Cost efficiency and non-performing loans: An application of the Granger causality test

Abstract

This study evaluated the nexus between cost efficiency and non-performing loans (NPLs) in the Zimbabwean banking sector for the period 2009–2014. The study was motivated by the increase in NPLs in the banking sector while banks have been accused of profiteering through excessive bank charges and interest rates. The study contributes to the literature on the relationship between efficiency and NPLs, which is a controversial area. The study established that the average cost efficiency was 81%. It increased from 70% to 88% between 2009 and 2014. It declined in 2012 and 2013 because of slowdown in economic activity. The study established that cost efficiency negatively Granger-causes NPLs, supporting the bad management hypothesis implying that the low level of efficiency was a result of poor credit management which led to a deterioration in the quality of banks’ loan books. Although poor credit policies might look lucrative in the short run, they have detrimental effects on the quality of the loan books of banks in the long run. The policy recommendation drawn from the results is that credit managers should adhere to the international best practice in managing credit.