Competition-Stability Nexus In The Banking Sector Of Zimbabwe (2009-2016)

This study explored the relationship between competition and stability in the banking sector of Zimbabwe. The aims were to investigate the relationship between competition and stability in the banking sector of Zimbabwe and to establish the determinants of bank stability in Zimbabwe. This was done using the System Generalised Method of Moments (GMM) because it can solve the endogeneity problem between the measure of stability and the measure of competition. The GMM uses the lags of the dependent variables as instruments in the equation thereby managing the endogeneity problem. Panel data of 17 banking institutions from 2009 to 2016 were analysed using Stata 13. The results suggest that competition leads to stability instead of the fragility. This implies that competition enhances the stability of the banking system in Zimbabwe. Previous stability level contributes positively to current stability. The results also suggest that stability in the banking sector can also be enhanced through increase in loan disbursement and technical efficiency. However, increase in loans in relation to deposits reduces stability by increasing liquidity risks. The study recommends financial liberalisation through facilitating existence of a contestable market, that is, a market with zero entry and exit costs, where there are no barriers to entry and exit such as sunk costs. The regulatory authority should design proper ease of entry and exit policies for insolvent banks and reduce the too-important-to-fail subsidies. Enough credit information should be enabled to flow easily and fast. The government should also enable the increment of loan customer base by giving property rights to farm owners; respecting and protecting property rights so that they can be recognised by banks as credible collateral security. This study also recommends the maintenance of the loans to deposits ratio at optimum levels in order to control liquidity problems.