RELATIONSHIP BETWEEN BANK SPECIFIC FACTORS AND

FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN ZAMBIA.

A COMPARATIVE ANALYSIS BETWEEN ZANACO BANK AND
BARCLAYS BANK ZAMBIA.

By

Mwewa M Mulubwa 14053365

Mpande Daniel 14030411

A DISSERTATION SUBMITTED TO THE UNIVERSITY OF ZAMBIA IN

PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF
BACHELOR OF ARTS
IN BUSINESS ADMINISTRATION.

THE UNIVERSITY OF ZAMBIA

DECEMBER 2018

1
 COPYRIGHT

No part of this dissertation may be reproduced, stored in a retrieval system or transmitted, in any
form or by any means, mechanical, photocopy, recovery or otherwise without prior written
permission from the authors or the University of Zambia.

i
 DECLARATION

This research project our own original work and has never been presented for a degree

at any other university for examination.

Signature ____________________________ Date ___________________________

Mwewa M Mulubwa

Signature ____________________________ Date ___________________________

Mpande Daniel

This research project has been submitted for examination with my approval as the

University supervisor.

Signature _______________________________ Date __________________________

Mr. Kaira

Lecturer, Department of Economics

School of Humanities and Social Sciences

The University of Zambia

ii
 ABSTRACT

The main purpose of this study is to investigate the relationship between internal bank specific
factors and financial performance. A comparative analysis of Zanaco bank and Barclays bank
Zambia. The study was conducted for the period of eight years (2010-2017). Return on Assets
was used as an indicator of financial performance. The study employed the CAMEL rating
system as an explanatory variable and found that there is a positive intermediate relationship
between capital adequacy and financial performance for both banks, a weak positive relationship
between RoA and asset quality for Barclays bank and an intermediate relationship for ZANACO,
a negative relationship between RoA and management quality (MQa) for both banks, an
intermediate relationship between RoA and MQb for Barclays and a strong positive relationship
for ZANACO. Earnings quality EQa and EQB for Barclays bank has a positive relationship with
RoA while EQc has a negative relationship and EQa and EQc for ZANACO has a positive
relationship but a negative relationship between EQb and RoA. It was further found that
Liquidity management LMa was positive for both banks while LMb was negative for both banks.

iii
 ACKNOWLEDGEMENTS

We wish to acknowledge with sincere gratitude our supervisor, Mr. Kaira for the invaluable
guidance he offered during various stages for this study. His wise counsel, encouragement, and
patience for the various suggestions made it possible for this study. We also wish to note that his
relentless efforts and selfless sacrifice ensured that we complete the program successfully.

To all our friends and colleagues who helped us in diverse ways, and encouraged us to complete
this work, we say thank you and God bless you.

iv
Table of Contents
CHAPTER ONE ......................................................................................................................................... 1
1.0 INTRODUCTION................................................................................................................................. 1
1.1 Background of the study .................................................................................................................. 1
1.2 Problem Statement............................................................................................................................ 2
1.2.1 Aim of study................................................................................................................................ 3
1.3 Research Questions ........................................................................................................................... 3
1.4 Research Objectives .......................................................................................................................... 3
1.4.1 General objective........................................................................................................................ 3
1.4.2 Specific objectives ...................................................................................................................... 3
1.5 Significance of the study ................................................................................................................... 3
CHAPTER TWO ........................................................................................................................................ 4
2.0 LITERATURE REVIEW .................................................................................................................... 4
2.1 Introduction ....................................................................................................................................... 4
2.2 Internal Determinants of Financial Performance of Commercial Banks .................................... 4
2.2.1 Capital Adequacy and Financial Performance ....................................................................... 4
2.2.2 Asset Quality and Financial Performance ............................................................................... 5
2.2.3 Management Efficiency and Financial Performance.............................................................. 5
2.2.4 Earnings Quality and Financial Performance ......................................................................... 6
2.2.5 Liquidity Mangament and Financial Performance ................................................................ 6
2.4 Theoretical Review............................................................................................................................ 7
2.4.1 Market Power Hypothesis ......................................................................................................... 7
2.4.2 Efficiency Structure ................................................................................................................... 8
2.4.3 The Portfolio Theory ................................................................................................................. 8
2.5 Empirical Review .............................................................................................................................. 8
CHAPTER THREE .................................................................................................................................. 10
3.0 METHODOLOGY ............................................................................................................................. 10
3.1 Research Design .............................................................................................................................. 10
3.2 Population, Sample size and Scope of the study ........................................................................... 10
3.3 Sources and Types of Data ............................................................................................................. 10
3.4 Research Methods ........................................................................................................................... 10
3.5 Data Analysis ................................................................................................................................... 10
3.6 Model Specification ......................................................................................................................... 11

v
 3.6.1 Model 1 ...................................................................................................................................... 11
3.6.2 Calculation Methods of Variables. ......................................................................................... 12
CHAPTER FOUR..................................................................................................................................... 13
4.0 DATA ANALYSIS, RESULTS AND INTERPRETATION ........................................................... 13
4.1 introduction ..................................................................................................................................... 13
4.2 Analysis of Data and Presentation of Findings ............................................................................ 13
4.2.0 Descriptive Statistics .................................................................................................................... 13
4.3Correlation Analysis ........................................................................................................................ 18
CHAPTER FIVE: CONCLUSIONS AND RECOMMENDATIONS................................................. 21
5.0 Conclusion ....................................................................................................................................... 21
5.1 Recommendations ........................................................................................................................... 22
5.2 Limitations ....................................................................................................................................... 22
5.3 Suggestions for Further Studies..................................................................................................... 23
REFERENCES .......................................................................................................................................... 24

vi
 LIST OF ABBREVIATIONS

CAMEL Capital Adequacy, Asset Quality, Management Efficiency, Earnings Quality,

Liquidity Management

FSDP Financial Sector Development Programme

BOZ Bank of Zambia

IBC Intermarket Banking Corporation

FNB Finance Bank Zambia

ZANACO Zambia National Commercial Bank plc

MQ Management Quality

EQ Earnings Quality

LM Liquidity Management

ROE Return on Equity

ROA Return on Assets

NIM Net Interest Margin

vii
 LIST OF TABLES

Table 3.6.2 1 ................................................................................................................................. 12

Table 4.2. 1 Summary Descriptive Statistics for Barclay Bank Zambia ...................................... 13
Table 4.2. 2 Summary Descriptive Statistics for ZANACO Bank ............................................... 13

Table 4.3. 1 Correlation coefficients for Barclays Bank Zambia ................................................. 18

Table 4.3. 2 Correlation coefficients for ZANACO Bank ............................................................ 19

viii
 LIST OF FIGURES

Figure 2.3 1framework.................................................................................................................... 7

Figure 4.2.3 1 Capital adequacy behavior .................................................................................... 15

Figure 4.2.4 1 Asset Quality behavior .......................................................................................... 15

Figure 4.2.5 1 Management Efficiency behavior.......................................................................... 16

Figure 4.2.6 1 Earnings Quality behavior ..................................................................................... 16

Figure 4.2.7 1 Liquidity Management behavior ........................................................................... 17

Figure 4.2.8 1 Trend Analysis....................................................................................................... 17

ix
 CHAPTER ONE

1.0 INTRODUCTION
1.1 Background of the study
According to Koch and Macdonald (2003), “Commercial banks, like any other financial
institutions, with financial characteristics largely reflect government imposed regulations and
peculiar features of the specific markets alike, they facilitate the flow of funds from surplus
spending units (savers) to deficit spending units (borrowers)”. Commercial banks are very
important as they can affect the stability of the financial system (Athanasoglou et al. 2005).
Ongore and Kusa (2013), support that Commercial banks play a vital role in the economic
resource allocation of countries.

Commercial banks become exposed to different types of risk that are influenced by different
factors. An example is liquidity risk. This occurs when the bank is unable to meet current
demand. Financial performance of a commercial is a guarantee not only to its depositors but to
the whole economy (Zawadi, 2013). Financial performance and its measurements is well
advanced within the fields of finance and management. Thus it is of great importance to evaluate
the overall financial performance of banks by implementing a regulatory banking supervision
framework. One of such measures of supervisory information is the CAMEL rating system
which was put into effect firstly in the U.S. in 1979.

Zambia enganged in a financial sector liberalization at the beginning of the 1990s and this
offered an opportunity for a revival in the banking sector of Zambia. In 2004, the Zambian
government embarked on the Financial Sector Development Programme (FSDP), a strategy
aimed at building and strengthening financial sector infrastructure to enable it to support
economic diversification and sustainable growth.

In 2006 there were 13 commercial banks aside from the Bank of Zambia, which regulates and
supervises the Zambian banking sector under the Banking and Financial Services Act 2000.
Since 2008, 6 more subsidiaries of foreign banks had been registered, bringing the total number
to 19 commercial banks for the whole sector by the end of 2012, (Bank of Zambia, 2014).
However, following the acquisition of Finance Bank Zambia Limited (FBZ) on 1st July 2016
and African Banking Corporation Zambia Limited (BancABC Zambia) in August 2015 by Atlas

1
Mara which led to their subsequent merger in 2017, as well as the closure of Intermarket
Banking Corporation Zambia Limited (IBC), the total number of commercial banks reduced to
17. According to Ministry of Finance (2018), Intermarket Bank was restructured with it’s
successor being Zambia Industrial Commercial Bank and commenced operation on 28th
November 2017. This brought the total number of commercial banks to 18 as of 2018.

According to the Bank of Zambia anuual report (2017), “Overall financial performance and
condition of the banking sector for the year ended 31 December 2017 was satifactory largely on
the account of a strong capital adequacy position, satisfactory earnings performance and a
satifactory liquidity position. However, the sector’s asset quality deteriorated.”

The measuring of banks performance and profitability focuses on three main indicators which
are; Return on Equity, Return on Asset and the indicator of financial leverage (intrest margin)
(Greuning & Bratanovic, 2003). Specific indicators of the banks, such as return on assets (ROA)
and return on equity (ROE), demonstrate how successfully the banks maintain their profitability.
In addition, Fitch (2012), puts much emphasis on the relevance of ROA and highlights it as one
of the main indicators in determining financial performance of a bank. Therefore, there is need to
understand how financial performance in commercial banks is determined and how each of the
identified internal determinants impact the financial performance.

1.2 Problem Statement

Studies carried out to evaluate the determinants of the financial performance of commercial
banks have revealed various factors such as the internal bank specific factors, industry specific
factors and external macro-economic factors (Sufian and Chong, 2008). However, Ongore and
Kusa (2013), stresses out that countries may differ in terms of their macro-economic conditions,
the financial systems as well as the operating environment of their commercial banks. This
shows that factors that can influence performance in one country may not be the same in another
country (Lipunga, 2014).

A number of studies have been conducted regarding the determinants of financial performance of
commercial banks in many African countries using both internal and external determinants.
Despite all these studies, there has not been much literature on the relationship between the bank
specific factors and financial performance of commercial banks with reference to the Zambian
Banking sector.

2
1.2.1 Aim of study
Therefore, the aim of this research is to investigate the relationship between internal bank
specific factors and financial performance of commercial banks in Zambia by conducting a
comparative analysis between ZANACO Bank and Barclays Bank Zambia over a period of Eight
years. In this study, financial performance will be measured using the specific variable, return on
assets (ROA) while the CAMEL rating system will be used as explanatory internal factor
variables.

1.3 Research Questions

This study will be guided by the following research questions

1. What are the bank specific factors that determine the financial performance of
Commercial Banks in Zambia?
2. How do bank specific factors influence financial performance of Commercial Banks in
Zambia?
1.4 Research Objectives
1.4.1 General objective
1. To determine the relationship between internal bank specific factors and financial
performance of commercial banks.
1.4.2 Specific objectives
1. To associate bank specific factors to financial performance of commercial banks.
2. To assess the realtionship between bank specific factors and financial performance of
both commercial banks.
1.5 Significance of the study
This study may prove beneficial to Commercial Bank’s management as it will help them to
better understand how internal factors impact their performance and help Commercial Banks to
develop strategies of capitalizing on these factors to improve performance. In addition to this, the
study will also guide policy makers in the banking sector especially the Central Bank of Zambia
in formulating and implementing policies which will ensure favorable macroeconomic indicators
to spur growth and profitability in this sector. The contribution of this research to academics may
also prove useful to future researchers and academicians in the field of finance, economics and
banking. The findings of the study can be used as a reference by other researchers.

3
 CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction
Financial Performance of Commercial Banks is a very critical issue in the banking sector, mostly
because it highlights the overall performance of Commercial Banks and Non-Banking
institutions. It also forms the basis of regulation by which the Central Bank (Bank Of Zambia)
gets to decide which bank remains operational based on their performance. The organization of
this chapter is dependent on the research questions asked in the previous chapter. Discussion of
the research questions will be done separately in synthesis with related theories and empirical
literature.

2.2 Internal Determinants of Financial Performance of Commercial Banks

Internal factors are individual bank characteristics which affect the bank’s performance and are
basically influenced by internal decisions of management and the board. According to Dang
(2011), CAMEL framework is often used to proxy the bank specific factors. CAMEL stands for
Capital Adequacy, Asset Quality, Management Efficiency, Earnings Quality and Liquidity
Management.

2.2.1 Capital Adequacy and Financial Performance

According to Athanasoglou et al. (2005), Capital is the amount of own funds available to support
the bank’s business and act as a buffer in case of adverse situations. It creates liquidity for the
bank as deposits are fragile and prone to bank runs. According to Diamond (2000), greater bank
capital reduces the chance of distress. Capital adequacy ratio is directly propotional to the
resilience of the bank to crisis situations. Sangmi and Nazir (2010), state that it also has a direct
effect on the profitability of banks by determining its expansion to risky but profitable ventures.
Although there is need to meet statutory capital reqiurements, there is a debate on how much
capital is enough. According to Beckmann (2007), High capital infringes banks to financialy
perform at their full potential. In the end banks become more risk averse and ingnore the
potential (risky) investments. As a result, investors end up demanding lower return on thier
capital in exchange for lower risk.

However Gavila et al (2009), argues that, highly capitalised banks are characterised with high

4
levels of financical performance as they face lower cost of bankruptcy and lower need for
external funding. This puts a bank at financial advantage especially in economies where external
borrowing is difficult. For this reason, high capitalized banks should be more profitable than
lowly capitalized banks.

2.2.2 Asset Quality and Financial Performance

This includes current assets, fixed assets, credit portfolio and other investments. Loans are the
banks major assets because they generate a major share of the bank’s income. According to
Dang (2011), the quality of loan portfolio determines the profitability of the bank as it has a
direct bearing on bank’s financial performance. Non-performing loan ratios are the best proxies
for measuring asset quality. It is a major concern for all commercial banks to keep the amount of
non-performing ratios to low levels because high none performing loans reduces bank’s
profitabiity (ibid).

Poor asset quality leads to low profitability which in turn leads to bank failure. Poor asset quality
led to the collapse of 37 banks in kenya in the 1980s (Mwega, 2009). According to a study
carried out on Financial performance and proftability by Kosmidou (2008), the results showed
that poor asset quality has a significant negative impact on both profitability and financial
performance of cormmercial banks. This indicated that banks would improve profitability and
financial performance by improving screening and monitoring of credit risk.

2.2.3 Management Efficiency and Financial Performance

The performance of management is often expressed qualitatively through subjective evaluation
of management systems, organizatonal disciplines, control systems, quality of staff and others. In
the literature on bank performance, operational expense efficiency is usually used to assess
managerial efficiency in banks. According to Rahman et al (2009), the higher the operating
profits to total income the more efficient management is of its operations and income generation.
Poor managemnet of expaneses is the major reason for poor profitability (Sufian and Chong,
2009).

Management effeciency affects performance through operatinal costs. A study carried out by
Beck and Fuchs (2004), clarified that there is need to reduce operational costs. In addition to
this, they further explained that overheads are one of the most impontant components of high
interest spreads. High interest spreads have significant bearing on Return on Assets (ROA) and

5
Return on Equity (ROE) (Mwega, 2009).

2.2.4 Earnings Quality and Financial Performance

Quality of Bank’s earnings evaluates profitability of a bank and explains its sustainability and
future growth (Nimalathasan, 2008).Earning quality mainly measures the profitability and
productivity of the bank, explains the growth and sustainability of future earnings capacity. In
the same way, bank depends on its earning to perform the activities like funding dividends,
maintaining adequate capital levels, providing for opportunities for investment for bank to grow,
strategies for engaging in new activities and maintaining the competitive outlook. Here two
ratios can be used to determining the profitability of banks i.e., return on asset and return on
equity(Hazzi & Kilani, 2013). According to Athanasoglou et al. (2005), Earnings is an important
parameter in measuring financial performance. When earnings from bank’s investments are less
than satisfactory, this leads the institution into external borrowing of funds to meet the day to day
capital requirements needed to operate. This may lead to low profitability of the bank as interests
paid by the bank to its lenders reduces the banks working capital.

2.2.5 Liquidity Mangament and Financial Performance

It refers to the bank’s ability to fulfill its obligations, mainly of depositors. According to Dang
(2011), adequate level of liquidity is positively related with bank profitability. The most common
liquidity financial ratios are customer deposit to total asset and total loan to customer deposits
(ibid). It is argued that when banks hold high liquidity, they do so at the opportunity cost of some
investment, which could generate high returns (Kamau, 2009).

High liquidity ratios indicate a less risky and less profitable bank (Hempel et al, 1994). Levine
(1998), further empahsises that despite having more liqiud assets that increase the ability of
commercial banks to raise money on short notice, there is a reduction in the managements ability
to commit credibly to an investment strategy.

6
2.3 Conceptual framework
INDEPENDENT VARIABLES DEPENDANT VARIABLE

(ROA)

FINANCIAL

PERFORMANCE

Figure 2.3 1framework

Source: Authors (2018)

2.4 Theoretical Review

Studies on financial performance date back to the late 1980s and early 1990s. According to
Athanasoglou 2006, two industrial organizational models where used in these studies; the Market
Power (MP) and Efficiency Structure (ES) theories. Through the years the balanced portfolio
theory was introduced and has since added greater insight to studies concerning financial
performance (Nzongang and Atemnkeng, 2006).

2.4.1 Market Power Hypothesis

The MP hypothesis postulates that the bank performance is influenced by the market structure of
the industry. The MP theory has two distinct approaches; the Structure Conduct Performance
(SCP) and the Relative Market Power hypothesis (RMP) (Tregenna, 2009).

The Structure Conduct Performance hypothesis emanated from Bain (1951), states that markets
characterized by a structure with relatively few firms and higher barriers to entry will conduct

7
pricing aimed at achieving joint profit maximization through collusion, price leadership, or other
tacit pricing arrangements. This type of conduct in turn yield profits that are greater than the
competitive accepted standards (Anjili, 2014). On the hand, the RMP hypothesis posits that bank
financial performance is influenced by market share. It assumes that only large banks with
differentiated products can influence prices and increase profits (Tregenna, 2009).

2.4.2 Efficiency Structure

The efficiency-structure (ES) is an alternative hypothesis that emerged as a criticism to the SCP
hypothesis. The efficiency hypothesis postulates that the relationship between market structure
and performance of any firm is defined by the efficiency of the firm. Firms with superior
management or production technologies have lower costs and therefore higher profits. There are
also two distinct approaches within the ES; the X-efficiency and Scale efficiency hypothesis
(Athanasoglou et al, 2006). The X-efficiency approach states that the more efficient firms are,
the more they are profitable because of their lower costs. Such firms tend to gain larger market
shares, which may manifest in higher levels on market concentration, but without any causal
relationship from concentration to profitability. The scale approach emphasizes economies of
scale rather than differences in management or production technology. Larger firms can obtain
lower unit cost and higher profits through economies of scale (Athanasoglou et al, 2006).

2.4.3 The Portfolio Theory

The portfolio theory approach is the most relevant and plays an important role in bank
performance studies (Nzongang and Atemnkeng, 2006). According to the Portfolio balance
model of asset diversification, the optimum holding of each asset in a wealth holder’s portfolio is
a function of policy decisions determined by a number of factors such as the vector of rates of
return on all assets held in the portfolio, a vector of risks associated with the ownership of each
financial assets and the size of the portfolio. It implies portfolio diversification and the desired
portfolio composition of commercial banks are results of decisions taken by the bank
management.

2.5 Empirical Review

Nurazi and Evans (2005) investigated whether CAMEL ratios could be used to predict bank
failure. The results suggested that adequacy ratio, assets quality, management, earnings, liquidity
and bank size are statistically significant in explaining bank failure. In addition, Olweny and

8
Shipo (2011) found that poor asset quality and low levels of liquidity are the two major causes of
bank failures. Poor asset quality led to many bank failures in Kenya in the early 1980s. Ongore
and Kusa (2013) concluded that the financial performance of commercial banks in Kenya was
driven mainly by board and management decisions, while macroeconomic factors have
insignificant contribution.

Another study on commercial banks conducted in Uganda measured by ROA, concludes that
management efficiency together with asset quality have a significant negative impact while
earnings ability has a statistically positive impact on the performance of domestic commercial
banks (Frederick, 2014). In addition, Cekrezi (2015), in the study of performance of commercial
banks in Albania finds that liquidity and capital adequacy have significant negative impact on
performance of commercial banks measured by ROA. Isik and Hassan (2003), predicted a strong
positive correlation between firm size and efficiency. However, Amel, Barnes, Panetta and
Salleo (2004) as well as Athanasoglou et al. (2008) stressed that effect of bank size may be
positive to a certain limit and subsequently become negative beyond that limit due to various
factors.

9
 CHAPTER THREE

3.0 METHODOLOGY
3.1 Research Design
This study employed a descriptive research design. A descriptive study defines a subject by
constructing a profile of people, groups or events through tabulation and the collection of data on
the frequencies on study variables (Cooper & Schindler, 2007). This research design also
ensures absolute explanation of the state of affairs and makes sure that there is no bias in data
collection and enables data collection from a significant target population at a cost-effective
manner.

3.2 Population, Sample size and Scope of the study

Population refers to all people or items with the similar characteristics that one wishes to study
(Zikmund et al., 2011). This study evaluated the impact of firm specific factors on commercial
bank financial performance in Zambia from a period of 2010 to 2017 and used purposive
sampling to select 2 out of the 16 commercial banks currently operational in Zambia. The two
banks are Zambia National Commercial bank plc (ZANACO) and Barclays Bank Zambia.

3.3 Sources and Types of Data

This study used Secondary data from the annual published financial statements of the two
commercial banks. The data collected was for a period of eight years from the year 2010 to 2017.
Data from financial statements was considered reliable since financial statements are prepared
based on standardized accounting principles in every industry.

3.4 Research Methods

The study employed mixed method approach (both qualitative and quantitative methods).
Quantitative research, according to Van der Merwe (1996), is a research approach aimed at
testing theories, determining facts, demonstrating relationships between variables, and predicting
outcomes. Qualitative research implies an emphasis on the qualities of entities and on processes
and meanings that are not experimentally examined or measured (Denzin & Lincoln, 2005).

3.5 Data Analysis

Data analysis entails examining the data collected and making deductions and inferences. The
data collected was edited, sorted for completeness and then analyzed using Pearson correlation

10
with the aid of STATA. Correlation was used to show the relationships that exist between the
variables used in the study while regression analysis was used to explain their relationship.

3.6 Model Specification

In establishing the impact caused by the firm specific factors, the study employed CAMEL rating
as independent variables while used return on assets (ROA) as the dependent variable. The
model used in this study was as follows;

3.6.1 Model 1
𝑅𝑂𝐴𝑖,𝑡 = 𝛽0 + 𝛽1𝐶𝐴𝑖,𝑡 + 𝛽2𝐴𝑄𝑖,𝑡 + 𝛽3𝑀𝑄𝑖,𝑡 + 𝛽4𝐸𝑄𝑖,𝑡 + 𝛽5𝐿𝑄𝑖,𝑡 + 𝜀𝑖,𝑡

Where;

ROA i,t = Return on Asset for bank i in year t,

CA i,t = Capital adequacy for bank i in year t,

AQi,t= Asset quality for bank i in year t,

MQi,t= Management quality for bank i in year t

EQi,t= Earnings quality for bank i in year t,

LQi,t = Liquidity quality for bank i in year t

β1-β6 = the coefficient of the explanatory variables,

εi,t= The error term

11
3.6.2 Calculation Methods of Variables.
(Dependant variable): Return On Assets(ROA) = Net profits/total assets

Independent Variables Ratios Formula

Equity Capital
1. Capital
Equity Capital to total Assets Total Assets
Adequacy
2. Assets Quality Loans & Advances
Loans & Advances to Total Assets
Total Assets
Operating Cost
Operating Cost to Profit after Tax
3. Management Profit after tax
(MQa)
quality
Operating profits
Operating profits to total income (MQb)
Total income
Net profit after tax *100
Net Profit Ratio (EQa) Total income

Net Interest Margin (EQb)

4. Earnings quality Net interest income/Total Assets

Diversification Ratio (EQc) Noninterest income/Total income

Loan to Deposit Ratio Total loans

5. Liquidity (LQa) Total deposits
Management Customer deposits to total assets Total deposits
(LQb) Total assets

Table 3.6.2 1

12
 CHAPTER FOUR

4.0 DATA ANALYSIS, RESULTS AND INTERPRETATION

4.1 introduction
This chapter contains the descriptive statistics, correlation analysis and the interpretation of the
research findings.

4.2 Analysis of Data and Presentation of Findings

4.2.0 Descriptive Statistics
The study used Descriptive Statistics to summarize collected data in terms of mean, standard
deviation, maximum and minimum values. Tables 4.2,1 and 4.2,2 show the results for the two
banks.

Table 4.2. 1Summary Descriptive Statistics for Barclay Bank Zambia

Variables Obs Mean Std. Dev. Min Max

RoA 8 .0187175 .0054774 .0131721 .0306252
capital_adequacy 8 .1092809 .0152121 .0881768 .1352949
asset_quality 8 .4982384 .072073 .4033802 .5964444
MQb 8 .2927762 .0766837 . 2927762 .4087765
EQa 8 .1769387 .0503754 .1205519 .2701468
EQb 8 .0631144 .0090294 .0506297 .0768498
EQc 8 .2780635 .0200643 .2397522 .2961014
LMa 8 .6129476 .0974644 .4895133 .7536995
LMb 8 .7495354 .0263034 .7096539 .7872294
Table 4.2.1 Source:Author (2018). Computed from financial statements of Barclays Bank Zambia
from a period of 2010-2017.

Table 4.2. 2 Summary Descriptive Statistics for ZANACO Bank

Variables Obs Mean Std. Dev. Min Max

RoA 8 .0208758 .00849 .0077235 .0319629
capital_adequacy 8 .1254168 .0139322 .1073082 .1502304
asset_quality 8 .4268049 .0480812 .3377495 .4901972
MQb 8 .2334775 .1077718 .0493429 .3335741
EQa 8 .1568004 .0690236 .0510427 .231033
EQb 8 .0884079 .0086409 .0793727 .0995662
EQc 8 .3226432 .0199089 .2878427 .3493938
LMa 8 .4922652 .1862797 .0620825 .6597174
LMb 8 .7591927 .0242272 .7233135 .7910088
Table 4.2.2 Source: Author (2018). Computed from financial statements of ZANACO Bank from a period
of 2010-2017.

13
Results in tables 4.2 1 and 4.2.2 show the average profitability proxied by Return on Assets
ratio of the two commercial banks. Average RoA for Barclays bank is 0.0187175 compared to
that of ZANACO which is 0.0208758 with the minimum and maximum RoA values for the
respective banks being 0.0131721 and 0.0306252 for Barclays bank and 0.0077235 and
0.0319629 for ZANACO.

Findings indicate that the average Capital adequacy ratio for Barclays Bank is 0.1092809 while
that for ZANACO is 0.1254168 with minimum and maximum values of 0.0881768 and
0.1352949 for Barclays Bank and 0.1073082 and 0.1502304 for ZANACO. The average asset
quality for Barclays is 0.4982384 while that for ZANACO is 0.4268049 with minimum and
maximum values of 0.4033802 and 0.5964444 for Barclays Bank and 0.3377495 and 0.4901972
for ZANACO. Results also indicate that the average Management quality (MQb) for Barclays is
0.2927762 with minimum and maximum values of 0.2927762 and 0.4087765 while the average
for ZANACO is 0.2334775 with the minimum and maximum values being 0.0493429 and
0.3335741 respectively.

Earnings quality is represented as EQa, EQb and EQc. The average (EQa) for Barclays is
0.1769387 with minimum and maximum values of 0.1205519 and 0.2701468 while the average
for ZANACO is 0.1568004 with minimum and maximum values of 0.0510427 and 0.231033
respectively. The average EQb for Barclays is 0.0631144 with minimum and maximum values of
0.0506297 and 0.0995662 while the average for ZANACO is 0.0884079 with minimum and
maximum values of 0.0793727 and 0.0995662. The average EQc for Barclays is 0.2780635 with
minimum and maximum values of 0.2397522 and 0.2961014 while the average for ZANACO is
0.3226432 with minimum and maximum values of 0.2878427 and 0.3493938 respectively.

Liquidity management is represented as LMa and LMb. The average LMa for Barclays is
0.6129476 with minimum and maximum values being 0.4895133 and 0.7536995 while the
average for ZANACO is 0.4922652 with minimum and maximum values being 0.0620825 and
0.6597174. The average LMb for Barclays is 0.7495354 with minimum and maximum values of
0.7096539 and 0.7872294 while the average for ZANACO is 0.7591927 with minimum and
maximum values of 0.7233135 and 0.7910088 respectively.

14
 Figure 4.2.3 1 Capital adequacy behavior

CAPITAL ADEQUACY
13%

13%

12%
Percentages

12%
13%
11%

11% 11%

10%
Zanaco Barclays

The figure above reflects the behavior of Capital adequacy for both banks on average over the 8
years. On average, Capital adequacy for ZANACO is 13% while that for Barclays bank is 11%.
This indicates that ZANACO bank has more capital to support the business than Barclays bank.

Figure 4.2.4 1 Asset Quality behavior

ASSET QUALITY
52%
50%
48%
Percentages

46%
44% 50%
42%
40% 43%
38%
Zanaco Barclays

The asset quality over the 8 years for ZANACO is 43% on average and 50% for Barclays bank
and this indicates that Barclays bank has better asset quality compared to ZANACO hence more
profitable as reflected by the trend analysis.

15
 Figure 4.2.5 1 Management Efficiency behavior

MANAGEMENT
EFFICIENCY
35%
30%
25%
20%
15% 29%
10% 23%

5%
0%
Zanaco Barclays

Findings also review that the Management quality for ZANACO on average is 23% while that
for Barclays bank is 29%. This means that Barclays bank has better management over the study
period compared to ZANACO.

Figure 4.2.6 1Earnings Quality behavior

EARNINGS QUALITY
EQ [a] EQ [b] EQ [c]

35% 32%
30% 28%
25%
Percentages

20% 18%
16%
15%
9%
10% 6%
5%
0%
Zanaco Barclays

Earnings quality was measured by three ratios, EQa (Net profit ratio), EQb (Net Interest Margin)
and EQc (Diversification ratio). From the figure above, EQa for ZANACO is 16% compared to
18% for Barclays, EQb is 9% compared to 6% and EQc is 32% for ZANACO compared to 28%
for Barclays on average indicating better earnings quality overall for ZANACO.

16
 Figure 4.2.7 1 Liquidity Management behavior

LIQUIDITY MANAGEMENT
LM[a] LM[b]

80%
70% 76% 75%
60%
61%
Percentages

50%
49%
40%
30%
20%
10%
0%
Zanaco Barclays

Over the years, Liquidity management measured by two ratios, LMa and LMb for both banks has
been fairly good. LMa measured by loans to deposits ratio is 49% for ZANACO and 61% for
Barclays while LMb measured by customer deposits to total assets ratio is 76% for ZANACO
and 75% for Barclays. Overall, Barclays has better Liquidity management compared to
ZANACO.

Figure 4.2.8 1Trend Analysis

Trend of ROA
Zanaco Barclays

3.5% 3.2% 3.1%

3.0% 2.6% 2.7% 2.7%
2.5% 2.1% 2.2%
1.8% 1.8% 1.7% 1.8%
2.0%
RoA

1.4% 1.5%
1.3% 1.2%
1.5%
0.8%
1.0%
0.5%
0.0%
2010 2011 2012 2013 2014 2015 2016 2017
Years

17
 Figure 4.2.8 1 shows the trend analysis of Return on Assets for both commercial banks from
2010 to 2017. Return on Assets was calculated as Net Profit/Total Assets. The fall in the
performance of Zanaco from 2013 to 2016 was as a result of reduced profits from its assets
(loans). The ratio of non-servicing loans to servicing loans increased thus reducing the expected
returns from its assets overtime. On the other hand, the increase in the performance of Barclays
bank was as a result of improvement in the management efficiency and reduction in the number
of impaired loans to its total loans. These improvements in management lead to better returns on
its assets thus a steady increase in the performance of the bank from 2015 to 2017.

4.3Correlation Analysis
This section shows the relationship between the dependent variable, bank performance (RoA)
and its independent determinants. These are shown by tables 4.3 and 4.4 below.

Table 4.3. 1Correlation coefficients for Barclays Bank Zambia

RoA capital_ asset_ MQa MQb EQa EQb EQc LMa LMb
adequacy quality
RoA 1.0000
capital_ 0.7216 1.0000
adequacy
asset_ 0.2044 0.6375 1.0000
quality
MQa - -0.7191 - 1.0000
0.7979 0.4359
MQb 0.6493 0.6212 0.3149 - 1.0000
0.8817
EQa 0.9227 0.7652 0.3192 - 0.8022 1.0000
0.9576
EQb 0.1869 -0.0618 - 0.3968 - - 1.000
0.4068 0.3729 0.1789
EQc - -0.5759 - 0.7672 - -0.880 - 1.000
0.9250 0.1093 0.6275 0.0025
LMa 0.3009 0.7188 0.9866 - 0.3660 0.3976 - - 1.000
0.4827 0.3582 0.2133
LMb - -0.3634 - 0.4675 - - 0.2618 0.2227 - 1.000
0.3227 0.8011 0.2204 0.3658 0.7576
Source: Authors (2018). Computed from financial statements of Barclays Bank Zambia from 2010-2017.

18
 Table 4.3. 2Correlation coefficients for ZANACO Bank

RoA capital_ asset_ MQa MQb EQa EQb EQc LMa LMb
adequacy quality
RoA 1.0000
capital_ 0.5308 1.0000
adequacy
asset_ 0.6669 0.8151 1.0000
quality
MQa -0.9025 -0.5971 -0.5280 1.0000
MQb 0.9724 0.4776 0.5810 -0.9446 1.0000
EQa 0.9657 0.4553 0.5865 -0.9116 0.9925 1.0000
EQb -0.4882 -0.0973 -0.2023 0.6120 -0.6452 -0.6360 1.000
EQc 0.1746 -0.2746 -0.2280 0.0280 0.0324 0.0256 0.5324 1.000
LMa 0.2446 -0.4542 -0.0213 -0.0561 0.2502 0.2494 -0.5080 0.0912 1.000
LMb -0.5780 -0.3974 -0.4373 0.5125 -0.5399 -0.4718 0.2550 -0.1243 -0.2230 1.000
Source: Authors (2018). Computed from financial statements of ZANACO Bank Zambia from
2010-2017.

The analysis was as the value of r denoted the magnitude and nature of association and was
interpreted as follows:

r = Zero this meant there is no association or correlation between the two variables.

When 0 < r < 0.25 = weak correlation.

When 0.25 ≤ r < 0.75 = intermediate correlation.

when 0.75 ≤ r < 1 = strong correlation.

When r = l = perfect correlation.

From tables 4.31 and 4.3 2 above, the correlation coefficient between Capital adequacy and
Return on Assets is 0.7216 for Barclays Bank and 0.5308 for ZANACO. This means that there is
an intermediate positive correlation between the RoA and Capital adequacy for both banks.

The correlation coefficient between Asset quality and Return on Asset (ROA) is 0.2044 for
Barclays bank and 0.6669 for ZANACO. This means a weak positive correlation between Asset
quality and ROA for Barclays bank and an intermediate positive correlation for ZANACO.

From the findings, the correlation coefficient between Management quality (MQa) measured by
operating cost to profit after tax ratio and ROA is -0.7979 for Barclays bank and -0.9025 for

19
ZANACO. This shows a strong negative correlation between MQa and ROA of both banks. The
negative correlation is due to poor management of expenses. On the other hand, the correlation
coefficient between MQb measured by operating profit to total income ratio and ROA is 0.6493
for Barclays bank and 0.9724 for ZANACO. This means that there is an intermediate positive
correlation between MQb and ROA for Barclays bank and a strong positive correlation for
ZANACO and this is basically due to higher operating profits with respect to total income for
both banks although ZANACO can be said to be more efficient due to its strong correlation with
the dependent variable.

Findings also review that the correlation coefficient between Earnings quality (EQa) measured
by Net Profit ratio and ROA is 0.9227 for Barclays bank and 0.9657. The results show a strong
positive correlation between the variables for both banks although there is a stronger correlation
for ZANACO compared to Barclays bank. The correlation coefficient between EQb measured by
Non-interest income over total assets ratio and ROA is 0.1869 for Barclays bank and -0.4882 for
ZANACO. This means that there is a weak positive correlation between the variables for
Barclays bank Zambia and a negative intermediate correlation for ZANACO. On the other hand,
the correlation coefficient between EQc measured by diversification ratio and ROA is -0.9250
for Barclays bank and 0.1746 for ZANACO. These findings review a strong negative correlation
between the variables for Barclays bank and a weak positive correlation for ZANACO.

The correlation coefficient between Liquidity management (LMa) measured by loan to deposits
ratio is 0.3009 for Barclays bank and 0.2446 for ZANACO. This shows a positive weak
correlation for both banks although that for Barclays banks is intermediate compared to a weak
correlation for ZANACO. On the other hand, the correlation coefficient between LMb measured
by customer deposits to total assets ratio and ROA is -0.3227 for Barclays bank and -0.5780 for
ZANACO. This reflects a negative intermediate correlation between the variables for both banks.

20
 CHAPTER FIVE: CONCLUSIONS AND RECOMMENDATIONS
5.0 Conclusion
The study found that there is a positive intermediate relationship between capital adequacy and
financial performance for both banks. This means that having a higher capital adequacy is more
preferable for commercial banks as I help the bank cope with abnormal and operational profits.
Based on this finding the study concludes that capital plays a vital role in determining
commercial banks performance and higher levels of capital improve the financial health of the
commercial bank.

The study found that there is a weak positive relationship between financial performance and
asset quality for Barclays bank and a positive intermediate relationship for ZANACO. This
indicates that the bank should try to maintain a high level of performing loans as a higher ratio of
non-performing loans deteriorates the overall quality of the bank’s assets in this case loans.
Based on this observation, the study concludes that an increase in servicing loans improves the
quality of a bank’s assets.

The study found out that management quality consisted of MQa, and MQb. There is a negative
relationship between MQa and performance for both banks and a positive intermediate
relationship between MQb and performance for Barclays and strong positive relationship for
ZANACO. This indicates that poor management of operational costs for MQa results into poor
performance and a reduction reflects good performance. Thus, the study concludes that banks
should try by all means to maintain low levels of operating costs to improve performance.

The study found out that there is a positive relationship between earnings quality EQa and EQb
and a negative relationship between EQc with financial performance for Barclays. On the other
hand, there is a positive relationship between RoA and EQa and EQc and a negative relationship
with EQb for ZANACO. Higher interest margins lead to improvement of earnings quality of the
commercial bank. Based on this observation, the study concludes that an increase in earnings
from interest and non-interest income significantly improves performance of commercial banks.

The study also found that the relationship between liquidity management LMa and performance
for both banks is positive while LMb is negative for both banks. This indicates that an increase in
commercial banks total deposits provides adequate funds for lending which in turn increases

21
interest income and the banks’ profits.

5.1 Recommendations
The study concluded that an increase in operating costs will negatively affect the financial
performance of both commercial banks. Therefore, based on this conclusion the study
recommends that managers of banks to come up with more effective strategies of how to reduce
these costs. Such policies would help both banks become more efficient.

The study also concluded that capital adequacy is of key importance to the commercial banks
and significantly affects how both banks perform. Thus, this study recommends that the Central
Bank of Zambia BOZ should develop effective policies regarding capital adequacy, bank
interests and liquidity management of commercial banks to ensure that they are in financial
position that enhances their overall performance.

The study also concluded that both banks maintain a level of high performing loans as an
increase in the banks’ non servicing loans deteriorates the quality of assets. Therefore, this study
recommends that management should pay attention and try to reduce the ratio of non-performing
loans by coming better improvised screening methods.

5.2 Limitations
This study focused on the internal bank specific factors that determine financial performance of
commercial banks. Hence, the scope of the study was commercial banks in Zambia and not any
other organizations in Zambia since financial performance of other organizations is determined
other factors separate from the ones used in the study.

The study only focused on the internal bank specific factors thus the excluded other factors that
may determine performance of a bank. These factors in include macro-economic factors and
industry factors. If all these factors were taken into account, results could have further given a
better explanation of how the current performance.

The sample picked for the study was two banks out of 17 commercial banks which wasn’t
enough to produce conclusive results as the relationship between certain variables was rather
vague and had to be left out in the research.

The study also assessed the quantitative factors and how they influence financial performance

22
using data obtained from financial statements and calculated variables using financial ratios.
However, the preparations of accounting data are prepared on standardized procedures, which
may leave out qualitative aspects.

5.3 Suggestions for Further Studies

The relationship between industry factors, macro-economic determinants and financial
performance may be considered in further studies. In addition to this the number of banks to be
picked as a sample for the study should be increased to make better inferences about the overall
relationship of between these determinants and financial performance. This study only used
Return on Assets (ROA) as a measure of financial performance. However, there are other
measures like Net Interest Margin (NIM), Net Profit Margin (NPM) and Return on Equity (ROE)
which can be used in the banking sector to measure performance.

23
 REFERENCES

Alkhatib, A. (2012). Financial Performance of Palestinian Commercial Banks. International

Journal of Business and Social Science, 3(3), 175–184.

Athanasoglou, P.P., Sophocles, N.B., &Matthaios, D.D. (2005).Bank-specific, industry-specific

and macroeconomic determinants of bank profitability. Working paper, Bank of Greece.

Atlas Mara Bank Zambia (3 November 2017). “Atlas Mara Bank Zambia is created by the
merger of BancABC Zambia and Finance Bank Zambia” (PDF). Lusaka: Atlas Mara Bank
Zambia Limited. Retrieved 18 July 2018.

Babar, H.Z., & Zeb, G. (2011). CAMELS rating system for banking industry in Pakistan: Does
CAMELS system provide similar rating as PACRA system in assessing the performance of
banks in Pakistan? (Master Thesis). Umea School of Business, Umea Universitet, Pakistan.

Bank of Zambia (3 May 2018). "List of Licensed Commercial Banks in Zambia". Lusaka: Bank
of Zambia. Retrieved 14 June, 2018.

Brooks, Ch 2008, Introductory Econometrics for Finance 2 nd edition, Cambridge University,

New work.

Cekrezi, A. (2015). Factors affecting performance of commercial banks in Albania. The

European Proceedings of Social & Behavioral Sciences (EpSBS), BE-ci 2015 May, Department
of Finance and Accounting, University “A.Xhuvani”, Elbasan, Albania, eISSN:2357-1330.

Christopoulos, A.G., Mylonakis, J., & Diktapanidis, P. (2011). Could Lehman Brothers’ collapse
be anticipated? An examination using CAMELS rating system. International Business Research,
4(2), 11-19.

Cornelia, E. T. (2012). The problems and prospects of management of small-scale business in

Nigeria. (Doctoral dissertation, Department of management, Faculty of Business adiministration,
University of Nigeria Enugu campus).

Cronje, C.J. (2007). Corporate annual reports (CARs): Accounting practices in transition (Ph.D.
Thesis). University of Pretoria, Pretoria, South Africa.

24
Dang, Uyen. ( 2011) The CAMEL Rating System in Banking Supervision: a Case Study of
Arcada

Diamond, D.W., Raghuram, A. (2000) A Theory of Bank Capital. The Journal of Finance 52(6),
12-23.

Frederick, N.K. (2014). Factors affecting performance of commercial banks in Uganda: A case
for domestic commercial banks. Proceedings of 25th International Business Research
Conference, 13-14 January 2014, Taj Hotel, Cape Town, South Africa, ISBN:978-1-922069-42-
9.

Gujarati, D 2004,. Basic Econometrics, 4 thedition. McGrawHill, Boston.

Koch, T., and MacDonald, S. 2014. Bank management. Nelson Education.

Majithiya, R., & Pattani, A. (2010). Rating the performance of the bank through CAMELS model
(Post Diploma thesis), Tolani Institute of Management Studies, India.

Ministry of Finance (22 January 2018). “Zambia Industrial Commercial Bank will thrive.”
www.mof.gov.zm accessed on 19 June 2018

Nimalathasan B (2008),. A Comparative Study of Financial Performance of Banking Sector in

Bangladesh an Application of Camels Rating System. Economic and Administrative Series 2:
141-52.

Ongore, V.O., &Kusa, G.B. (2013),. Determinants of financial performance of commercial

banks in Kenya. International Journal of Economics and Financial Issues, 3(1), 237-252.

Rozzani, N., & Rahman, R.A. (2013),. CAMELS and performance evaluation of banks in
Malaysia: Conventional versus Islamic. Journal of Islamic Finance and Business Research, 2(1),
36-45.

Said, R.M., Mohd, H.T. (2011) Performance and Financial Ratios of Commercial Banks in
Malaysia and China.

Sangmi, M., Tabassum, N. (2010). Analyzing Financial Performance of Commercial Banks in

India: Application of CAMEL Model. Pakistan Journal Commercial Social Sciences.

25
Sarker, A.A. (2006). CAMELS rating system in the context of Islamic banking: A proposed ‘S’
for Shariah framework. Journal of Islamic Economics, Banking and Finance, 2(2), 1-26.

Sarwar, A., & Asif, S. (2011). Safety & soundness of financial sector of Pakistan: CAMEL
rating application. Interdisciplinary Journal of Contemporary Research in Business, 3(2), 624-
630.

Sufian, F and Shah, M 2009,. Determinants of Bank Profitability in a Developing Economy.

Empirical Evidence from Bangladesh, Journal of Business Economics and Management.

Timothy W. Koch and S. Scott Macdonald, (2003)., BANK MANAGEMENT, 5th ed. South
Western, USA.

University of Applied Sciences, International Business.

Zanaco (7 March 2018),. Zambia National Commercial Bank Annual Report for the Year Ended
31 December 2017. Lusaka: Zambia National Commercial Bank (Zanaco). Retrieved 14 June
2018.

Zawadi, A.(2013). Comparative analysis of financial performance of commerical banks

Tanzania. Research Journal of Finance and Accounting, 4(19).

26