An Evaluation of the Cost and Revenue Efficiency of the Zimbabwean Banking Sector

Sanderson Abel and Pierre Le Roux, May, 2017
Banking sector efficiency measures the proximity of a decision making unit to its production possibility frontier, composed of sets of points that optimally combine inputs in order to produce one unit of output. Banking sector efficiency has been of interest to policymakers and scholars for a number of reasons. Efficiency leads to a reduction in spreads between lending and deposit rates which stimulate greater demand for loans and an increase in mobilisation of savings. Wide spreads affect intermediation and distort prices which impairs the role of the financial system. Efficiency contributes to the understanding of the primary monetary policy transmission channel helping policymakers to obtain feedback on how changes in the regulatory environment affect bank efficiency and how efficiency translates into bank performance. Banking sector efficiency assists in benchmarking an individual bank against international best practice and assessing the effect of various policy measures on the sector performance.

The study of banking sector efficiency is important in Zimbabwe since the banking system assets constitute a substantial proportion of total output and banks constitutes the largest part of the financial system. The performance of the banking sector is therefore of systematic importance in the Zimbabwean economy. A banking sector that is efficient is supposed to have narrow spreads between lending rates and deposit rates. Since 2009, there has been concerns by policy makers and the banking public that banking institutions in Zimbabwe are profiteering through charging high interest rates and bank charges to cover their operational inefficiencies. This concern resulted in the central bank instituting the Memorandum of Understanding, which controlled and regulated the pricing of banking products in 2013.

The study undertook an empirical evaluation of the cost and revenue efficiency of the Zimbabwean banking sector. The study employed the Data Envelopment Analysis method to measure the cost and revenue efficiency of the banking sector. In the second stage the Tobit regression model was used to examine the determinants of cost and revenue efficiency. The results suggest that cost and revenue efficiency increased during the period 2009-2012 which coincided with positive growth rates and economic stability. There was a reduction in both cost and revenue efficiency in 2013 as a result of the government induced memorandum of understanding between the central bank and all banks setting the stage for banking sector price controls. The study established that private banks were more revenue efficient compared to public banks. There was only marginal difference between the cost efficiency of private and public banks. The study further established that commercial banks were more cost and revenue efficient than building societies.

An evaluation of the determinants of the banking sector efficiency suggest that both bank specific factors and macroeconomic factors determines cost and revenue efficiency. The study established that cost and revenue efficiency are determined by banking competition, bank size, credit risk, bank capitalisation, economic growth and inflation. The result implies that efficiency in the banking sector is dependent on the strategies that bank management adopt and also the policy measures put in place to enhance the macroeconomic environment. Policy makers should ensure that they put in place procompetitive policies in order to improve the efficiency of the banking sector. This then calls for the implementation of financial sector reforms in order to remove all bottlenecks that hinders competition. The study revealed that tampering with market forces is detrimental to the efficiency of banking sector which impairs financial intermediation. The imposition of the memorandum of understanding was accompanied by the decline in both revenue and cost efficiency supporting the need for upholding the operations of free market forces. The macroeconomic environment has a bearing on the efficiency of the banking sector in Zimbabwe. This means an increase in economic activities increases the demand for financial services which increases efficiency. This result calls for banking policy makers to put in place user friendly policies that enhances economic activity.

There are a number of learning points for the South African government; nurturing an efficient banking sector leads to a reduction in spreads between lending and deposit rates which stimulate economic activity. Efficiency of the banking sector is important for understanding the monetary policy transmission mechanism. It is important that the government should ensure a conducive operating environment for banks for efficient intermediation. The regulation of the banking sector should be minimal and should avoid disturbing the dictates of market forces. The government should also ensure that they put in place procompetitive policies in order to improve the efficiency of the banking sector.The study of banking sector efficiency is important in Zimbabwe since the banking system assets constitute a substantial proportion of total output and banks constitutes the largest part of the financial system. The performance of the banking sector is therefore of systematic importance in the Zimbabwean economy. A banking sector that is efficient is supposed to have narrow spreads between lending rates and deposit rates. Since 2009, there has been concerns by policy makers and the banking public that banking institutions in Zimbabwe are profiteering through charging high interest rates and bank charges to cover their operational inefficiencies. This concern resulted in the central bank instituting the Memorandum of Understanding, which controlled and regulated the pricing of banking products in 2013.

The study undertook an empirical evaluation of the cost and revenue efficiency of the Zimbabwean banking sector. The study employed the Data Envelopment Analysis method to measure the cost and revenue efficiency of the banking sector. In the second stage the Tobit regression model was used to examine the determinants of cost and revenue efficiency. The results suggest that cost and revenue efficiency increased during the period 2009-2012 which coincided with positive growth rates and economic stability. There was a reduction in both cost and revenue efficiency in 2013 as a result of the government induced memorandum of understanding between the central bank and all banks setting the stage for banking sector price controls. The study established that private banks were more revenue efficient compared to public banks. There was only marginal difference between the cost efficiency of private and public banks. The study further established that commercial banks were more cost and revenue efficient than building societies.

An evaluation of the determinants of the banking sector efficiency suggest that both bank specific factors and macroeconomic factors determines cost and revenue efficiency. The study established that cost and revenue efficiency are determined by banking competition, bank size, credit risk, bank capitalisation, economic growth and inflation. The result implies that efficiency in the banking sector is dependent on the strategies that bank management adopt and also the policy measures put in place to enhance the macroeconomic environment. Policy makers should ensure that they put in place procompetitive policies in order to improve the efficiency of the banking sector. This then calls for the implementation of financial sector reforms in order to remove all bottlenecks that hinders competition. The study revealed that tampering with market forces is detrimental to the efficiency of banking sector which impairs financial intermediation. The imposition of the memorandum of understanding was accompanied by the decline in both revenue and cost efficiency supporting the need for upholding the operations of free market forces. The macroeconomic environment has a bearing on the efficiency of the banking sector in Zimbabwe. This means an increase in economic activities increases the demand for financial services which increases efficiency. This result calls for banking policy makers to put in place user friendly policies that enhances economic activity.

There are a number of learning points for the South African government; nurturing an efficient banking sector leads to a reduction in spreads between lending and deposit rates which stimulate economic activity. Efficiency of the banking sector is important for understanding the monetary policy transmission mechanism. It is important that the government should ensure a conducive operating environment for banks for efficient intermediation. The regulation of the banking sector should be minimal and should avoid disturbing the dictates of market forces. The government should also ensure that they put in place procompetitive policies in order to improve the efficiency of the banking sector.

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An Evaluation of the Cost and Revenue Efficiency of the Banking Sector in Zimbabwe