Banking Competition-Financial Stability Nexus of the Zimbabwe Commercial Banking Sector (2009-2018)

Abstract

The motive behind carrying out of this study was the distress and alarm in the banking sector of Zimbabwe due to liberalized of the financial system by relaxation of entry restrictions resulting in increased participation of private sector, with the aim of enhancing competition of the sector. The focus of this study was to investigate on the effectiveness of competition-financial stability nexus in the banking sector of Zimbabwe based on the dominance of the five banks listed on the Zimbabwe Stock Exchange (ZSE) and is premised on establishing the effect of competition on financial stability. The research complements existing literature by inferring the effect of competition on stability, over the duration 2009 to 2018.The measurement of competition was the Lerner index (measure the market concentration) and then, calculation of the Z-Score to measure the distance to distress. The results from the Lerner index used to exhaustively affirm monopolistic competition as the predominant competitive environment in Zimbabwe. The study also through Z-score and Lerner indices with OLS estimation method found results aligned towards competition-fragility view. The outcomes have affirms for policy formulation in the Zimbabwean banking sector through its agency of regulation and supervision to maintain financial stability armed with the mechanism for setting reforms in a monopolistic competitive environment. Firstly, it would be prudent to implementing stringent capital regulations under the Basel III and regulation such as risk-adjusted deposit insurance. Secondly, regulatory authorities should introduce income diversification thresholds for commercial banks. Finally, it is also important for policy makers to facilitate designing institutions, including regulatory policies to create efficient financial markets in Zimbabwe that allocate society’s savings to their best use and support real markets.