Banking Industry Competition and Stability in Zimbabwe

The study investigates the impact of changes in banking industry competition on the industry’s stability in Zimbabwe using a sample of 18 banks for the period 2009-2017. The period of study coincides with an era when the country experienced growth and stability (under full dollarization) after a decade of an economic crisis (prior to full dollarization). First, the study employs a modified version of the Boone (2008) Indicator to establish the evolution of competition. Second, the -score is employed to investigate the nexus between banking industry competition and stability in the country. The study establishes that banking industry competition in Zimbabwe registered a pronounced increase for the period 2009-2012. This was, to some extent, attributed to the banks’ aggressive business models that sought to increase client bases by offering loans in order to increase asset bases and profitability. This trend was, however, reversed post-2012, as competition consistently fell between 2013 and 2017, mainly due to falling demand for both personal and business loans and a measured approach by banks in issuing new loans following a rise in non-performing loans (NPLs). The relationship between banking industry competition and stability is strong and competition appears to be good for the country’s banking industry. Our findings have potentially important policy implications regarding the design and enforcement of regulations that create the right incentives to safeguard stability, while at the same time conscious of the link between competition and stability. Understanding the dynamics of competition and stability is crucial, not only to banks, bank regulators and policy makers in Zimbabwe, but also to other developing countries, as they have the leverage to shape bank competition to levels that produce desired levels of stability. To banks, competition has implications on their access to finance and stability of the industry.