Threshold effect of non-interest income disaggregates on commercial banks’ financial performance in Zimbabwe

Abstract

Financial performance has become a trending concept in corporate finance and strategic management in recent times especially in the aftermath of the Global Financial Crisis (GFC) of 2007–2009. As an antidote to charter value erosion caused by stiff competition from incumbents in traditional banking activities, banks venture into non-core banking activities as a diversification and survival strategy. The purpose of the study is to determine the optimal threshold levels of non-interest income that stimulate financial performance of ten Zimbabwean commercial banks using non-interest income disaggregates over 2009–2020. Unfortunately, studies that examine the non-interest-income-financial performance nexus of banks involved in intermediation are scant and inconclusive. Furthermore, the use of threshold models to crack this puzzle are conspicuous. The study employed Fully Modified Ordinary Least Squares and Threshold difference Generalized Methods of Moment nonlinear threshold approaches. The aggregated and disentangled non-interest income dynamic optimal thresholds found are 26 %, 17 % and 10 % whereas the average static ones are 35 %, 28 % and 17 %. Compared to aggregated non-interest income, the study reveals that the disaggregates pose a greater positive impact on financial performance of banks in the upper regime than their counterparts in the lower regime. In addition, more banks were found to be operating below the required minimum thresholds. To avert episodes of bank failures and hedging against banking sector fragility, commercial bank managers should come up with well-diversified portfolios of income-generating ventures. Also, central bank regulations must promote non-interest activities, competition, growth and reduce leverage of commercial banks.