Corporate Governance and

Bank Performance:
Evidence from Zimbabwe
By Lance Mambondiani, Ying-Fang Zhang and Thankom Arun1

FOR DISCUSSION PURPOSES ONLY

1
Working Paper by Dr Lance Mambondiani and Professor Arun Thankom (University of Central
Lancashire Business School) and Dr Yin-Fang Zhang at Institute of Development Policy and
Management (IDPM, University of Manchester). For enquiries contact [email protected]

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Introduction

Interest in corporate governance has resurged since the Asian financial crisis in 1997
and following the highly publicised corporate failures of big US companies such as
Enron and WorldCom. The 2008 global financial turmoil, which triggered widespread
bank and financial institutions failures in developed countries and later spread to
developing countries, has made the world, once again, became aware of the
consequences of bad corporate governance. This time the attention is to governance
issues in financial and banking institutions.

Despite abundant literature on corporate governance in general, not as much has been
written on corporate governance of banks. Even in developed economies, corporate
governance of banks has only recently been discussed in the literature (Macey and O’
Hara, 2003). There is in particular a devoid of literature on governance issues of
banks in developing countries. Research on how banks are governed in the context of
developing countries is warranted in the wake of the 2008 financial crisis.

It is generally agreed that effective corporate governance assures protection on

investment and generates return. The implication is that sound corporate governance
leads to improved firm performance. However, empirical studies have failed to
provide conclusive evidence on this theoretical link. Methodological issues associated
with measures used for corporate governance and performance are sometimes used as
explanation to the body of mixed results (Bhagat and Bolton, 2008). Recent thinking
has taken the view of governance mechanisms being endogenously determined
(Belkhir, 2009), raising doubts about the causality link.

Nevertheless, research on corporate governance and performance relationship

has so far been concerned with non-financial firms. Only recently has a growing body
of literature started emerging to relate corporate governance to performance of banks,
with a predominant focus on developed countries. Corporate governance of banks is
important for several reasons. Banks play an important role in the national and,
increasingly, international payment system. As the main intermediates in the financial
systems, they are important engines of economic growth (King and Levine, 1993;
Levine, 1997). This is particularly true of developing countries where non-banking
financial institutions are less developed. Given their role in financing firms in the real
economy, banks can affect corporate governance of non-financial firms. Furthermore,
failure of banks has far more negative externalities. Therefore the stability and health
of the banking sector through effective sector regulation and supervision and sound
corporate governance become vital.

The banking industry has particular idiosyncrasies which require a broader approach
to corporate governance to encapsulate both shareholders and depositors. (Macey and
O’ Hara, 2003; Arun and Turner, 2004) Banking entities are characterized by high
opaqueness or severe information asymmetries, unique capital structures in that
depositors provide far more financial resources than shareholders, and peculiar
contractual forms (Levine, 2004; Bhattacharya, et al, 1998; Macey and O’ Hara,
2003). The special nature of banking means a more complex governance system to
address more complicated agency problems. In many developing countries, the issue
of bank corporate governance is further complicated by extensive political

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intervention in the operation of banks through government ownership and restrictions
on foreign bank entry (Arun and Turner, 2004). A related issue in developing
economies which has determined how and in whose interests banks are governed is
the activities of distributional cartels or entrenched interest groups (Oman, 2001;
Haque,, et al, 2011). In addition, many developing countries have subject their
banking sector to liberalisation and other reforms, adding even more to the
complexity of governance issues in the sector.

Given the importance and complexity of governance systems of banks and the gap in
literature, research on bank corporate governance in developing countries is
warranted. The paper attempts to contribute to literature by looking at corporate
governance of banks in an Africa country – Zimbabwe, and associate corporate
governance to bank performance. Although it suffered from data and resulting
methodological limitations, the analysis presented in this paper attempts to add to
sparse empirical evidence on the related issues and shed light on factors which affect
bank corporate governance and performance in the context of a developing country
like Zimbabwe, where the banking sector has undergone turmoil and reform. The
paper is structured as follows. After the introduction section, a review of literature on
corporate governance of banks and the relation between corporate governance and
performance is presented. A brief overview of the Zimbabwean banking sector is
provided before the discussion of data and methodology. The results of data analysis
are then presented and discussed. The last section concludes.

Literature Review

Corporate governance can be broadly defined as the system by which companies are
directed and controlled (Cadbury, 1992). Contemporary debate on the subject has
been dominated by the agency theory. Based on this theory, the narrow approach to
corporate governance is concerned primarily with how equity investors induce
managers to provide them with an appropriate return on their invested capital. As far
back as Adam Smith, it has been recognized that managers do not always act in the
best interests of equity holders (Henderson, 1986). The agency problem between
managers and shareholders is exacerbated in the Anglo-Saxon economies where there
is substantial separation of ownership and control in firms (Jensen and Meckling,
1976; Fama and Jensen, 1983). Disciplinary effects can come from internal and
external corporate control mechanisms (Shleifer and Vishny, 1997). Legal protection
is also important when there are a large number of atomized shareholders.

However, separation of ownership and control is not as common in other countries, in

particular in less-developed countries (La Porta, et al, 1999). This puts in question the
usefulness of the narrow approach when looking at corporate governance in countries
featured by ownership concentration (Arun and Turner, 2003). Unlike dispersed ones,
large shareholders have incentive and, quite often, the resources to monitor the
management. It’s not rare that they can have outright control of the latter. Although
the agency theory is still a useful analytical tool, attention is no longer centered only
on agency problem between managers and shareholders. Instead, how to protect
minority shareholders and other investors from expropriation of controlling
shareholders presents the main challenge in corporate governance. If corporate
governance is to reduce vulnerability of minority investors (including small
shareholders), internal and external governance mechanisms can be expected to be

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different from those in countries where separation of ownership and control is
pervasive. Legal protection becomes even more needed. However, in countries where
ownership concentration is dominant, legal protection available to minority investor is
usually weak (La Porta, et al, 1999).

In fact, ownership structures which arise out of different degrees of concentration

have evolved out of national traditions and institutional arrangements such as the
country’s legal system or taxation rules. Concentrated ownership has been developed
as a response to weak legal protection available to minority shareholders. One
advantage of concentrated shareholding is that it overcomes, to some extent, the
problem with monitoring management. However, the entrenchment and expropriation
hypotheses argue that block holding insiders most often become entrenched and
expropriate outside owners and minority investors (Morck et al, 1988). Which effects
dominate depends on the identity of shareholders as well as the institutional setting of
a country (Shleifer and Vishny, 1997). In developing countries, concentrated
ownership has been associated more with corporate governance weaknesses rather
than strengths: controlling shareholders exploit minority investors for their personal
benefits (Brownbridge and Harvey, 1998).

As a special type of firm, corporate governance of banks deserves special attention.

Part of the uniqueness of banks lies in their capital structure and associated
information asymmetry. Banks tend to have far less equity than debt in their capital,
with the bulk of the funding from depositors. This creates more complicated agency
problems: conflicts in interests and risk perception among more than two parties
simultaneously. Dispersed depositors have little incentive to monitor the managers and
equity owners in operating the bank, due to the free-riding problem. It is difficult for
them to know the true value of a bank’s loan portfolio as such information is
incommunicable and very costly to reveal (Bhattacharya et al., 1998). Severe
information asymmetry gives bank managers and equity holders an incentive to invest
in riskier assets than promised ex ante. In the presence of the agency problems
between managers and shareholders and those between depositors and managers
(sometimes in collusion with shareholders), it is more appropriate to adopt a broader
view of corporate governance for banks to encapsulate depositors as well as
shareholders (Macey and O’Hara, 2001).

Due to the peculiar contractual form of banking, the external market for corporate
control potentially fails to discipline the managers and owners of banks. It has been
argued that competition in the product or service market may act as a substitute for
corporate governance mechanisms (Allen and Gale, 2000). However, the banking sector
may be a lot less competitive than other business sectors, partly due to its information-
intensiveness (Caprio and Levine, 2002). Under such circumstances, government
intervention has often been used in attempt to overcome the agency problems and the lack
of competitive pressure. Government intervention may take the forms of government-
ownership and regulation and supervision over the sector. Government ownership of
banks is an extreme, though largely unsuccessful, way to deal with the governance
problem. In terms of regulators exerting governance, the government is virtually
removed as an effective monitor in the case of government owned banks. When the
government is both the owner and regulator, there is a conflict of interest in its two
roles. In terms of market competition, the link is again broken with government
owned banks, in that regulators tend to enact policies that restrict competition and

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protect government-run banks. Evidence indicates that those countries with a higher
share of state ownership in banking experience worse outcomes on average (Barth, et
al, 2004).

Government-provided guarantees in the form of implicit and explicit deposit

insurance have been used to encourage economic agents to deposit their money with a
bank. Such schemes transfer a substantial part of the moral hazard cost to the
government. Regulation and supervision can be used to ameliorate this moral hazard
problem by imposing asset restrictions, interest rate ceilings, separation of
commercial banking from insurance and investment banking, and reserve
requirements. Assuming that governments have both the ability and the will to
overcome market and institutional failures, regulation, as an external governance
mechanism, can enhance the corporate governance of banks. However, countervailing
views argue that governments regulate banks for reasons other than public interests
(Buchanan and Tullock, 1962; Stigler, 1971). In the case of political capture,
politicians and regulators may induce banks to divert the flow of credit to politically
connected firms; in the case of regulatory capture, regulators act in the interests of
banks rather than in the best interests of society (Becker and Stigler, 1974; Rajan and
Zingales, 2003). In either case, regulation and supervision of banks may actually
reduce the efficiency of corporate governance of banks.

Firms as complex as banks rely not just on external corporate governance to discipline
managers, but also on the internal governance mechanisms to show the commitment
of bank managers and equity owners to depositors. The Basel Committee on Banking
Supervision emphasizes the role of the board of directors in the internal governance
system. Literature suggests that board size, composition and activity affect the board’s
effectiveness, which in turn affects bank value (Nam and Lum, 2006). Given their
particular idiosyncrasies and special agency problems, banks tend to have bigger and
more independent boards than nonfinancial sectors, in order to play the dual role as
advisor and monitor (Adams and Mehram, 2008; Andrés and Vallelado, 2008).
Recently, research has begun to follow the lead of nonfinancial studies to explain
governance mechanisms as endogenously determined. When substitute governance
mechanisms such as the legal protection for investors and concentrated ownership can
provide effective monitoring to reduce agency conflicts and ease the governance
problem between investors and managers, the board does not need to increase its size
or/and include more outsiders (Li, 1994; Bathala and Rao, 1995; Bak and Li, 2001;
Belkhir, 2009).

The discussion so far on corporate governance of banks holds for developing

countries as well. However, the peculiar contexts of such countries should also be
taken into consideration. Ownership concentration is pervasive in developing
countries, in particular in the banking sector. Governments and powerful families are
the two major controlling shareholders. As discussed earlier on, government
ownership in banks impedes the effectiveness of regulation as an external governance
mechanism and breaks the link between competition and bank efficiency. From the
perspective of the agency theory, government-owned banks are a perfect example of
widely-held firms, with the principals (the public) having no power to monitor the
banks. From the political economy perspective, state-owned banks may be intervened
to serve the interests of elite groups (Shapiro and Willing, 1990; Shleifer and Vishny,
1994). In sum, state-ownership in banks tends to serve as an obstacle for sound

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corporate governance. This is confirmed by the findings of some empirical studies on
developing countries (e.g. Levine, 2004, Mishkin, 2005).

Another type of major controlling shareholders in banks in developing countries are

powerful families who have close ties with the government. In theory, concentrated
shareholders have more power to monitor the firm to maximize shareholders’ value.
However, with poorly-defined property rights, weak enforcement of contract, weak
judicial systems and pervasive clientelism, what has often been observed in
developing countries is that powerful families have outright control of the
management of banks to serve the private interests of their own or related elite groups
at the expenses of depositors and other investors. Oman (2001) calls the corporate
insiders and related government elite ‘distributional cartels’, and notes that their
existence undermines the credibility of investor legal protection and prevents any
reform of the banking sector which will endanger their interests. Therefore, ownership
concentration in banks in developing country may present an obstacle to good
corporate governance.

Compared with developed countries, regulation and supervision over the banking
sector tend to be less effective in developing countries, partly due to their institutional
weakness, capacity and resource constraints and problems with the political system.
Enforcement of regulation and other rules is further weakened by government
ownership of banks and the existence and activities of entrenched interest groups or
‘distributional cartels’ (Arun and Turner, 2004). Regulation may not be implemented
uniformly across banks and it is not rare that banks with close ties with the
government can tread on rules and regulatory requirements (Llewellyn, 1999). In
developing countries, regulatory forbearance has often been characterised by delays
due to budgetary and political considerations (Allen and Saunders, 1993). It is
therefore not surprising that, in many developing countries, regulation and supervision
over banks fails to serve as an effective external governance mechanism on the one
hand and to prevent banking crisis on the other (Brownbridge, 2002).

In theory, effective corporate governance assures protection on investment and

generates return. It is argued that managers and owners of firms who show efforts in
implementing good corporate governance will increase market credibility and
subsequently collect funds at lower cost and lower risk (Nanka-Bruce, 2009). The
implication is that sound corporate governance leads to improved firm performance.
However, empirical studies in general have yielded mixed results. Some studies have
found a positive correlation between corporate governance and performance (e.g.
Klapper and Love, 2004; Drobetz, 2004). There are researches that have gone a step
further to conclude a causality running from corporate governance to firm
performance (e.g. Drobetz, et al, 2003). However, there is abundance of studies which
failed to lend an a positive support (Gompers, et al, 2003). Bauer, et al, 2004 argued
that initially an insignificant relationship was reported which afterwards turned to a
significantly and statistically negative relationship. A similar observation was made
by Beiner et al. (2004). Other studies (see Park & Shin, 2004 and Prevost et al., 2002)
do not find evidence of any relationship between corporate governance and
performance.

Mixed evidence has also been found when the impact of individual corporate
governance mechanisms on performance is concerned. Whether ownership matters for

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firm performance has long been debated. In the classical paper by Berle and Means
(1932), dispersed ownership is argued to have the advantage of enabling operations
large in scale and scope and allowing most skilled managers to control the business.
Firms with diversified ownership can thereby compensate for agency costs with
improved efficiency and profitability (Lauterbach and Vaninsky, 1999). However,
difficulty in monitoring managers may increase agency costs to such a point to offset
any efficiency gains associated with the separation between ownership and control.
The impact of concentrated ownership on performance is not clear-cut either. The
argument that large shareholders reduce agency costs associated with monitoring
management predicts the relationship between ownership structure and performance
in the opposite direction to the entrenchment and expropriation theses. So far,
empirical studies have not lent insights into the theoretical ambiguity in the
ownership-performance relationship.

Board size is hypothesized to have a relationship with firm value and/or corporate
governance ratings (Drobetz, et al, 2003). Inclusion of non-executive directors for
purposes of board independence tends to increase the board size. However, it can be
argued that larger boards may be ineffective due to problems such as free-riding,
conflicts in interests and retarded decision making. Evidence from empirical studies is
at large inclusive. 2 Controversy also exists when it comes to the impact of board
independence on firm performance. The benefits of independent boards lies in the
expectation that external directors would serve as checks and balances on executive
directors and bring in expertise, objective judgment and other valuable resources
(Lawrence and Stapledon, 1999). Baysinger and Hoskisson (1990) and Ezzamel and
Watson (2002) challenge such benefits by emphasizing lack of commitment from
external directors and likelihood of collusion between executive and non-executive
board members. The link between CEO/board chairman duality and firm performance
is ambiguous both theoretically and empirically. Duality and separation of the two
roles do not seem to substantively differ in their effects on financial performance
(Coles and Hesterly, 2000, Conyon and Murphy, 2000).3

Inclusive empirical evidence is often attributed to methodological and data issues, in

particular measures used for corporate governance and performance. Bohren and
Odegaard (2004) points to the difficulty in obtaining good quality data for analysis,
which may consequently rule out the use of certain measures of the variables and
superior analysis methods (a setback also shared by our study). As corporate
governance embodies too many mechanisms for a holistic interpretation of the effects
on performance, aggregating the mechanisms into one or a few governance measures
dampens the effects of any single mechanisms (Nanka-Bruce, 2009). There has been
no agreement on how to measure performance as well. Many studies have used
measures based on market valuation of firms, in justification that investors perceive
well-governed firms as less risking and apply a lower expected rate of return, thereby
leading to higher firm valuation. Such measures can account for the value of a firm’s
intangible assets, but make little attempt to calculate the replacement cost of tangible
capital. They also lead to the exclusion of unlisted firms from the sample. Other

2
Studies that find a negative relationship between board size and performance include Eisenberg et al,
(1998), Carline, at al (2002), Mak and Yuanto (2002). Aggarwal, et al (2007) and Hothausen and
Lurckrer (1993) find on significant link between the two.
3
A comprehensive review of empirical studies is presented by Kang and Zardkoohi (2005), which that
empirical research has produced mixed results.

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widely used measures are constructed from accounting data, which are argued to be
able to reflect yearly fluctuations in underlying business conditions (Demsetz and
Lehn, 1985). Unlike market valuation measures, accounting measures are readily
comparable between listed and unlisted firms. However, it has been noted that
accounting data are subject to the discretion of managerial accounting choices
(Renneboog, 2000). Many studies have combined market-value and accounting-based
measures, in attempt to offset each other’s drawbacks. As corporate governance may
impact on the firm value and operating performance in different ways and the two
types of measures capture different aspects of firm efficiency, it is not surprising that
mixed results are found across various measures in single studies (e.g. Gompers, et al,
2003).

Recently, the causality from corporate governance to firm performance has been
challenged by the view that corporate governance is endogenously determined. One of
the examples of the endogeneity is that a growing firm with a great need for outside
financing has more incentive to adopt better governance practices in order to lower its
cost of capital. The proposition has been supported by empirical evidence in Klapper
and Love (2004). Demsetz and Lehn (1985) postulates that ownership concentration is
the result of equilibrating operating characteristics of individual firms and that
diffused ownership emerge as a response to value maximization. For reasons related
to performance-based compensation and insider information, firm performance could
be a determinant of ownership (Bhagat and Bolton, 2008). Supporting evidence
comes from Cho (1998), which has found that corporate value affects ownership
structure while the latter has no effect on the former. Demsetz and Villalonga (2001)
finds that the relationship between ownership structure and corporate performance
become statistically insignificant once endogeneity is controlled for.

In contrast with the abundance of empirical studies on developed countries, much less
attention has been put to corporate governance in developing countries. Studies
focused on banks in such countries are even sparser. Given the fact that banking in
these countries is usually under-developed, corporate governance may be an issue
critical to the health of the sector as well as the development of the whole economy.
This paper attempts to fill in the gap in literature by focusing on banks in one African
country – Zimbabwe.

Zimbabwean banking sector

When Zimbabwe gained independence from Britain in 1980, the banking sector was
dominated by foreign-owned banks until 1991 when the financial sector was
liberalised as part of the Economic and Structural Adjustment Programme. The IMF
prescribed liberalisation measures were adopted to open up and de-regulate the sector
in attempt to promote financial development in particular and economic growth in
general (Harvey, 1995). For the first time in Zimbabwean history, indigenous banks
were allowed and subsequently encouraged. In fact, all new licenses were issued to
such banks in the 1990s, with the first indigenous commercial bank established in
1997 (Mumvuma, et al, 2003). The number of banking institutions increased rapidly
and by 2002 they had more than doubled. The emergence and expansion of
indigenous banks was in line with the political zeal to break up the dominance of
foreign banks which used to serve the white population. Issuing of licenses to those
with political connections was lax, enabling the elite group to use newly-licensed

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banks as an avenue to accumulate wealth (Chikukwa, 2004). There was ownership
concentration in newly-licensed indigenous banks, with the founders and their
families as controlling shareholders and represented in top management and the board
of directors (Mumvuma, 2003).

In the late 1990s and at the turn of the 21th century, the Zimbabwean economy was
troubled by hyperinflation, resulting in declining savings from depositors and forcing
many banks to use other sources to fund their lending. Banks, in particular indigenous
ones, were encouraged by negative real interest rates resulting from government
policies to borrow from the central bank to fill in the gap in reduced interest incomes.
Arrangements like the so-called overnight accommodation window further opened
avenues for banks to borrow from the central bank. However, the use of such
borrowed money was not closely and properly supervised. Banks were alleged to use
the funds to invest in speculative and non-core activities and even, in some cases, to
support daily transactions (RBZ, 2003).

With the deepening of the crisis and imminence of the collapse of the banking sector,
a temporary withdrawal of its function as the lender of last resort was announced by
the central bank in December 2003. The departure of the central bank from its
previous approach of forbearance put a number of banks into liquidity crisis.
Subsequently, 13 banking institutions collapsed, all of which were indigenous,
licensed after the financial liberalisation from 1991. Following the banking crisis,
tough measures were taken under Presidential powers and many bank owners and
managers were accused of or arrested for frauds and/or abuse of depositors’ money.
Some of the bank owners/founders simply fled to other countries fearing arrest.

The distress experienced by individual banks and the turmoil of the sector led to a
review of the regulatory environment and significant amendments to the laws
governing the financial sector (Makoni, 2010). The Troubled Financial Institutions
Resolution Act (2004) was enacted, under which seven of the 13 collapsed banks
were placed under curatorship, one under liquidation, one closed, and the other four
under the Troubled Bank Fund. At the time, the government put the failure of
distressed banks down to capricious greed of alleged owner managers and associated
corporate governance issues. Consequently, new laws and regulations were
introduced intended to empower the central bank to swiftly enforce ownership
changes and restructure the financial sector. Bank founders in private indigenous
banks were required to reduce their shareholding and some were forced out of their
companies under varying pretexts. New regulation requires that shareholding by any
individuals must not exceed 10 percent of the bank’s shareholding. The ownership
regulations have not always been forcefully enforced and it is unsurprising that some
banks have found ways to get round this regulation.4 The regulations were intended to
improve corporate governance through a shift from owner-controlled to manager-
controlled banks.

The Zimbabwean banking sector has undergone restructuring through closing down
some distressed banks, and A&Ts. In the cases of mergers, the licenses of individual
merging institutions were withdrawn and a new one was issued to the merged bank,
supposedly on the ground that the new regulatory limit on ownership was abided by.

4
– see the evidence of one of the case studies – as a footnote???).

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By the time of January 2010, there were 17 commercial banks, of which eight was
private indigenous (listed or unlisted), six foreign owned, and three state-owned.

Methodology and Data

The paper focuses on Zimbabwean commercial banks, which have undergone changes
and turmoil over the years. Attention is put to corporate governance of the banks and
how it is relates to bank performance, against the background of the introduction of
the new regulation which puts restriction on individual investors’ shareholding.
Descriptive analysis of the performance of the banking sector and of individual
commercial banks is presented, followed by summary statistics of the corporate
governance variables of sample banks. The corporate governance variables are then
correlated to bank performance indicators. The rest of the section details the measures
of the variables, data sources and the way the variables are analysed.

Corporate governance variables are constructed based on data from a questionnaire

survey which was conducted in 2010. Among the 17 commercial banks at which the
survey is targeted, 12 completed and returned the questionnaire.5 This gives a sample
of 12 banks for the analysis of the paper. There is no basis to believe that the
exclusion of the other five banks has produced marked bias in sampling. Generally
speaking, it is a small sample, but not surprisingly so given the total number of
commercial banks in the sector. Due to infeasibility in collecting longitudinal data on
corporate governance mechanisms through a single questionnaire survey, it is
impossible to construct a panel data set. The small number of observations – 12 in
total – rules out the use of regressional analysis, and leads to the employment of less
sophisticated methods. This is a main limitation of the study.

Two sets of corporate governance variables are constructed. Firstly, variables of

individual corporate governance mechanisms are constructed along four dimensions:
ownership, the board of directors, risk control, and disclosure. The dimensions are
identified in line with literature on corporate governance of both financial and non-
financial firms. Certainly, corporate governance is of multi-facet that goes far beyond
the four dimensions (or the dimensions used by any empirical studies), and each
dimension is so rich that any specific measures tend to over-simplify. Nonetheless, the
dimensions and specific measures/proxies adopted in the paper are justified and
widely used by existing literature. Table 1 listed the variables.

For ownership attributes, dummy variables are used to distinguish among ownership
types, namely foreign-owned, indigenously private-owned, and government-owned
banks. There is also a dummy variable to show whether the bank is publicly listed or
not. Ownership structure is measured by shares held by executive directors, insider
board members, institutions, the largest five blockholders. The purpose is to measure
ownership concentration and identify the controlling shareholder(s). Board
characteristics include board independence measured by the number of non-executive
directors divided by the total number of board members,6 the board size measured by
the total number of directors, directors’ qualification measured by the percentage of

5
Three other banks sent back incomplete questionnaires and were therefore excluded from the sample.
6
A better measure would be the number of unaffiliated independent directors divided by the total
number of board members. However, there is no information for us to tell whether non-executive
directors are affiliated or not.

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directors with a university degree or above, and CEO/Chairman duality measured by a
dummy variable which take the value 1 if the two positions are occupied by one
persona and 0 otherwise. Most empirical studies measure risk with the standard
deviation of monthly stock return for a number of preceding years for listed
companies. The standard deviation of return on asset over a period can be used for
non-listed firms.

Given the dramatic changes over the last ten years during which many banks in
Zimbabwe were merged and some new banks were licensed rather recently, it is
impossible to construct such measures which are comparable across individual banks.
Therefore, the paper instead uses a proxy for this attribute. We look at whether there
has been reported insider lending, based on the responses from informative banks
together with data from other sources.7 It’s noted that the proxy is rather one of the
results of poor risk control than the mechanisms which are used in practice. This
limitation calls for caution when interpreting the results of analysis.

Table 1. List of Corporate Governance Variables

Variables Description
Ownership
OWTF Dummy variable – ‘1’ for banks with a foreign shareholder as the
majority shareholder, and ‘0’ otherwise
OWTP Dummy variable – ‘1’ for banks with private indigenous investors as
the majority shareholder, and ‘0’ otherwise
PUB Dummy variable – ‘1’ for publicly listed banks and ‘0’ otherwise
EXEOWN Shares controlled by executive directors, measured by percentage of
shares controlled (directly and indirectly owned) by executive
directors
OCON Shares controlled by inside board members (including executive
directors and CEO), measured by percentage of shares controlled
(directly and indirectly owned) by inside board members
INSTOWN Institutional share ownership, measured by percentage of shares
owned by institutional shareholders excluding government and
governmental owned bodies such as the National Investment Trust
LCON5 Ownership concentration, measured by the percentage of shares
owned by the five largest shareholders
Board of Directors
PROPNED Board independence, measured by the number of non-executive
directors divided by the total number of board members
BDSZ Board size, measured by the total number of directors
LBQL Directors’ qualification, measured by the proportion of directors with
a university degree or above
DUALITY CEO/Chairman duality – a dummy variable which takes ‘1’ if there is
such duality and ‘0’ otherwise
Risk Control
ISLD Inside lending, measured by using a total of 4 questions from the QS
expressed as a percentage, with the lower % indicating a high ratio of
ISLD.
Information Disclosure
LDSC Voluntary disclosure by banks, measured as an index

7
data are drawn from internal documents of individual banks, website of and documents from the
central bank, newspapers, and interviews with bank managers and central bank officers.

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The last dimension is concerned with information disclosure. Following the crisis of
the banking sector in 2003, Zimbabwean central bank introduced stringent regulation
requiring disclosure of information by banks to stakeholders. An index is constructed
to capture the extent of compliance using standard questions regarding the different
bank’s level of disclosure.

Secondly, corporate governance scoring which aggregates the four dimensions is

constructed. Rating agencies have developed various corporate governance scoring or
indices to assess corporate governance of companies. Some empirical studies have
also used corporate governance scoring (CGS) or scorecard to examine mechanisms
used to govern corporations (e.g. Black, 2001; Black, et al, 2003; Gompers, et al,
2006; Brown and Caylor, 2006; Cheung and Jang, 2008). Because no rankings or
indices have been developed by rating agencies for Zimbabwean companies, the paper
constructs its own CGS based on responses from the questionnaire survey, following
the method used by Cheung and Jang (2008).8

Table 2: Corporate Governance Scoring

Questions Desirability
Ownership
Is there ownership concentration? Yes as desirable
Is the controlling shareholder a foreign investor (or institutions)? Yes as desirable
Is the bank state-owned? No as desirable
Is the bank listed? Yes as desirable
Is the founder (if any) the CEO or one executive director? No as desirable
Is the CEO or any of executive director one of the top five No as desirable
shareholders (direct and indirectly owned shares)?
Is there any institutional investor (other than government or Yes as desirable
government-owned institutions)?
Board of Directors
Does the board have nomination committee? Yes as desirable
Does the board have Audit Committee Yes as desirable
Do executive directors all have university degree or above
Is the CEO the board chairman? No as desirable
Risk Control
Has any member of the board borrowed or attempted to borrow No as desirable
from the bank in the past five years.
Has the bank ever extended a loan or financial support to No as desirable
subsidiaries or bank holding over the past five years
Has any member of the board recommended or influenced
Has the bank ever extended a loan to either CEO or members of No as desirable
senior management of members of the board over the past 5 years
Has the bank ever written off as bad debt a loan extended to the No as desirable
CEO

Information Disclosure

8
Cheung and Jang (208) constructs corporate governance scores for emerging economies in East Asia.
There is no ground to believe that the application of the method to firms is problematic.

12 | P a g e
The four aforementioned dimensions used for individual corporate governance
variables are employed for constructing CGS. Responses to questions in the
questionnaire survey are examined and converted to numeric values. A value of 1 is
assigned to answers considered desirable and 0 to those undesirable. A sub-index is
then constructed for each of the dimensions by dividing the total score by the total
number of questions in that dimension. A final CGS is obtained by taking sum of the
four sub-indices with an equal weight. Table 2 lists the questions for the construction
of CGS. In regard to ownership,

The purpose of scoring the corporate governance dimensions is to determine which of

them are necessary to ensure good practices. It is important to note that the scores do
not reflect the quality of corporate governance of individual banks. In addition, the
outcomes of the scoring depend heavily on which questions are included in the
scoring and how much weight is assigned. In this sense, the scores are subjective
judgments and may not necessarily reflect the true state of the quality of corporate
governance of individual banks.

This paper adopts accounting-based indicators to measure performance. The choice is

made because of the presence of non-listed banks in the sample which rules out the
use of market value based measures. Two indicators of profitability are employed,
namely ROE and ROA.9 We also use NIM, CIM, NPL and LLR ratios to measure
operational efficiency and asset quality. Data are drawn from the Global Credit Rating
Company for the year 2010.

Correlation analysis between bank performance and corporate governance,

complemented by descriptive analysis of each of the two variables. Corporate
governance is firstly disaggregated into four aspects each of which correlate to bank
performance. CG is then measured by a more aggregated way, CGS (capture four
categories?), and relate to CG. Descriptive analysis on the change of performance
indicators in general, among different ownership types; correlation between different
CG variables (in particularly the shareholding of executives and directors, ownership
concentration; ownership types; ownership variables and insider trading variables;
etc).

Empirical Results

The empirical results have been organised into two significant periods in the
Zimbabwean banking sector. That is, the period (1999-2003) from the financial sector
liberalisation to the banking sector crisis in 2003 and then the period (2004-2008)
after the banking sector crisis and the introduction of regulatory changes by the
central bank in 2004. In addition to analysing the aggregate performance data for the
two periods, a performance trend analysis of individual banks between 2004 and 2008
is also made with the objective of observing the performance measures of these
individual banks after the introduction of the 2004 regulatory changes.

9
ROE and ROA are two widely used indicators of performance. Studies which used such measures
include Hassan and Bashir (2003); Antwi-Asare and Addison (2000); Bothwell (1980); Demsetz and
Lehn (1985); abd Joh (2003)

13 | P a g e
Profitability and operational efficiency (1999 to 2008).

Changes in the profitability of the banking sector can indicate whether the
performance of the sector as a whole has improved or not following the 2004
regulatory reforms. A paired t test was carried out to see whether there is a significant
difference in the sector’s profitability between the two periods (1999-2003 and 2004-
2008). The results are summarised in Table 3 indicating an upward positive change in
the ROA ratio from 5.31 percent to 18.11 percent, whilst ROE indicators also showed
an upward movement from 49.38 percent to 92.80 percent. Over the 8 years, both
ROA and ROE variables showed a continuous increase year on year (y-o-y) except
for a decline in both indicators between 2003 and 2004. This decline may have been a
result of the banking sector crisis during this period.10

In view of the regulatory reforms introduced in 2004, both ROA and ROE ratios are
expected to improve. When tested for significance, the changes in both ROA and
ROE in Table 3 over the two periods are statistically significant at 1 percent and at 5
percent respectively suggesting an increase in ROA and ROE over time. 11 ROA
shows how well a bank is performing using the resources at its disposal to generate
additional resources for the bank and ROE measures how much profit a bank
generates with the money shareholders have invested. Positive growth in these
indicators is considered necessary for bank viability (Dziobek and Pazarbasioglu,
1977:8-9). Good earnings performance enables a bank to fund its expansion, remain
competitive and replenish or increase its capital.

When Cost to Income Ratio (CIR) and net interest margin (NIM) ratios are considered,
literature suggests that the lower the CIR, and the higher the NIM ratio, the more
profitable a bank will be (Reaz, 2005). The results in Table 3 indicate an increase in
the CIR ratio from a mean of 18.24 percent in the first period to 57.74 percent in the
second period. The NIM mean decreased from 236.33 percent to 66.1 percent in the
second period. In both cases, the results show negative signs from expected outcomes.
However, the differences in the means for both p values for the paired t test on CIR
and NIM ratios over the two periods were not statistically significant. The reduction
in the NIM ratio over the two periods may have been a result of negative real interest
rates and a decline in interest bearing assets following a collapse of the Zimbabwean
economy between 1999 to 2003.

10
Between 2003 and 2004, ROA fell from 15.58 % to 10.94, whilst ROE also retreated from 72.33% to
59.28% indicating the severity of the banking sector crisis.
11
The significance level used in this analysis is .05 which is the level used in social science studies.

14 | P a g e
Table 3: Paired t test for Profitability Ratios of All Zimbabwean banks (1999-2008). *
Variable Obs. Mean Std. Error. Stnd. Dev. [95% Conf] t-
statistic.

ROA 5(1999-2003) 5.316 2.599588 5.812855 -1.901612

5(2004-2008) 18.11 3.363914 7.521941 8.770276 -
8.8026.

Ha:mean (diff)<0 Ha:mean(diff)!=0

Pr(T<t)=0.0005 Pr(T>t)=0.0009
ROE
5(1999-2003) 49.386 9.179717 20.52647 23.89902
5(2004-2008) 92.806 10.86921 24.30429 62.62824 -
3.0767

Ha:mean (diff)<0 Ha:mean(diff)!=0

CIR Pr(T<t)=0.0185 Pr(T>t)=0.0370

5(1999-2003) 18.24 3.010581 6.731865 9.881286

5(2004-2008) 57.742 27.570661.64974 -18.80627 -1.3337

Ha:mean (diff)<0 Ha:mean(diff)!=0

NIM Pr(T<t)=0.1266 Pr(T>t)=0.2532

5(1999-2003) 236.33 96.82188 216.5003 -32.49065

5(2004-2008) 66.1 30.14519 67.40668 -17.59645
+1.6191

Ha:mean (diff)<0 Ha:mean(diff)!=0

Pr(T<t)=0.9096 Pr(T>t)=0.1807
Source: Statistical Analysis based on RBZ Annual Reports.

*Profitability data is for all banks for two periods (between 1999-2003 and 2004-2008). T-statistic is
for the difference in means between pre-regulatory reform and post regulatory reforms. Under one
tailed test, significance at 0.5% level. CIR, refers to Cost to Income Ratio. The observation refers to
the total number of years in each period whilst the particular period is indicated in brackets.

Profitability Ratios by bank ownership types (2003-2008).

We also conduct a trend analysis of the profitability ratios between 2004 and 2008
(period after introduction of regulatory reforms) using data at bank level. The purpose
is to examine the performance of the individual banks and then by ownership type.
The expectation is that after the corporate governance reforms, profitability indicators
should improve (Reaz, 2005). The full consolidated results for all banks in respect of
these profitability indicators between 2004 and 2008 are summarised in Table 2 and
Figure 1 below. The results show that private indigenous banks recorded the lowest
ratios in ROA and ROE between 2004 and 2005 compared to foreign banks with the
highest ratios and state banks with the second highest.

15 | P a g e
 Figure 1 which highlights the results of a trend analysis for the ROA ratio between
2004 and 2008 show that indigenous banks were outperformed by state banks
between 2004 and 2005. The trend is however reversed between 2006 and 2008.

Table 4: Measures of Bank Profitability by Ownership Type (2003-2008).

2004 2005 2006 2007 2008
Bank Type ROA ROE ROA ROE ROA ROE ROA ROE ROA ROE
State owned 11 117 11.45 116.45 13.7 106.43 9.9 58.5 6.7 19.03
Foreign 13.33 109.48 15.88 123.45 26.35 114.45 19 69 30.76 94.81
Pvt Indig. 7.6 -17.2 4.7 93.37 22.65 118.03 18.53 88.07 28.8 173.77

All Banks 10.94 59.28 13.86 110.58 16.25 99.46 19.04 76.99 30.46 117.93

Source: Bank Annual Reports and Global Credit Rating, GRC (2009).

Foreign banks remained top performers for the whole period between 2004 and 2008.
The results for NIM and CIR ratios between 2004 and 2005 show a similar pattern,
with indigenous banks reporting the lowest NIM ratio in 2004 of 35.7 percent,
compared to foreign banks (45.28 percent) and state banks (63.95 percent). A similar
pattern is also repeated in 2005. Between 2006 and 2007 there was a slight
improvement in the NIM ratios for all banks, although the ratio retreated to -10.7
percent in 2008. The decrease could have been a result of a reduction in bank deposits
due to market uncertainties resulting from dollarization of the economy.

Figure 1: Trend Analysis – ROA Ratio by Ownership Type (2004-2008)

Source: Author’s own compilation

One of the reasons why private indigenous banks had the lowest ratios may be
attributable to the reconstruction of the sector through mergers and acquisitions. The
introduction of the regulatory changes in 2004 could also have been a factor since it
only affected indigenous banks. A further analysis of the cost to income ratio (CIR)
provides an insight into the cost efficiencies of the different bank ownership types.
The cost efficiency of banking firms is predicted to be positively associated with bank
performance and specifically with bank profitability. The standard analysis of cost to
income ratio, which is employed in other studies such as Pasiouras and Kosmidou

16 | P a g e
 (2006), reflects the ability of bank’s management to cover operating expenses by the
generated bank income.

Table 5: Measures of operational efficiency by Ownership Type (2004-2008).

2004 2005 2006 2007 2008*
Bank Type CIR NIM CIR NIM CIR NIM CIR NIM CIR NIM
State owned 48.2 63.95 42.7 44 38.15 53.4 49.55 27.73 - 10.4
Foreign 39.53 45.28 32.61 32.8 26.21 84.1 23.16 33.71 - 10.55
Pvt Indig. 65.92 35.7 70.3 31.74 39.92 71.97 36.87 49.83 - -10.7

All Banks 53 43.67 52.71 33.46 35.79 76.62 33.54 42.92 - 0.9

Source: Bank Annual Reports and Global Credit Rating, GRC (2009).

*CIR data for 2008 were not available.

The results in Table 5 show that foreign banks with an average cost to income ratio of
24.89 percent were the most cost efficient whilst indigenous banks with an average
ratio of 41.80 percent outperformed state owned banks. The high CIR ratio of state
owned banks could be attributed to a proportionately larger branch network in the
rural areas compared to other banks, due to the government’s desire to provide
banking facilities to the rural population.

Demirguc-Kunt and Huizinga (1999) who analysed the determinants of commercial

bank interest margins and profitability for 80 countries between 1988-1995 period
show that, in developing countries, foreign banks have higher net interest margins
(NIM) and profits than domestic banks, while the opposite is true for developed
countries. The reasons noted for this superior performance of foreign banks is their
technological edge which is relatively strong to overcome any informational
disadvantages. 12 Macroeconomic factors are also found to explain variations in
interest margins across countries since inflation is believed to be associated with
higher realised interest margins and higher profitability.13

Aggregate profitability ratios for the banking sector before and after the introduction
of the 2004 regulatory changes show an upward movement in ROA and ROE. This
improvement was found to be statistically significant. There is also indication of a
general increase in the CIR and a reduction in the NIM ratio over the same period
although this was statistically insignificant. The trend analysis between 2004 and
2008 in suggest that foreign banks performed better than both indigenous and state
owned banks during this period. The results also indicate poor performance by
indigenous banks between 2004 and 2005 which may have been the result of the 2003
banking crisis.

12
See Demirguc-Kunt and Huizinga (1999)
13
Ibid. (The positive relationship between inflation and bank profitability implies that bank income
increases more with inflation than bank costs. Further, high real interest rates are associated with higher
interest margins and profitability, especially in developing countries)

17 | P a g e
Asset Quality Ratios (1999-2008).

Credit risk exposure is used across literature as an indicator of asset quality, which
can be measured by the ratio of non-performing loans (NLPs) to loan-loss provisions
(Demirguc-Kunt and Huizinga (1999). Since loan-loss provisions indicate the
probability of loans to become non-performing, higher provisions are taken to be
negatively related to bank profitability. Different authors capture this effect by using
different indicators. Athanasoglu et al (2006) uses loan-loss provisions to non
performing loans ratio, whilst Kosmidou et al. (2006) use loan-loss provisions to total
assets ratio as an indicator. 14 In our analysis we use loan loss provisions to non
performing loans ratio to measure credit risk exposure of Zimbabwean banks.

Asset quality is an important performance measure since the solvency of banks is at

risk when their assets become impaired due to over exposure to non-performing loans.
Non Performing loans (NPLs) have been identified in literature as one of the primary
causes of bank collapses (Llewellyn, 1998; Brownbridge, 1998).15 The banking sector
reforms, introduced by the central bank in 2004, were expected to enhance the
efficiency of banks and strengthen their profitability and solvency by reducing the
NPL ratio. 16 The data used to analyse NPL ratio and loan loss provisions are
aggregate data for the banking sector as a whole. Figure 2 shows the changes in the
two indicators for the banking sector over the period between 1999 and 2008.

Figure 2: Aggregate asset quality of the banking sector (1999-2008)*

Asset Quality Ratios (1999-2008)
80
70
60
50
40
30
20
10
0
Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

NPLs to gross loans Total Provions to NPLs

Source: Author’s own compilation

*Figures in the vertical Axis are in percentages.

14
Regardless of the indicator used, the relationship between loan loss provisions with bank profitability
is expected to be negative.
15
According to Brownbridge (1998), the single biggest contributor to the bad loans of many of the
failed local banks was insider lending. In at least half of the bank failures, insider loans accounted for a
substantial proportion of the bad debts
16
In this case, higher NPL would be associated with less efficient banks.

18 | P a g e
The results show the NPL ratio peaking in at the height of the financial sector crisis in
2003, whilst the NPLs to gross loans ratio recorded the lowest result in the same year.
After 2003, both ratios indicate a downwards movement although they start to move
upwards again after 2007. Table 6 analyses the results of a paired t test for NPLs to
gross loans and loan loss to gross loans provisions ratios between the two periods
(1999-2003 and 2004-2008).

Table 6: Paired t test for Asset Quality Ratios of All Zimbabwean banks (1999-2008). *
Variable Obs. Mean Std. Error. Stnd. Dev. [95% Conf] t-
statistic.

NPLs 5(1999-2003) 11.62 2.47657 5.5377 4.743939

5(2004-2008) 16.452 5.098978 11.40166 2.294968 -
0.7491.

Ha:mean (diff)<0 Ha:mean(diff)!=0

Pr(T<t)=0.2477 Pr(T>t)=0.4954
LLR
5(1999-2003) 56.06 7.18071 16..05656 36.12315
5(2004-2008) 14.762 8.594926 19.21884 -9.101341
2.8985

Ha:mean (diff)<0 Ha:mean(diff)!=0

Pr(T<t)=0.9779 Pr(T>t)=0.0442

Source: Statistical Analysis based on RBZ Annual Reports.

*Profitability data is for all banks for two periods (between 1999-2003 and 2004-2008). T-statistic is
for the difference in means between pre-regulatory reform and post regulatory reforms. Using a one
tailed test at 5 percent significance level. NPLs, refers to Non Performing Loans Ratio, whilst LLR
refers to Loan Loss Provisions. The observation refers to the total number of years in each period
whilst the particular period is indicated in brackets.

When the means for the two periods are compared, the results show a decline in loan
loss provisions from 56.06 to 14.76 percent although the NPL ratio records a marginal
increase over the same period, from 11.62 percent to 16.34 percent between the two
periods. However, the Paired t test for both ratios shows that the changes over the two
periods were not statistical significant.

Asset Quality Ratios by Ownership type (2004-2008).

Data on asset quality ratios at the bank level are used to make a trend analysis from
2004 and 2008. Table 7 summarises the results by ownership types.

19 | P a g e
 Table 7: Asset Quality Ratios by Ownership Type (Average, 2004-2008). *
2004 2005 2006 2007 2008
Bank Type NPL LLR NPL LLR NPL LLR NPL LLR NPL LLR
State owned 25.95 8.3 22.7 17.15 5.2 2.83 0.83 1.73 14.3 3.12
Foreign 16.87 15.96 12.01 11.53 9.80 5.31 4.93 2.60 3.93 3.12
Pvt Indig. 20.23 17.4 16.92 10.75 4.85 1.65 9.86 4.21 62.21 15.55

All Banks 18.41 11.94 14.75 11.17 6.45 3.14 5.94 3.14 34.36 7.81
Source: Researcher’s compilation from fieldwork data.
*The figures in this analysis are the averages for each ownership type over the five year period.

The results indicate that NPLs had been declining across different ownership types
before making a sharp increase in 2008. In general, the results reveal that foreign
banks had lower NPLs and LLRs ratios compared to other bank types. The high NPL
and LLRs averages among indigenous banks should however take into consideration
the results in a few indigenous banks with recorded higher NPL ratios compared to
others.17

Figure 3: Trend Analysis of NPL/Gross Loans by ownership type (2004-2008)

Source: Author’s own compilation

One explanation for a high NPL ratio could be high levels of insider loans and default
rates in indigenous banks reported by the central bank. Indigenous banks attracted
poor quality loans and high default clients due to their comparatively small sizes.
Loan Loss Reserve/Gross loans ratio suggests that indigenous banks also had higher
provisions (12.05 percent) compared to other bank types. The sharp increase in 2008
in both NPL and LLR indicators which may have been a result of the panic and
apprehension initially caused by the dollarization of the economy which resulted in
increased loan defaults.

17
For example, CFX Bank had an NPL ratio of 462.7 percent in 2007 when the rest of the indigenous
banks in the same sector had NPL ratios below 10 percent. In 2004-5, FBC Bank had higher NPL ratios
of 64.9 percent and 44.8 percent respectively compared to other banks which averaged 15 percent
NPLs.

20 | P a g e
Liquidity Ratios by ownership type (2004-2008)

Liquidity management is another important dimension of banks and one that is closely
related to corporate governance. This is because solvent financial institutions may be
driven towards insolvency by poor management of short-term liquidity. Generally, the
liquidity of banks is a necessary condition for ongoing banking operations and any
severe liquidity challenges can lead to a bank failure. 18 One of the ratios used to
measure liquidity is loan to asset ratio defined as a ratio of the total outstanding loans
to total assets. A high ratio indicates that a bank is loaned up and its liquidity is low
which exposes the bank to higher defaults. Another ratio which can measure liquidity
is the loan to deposit ratio (LTD). This is the percentage of a bank’s loans against its
deposits which is used as a gauge of a bank’s solvency. The higher the ratio, the more
the bank is relying on borrowed funds which are generally more costly than deposits.
By international standards, healthy LTD ratios typically fall between 95 percent to
105 percent.

There are two opposing considerations when determining any bank’s LTD ratio. First,
there is the risk element arising from issues such as economic performance, quality of
bank management, the deposit base and lending opportunities (Aryeetey, 1994).
Zimbabwe’s general economic decline and the liquidity crisis in the banking sector in
2003 may be due to some reason that banks were sceptical to increase borrowing. The
effect of these combined factors would lower the LTD ratio. Secondly, banks have to
consider the earnings factor, which would result in a higher ratio.19 Financial reforms
tend to focus banks on increasing their earnings potential, thereby expecting a higher
LTD ratio.

A trend analysis of the loan to total asset ratio by ownership type between 2004 and
2008 is presented in Table 8.

Table 8: Loan to Asset Ratio by ownership type (2004-2008)

2004 2005 2006 2007 2008 Average
Ownership
Type
State Owned 36.35 33.5 28.25 30.20 0.95 25.85
Foreign Banks 39.14 19.15 24.50 26.5 16.20 25.25
Indigenous 56.73 41.91 46.16 40.87 36.25 44.38
Banks
All Banks 47.42 31.55 35.13 33.7 23.84 34.32
Source: Researcher’s compilation from fieldwork data

The results show a decrease in the loan to asset ratio for the whole banking sector
from 47.42 percent in 2004 to 34.32 percent in 2008. Indigenous banks reported loan

18
Conversely, maintenance of superfluous liquidity can lead to the underperformance of banking assets
and thus to lower profitability of banking firms. However, an unmatched position potentially enhances
profitability but also increases the risk of losses.
19
McNaughton and Barltrop (1992:13) argue that ‘though the appropriate level varies by country. 70-
80 percent would represent a reasonable balance between liquidity and earnings’ concerns.

21 | P a g e
to asset ratios above the banking sector averages.20 Both Table 6 and Figure 4 show
that over the 5 years, private indigenous banks had the highest loan to asset ratio. The
trend analysis also shows that indigenous banks had higher liquidity ratios between
2004 and 2005 compared to other banking types. The reduction of the loan to asset
ratio between 2004 and 2008 in figure 4 could have been a result of reduced lending
by most banks. This could have been a result of increased liquidity constraints
imposed upon the banking sector over the period. Another possible reason for the
more conservative credit practices over this period could be the rigorous lending
guidelines introduced in 2004 which resulted in a cautious approach to avoid liquidity
problems.

Figure 4: Trend Analysis of loan to Asset Ratio by ownership type (2004-2008)

Source: Author’s own compilation.

The results also show a sharp fall in the ratio in 2008 which could be a result of low
deposits by customers following the dollarisation of the economy with customers
unsure of the changes, preferred to keep their money outside the banking system.

Correlation results between corporate governance and performance.

Having specified the variables used in the correlation analysis, we then analyse the
results of the correlation between corporate governance and performance. The
Pearson Product-Moment Correlation Coefficient (r) or correlation coefficient is
interpreted using the established procedure. Firstly, the sign of the correlation (+, -) is
interpreted to define the direction of the relationship between the variables. Based on
the general statistical interpretation of correlation coefficients, a positive correlation
coefficient is interpreted to mean that as the value of one variable increases, the value
of the other variable increases whilst a negative correlation indicates that as one
variable increases the other one decreases (Lomax, 2007).

20
ReNaissance Bank had a high loan to asset ratio of 102.6 % in 2004 and 128.2 in 2006 whilst CBZ
Bank reported 73.2 % in 2004. This could have been responsible for the high averages within the
private indigenous banks.

22 | P a g e
Second, the absolute value of the correlation coefficient is taken to measure the
strength of the relationship between the variables. A correlation coefficient of r=0.50
or greater is taken to indicate a stronger degree of linear relationship than one below
0.50. 21 Lastly, the analysis tests whether the correlation coefficient is statistically
significant by interpreting the p-values.

The correlation results presented in Table 9 shows the relationship between the
corporate governance variables and the performance variables separately. In general,
whilst some of the corporate governance variables show a positive relationship with
performance variables, a significant number show the relationship between the
variables to be negative. We only find a strong relationship between the variables
displayed in Table 9. However, only a few of the relationships are statistically
significant. However, some major findings from the results show a strong and
statistically significant negative correlation between degree of insider lending (ISLD)
and ROE. Although not statistically significant, we also find a strong relationship
between the board of director’s level of qualifications (LBQL) and the bank’s non-
performing loans (NPLs).

Table 9: Variables showing strong correlation

CG Variable Performance Variable Coefficient P-Value

Ownership Variables
OCON ROA 0.5065 0.1357

Board Variables
LBQL NPL -0.5071 0.0924
LBQL LLR -0.563 *0.0567

Risk
ISLD ROE -0.6439 *0.0239

Disclosure
LDSC ROE 0.5124 0.1039
LDSC CIM -0.5047 0.0942
*Results are statistically significant.

Although the results show no strong correlation between corporate governance and
performance variables, this does not necessarily disprove the claim that good
governance leads to good performance. Besides the fact that some studies in other
countries do not find this relationship to be robust, a number of factors could have
influenced the findings from this study. First, most research supports the positive
correlation between firm-level corporate governance practices and different measures
of firm performance. The link is stronger with market-based measures of performance
(that is firm valuation) and weaker with accounting measures (Lomax, 2007). One of
the reasons for a weaker relationship when using accounting figures might be
explained by the allowed discretion in accounting reporting and the fact that better
governance might reduce such discretion (Dedman, 2002). This study uses accounting
21
Likewise, a correlation coefficient of r=-50 shows a greater degree of relationship than one of r=.40.
A correlation coefficient of zero (r=0.0) indicates the absence of a linear relationship and correlation
coefficient of r=+1.0 and r=1.0 indicate a perfect linear relationship.

23 | P a g e
measures, instead of stock returns due to the absence of reliable stock market data.
This may explain the weak relationship we find between corporate governance and
performance.

Second, some studies find a weak relationship between corporate governance and
performance as a result of a financial crisis or poor macroeconomic conditions. A
study of 296 financial institutions in 30 countries found that board independence and
high institutional investor ownership, which are usually assumed to be good practices,
were associated with poor stock performance during a crisis (Erkens et al., 2010).
The deteriorating macroeconomic climate in Zimbabwe at the time of this study may
have contributed to a weaker association between corporate governance and
performance. Third, the findings could also indicate that besides corporate governance,
there may be other institutional factors which can affect the relationship between
corporate governance and performance (Rajan and Zingales, 1999; Brownbridge,
1998). These include the effect of regulatory and political factors such as the central
bank regulatory policies, the existence of special interest groups and political
interference in banks.

Correlation analysis between CGS scoring and performance

The results from Corporate Governance Scoring (CGS) are summarised in Table 10.
They show higher corporate governance scoring by foreign owned banks (Barclays
and Stanbic Bank). However, FBC Bank, a private indigenous bank also recorded the
second highest corporate governance score from all the banks ranked. The lowest
ranked banks (ReNaissance and Interfin) are private Indigenous banks. A year after
the survey, the two banks collapsed and were placed under curatorship by the central
bank.

Table 10: Corporate Governance Score of Individual banks by sub-category

Bank OWNERSHIP BOARD RISK CONTROL DISCLOSURE TOTAL
(ISLD) (LDSC) SCORE
State
Agribank 3 4 3 0 10
ZB 5 4 3 0 12
Average 4 4 3 0 11
Foreign
Stanchart 5 4 5 0 14
Barclays 7 4 5 1 17
Premier 5 4 0 0 9
BancABC 5 4 3 1 13
Met Bank 5 4 3 0 12
Average 5.4 4 3.2 0.4 13
Indigenous
CFX 5 4 1 0 10
NMB 5 4 2 0 11
Kingdom 4 4 2 1 11
TN Bank 4 4 4 0 12
FBC 6 4 4 1 15
ReNaissance 4 4 0 0 8
Interfin 4 4 0 0 8
Average 4.5 4 1.8 0.2 10.7
Source: Author’s own compilation from fieldwork data.

24 | P a g e
 Except for the three banks which recorded the highest score, in general, the results
show no marked differences in the corporate governance scores between the rest of
the banks regardless of ownership type. When analysed by category, all the banks had
complete scores for their board structures largely because of new regulatory
provisions which required banks to set up new board structures and sub-committees.

We also relate CGS to different classifications of banks, more specifically to establish

whether CGS differs between listed and non listed banks, between stand alone banks
and banks as part of a holding company, and between foreign owned domestic banks,
and between banks in which CEOs and executive directors control more than 10
percent of the shareholding and those in which they control less. The results in this
regard are presented in Table 11 alongside the ROE means.

Table 11: Corporate Governance Scores (CGS) by Ownership Structure

Ownership Structure No of Banks CGS/Means P–Values**
ROE/Mean*

Listed Banks. 9 28.5 143.71

Unlisted Banks 3 26.5 87.63

Pr ([T ]>[ t ])=0.6996

Stand-alone-Banks 5 28.4 151.02

Part of a Group or Holdings 7 25.8 96.07

Pr ([T ] >[ t ])=0.6192

Substantially owned by foreigners 5 27.41 80.06

Others 7 27.71 75.02
Pr ([T ] >[ t ])=0.9100

CEO >10 % shares. 3 26.80 117.13

CEO<10 % shares 9 32.33 128.92

Concentrated ownership Pr ([T ] >[ t ])=0.0351

Executive >10 % shares
Diffuse Executive Directors <10% 5 25.60 107.43
shares. 7 32.63 142.88

Pr ([T ] >[ t ])=0.0743

Source: Author’s own compilation from fieldwork data.

*Return on Equity (ROE) as at year ending 2008.

** The p-Values in this table relates to a paired t test for the corporate governance score between the
two contrasting ownership types.

25 | P a g e
 Though statistically insignificant, the comparative results show that banks listed on
the Zimbabwe Stock Exchange have higher average CGS (28.5) compared to unlisted
banks (26.5). When the means for the ROE ratio for the two are compared listed
banks have a higher average ROE average (143.71%) almost double that of unlisted
banks (87.63 %). A possible explanation for the higher CGS among listed banks could
be the extra corporate governance compliance requirements for listed companies
enforced by the stock exchange (Mangena and Tauringana, 2005). The results show
that stand-alone-banks have higher CGS (28.41) and higher ROE ratios (151.02)
compared to those which are part of a group or holding company with lower score
CGS (25.8) and ROE ratios (96.07%). During the same period, foreign banks
performed marginally better than locally owned banks.22

The results in Table 11 also show that owner managed banks in which the CEO
controls 10 percent or more of the bank’s shareholding have lower CGS (26.80) and
lower ROE ratios (117.13 %) compared to banks in which the CEO owns less than 10
percent of the shareholding with higher CGS (32.33) and higher ROE (128.92). The
difference in the CGS in this regard is statistically significant at 5 percent. The last set
of results show banks with diffuse ownership in which executive directors own less
than 10 percent of the issued share capital, to have higher CGS (32.63) and higher
ROE ratio (142.88%) compared to banks with concentrated ownership in which
executive directors control more than 10 percent of the shareholding with a lower
CGS (25.60) and lower ROE ratios (107.43). The difference in the CGS between
these two groups is also statistically significant at 10 percent.

A correlation analysis between the corporate governance scores and the performance
indicators is also performed. The CGS in the different categories such as Ownership
and Board are also correlated separately. The results are summarized in Table 12.

Table 12: Correlation Analysis Results.

CGS ROA ROE NIM CIM NPL LLR OWTF OWTP PUB
Variable
CGS
(Coeff) 0.2684 -0.0598 0.0568 -0.3314 -0.3199 -0.3948 0.3213 -.0.1414 0.2957
P-value 0.3990 0.8535 0.8607 0.2927 0.3107 0.2041 0.3085 0.6612 0.3508
OWT
(Coeff) 0.1271 0.0534 0.1762 -0.6350 0.0027 -0.0602 0.4283 -0.1034 0.3089
P-value 0.6939 0.8690 0.5838 0.0265 0.9935 0.8527 0.1648 0.7492 0.3286
BOARD
(Coeff) . . . . . . . . .
P-value 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
RISK
(Coeff) 0.1965 -0.2684 -0.1765 0.0001 -0.4195 -0.4927 0.1662 -0.1857 0.0818
P-value 0.5405 0.3989 0.5831 0.9998 0.1746 0.1036 0.6057 0.5633 0.8005
LSDC
(Coeff) 0.3904 0.4342 0.4474 -0.2566 -0.2107 -0.2079 0.1195 0.1195 0.5000
P-value 0.2095 0.1584 0.1448 0.4207 0.5109 0.5167 0.7114 0.7114 0.0979
Source: Author’s own compilation.
* Results show a strong relationship between the variables. p-Value statistically significant at 5 percent.

22
It should be noted, however, that foreign banks in this analysis includes weak indigenous banks
which were taken over by foreign investors after the 2003 financial sector crisis.

26 | P a g e
Although there is a positive correlation between corporate governance scores and
some performance variables such as ROA, NIM and PUB listing, none of these results
are strong or statistically significant. When analysed by sub-category, the results for
the correlation between the corporate governance scoring categories and performance
variables largely mirror those of the composite corporate governance scoring. The
only results which show a strong and statistically significant relationship is between
ownership variables and cost to income margin (CIM).

Conclusion

The purpose of this paper was to analyse the relationship between corporate
governance and performance in the Zimbabwean banking sector using various
statistical measures. The first set of results presents our findings on the general
aggregate performance of the banking sector during the periods between 1999-2003
and 2004-2008. The two time periods represents the period before and after the 2003
banking sector crisis and the implementation of a new set of corporate governance
regulations by the central bank. Our findings suggest a positive growth of profitability
ratios such as ROA and ROE suggesting performance improvements between the two
periods. We also find differences in the performance ratios between the two periods to
be statistically significant using a paired t test.

In the second part of the analysis, we conducted a correlation analysis between

selected corporate governance and performance variables. In general, whilst most
corporate governance variables show a positive correlation with performance, our
results show the relationship as neither strong nor statistically significant. We
however find a strong and statistically significant relationship between corporate
governance variables such as the level of insider lending and performance variables
such as ROE, suggesting that as the level of insider lending increases, performance
reduces.

Lastly, we constructed a corporate governance scoring (CGS) grid based on selected

corporate governance variables. The CGS was then correlated with the performance
variables. The results in this regard match our general findings relating to corporate
governance and performance as positive but not strong or statistically significant.
When the results are analysed separately, they reveal some interesting findings. First,
we find that banks listed on the Zimbabwe Stock Exchange have higher CGS and
ROE ratios compared to unlisted banks. Stand alone banks also attained higher scores
and ROE ratios compared to banks that are part of a holding group.

Significantly, we also find that owner managed banks in which the CEO controls 10
percent or more of the bank’s shareholding have lower CGS and lower ROE ratios
compared to banks in which the CEO owns less than 10 percent of the shareholding
with record higher CGS and higher ROE. The difference in the CGS in this regard is
statistically significant at 5 percent. Banks with diffuse ownership in which executive
directors own less than 10 percent of the issued share capital also had higher CGS and
higher ROE ratio compared to banks with concentrated ownership in which executive
directors control more than 10 percent shareholding. The difference in the CGS
between these two groups is also statistically significant at 10 percent.

27 | P a g e
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