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

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Blessing Katuka
Calvin Mudzingiri
Edson Vengesai


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.


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