i

APPROVAL FORM

The undersigned certify that they have supervised the student B1542606. Dissertation entitled:

The impacts of interest rate on financial performance of commercial banks. A survey of

ZB commercial bank in Zimbabwe (2013-2017) submitted in partial fulfilment of the

requirements of Bachelor of Commerce Honours Degree in Banking and Finance at Bindura

University of Science Education.

…………………………………....... ……/………/…………/…………

STUDENT DATE

…………………………………….. …/…………/……………/……….

SUPERVISOR DATE

……………………………….. …/…………/…................/.............

CHAIRPERSON DATE

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RELEASE FORM

NAME OF STUDENT: Kambuyu Tendai

DISSERTATION TITLE: The impacts of interest rate on financial performance.

A survey of ZB financial holdings in Zimbabwe.

DEGREE TITLE: Bachelor of Commerce Honours Degree in Banking

and Finance.

YEAR THIS DEGREE IS

GRANTED: 2019

Permission is hereby granted to the Bindura

University of Science Education Library to produce

single copies of this dissertation and to lend or sell

copies for private, scholarly or scientific research

purpose only. The Author reserves other publication

rights and neither the dissertation nor extensive

extracts from it may be printed or otherwise

reproduced without the author’s written permission

SIGNED: ………………………………………………...

PERMANENT ADDRESS: 3839, Tynwald North, Westgate

Harare, Zimbabwe

CELL: 0784 001 809/ 0715 677 536

iii

DEDICATIONS

To my family, friends and relatives. You are an amazing family ever!

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ABSTRACT

The study aimed to empirically investigate the impacts of interest rates on financial

performance of commercial banks in Zimbabwe, taking into consideration other factors that

affect financial performance of commercial banks in Zimbabwe banking sector. The study

results revealed that interest rate do have a weak positive impact on financial performance of

commercial banks in Zimbabwe. The study also revealed that money supply is the major factor

that influence financial performance of banks as supported by findings from primary sources

(questionnaire). In the study, primary data was collected through interviews and questionnaires

instruments for presentation in chapter four. According to findings (regression analysis),

interest rate and financial performance positively relate in the short run and a negative

relationship co-exists in the long run. The study concluded that interest rate has an influence

on financial performance and hence the researcher rejected null hypothesis (H0). The study

also recommended the government of Zimbabwe through the RBZ to put interest rate ceilings

and floors to protect customers and commercial banks. Therefore, there is need for the central

bank (RBZ) to regularize, control and review the interest rate policy so as to restore customers’

confidence in the banking sector and to promote a good environment in the banking sector.

Keywords: Interest rate, financial performance, commercial banks, monetary policy, return on

assets, return on equity

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ACKNOWLEDGEMENTS

First and foremost, I would like to thank the Lord for the strength and knowledge he poured

for the success of this research. Secondly, I would like to express my gratitude to all people I

have met during the period I was undertaking the study in the field. I would also like to express

my indebtedness to my supervisor for guidance and the unwavering support throughout the

study, RBZ personnel and ZB Financial Holdings for furnishing me with necessary information

which led to the success of this study. My special thanks also goes to all Banking and Finance

lectures for assisting me with guidance. To my dad, mum, brothers, sisters and my lovely

girlfriend, I would like to say thank you for infinitely supporting me with prayers, courage and

financial support which contributed to the success of this study. You have been a motivating

force to the success of this research.

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Table of Contents

APPROVAL FORM .............................................................................................................................. i

RELEASE FORM ................................................................................................................................. ii

DEDICATIONS ................................................................................................................................... iii

ABSTRACT .......................................................................................................................................... iv

ACKNOWLEDGEMENTS ................................................................................................................. v

List of tables.......................................................................................................................................... ix

List of figures ......................................................................................................................................... x

List of Abbreviations and acronyms .................................................................................................. xi

List of Appendices ............................................................................................................................... xii

CHAPTER I .......................................................................................................................................... 1

INTRODUCTION ................................................................................................................................. 1

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

1.1 Background of the study....................................................................................................... 1

1.2 Financial performance ................................................................................................................ 3

1.2.1 The financial performance of ZB Bank from 2012-2017 .................................................. 4

1.3 Problem statement ...................................................................................................................... 5

1.4 Research objectives ..................................................................................................................... 5

1.5 Research questions ...................................................................................................................... 6

1.6 Research hypothesis .................................................................................................................... 6

1.7 Assumptions of the study ............................................................................................................ 6

1.8 Significance of the study ............................................................................................................. 6

1.8.1 The researcher ...................................................................................................................... 6

1.8.2 Academics ............................................................................................................................. 7

1.8.3 The banking sector in Zimbabwe ....................................................................................... 7

1.8.4 The Bindura University ....................................................................................................... 7

1.8.5 The regulator ........................................................................................................................ 7

1.9 Delimitations of the study ........................................................................................................... 7

1.10 Limitations of the study ............................................................................................................ 8

1.11 Definition of terms .................................................................................................................... 8

1.12 Chapter Summary .................................................................................................................... 9

CHAPTER II ......................................................................................................................................... 9

LITERATURE REVIEW .................................................................................................................. 10

2.0 Introduction ............................................................................................................................... 10

2.1 Zimbabwe current interest rate ............................................................................................... 10

vii

2.2 Theoretical review ..................................................................................................................... 10

2.2.1 Loanable funds theory ....................................................................................................... 10

2.2.2 Expectations theory ............................................................................................................... 11

2.2.3 Loan pricing theory ........................................................................................................... 11

2.2.4 Credit market theory ......................................................................................................... 12

2.3 Conceptual framework ............................................................................................................. 12

2.4 Empirical review ....................................................................................................................... 13

2.5 Other Determinants of Financial performance of commercial banks ................................. 16

2.5.1 Lending interest rate .......................................................................................................... 16

2.5.2 Leverage or gearing ratios ................................................................................................ 16

2.5.3 Firm’s size ........................................................................................................................... 16

2.5.4 Economics factors .............................................................................................................. 16

2.6 Financial performance indicators ............................................................................................ 17

2.6.1 Return on Equity (ROE) ................................................................................................... 17

2.6.2 Net Interest Margin (NIM) ................................................................................................ 17

2.6.3 Return on Assets (ROA) .................................................................................................... 17

2.7 Gap Analysis .............................................................................................................................. 17

2.8 Chapter Summary .................................................................................................................... 18

CHAPTER III ..................................................................................................................................... 18

RESEARCH METHODOLOGY ...................................................................................................... 19

3.0 Introduction ............................................................................................................................... 19

3.1 Research Design ........................................................................................................................ 19

3.2 Population and sample ............................................................................................................. 19

3.2.1 Population of the study ...................................................................................................... 20

3.2.2 Sample of the study ............................................................................................................ 20

3.2.2.1 Cluster sampling ............................................................................................................. 20

3.2.2.2 Convenience sampling .................................................................................................... 20

3.2.2.3 Stratified random sampling ........................................................................................... 20

3.3 Research instruments and data collection procedures .......................................................... 21

3.3.1 Primary Data ...................................................................................................................... 21

3.3.1.1 Questionnaires ................................................................................................................. 22

3.3.1.2 Personal interviews ......................................................................................................... 23

3.3.2 Secondary Data ...................................................................................................................... 23

3.4 Validity and reliability .............................................................................................................. 24

3.4.1 Pilot test of Instruments .................................................................................................... 24

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3.5 Model Specification and Parameter estimation ..................................................................... 24

3.6 Justification of the variables for the model............................................................................. 25

3.6.1 Demand for loanable funds (DLF) ................................................................................... 25

3.6.2 Interest rates (RIR) ............................................................................................................ 25

3.6.3 Inflation ............................................................................................................................... 25

3.6.4 Money supply growth (M2) ............................................................................................... 25

3.7 Data Presentation and Data Analysis procedures .................................................................. 26

3.8 Chapter summary ..................................................................................................................... 27

CHAPTER IV......................................................................................... Error! Bookmark not defined.

DATA PRESENTATION, ANALYSIS AND DISCUSSION .......................................................... 28

4.0 Introduction ............................................................................................................................... 28

4.1 Response rate ....................................................................................................................... 28

4.2 Analysis and Presentation of responses to questions ............................................................. 31

4.2.1 Factors affecting financial performance of commercial banks ...................................... 31

4.2.2 response on customers who have ever applied for a loan ............................................... 33

4.2.3 factors considered by customers when applying for a loan. ........................................... 34

4.2.4 Responses on clients who switched banks regarding to loan issues ............................... 35

4.2.5 Period while the respondents were employed at ZB Financial Holdings ...................... 38

4.2.6 Response on the relationship between interest rates and performance of commercial

...................................................................................................................................................... 39

4.2.7 Responses on the type of relationship that exist between interest rates and financial

performance. ................................................................................................................................ 40

4.3 Analysis and presentation of data from interview questions ............................................ 42

4.4 Analysis of results from secondary data ................................................................................. 43

4.4.1 Correlation and regression Analysis ................................................................................ 43

4.5 Chapter summary ..................................................................................................................... 47

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ..................................................... 48

5.0 Introduction ............................................................................................................................... 48

5.1 Summary of findings ................................................................................................................. 48

5.2 Conclusions ................................................................................................................................ 49

5.3 Recommendations ..................................................................................................................... 50

5.4 Suggestions for further studies ................................................................................................ 50

5.5 Chapter Summary ....................................................................... Error! Bookmark not defined.

REFERENCES .................................................................................................................................... 51

ix

List of tables

Table 3.1 Likert scale………………………… ……………………………………………...23

Table 4.1 Summary of responses of questionnaires………………………………...………...29

Table 4.2 Factors affecting financial performance …………………………………...............32

Table 4.3 Factors considered when applying for a loan………………………….....................34

Table 4.4 reasons for switching banks ………………………………………..........................36

Table 4.5 period at work………………………………………………………………............38

Table 4.6 type of relationship between interest rate and financial performance………............40

Table 4.7 ROA for ZB Bank (2013-2017) ……………………………………………............43

Table 4.8 ROE for ZB Bank (2013-2017) ……………………………………………………44

Table 4.9 Annual interest rates………………………………………………………………..45

Table 4.10 descriptive statistics………………………………………………………………45

Table 4.11 Regression results of interest rate and ROE……....………………………………46

Table 4.12 regression results interest rate and ROA…………………………………………..47

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List of figures

Fig 1.1 Finance performance of ZB Bank……………………………………………………..4

Fig 4.1 Response rate on questionnaires…………………………………………………......30

Fig 4.2 Response rate on interviews…………………………………………………………31

Fig 4.3 Factors influencing financial performance…………………………………………..32

Fig 4.4 Level of influence of each factor…………………………………………………….33

Fig 4.5 Customers who have applied for a loan……………………………………………...34

Fig 4.6 Factors considered when applying for a loan………………………………………...35

Fig 4.7 Number of customers who switched banks………………………………………….36

Fig 4.8 Reasons for switching banks…………………………………………………………37

Fig 4.9 Experience at work…………………………………………………………………...39

Fig 4.10 Relationship between Interest rate and financial performance……………………..40

Fig 4.11 Type of relationship between interest rate and financial performance……………..41

Fig 4.12 Relationship between interest rate and interest income………………………….....42

Fig 4.13 Trend analysis of ZB’s ROA……………………………………………………….44

Fig 4.14 Trend analysis of ZB bank’s ROE…………………………………………………45

xi

List of Abbreviations and acronyms

RBZ……………. …………………………...Reserve Bank of Zimbabwe

IMF………………………………………......International Monetary Fund

SADC ………………………………………. Southern African Development Community

MPS…………………………………………. Monetary Policy Statement

ROA…………………………………………. Return on asset

ROE …………………………………………. Return on Equity

OMO…………………………………………. Open Market Operations

GDP…………………………………………...Gross Domestic Product

MS…………………………………………......Money Supply

ZIMSTAT………………………………….......Zimbabwe National Statistics Agency

ANOVA………………………………………. Analysis of Variance

RIR……………………………………………. Real Interest Rate

NIM…………………………………………….Net interest Margin

xii

List of Appendices

Appendix 1: Research questionnaires………………………………………………………..57

Appendix 2: Research Interview Questions………………………………………………….62

Appendix 3: Interest rate, ROA and ROE……………………………………………………63

1

CHAPTER I

INTRODUCTION

1.0 Introduction

Interest rate has been identified as one of the major tools used to drive economic performance

for any given country. In most countries, monetary policy is placed in the hands of the Central

Bank under the supervision of the governor. Since interest rate influence the supply and

movement of money in the economy, its effects are of great concern to the banking sector in

Zimbabwe (Kariuki & Ngahu, 2016). This therefore portrays that the ineffective controlling of

money using interest will pose some dangers to the bank’s financial performance. This calls

the need for effective and sound interest to improve efficiency and financial performance of

commercial banks in Zimbabwe. This research provides a review on the resulting effects of

interest rates on banking sector in Zimbabwe –specifically to ZB Financial Holdings

commercial bank. The chapter 1 covered background of the study, statement of the problem,

purpose of the study; objectives, research questions; hypothesis statement, assumptions,

delimitations of the study, limitations, definition of terms and the chapter summary.

1.1 Background of the study

According to Sayedi (2013), Interest rate is the cost of borrowing normally expressed as a

percentage over given time period. Over the last two decades’ different significant changes

took place in the global economy with effects for the international macroeconomics variables

like the bank discount rates. These developments comprise some more integrated international

economies like India; United States of America and China which were undertaking approaches

to the monetary policy by central banks following the worldwide financial crisis (GFC).

Interest rate policy implemented by central banks show circumstances within economies with

respect to economic development and growth. According to Bernake & Blinder (1995) central

banks behaviour globally on interest rate is seized by fluctuations in price (inflation) relative

2

to target and by output departures from potential. Global interest rate is initiate to rise

significantly when aggregate international output, international prices and prices of oil are also

increasing (Juvenal & Petrella, 2014).

In Zimbabwe; the interest rates were fluctuating due to macroeconomics instability (Mzumara,

2006). The standard interest rate in Zimbabwe was last logged at 9.32%. The rate of interest

was averaged 12.28% from 2011 up to 2018; getting an all-time extreme of 16.04% in March

2012 due to dollarization that have been implemented in 2009 and the lowermost rate of 8.86%

in September 2017 (source RBZ). The Central bank of Zimbabwe does not have an official

discount rate, but they use the weighted lending rate (RBZ). Weighted lending rate is the

addition of lowest nominal lending rates weighted by specific bank’s loan book sizes and

issued by the Reserve bank of Zimbabwe (RBZ reports).

Zimbabwe has been characterised by high volatility of interest rate in the recent past years due

to economic surges on commercial banks performance remains unknown (Mzumara, 2006).

Commercial banks in the Sub Saharan remained high as compared to those in the rest of the

world (IMF,2001). Zimbabwe is dominated by commercial banks in its financial sector and

any failure would result in bank runs as a result of the contagion effect which could implicate

the financial crisis (IMF,2001). There are 13 commercial banks in Zimbabwe (the mid-

monetary policy statement of 2018). In the recent years; a large number of developing

countries especially African countries like Zimbabwe have been deregulating and reforming

the financial systems to liberate them so that they will provide viable financial services to their

general populace (Seibel, 2001).

Commercial banks in Zimbabwe during the era of 2000 to early 2009 were having challenges

of hyperinflation in the volatile environment (RBZ BLSS; 2009). According to the monetary

policy statement (2009), inflation rose to 231 150 889% in 2008 and this obstacle most

commercial banks performance (Source: ZIMSTAT). During this crisis period in Zimbabwe,

commercial banks had no choice other than charging 100% interest rates on loans and paid

approximately 40% on deposits (World bank). In the SADC region, interest rate spread (the

difference between interest charged on loan and interest paid on deposits) was averaged at

10.15% at the same time as in Zimbabwe was higher at 144.60% (World Bank indicator,

2015).

In 2009, the RBZ dollarized the economy with new stable currency which created a friendly

3

environment for both investors and commercial banks (Monetary Policy Statement; 2009). In

this era, the government of Zimbabwe abandoned the Zimbabwean dollars (bearer cheques)

and adopted the multicurrency regime system specifically the United States Dollar and South

African Rand and to a lesser extent of British Pound and Botswana Pula (Mzumara, 2012).

Interest rate cap was removed in this year and the interest rate was now determined by the

market forces of demand and supply (Monetary Policy Statement, 2009). This affected the

economic units as they were reluctant to save their money with the commercial banks as they

would receive low rates of interest and the deficit units were also reluctant to borrow at high

rates from Commercial banks in Zimbabwe (Njanike, 2008). Some international commercial

banks like Barclays (now First Capital Bank), Stanbic, Standard Bank, to mention but a few

remained inactive in their lending approach as they increase their ratios of loan to deposits by

increasing their loans and advances between 2009 to 2012 (Monetary Policy Statement, 2012).

Financial performance of commercial banks was low during these years. In 2013, the financial

crisis rocked the commercial bank sector due to non-performing loans increase and misuse of

depositor’s funds (RBZ, 2014) and two banks were forced to close in 2014 due to this

challenge (liquidity). Most commercial banks made some net losses during the year 2014 as

the clients lost confidence in the system due to bank overruns as the central bank was failing

to perform its function as a lender of last resort. However, the bank’s financial performance

increased from 2015 to 2017.

Commercial banks in Zimbabwe have been making remarkable profits although some were

declaring loses like the Time bank, Kingdom bank and Trust bank. The studies researched

suggest indicating that, provided the importance of commercial banks in the continent of

Africa, the understanding of the factors that hinder the financial performance of commercial

banks is important.

1.2 Financial performance

Financial performance is the degree of the change in financial terms of a firm’s financial

outcomes that emanates from decisions of the management (Woods & Sangster, 2005).

Financial performance of a commercial bank in Zimbabwe is mirrored in the drifts of returns

from investments and share prices from an investor’s perspective (Randal, 1996). Commercial

banks also monitor performance through the accounting measures like Return on Investments,

4

return on assets, return on equity (Woods & Sangster, 2005) and operating profit margin

(Gilchris, 2013). CAMELS (Capital adequacy, Asset Quality, Management competency;

Earnings; liquidity and market risk sensitivity) rating system is one of the tools used by central

bank to evaluate the financial performance of commercial banks in Zimbabwe (Pearson, 2012).

Other financial management accounting methods used to measure financial performance are

Return on Average assets (ROA), Return on capital employed; net profit margins and Return

on Equity (Lerner, 1993); to mention but a few commonly used. Asset quality provides the

quality of loans and how well resources are used. The accounting measures have the benefit of

being measuring absolute performance (Randal, 1996). In the study, the measures of financial

performance will dwell much on accounting principles and measures rather than the returns

from stocks.

Analysis of financial performance of commercial banks has been of huge interest to academic

study since the Great depression of 1940’s. The study indicated that Sub-Saharan Africa’s

commercial banks have better financial performance in the last two decades as compared to the

rest of the whole world due to their better Return on Assets (ROA).

1.2.1 The financial performance of ZB Bank from 2012-2017

Figure 1.1

Source: figures extracted from ZB website (www.zb.ac.zw).

-3,00%

-2,00%

-1,00%

0,00%

1,00%

2,00%

3,00%

4,00%

2012 2013 2014 2015 2016 2017

RO

A I

N %

YEARS

Financial perfomance as measured by return fomance as measur

on assets (ROA)

ROA

5

As shown above the return on asset from the financial statements of ZB financial Holdings

were fluctuating from 2012 to 2017. In 2012 there was a ROA of 2.92% which then declined

to 0.82% in 2013 and then to a negative ROA of -2.68% in 2014. The ROA rose to 2.16% in

2015 and increase at a decreasing rate in 2016 to 2.32%. The Return on Asset further increased

to 2.98% in 2017 by a greater margin. All these changes show fluctuations in financial

performance and it is to the researcher’s attention to research on the impacts of interest rates

on this performance (Source: www.zb.ac.zw)

1.3 Problem statement

The commercial banks in Zimbabwe are continually affected by interest rates which are high

on bank loans, high charges of banking transactions and low for client’s deposits. Exorbitant

charges make it difficult for commercial banks to perform their intermediary role of mobilizing

funds from surplus units to deficit units. The financial performance of commercial banks has

been fluctuating in recent years and it is to the attention of the researcher to assess on how

interest rates impact this financial performance. The researcher was motivated by the

fluctuations in bank performance and decided to research on the effects of interest rates to the

overall financial performance holding other factors that affect financial performance to be

constant. In Zimbabwe, very few studies have been taken to examine the degree to which

interest rates affects financial performance of commercial banks prior to other determinants

that impact in the financial performance of banks. The different studies on financial

performance of commercial banks in Zimbabwe have not been fully researched regarding

interest rates as the major determinant and it is vital that the gap be filled by the researcher’s

study to answer the following question. What is the effect of interest rates policy on the

financial performance of commercial banks in Zimbabwe?

1.4 Research objectives

Main objective

Ø To investigate the impacts of interest rate policy instrument on the financial

performance of commercial banks in Zimbabwe

Other Objectives

Ø To determine the effects of interest rate on net interest income of commercial banks in

Zimbabwe.

6

Ø To analyse other factors that impact the financial performance of Commercial Banks in

Zimbabwe.

1.5 Research questions

Ø What are the impacts of using interest rate policy instrument by the central bank (RBZ)

on the Financial performance of commercial banks in Zimbabwe?

Ø What are the implications of interest rates on net interest income of commercial banks

in Zimbabwe?

Ø What are other factors apart from interest rate that influence the financial performance

of commercial banks in Zimbabwe?

1.6 Research hypothesis

Null hypothesis (H0): The actions of Reserve Bank in manipulating the interest rate policy do

not have significant impacts on the financial performance of commercial banks in Zimbabwe.

Alternative hypothesis (H1): The actions of the Reserve bank in manipulating the interest rate

policy do have major impacts on the performance of commercial banks in Zimbabwe.

1.7 Assumptions of the study

Ø Findings reflected the problems which were being faced by ZB commercial bank and

how interest rate policy instrument influenced the financial performance of the

commercial bank.

Ø The fairly stable political and economic environment was to prevail in the foreseeable

future.

Ø The limitations encountered by the researcher did not negatively impact the validity of

the findings.

1.8 Significance of the study

The researcher did the research to help:

1.8.1 The researcher

7

Carrying out this research on the effects of interest rate on financial performance of commercial

banks will help the researcher to be fully equipped with ideas and technical knowhow of how

monetary policies affect financial performance of banks. It will also assist the researcher to

attain an honours degree in Banking and Finance since it is a requirement for one to graduate.

1.8.2 Academics

It will also assist other students to get information for literature review. It will assist other

academics to acknowledge the notion that interest rate policy has significant effects on the

financial performance of commercial banks in Zimbabwe.

1.8.3 The banking sector in Zimbabwe

This research will help many banks in Zimbabwe to appreciate the effects of interest rate by

the RBZ on their financial performance and how they should comply with the policy to increase

their lending capacity.

1.8.4 The Bindura University

This piece of research will be of paramount importance to the Bindura University as it will

increase the quantity of thesis therefore provides students with knowledge for their literatures.

1.8.5 The regulator

This study will assist the Reserve bank of Zimbabwe as the regulator of commercial banks in

formulating policy to control and regulate interest rates so as to achieve its macroeconomics

objective like stable prices, balance of payments equilibrium; exchange rate stability and high

employment rate.

1.9 Delimitations of the study

This research was based on commercial banks in Harare specifically to ZB financial holdings

commercial bank. Both primary and secondary data was used. Trends between 2013 to 2017

was used. The research used both quantitative data and qualitative data to support the figures;

graphs; pie charts and tables. The study was concentrating on the secondary information

extracted from Zimbabwe National Statistics Agency (ZIMSTAT) and the Reserve Bank of

Zimbabwe (RBZ) publications for the period under study. Primary data was extracted from

8

questionnaires and interviews. It was set to investigate if interest rates have an impact on the

financial performance of commercial banks in Zimbabwe.

1.10 Limitations of the study

1.There was lack of coordination from selected and targeted groups. Workers and customers

were wary of the intension of the study. However; to minimise this challenge; the researcher

highlighted on the significance of the study and guarantee confidentiality which means no

names was to be published in the study. To coordinate the selected group; the researcher

communicated effectively so as to enhance participation by every member selected.

2. Though there is time period given; reference to data and information from previous years

made as the researcher instituted and tried to use current and past data on interest rate and

financial performance. In addition, the data gathered tend to scatter or made it very difficult to

pass an objective judgement because a lot of things happened economically or politically in

this turbulent environment of the economy.

3. Getting access to undertake the research within the bank was not an easy task as banks feared

that their confidentiality would be tempered with. To reduce this limitation so as to access

information easily, the researcher used a letter from the University seeking permission to

undertake the study.

1.11 Definition of terms

1.11.1 Financial performance- is the bank’s capacity to generate new resources, from its

operations on daily basis over a given time period and it is determined by net income and cash

from operations (Poudel, 2012). It is a gauge of how a firm is profitable in relative to its total

current and fixed assets (McConnel, 2009). Performance is the capacity to sustain growth and

stability over given period (Mzumara, 2006).

1.11.2 Interest rate- According to Crowley (2007), interest rate is defined as the funds a

borrower paid on borrowed funds from a financial institution. It is the price in monetary value

in percentages compensated to lenders for borrowing (Chandra, 2005).Interest rate is the cost

of borrowing borne by borrowers (Beardshaw, et al., 2001).

1.11.3 Lending rate- The amount of interest that borrowers pay to the banks when they get

money from the banks (Beardshaw, et al., 2001).

9

1.11.4 Financial intermediation- It refers to the provision of financial services and products

that is savings and credit (Njanike, 2008).

1.11.5 Dollarization- the adoption of another official currency of another country to use as the

local currency to facilitate trade of goods and services. In Zimbabwe the Reserve Bank of

Zimbabwe adopted the US$ in 2009 (Mzumara, 2006).

1.11.6 Money supply- It is the total amount of currency in an economy that is circulating in a

given time period (Mzumara, 2012)

1.11.7 Inflation- It is a persistent rise in general price level of services and goods in an

economy for a specified time period (Mzumara, 2012)

1.12 Chapter Summary

This chapter focused on introduction of the topic. It also signified the objectives, research

questions, research hypothesis as the backbone of this research. Other issues taken note of are

scope of the study, justification of the study and limitations of the study. This chapter act as

the foundation of the research in which the whole research will rely on. As the introduction

chapter, it outlines the objectives to be achieved in the research and the research questions that

should be answered by the research in the study. All other chapters that is chapter 1 to 4 rely

on this chapter as their foundation. The next chapter outlines the literature review of the study

through theoretical review and empirical review and the gap to be filled was also identified in

the next chapter of the study.

10

CHAPTER II

LITERATURE REVIEW

2.0 Introduction

The focus of this chapter was the exploration of existing literature on the topic of study. In as

far as existing literature is concerned, researchers have conducted their researches assessing

the impacts of interest rate policy on the broader economy. This researcher was paying

attention on how the manipulation of interest rate as a monetary policy has implications on the

performance of commercial banks in Zimbabwe. The idea of this chapter was to gather the

available evidence on how the actions of Reserve bank in altering the interest rate policy

impacts the playground of commercial banks in executing their roles of serving the clients.

The monetary policy used by the Reserve Bank of Zimbabwe (RBZ) include Required Reserve

Ratio (RRR), Open Market Operations (OMO), Moral Suasion, Bank lending rate, and interest

rate (RBZ Act) but the researcher was focusing on interest rate policy specifically. The chapter

comprised of the introduction, empirical review, theoretical review, other determinants of

financial performance, indicators of financial performance, gap analysis and chapter summary

2.1 Zimbabwe current interest rate

The standard interest rate in Zimbabwe was last recorded at 9.32% (RBZ). The rate was

averaged 12.28% from 2011 up to 2018; getting an all-time maximum of 16.04% in March

2012and the lowest rate of 8.86% in September 2017 (source RBZ). The Central bank of

Zimbabwe does not have an official discount rate, but they use the weighted lending rate.

Weighted lending rate is the sum of lowest nominal lending rates weighted by specific bank’s

loan book sizes and issued by the Reserve bank of Zimbabwe (World Bank, 2017).

2.2 Theoretical review on interest rate and financial performance

2.2.1 Loanable funds theory

Under this, the rate of interest is calculated based on supply and demand of loanable funds in

the capital market (Beardshaw, et al., 2001). The nominal interest rate is determined by the

equilibrium amid demand and supply of loanable funds (Mzumara, 2006). This means that an

11

increase in demand for loanable funds would lead to rise in rate of interest and an increase in

supply would result in reduction of the rate of interest. Thus, monetary policy influences

economic activity through their implications on interest rate and investment. On more logical

note, if the economic activities are at equilibrium and there is open market purchase of state

securities by the central bank of Zimbabwe, this OMO will rise the commercial banks reserve

and increase the banks reserves (Beardshaw, et al., 2001). An increase in money supply causes

the general level of interest to fall and affects the commercial banks financial performance and

in turn spearhead investment given businessman anticipated profit (Mzumara, 2006). Loanable

funds theory postulated that a decrease in supply of money lead to rise in interest rate thereby

increasing banks’ profits (Ekpang & Uwalaka, 2015). The rising in loanable funds supply

would result in a decrease in interest rate. If both (demand and supply) for loanable funds

change, the resultant rate of interest would hinge on much on the direction and magnitude of

movement of supply and demand of loanable funds (Bernake & Blinder, 1995). The demand

for loanable funds is also produced from the government (Bernake & Blinder, 1995)

The loanable funds theory has some similar characteristics with the Keynesian theory of

liquidity-preference Theory of interest as both indicate the significance of the cash balance

preferences and the functions undertaken by the banking industry to enable safety of

investment funds (Keynes, 1936).

2.2.2 Expectations theory

The theory was developed by Lutz in 1940. He indicated that the theory is grounded on the

premise of expectations that people will have regarding the future circumstances (Lutz, 1940).

If investors predict future interest rates to be low; they would prefer to hold short term

securities and when they predict high interest rates; they will prefer to hold long term securities

(Lutz, 1940). The theory is built on the assumptions that investors have perfect knowledge

about the future short-term interest rates; there are no taxes or any other holding costs involved

and investors as profit maximises (Beardshaw, et al., 2001). Lutz concluded that a long-term

interest rate is an average of the expected future rates on short period bonds. If the long interest

rate is an average of short-term interest rates, if the short-term interest rates rise, the long-term

interest will also increase as the average will also increase (Bekaert, 1998).

2.2.3 Loan pricing theory

According to this theory; Banks cannot all the time set the high rate of interest so as to try to

maximise income from interest (Beardshaw, et al., 2001). The theory states that commercial

12

banks should consider the challenges of moral hazard and adverse selection as it is very hard

to predict the borrower type at the inception of bank rapport (Chodechai, 2004). If the bank

has decided to put too high rates of interest; it may trigger adverse selection challenges since

borrowers who are risk lovers are willing to accept the high interest rates and this may induce

the challenge of moral hazard behaviour by clients as they are likely to engage on high risky

investments (Chodechai, 2004). According to Stiglitz & Weiss (2001); it is usual that in some

instances we may not find that the rate of interest fixed by banks is commensurate with the

borrower’s risk.

2.2.4 Credit market theory

This is the neoclassical credit market theory which claims that the terms of credits clear the

market (Bernake & Blinder, 1995). If covenants are hold constant; the interest rate is the sole

price mechanism (Bernake & Blinder, 1995). In this scenario; if the credit demand increases

and a given customer supply; the rate of interest may rise and if the credit demand falls; the

interest rate will fall. According to (Bernake & Blinder, 1995) the interest premium will likely

to be higher if the risk of failure by the borrower is higher also. This may lead to depreciation

of the local currency and the central bank (RBZ) must regulate the rate of interest to increase

the borrowing cost, and the commercial banks also must act to improve their financial

performance by increasing their rates and thus lowering lending as credit becomes costly

(Mzumara, 2006)

2.3 Conceptual framework on interest rates and financial performance

Interest rate is defined as the cost of borrowing (Beardshaw, et al., 2001). The difference

between interest earned from loans and interest paid for bank deposits is called interest spread

or net interest income (Njanike, 2008). In most developing countries in Africa such as

Zimbabwe, the major driver of interest rate is the changes in price levels (inflation) (Mzumara,

2012). As the rate of inflation increases, the commercial banks try to pass the cost to the final

consumers that is clients by charging high interest rate so as to offset the inflation cost (Keynes,

1936). Inflation erodes the purchasing power parity of money, so commercial banks use

interest rate as compensation tool (Mzumara, 2012).

In addition, it is also noted that in most developing countries, interest rate is controlled and

determined by the central bank. The reason being weak market forces of demand and supply,

so the need to control the interest rates to be charged to the consumers and to protect

depositors’ interest. For example, in Kenya and Zimbabwe the government determine the

13

lending and deposit rates of the financial institution. This is because interest rate induces

investment prospects and drive economic activities, so there would be needed to control and

regulate its operations. The major function of interest rate is to mobilize scarce financial

resources to where they could be used most efficiently.

According to the RBZ Monetary Policy Statement (2017), interest rate was pegged below an

annual average of 12%. The lending interest rates were fluctuating for the past five years which

also negatively impacted the financial performance of commercial banks in Zimbabwe.

In this research, interest rate was used as the independent variable and financial performance

as the dependent variable. Financial performance was measured by the ZB’s average return on

assets (ROA) and return on equity (ROE).

2.4 Empirical review on interest rates and financial performance

Basically, commercial banks are there to play a pivotal role in the functioning of the economy.

Adebayo (2003) in Dogarawa (2012) noted that commercial banks exist to play the role of

money and financial service providers as well as credit and payment intermediations. The

Banking Act of Zimbabwe Chapter 24 subsection 6(1)(a) states that the main functions of

commercial banks are acceptance of deposits; honouring of cheques and keeping of accounts

on behalf of customers. However, the roles of commercial banks have heightened to offering

of medical aids, insurance services, assurance covers, offering of custodial services just to

mention but a few. Interest rates as a monetary policy instrument is the key primary drivers of

financial performance by financial institutions including commercial banks (Kariuki & Ngahu,

2016).

As Delfiner et al (2006) noted, lower interest rates negatively impact the performance of

commercial banks since they mainly rely on interest income as their source of revenue. If

commercial banks charges lower rates on borrowed loans, it means lower revenue which in

turn will threaten their existence and viability resulting in poor financial performance.

However, Milson (2013) argued that lower interest rates give the borrowers the appetite to

repay their loans therefore reduces the risk of non-performing loans as well as defaults in

repayment. Therefore, if the commercial banks have no non-performing loans, it means the

banks can relend to other clients thus increasing capability of expanding business hence good

financial performance of the banks.

In contrast, Flannery (1980) opined that when interest rates rise because of the actions of

14

Reserve bank (central bank), the performance of commercial banks may be affected in two

separate ways: the first one being that the banks are likely to make huge profits margin given

that customers are borrowing at the increased rate (Flannery, 1980). He further proposed that

at increased lending rates, the clients would find it difficult to borrow in the open market thus,

they proceed to demand more loans which therefore increase the loan interest rate. The

increase in the borrowing of loans would therefore affect the asset side of the balance sheet

for commercial banks as well as ultimately increasing the interest earned from these loans

thereby impacting the return on assets of commercial banks. By so doing, the performance of

commercial banks will be positively affected (Flannery, 1980). He further pointed out that

when bank rates changes, the effect on revenues or costs of commercial banks that is which

one outweighs the other depends on which side of the bank’s balance sheet is large and the

maturity rates differentials between the assets and liabilities (Flannery, 1980). For example, if

the asset side compose of items that have a short maturity period whilst the liability side have

long maturity period, it means the commercial bank will benefit from the increased bank rates

(Flannery, 1980).

According to Gilchrist (1994) banks’ lending does not decline when policy is constricted. He

concluded that total lending reduction is a result in reduction consumer and real estate loans.

However, according to Sergius (2015), lending may respond to a constriction and tightening

of monetary policy as they postulated that total loans and business loans at small commercial

banks while at large commercial banks remain unaffected.

According to Amidu (2006), for monetary policy to function through a credit channel, not only

must there be dependent debtors, but monetary policy must also directly affect banks readiness

to lend. He added that impact of monetary policy on lending behaviour is stronger for banks

with less liquid balance sheets. Tightening of monetary policy means bank transactions

deposits fall directly leading to fall in bank loans thereby affecting the financial performance

of commercial banks negatively (Amidu, 2006).

By depressing the interest rates, the commercial bank could hope to encourage economic

activity by reducing the borrowing cost and hence increasing the demand for loanable funds;

whilst, in opposition; rising interest rates discourage borrowing (Beardshaw, et al., 2001). This

means that the bank can make huge profits when interest rate is low as many people will be

able to borrow and when the interest rate is high; customers will be scared away hence the

bank will perform badly financially. They further (Beardshaw, et al., 2001) argued that higher

15

interest rates may attract foreign funds inflows thus making it more problematic to control the

money supply by the central bank as this will increase demand for currency and makes

importing cheaper meaning that exporting will be expensive ; accordingly creating a current

account deficit on the balance of payments and this will negatively affect the performance of

commercial bank.

Interest rates changes impact the banking institution’s earnings by shifting the sensitivity of

the interest income and costs (Njanike, 2008). He further added that these changes also

influence the underlying value of a bank’s liabilities, assets, and off-balance sheet instruments

as the present values of cash flows will also change (Njanike, 2008).

In addition, regardless of interest rate, good management of commercial banks improve

performance of the bank while poor management will result in failure and collapse of many

banks (Njanike, 2008). Good management lead to good corporate image and goodwill and

hence the ability to lure deposits form surplus units in the economy (Njanike, 2008). Moreover,

good track record of management mean that the bank will not face the challenge of hard capital

rationing. Hard capital rationing is when a bank finds it difficult to raise funds from external

sources such as from International Monetary Fund (IMF) and World bank or from the central

bank. Thus, improve the financial performance of commercial banks in Zimbabwe.

According to Enyioko (2012), the interest rate of commercial banks sometimes may not be

necessarily being an indicator of financial stability hence financial performance. This means

that interest rate is not the major determinant of financial health and wellness of the bank. He

further added that for banks to be effective and efficient, the interest rates should be determined

by the market forces of demand and supply (Enyioko, 2012).

Mwangi (2014) undertook a research on the effect of lending interest rates on financial

performance of deposit taking micro finance institutions in Kenya where he found out that

loan interest and advances had a significant effect and is positively correlated to interest

income. This means that in economic environments where lending interest rate is characterised

by rapid increase as compared to the interest paid on deposits, the interest rate spread will

widen. Then reason being the quicker sensitivity of lending rates to any changes in the

turbulent macro environments. Lending rates tend to be elastic while deposits rates tend to be

inelastic. By doing so, the commercial banks tend to yield high profits due to interest rate

spreads in terms of Return on Equity and Return on Assets. Thus, this would improve and the

interest income of commercial banks. (Mwangi, 2014)

16

In increase addition, there is an inverse relationship between interest rates and demand for

loanable funds in Zimbabwe since Independence (Makochekanwa, 2009). According to his

findings, they indicated that interest rates and inflation are major factors behind variations in

the demand for loanable funds which determine the financial viability of commercial banks.

.

2.4.2 Other Determinants of Financial performance of commercial banks

The financial performance of commercial banks in Zimbabwe is influenced by different factors

like interest rates; gearing; firm size; economic factors and risk, to mention but a few. The

study was focusing on lending interest rate factor on commercial banks.

2.4.2.1 Lending interest rate

The highest revenue of commercial banks is being generated from interest income bank

lending thus commercial banks with quality portfolios of loans incline to have an upward

growth because of good financial performance (Amidu, 2006). According to (Saunder,

1995)lending interest rate affect the overall economic activity of the country including the

movement of financial services, goods and financial assets. Interest rates relates to the present

value to the future value of money.

2.4.2.2 Leverage or gearing ratios

Gearing also has an implication on financial performance of commercial banks as indicated

by (Rasheed, 2010)that firms (commercial banks) with higher profit rates would remain low

geared because of their ability to use their own sources of finance (Randal, 1996). However;

commercial banks which relies mostly on debt funding have the high risk of financial risk and

bankruptcy of the bank (Woods & Sangster, 2005). Total assets of the banks positively affect

the banks financial performance as a result of low financial risk exposure.

2.4.2.3 Firm’s size

Large companies have financial benefits hence have a positive impact on financial

performance of commercial banks as they have high access to labour, capital, entrepreneurship

and land (factors of production) and cheaper funding (Saunder, 1995). However; small firms

do not have enough access to funds and usually they get funds at higher rates thereby exposing

the firm to financial risk hence poor financial performance of the firm.

2.4.2.4 Economics factors

The economic factors like inflation, balance of payments; employment rate, exchange rate and

economic growth have an impact on financial performance of commercial banks (Mzumara,

17

2012). Stable economic factors result in positive and sound financial performance of

commercial banks. However, if there is economic meltdown (such as cash crisis) the

commercial banks may likely to face challenges hence negatively affect the financial

performance as it would be difficult to lend funds (Mzumara, 2012).

2.5 Financial performance indicators

2.5.1 Return on Equity (ROE)

It is an investment financial ratio that determine how much profit a bank can recoup as

compared to the total equity employed by shareholders of the firm (Randal, 1996). Banks with

high ROE are better company in terms of profit hence high performance. It is calculated as

Net Income after taxes divided by Total capital employed (Randal, 1996).

2.5.2 Net Interest Margin (NIM)

This is the interest spread which is the difference between interest income obtained by

commercial banks and the amount of interest paid by banks such as the one on deposits (Gul,

et al., 2011). This measure and depicts the gap between income received from interest on loans

the cost of the borrowed money. It can be calculated as interest income divided by total

earnings (Gul, et al., 2011). Banks with high NIM indicates high performance and those with

low shows low performance (Ongore & Kusa, 2013).

2.5.3 Return on Assets (ROA)

This financial ratio is also the most important measure of bank’s financial performance in

terms of profitability (Khrawish, 2011). It can be calculated as Net Income divided by Total

assets. The bank with high ROA indicates high performance as they will be efficiently utilising

company’s assets to generate income (Randal, 1996). This will help to measure the bank’s

financial performance.

2.6 Gap Analysis

Many researchers have done their studies assessing the impacts of interest rate policy on the

performance of banks focusing on many issues of financial performance but some of them

have little conceptual contribution on the Zimbabwe case. Many researchers did their study in

the broad economy and in stable economies. This motivated the researcher to study more on

the interest rate policy impacts on financial performance of banks in an unstable economy with

volatile markets. It was to the attention of the researcher to study this topic as interest rates

were fluctuating hence the need to examine how this can affect the financial performance of

18

commercial banks in Zimbabwe as some research on this topic were undertaken where macro-

economic environments were stable. Thus, the purpose of this study shall be to find the impacts

interest rate brings to the banking industry, commercial banks particularly.

2.7 Chapter Summary

As indicated by the literature review above, there are so many factors that influence the

financial performance of commercial banks. The chapter also looked at other researches that

have been done by others to explain the relationship between interest rates and financial

performance, and the different theories of interest rate that explain the relationship between

interest rate and financial performance of commercial banks. It also covered the gap analysis

of the study which was filled by the research findings. This chapter also explored the indicators

of financial performance which the researcher used to measure financial performance such as

return on equity and return on assets. The next chapter outlines the research methodologies

that is how to collect data and sampling techniques.

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CHAPTER III

RESEARCH METHODOLOGY

3.0 Introduction

The aim of this chapter was to provide information and data in reference to the methodology

through which was collected and analysed. The chapter was much centred upon data collection

methods used to gather information for this dissertation to provide the solutions to the

population and sampling, hypothesis testing, research design, and the methods of research

applied. Methodology mean the theory of ways research must be done (Saunders, et al., 2016).

This chapter is a foundation to chapter four as it outlined the research instruments to collect

data and procedures to analyse the data.

3.1 Research Design

In order to effectively investigate the relationship between interest rate and financial

performance of commercial banks, the researcher decided to employ use of more of

quantitative information. Quantitative research is defined as numerical values got from data

analysis procedures (Saunders, et al., 2016). Some aspects of qualitative information were

used to support quantitative information gathered, for example responses from bank teller on

how they carry out their work to improve financial performance. The researcher used the Likert

scales to accurately measure the variables under research by the researcher since Likert scale

enables the gathering of information at once for different variables and hence produces multiple

outcomes. The collected qualitative data was translated in descriptive statistics. To effectively

measure the relationship between interest rate and bank performance, the researcher used the

regression analysis method to find the relationship with interest rates as the independent

variable and financial performance as the dependent variable.

20

3.2 Population and sample

3.2.1 Population of the study

Population refers to the aggregate number of units from which one can collect data such as

artefacts, individuals or organisations (Kothari, 2008). The research was conducted focusing

on ZB bank financial holdings in Harare Central Business District.

3.2.2 Sample of the study

A sample is a set of population and it therefore fully represent the whole population under study

(Kothari, 2008). The sample of the study of the researcher was comprised of ZB bank clients

and workers as well as the management of the bank. The research sample was selected from

ZB commercial bank. The researcher used different sampling techniques which comprises of

probability and non-probability sampling to select a sample size. These methods include the

following;

3.2.2.1 Cluster sampling

This is the technique where members of the population are subdivided into unique subgroups

before a sample has been undertaken (Cohen, et al., 2011). From the subgroups, a whole cluster

is then picked randomly to represent the sample thus in the case of the researcher, ZB bank

Financial Holdings in Harare CBD has been chosen to represent the population under the

research.

3.2.2.2 Convenience sampling

This method uses the participants which are readily available and those that are willing to take

part in the study (M.S.MacNealy, 1999). This method falls under the non-probability group.

Its main benefits to the researcher was that of likely reduction in costs and the proximity of the

respondents.

3.2.2.3 Stratified random sampling

This refers to the splitting of the population into different layers or strata which are not similar

to each other and cover the whole population (Cohen, et al., 2011). The researcher also used

this sampling technique so as to suit the two different groups of bank clients and its employees

21

and as a result of this samples were drawn from two distinctive strata and were combined to

have one sample for the study of 70 respondents in which 60 managed to reply.

3.3 Research instruments and data collection procedures

Research instruments can be referred to as the tools and different ways used by the researcher

to have access to the information under the study (Mugenda & Mugenda, 2003). It would be

difficult for the researcher to get data without using these mechanisms and ways. The most

common used instruments were the research interviews to get first-hand information and the

questionnaires to obtain the opinions of respondents on interest rates and financial performance

of commercial banks. The researcher used both the quantitative and qualitative methods of

collecting data as the qualitative methods were used to support the quantitative one in form of

explanation.

The researcher also collected data from different sources to improve the authenticity of the data

gathered. The data was collected from primary and secondary sources. Primary data can be

defined as first hand data which can be directly and firstly collected from the respondents

targeted for the study of the researcher (Saunders, et al., 2016). On the other hand, secondary

data is the one obtained from second hand sources like publications such as newspapers,

televisions and journals (Saunders, et al., 2016).

3.3.1 Primary Data

This is the source that provide first-hand information, and this can be achieved through

interviews (personal) and self-administered questionnaires with different arms of the

commercial bank such as with ZB Bank Retail Branch Management, Credit Departmental

heads, Corporate Banking and Queries department, to mention but a few. The main reason for

using primary data was to improve the accurateness of research as primary data is up to date

and subject to any changes thus made it very reliable to the researcher to use as the data was

directly obtained from targeted population like in those department that deals with interest rate

risk management. On the other side of the coin, primary data proved to be costly and difficult

to obtain from Banks because of its confidentiality as the researcher had to travel for interviews

but in order to curb this challenge, the researcher equipped himself with money so that his

findings were not affected. The primary data can be obtained from a questionnaire and personal

interviews.

22

3.3.1.1 Questionnaires

These are lists of questions that are extended to the research respondents for feedback to the

researcher on respondent’s opinions (Clough & Nutbrown, 2012). There are different authors

which defined questionnaires. Questionnaires are primary data collections techniques where a

single person is instructed to answer a set of predetermined questions in the order (Saunders,

et al., 2016). The questionnaire includes the closed questions and open questions which has to

be attempted by the respondents. It is where an individual record their answers on their own

(Clough & Nutbrown, 2012)whereas Cohen et al (2011)indicated that a questionnaire

encompasses interviews through either face to face or through a telephone.

The researcher decided to use the questionnaire to obtain primary data because of its

convenience to the respondents as it provides enough time for them to attempt all questions

and hence reduces the chances of bias as the quality of responses improves as the respondents

get enough time to read and understand all questions (Clough & Nutbrown, 2012). In addition

to this, questionnaires can also be used for future references as they keep records. In this

research, selected respondents from ZB financial holdings were tasked to answer the questions

through airing out their opinions, feelings, perceptions and views regarding the effects of

interest rates on commercial bank’s financial performance. The questionnaires were drafted in

accordance and in reference to the research objectives and questions so that the researcher

would not go astray and be able to achieve the research objectives outlined earlier.

Questionnaires were also administered to the different ZB Holdings stakeholders such as loan

officers, bank tellers, supervisors and clients, to mention but a few. For ratings questions, the

researcher used the Likert scale.

Use of Likert scale

This can be defined as the psychometric response scale used in questionnaires to get the extent

of agreement or disagreement with a supposition or a blend of suppositions (Cohen, et al.,

2011). It consists of a list of statements in which the respondent is required make his or her

opinion on every question (Nisbert, et al., 2005). Each category of response is represented by

a given code on the Likert scale with 5 meaning the highest rank of the statements of strongly

agree whereas 1 as the least rank representing or denoting that the respondents strongly

disagree with a given question or statement (Cohen, et al., 2011). The classification of the

responses is shown below in table 3.1.

23

The Likert scales

Table 3.1

Response category Code allocated

Strongly agree 5

Agree 4

Neutral 3

Disagree 2

Strongly disagree 1

3.3.1.2 Personal interviews

It can be defined as a purposeful discussion two or more people (Clough & Nutbrown, 2012).

Interviews can be categorized into three that is structured interview, semi-structured and

unstructured interviews (Cohen, et al., 2011). However, in this research the researcher was

using structured interview as it gives the possible and good responses which will be easily

analysed as compared to the semi-structured and unstructured interviews. The interviews were

done face to face with the managers to get their opinions on the impacts of interest rate and

financial performance of commercial banks. These managers were booked in advance for

interviews to conduct the interviews when they were free.

3.3.2 Secondary Data

Secondary data is obtained from publications like the Reserve Bank of Zimbabwe’s

publications and the annual reports from the commercial banks in noting trends in profitability

and interest rates from the period under study (2013-2017). The types of secondary data

variables collected are interest rates, return on asset and return on equity. The researcher used

this source of data to have more data for analysis to give accurate findings (Clough &

Nutbrown, 2012). However, the main challenge of secondary data is that it is subjective. This

is because it is not the first-hand information, so it could be written in a biased way which will

hinder the accuracy of the research. However, to counter this challenge, the researcher red

extensively wide from secondary sources like textbooks so as to be fully equipped with relevant

information before application in the study.

24

3.4 Validity and reliability

3.4.1 Pilot test of Instruments

The researcher employed different instruments to gather data for the study and all the

instruments were successful as the instruments complemented each other in information

gathering. The researcher did a pilot test before dispatching of questionnaires to respondents.

Pilot test can be defined as the situation when the researcher investigates on the time lag that

respondents would require to complete checking all the questions on the Questionnaire (Cohen,

et al., 2011). The researcher took a sample of 6 questionnaires and handed to selected Banking

and Finance students to check and test the time lag needed by respondents to complete all the

questions and this helped the researcher to determine the validity and reliability of the

questionnaire. Thus, it helped the researcher to remove some data which were not valid, reliable

and relevant.

3.5 Model Specification and Parameter estimation

With reference to the suggestions and views in chapter 2 regarding to the empirical and

theoretical review on the impacts of interest rates on financial performance of commercial

banks in Zimbabwe, the researcher utilized the following linear regression model. The model

indicated that financial performance as measured by return on asset is affected by interest rates,

real gross domestic product (GDP) and growth of money supply.

The model is given by the following equation;

ROA=β1RIR+ β2MSG+ β3INFL+ µ

Where:

ROA: Return on Asset

RIR: Real interest rates

MSG: Money supply growth

INFL: Inflation

µ: The random error term

where;

25

β1, β2, β3 and are regression coefficients

3.6 Justification of the variables for the model

3.6.1 Return on asset (ROA)

The data for this variable was extracted from ZB financial statements and was used as a

proxy to represent financial performance.

3.6.2 Interest rates (RIR)

This is the second variable in the regression equation model. It can be defined as the cost of

borrowing loanable funds or capital over a specified time period (Njanike, 2008). High interest

rates proved to have negative effects to investments as it makes borrowing to be costly and this

scares away borrowers (Beardshaw, et al., 2001). However, it would be attractive for the

depositors as they would get higher income in terms of interest for their deposits. This denotes

that there is a negative relationship between interest rates and financial performance of

commercial banks. The researcher also obtained the data from the ZIMSTAT and RBZ. The

researcher used the interest rate as the variable that affect financial performance because the

interest rates were fluctuating in Zimbabwe, so it motivated the researcher to investigate if

these changes has an impact on the financial performance of commercial banks in Zimbabwe.

3.6.3 Inflation

This can be defined as the general rise in price levels in an economy (Beardshaw, et al., 2001).

The researcher used the consumer price index (CPI) as a proxy for inflation (Makochekanwa,

2009). During inflationary periods, banks increases the cost of borrowing to cater for the

lending cost and by doing so reduces the commercial bank financial performance as few

borrowers would be able to gets loans (Mzumara, 2012). The data for inflation used was also

obtained from ZIMSTAT price section between 2013 to 2017. Inflation was used as the factor

that influence financial performance in Zimbabwe because the country was experiencing

deflationary and inflationary during the period under study and thus it was to the attention of

the researcher to use this proxy as a variable as inflation both determines interest rate and

bank’s performance.

3.6.4 Money supply growth (M2)

26

This is the aggregate money in circulation injected by the central bank (RBZ) through its

policies like interest rates, Open market operations, moral suasion, to mention but a few

(Beardshaw, et al., 2001). The main objective of the government in this scenario is to equate

the money supply and the money demand in an economy, other things being equal (Mzumara,

2012). There is a positive relationship between loanable funds and growth of money supply as

it would be cheaper to borrow if there is excess money in the economy (Beardshaw, et al.,

2001). In this study, the researcher opted to use the M2 to represent the money and quasi-

money supply. The data were obtained from RBZ publications between the period under study

that is 2013 to 2017. The money supply growth used was broad money that is M2. M2 is an

important statistical proxy because it depicts and clearly shows the underlying strengths and

stability of the economic activities in a country like Zimbabwe (Mzumara, 2006). The

justification of this variable as argued by Favero & Spinelli (1999) is the general price level

has a strong relationship with broad and wider monetary aggregates like M2 thus it is the best

proxy for the researcher to use money supply growth (M2) in this study.

3.7 Data Presentation and Data Analysis procedures

This study consisted of data obtained from primary and secondary sources. To provide an

extensive analysis and presentation, the researcher makes use of the Excel, word and IBM

SPSS for statistical presentation of the research. IBM SPSS was used to represent regression

and correlation analysis and other variables.

In addition, the researcher also used tables to depict the relationship between data obtained for

evaluation purposes. The researcher also applied in the next chapter the pie charts and graphs

for better illustration of the 2 variables under study that is interest rates and financial

performance of commercial bank (Mugenda & Mugenda, 2003).

In reference with the research design above, data was evaluated and analysed using the

regression and correlation model from the secondary data that is publications from ZB

Financial Holdings (financial statements) and RBZ publications in form of monetary policies

(to get average annual interest rates). These data were presented in tables in the next chapter in

forms of matrix (correlation) for good presentation.

In qualitative analysis, the researcher was analysing the findings in terms of other services that

cannot be quantified like customer services in the banking hall. The researcher was thus mainly

27

focusing in descriptions, hypothesis testing and comparisons so as to prove whether interest

rates improve financial performance of commercial banks in Zimbabwe.

3.8 Chapter summary

The purpose of this chapter was to lay out the methods and techniques that were used to

successfully conduct this research. The chapter comprises of research design, sample and

population under the study, sampling techniques and the procedures and instruments that were

used to in collection of data. The information from this chapter was then used for presentation,

analysis and discussion of data in chapter four.

28

CHAPTER IV

DATA PRESENTATION, ANALYSIS AND DISCUSSION

4.0 Introduction

This chapter is focusing on presentation, analysis and discussion of the research findings

gathered from the case study under study that is ZB financial holdings through questionnaires

and interviews. The presented data was analysed through use of pie charts, line graphs, bar

graphs and tables. The regression analysis and correlation used interest rate as the independent

variable and financial performance as the dependent variable.

4.1 Response rate

The researcher targeted a total population of seventy with thirty-five bank employees and

thirty-five customers respectively to produce accurate results represented by the population.

There were also eight interviews undertaken and scheduled for managers and departments

heads of the bank.

1.Questionnaire response rates

A total of seventy questionnaires were administered to employees and customers and sixty-

three of them were responded to translating to 90% response rate and a non-response rate of

10%. Thirty-five of the questionnaires were administered to bank customers and thirty-two of

them were collected translating to a response rate of 91.43% and a non-response of 8.57% rate.

The other thirty-five which were distributed to bank employees resulted in thirty-one of them

being returned which is 85.57% response rate and non-response rate of 11.43%. These rates

(response) reflect the true representation of the whole population as the response rate should

be above 50% (Bryman & Bell, 2003).

The following table, table 4.1 provides a detailed summary of the response rate to the

questionnaires.

29

Table 4.1

Respondents Questionnaires

send

Questionnaires

answered

%

response

Loan officers and tellers 20 17 85%

Supervisors and accounts staffs 15 14 93.33%

Individual clients 25 22 88%

Company clients 10 10 100%

Total 70 63 90%

N=63

Source: Primary data (Questionnaires) 2018

Out of seventy questionnaires administered, sixty-three were answered completely. This

indicates an approximate response rate of 90%. The contribution of each category to overall

percentage is shown below.

30

Source: Primary data

Figure 4.1

2 Interview response rate

The researcher also had the change to interview some branch managers and other credit

managers who had an understanding and appreciation of the effects of interest rates on their

financial performance. Out of eight interviews scheduled, seven were successfully interviewed

resulting in 87.5% response rate. This has been diagrammatically shown below.

100%

88%

93,33%

85%

75% 80% 85% 90% 95% 100% 105%

company clients

individual clients

supervisors and accounts staffs

loan officers and tellers

% RESPONSE

RE

SP

ON

DE

NT

SResponse rate on questionnaires

Response rate on questionnaires

31

Fig 4.2

Source: Primary data (Interviews)

4.2 Analysis and Presentation of responses to questions

This section seeks to explore the primary data gathered via a questionnaire. The researcher

used the approach of question-to-question to analyse the gathered data. The participants from

ZB financial holdings were issued with questionnaires comprising of closed and open questions

to attempt basing on their own independent judgement, insight and mind of each given

question.

4.2.1 Factors affecting financial performance of commercial banks

To conclude this research, the researcher must determine the major determinants that influence

financial performance of commercial banks in the economy. These factors were according to

the weight assigned to each factor by respondents. This can be shown by the table below.

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

90,00%

100,00%

managers

% r

esp

on

se

category

% response

32

Table 4.2

Factor Total respondents % of total

Interest rate 18 28.57%

Gearing level 8 12.70%

Money supply 23 36.51%

Inflation 14 22.22%

Total 63 100%

Figure 4.3

Source: Primary data

As portrayed above on the pie chart, 36% of the total respondents of 63 believed that money

supply poses a great influence on the financial performance of commercial banks whereas

interest rate (29%) is the second factor with greater impact on commercial bank’s performance.

Inflation has also a major impact on financial performance of commercial banks whereas

gearing ratio and firm size poses little impact on the performance of commercial banks.

According to these primary findings, it can be safely concluded that interest rate has a major

influence on financial performance of commercial banks in Zimbabwe as the cash crisis is

looming in the country and distorted exchange rates leading to fluctuations in interest rates

which negatively affect financial performance of commercial banks.

money supply

36%

interest rate

29%

inflation

22%

gearing level

13%

Factors affecting financial performance of

gearing level

s affecting financial performa

commercial banks (n=63)

money supply interest rate inflation gearing level

33

As shown below, money supply has the greatest impact on financial performance of

commercial banks, followed by interest rate and inflation respectively. Firm size has least

impact on financial performance among the factors listed in the questionnaires followed by

gearing ratio. This analysis helped to find the objective of the researcher of analysing other

factors that impact the financial performance of commercial banks.

Figure 4.4

4.2.2 response on customers who have ever applied for a loan

According to the research findings on number of people who have once applied for loans in

commercial, 25 out of 32 customers indicated they have once applied translating to 78.13%

and 21.87% have never applied. This was undertaken to determine the credibility, reliability

and validity of the study. The findings proved to be effective as 78.13% denoted that they have

applied before for a loan. Findings of this study are depicted below.

0%

10%

20%

30%

40%

50%

60%

70%

80%

money supply interest rate inflation gearing ratio firm size

level of influence for each factors affecting of influence for each factors affe

financial performance (n=63)

greatest impact greater impact great impact significant impact least impact

34

Fig 4.5

4.2.3 factors considered by customers when applying for a loan.

In his study, the researcher investigated on possible factors customers (both individual and

company) consider before applying for a loan in a commercial bank. Out of 32 customers, 13

of them consider interest rate charged on the loan which could also determine their benefit

yielded from the loan. 9 considers economic situation whereas 5 and 2 considers quality of

loans and repayment period respectively. This can be shown below by the table in percentages.

Table 4.3

Factor considered Total respondents % of total

Interest rate 13 40.63%

Time period 3 9.38%

Economic situation 9 28.13%

Quality of loans 5 15.63%

Other 2 6.25%

Total 32 100%

Source: Primary data

These findings can be clearly depicted by the diagram below,

applied

78%

never applied

22%

responses on customers who have applied on customers who ha

for a loan (n=32)

applied never applied

35

Figure 4.6

Source: Primary data

From the findings above, it can be concluded that most customers are now considering cost of

borrowing due to the turbulent environment in the economy before take loans. This help them

to choose banks with low interest rates. This means that interest rates have an influence on

financial performance since it determines the amount to be borrowed by customers hence a

positive relationship with performance as borrowing depends on cost of borrowing according

to individual customers. In addition, some customers (company) listed other factors they

consider which were not given by the researcher such as the amount to be advanced as loan,

capital adequacy of the bank and its management.

4.2.4 Responses on clients who switched banks regarding to loan issues

The researcher undertook a study on number of clients who switched from one bank to another

commercial banks on loan grounds so as to determine the factors which drives or pull them to

choose another bank and to assess if interest rate bear an influence in these switches. According

to the findings 24 switched the banks translating to a higher percentage of 75% whereas those

which did not switch only constitute 25% (only 8 in the population). Thus interest rate has an

impact on the financial performance of commercial banks in Zimbabwe. This can be shown by

the bar graph below.

0,00%

20,00%

40,00%

60,00%

80,00%

100,00%

120,00%

interest rate time period economic situation quality of loans other

Response on factors to consider when onse on factors to consider w

applying for a loan (n=32)

individual customers companies

36

Figure 4.7

Source: Primary data

In the questionnaire, the researcher provided possible reasons for switching to other

commercial banks and the other option to choose “other” as some were outlining other reasons.

The findings of this were shown below in the table.

Table 4.4

Reason individual % of

individual

Company % of

company

% of

total

reason

Interest rate 10 66.66% 5 33.33% 46.87%

Time to repay 1 50% 1 50% 6.25%

Non-availability of loans 5 50% 5 50% 31.25%

Other 3 60% 2 40% 15.63%

Source: Primary data

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

switched never switched

75,00%

25,00%

N U M B E R O F C U S TO MER S W H O S W I T C HE D

B A N KS ( N = 3 2 )

number of customers who switched banks

37

Source: Primary data

Figure 4.8

According to the findings from a questionnaire, 15 out of 32 have been switched from their

previous banks as result of high cost of borrowing. Some indicated that they switched from

prestigious banks like Barclays bank (now First Capital bank) and Standard Chartered bank

between 2013-2017 as a result of high interest rate of borrowing as they could not afford and

hence switched to ZB bank which they believed they charge low rates of interest. 10 indicated

that they switched because their banks were failing to issue out loans hence, they opted to

choose viable bank that is ZB Holdings. In addition, 5 other customers specified other reasons

apart from the ones provided in the questionnaire. Some indicated that they switched as a result

of little or insufficient funds in their accounts as they could not meet the minimum cash

requirements prescribed by the bank. On the other hand, some clients noted that they switched

in search of hard currency to sustain their living so as avoid the three-tier pricing system which

charges high prices on mobile money or electronic transfer than cash hence clients opted for

ZB Holdings where they believe they can easily access hard cash in this cashless economy.

From this finding, the researcher can safely indicate and conclude that in Zimbabwe interest

rate is a major determinant of bank’s financial performance. This is because high interest rates

result in mass exodus of customers to other banks hence negatively impact the return on

investments of commercial banks as indicated in the findings above. Low interest rates lures

customers as evidenced by large percentage of customers who switched to ZB bank in search

66,67%

50% 50%

60%

33,33%

50% 50%

40%

HIGH INTEREST RATE LONG REPAYMENT PERIOD NON AVAILABILITY OF

LOANS

OTHER

% R

esp

on

se

reseaons for switching

response on why customers switched banks

(n=32)

individual customers company customers

38

for greener pastures that is low cost of borrowing. This argument and finding on low interest

rates on profitability is in line with the findings and empirical review of Milson (2013) who

also argued that low rates of interest increases the profitability of commercial banks as the bank

would able to retain all its customers and able to acquire new customers. This can also help to

conclude that financial performance is affected by interest rate fluctuations.

4.2.5 Period while the respondents were employed at ZB Financial Holdings

The researcher gathered data on number of years the employers were at work so as to determine

the experience and knowledge of the workers about the effects of interest rates on financial

performance of commercial in Zimbabwe. Out of 31 respondents, 15 had an experience

between 5-10 years, 9 had experience of more than 10 years and 7 had experience of less than

5 years. The statistics of this study is well presented in the table below in percentages.

Table 4.5

Experience (Years) Respondents % of respondents

0-5 7 22.58%

5-10 15 48.39%

10+ 9 29.03%

Total 31 100%

Source: Primary data

The findings were further analysed and simplified by the pie chart below.

39

Figure 4.9

Source: Primary data

As indicated above, about 77.42% of the respondents have been employed with ZB bank for a

period of at least 5 years whilst 22.58% have been employed by the company for less than 5

years. Since most of the employees have been with the bank for at least 5 years, this denoted

that the data obtained was relevant and valid as these respondents had a vast experience to

observe the impacts of interest rates on financial performance of commercial of commercial

banks.

4.2.6 Response on the relationship between interest rates and performance of

commercial

This was undertaken so as to observe what respondents think about on the relationship that

exist between interest rates and financial performance. Out of 63 respondents, 53 (84.13%)

shared the same sentiments that a relationship does exists while 10 (15.87%) respondents

disagree with the notion as they believe that financial performance is driven by money supply

in the economy. This can be clearly shown below diagrammatically.

As depicted below, it can be concluded that interest rate affects financial performance of

commercial banks as it determines the cost of borrowing. According to the survey, 84.13%

agreed with the notion that interest rate is a major factor of determining bank’s performance.

0-5 years

23%

5-10 years

48%

10+ years

29%

Response on experience at work (n=31)

0-5 years

5-10 years

10+ years

40

Figure 4.10

Source: Primary data

4.2.7 Responses on the type of relationship that exist between interest rates and

financial performance.

The researcher listed on his questionnaire whether interest rate has a negative consequence on

financial performance of commercial to assess their views. The findings of this study whether

they agree with the statements is shown below in the table.

Table 4.6

Decision respondents % to total respondents

Strongly agree 34 53.96%

Agree 16 25.40%

Neutral 1 1.59%

Disagree 5 7.94%

Strongly Disagree 7 11.11%

Total 63 100%

Source: Primary Data

This table can be further interpreted by a way of diagram as indicated below;

0,00%

20,00%

40,00%

60,00%

80,00%

100,00%

agree disagree

Responses on the relationship between Responses on the relationship between

interest rates and financial perfomance and financi

(N=63)

Responses on the relationship between interest rates and financial perfomance

41

Figure 4.11

Source: Primary data

As graphically depicted above, 53.96% strongly agree that interest rate bear a negative

influence on financial performance, 25.40% agree while only 1.59% was neutral. About

11.11% strongly disagree whilst 7.94% disagree. Those who disagreed and strongly disagreed

believe that there is a positive correlation between interest rates and bank’s financial

performance as financial performance improve if rates of interest increase. Those who disagree

or strongly disagree were sharing the same thoughts with (Flannery, 1980) as already indicated

in literature review that he believed that interest rates had a positive relationship with financial

performance. His argument was that, if customers borrows at higher interest rate, the bank’s

interest income will also increase leading to better financial performance. However, most of

the respondents agreed that interest rates have a negative relationship with bank’s financial

performance. This means as interest rates increases, few customers borrow money leading to

decline in bank’s return on assets (ROA) and investments (ROI). From these findings, the

researcher can safely conclude that the relationship between interest rate and financial

performance does exist and its negative meaning interest rate (independent variable) negatively

correlate with bank’s financial performance (dependent variable). This notion agrees with the

findings of Beardshaw et al (2001) who also believed that interest rate is negatively correlate

to financial performance. The argument was that rising lending rates increases the cost of

borrowing hence discourages bank customers from taking out loans. In other words, they

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

strongly agree agree neutral disagree strongly disagree

% O

F R

ES

PO

ND

EN

TS

CATEGORIES OF RESPONDENTS

responses on whether interest rates has a

,00%

responses on whether interest rates has a

negative effect on bank performance (n=63)

respondents

42

argued that as interest rates increases, customers will find it difficult to borrow hence the

interest income will be reduced.

4.3 Analysis and presentation of data from interview questions

As previously alluded in the research objectives that one of the objectives of this study is to

investigate the impacts of interest rates on income of commercial banks in Zimbabwe, the

researcher resorted to interview to have accurate answers in relation to the fluctuations in ZB’s

attributable income from 2013-2017.

All interviewed managers and loan officers have the same thoughts and sentiments about the

impacts of interest rates on commercial banks of Zimbabwe. They believed that interest rate

increases the interest income of the bank and hence improves its net income flows leading to

high profit margins. As the customers borrows more loans, the interest income will also

increase but they said however in the current situation customers are nomads meaning they are

now easily switching to other banks where there is low rate of interest. They pointed out that

in the long run increase in interest rate will subsequently decreases the interest income as clients

will opt for other banks. This is in conventional line with the findings of Mwangi (2014 who

also found out that interest rate is positively correlated to interest income. He found out in his

research that interest rate spread increases the interest income of the commercial banks hence

its profitability and this drew the same conclusion with this topic under the study.

The relationship between interest rate and income of the bank is clearly depicted by the graph

below.

Fig 4.12

Interest income

interest rate

43

As shown above, as interest rate increases, the interest income initially increase but started to

decrease as consumers would switch to other banks with low borrowing cost. The demand for

loans is hence elastic as consumer quickly respond by a large proportion to any changes in

interest rates.

From the interviews again, the researcher found out that banks consider different factors when

advancing loans such as capital of the borrower; economic conditions and purpose of the loan

and the amount to be borrowed. The researcher also noted that banks could increase their

performance even if interest rates fluctuates by use of advanced technology which help to cut

administration and operational costs and to withstand competition. This was found out from

the interviews undertaken.

4.4 Analysis of results from secondary data

4.4.1 Correlation and regression Analysis

The correlation of the dependent variable (financial performance as measured by its Average

Return on Assets and Return on Equity) and independent variables (interest rate which is the

interest charged on loans) are shown below. The researcher used return on assets and return on

equity to measure the financial performance. The return on assets for ZB bank from 2013-2017

is shown by the trend below.

Table 4.7

Year Average ROA

2013 0.82%

2014 -2.68%

2015 2.16%

2016 2.32%

2017 2.98%

Source: Zb bank websites (www.Zb.ac.zw)

As indicated below, the Average return on assets (ROA) of ZB bank was fluctuating in the

under the study. The highest return was in 2017 of 2.98% and the lowest of -2.68% was

recorded in 2014. These fluctuations motivated the researcher to find out if interest rates have

any influence and hence the use of regression and correlation analysis to find out the

relationship that co-exist between these 2 variables.

44

Figure 4.13

Source: Secondary data

Trend analysis of return on equity (ROA)

Table 4.8

Year Return on Equity (ROE)

2013 -0.42%

2014 -13.40%

2015 12.55%

2016 13.44%

2017 16.28%

Source: www.zb.ac.zw

As shown above, financial performance of ZB bank was fluctuating during the period under

study as shown by return on equity. In 2013 ROE was -0.42% and it further decreased in 2014

to -13.40%. The ROE then increased to 12.55% and further to 13.44% in 2016. ROE was high

in 2017 where it reached 16.28%.

These findings from publications can be further detailed in the trend graph below,

-3,00%

-2,00%

-1,00%

0,00%

1,00%

2,00%

3,00%

4,00%

2013 2014 2015 2016 2017

% o

f R

OA

Years

trend analysis of ZB's Average Return on Assets (ROA)

trend analysis of ZB's Average Return on Assets (ROA)

45

Fig 4.14

Annual lending interest rates

Table 4.9

Years Interest rates

2013 9.74%

2014 9.47%

2015 8.54%

2016 7.11%

2017 10.61%

4.4.1.1 Descriptive statistics

Table 4.10

N Range Minimum Maximum Mean

Std.

Deviation Variance Skewness

Statistic Statistic Statistic Statistic Statistic Std. Error Statistic Statistic Statistic

Std.

Error

ROA 5 6 -3 3 1.12 1.013 2.264 5.127 -1.637 0.913

ROE 5 30 -13 16 5.69 5.572 12.460 155.258 -1.122 0.913

Interest

rates

5 4 7 11 9.09 0.596 1.332 1.775 -0.735 0.913

Valid N

(listwise)

5

Source: IBM SPSS statistics

-15,00%

-10,00%

-5,00%

0,00%

5,00%

10,00%

15,00%

20,00%

2013 2014 2015 2016 2017

RO

E I

N %

YEARS

Trend analysis of ROE for ZB bank

46

As shown above, the table shows the detailed presentation of the type of the data under study.

The data is normally distributed across the whole range hence credible and accurate

representation of data. By using coefficient of skewness, it can be safely deduced and

concluded that the secondary data used for regression analysis are distributed normally as all

ROA, ROE and interest rates are close to zero. Kurtosis should be close to 3 and from the table

above, we can deduce that the variables are smoothly distributed except for ROE and interest

rates which are not close to 3.

4.4.1.2 Regression results

The researcher used interest rate as the independent variable and financial performance as the

dependent variable and financial performance was measured by ROA and ROE. For the

purpose of clarity and reliability, the researcher found out the relationship between interest rate

and ROA and interest rate and ROE separately to find out if they came to the same conclusion.

The results of the regression analysis of interest rate and financial performance is shown by the

table below.

Table 4.11

Regression results of Interest rate and ROE

Model Summary

Model R

R

Square

Adjusted R

Square

Std. Error of

the Estimate

1 .215a .046 -.272 14.053

a. Predictors: (Constant), Interest rates

Source: SPSS

n=5 x (mean)=9.094 y (mean)=5.69 ∑x=45.47 ∑y= 28.45

x2= 420.6043 y2= 782.9109 a=23.94 b=-2.01

r=0.215

As shown by the findings above, a positive correlation coefficient of (0.215) indicates that there

is a weak positive relationship between interest rate and financial performance (represented by

ROE). The relationship is not strong and as concluded from the primary sources that the

positive relationship exists in the short run, the researcher can also safely point out that in the

long run the relationship will be negative. The reason being that consumers will start to switch

47

for other banks, as indicated above the adjusted R square became negative of (-0.272)

indicating that as time goes, interest rate increase would result in poor financial performance

as customers could easily switch to other banks. This regression finding is in line with some

scholars and researchers cited in chapter 2 (literature review) who also believe that positive

relationship exists. For example, Flannery (1980) also denoted that there is a positive

relationship between interest rates and financial performance if customers borrow at high rates

and in the long run they could switch to low rates leading to a negative relationship.

Table 4.12

Regression of interest rate and ROA

Model Summary

Model R

R

Square

Adjusted R

Square

Std. Error of

the Estimate

1 .146a .021 -.305 2.587

a. Predictors: (Constant), Interest rates Source: IBM SPSS

As shown above, both indicators of financial performance came to the same conclusions. From

the table, a positive correlation coefficient of 0.146 exist between interest rates and ROA

indicating a positive relationship between two variables. Some of the researchers strongly

disagree with this finding as they believe that a negative relationship co-exists. Beardshaw et

al (2001) believed that there is a negative relationship as they argued that low rates encourage

borrowing hence increase profits as opposed to high rates of interest which scares away

customers to borrow loans.

4.5 Chapter summary

This chapter was mainly focusing on presentation, analysis and discussion of research findings.

The researcher represented data using tables, pie charts and graphs and also the IBM SPSS

package was used for regression analysis of secondary data from publications such as ZB

financial holding’s financial statements and monetary policy statements. According to

regression and correlation analysis findings, the researcher found out interest rates and financial

performance positively correlate in the short run and in the long run the relationship will

become negative as consumers would switch to other banks with low rates of interest (weak

positive relationship.

48

CHAPTER V

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introduction

The chapter covers the summary of the research findings, conclusions and the

recommendations. It also covers the suggestions for further research on the topic in the future.

The findings summarised covers the whole research and the conclusions made were for the

whole project.

5.1 Summary of findings

The researcher was investigating the impacts of interest rate on financial performance of

commercial banks in Zimbabwe. The researcher also explored the various factors that affect

the financial performance of commercial banks. Financial performance was measured by

financial ratios like return on asset (ROA) and return on equity (ROE). Chapter one dealt with

the research objectives, questions and hypothesis testing. Chapter two explored the existing

literature to come up with the best research methodologies about interest rate impacts on

financial performance of commercial banks and this chapter also established the research gap

left by previous researcher which motivated this study to be undertaken on effects of interest

rate on the financial performance of commercial banks. Chapter three went on to detail the

research methods, instruments and data collection methods to be used in the study. The

chapter’s aim was to direct the research on the methods to be followed in chapter four of the

study. Chapter four dealt comprehensively with the presentation, analysis and discussion of

research findings from primary sources and secondary sources through use of diagrams, graphs,

tables and pie charts. The main aim of chapter four was to attain the objectives from chapter

one and to answer all the research questions.

According to the findings from primary sources (questionnaire and interviews); money supply

emerged as the major determinant of financial performance in Zimbabwe’s banking sector. The

monetary supply policies have a bearing influence on bank’s financial performance through

49

either contractionary measures or expansionary measures and thus the research shows that a

positive correlation exists between financial performance and money supply in circulation.

This means as the economy have more money in circulation, it signifies that more money will

be available for lending by commercial banks and this will drive interest rate down and thus

more loans will be demanded by customers and therefore increase in financial performance in

terms of return on assets and return on equity.

5.2 Conclusions

The main objective of this research was to investigate and find out the impacts of interest rate

on financial performance of commercial banks. The main conclusions drawn from the findings

are as follows;

· According to the findings from primary sources, the researcher found out that a negative

relationship exists between financial performance and interest rates, therefore null

hypothesis (H0) is rejected and alternative hypothesis (H1) accepted concluding that

financial performance function is sensitive and impacted by fluctuations in interest rate.

However, according to the regression and correlation analysis, a weak positive

relationship between interest rate and financial performance exist which in the long run

could be negative as customers would switch to banks with low borrowing costs.

· Basing on primary findings, money supply was viewed as the major determinant of

financial performance as the central bank (RBZ) failed to perform its function of

controlling money supply due to use of other country’s currency for the period under

the study. The current situation of cash crisis in Zimbabwe mean that the central bank

will fail to adopt the expansionary policies to broaden money supply as they are not

currently printing any money, and this is creating shortages thus affecting the bank’s

ability to issue out withdraws leading to poor financial performance. Shortage of hard

currency in circulation and mushrooming of black markets are surging up interest rates

in Zimbabwe.

· According to the findings, interest income has a positive relationship with interest rate.

This means that the interest income increases as interest rate also increases (lending

rate) as compared to the deposit rate.

· Financial performance of commercial banks is negatively affected by many factors in

Zimbabwe such as inflation, size of the firm, economic situation; to mention but a few.

50

· There is high borrowing cost in Zimbabwe. Commercial banks are charging exorbitant

lending rates to customers on loans. However, on the other hand commercial banks are

paying low deposit interest rates to depositors leading to high interest spreads by

commercial banks in Zimbabwe.

5.3 Recommendations

With reference to the findings and conclusions drawn by the researcher, there are many

measures that should be taken by central bank and commercial banks to revive the banking

sector in Zimbabwe so as to have stable interest rates in Zimbabwe.

· The RBZ should re-dollarize the United States Dollar (USD) so as to improve the

liquidity challenges faced by the banking sector and to stabilise the economy by getting

rid of the bond note. This will help to stimulate economic activities and hence more

investments as the interest rates will stabilise. As the economy stabilises, the RBZ

should then adopt its own currency (Zimbabwean dollar) to have control on money

supply in circulation.

· The monetary authority should put an official uniform lending rate to be used by all

commercial banks as well as the legal framework to control the interest rate. This will

reduce burden to customers who are being charged high rates by banks. This can be

effectively achieved by putting the interest rate ceiling on bank loan rate so as to protect

customers and interest rate floor in bank deposits rates so as to protect the commercial

banks in Zimbabwe and to have a viable and sound interest rate in the sector.

· Commercial banks should venture into financial innovation and financial engineering

to keep costs at minimum and to have access to new customers so as to widen

profitability and survival even in times of fluctuations in interest rates.

5.4 Suggestions for further studies

It is highly expected that this study will help other financial institutions such as ZB bank in the

banking sector in reviewing the interest rate. It is envisaged to undertake further studies in the

following topics on bank’s performance.

· Investigate effects of the 2 percent tax rate on electronic transfers on lending

performance of commercial banks in Zimbabwe.

51

· Strategies that can be adopted by the central bank to restore confidence in the banking

sector.

· Effects of black exchange rate markets on financial performance of commercial banks.

52

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Amidu, M., 2006. the link between monetary policy and banks lending behaviour, the

Ghananian Case, banks and bank systems. 1(1).

Banking Act (Zimbabwe)

Baughn, W. & Donald, R., 2003. The International Banking Handbook. Homewood: Dow

Jones-Irwin.

Beardshaw, J., Brewster, D., Cormack, P. & Ross, A., 2001. Economic: A student's guide.

Edinburgh Gate; Harlow; Essex: Pearson Education Limited.

Bekaert, G., 1998. Regime Switches in interest rates. s.l.:Cambridge.

Bernake, B. & Blinder, A., 1995. Credit; Money ; and Aggregate demand: American

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APPENDIX 1: QUESTIONNAIRES

BINDURA UNIVERSITY OF SCIENCE EDUCATION

Dear sir/ madam

I am a final year student at Bindura University of Science Education, doing a Bachelor of

Commerce Honours Degree in Banking and Finance (BCOM.BAF). As a requirement to my

degree program from Bindura University, I am undertaking a study on the topic, “The impact

of interest rates on financial performance of commercial banks in Zimbabwe”, The case

study of ZB financial holdings (2013-2017).

May you kindly help by answering the questions on the questionnaire to the best of your

judgements and knowledge. The opinions you give shall be only used for academic purposes

and shall be handled with confidentiality. For confirmation on the use of data, I kindly refer

you to conduct Bindura University of Science Education.

Your cooperation is always greatly appreciated.

Yours faithfully

……………………………….

+263 784 001 809/ +263 715 677 536

57

Instructions

1. For the purpose of guaranteeing your privacy and confidentiality, please do not write

your name on the questionnaire provided.

2. Respond the questions through ticking in the applicable box and kindly write some

comments of your views in the space provided therein.

SECTION A

Personal information

1. Name of branch……………….............................

2. Position held in the bank…………………………

3. Gender: male female

4 Highest level of Academic qualifications

O Level

A Level

National Diploma

Degree

Any other (specify)………………………

5 For how long have you been working for ZB bank………………….

SECTION B

This section relates to the impacts of interest rates on financial performance

1. Do you think the following factors influence the financial performance of commercial

banks in Zimbabwe?

Factor yes no

Interest rate

Firm size

Gearing level

Economic factors

58

Competition

2. Among the following determinants, which factor do you think has the greatest effect

on financial performance of commercial banks?

(Tick 1 being the least and 5 being the most)

Scores 1 2 3 4 5

Interest rates

Money supply

Inflation

Firm size

Gearing ratio

Interest rates and financial performance

NB (Key: SA= strongly agree, A= Agree, N= Neutral, D= Disagree, SD= Strongly

disagree)

Opinions SA A N D SD

3. “Commercial banks prefers to charge low interest

when taking deposits” Do you agree?

4. “Borrowers consider interest rate as the major

determinant when seeking loans from banks”. Agree?

5. “Financial performance of commercial banks increases

if low interest rates are charge”. Do you agree?

6. Are there any relationship between interest rate and

financial performance of commercial banks?

7. “Interest rates have negative consequences on the

financial performance of commercial banks”. Do you

agree?

8. In your own views, what do you think commercial banks in Zimbabwe should do to

lure more clients to take loans?

59

i…………………………………………………………………………………………

………………………………………………………………………………………….

ii…………………………………………………………………………………………

iii………………………………………………………………………………………

…………………………………………………….

9. Were there any fluctuations in bank’s financial performance in the last 5 years?

Yes NO

10. If yes, what do you think might be the cause?

…………………………………………………………………………………………

…………………………………………………………………………………………

………………………………………………………………………………

SECTION C

Questionnaire for customers

1. Type of customer

Individual customer

Company

2. Did you ever apply for a loan? Yes No

3. Which factor do customers consider most when applying for a loan?

Interest rate

Time period to repay

Economic situation

Quality of loan

Other (specify)……………………………………………………………………….

4. Did u ever switch the bank on matters regarding to loans?

Yes No

5. If yes, what was the reason for switching?

High interest rates

Long tenure period

Non availability of quality loans

Other (specify)……………………………………………………………….

60

6. Specify the factor you think has a greater impact on financial performance of

commercial banks in Zimbabwe……………………………………………........

Any other comments on effects of interest rates on financial performance of commercial

banks.

Comments………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

Thank you for your time

61

APPENDIX 2: RESEARCH INTERVIEW QUESTIONS

Interview questions for bank managers

1.What is your understanding on interest rate within your organisation?

2. What factors do you think can be considered by borrowers when taking out loans?

3. What are the impact of interest rate on financial performance of commercial banks?

4. What are the determinants that influence the financial performance of commercial

banks in Zimbabwe?

5. From the factors outlined above, which factor do you think has the most influence on

financial performance of commercial banks?

6. What type of relationship do you think exists between interest rates and interest

income of commercial banks?

Any comments,

Comments…………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

Thank you for your contribution.

62

APPENDIX 3: ANNUAL INTEREST RATES, ROA AND ROE

Year Interest rate Return on Asset Return on Equity

2013 9.74% 0.82% -0.42%

2014 9.47% -2.68% -13.40%

2015 8.54% 2.16% 12.55%

2016 7.11% 2.32% 13.44%

2017 10.61% 2.98% 16.28%