Demystifying the Role of Governance Quality and Fiscal Space on Nonperforming Loans in Zimbabwe

Abstract

The paper examines the effects of governance quality and fiscal space on non-performing loans (NPLs) in Zimbabwe. We estimated pooled ordinary least squares (OLS) and quadratic regressions with panel-corrected standard errors (PCSE) and Driscoll-Kraay standard errors using the full dollarisation era dataset for 13 banks from 2009 to 2017. We noted that all the governance indicators are on average negative (bad) and that improvement in the rule of law, political stability and control of corruption stimulates reduction in NPLs if the indicators improve beyond -1.654, -0.876 and -1.361, respectively. More interestingly, the results revealed that an improvement in the interaction terms of political stability and control of corruption with rule of law, governance index and voice and accountability significantly reduces NPLs, which is new empirical evidence in the literature. Regarding fiscal space, we find evidence that fiscal balance positively and significantly affects NPLs. We contribute to the literature by providing new evidence on the role of governance quality in NPLs formation in Zimbabwe, especially when corruption and political stability interact with all governance indicators. We recommend that the Zimbabwean government improve political stability, control of corruption, voice and accountability and the rule of law to reduce NPLs.