on Bank Financial Performance in a subdued economic environment: A case of the Zimbabwean Banking Industry
FEATURED PAPER
By Farai Don Dzapasi
Department of Banking and Finance
Great Zimbabwe University
Zimbabwe
Abstract
Liquidity is generally referred to as the ability to generate adequate cash to pay off financial obligations but in banking it mainly refers to the ability to honour maturing deposits. Banks indeed require liquidity since such a large proportion of their liabilities are payable on demand (deposits) but typically the more liquid an asset is, the less it yields. Hence, the decision to choose a particular combination of assets over another, taking into consideration the liability size of a bank, would have a massive effect on bank liquidity management, profitability and risk. This paper sought to establish the impact that proper liquidity management has on the financial performance of banks on the backdrop of a poorly performing economy. Factors that include asset liability mix, regulatory and market changes and liquidity management strategies are closely scrutinised in line with the ever changing Zimbabwean economic environment. A mixed research methodology was adopted, where research methodology is based on the multiple viewpoints or perspectives which are brought forward by both qualitative and quantitative research methodologies. The study focused on the population of banking financial institutions in Zimbabwe and drew a sample of five (5) leading banks that comprised of Commercial Bank of Zimbabwe (CBZ), Standard Chartered Bank of Zimbabwe, First Capital Bank, FBC Bank and ZB Bank. The major findings of the study were that there is a strong positive relationship between liquidity management and bank financial performance. Trade-off between liquidity and profitability in Zimbabwean Banking institutions has seen a decline in profit margins over the period under study, but has fostered greater stability that has guaranteed better performance and sustainability. However, there is need for a holistic approach to liquidity management by all stakeholders involved in the exercise and as such, recommendations have been forwarded for their consumption.
Key words: Liquidity management, Asset-Liability exposure, Liquidity contingency plan, Gap analysis, Volatility analysis, Current ratio, Return on Equity
Introduction
The recent trends on the global financial scene have had significant impact on the banking industry worldwide with one major need being that for effective liquidity management in banking institutions. Liquidity is generally referred to as the ability to generate adequate cash to pay off financial obligations but in banking it mainly refers to the ability to honour maturing deposits (Adalsteinsson, 2014). According to Choudhry (2011) liquidity management refers to the funding of deficits and investment of surpluses, managing and growing the balance sheet, as well as ensuring that the bank operates within regulatory and stipulated limits. Ideal bank-management is an uninterrupted endeavour of assuring that a balance exists between liquidity, profitability and risk (Banks, 2014). Banks indeed require liquidity since such a large proportion of their liabilities are payable on demand (deposits) but typically the more liquid an asset is, the less it yields. Hence, the decision to choose a particular combination of assets over another, taking into consideration the liability size of a bank, would have a massive effect on bank liquidity management, profitability and risk (Choudhry, 2012). In managing its assets and liabilities in the wake of uncertainties in cash flows, cost of funds and return on investments, a bank must ascertain its trade-off between risk, return and liquidity (Landskroner and Paroush ,2011). Indeed, studies in other countries across the globe have attributed bank failures to poor liquidity management. This is so because scholars argue that one of the major contributors of the Global Financial crisis of 2007-2008 was poor liquidity management (Adalsteinsson, 2014). This was largely as a result of the collapse of Lehman Brothers, a leading Investment Bank which ended up spreading across the globe through the “contagion effect”.
Furthermore, in Nigeria, the challenges of inefficient liquidity management approaches in banks were exposed during the “liquidation and distress” era of 1980s and 1990s. This is so because the negative cumulative effects of this liquidity crisis stayed up to the re-capitalization era in 2005 in which banks were required to raise their capital base from N2 billion all the way to N25 billion (Agbada & Osuji, 2013). Thus, this is the reason why the Basel Committee continually advocates for sound and prudent liquidity management in all Banks across the globe since it is of paramount importance. This is so because Basel Committee on Banking Supervision (2008:1) subscribes to the view that, “Virtually every financial transaction or commitment has implications for a bank’s liquidity. Effective liquidity risk management helps ensure a bank’s ability to meet cash flow obligations, which are uncertain as they are affected by external events and other agents’ behaviour. Liquidity risk management is of paramount importance because a liquidity shortfall at a single institution can have system-wide repercussions.”
In the early 2000s, the Zimbabwean financial system was characterized by incoherent regulatory and market changes that led to a redefinition of some bank operations and policies. This change in banking operations triggered various forms of financial risks which posed an uphill task to traditional liquidity management (Chikoko and Le Roux, 2012). In an attempt to move towards consolidated supervision and risk based financial regulation, a number of policy initiatives and monetary controls were taken by the Reserve Bank of Zimbabwe (RBZ). Enhanced steps were also seen to ensure prudent supervision and market stability. During the last quarter of 2003 and the first quarter of 2004, quite a number of banking institutions suffered from serious challenges that ranged from chronic liquidity problems, liquidity management deficiencies and poor corporate governance (Nhavira, Mugocha and Mudzonga, 2013). The RBZ noted that some banking institutions did not have inclusive liquidity management strategies and policies, arguing that in some cases long- term non- performing assets were recklessly funded through short term liabilities in an environment characterized by rising interest rates. Examples were Century Discount House which was closed in 2004 due to severe liquidity challenges, Royal bank, Barbican bank and Trust bank all due to poor liquidity management (Nhavira, Mugocha and Mudzonga, 2013).
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How to cite this paper: Dzapasi, F.D. (2020). The impact of Liquidity Management on Bank Financial Performance in a subdued economic environment: A case of the Zimbabwean Banking Industry; PM World Journal, Vol. IX, Issue I, January. Available online at https://pmworldlibrary.net/wp-content/uploads/2020/01/pmwj89-Jan2020-Dzapasi-impact-of-liquidily-management-on-bank-performance.pdf
About the Author
Farai Dzapasi
Great Zimbabwe University
Masvingo, Zimbabwe
Farai Dzapasi is a lecturer in the Department of Banking and Finance at the Great Zimbabwe University. He holds a Bachelor of Commerce Honours in Finance and Master of Commerce in Finance from Great Zimbabwe University.
