AN INVESTIGATION INTO THE EFFECTS OF MULTICURRENCY SYSTEM ADOPTION (DOLLARIZATION) ON THE PERFORMANCE OF THE ZIMBABWEAN BANKING SECTOR.

1. UNIVERSITY OF ZIMBABWE
FACULTY OF COMMERCE
BUSINESS STUDIES DEPARTMENT
AN INVESTIGATION INTO THE EFFECTS OF MULTICURRENCY SYSTEM
ADOPTION (DOLLARIZATION) ON THE PERFORMANCE OF THE
ZIMBABWEAN BANKING SECTOR
BY:
MAUYE NIMROD K - R158652P
SUPERVISED BY:
DR N KASEKE
ResearchPaper Submitted in Partial Fulfillment of the Requirements of the
Bachelor of
Business Studies Honors Degree in Finance and Banking
JUNE 2017

2. i
APPROVAL FORM
The undersigned certifies that he supervised the student Mauye Nimrod K, R158652P in
carrying out a research with the title: An investigation into the effects of multi-currency
system adoption on the performance of the Zimbabwean banking sector which was
submitted to partially fulfil the requirements of the Bachelor of Business Studies Honors
Degree in Finance and Banking at the University of Zimbabwe.
……………………………… ………………………….
SUPERVISOR SIGNATURE DATE

3. ii
DECLARATION
I, Mauye Nimrod K (R158652P) do thus proclaim that this thesis is the aftereffect of my
own examination and exploration, but to the extent displayed in the affirmations, by
remarks and reference incorporated into the body of the report, and that it never been
disclosed in partial or in full for any degree at whatever college.
………………………. ………………………….
STUDENT SIGNATURE DATE

4. iii
DEDICATION
This research study is devoted to Julia Gupudza for her backing and patronage from my
childhood and to Almighty God for his reinforcement through process of carrying out the
research and the gift of life, my family and lecturers.

5. iv
ACKNOWLEDGEMENTS
Firstly, I would like to give thanks to the invisible one yet visible in his work, the Almighty
God, for his invisible assistantship yet visible in effect. I am indebted for all his provision
of wisdom and understanding to overcome challenges that were encountered during the
course of undertaking this research study. To Him and to Him be all the praises.
I would like to extend my enormous appreciation to my Supervisor, Dr. N Kaseke for all
his time, suggestions, comments, advice in shaping this study and also for his guidance
constantly. Further, obliged appreciation to my mom and father, Mr. and Mrs. Mauye for
their financial help, emotional support, prayers and encouragements. I am also very
thankful to my family for their assistance and moral support.
I express appreciation to my companions: Tinashe Chirara, Marlon Magodi, Eugene
Masimba, Tebogo Msimbe, Telson Nhendo, Tinotenda Makonza and the Finance and
Banking 2017 classmates the shared knowledge and jokes and my lectures also

6. v
LIST OF ACRONYMS
ATM Automated Teller Machine
BOP Balance of Payment
CBZ Commercial Bank of Zimbabwe
ESAP Economic Structural Adjustment Program
FDIs Foreign Direct Investments
GDP Gross Domestic Product
IMF International Monetary Fund
LOLR Lender of Last Resort
MCS Multi-currency system
MOF Ministry of Finance
MPS Monetary Policy Statement
NPL Non-performing Loan
RBZ Reserve Bank of Zimbabwe
RGDP Real Gross Domestic Product
SMEs Small to Medium Enterprises
SPSS Statistical Package for the Social Science
US$ United States of America Dollar
US United States
ZSE Zimbabwe Stock Exchange
ZW$ Zimbabwean Dollar

7. vi
LIST OF TABLES
Table 2.1: Countries with Bi or MCSs…………………………………………………….9
Table 4.1: Banking Sector experience of respondents…………………………………...35
Table 4.4: Loan products offered by banks under MCS era……………………………..42
Table 4.5: Rating on lending preferences under MCS era……………………………….43
Table 4.11: Loans and Interbank market efficiency……………………………………...49
Table 4.13: The Cronbach Alpha………………………………………………………...50

8. vii
LIST OF FIGURES
Figure 4.1: Response rate by Banks and the RBZ……………………………………….35
Figure 4.2.1: Respondents involvement in the banking sector prior MCS adoption…….37
Figure 4.2.2: Comparison of the banking sector before and after MCS…………………38
Figure 4.2.3: Level of satisfaction brought by MCS ……………………………………40
Figure 4.3: Bank sources of funds under MCS era………………………………………41
Figure 4.6: Commercial Bank capitalization levels as at 31 December 2016…………...44
Figure 4.7: RBZ and the LOLR function………………………………………………...45
Figure 4.8: Views on the continued use of MCSs………………………………………..46
Figure 4.9: Views on de-dollarizing the economy……………………………………….47
Figure 4.10: Five year forecast about the banking sector…………….………………….48

9. viii
LIST OF APPENDICES
APPENDIX A: SURVEY QUESTIONNAIRE………………………………………….64
APPENDIX B: INTERVIEW GUIDE FOR RBZ……………………………………….68

10. ix
TABLE OF CONTENTS
APPROVALFORM..............................................................................................................i
DECLARATION..................................................................................................................ii
DEDICATION ....................................................................................................................iii
ACKNOWLEDGEMENTS ................................................................................................iv
LIST OF ACRONYMS........................................................................................................v
LIST OF TABLES ..............................................................................................................vi
LIST OF FIGURES ...........................................................................................................vii
LIST OF APPENDICES ................................................................................................... viii
ABSTRACT......................................................................................................................xiv
CHAPTER ONE ................................................................................................................. 1
INTRODUCTION AND BACKGROUND........................................................................ 1
1.0 INTRODUCTION .................................................................................................... 1
1.1 BACKGROUND OF THE STUDY ......................................................................... 3
1.2 PROBLEM STATEMENT........................................................................................ 5
1.3 RESEARCH OBJECTIVES ..................................................................................... 5
1.4 RESEARCH QUESTIONS ...................................................................................... 6
1.5 JUSTIFICATION OF THE STUDY......................................................................... 6
1.6 SCOPE OF THE RESEARCH ................................................................................. 6
1.7 ORGANIZATION OF THE REST OF THE STUDY.............................................. 6
CHAPTER TWO ................................................................................................................ 8
LITERATURE REVIEW.................................................................................................... 8
2.0 INTRODUCTION .................................................................................................... 8
2.1 DOLLARIZATION................................................................................................... 8
2.1.1 PHASES OF DOLLARIZATION.......................................................................... 8

11. x
2.1.2 EFFECTS OF DOLLARIZATION.................................................................. 10
2.1.3 BENEFITS/ADVANTAGES OF DOLLARIZATION .....................................11
2.1.3.1 Low inflation..................................................................................................11
2.1.3.2 Reduce administration and transaction costs .................................................11
2.1.3.3 Creation of a sound financial system.............................................................11
2.1.3.4 Lower interest rates....................................................................................... 12
2.1.4 DISADVANTAGES OF DOLLARIZATION.................................................. 12
2.1.4.1 Economic costs ............................................................................................. 12
2.1.4.2 Political costs ................................................................................................ 13
2.2 THEORETICAL LITERATURE REVIEW ........................................................... 13
2.2.1 Optimum Currency Area Theory (Robert Mundell, 1961) .............................. 13
2.2.2 No Separate Legal Tender Regime .................................................................. 14
2.2.3 Quantity Theory of Credit (QTC) (Werner, 1992, 1997) ................................. 15
2.2.4 The Two-Sector Model of Exchange Rate Determination............................... 16
2.2.5 Financial Intermediation Theory...................................................................... 16
2.2.6 Portfolio Considerations .................................................................................. 17
2.3 EMPIRICALLITERATURE REVIEW ................................................................. 17
2.4 BANK PERFORMANCE....................................................................................... 21
2.4.1 Importance of measuring bank performance ................................................... 21
2.5 MEASURING BANK PERFORMANCE.............................................................. 21
2.5.1 Return onAssets (ROA) .................................................................................. 22
2.5.2 Return on Equity (ROE) .................................................................................. 22
2.5.3 Net Interest Margin (NIM)............................................................................... 22
2.6 DETERMINANTS OF BANK PERFORMANCE ................................................ 23
2.6.1 Internal factors ................................................................................................. 23

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2.6.1.1 Capital adequacy........................................................................................... 23
2.6.1.2 Asset quality.................................................................................................. 24
2.6.1.3 Managerial efficiency ................................................................................... 25
2.6.1.4 liquidity......................................................................................................... 25
2.6.1.5 Bank size....................................................................................................... 26
2.6.2 Ownership Structure and Bank Performance................................................... 26
2.6.3 Agency Theory and Bank Performance ........................................................... 27
2.7 Macroeconomic/External Factors ........................................................................... 27
2.7.1 Inflation............................................................................................................ 27
2.7.2 Gross Domestic Product Growth ..................................................................... 28
2.8 Chapter Summary ................................................................................................... 28
CHAPTER THREE........................................................................................................... 29
RESEARCH METHODOLOGY...................................................................................... 29
3.0 INTRODUCTION .................................................................................................. 29
3.1 RESEARCH DESIGN ............................................................................................ 29
3.2 RESEARCH STRATEGY AND APPROACH....................................................... 29
3.3 STUDY POPULATION.......................................................................................... 30
3.4 SAMPLING METHOD .......................................................................................... 30
3.5 SAMPLE SIZE ....................................................................................................... 30
3.6 DATA COLLECTION ............................................................................................ 31
3.6.1 Primary Research Tools ................................................................................... 31
3.6.2 Secondary Data ................................................................................................ 32
3.7 DATAANALYSIS .................................................................................................. 32
3.7.1 Test for Reliability (Cronbach Alpha Test) ...................................................... 33
3.8 CHAPTER SUMMARY......................................................................................... 33

13. xii
CHAPTER FOUR............................................................................................................. 34
PRESENTATION AND ANALYSIS OF FINDINGS ...................................................... 34
4.0 INTRODUCTION .................................................................................................. 34
4.1 RESPONSE RATE.................................................................................................. 34
4.2 Experience of the respondents in their respective organizations ............................ 35
4.2.1 Banking Sector involvement prior MCS adoption........................................... 36
4.2.2 Comparison of the banking sector before and after MCS regime ................... 37
4.2.3 Level of satisfaction brought by MCS on the banking sector performance .... 38
4.3 Corporate Financial Strategies................................................................................ 39
4.3.1 Cost Reduction Strategies ................................................................................ 40
4.3.2 Measures to increase revenue base: Diversification ........................................ 41
4.4 Loan Facilities Offered by Banks in the MCS Era ................................................. 41
4.5 Strategies to Improve Loan Quality ........................................................................ 41
4.5.1 Basis of Lending .............................................................................................. 41
4.5.2 Loan Maturities................................................................................................ 42
4.5.3 Type of Borrowers............................................................................................ 42
4.6 Capitalization and Survival of banks under MCS................................................... 43
4.7 RBZ and the LOLR function under MCSs ............................................................. 44
4.8 Views on the continued use of MCS ....................................................................... 45
4.9 Views about discontinuation of MCSs.................................................................... 45
4.10 Five year forecast about the banking sector.......................................................... 47
4.11 Loans and interbank market efficiency ................................................................. 48
4.12 RECOMMENDATIONS BY RESPONDENTS TO BANKS AND RBZ............ 48
4.13 RELIABILITY OF THE DATA............................................................................ 49
4.14 CURRENT POLICIES TO EMBRACE AND MANAGE MCSs ........................ 50

14. xiii
4.14.1 Bond coins and notes ..................................................................................... 50
4.14.2 Use of plastic money initiative ...................................................................... 50
4.14.3 Cash withdrawal limits .................................................................................. 51
4.14.4 Zimbabwe not a ‘US$ Economy’ .................................................................. 51
4.15 CHAPTER SUMMARY....................................................................................... 51
CHAPTER FIVE .............................................................................................................. 53
CONCLUSION AND RECOMMENDATIONS .............................................................. 53
5.1 INTRODUCTION .................................................................................................. 53
5.2 SUMMARY ............................................................................................................ 53
5.3 CONCLUSION....................................................................................................... 54
5.4 RECOMMENDATIONS ........................................................................................ 56
5.4.1 Continuation of the bond note initiative to higher denominations .................. 56
5.4.2 De-dollarization ............................................................................................... 56
5.4.3 Mergers and Acquisitions................................................................................. 57
5.4.4 Flexing economic policies so as to attract FDIs .............................................. 57
5.4.5 Recapitalization of the Central bank ................................................................ 57
5.5 Solutions to liquidity challenges and NPLs ............................................................ 58
5.6 SUGGESTIONS FOR FUTURE STUDIES .......................................................... 58
REFERENCES ................................................................................................................. 60
APPENDIX A: SURVEY QUESTIONNAIRE ................................................................ 63
APPENDIX B: INTERVIEW GUIDE FOR RBZ ............................................................ 67

15. xiv
ABSTRACT
The purpose of this study was to investigate the effects of multi-currency system adoption
(dollarization) on the performance of the Zimbabwean banking sector. In this regard the
study focused on measuring banking sector performance in terms of efficiency and
development (growth) that was sustained since multi-currency system inception till now.
Thus the study sought to draw deep insights on how banks have been mobilizing deposits
and other fund sources, lending and other fund uses under multi-currency regime. The other
enquiry that was set out by the study was to look at how the Central bank have been
executing its functions such as LOLR under a dollarized economy. The study utilized a
qualitative research approach as the chief aim was to gather data as much as possible and
data was collected from banks around Harare and from the RBZ. Primary was collected
using well-structured questionnaire and interviews some conducted over the mail, and also
secondary data was obtained from published journals, RBZ web, the internet and other
relevant texts on dollarization to fill in the gaps that primary data could not cover. For ease
assessment of findings, results were presented in the form of pie charts, graphs and tables.
The results of the investigation revealed that, despite banks being well capitalized. MCS
initially turned the banking sector’s fortunes around just after its inception but however
turned to be evil with their continued use as liquidity challenges continue to persist and
also the absence of the LOLR function by the RBZ. The study also commended the
government should recapitalize the RBZ and also to flex economic development policies
so as to attract FDI.

16. 1
CHAPTER ONE
INTRODUCTION AND BACKGROUND
1.0 INTRODUCTION
The purpose of this study is to investigate into the effects of multi-currency system
adoption on the performance of Zimbabwean banks. In this regard the research study
focused mainly on banking sector efficiency and growth (development) sustained during
the multi-currency era that is from, 2009 to 2017 the period in which multiple currencies
are circulating in the economy. Efficiency has been used as a relative measure of bank
productivity explaining how well banking institutions are employing resources visa-a-vis
existing production possibilities frontier or in relation to current best practices. Banking
sector development or growth looked not only on the size of banks but also access such as
ATMs and branch density, and also the percentage of households with bank accounts
compared with pre-dollarization episodes.
The introduction of multi-currency systems endorsed the circulation of multiple currencies
in the economy which sought to close the Reserve bank of Zimbabwe’s quasi fiscal
operations. The adoption brought economic stability as it was witnessed as a remedy to
high inflation, domestic monetary instability as well as exchange rate volatility, which had
posed a great predicament on the Zimbabwean banking sector and triggered insufficient
economic performance. Banks failed to perform their intermediation functions as money
loses its value overnight, various cash shortages exhibited by long queues at ATMs and in
banking halls, and also closure of local banks due to increasing liquidity challenges. The
hyperinflation was believed to have emanated from the excessive printing of money
(seigniorage), foreign currency shortages as well as demand pull and cost push inflation
(Makochekanwa, 2007). As a measure to end astringent economic conditions, that is to
curb the hyperinflation trend and also the restoration credibility in the monetary system,
and unlike other countries which adopt one hard currency, the Zimbabwean government
demonetized the local currency that is the Zimbabwe dollar (ZW$), and officially adopted
multiple currencies as its legal tender.

17. 2
The basket of currencies comprised of United States dollar (US$), Euro, South African
rand, Botswana pula and the British pound sterling which all performed the functions
money. It further adopted the Australian dollar, Chinese yuan, Japanese yen and the Indian
rupee, thus the system constituted a basket of nine currencies. This turned Zimbabwe’s
economic fortunes around as it managed to emancipate itself from domestic monetary
instability, high inflation and also exchange rate volatility.
Less economically developed or poor countries unlike developed countries have always
been in quest of emancipating themselves from cyclical insufficient economic performance
and low growth. (Hanke and Schuler, 1999). Most of these countries have, however not
fully developed their financial systems and insufficient capital accumulation which is a
major setback to the maximization of their development goals, therefore they have been
depending on foreign financial resources such as lines of credit to seal the financial gap. In
case of Zimbabwe, seven (7) years after the ZW$ was discontinued and the announcement
of official dollarization, which is according to Barro and Gordon (1983) an advance phase
of dollarization, that is, a complete change of local currency into foreign currency and local
banks are still experiencing a myriad of challenges that is, cash shortages, long queues in
banking halls and at ATMs and even closure of some banks, despite the fact that Zimbabwe
is using one of the most powerful currencies in the world as its legal currency. Thus raising
questions to whether multicurrency system (dollarization) adoption is syncing with the case
of Zimbabwe, also whether the move was the preeminent or, if there are other alternatives
that can be put in place to try to emancipate the unceasingly disintegrating banking sector?
It is against this background that the researcher has decided to have an in-depth analysis to
establish the extent to which the inception of multiple currencies have impacted the
performance of mainly commercial banks and the banking sector at large. This study
therefore, aims at investigating and exploring the effects of multi-currency system adoption
on the banking sector, assessing whether dollarization have managed to revive the
crumbling banking sector.
The remaining part of this chapter has been organized to include background, statement of
the research problem, objectives, the relevance and significance of the study.

18. 3
1.1 BACKGROUND OF THE STUDY
The Zimbabwean banking sector have been facing a myriad of challenges even prior
multicurrency system adoption, some of which was believed to have emanated from a
plethora of policies which were sanctioned by the government, such as the land reform
program, ESAP and other macroeconomic variables such as, high inflation rates, volatility
in exchange rates, thus ZW$ became valueless, rendering itself meaningless and therefore
difficult to work with in an economy. These policies posed an extremely difficult and
political challenges on the banking industry (Hanke and Kwok, 2008), thus the banking
system failed to provide adequate domestic currency to both individuals and corporates.
The IMF (2006), argues that, events in the banking sector have been concurrently
predisposed largely by political factors.
The banking sector witnessed phenomenal growth since deregulation, during the period of
1991 to 2003 innovative domestic banks found their way into the financial sector, new
innovative developments with introduction of new products and services within the sector.
However, due to new regulations set by the appointed RBZ governor in 2003, the central
bank vowed to stop speculation in the ZW$ and related instruments. The Zimbabwean
(2009) fiscal policy stresses that, between 2000 and 2008, the financial sector has severely
been destabilized by inconsistent macroeconomic policies, undesirable real interest rates,
colossal capital flights and erosion of deposits. Overall, the financial sectors balance sheets
were abridged to less than 25% of their 2004 value, thus reflecting an erosion of the real
value of financial assets and liabilities in ZW$ (World Bank, 2005). Currently, the banking
sector is composed of commercial banks, merchant banks, building societies, savings bank
and development institutions (RBZ, 2016), following the cessation of AfrAsia Bank, and
Capital Bank Limited being preceded by Allied Bank Limited.
The inception of multiple currencies on the 30th of January 2009 (MOF, 2009), witnessed
the general recovery of the Zimbabwean economy from an inordinate depression and its
RGDP increased by 20.1% in 2009 to 2011. Commercial banks play a fundamental role in
providing much credit in Zimbabwe, about 82.92% of the total market loans and advances
are controlled by commercial banks (RBZ, 2012), thus the major contributing players in
the banking sector.

19. 4
Under the patronage MCS, bank interest rates were decentralized to adjust with the possible
cost of dollarization which include, the absence of the lender of last resort, central banks’
inability to issue currency and lack of active interbank market (RBZ, 2015). Prior the
multicurrency regime adoption, GDP is projected to have declined by 40% between 2000
and 2008 (GoZ, 2009), hyperinflation peaked in September 2008 at 231 million percent
(GoZ, 2009). Assets and liabilities that were denominated in ZW$ were also eroded in the
real terms. Due to limited fiscal space the government could not recapitalize the bank, thus
the central was not able to execute its functions including LOLR function and this restricted
the amount of activity in the interbank market. Sources of liquidity included borrowing
from other bank, foreign companies, and deposits from individuals and institutions.
Liquidity situations was exacerbated due to poor performance in exports.
Total amount of deposits increased significantly from US$382 200 in February 2009 when
multiple currencies were introduced to US$1 400 000 by the end of December 2009. In
August 2014, deposits reached US$4 320 000. An increased number of deposits was as
result of increased industrial production and resultant increase in salaries (Sanderson and
Roux, 2012). The stability and growth led to the demand of loans and advances, the total
number of loans in the banking sector increased significantly by US$596 900 to US$700
000 from February to December 2009, there was a further increase in loans and advances
by August 2014 to US$3 726 670 (RBZ, 2014). The growth rate of loans and advances was
believed to be higher than the growth of deposits, which resulted in an increase in the loan
deposit ratio. Most loans were advanced to industries which were in need of finance to fund
projects, resources for retooling and working capital purposes (Sanderson and Roux, 2012).
However, during MCS period NPLs grew from 2% in 2009 to 20.1% in September 2014,
thus reflecting a decline in the asset quality.
The central bank of Zimbabwe has also been tied up by official dollarization and even
though it recommenced its operations that had been moved to CBZ during the hyper-
inflation of 2008/9, it has lost its governor over some of its critical functions in the banking
sector. Due to MSC adoption the RBZ has been undesirably affected because of loss of
authority over the, the loss of the lender of last resort function, issuance of currency and

20. 5
the loss of complete monetary policy instruments thus the banking sector continues to
agonize even though the economy is currently intensely dollarized.
1.2 PROBLEM STATEMENT
A large number of researches have tend to point out innumerable benefits realized by
economies that adopt MCS or advantages of dollarizing the economy. Dollarized countries
foster the re-monetization of the economy and financial re-intermediation, which assists in
enforcing fiscal discipline by impeding inflationary financing of the budget and will bring
greater transparency in pricing and accounting after several episodes of inflation. When
multiple currencies are circulating in the economy, low interest rates and high investment
is experienced thus resulting in improved economic growth. By assessing the advantages,
one may come to ask why the Zimbabwean banking sector underperforming whilst it is
operating in the midst of MCS.
Movements in the US dollar or rand exchange rate was held to have posed a great hardship
on Zimbabwe in terms of competitiveness and international investment position since the
main trading partner and country of origin of capital inflows was South Africa since prices
and wages being agreed and quoted in US$. With dollarization, the central bank loses its
ability to respond to sudden runs on bank deposits in the case that they decrease or are just
low. Banks in Zimbabwe have failed to meet customer withdrawals and are running out of
cash, customers even failing to access cash from ATMs as well as failing to extend loans
and advances to the most productive sectors of the economy, while operating in multi-
currency system economy. Thus the researcher desires to have a deep insight of how
multicurrency system adoption is impacting the performance of Zimbabwean banking
sector.
1.3 RESEARCH OBJECTIVES
 To analyze the impact of multicurrency system adoption on the performance of the
Zimbabwean banking sector.
 To reveal whether current challenges being faced by the Zimbabwean banking
sector are attributed to multicurrency system adoption or not.

21. 6
1.4 RESEARCH QUESTIONS
 What is the impact of multicurrency system adoption on the performance of the
Zimbabwean banking sector?
 To what extent did multicurrency system adoption contributed to the challenges
being faced by the Zimbabwean banking sector?
1.5 JUSTIFICATION OF THE STUDY
The most covered issues concerning multi-currency systems mainly focused on how they
have affected the wellbeing of Zimbabweans, their reactions and perceptions, say studies
by (Makochekanwa, 2016), (Hanke and Kwok, 2009), some works by Makochekanwa
(2009), Hanke (2008) covered explicitly on how multi-currency systems have brought
sanity in the Zimbabwean economy by curbing hyper-inflation. Some international studies
on multi-currency system for example, International Monetary Fund (2010), Cohen (2000),
D ‘Arista, (2000), Duma, (2011) have been mainly mooring on impacts on the economy,
finance and partially on the banking sector. Thus the research gap has prompted the
researcher to have an in depth sight and covering explicitly on the effects of multi-currency
system adoption on the Zimbabwean banking sector exclusively.
1.6 SCOPE OF THE RESEARCH
The research study was conducted in Zimbabwe and it incorporates every registered
banking institution. The research focused on banking institutions within geographical
boundaries of Harare which deem to display a fair a representation of all banks operating
in Zimbabwe. It focused entirely on the period 2009- 2017, that is the period the
multicurrency system was adopted up to date.
1.7 ORGANIZATION OF THE REST OF THE STUDY
Chapter Two covers the literature relating to the impact of multicurrency system adoption
(dollarization) on the Zimbabwean banking sector while Chapter Three incorporates the
methodology used in executing the study. Chapter Four accounts for the research findings,
interpretation of results and analysis. Lastly, Chapter Five concludes the research study and

22. 7
give the probable recommendations that arose throughout the execution of the research
study.

23. 8
CHAPTER TWO
LITERATURE REVIEW
2.0 INTRODUCTION
A review of theories vis-à-vis the adoption of MCS (dollarization) in general, its
implication on performance of central banks, the banking sector in particular as well as
how the use of multiple currency have impacted other country’s economies. The
significance of this literature is to provide a theoretical background knowledge to the
research topic, to provide an outline of areas that have already been explored concerning
the adoption of multiple currencies which will enhance the research methodology.
2.1 DOLLARIZATION
A plethora of studies by different scholars have displayed no uniformity in the manner in
which they have defined dollarization or multicurrency system adoption, as initial studies
stressed mainly on currency substitution (de jure), in which the term dollarization was
viewed as a substitute of the former. Others had the idea of unofficial dollarization (de
facto) which was used to describe an indication of the use of foreign currency side to side
with the national currency where foreign currency is not a legal tender. Studies by, Yeyati,
(2006), Karras, (2002), Makochekanwa, (2009) emphasized on official and unofficial
dollarization. However, unlike other countries that dollarize their economies, by adopting
one hard currency Zimbabwe adopted multiple currencies for circulation in the economy.
Official dollarization has been described as the case in which the foreign currency is given
(usually exclusive) legal tender status (de jure), whilst the broadly usage of foreign
currency alongside with the national currency have been described as unofficial
dollarization (de facto). In addition to that, Makochekanwa (2009), also stresses on semi-
official dollarization or bi-monetary system, which exists when a foreign currency
(currencies) is adopted as legal tender dominating bank deposits, but playing second role
to the local currency in payment of such costs as wages, taxes, and day to day transaction.
2.1.1 PHASES OF DOLLARIZATION
There are, a plethora of reasons to justify why countries dollarize their economies.
Dollarization is stirred by forfeiture of credibility of monetary policy due to extensive

24. 9
episodes of high and volatility of inflation rates and also the depreciation of local currency
as well as a consequence of macroeconomic stability (Hauskrecht and Hai, 2004). Most of
the literature have revealed that small, open economies that are disposed to international
shocks will discover that pegging their currency in US$ or opting for high levels of
dollarization can thwart high levels of exchange-rate volatility that can be a detriment to
their economies.
The literature has showed that dollarization typically consists of three stages. According to
Calvo and Vegh (1992), the first stage of dollarization commences in the course of
hyperinflation and currency depreciation, when household and economic agents lose
confidence in their domestic currency as a store of value (asset substitution). The second
stage, as local currency continues to depreciate prices and wages start to be quoted in
foreign currency, which then obtains a further function as a unit of account (Shinkevich
and Oomes, 2002). The final stage is sometimes known as currency substitution, which
entails the use of foreign currency as a medium of exchange.
The table below shows countries with MCS
Table 2.1: countries with Bi or MCS
Country Political Status Currency used Since
Bahamas Independent Bahamian dollar,
U.S dollar
1996
Bhutan Independent Bhutan ngultrum,
Indian rupee
1974
Bosnia and
Herzegovina
Independent Bosnia
Convertible marks,
German mark,
Croatia kuna,
Yugoslav dinar
1998
Brunel Darussalam Independent Brunel dollar,
Singapore dollar
1967

25. 10
Cambodia Independent Cambodian riel,
U.S dollar
1980
Isle of Man British
dependency
Pound sterling,
Local pound
1800s
Lesotho Independent Lesotho loti, South
African rand
1974
Liberia Independent U.S and Liberian
Dollars
1944
Luxembourg Independent Luxembourg
Franc/euro,
Belgian
Franc/euro
1945
Namibia Independent Namibian dollar,
South African rand
1993
Zimbabwe Independent U.S. dollar, South
African rand,
Pula, British Pound
2009
Source: IMF Exchange Arrangements and Exchange Restrictions, various issues1
2.1.2 EFFECTS OF DOLLARIZATION
Dollarization have surged in the recent years to be on the forefront of monetary policy
alternatives for African and most Latin American countries with several countries opting
for the US$ as legal tender. Dollarization have become most of the debated monetary policy
alternatives for curbing inflation and bringing monetary system stability, say studies by
economist such as Makochekanwa (2009); Hanke (2008) and others say Agnoli (2002);
Cohen (2000); Karras (2002) have all opined that the benefits of dollarization outshine the
costs of it.
1 Annual Report on Exchange Arrangements and Exchange Restrictions October 2014

26. 11
2.1.3 BENEFITS/ADVANTAGES OF DOLLARIZATION
2.1.3.1 Low inflation
Dollarization have been witnessed as a panacea to the risk of depreciation of
domestic currency, which is believed to be the major contributing factor in
accelerating inflation (Agnoli, 2002). This also conforms with studies by Karras
(2002) on North, Central and South American countries, in which he concluded
that, dollarization eliminates exchange rate volatility, which in turn makes
depreciation or devaluation of local currency against the anchor currency
impossible. Makochekanwa (2009) is also with the idea that, dollarization lower
inflation provided that appropriate conversion rate is established, this have been
witnessed in Zimbabwe since the beginning of February 2009.
2.1.3.2 Reduce administration and transaction costs
Reduction in administrative cost is one (1) of the three (3) benefits of dollarizing a
country as noted by Cohen (2000). Cohen (2000), postulates that, dollarization
enables the government to save cost associated with maintaining infrastructure
which is dedicated to the production and management national money (printing of
money). This would be a great significant to countries which will be coming out of
high episodes of inflation, such as the Zimbabwean case. The savings will assist in
covering up for resources used over in years in chasing little foreign currency that
would be held by individuals, banks and exporters (Makochekanwa, 2009).
furthermore, the elimination of currency conversion permits trade flows, which is
in line studies by Fisher (1982) and DeGrauwe (2000), in which they stressed that,
the conversion of domestic currency to anchor currency is the most noticeable effect
of dollarization. Makochekanwa (2009) also opined that, lowering of transaction
costs results to the reduced costs of international trade and investments.
2.1.3.3 Creation of a sound financial system
There more to the meaning of dollarization other than the mere adoption of foreign
currency as legal tender (Cohen, 2000; Makochekanwa, 2009). Adoption of foreign

27. 12
currency as legal tender forces local financial institutions to adjust their operations
and improve their quality of service delivery. It also fosters and promotes
integration of the country with the anchor country as well as the global economy at
large. Financial stability is also enhanced as a more stable currency is a precondition
for financial development, that in turn will ultimately result in strong and steady
economic state.
2.1.3.4 Lower interest rates
Deficit units benefit more with dollarization due to low interest rates, which enables
them to access loans at a low cost. Low interest rates are achieved as the country
that would have dollarized can adopt policies of the central bank of the anchor that
will be providing the currency without investing heavily in efforts of building
market confidence of its own currency (Cohen, 2009). It also stabilizes the
relationship with that of a currency whose reputation have already been well
established and secure, hence reducing the magnitude of volatility of domestic
interest rates (real and nominal interest), thus eliminating devaluation-risk premium
in domestic currency rate of interest.
2.1.4 DISADVANTAGES OF DOLLARIZATION
Disadvantages of dollarization have been demarcated into two categories that is, economic
and political (Cohen, 2000), Cohen (2000) is with the idea that, political drawbacks of
dollarizing a country are more critical that economic costs.
2.1.4.1 Economic costs
The major drawback of dollarization which has been noticed by scholars say Cohen
(2000) and Makochekanwa (2009) is the loss of autonomous monetary authority,
since the dollarized nations will be unable to exercise unilateral control on its
exchange rate or over its money supply. In the case that the country adopts the US$
currency, there will be an integral hierarchical relationship as the authority is
conceded by US Federal Reserve. This is also in the case of South African Reserve
Bank (if the South African rand is adopted), thus all monetary decisions are made

28. 13
in the anchor country. In the case with Zimbabwe, by end of December 2008 the
country was already 95% dollarized, which portrays that the country’s monetary
autonomy was already been eroded before official dollarization.
As noted by Makochekanwa (2009) that, dollarized countries lose control over
exchange rate policy and the country will be unable to adjust its exchange rate in
irregular circumstances thus may turn to expose the country’s economy to a risk of
external shocks such as food price and primary commodity prices, mostly in cases
where the world trading system is to open up due to globalization.
2.1.4.2 Political costs
Money is one of the most potent tangible national symbols which distinguishes
one country from the rest and the ability of money to signify the exclusivity of
national identity is confined into two ways (Cohen. 2000). Firstly, the use of
domestic currency plays a crucial role of retelling the general citizens on a daily
basis of their oneness, connectedness and loyalty with the country. Secondly, due
to use of money on day-to-day transactions, a currency highlights the fact that
everyone belongs or part of the same social entity, thus the adoption of foreign
currency as legal tender entails the forfeitures these prerogatives hence, loss of
national symbol.
Dollarization is also associated with the loss of insurance against risk, since the
preservation of domestic currency acts as a kind of insurance strategy against risk.
With seigniorage, a country can have an emergency alternative source of revenue
in times of genuine problems thus, providing an alternative of finding the desired
purchasing power quickly when antagonized with unexpected contingencies. This
means that, the ceasing of domestic currency and adoption of foreign currency as
witnessed in Zimbabwe will erode all these privileges.
2.2 THEORETICAL LITERATURE REVIEW
2.2.1 Optimum Currency Area Theory (Robert Mundell, 1961)
The use of single currency infers that a single central bank retains the power of issuing
notes for circulation in the system thus, potentially elastic supply of interregional means of

29. 14
payment. However, the currency zone or area comprising of more than one currency, the
supply of international means of payment is conditional upon the cooperation central banks
for example the use of the South African rand as de jure or de facto calls for the country
considering the adoption of the currency to join the Common Wealth Currency (CWM).
The theory of optimum currency area was propagated by Robert Mundell (1961) and later
by various scholars Escribano and Sebastian (2011).
The theory assumes that if a geographical area adopts a fixed exchange regime, or a solitary
currency within its boundaries, there is a great improvement or an increase in terms of trade
volumes between the countries involved. Thus reducing foreign exchange risk
management, in terms of transaction exposure, translation exposure where the country has
subsidiaries operating within the geographical unit as well as other exposures such as such
as depreciation of a currency from the time ordering and the time of delivery (Saamoi,
2011). Taking the case of Zimbabwe which adopted the multi-currency regime in 2009
where the US$ was the most actively and significantly traded currency among the basket
of several currencies which was legal tender and according to Hawkins (2010) transactions
with the $US constituted 80% of all transactions, salaries and wages. Trade can hardly
increase, notwithstanding the fact that Zimbabwe was using the US$ as de jure, due to
geographical barriers as well as political factors which restricts Zimbabwe from trading
with United States not to mention economic sanctions which were imposed on Zimbabwe.
it officially dollarized its economy marking the demise of the ZW$ as legal tender and the
genesis of a multi-currency regime, that has to assisted the economy turn around the
fortunes of its sectors.
2.2.2 No Separate Legal Tender Regime
Under the no separate legal tender regime arrangement, a country gives away its capacity
of using monetary policies, when a country adopts a currency of another country for all its
internal financial transactions such consumption, investments, credit advancement
(Mengesha, 2013). This foreign exchange arrangement with no separate legal tender the
currency of another country is used as a sole legal tender, or the member belongs to a
monetary or currency union in which the same legal tender is shared by the members of
the union for example CMA, EUROZONE. Notes and coins of another nation circulates as

30. 15
the sole legal delicate (formal dollarization) By applying such a regime, a country
relinquish part of its monetary policy freedom to the mother country of the currency, thus
control over the internal monetary policy would be diluted (Rose 2013). This theory is
usually adopted by a country which has a domestic monetary instability, high exchange
rate volatility, hyperinflation and basically an economy which is in a deep recession.
If a country adopts this regime, inflation rates, exchange rates and prices would be
borrowed from the parent country of the currency, for instance the case of Zimbabwe, the
greatest influence will be from the United States of America. A monetary regime based on
an explicit legal assurance to exchange domestic currency for a particularized foreign
currency at a fixed exchange rate together with limitations on the issuing authority to
ensure the achievement of its legal obligation. This means that local currency will be issued
visa-a-vis foreign exchange and that it will remain fully backed by foreign assets, thus
eliminating central banks functions such as LOLR, control of monetary policy and leaving
only a limited scope of discretionary monetary policy.
2.2.3 Quantity Theory of Credit (QTC) (Werner, 1992, 1997)
The QTC was originally proposed in 1992 (Werner, 1992, 1997, 2005, 2012), it is also
known as the theory of disaggregated credit. As it has been described above on the theory
of no separate legal lender and monetary policy inconsistence, the conditions of these two
limit credit creation in Zimbabwe, thus of great significance to have deep insights into the
QTC. The theory postulates that all money is credit, and the credit money have assorted
implication on the economy depending on the use the credit is put to, which can be
described in two streams of credit which include credit for real economy that is, for GDP
transactions (nominal GDP) and credit for non-GDP transactions (credit for financial
transactions) which determine the value of asset transactions (Springer, 2015).
Credit for GDP transactions, is a scenario in which, credit is used for productive purposes
which involves R&D, investments or/ and education, in this case there is the possibility
that credit creation is sustainable since loans can be serviced and repaid thus resulting in
non-inflationary growth. The other scenario is when credit is used for unproductive
purposes which can the form of form of consumer credit which contribute to the GDP by
expanding demand, but since demand is not met with an increased amount of goods and

31. 16
services, real GDP will not only nominal GDP and other non-GDP transactions such as
financial/asset transactions. Conclusions that are drawn from this theory are that, national
economies should refrain from credit consumption and financial credit as it is
unproductive, while investment credit must be embraced at all prospects since it results in
an improved GDP and BOP position.
The QTC assists in this research study in the determination of the relationship between
credit creation visa-a-vis economic growth and in policy recommendations. It is
extensively relevant in the explaining the Zimbabwean situation, since it can be
contemplated that for the period from 2004 to 2011 that is, five years’ prior MCS adoption
(dollarization) and two years after the adoption of the regime, credit creation by banks and
economic growth moved in a contradistinctive direction, up until 2012. this was due to the
former period where credit creation was largely being put on non-GDP transactions
(consumptive in nature) as it was being handled by a flaccid authority (the RBZ) and credit
creation was later on has been put to some extent for productive purposes (GDP
transactions) such as investments which was being controlled by a much more powerful
currency, the US$.
2.2.4 The Two-Sector Model of Exchange Rate Determination
Initial research studies on dollarization found no dissimilarities between the reasons of
currency and asset substitution, with the assumption that, there are only two assets which
are local and foreign currency and was considered rational within the context of regulated
capital mobility. The model was for a small underdeveloped economy, where households,
held both local and foreign currency, with a rational anticipation and prices being fully
malleable. households maximized real financial wealth W, in foreign currency: W=M/E +
m, where M is the local currency, m is foreign money and E, the nominal exchange rate.
Economies that are more open to trade, should be more dollarized and thus, dollarization
should increase immensely with trade integration (Ennis, 2000; Ize & Levy, 2003; and
Yeyati, 2003).
2.2.5 Financial Intermediation Theory
Provided normal operating or trading grounds, within the banking sector or even the
economy in particular, banks should be able to facilitate the transfer on money from surplus

32. 17
units to deficit units. Berger (2001) stressed that banks must make loans to its customers
from the deposits that could have been made by individual depositors and corporates, thus
realizing profits through the purchase of money at lower interest rates (say 8%) and lending
it at a higher interest rate (say 15%) as well as borrowing in the interbank market that is
from the central bank (say at 10%). The theory basically explains how banks generate
income, but it calls for a fully functional and operation central banks, such banks will be
reliable and can run to the central bank when faced with liquidity crisis. However, in the
case of the Reserve Bank of Zimbabwe it is not fully functional whilst it is in the midst of
multi-currency regime, thus failing to provide interbank facilities to local banks, which are
facing difficulties in meeting customer withdrawals, to the extent of being able to provide
a maximum withdrawal limit of only $20 per day.
2.2.6 Portfolio Considerations
The theory assumes that economic agents can also hold foreign assets and liabilities when
currency substitutions come into effect. Shuler and Stein (2000), believes that financial
dollarization can be an effective way in getting insurance against volatility in rates or
prices. Furthermore, the use of multiple currencies at the same time or full dollarization
will give rise to arbitrage opportunities, for instance, banks can an advantage of Triangular
Arbitrage that is, the practice of trading for example, the US$ into another currency say the
pound sterling, which can be traded to a third currency say the South African rand, and
finally would be traded back to the US$ to a make a profit margin. If such gaps of exchange
rate exist in the financial market, thus a bank can just benefit by transacting within
Zimbabwe, without engaging in international financial transactions since all currencies will
be locally available. The Bid-Ask spread likewise, banks can utilize the gap between any
two currencies. However, it is not that stress-free to find buyers and suppliers of foreign
currency which will be convenient for banking institutions to make profits due to
Zimbabwe’s current economic situation.
2.3 EMPIRICAL LITERATURE REVIEW
In addition to the theoretical literature it is imperative to assess the impact of dollarization
on the banking sector on an empirical point of view. Empirical literature review involves
looking at other studies that have been completed by other scholars before, the approaches

33. 18
and conclusions they drew, and also a look on the other countries that have experienced
dollarization, and how it affected their central bank and the banking sector.
The banking sector face challenges mostly in economies, where or whole of bank deposits
are kept in foreign currency, thus the existence of a currency mismatch risk for commercial
banks irrespective of the foreign exchange regime used which can be fixed or floating.
Households and other businesses begin to hold more forex in order to cover for the risk of
exchange rate that they would have been exposed to and banks will respond by making
loans and advances in foreign currency to cover the foreign exchange risk that they would
have been exposed to provided that they have made loans and advances in local currency.
The substitution is not however, a remedy to risks that a bank has been exposed to, rather
only a transfer of risk from currency risk to credit or default risk. Domestic currency loses
value due to devaluation or rapid depreciation, thus leading mismatches in currency or non-
performing loans may result in financial instability in the economy, and ultimately, the
local currency would be wholly substituted by a better and more stable foreign currency to
try and boost financial stability. However, by adopting full dollarization, and/or the
endorsement of multiple currencies in the economy, banks lose some of their traditional
functions, so does the central bank, consequently the banking sector would also be
adversely affected at the same time.
A number of research studies have been carried out before and have had different views on
the impacts of full dollarization on the banking sector. The literature by Calvo (1999) also
confirms that, there is an increase in gaps of nominal shocks in a dollarized economy and
also Berg and Borensztein (2003), stressed on the issue that, banking institutions are
incapable of isolating devaluation risk from their operations. As noted by Chang and
Velasco (1998) that, the East Asian Financial Crisis was attributed to the inability by
financial systems to meet their short term obligations in foreign currency which was
described as currency crisis, which conforms with the studies done by Reagle and Salvatore
(2005) in which they concluded that, a high ratio of short term forex based debt to GDP
was a warning to East Asia crisis. Countries in East Asia had an extraordinary level of
foreign currency which posed a great hardship on the central bank to intervene since it had

34. 19
lost control of the fiscal quasi operation and could not directly influence monetary policies,
thus calls for backing from International Corporation and involvement of IMF.
Studies that have been concluded by Munanga (2013), provide an example of Tanzania’s
liberalization of its financial sector which endorsed foreign currency accounts in the 3rd
quarter of 1992 as a form of dollarization of the economy, also quoting Ecuador and
Panama as other countries that were compelled by hyperinflation into dollarization of their
economies in their history. Thus dollarization makes it probable to successfully combat
hyperinflation and achieve economic stabilization, as witnessed in Ecuador in 2002, when
its inflation rate declined from 90% to a single digit percentage (Munanga, 2013).
The literature has confirmed that, irrespective of the exchange regime being adopted,
banking institutions that operate in dollarized economies are subject to difficulties in risk
management such as hedging themselves against foreign exchange rate risk which lies
within high dollarization rates. For example, banks may face challenges in case where a
fixed exchange rate regime is being used, thus difficulties is managing risks are
experienced, and the problem is inherent in estimating the degree of official and unofficial
dollarization since the amount of forex in circulation in usually unknown. However, Porter
and Judson (1996) suggest that 40 to 60 percent of the US currency is held abroad and
basing on geographical locations, Latin America has the highest rate of dollarization this
have been attributed to the citizens and governments’ desire of safeguarding themselves
against high expansion rates and undervaluing hazard (Salvatore, 2003).
A portion of the past scholarly studies on dollarization bolster the adoption of multi-
currency system (dollarization), for example Makochekanwa (2009), Rose (2000), Hanke
(2008) all asserted the benefits of dollarization such as low inflation which was witnessed
in the case of Zimbabwe since February 2009. Rose (2000), conducted a survey in El
Salvador and concluded that, countries that make use of a similar currency are more likely
to trade up to three times they would otherwise do in the case that they would be using
different currencies. However, this conclusion may not wholly apply in the dollarization
case of Zimbabwe where the main Zimbabwean currency is the US$ of the USA. The two
countries do not have a favorable trading relationship because of the sanctions that were
imposed by the government of the USA on the Zimbabwean government. This means that,

35. 20
to some extent, Zimbabwe is in a position not to fully enjoy this advantage of dollarization,
but would however fully utilize the opportunity had the major currency in circulation been
the Chinese Yean, since Zimbabwe and China have very good relationship, be it
commercially, sponsorships and other governmental relationships.
However, Alesina and Barro (2001), noted two imperative arguments against dollarization.
The first one they note is the loss of national pride which conforms with that was stressed
by Makochekanwa (2009) that is, loss of national symbol (the view that successful and
powerful countries must always have their own currency) and the second one is the issue
of the monetary policy, the case in which the Central Bank would no longer effectively and
wholly action on the monetary policy, since it can neither fully control or determine the
amount of the US Dollar in circulation nor have a direct impact on the cost of credit which
would be in sync with the domestic economic conditions and support advancement of credit
by banks and other financial institutions.
A research that was carried out by Sandoval, Malaga, and Carpio (2015) on the impact of
dollarization and CAFTA-DR on El- Salvador’s trade flows revealed that, dollarization has
a positive and significant impact on El-Salvador’s imports and exports, which also concurs
with the study by Rose (2000) who stressed on the fact that countries that make use of the
same currency are more likely to increase trade by three times.
Drivers of dollarization have been believed to have been influenced by greatest two main
push factors, which the literature described as institutional and economic drivers.
According to Grobe and Uribe (200!), economic factors encompasses for example money
supply, interest rates and also foreign reserves that are held by the central bank which
normally determine economic drivers. This was impending in the Zimbabwean case since
interest rates were too much high that bank lending was near impossible and unaffordable,
which resulted to the banking sector collapse with other sectors of the economy. Nicolo
and Honohan (2003) described institutional factors that drive dollarization as economic
openness, financial stability, exchange rate regime which will be in action, reliability of
policies and regulations or foreign currency holding controls. This was also noticeable in
Zimbabwean case just before dollarization, and to date financial market stability and policy
reliability are yet to be revitalized by dollarization. There is a very wide conformity

36. 21
amongst economists that countries which surrender their currency concurrently delegate
its monetary policy to the federal bank of the nation that own the currency which it adopts.
They go on to agree that dollarized countries automatically experience lower inflation as
compared to nationals that keep on the lookout for their own domestic monetary policies
in problematic times.
2.4 BANK PERFORMANCE
Bank performance refers to an indicator of the extent to which a bank is able to meet the
objectives for which it was established. Owners of banks like any other shareholders are
mainly interested in the increase of their value or wealth while government and regulators
are largely concerned with the ability of the banking institution to perform its functions of
channeling out funds to the most economic sectors for enhanced economic growth. Thus it
is of a great paramount to measure bank performance especially in the case of Zimbabwe
which is running its economy with multiple currencies.
2.4.1 Importance of measuring bank performance
The major reason for measuring bank performance is to make a distinction between banks
that are performing well from those which are not (Berger and Humphrey 1997). Gul et al
(2011) also opined that, banks regulators usually screen banks based on their liquidity,
solvency and overall performance, thus the measurement of bank performance is of great
paramount in allowing bank supervisors and regulators to detect possible problems as well
as estimating the timing of supervisory intervention. Performance of banks also facilitate
in decision making by the investor, as decisions on which bank to invest are largely
determined by the performance of the particular institution.
2.5 MEASURING BANK PERFORMANCE
Return on Equity (ROE), Return on Assets (ROA) and Net Interest Margin (NIM) are the
widely employed measures of bank performance (Ahmed, 2003). however, there are a
plethora of diversified opinions on the most effective indicators of bank performance say
studies by Goudreau and Whitehead (1989); Uchendu (1995) which all stressed that, ROA,
NIM and ROE are appropriate indicators of bank performance while other scholars say
Hankock (1989) believe that ROE is the most preferred indicator of bank performance.
Furthermore, Akinola (2008) encompassed ROA, ROE, Rate of Return on Capital (ROC),

37. 22
Profit before Tax (PBT) and Profit after Tax (PAT) in measuring bank performance. Revel
(1980) used interest margin in the determination of bank performance of U.S banks and
Sanni (2009) made use of Earnings per Share (EPS). The main measures of bank
performance as postulated by Uchendu (1995) are explained below.
2.5.1 Return on Assets (ROA)
According to Khrawish (2011) ROA is a ratio of income to total assets, as it measures the
efficiency of management in employing the companies’ assets to generate income. Wen
(2010) stressed that, a higher ROA depicts effectiveness of the firm in using its resources,
thus a lower ROA depicts ineffectiveness use of assets which might imply that a firm’s
assets are outdated for instance, in the banking scene banks’ software systems might be
outdated to the extent it might not be able to handle and process high volumes of data thus
might lead to a lower ROA, or some assets might be lying idle. Banks with higher equity
thus lower leverage ratio usually report a higher ROA but a lower ROE (Dietrich and
Wanzenried, 2011). Contrariwise, ROE overlooks higher risk that is related with a higher
leverage and also the influence on the leverage, though high gearing can be a tax advantage,
it exposes a firm to bankruptcy costs.
2.5.2 Return on Equity (ROE)
This ratio shows how much profit has been generated/earned visa-a-vis the amount that
was invested by bank owners, thus it shows a return that will be received by the investor
from the funds invested in the firm. Khrawish (2011) opined that, ROE shows how well
the management is utilizing shareholders’ funds. Therefore, banking institutions with a
higher ROE are said to in a position of generating higher income per dollar invested by
equity holders.
2.5.3 Net Interest Margin (NIM)
NIM is a measure of the difference between amounts paid to depositors (creditors/lenders)
by the bank and amounts received from borrowers (debtors) visa-a-vis the amount of the
bank’s assets which are in a position of generating income. Thus can be said. NIM is a gap
that exists in between net interest income and net interest expense expressed as a percentage
of interest earning assets. Gul et al (20II) defines NIM as the net interest income expressed
as fraction of total earnings assets. A higher NIM reflects a satisfactory performance in

38. 23
interest earning assets, which could reflect a riskier lending practice which is associated
with a substantial provision of loan losses.
Nonetheless, financial ratios can tend to be misleading provided that financial statements
have been fabricated to portray desirable scenarios, more so, when used alone, financial
ratios are good for nothing and for them to reflect a meaning trend analysis should be done
or inter firm comparisons. Athanasoglou et al., (2005) suggested that, depending on
financial ratios there is a bias due to off-balance-sheet activities.
2.6 DETERMINANTS OF BANK PERFORMANCE
Determinants of Bank Performance have been categorized into bank specific (internal) and
macroeconomic (external) factors (Aburime, 2005). Internal factors have been described
as individual bank features. Internal factors are determined by board of directors and
management internally and they vary from one institution to another. Macroeconomic
factors are outsides banks’ sphere of influence or external variables that which are beyond
the banks’ control as alluded by Haron and Wan (2004) and such variables exists in the
environment in which the business operates. Olweny and Shipho (2011) postulates that,
Market Power Theory assumes that, bank performance is a function of external market
forces, whilst efficiency structures assume that, the profitability of a bank is influenced by
internal efficiencies or inefficiencies. Thus bank performance is largely depended on the
prevailing circumstances of both micro and macroeconomic environments.
2.6.1 Internal factors
The Capital Adequacy, Asset Quality, Management Efficiency, Earnings Ability, and
Liquidity. (CAMEL) framework has been widely used by various scholars as a proxy for
bank internal factors (Dang, 2011), including other specific variables such as firm size and
innovation capacity.
2.6.1.1 Capital adequacy
The BCBS (2008a) has defined bank capital as a cushion of bank shareholders and
customers from unexpected losses which may arise due to risks that are assumed
by the banking on its daily trading and dealings. This confirms with what was
stressed by Athanasoglou et al. (2005) that, bank capital is the amount of owners’

39. 24
funds, which protect the bank from unfavorable shocks and also supporting the
business. Capital also reduces the likelihood of bank distress (Diamond, 2000). IMF
(2011), forwarded that, capital adequacy portrays a scale of ability of banks or
financial institutions to resist impact or shocks in its balance sheet and it also gives
guarantee that a banking institution will be liquid enough in the long term since
some deposits are withdrawn on demand and the bank will be subject to bank runs.
Capital adequacy can also assist banks in undertaking other off-balance-sheet
activities such as underwriting. Capital adequacy is measured by the CAR (Capital
Adequacy Ratio) (Dang, 2011), which is a ratio of total equity to assets and it also
measures internal strength of a bank to hold up adverse shocks. There is an
affirmative relation between performance and capital adequacy (Hassan and Bashir,
2003) since well capitalized banks are not subject to bankruptcy costs which in turn
reduces their cost of funding, thus profitability. Such banks have easier access to
cheaper sources of funds, also can take full advantage of growth and the bank will
be also in a position to exploit investment opportunities that might arise.
2.6.1.2 Asset quality
Asset quality is another important determinant of bank performance. Bank assets
take the form of loan advances, investments in money markets and capital markets
and also fixed assets. However, most of banks income is earned from loan interests
which are channeled to other sectors of the economy, thus the quality of loan
determines and is responsible for bank performance. The major risk affecting banks
is the possibility that, loans and advances will turn to be bad in the case that
borrowers fail to honor their obligations (Dang, 2011). Thus the ratio of non-
performing loans to total loans best describes a measure of asset quality. It is
therefore a cause for concern for most banking institutions to keep the level of NPLs
at minimum and for this reason most banks have taken a step further in devising
strategies and techniques to reduce the probability of default risk, most of them
have credit policy manuals which regulates how credit originates, sanctioned and
reviewed as a measure of minimizing loan losses, some have established risk
management committees and department within the organization. According to

40. 25
Sangmi and Nazir (2010), a lower ratio of NPLs to total loans depicts a good quality
portfolio and a most preferable one while a large proportion of NPLs is detrimental
to bank survival and growth. NPLs alters the stability of the banking sector and are
directly related to bank failures.
2.6.1.3 Managerial efficiency
Management team plays a pivotal role in ensuring that bank performance is
sustained. Managers are regarded as main employees in firms and should always
assume the role of influencing performance to their subordinates, thus the success
of banks, therefore largely depends on managerial efficiency in deploying both
firms financial and non-financial resources for income generation and cost
reduction. Financial ratios can be used as a measure of how well managers are
utilizing a firm’s resources, one of the ratio which can be used is the operating profit
to income (Sangmi and Nazir, 2010). It follows that, a more efficient management
team in terms of operational efficiency is depicted by higher operating profit to
income. The expense to asset ratio is the other proxy for measurement of managerial
quality, the ratio is anticipated negatively related to the profitability of the bank.
Thus the case entails that management efficiency is a major variable in explaining
a firm’s profitability due to the influence it has in the determination of the level of
expenses (Athanasoglou et al. 2005). However, a bank’s profitability is also largely
influenced by the level of expertise and experience of the management team.
2.6.1.4 liquidity
Financial performance is largely influenced by bank liquidity. Liquidity is the
ability of a bank to meet its obligations and commitments as and when they fall
due. The BCBS (2000) has expressed liquidity as the ability of a banking institution
to fund the increase in assets and also to meet short term obligations when they fall
due. Liquidity was described by Samad (2004) as the lifeblood of a bank, and
adequate liquidity has a positive relationship with profitability as expressed by
Dang (2011). Cecchetti (2005) is with the view that a more liquid a bank’s asset,
the less chances of the bank to experience problems in meeting its commitments.
Cecchetti (2005) defined liquidity as the easiness of the assets to turned into cash,

41. 26
thus high liquidity positions reflect opportunity cost since there is a trade-off
between liquidity and profitability.
Most liquid banks have less chances of being insolvent but tend to lose a huge
amount of revenue which can be realized from interest on investments. Liquid asset
ratio and loan to deposit ratio are the mostly used measurements of liquidity of
banks. Thus the lower the liquid asset ratio and the higher the loan to deposit ratio,
the higher the possibility of a bank to fail to meet the demand for loans (Shen et al,
2009). However, the loan to deposit ratio only focus on loans as bank asset
overlooking other assets which can be converted into cash. Nevertheless, various
proxies for liquidity measurement have been forwarded, Said and Tumin (2011),
did not find any linkage between liquidity and performance of Malaysian and
Chinese banks.
2.6.1.5 Bank size
The size of the bank can be used to account for the industry’s economies and dis-
economies of scale. Kosak and Cok (2008) postulates that, larger banks due to their
size are in a position to exploit economies of scale hence higher profits. Large banks
are able to use their market power for instance, the use of brand image in providing
various related services to its customers. It can be involved in mortgage financing
taking an advantage of a broader branching network and also insurance services,
thus improves the total profitability of a bank (Elsas et al., 2010). Khrawish (2011)
found that, there is a significant and positive relation between profitability and bank
size.
2.6.2 Ownership Structure and Bank Performance
One of the most pertinent issues that has attracted attention of many scholars in corporate
governance is the effect of ownership structure and bank performance say studies by La
Porta et al. (1999); Shleifer and Vishny, (1997). The relation between ownership structure
and bank performance arises from Agency Theory that can be defined as a conflict of
interest between shareholders and managers. The way in which corporates are managed
and operates is a function of ownership structure, thus bank performance is depended on
the way it is managed and controlled. Javid and Iqbal (2008), are with the idea that,

42. 27
ownership matters more than concentration and further argued that, interest and behavior
of owners is reflected by ownership identity. According to Ongore (2011) investment
approach by shareholders and risk averseness have a great influence on managerial
behavior when managers are executing their daily routine tasks.
2.6.3 Agency Theory and Bank Performance
The theory is based on the relationship that exist between agents (managers) and their
principals (shareholders). When agents pursue other interests which are contrary to the
expectations of the bank owners will result in agency costs in form of conflict of interest.
Principal-agent model by Prowse (1992) suggest that, managers less likely to follow the
profit maximizing objective/activities provided that there is an absence of strict monitoring
from shareholders. Thus firms that are controlled by owners are likely to be more profitable
than those that are controlled by managers. However, incentives can be used to ensure that
management is motivated to pursue objectives of profit maximization through related
remuneration.
2.7 Macroeconomic/External Factors
Macroeconomic factors are beyond management’s control and exist in the environment
which banks operate and changes in such factors exerts an effect on bank performance.
2.7.1 Inflation
The relationship between inflation and bank performance was first addressed by Revell
(1979), in which he asserts that, bank performance is depended on the rate at which
expenses are increasing visa-a-vis inflation. The effect of inflation will be negative
provided that expenses are rising at a higher rate than the rate of inflation and vice-versa.
Afanasieff et al. (2002) opined that inflation have an adverse impact on interest margins,
this was confirmed by Naceur and Kandil (2009) who postulated that, bank performance
is depended on credit demand at a given point in time since banks are in the business of
borrowing and lending to individuals and corporates. The aggregate demand for loans is
reduced by inflation since it poses uncertainty about the future, hence a decrease in loan
demand will eventually lead an unfavorable bank performance. According to Perry (1992)
the impact of inflation on performance by banks is largely depended on whether the
inflation is anticipated/unanticipated. Inflation will have a positive effect on bank

43. 28
performance provided that it is anticipated, since bank can revise and adjust their interest
rate accordingly. If inflation is unanticipated, banks will be reluctant to revise their interest
and adjust them, thus costs will rise faster than revenues which will result in losses being
experienced. Revell (1980), alluded that, inflation affect banks in various ways such as
exchange rates, asset prices, interest rates and operating costs.
2.7.2 Gross Domestic Product Growth
There is an affirmative association between Gross Domestic Product (GDP) and bank
performance, since a higher growth in national output, measure by GDP reflects an increase
in economic activities, thus banks can have an opportunity to underwrite more loans, hence
profitable. This confirms with what other scholars have forwarded say (Athanasoglou et
al., 2005); Schwaiger and Liebig (2008) who all asserts that, there is high demand for credit
during economic boom as compared during the time of economic recession. However,
other scholars say Bernanke and Gertler (1989) found out that, during times of economic
recession borrowers’ credit ratings decrease which will result in banks charging higher
interest rates on advances in a bid to improve their performance, thus concluded that, there
is an inverse relationship between GDP and bank performance.
2.8 Chapter Summary
Various scholars tend to have similar views about the effects of MCS on performance of
the banking sector, central banks as well as the economy in general, as supported by some
of the empirical evidence in the studies that have been completed. In this chapter, review
of the literature was carried out under several headings, such as dollarization definition,
phases of dollarization, theoretical, empirical literature review as well as measurement of
bank performance and the determinants of bank performance. The CAMEL framework was
mainly used in the analysis of bank specific factors and also other macroeconomic
variables.

44. 29
CHAPTER THREE
RESEARCH METHODOLOGY
3.0 INTRODUCTION
This research study was largely qualitative, as it rests on expertise of different personnel in
the industry of banking who were consulted by the researcher during the execution of the
study. Being conversant on the literature from the previous section, this chapter articulates
the research methodology, varying from an account of the research design and data
collection methods that were used by the researcher in executing the research study.
Saunders, Lewis and Thornhill (2007), opined that, research approaches applied by a
professional are managed by the investigation that one is conveying out, thus whether or
not the research is quantitative or qualitative. The chapter is divided into sections which
include research design, a description of research strategy and approach employed,
population under study, sampling methods and the resulting sample size. Instruments
chosen and the justification beyond the choices have also been considered in this chapter.
3.1 RESEARCH DESIGN
Survey Design involves developing a sampling plan and generating procedures for
obtaining population estimates from the sample data and for estimating the reliability of
those population estimates must be established (Levy and Lemeshow, 1999). Research
design is the important step to gather and analyze the imperative data and assist to find the
location of the study, sample size, population and so on. (Sekaran & Bougie, 2009).
3.2 RESEARCH STRATEGY AND APPROACH
The research study has looked into the deep insights of multicurrency system adoption
(dollarization) on the performance of the Zimbabwean banking sector including the central
bank, thus personal and professional knowledge had to be ‘milked’ from the respective
personnel, hence a more exploration of the phenomenological approach to researching have
been used by the researcher in conducting the study. Saunders, Lewis and Thornhill (2007)
suggest that the target of subjective phenomenological investigation is to delineate a lived
experience of a marvel. As this was a subjective investigation of account information,
techniques to break down its data must be exceptionally one of a kind in connection more

45. 30
standard or quantitative techniques for investigation. However, in cases that call for an
illustration of figures, the qualitative approach was concocted with some quantitative
research instruments as well as data collection methods, since the study is somehow based
on inclination which was noticed in banking sector.
3.3 STUDY POPULATION
As indicated by Cargan (2007) the population size and sort relies on upon the reason for
the research, and it is basic to concentrate the greater part of the components in the
population of interest. The research is on the effects of multicurrency system adoption
(dollarization) on the performance of the Zimbabwean banking sector, thus the population
under concern involves banking institutions in Zimbabwe and the RBZ. However, because
of reasons such as convenience and costs, consideration of the population under study was
asymmetrical or not equal, population members in Harare had obviously a better weight
that those outside the city because of costs of mobility involved, nevertheless, data from
banking institutions outside Harare have been greatly considered due to high technological
era that is, over the internet.
3.4 SAMPLING METHOD
Taking into consideration time constraints and availability of funds, banking institutions in
Harare were mainly considered for questionnaires and interviews, thus the major
contributing factor on the basis of sampling was convenience. Headquarters of banking
institutions were mainly approached for information assistance and data since most of the
data is kept there.
3.5 SAMPLE SIZE
Data from banking institutions in Harare was collected and the RBZ. The researcher mainly
targeted management in these institutions since they are the one with in depth knowledge
and probably have been with the respective institution for a much longer period to have
witnessed the pre-dollarization and even to understand post-dollarization periods. Top
management of the RBZ personnel were contacted for interviews and questionnaires, and
thirty (30) respondents from banking institutions were contacted for completion of
questionnaires. The researcher managed to conduct two interviews with the RBZ officials

46. 31
over the mail and ten questionnaires were sent for completion. Thus the sample size, all in
all for the research was forty-two.
3.6 DATA COLLECTION
For the purpose of this research study and in order to achieve the objectives, reliability,
authenticity as well as to get a more integral view of the topic, the researcher has collected
data from both primary and secondary sources. Considering the fact that the research study
is largely qualitative, to elicit primary data, self-administered questionnaires were utilized,
which contained closed ended questions and also face to face interviews. Questionnaires
were handed over to chosen sample which saved the researchers time and money issues.
Generally, respondents or people provide better responses provided that they are given
much time to think over their answers, because responses they provide would be
anonymous. Out of the total number of questionnaires that were administered, majority of
the people rarely returned them and as opined by Welfens and Ryan (2011) that, the ones
that returns would not represent the predetermined sample size, thus the researcher had to
conduct interviews usually face to face on issues that require quicker responses as well as
that required personal judgement.
3.6.1 Primary ResearchTools
The researcher utilized questionnaires and interviews
 Questionnaires: A large portion of the questionnaire that was used for this research
study contained leading questions in a structure of a Likert Scale, which makes time
to responding and data analysis much quicker and easier. The Likert Scale provide
consistence in responses. However, there were some questions with open-ended
questions, which calls for respondents’ personal views.
o Justification for using questionnaires: Questionnaires are easy to
scrutinize and data entry and tabulation can be done effortlessly, and
also most respondents are accustomed with questionnaires.
Questionnaires are expedient to respondents in that they allow a
respondent to generate some free time to look into the questionnaire as

47. 32
opposed to setting an appointment which may be a problematic
especially when it comes to senior executives.
o Shortcomings of using questionnaires: Some respondents may take
time to respond to the questionnaires which in turn compromise the
research as time is of crux in this study. Questionnaires on their own do
not provide some comprehensive information of what the research will
be trying to ask as opposed to say personal interviews where
supplementary questions can be derived from a response given by the
respondent.
 Interviews: On issues that required further clarification on responses, the
researcher, where possible, conducted interviews (face to face) and in some
instances telephone interviews were used, this was mainly on issues which could
not be further clarified by a way of questionnaire. Generally, interviews provide
instant responses, mood of the respondent as well as body language which have
assisted the researcher in data analysis and drawing up conclusions.
3.6.2 Secondary Data
The secondary data have contributed immensely towards the formation of background
information needed by both the researcher in order to build constructively the research
study and the reader to comprehend or grasp more thoroughly the survey outcome.
Secondary data was mainly collected from bank websites, related authors in the study area
and also the RBZ website. The researcher has also made use of publications from ZimStats,
the World Bank, IMF, BIS, Basel Accords, Monetary policies, the RBZ and some relevant
text-books. Scholarly articles such as journals and other working papers by different
individuals were also used mainly in the area of multi-currency systems (dollarization).
3.7 DATA ANALYSIS
The researcher has chosen the data on relevance and the analyzed the remaining data so
that the research will provide an impression to readers. The scrutiny encompasses an
analytical and logical evaluation so as to have an in-depth sight to every data component
collected. SPSS software which normally uses the Likert Scale approach was used in the

48. 33
analysis process. The researcher also conducted objective and subjective reasoning since
the study was qualitative, this was done to analyze and review the date in order to draw up
conclusions and recommendations that were provided.
3.7.1 Test for Reliability (Cronbach Alpha Test)
The Cronbach Alpha Test was used for the purpose of knowing whether the research study
was either reliable or valid. The test is widely known as a measure of unwavering quality
or inward consistency and it is mostly utilized to figure out if the scale is solid or not in
cases with different Likert questions contained in a poll that frame a scale.
3.8 CHAPTER SUMMARY
The chief aim/focus of this chapter has been to provide insights on the research
methodology utilized by the researcher in conducting the research study. Provides various
research tools and instruments used in the build-up phase of the research and also reasons
behind choosing such instruments. The chapter also went on to provide the targeted
population, sampling methods, sample size and reasons to why the sample considered was
chosen.

49. 34
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF FINDINGS
4.0 INTRODUCTION
Usefulness of information relies upon proper data presentation, therefore, this chapter
illustrates how data collected from both primary and secondary sources was presented. This
chapter serves to analyze, interpret and present empirical results relating to the effects of
MCS adoption on performance of the Zimbabwean banking sector. As opined by Carson
and Coviello (1996) that, presentation and analysis of data reflects an attempt to arrange
data as well as reviewing explanations such that it will make sense to the reader. Thus, the
findings are based on the objectives that were set for the study. Findings will be presented
using presentation tools such as graphs, pie charts and tables.
4.1 RESPONSE RATE
Figure 4.1: Response rate by Financial Institutions
The analysis involves computation of the number of personal interviews conducted and the
number of questionnaires returned against the total of number of interviews scheduled and
questionnaires administered. The research study utilized questionnaires and interviews as
data collection tools, and out of 40 questionnaires that were disbursed, 36 were completes
75%
25%
Responserete
BANKS RBZ

50. 35
and returned successfully for analysis. Due to date and time re-scheduling of interviews by
the RBZ officials the researcher resorted to emailing.
As portrayed by the pie-chart above, most respondents were from banks which yielded the
highest response rate and the remainder from the RBZ. Banks constituted 75% of the
respondents and the remaining 25% from the RBZ. A total of 30 questionnaires were
administered to banking institutions, 28 of them were returned successfully making a
success response rate of 93.33% and out of 10 questionnaires that were sent to the RBZ 8
of them were successfully returned, thus a success response rate of 80%.
For interviews that were conducted over the mail, the researcher managed to get all the
intended responses. As opined by Johnson, Copas, Erens, et al. (2001) that, electronic
strategies have an inclination towards expanding reaction rates rather a than a conventional
paper and pencil technique, thus the researcher had to opt for emailing to conduct
interviews with the RBZ management as they were busy.
Frequency Percent Cumulative Percent
Valid LESS THAN AYEAR 5 13.9 13.9
1-5 YEARS 6 16.7 30.6
5-10 YEARS 14 38.9 69.4
10+ YEARS 11 30.6 100.0
Total 36 100.0
Table 4.1: Banking sectorexperience of respondents
4.2 Experience of the respondents in their respective organizations
Findings and conclusions of this research study are based on personal experiences of
management and other personnel in the banking industry, thus the researcher had to
understand the experience of the respondents. Respondents that were contacted for data
collection both from banks and the RBZ had witnessed enough about MCS and the banking
sector and had much experience such that one can conclude that, they indeed understood
their roles and responsibility.

51. 36
Data collected based on the experience of the respondents gives assurance to the researcher
that the data collected would be highly based on things that respondents have actually
witnessed and experienced. However, a proportion of respondents had spent less time
within the industry since some were young, upcoming generation and some were interns.
Thus the study combined the opinions of both the experienced and younger generation who
are passionate and eager to learn and also understand things as well as implementing them
for the betterment of the sector as a whole.
4.2.1 Banking Sector involvement prior MCS adoption
Figure 4.2.1: Banking Sector involvement prior MCS adoption
As portrayed by the graph above, 75% of the respondents from the RBZ were involved in
the bank sector before the endorsement of multiple currencies in the system and are still
involved, and 25% came in after the adoption. For the questionnaires that were sent to
banks, 72% of the respondents were in the sector pre-dollarization and the remainder came
in after. An average of 73% of the total respondents have been in the banking sector pre-
dollarization and 27% joined after, thus implying that, most of the respondents who were
contacted for data collection had much knowledge and experience about the conditions of
the banking sector prior MCS adoption as such information was required for the
investigation. However, the other part of the respondents who came in after MCS regime
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
RBZ BANKS AVERAGE
75% 72% 73%
25% 28% 27%
YES NO

52. 37
have witnessed both the episodes of pre-dollarization and post-dollarization and the
banking sector environment thus their contributions were equally important.
4.2.2 Comparison of the banking sector before and after MCS regime
Figure 4.2.2: Comparison of the banking sectorbefore and after MCS regime
Data which was collected on this question reflects that, in terms of banking sector’s
viability prior and after MCS adoption there is a normal distribution, suggested by a sample
of 33.33% which was contacted for interviews and questionnaires. The response was that,
the banking sector was averagely well after multiple currency regime, with the same figure
saying the sector turned out to be poor, thus can be concluded that, the adoption of MCS
has not been clear about its authenticity in improving banking sector performance and has
given the banking sector personnel a mixed feeling about its soundness and dependability.
A proportion of 13.9% of the respondents believed that dollarization has brought sanity
and has made the banking sector much better as compared to what it was before and only
2.8% of the respondents which came from the RBZ suggest that the adoption of MCS have
been excellent in influencing banking sector performance. The remaining portion believed
that MCS has exacerbated banking sector problems making it extremely poor.
EXCELLENT GOOD AVERAGELY WELL POOR VERY POOR
BANKS 0% 8.30% 27.80% 27.80% 11.10%
RBZ 2.80% 5.60% 8.30% 8.30% 8.30%
0%
5%
10%
15%
20%
25%
30%
BANKS RBZ

53. 38
Generally, a huge chunk of respondents that were contacted for questionnaire completion
and interviews believed that just after the MCS inception the banking sector have been
performing very well compared with period where the ZW$ was in circulation. From
interviews that were conducted over the mail with RBZ officials, the most contributing
factor for banking sector inefficient during the ZW$ era was that, some banks were
operating below capacity, characterized by cash shortages as well as the effect of inflation
which undermined most of the banks’ functions for instance, banks could not extend loans
and advances due to high volatility of interest rates as money loses its value day by day.
However, most banks after dollarization assumed their traditional functions thus showing
how good was an out-turn from MCS. In case of RBZ it lost some of its functions which
include the LOLR function.
4.2.3 Level of satisfaction brought by MCS on the banking sectorperformance
Out of the total respondents that were contacted for questionnaire completion, 30.6% of
them were satisfied whilst 33.3% were dissatisfied. This was almost a balanced scenario
on satisfaction levels as to how MCS has met what was being expected or desired in the
banking sector performance. On the ends 16.7% of the respondents were very dissatisfied
while 5.6% of the very same sample very satisfied with dollarization and a proportion of
13.9% of the respondents were somehow satisfied, thus the scale will be reduced to cater
for the ‘satisfied’ and ‘dissatisfied’ which will make up the sample of 50% of those who
were happy and satisfied with the adoption of the multi-currency regime and the other half
was completely the opposite.
The argument behind those who were satisfied with MCS was that, due to the introduction
of MCS, it spelt the demise of the ZW$ since most local banks including the RBZ were
underperforming and also closure of some local banks and with MCS, it turned the banking
sector’s fortunes around and the industry came back on its feet even the RBZ was and still
not performing some of its functions wholly as expected. However, those who were
dissatisfied with MCS cited liquidity challenges currently facing the banking sector as well
as various cash shortages as most banks are failing to demand for liquidity and suggested
that if the central bank is still controlling money supply it would have assisted which it
cannot do at the current situation.

54. 39
Figure 4.2.3: Level of satisfaction brought by MCS on the banking sector
performance
4.3 Corporate Financial Strategies
As indicated by the survey, most banks resorted to deposit sources of funds, with 60% of
the banks relying on deposits to fund their activities under the MCS era. Twenty percent
(20%) of the surveyed banks largely depends on offshore lines of credit as their main
sources of funds. However, this finding is contrary to that of (Bogetic, 1999) who found
out that, most banks in Panama were largely depended on offshore lines of credit under a
dollarized economy. This rather contradictory result may be due to fact that Panama’s
banking sector is mainly composed of foreign owned banks than Zimbabwe, thus foreign
banks can have an easier access to offshore lines of credit in comparison with domestically
owned banks.
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%
VERY DISSATISFIED
DISSATISFIED
SOMEHOW SATISFIED
SATISFIED
VERY SATISFIED
RBZ BANKS