ZIMBABWE COMMERCIAL BANKS’ CREDIT RATING SYSTEMS AND THEIR COMPLIANCE WITH THOSE OF INTERNATIONAL RATING AGENCIES

Abstract

Zimbabwe’s banks experienced a steep upward trend in non-performing loans (NPLs) from 1.8% in December 2009 to 20.45% in September 2014 (Reserve Bank of Zimbabwe, [2014, September], Quarterly industry report, p. 10). This was a phenomenal rise of 1036.11% in 5 years. Most of Zimbabwe’s banks are currently facing challenges in reducing the level of NPLs. It could be that Zimbabwe banks’ credit rating systems lack robustness which could be contributing in causing the steep rise in the NPLs. The study aims to assess and evaluate the credit rating systems used by commercial banks in Zimbabwe in comparison with those of international rating agencies. Research Methodology The research used both qualitative and quantitative techniques in gathering data. The target population was all the heads of credit departments of the 13 commercial banks in Zimbabwe. These 13 commercial banks constituted the entire population and the research covered 100% of these commercial banks. A questionnaire was used to collect data from the target vi population. The questionnaire had a Likert scale design for the data which was subjected to quantitative analysis. The Likert scale ranged from 1 to 5 (1 – never, 2 – rarely, 3 – sometimes, 4 – often and 5 – always). vii Findings of the study 1. Commercial banks in Zimbabwe always used credit rating models as evidenced by 100% of the respondents who stated that their banks used credit rating models. The models are used to compute customer credit ratings as part of the creditworthiness assessment which is done before considering giving loans. 2. The credit rating models were reviewed annually to factor in any changes in the operating environment. This was confirmed by a mean of 4.83 and a mode of 5 which were in agreement with the respondents who submitted that the models were always reviewed (91.7% positive response). There was not much variation based on a standard deviation of 0.577 confirming that all commercial banks reviewed their credit rating models. 3. The credit rating systems of the Zimbabwe commercial banks were aligned to the Reserve Bank of Zimbabwe ratings. A mean of 4.92 and a mode of 5 supported by a frequency of 91.7% indicated that the Zimbabwe commercial banks’ rating systems were aligned to the ratings of the Reserve Bank of Zimbabwe. 4. All the questionnaire respondents provided similar feedback that Zimbabwe commercial banks used financial and non-financial information, and that their credit rating models auto-calculated credit ratings based on data fed into the credit rating systems. This was vouched by a mean of 4.92, a median of 5 and a mode of 5 which were in line with a frequency of 91.7% indicating that all Zimbabwe commercial banks use financial and non-financial information in the credit rating process and the credit rating systems automatically compute the customer credit rating based on the data. The standard deviation on each of the following: “use of financial information”; “use of non-financial information”; and “models automatically calculate credit rating results” was 0.289 confirming that there was not much variation. viii 5. Credit reference bureaux were used to get reference information on potential and existing customers as part of the credit rating process. This was supported by a mean of 4.92% and a mode of 5 which were consistent with a frequency of 91.7%. There was little variation in the responses as confirmed by the dispersion of the responses (standard deviation of 0.289). 6. Industry and external environment information was used in assessing the customer credit rating as evidenced by a mean of 5 and a mode of 5 which were in line with a frequency of 100%. There was no variation as the feedback was that all Zimbabwe commercial banks use the industry and external environment information when assessing customer credit rating (standard deviation of 0.000). 7. In addition to the industry and external environment information, all commercial banks in Zimbabwe use the borrower’s financial and reputational information to assess credit rating. This was evidenced by a frequency of 100% for the respondents who submitted that their banks used borrower’s financial and reputation information in the rating process. 8. All the Zimbabwe commercial banks had management override policies and management committees reviewed these policies. This was confirmed by a mean that ranged from 4.5 to 5 and a mode of 5 which were supported by the frequencies on the existence of management override policies (often – 41.7% and always – 58.3%) and that management committees review these policies (often – 8.3% and always – 91.7%). There was little variation in these responses (standard deviation ranged from 0.2 to 0.6). The respondents further indicated that where credit policies existed, management overrides were rare. This was confirmed by a mean of 1.58, a mode of 2 and a standard ix deviation of 0.515 which were supported by the frequencies on management modification of credit rating results (rarely – 58.3% and never – 41.7%). 9. The boards of all the Zimbabwe commercial banks oversee the credit risk and processes. All the research questionnaire respondents (100%) stated that their banks have boards that provide oversight on credit risk. This was supported by a mean of 5, a median of 5, a mode of 5 and a standard deviation of 0.000. 10. There was a strong negative correlation between the existence of management override policies and management propensity to modify credit rating results. The correlation result was r(10) = -0.714, p<0.01. This was supported by a cross tabulation analysis which showed that where there were always credit policies, management overrides of credit ratings were rare.