Credit Management and Profitability of Banks in Zambia

Abstract

The aim of this study was to evaluate the effect of credit management on the profitability of banks in Zambia. Accordingly, the research question designed to guide the study was: To what extent do bank credit management policies and practices affect the profitability of banks in Zambia? To answer the research question above, the Return on Average Assets (ROAA) was computed as a measure of bank profitability, the dependent variable. Measures for independent variables such as leverage (the ratio of total debt to total net assets), asset quality (non-performing loan ratio) and credit risk (gross loans and advances to total assets, and loan loss provision ratio), which reflect bank credit management policies and practices were also computed. Bank size and percentage growth in annual income were included as control variables in the model. To analyze the data, a fixed effects regression model with dummy variables was employed, using panel data spanning 12 years from 2010 to 2021. The data encompassed 15 out of the 18 commercial banks operating in the country. The study found that the regression model accounted for 60% of the variation in bank profitability, of which 35% was attributable to the in-between subject variation and 25% to the independent variables. With respect to the effect of individual predictor variables on bank profit, the study found a statistically significant positive relationship with bank size, while the loan loss provision had a statistically significant negative correlation. Illustratively, a one-unit increase in bank size enhanced bank profit by 0.019 units, ceteris paribus, while a one-unit increase in loan loss provision decreased bank profit by 0.278 units,ceteris paribus. Furthermore, the study revealed that an increase in leverage and credit risk had a negative but statistically insignificant effect on profit respectively, while growth and asset quality had the opposite but also statistically insignificant effect. Overall, the study concluded that credit management policies and practices, as measured by the independent variables, significantly affected bank profit performance in the country.