FACULTY OF COMMERCE

DEPARTMENT OF BUSINESS MANAGEMENT

Name of Author : Beverley Chikwira

Registration No. : R122520y

Degree Programme : B Com (Hons) Business Management

Title : Research Proposal

Level : 4:1

Mode of Entry : PDP

Topic : An analysis of the impact of minimum capital requirements on bank

profitability in Zimbabwe

RESEARCH TOPIC 1

Beverley Chikwira R122520y

 An analysis of the impact of minimum capital requirements on bank profitability in

Zimbabwe

1.1 BACKGROUND INFORMATION

Capital is essential and critical to the perpetual continuity of a bank as a going concern. A

minimum amount of capital is required to ensure safety and soundness of the bank and also to

build trust and confidence of the customers. A bank with a sound capital position is able to

pursue business opportunities more effectively and has more time and flexibility to deal with

problems arising from unexpected losses thus achieving increased profitability.

The banking industry is the heart of the economic development of any country. The

availability of banking infrastructure is considered as one of the prerequisites for rapid and

balanced development of any country. Recent economic crises have revealed the importance

of bank regulations to hedge against the high risk attributed to imbalances in banks’ statement

of financial positions. Nonetheless, excessive regulations may have adverse effects on the

operations of banks. On the one hand, they serve as prudential measures that mitigate the

effects of economic crises on the stability of the banking system and subsequent

accompanying of macroeconomic results. On the other hand, excessive regulations may

increase the cost of intermediation and reduce the profitability of the banking industry.

Simultaneously, as banks became more constrained, their ability to expand credit and

contribute to economic growth will be hampered during normal times. In a developing

country like Zimbabwe banks play an important and sensitive role, hence their performance

directly affects the growth, efficiency and stability of the economy.

Beverley Chikwira R122520y

At independence (1980) Zimbabwe had a sophisticated banking and financial market, with

commercial banks mostly foreign owned, Makoni (2010). For years the government did not

interfere with the banking industry and there was neither nationalisation of foreign banks nor

restrictive legislative interference on which sectors to fund or the interest rates to charge,

despite the socialistic national ideology. However, the government later purchased some

shareholding in two banks. It acquired Nedbank's 62% of Rhobank at a fair price when the

bank withdrew from the country, now known as Zb bank. The decision may have been

motivated by the desire to stabilise the banking system. The State in 1981 also partnered with

Bank of Credit and Commerce International (BCCI) as a 49% shareholder in a new

commercial bank, Bank of Credit and Commerce Zimbabwe (BCCZ). This was taken over

and converted to Commercial Bank of Zimbabwe (CBZ) when BCCI collapsed in 1991 over

allegations of unethical business practices. In the first decade, no indigenous bank was

licensed and there is no evidence that the government had any financial reform plan, Makoni

(2010). Later on as part of financial reforms aided by ESAP the Registrar of Banks in the

Ministry of Finance, in liaison with the RBZ, started issuing licences to new players as the

financial sector opened up.

To date the Zimbabwean banking sector comprises of the Reserve Bank of Zimbabwe (RBZ)

as the Central Bank for the nation and is the supervisor of all other banks, it guides and

maintain discipline through its monitoring and policy set ups. Zimbabwe has 18 commercial

banks, 2 merchant banks, 4 building societies and 1 savings bank. There are 16 asset

management companies and 95 micro-finance institutions.

Beverley Chikwira R122520y

Following the introduction of the multi currency regime, the RBZ introduced a phased

implementation plan for the enforcement of the prescribed minimum paid up equity capital

requirements for banking institutions. The prescribed minimum paid- up equity capital

requirement had been 12.5 million for commercial banks, 10 million for merchant banks, 10

million for building societies, 7.5 million for finance houses and discount houses, and 1

million for micro finance banks.

The Zimbabwe’s banking industry is battling a liquidity crisis which has undermined its

capacity on lending. Banking institutions are still struggling after the economy restoration

and are not running their business operations at full capacity. 10 out of 25 financial

institutions have recorded losses in the first quarter of 2010 ending 31 March. Some banks

are struggling to meet the minimum capital requirements set by the central bank and the

amount of money that banks lend is directly affected by the reserve requirements set.(RBZ

Monetary Policy 2011). Some banks are surviving on the bank charges and minimum

balances for investing making it hard to generate money for needy investors.

Following this implementation, six banks which are ZABG Bank, Royal Bank, Kingdom

Bank, Genesis Investment Bank, Eco Bank and Renaissance Merchant Bank failed to meet

the prescribed minimum capital threshold and risked losing their licences if they failed to

submit realistic recapitalisation plans.

As at 30 June 2012 the number of operating banking institutions including POSB declined to

25 from 26 following the voluntary surrender of a banking license by Genesis Investment

Bank after its failure to meet the minimum capital requirements.

Beverley Chikwira R122520y

Despite the failure by banks to meet the capital requirements, this year the reserve bank

governor has increased the minimum capital requirements for banks (July 2012 monetary

policy), as this will strengthen both local and international banks so that they play a

meaningful role in the development of the economy.

1.2 PROBLEM STATEMENT

Following the introduction of the multicurrency regime, the RBZ introduced a phased

implementation plan for the enforcement of the prescribed minimum paid up equity capital

requirements for banking institutions.

Some banks are struggling to meet the minimum capital requirements set by the central bank

and are surviving on the bank charges and minimum balances for investing, making it hard to

generate money for lending to needy investors.

1.3 RESEARCH OBJECTIVES

The researcher seeks to analyse the impact of minimum capital requirements on bank

profitability in Zimbabwe.

The objectives are:

1.3.1 To analyse the impact of minimum capital requirements on bank profitability in

Zimbabwe

Beverley Chikwira R122520y

1.3.2 To analyse the performance of the banking sector in Zimbabwe in relation to the

minimum capital requirements set

1.3.3 Deduce factors influencing the banking sector’s failure to meet the minimum capital

requirements

1.3.4 Suggest ways in which banks can meet the minimum capital requirements set

1.4 RESEARCH QUESTIONS

What is the impact of minimum capital requirements on bank profitability in Zimbabwe?

Analyse the performance of the banking sector in Zimbabwe in relation to the minimum

capital requirements set?

What are the factors influencing the banking sector’s failure to meet the minimum capital

requirements?

Suggest ways in which banks can meet the minimum capital requirements set.

Statement of Hypotheses

The following types of hypotheses were identified:

H0: Minimum capital requirements have an effect on bank profitability in Zimbabwe

H1: Minimum capital requirements have no effect on bank profitability in Zimbabwe

1.5 SIGNIFICANCE OF THE STUDY

The study is going to be done in partial fulfilment of requirements of Bachelor of Science

Honours Degree in Accountancy and will provide the researcher with the research skills for

Beverley Chikwira R122520y

future academic and scientific researches and will enhance the researcher’s understanding in

the field of accounting. It will also apply knowledge acquired over the years at Chinhoyi

University of Technology in moulding practical solutions applicable to the industry.

The study aims at helping the banking sector on the strategies employed to meet the

minimum capital requirements required by the central bank.

The study has a positive impact on the researcher as it increases and sharpens her skill and

knowledge on the banking sector.

The research results may form the data base for other scholars interested in studying the

performance of the bank sector and also the researcher will provide information and relevant

literature on research topic that could be used or further developed by other researchers

ASSUMPTIONS

 Information which the researcher will collect from respondents is accurate, valid and

relevant and can be relied on.

 The researcher will receive enough cooperation from all the targeted respondents who

will be interviewed

 The information collected from the secondary data sources is bound to be accurate

and there are no elements of window dressed books

 Response will provide unbiased information.

 Conclusion will be drawn from analysis of results and recommendations derived from

these conclusions.

Beverley Chikwira R122520y

1.6 DELIMITATIONS OF THE STUDY

The research is based on a case study of the banking sector. As such information obtained is

largely based on the impact on the banking sector specifically commercial banks, merchant

banks and building societies.

1.7 LIMITATIONS OF THE STUDY

 Time on the project is limited and will be allocated on other study sections. The

student however will work on the research even during the weekends and public

holidays

 Useful information to the research project cannot be easily accessible because it is

considered highly internal and sensitive. The researcher will have to notify the

respondents that data collected is purely for academic use, not for public

consumption.

 The views of other parties like the auditors of the organisation can be difficult to

obtain due to confidentiality, e.g. audit reports however the researcher can seek

permission from relevant authorities.

 Finance costs of collecting first hand data is a burden and as a result, the researcher

will have to resort to cheaper means like readily available data and e-mails.

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2.0 LITERATURE REVIEW

A review of literature is the extraction and contextualization of relevant knowledge from

published works (Gwimbi and Dirwai, 2003). According to White (2005) literature review is

the interpretation of what you read to add value to your own writing. Dena Taylor (2011)

defined literature review as an account of what has been published on a topic by accredited

scholars and researchers. McMillan and Schumacher (1997) went further to define literature

review as a narrative criticism of the existing literature. From the definitions it can be

deduced that the purpose of reviewing literature is to convey to readers the knowledge and

ideas that have been established on the impact of minimum capital requirements on bank

profitability. The researcher considered literature from different world scholars, journals,

newspapers, internet, dictionaries, reports and authors on the subject of impact of minimum

capital requirements on bank profitability.

Literature review is the backbone of the research project since it facilitates the review of the

banking sector performance. Literature is mainly reviewed to establish benchmark and

support arguments of the researcher. The literature review will focus on the historical

information about the minimum capital requirements and the performance of the banking

sector. Both negative and positive impacts will be discussed and this will be in a funnel

approach where the focus will be from the globe, Africa, Southern Africa to more specific

Zimbabwe's economy.

2.2 Sources of literature

Information is going to be obtained from the published printed sources (books, journals,

magazines and newspapers), published electronic sources (e-journals, websites), government

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records, researches done in other countries, public sector records and the relevant past

theories.

2.3 Review on literature

The experience of many countries shows that capital regulation and supervision are essential

for stable and healthy financial system and that the need becomes greater as the number and

variety of financial institution increase. The banking sector has always received upper

attention on protection due to the vital role it plays in an economy. Minimum capital is one of

the three “pillars” of macro prudential regulation. Bank capital serves both as a buffer and as

a disincentive to excessive risk taking. When general equilibrium effects are taken into

account, however, it is not clear that higher capital requirements will reduce the level of risk

in the banking system (Gale, 2010). It has become evident that one of the very completing

requirements for the success of any business in any economy is the existence of favorable

regulatory environment as evidenced from Schmidt (2002), Thatcher (2002), Thatcher and

Stone (2002), and Moran (2002) submitting that regulations can either promote or stifle

business performance. Empirical evidence from Kerwer (2005), King (2005) and Quaglia

(2005) also suggests that environmental regulations deter entry into industries where the

requirements for regulatory compliance activities are high. In most cases banks regulators see

capital adequacy regulation as a means of strengthening the safety and soundness of the

banking industry (Oladejo and Oladipupo, 2011).

A different strand of the theoretical literature suggests that banks with higher capital may

experience lower survival odds. Calomiris and Kahn (1991) show that a capital structure with

sufficiently high demand deposits (and by implication lower equity) leads to more effective
Beverley Chikwira R122520y
monitoring of bank managers by informed depositors and hence a smaller likelihood of bad

investment decisions. This suggests that a bank with higher capital (and consequently lower

deposits) may face a higher probability of bad loans and hence loan default, which may result

in a lower survival probability. Thus, some theories predict that higher bank capital should

lead to a higher survival probability for the bank, whereas others suggests that higher capital

may worsen the portfolio choices and liquidity of banks and hence lead to a lower survival

likelihood.

4 METHODOLOGY

4.1 INTRODUCTION

This section describes how the study will be conducted and the methods used for data

collection. It is divided into sections which involve the research design, data sources, research

instruments, sampling data collection procedures and finally the data analysis procedures.

4.2 Research Design

The rational of using research design is for the researcher to plan one’s work so that the

validity of the research is enhanced. This will help the researcher to have an in- depth

analysis and understand various research strategies prior implementation. This increases

efficiency and flexibility of research outcomes. The research will be carried out using the

descriptive research design approach. The suitability of using descriptive research design is

that it allows the researcher to collect data qualitatively using research instruments such as

personal interviews and questionnaires. This implies that the researcher will be able to collect

data based on opinions, perceptions and attitudes about the performance of the banking

Beverley Chikwira R122520y

industry. The researcher will also obtain secondary data in the form of magazines, brochures

and reports.

4.3 Data Sources

There are two types of data sources used in research and these are primary and secondary

data.

Primary data is data captured at the point which it is generated for the first time and with a

purpose in mind. It will be collected through interviews and questionnaires to selected

respondents. When collecting primary data the relevant target population will be used to

ensure applicability of gathered data to the researchers’ problem.

Secondary data is data that has been collected by other researchers for other purposes but

related to this particular study. Such sources include bank records, literature reviews from

textbooks and the internet. Secondary data is authentic, reliable and well accepted in the

academic circles thus the researcher will find it useful.

4.4 Research Instruments

The instruments which will be used in the research include interviews and questionnaires.

After seeking permission from relevant authorities, the researcher will make use of open

ended questions so as to gather much information as possible, structured questionnaires will

also be used as they allow high data response. The research will give respondents room to

respond to questions at their own manner as objectively as possible. The researcher will also

conduct face to face interviews with interview guidelines which will allow the researcher to

be guided on the series of questions to ask thereby reducing the risk of asking questions out

of the context of the study.

4.5 Population and sampling

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Singn(2006) defined population as the entire mass of observation which is the parent group

from which a sample is to be formed. The target population consists of management of the

head offices of merchant and commercial banks and building societies which are located in

Harare. This particular population will provide the necessary information pertaining to the

performance of the banking sector and the impact of minimum capital requirements on bank

profitability.

4.5.2 Sampling techniques

Out of a total of the 25 banking institutions, 5 (20%) banks shall represent the whole

population and stratified sampling technique will be used. The banks shall be selected

according to their types which are merchant and commercial banks and building societies.

Stratified sampling divides the population into segments or strata. Each stratum has relatively

homogeneous elements. Either a specific number of elements are selected at random from

each stratum in the population.Random sampling will be applied within the strataso as to

ensure that all parts of the population will be represented in the study and each subject has an

equal chance of being selected so as to increase accuracy on results.

4.7 Data collection procedure

After obtaining the permission to carry out the research, the researcher will inform various

department of each company on the intention of the study. A pilot study will be taken from 5

samples to make sure that each question sounds the same to all samples. The interviews and

questionnaires shall be short and precise. This can be justified as permission shall be

requested so as to know and abide by the rules stated by the authorities in the organisation.

4.8Data presentation and analysis

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Data shall be analysed though facts and shall be presented in the form of narrative notes and

graphs where necessary. The data collected by the researcher shall be tabulated and analysed

in a sequential order of obtainment. The process of data analysis included will use

descriptive statistical methods in the form of percentiles, graphs, pie charts and statistical

parameters (deviations, mean and variances). This will be done to give a clear picture of the

study to the lay mans.

TIME BUDGET

Activity Date of completion

Research proposal 11/12/2012
Chapter 1 To be notified
Chapter 2
Data collection
Chapter 3
Chapter 4
Chapter 5
Editing and coding
Printing and binding
Report Submission

The time budget predicts the time which shall be conducted in order to complete a task. Time

budget is one of the best ways to stay focused, limit distractions and get more done.

MONETARY BUDGET

Expenses $ US

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 Transport and accommodation 300.00
Printing and stationery 50.00
Internet Services 80.00
Miscellaneous expenses 150.00
Total 580.00

Cash budget outlined above is a budget for cash planning and control that presents the

expected cash outflow for a designated time period of the project. It helps in avoiding cash

shortages.

REFERENCE LIST

1. 2012 Mid-Term Monetary Policy Statement Issued In Terms Of The Reserve Bank Of

Zimbabwe Act Chapter 22:15, Section 46

2. Banking Act Chapter 24.20

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3. Makoni Tafadzwa Dr. (2010), "Overview of Zimbabwean Banking Sector (Part

One)," Ezine Articles.

4. Dena Taylor (2011), Research methods in business University of London, United

Kingdom.

5. Gwibi and Dirwai (2003, 57) An analysis of the reliability and validity- UNISA

6. Mcmillan,J S. and Schumacher (1997), Research in Education, a Conceptual

introduction 4th Edition. New York, Addison Wesley Education Publishers.

7. White (2005), Systematic Literature Reviews, Plymouth, United Kingdom

8. Gale, D. (2010). Capital regulation and risk sharing. International Journal of Central

Banking, 6(4), 187-204.

9. Moran, M. (2002). Understanding the regulating state. British Journal of Political

Science, 32, 391-413.

10. Oladejo, M. O., & Oladipupo, A. U. (2011). Capital regulation and the performance

of the Nigerian banks: Need for review. Journal of Emerging Trends in Economics

and Management Sciences, 2(3), 215-224.

11. Schmidt, V. (2002). The futures of European capitalism, Oxford: Oxford University

Press

12. Thatcher, M. (2002). Delegation to independence regulatory agencies: pressures,

functions and contextual mediation. West European Politics, 25(1), 125-147.

13. Thatcher, M., & Stone S. A. (2002). Theory and practice of delegation to non

-majoritarian institutions .West European Politics, 25(1), 1-22.

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Beverley Chikwira R122520y