both the emerging and developed economies in the

region and abroad, like the recent events in Europe and Asia. The merits of using secondary data

encompassed the cost affordability and saves time.

3.7 Data Analysis

Due to the nature of the research study topic, both qualitative and quantitative data analysis were

used to analyze the findings which had been gathered in the research. Data collected from

respondents was translated into numerical values which represented the frequencies for the

responses obtained from the questionnaires administered and the personal interviews held by the

researcher. These frequencies were then represented in percentage scores for each response to an

area of focus specified on the questionnaire. The researcher also used descriptive statistics in the

analysis of the primary data collected.

3.8 Conclusion

The chapter gave information about how the research study was undertaken by showing the

research design adopted, the study population and the sampling techniques used for the purpose


of this research. The research design used provided the overall strategy for answering the

research questions for this research project. The questionnaire and interview responses were

coded and then tallied, question by question. Chapter 4 will enhance the validity of data collected

concerning the impact of multi-currency regime adoption of banks liquidity in Zimbabwe. It will

consist of graphs, charts and tables for data analysis, presentation and results discussion.


CHAPTER FOUR

ANALYSIS, PRESENTATION AND DISCUSSION OF RESULTS

4.0 Introduction

This chapter illustrates how data gathered from both primary and secondary research was

presented and analysed to evaluate the viability of the building society banking model in a

dollarized economy. The results of the analysis are presented diagrammatically and expressed in

percentages for ease of assessment. Data did not lend itself to statistical techniques hence content

analysis was used. Bar charts, pie charts and tables were employed to present the findings of the

research.

4.1.0 Response Rates Analysis

The analysis entails the computation of the number of questionnaires returned and personal

interviews conducted against the total number questionnaires administered and interviews

scheduled by the researcher.

4.1.1 Questionnaire Response Rate

The researcher administered a total of 28 questionnaires as shown in Table 4.1 below, 22 to

commercial banks in Zimbabwe, 2 to the RBZ and 4 to economists 10. Out of the 28, 22

questionnaires were returned to the researcher. Four and none questionnaires sent to commercial

banks and the RBZ questionnaires were returned respectively whilst all the questionnaires

administered to Economists were returned to the researcher. Commercial Banks, Economists and

the RBZ had 81.8%, 100% and 0% response rates respectively giving an average response rate of

78.6%.

Table 4.1: Questionnaire Response Rates

RESPONDENTS ISSUED RETURNED RESPONSE RATE %

Commercial Banks 22 18 81.8

Economists 4 4 100

RBZ 2 0 0

Total 28 22 78.6

[Source: Primary Data]


Figure 4.1: Distribution of Questionnaires Respondents


From the above pie chart in Figure 4.1, of the total of 28 questionnaires that were administered

by the researcher, 60.7% of them were issued to the Commercial Banks, 14.3% were

administered to Economists and the remaining 7% constituted of the RBZ.

4.1.3 Personal Interviews Response Rates

The researcher also held personal interviews to collect data for analysis. The personal interview

had a response rate of 47% as shown by Table 4.2 below. Out of the plan total of 15 interviews,

the researcher managed to conduct only 7. The researcher only conducted interviews with three

banks namely BancABC, Standard Chartered bank, FBC and Steward Bank, and also with three

of the four selected economists. The other commercial banks and the Reserve Bank of Zimbabwe

declined the personal interviews, due to their busy schedules and anonymity issues. The

interviews were held as a follow up on the administered questionnaires, as some of the

respondents avoided open ended questions in the questionnaires.

Table 4.2 Interview Response Rates

INTERVIWEES PLANNED HELD RESPONSE RATE %

Commercial Banks 10 4 40

Economists 4 3 75

RBZ 1 0 0

Total 15 7 47


Commercial Banks

60.7%

Economists

14.3% RBZ

7%

Commercial Banks

Economists

RBZ


Figure 4.2: Distribution of Interviews Respondents


From the above pie chart, of the total of 15 personal interviews that were planned by the

researcher, 67% of them constituted of the Commercial Banks, 27% were conducted to

Economists and the remaining 7% constituted of the RBZ.

4.2 Does Multicurrency Regime Adoption have Impact on Liquidity of Zimbabwe

Banks

Figure 4.3: Respondents on the impact of multicurrency regime on bank liquidity


Commercicial

Banks

67%

Economists

27%

RBZ

7%

Commercial Banks

Economists

RBZ

0

2

4

6

8

10

12

14

16

Commercial Banks Economists RBZ

YES

NO


From Figure 4.2, 22 questionnaires that were returned to the research, 15 of the commercial

banks and 3 of the Economists respondents revealed that multicurrency regime adoption have an

impact on the liquidity of Zimbabwean banks whilst three commercial banks and one economist

viewed that multicurrency adoption has no impact on the liquidity of the banks. The researcher

could not ascertain the stance of the RBZ on the issue as none of the two questionnaires

administered to them were returned to the researcher.

On the contrary, all of the respondents except for the RBZ that held personal interviews with the

researcher revealed that multicurrency regime adoption has an impact on the liquidity of

Zimbabwean banks. In summary, 81% of the respondents viewed that multicurrency regime

adoption has an impact on banks‟ liquidity whilst the remaining 19% disagreed the assertion as

shown on Figure 4.3 below.

Figure 4.4: Impact of multicurrency regime adoption on banks’ liquidity



4.3 Causes of Liquidity Crisis in Zimbabwean Banks

The researcher gathered the causes of liquidity crisis in the Zimbabwean banking sector. The

researcher managed to give the respondents options to choose from the pool of causes that were

given in the questionnaire, and also gave room for the respondents to add what they thought had

a hand on the causes of liquidity challenges in Zimbabwean bank issue.

Figure 4.5: Causes of Banks Liquidity Challenges


From Figure 4.4, all of the respondents viewed that the absence of the lender of last resort role

(LLR) by the RBZ post adoption of the multiple currency regime in February 2009 is the major

cause. The defunct of the RBZ meant banks could not access quick funds from the central bank

and have to rely on other alternative credit lines and that have seen banks many banks if not all

encounter liquidity crunches or even collapse in worst cases scenarios like Capital Bank Limited,

Interfin Banking Corporation and Trust Bank Limited in the last quarter of year 2014 (MPS, Jan

2015).

89% of the respondents pointed out that NPLs are a cause as a result of exorbitant interest rates

of lending ranging between 12% and 25% per month as at 31 December 2014 in most of the

Zimbabwean banks. These high costs of borrowing within the banking sector are attributable to

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

YES

NO


an increase defaults in loan repayments and loan servicing mostly triggered by moral hazards and

adverse selection in loans advances by banks. MPS (Jan 2015) also revealed that Credit risk

remained a key challenge in the banking sector between year 2009 and 2014. And that have led

to a gradual rise in the average nonperforming loans to total loans (NPL/TL) ratio from 0.32% in

March 2009 to 16% as at 31 December 2014 as shown by Figure 4.5 over leaf.

Figure 4.6: NPL's Trend from 2009 to December 2014

[Source: RBZ Jan 2015 MPS]

83% of the respondents revealed that undercapitalization of banks is a cause of banks liquidity

crisis and 80% of them viewed that lower public confidence in banks is also a cause. Post

dollarization of the economy has been characterized by diminished public confidence in the

sector which emanated from the erosion of the depositors funds prior to the end of

hyperinflationary era in 2009 and also in the closures of troubled banks. This have resulted in

subdued deposits and savings within the banking sector from to US$1358.68 million in

December 2009 to US$4968.06 as at 31 September 2014 (Quarterly Industry Report, Sept 2014).

56% of the respondents went on to say that maturity mismatches on banks assets (loans and

advances) and liabilities (demand and fixed deposits) have a hand on the liquidity crisis that

hounds most of Zimbabwean banks. They said it was because non-performing loans that locked

in the most of the liquid funds that could be used to reimburse mostly the demand deposits of

most clients. 56% of the respondents said the liquidity crisis was not attributable to competition


because the economy is not overbanked and also because about seventy percent of the country‟s

population is not banked especially those living in remote areas where most banks are not

geographically located (FinScope Survey, 2013), hence competition is not a major cause of the

liquidity challenges that are chocking the economy‟s financial system.

From the interviews held with the economists, unearthed that all of the aforementioned above all

the bank liquidity causes in Zimbabwe played vital roles. Besides the causes that were suggested

by the researcher, one of the interviewee also pointed that banking malpractices due to lax

regulatory and supervision by the RBZ were also a cause. Other interviewees went on to say that

the adoption of the multicurrency by the government brought about a level of economic playing

field, it is a source of liquidity crunch as it came with the loss in power of influencing money

supply and the monetary policy as whole.

The researcher went on to consolidate the opinions of all the respondents on the bank liquidity

crisis issue. The respondents‟ data showed that of all the causes of bank liquidity crisis in

Zimbabwe, the absence of the LLR by RBZ with 22% is the major cause, followed by NPLs with

20%, low confidence and undercapitalization had also a fair lion‟s share of 18% each. Maturity

mismatches, competition and others had 12%, 10% and 2% respectively. Below is Figure 4.6 that

shows the responses given by people as to the causes of bank liquidity challenges in Zimbabwe.

Figure 4.7: Distribution of Liquidity Challenges Causes in Zimbabwean Banks


20%

18%

10% 22%

18%

12%

2%

NPLs

Low Confidence

Competition

Absence of LOLR

Undercapitalization

Maturity Mismatches

Others


4.4 Liquidity Risk Management Procedures Deployed by Zimbabwean Banks

An analysis on the causes of liquidity in banks showed that all the commercial banks respondents

that were under the research study use liquidity risk management processes and strategies as

shown in Figure 4.6 below. However the researcher noted that 67% of the economists‟

respondents had the opinion that most if not all the banks in Zimbabwe do not have proper

liquidity process and strategies put in place by these financial institutions whilst the remaining

33% of the economists‟ respondents argued that actually banks have these processes and

strategies within their systems.

Figure 4.8: Do banks deploy liquidity management processes and strategies


Of the three banks that were interviewed by the researcher, they alluded that they use Asset and

Liability Committee (ALCO), Stress Testing, Management Information Systems (MIS), the

Basel II Accord, Board of Directors and also the RBZ Audits as some of the processes they have

adopted. During the courses of the interviews conducted by the researcher, two of the economists

interviewees argued that every financial institution in the Zimbabwean banking sector actually

have the liquidity management process and strategies in theory but in practical there are not very

effectively put into their intend purposes and uses. One economist interviewee even pointed out

that it is not these banks laxity in maintaining these processes and strategies but the current

0%

20%

40%

60%

80%

100%

120%

Commercial Banks Economists RBZ

YES

NO


economic climate in the sector is not predictable and also that most of the banks are making the

most of the regulatory arbitrage since the RBZ is partially defunct at the moment.

Figure 4.8 shows the summary of the findings of respondents who view that Zimbabwe‟s banks

deploy liquidity management processes and strategies. Of the respondents who agreed that the

banks have these processed and procedures, 75% were commercial banks respondents, 11% were

economists‟ respondents and the remaining 14% was attributable to questionnaires that were

administered to respondents but were not returned back to the researcher. On the contrary, there

was no response of the regulatory authority as none of the questionnaires administered was

returned to the researcher by the RBZ

Figure 4.9: Respondents that say banks deploy liquidity management processes and

strategies


4.5 Does Recapitalization have an Impact on the Liquidity of Zimbabwe’s Banks

The researcher noted that all the respondents from the 22 questionnaires that were returned to the

researcher by respondents and all the 7 personal interviews conducted, had 100% responses

apiece as both commercial banks and economists respondents all agreed that recapitalization of

the banks actually has an impact on their liquidity positions. Figure 4.9 shows the responses of

both the commercial banks and economists on the impact of banks recapitalization on their

liquidity positions.

75%

11%

14%

Commercial Banks

Economists

RBZ

Unreturned Questionnires


Figure 4.10: Impact of recapitalization on banks’ liquidity


The personal interviews conducted with the commercials banks and the economists, all of the

respondents highlighted that banks recapitalization increases both net capital base and the core

capital position of the financial institution as shown in Figure 4.9 above. They even went to shed

more light to the researcher that once a bank is adequately capitalized, it will have a buffer

against future unexpected losses and also will be in a position good enough to absorb both the

internal and external shocks during its course of operations. The shocks include operational

accounting losses, financial crisis and risks such as liquidity and credit risks that have been

hounding the Zimbabwe‟s banking sector post multiple currency adoption in 2009.

4.6 Possible Measures that can be Instituted by RBZ and the Banking Sector in

Combating Liquidity Crisis

The researcher was not able to conduct an interview with the RBZ officials regarding its position

on the banks liquidity crisis as they cited busy schedules and work commitments. The researcher

had to use secondary data on the possible measures that can be adopted by the central bank to

curb the liquidity challenges facing the banking sector. Bank and Banking Survey (2012)

postulated that the RBZ it have increased the banks minimum capital requirements in a quest to

increase the capital buffer and so as to protect depositors funds in an event of a bank failure. It

also reveal that the previous stipulated minimum requirements of US$12.5 million were not that

0%

20%

40%

60%

80%

100%

120%

YES NO

Commercial Banks

Ecoonomists


good enough to absorb the both the internal and external shocks like the liquidity crisis hounding

the Zimbabwe‟s volatile banking sector. It also went on to stipulate the new requirements of

US$100 million that is enforceable in the year 2020 and that capital will see banks being able to

absorb most of the shocks of bank and also enable them banks to have enough liquidity to pay

the demand depositors and other short-term liabilities when they fall due.

The Bank and Banking Survey (2012) also revealed that all the financial institutions have to

adopt the preceding new minimum capital requirements. Table 4.3 below shows those new

minimum capital requirements.

Table 4.3: The New Capital Requirements

INSTITUTION TYPE PREVIOUS MIN CAPITAL NEW MIN CAPITAL

Commercial Banks USD 12.5 million USD 100 million

Merchant Banks USD 10 million USD 100 million

Building Societies USD 10 million USD 80 million

Finance Houses USD 7.5 million USD 60 million

Discount Houses USD 7.5 million USD 60 million

Micro Financial Institutions USD 1 million USD 5 million

[Source: Banks and Banking Survey 2012]

One bank namely CBZ Bank (with US$109.81) has already surpassed the minimum capital

requirement for the Tier 1 strategic group which is effective in 2020 and other five banks namely

CABS, Stanbic, CBZ Building Society, BancABC and Standard Chartered have also surpassed

half mark of the minimum capital requirements. The remaining fifteen banks are still less than

the US$50 million with five years to go before the year 2020 deadline. Table 4.4 overleaf shows

the current bank core capitals as at 30 September 2014.

The MPS (January 2015), revealed that the Ministry of Finance will inject a tune of US$200

million towards the rehabilitation of the RBZ in a bid to resuscitate the lender of last resort role


(LLR) in the banking sector. The central bank also put ceiling on the amount of funds that can be

kept in banks nostro accounts and by doing so this will encourage banks to invest the rest of the

funds in the Zimbabwean money markets, thus it will result in the increase of amount of liquid

funds circulating in the economy.

Table 4.4: Current banks capital as at 30 September 2014

[Source: RBZ Banking Sector Report for Quarter Ended 30 Sept 2014]

The RBZ also ordered the banks to slash interest on deposits of US$800 and below in a bid to

stimulate confidence and savings culture within the banks, thus it will avail funds to banks that

can be reinvested to improve their liquidity positions. The 2015 MPS also revealed that the RBZ

will form ZIMACO in a bid to unlock funds locked in NPLs through securitization. The RBZ

also introduced bond coins on the 18th

of December 2014 which will also improve the liquid

funds circulating in the economy.

4.7 Conclusion

The issue of combating bank liquidity crisis in Zimbabwe has become an overnight sensation in

the banking sector. There are a number of forces at work against each other, from economic

policies such as the indigenization and also political issues as they hinder the successful curbing


of the banks liquidity crisis. This chapter covered data presentation and analysis of the overall

findings. In the next chapter, the researcher will summarize, conclude and make

recommendations using research findings.


CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS

5.1 Introduction

This chapter marks the end of the research project by encompassing the summary of findings,

conclusions and recommendations based on the results. The summary presents a snapshot of the

research study, recounting the various highlights of the study. The conclusion gives inferences

based on the empirical findings while the recommendations on how best commercial banks can

improve profitability are proposed basing on the conclusion. The chapter also avails the

suggestions for areas of further study research.

5.2 Summary

This research study was based on the problems that have been encountered by the Zimbabwean

banking sector post adoption of the multicurrency (dollarization) regime from year 2009 to 2014.

The research concentrated on eleven commercial banking institutions in Zimbabwe as the target

population. From the chosen respondents, the researcher managed to administer questionnaires

and held personal interviews with the targeted banks and economists although the researcher

could not ascertain the stance of the RBZ on the issue. Non-probability sampling was used in

selecting these respondents. Analytical tools comprised of graphs, charts and pie tables were

used in the data analysis and presentation.

In consideration to the research findings, detailed prior to this chapter, it has been revealed the

multicurrency adoption in 2009 has an impact on banks liquidity challenges that are hounding

the banking sector. It was unearthed that the major causes of liquidity crisis were mostly the

absence of lender of last resort function by the RBZ, non-performing loans, diminished public

confidence, maturity mismatches and undercapitalization of the banks.

Other than the aforementioned causes, it was also deduced from the respondents that banking

malpractices due to laxity in proper and sound bank regulation and supervision by the RBZ have

a hand in the banking sector liquidity crisis.


From the preceding findings by the researcher, it is now fair to say that although the central bank

(RBZ) is partially defunct, it has also taken some strides towards addressing the crisis despite the

volatility of the economic climate that emanated from the adoption of multiple currencies in

2009.

5.3 Conclusions

5.3.1 Does Multicurrency Regime Adoption have Impact on Liquidity of Zimbabwe

Banks

Although the adoption of the multicurrency regime (dollarization) in 2009 brought about a level

economic playing field, it has impacted negatively on the banks liquidity positions as the

Zimbabwean banking sector experienced an unprecedented period of stability, ever since the

introduction of the regime.

5.3.2 Causes of Liquidity Crisis in Zimbabwean Banks

The absence of the lender of last resort role (LOLR) by the RBZ post adoption of the multiple

currency system in February 2009 is the major cause. The defunct of RBZ on this role meant

banks could not access quick funds from the central bank and have to rely on other alternative

credit lines. Non-performing loans, diminished public confidence, maturity mismatches and

undercapitalization of the banks were revealed as the other major causes of liquidity crisis in the

banking sector.

Besides the causes that were suggested by the researcher, the research findings pointed out that

banking malpractices due to lax regulatory and supervision by the RBZ were also a cause. The

adoption of the multicurrency by the government was also seen as a source of liquidity crunch as

it came with RBZ‟s loss in power of influencing economy‟s money supply and the monetary

policy as whole.

5.3.3 Liquidity Risk Management Procedures Deployed by Zimbabwean Banks

It was discovered that most banks use Asset and Liability Committee (ALCO), Stress Testing,

Management Information Systems (MIS), the Basel II Accord, Board of Directors and the RBZ

Audits as some of the liquidity risk management procedures and processes they have adopted.


It was also unearthed that every financial institution in the Zimbabwean banking sector actually

have the liquidity management process and strategies in theory but in practical there are not very

effectively put into their intend purposes and uses. It was even pointed out that it is not these

banks laxity in maintaining these processes and strategies but the current economic climate

prevailing in the sector is not predictable and also that most of the banks are making the most of

the regulatory arbitrage as the RBZ is partially defunct.

5.3.4 Does Recapitalization have an Impact on the Liquidity of Zimbabwe’s Banks

Recapitalization of banking institutions increases both net capital base and the core capital

position of the financial institution. The research findings noted that adequately capitalized banks

have a buffer against future unexpected losses and also will be in a position good enough to

absorb both the internal and external shocks during its course of operations like the operational

accounting losses, financial crisis and risks such as liquidity and credit risks

5.3.5 Possible Measures that can be Instituted by RBZ and the Banking Sector in

Combating the Liquidity Crisis

RBZ it have increased the banks minimum capital requirements in a quest to increase the capital

buffer and so as to protect depositors funds in an event of a bank failure. It also reviewed the

previous stipulated minimum requirements for the Tier 1 strategic group of US$12.5 million to

US$100 million and these new capital requirements will be effective in the year 2020 and were

seen as good enough for the banking institutions in absorbing the both the internal and external

shocks in the financial sector like the liquidity crisis.

The Ministry of Finance will inject a tune of US$200 million towards the rehabilitation of the

RBZ in a bid to resuscitate the lender of last resort role (LOLR) in the banking sector. The

central bank also put ceiling on the amount of funds that can be kept in banks nostro accounts,

ordered the banks to slash interest on deposits of US$800 and below in a bid to stimulate

confidence and savings culture within the banks. The RBZ will form ZIMACO aimed at

unlocking funds locked in NPLs through securitization in a bid of increasing the liquid funds

circulating in the economy


5.4 Recommendations

The following are recommendations suggested based on this research study findings:

The Reserve Bank of Zimbabwe (RBZ)

The RBZ should instil back public confidence within the banking sector by making the

banking institutions reduce the interest rate on their loans and advances as this will improve

loans servicing hence reduction in the level of NPLs and also the funds locked in NPLs.

The RBZ should adopt stringent and robust bank regulation and supervisory techniques in

ensuring proper and sound liquidity management in the banking sector, thus will reduce

banking malpractices and the probability a of another liquidity crisis in the near future of the

sector.

The RBZ should establish a credit reference bureau within the financial system to reduce

moral hazards and adverse selections by the banking sector in lending activities. The bureau

will protect the sector from serial loan defaulters that are causing the liquidity crisis through

exacerbating the NPLs level since post multiple currencies system adoption by the economy.

5.4.2 Banks

Bank capitalization through the Basel Committee recommendations should be encouraged so

that bank liquidity positions can be enhanced. Banks should endeavour to adopt these

recommendations as they boost up their core capitals.

The appointed board of directors and senior management should be responsible for approving

and periodically reviewing the bank„s liquidity risk strategy and significant other risk policies

pertaining to the liquidity of the bank. Management should do away with insider loans and

the siphoning off depositors funds for personal use and for funding their lavish lifestyles at

the expense of the bank‟s loyal customers.

Banks should consider restructuring their non-performing loans and the other loans that have

the high probabilities of being defaulted. The restructuring of loans entails the changing of

the terms and conditions of the already advanced loans that are about to be defaulted or in


default so that they can be repaid back. This help the banks reduce the rapidly escalating

levels of the non-performing loans in the banking sector and also it will help them unlock the

funds locked in the NPLs that can improve their liquidity positions.

The Government

The government should expedite the capitalization of the RBZ to act as lender of last resort

and the resuscitations of the inter-bank and financial markets in the financial system, thus

they will improve the liquid funds in circulation.

The government should consider reviewing its economic policies like the indigenization

policy so as to increase foreign direct investment and the flow of capital into the economy so

as to lure potential investors into the financial system, thus will help banks in accessing

eternal lines of credit.

5.5 Suggestions for Areas of Further Research



economy. The intermediary role of banks in an economy can be effectively played in a banking

sector epitomized by adequate liquidity. However there is a necessity to further explore the

issues behind the liquidity crisis as it is a dynamic topic that has multiple impacts on the

economy as whole. The research study areas include:

Is the absence of the local currency the source of liquidity crisis in Zimbabwe‟s banks?

Is the re-introduction the Zimbabwean dollar the solution of banks liquidity crisis?

Assessment of role play by the RBZ in the prevention of banking crisis like the liquidity

crunch?


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APPENDICES

Dear Sir/Madam

My name is Dhliwayo Takudzwa, a final year student at the National University of Science and

Technology (NUST) studying a Bachelor of Commerce Honours Degree in Banking. I am

carrying out a research on, “An analysis of Multi-currency Regime (Dollarization) impact on

the liquidity challenges faced Zimbabwean banks (2009-2014), a case of Bulawayo

Commercial Banks.”

I am kindly asking for your time from your busy schedule to complete this questionnaire. The

information will be strictly kept confidential and used for academic purposes only. Your

correspondence and cooperation is kindly appreciated.

Yours Sincerely

Dhliwayo Takudzwa


APPENDIX 1: COMMERCIAL BANKS QUESTIONAIRE

1. Does the adoption of multi-currency (dollarization) regime have an impact on banks liquidity

crisis?

□Yes □No

2. What have been the major causes of liquidity crisis in the banking sector?

□ Non Performing Loans

□ Maturity Mismatches

□ Absence of Lender of Last Resort Role

□ Banks Undercapitalization

□ Competition

□ Other…………………………………………………………………………………….

3. Is there any competition in Zimbabwean banking sector

□Yes □No

4. If your answer in question (3) above is yes, in your opinion does the competition, contributes

to liquidity challenges among the banks?

□Yes □No

5. Has low confidence in the banking sector, been the source of current liquidity crunch?

□Yes □No

6. How does confidence affect bank liquidity?

......................................................................................................................................................

......................................................................................................................................................

.....................................................................................................................................................


7. Has the absence of the Lender of Last Resort role from the RBZ also contributed to the

current bank liquidity crunch?

□Yes □No

8. In your opinion, what have been the effects of liquidity crisis in the economy?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

9. How has liquidity crisis affected economic performance?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

10. The banking sector is experiencing high levels of non-performing loans (NPLs). Are these

NPLs the sources of current liquidity crisis in banks?

□Yes □No

11. What impact do these NPLs have on the banks liquidity position?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

12. Does your institution have any liquidity risk management processes in place?

□Yes □No

13. Has your institution been following those proper liquidity risk management procedures?

□ Yes □ No


If No, explain the reason for your choice of answer.

…………………………………………………………………………………………………

…………………………………………………………………………………………………

………………………………………………………………………………………………….

14. In your view, is bank liquidity risk generally being given the priority and attention it requires

by banks?

□Yes □No

15. Does capitalization of banks have an impact on your institutions liquidity position?

□ Yes □ No

Give reason for your answer to the above question.

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

16. In your view, does under capitalization has contributed to the current banks liquidity crisis?

□ Yes □ No

Explain your answer from the above question

……………………………………………………………………………………………

17. Has the Reserve Bank of Zimbabwe (RBZ) taken any action to reduce liquidity crisis?

□ Yes □ No

Could you please explain your answer?

………………………………………………………………………………………………………

……………………………………………………………………………………………………..


18. What possible solutions would you suggest, that can help resolve the liquidity crisis?

□ New capital requirements

□ Lender of last resort restoration

□ Capitalization of banks

□ Strong supervision by Reserve Bank

□ All of the above

□ Other……………………………………………………………………….


APPENDIX 2: RESERVE BANK of ZIMBABWE QUESTIONAIRE


crisis?

□Yes □No


crisis?

□Yes □No

3. What have been the major causes of liquidity crisis in the banking sector?

□ Non Performing Loans

□ Maturity Mismatches

□ Absence of Lender of Last Resort Role

□ Banks Undercapitalization

□ Competition

□ Other…………………………………………………………………………………….

4. The banking sector is experiencing high levels of non-performing loans (NPLs). Are these

NPLs the sources of current liquidity crisis in banks?

□Yes □No

5. What have been the major effects of liquidity crisis on the economy?

………..…………………………………………………………………………………………

…………………………………………………………………………………………………..

6. Have commercial banks been employing liquidity risk management processes?

□ Yes □ No


7. Does capitalization of banks have an impact on the banks liquidity?

………………....………………………………………………………………………………

…………………………………………………………………………………………………

8. What plans is the central bank employing to abate liquidity crisis?

□ Yes □ No


APPENDIX 3: ECONOMISTS QUESTIONAIRE

1. What have been the major causes of liquidity challenges in Zimbabwe?

□ Non performing loans

□ Speculative activities by commercial banks

□ Lack of corporate governance

□ Informal sector

□ Other………………………………………………………………………………

2. What have been the major effects of liquidity crisis on the economy?

………………………………………………………………………………………………

………………………………………………………………………………………………

3. Have commercial banks been employing liquidity risk management processes?

□ Yes □ No

Explain your answer please

………………………………………………………………………………………………

………………………………………………………………………………………………

4. What can the central bank and the banks do to combat the liquidity crisis?

………………………………………………………………………………………………

………………………………………………………………………………………………

5. In your opinion, does capitalization of banks have an impact on their liquidity position?

□ Yes □ No

□ Other……………………………………………………………


APPENDIX 4: INTREVIEW QUESTIONS

1. In your opinion, what have been the major contributors to the liquidity crisis?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

2. What have been some of the effects of liquidity crisis to economic growth?

………………………………………………………………………………………………….

………………………………………………………………………………………..................

.....................................................................................................................................................

3. To what extent has the liquidity crisis affected the banking sector?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

4. What measures has the central bank taken to reduce the impacts of liquidity crisis in the

banking sector?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

5. Has the banking sector been carrying out liquidity risk management processes?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

………………………………………………………………………………………………....

6. Has lack of adequately capitalization of banks been the source of banks liquidity challenges?

…………………………………………………………………………………………………..


7. What other possible measures can be instated by the RBZ and the banking sector in

combating liquidity challenges?

………………………………………………………………………………………………..…

……………..................................................................................................................................

......................................................................................................................................................

the impact of multi-currency (dollarization) regime adoption on the liquidity challenges banks

Economy & Finance