The Effect of Dollarization on the Growth of Non-Performing Loans in the Zimbabwe Banking System: An Autoregressive Distributed Lag (ARDL) Bound Test Approach

Abstract

This research evaluates the effect of dollarization and internal bank factors that caused unprecedented high levels of non-performing loans (NPLs) in the Zimbabwe banking system. In examining the surrounding issues, recommendations are made, which might resolve or at least ameliorate Zimbabwe’s NPLs problem. The study employed an autoregressive distributed lag (ARDL) bound test procedure by making use of the financial soundness indicator data for a Zimbabwe banking system for the period 2000-2014 on a quarterly basis. Empirical findings indicated that the dollarization has no influence on the growth of NPLs both in the short and long run. Among bank fundamentals, however, liquidity, return on equity, efficiency and interest rate spread proved to be prominent bank-specific determinants of NPLs. The findings also suggest that return on equity and NPLs from previous period are positively related to current levels of NPL.  On the other hand, however, liquidity, cost efficiency and interest rate spread variables in the long-run were found to have a negatively significant impact on NPLs.

Keywords: banking system, non-performing loans, dollarization, ARDL, Zimbabwe