The Dynamics, Challenges and Transition of Banking Sector Development in Zimbabwe

Zimbabwe financial sector went through different phases of transformation during the past four decades (RBZ, 2014). This paper analysed the historical developments and structure of the Zimbabwe's banking sector. Challenges encountered by Zimbabwe banks and the determinants of Zimbabwe banking sector success were also assessed from an empirical literature and case study based approaches. This paper deviates from previous studies on banking sector development in Zimbabwe in that (1) it focuses on developments, critical success factors, challenges and determinants of Zimbabwe banking sector all in one study, (2) It uses both case study and empirical study approaches in one paper and (3) there is no study on Zimbabwe the author is aware of which investigated the determinants of Zimbabwe banking sector development using macroeconomic variables. The case study approach found out that poor savings culture, high lending rates, systemic risk and absence of lender of last resort were the major challenges faced by Zimbabwe's banking sector. Moreover, an empirical literature review prognosis showed that inflation, reserve ratio requirement, lending and deposit rates, output and economic growth played an influential role in determining Zimbabwe's banking sector profitability. Unlike previous studies which focused on banking sector profitability, the current study explored the macroeconomic determinants of Zimbabwe's banking sector development using the ordinary least squares (OLS) multiple regression model with data ranging from 1984 to 2014. Economic growth, deposit interest rates, savings and foreign direct investment (FDI) were found to have had a positive and significant impact on banking sector development of Zimbabwe in line with theory and empirical literature. The study therefore urges the Zimbabwean authorities to design and implement policies that grows the economy, ensure that depositors receive better interest rates, increase savings mobilization and FDI inflow attraction efforts in order to promote banking sector development. Inflation and trade openness had a negative but non-significant impact on Zimbabwe's banking sector development. The Zimbabwean authorities should therefore keep both inflation and trade openness at lower levels in order to deepen the banking sector.