An analysis of the causes of bank fragility in Zimbabwe (2003–2005)¹

This paper analyses the causes of bank fragility in Zimbabwe during the period 2003–2005, which period saw ten financial institutions being placed under curatorship, with two being liquidated and one discount house closed. Ordinary least squares (OLS) regression and non-probabilistic qualitative questionnaire analysis was applied on data for the period 2003Q₃ to 2005Q₂. The main variables selected for analysis in this study are the CAMELS ratios and selected micro- and macroeconomic factors which could cause bank fragility. Model results showed that two CAMELS ratios, return on assets (ROA) and liquidity (LIQ) and the macroeconomic environment (real GDP growth) were the main significant causes of financial distress of the banking sector. Qualitative results from the questionnaires indicate that other factors like the unethical conduct of management, ineffective boards, disregard for risk management tools & techniques, poor security analysis, high concentration of loans, connected lending and diversion from core to non-core activities also contributed to the fragility of financial institutions. The study advocates for sound corporate governance policies and plausible risk management tools. The regulators should also develop comprehensive early warning systems (EWS and) and strive for a stable macroeconomic environment, both crucial to avert bank failures.