Cost Efficiency and Banking Sector Profitability in Zimbabwe: An ARDL Bounds-Testing Approach, 2015Q1–2024Q4

This study examines whether cost efficiency is the primary determinant of banking sector profitability in Zimbabwe over 2015Q1–2024Q4, an interval spanning dollarization, the reintroduction of a local currency, the 2020 foreign currency auction system, and the 2024 transition to the Zimbabwe Gold (ZiG). Using quarterly data from the Reserve Bank of Zimbabwe (RBZ) and the Zimbabwe National Statistics Agency (ZIMSTAT), the study applies the Autoregressive Distributed Lag (ARDL) bounds-testing approach of Pesaran and Shin (1997), chosen for its suitability to small samples (n = 40) and mixed order of integration. Return on assets (ROA) is modelled as a function of the cost-to-income ratio (CTI) and six further determinants — digital adoption rate (DAR), fee-to-income ratio (FIR), loan-to-deposit ratio (LDR), capital adequacy ratio (CAR), inflation (INF) and non-performing loans (NPL). Bounds testing confirms cointegration (F = 10.375, exceeding the 5% upper bound of 3.21). The long-run CTI coefficient is negative and significant (−2.81, p < 0.05): a one percent improvement in cost efficiency raises ROA by 2.81 percent, the largest effect in the model. FIR (−1.45) and NPL (−0.18) are also significant long-run determinants, while DAR, CAR, LDR and INF are not significant at the 5% level over the long run. The error correction term (−2.59, p < 0.05) indicates rapid adjustment toward equilibrium after short-run shocks. Diagnostic tests confirm no serial correlation, homoskedastic and normally distributed residuals, correct functional form, no harmful multicollinearity, and stable parameters. The results support the Efficiency Structure Hypothesis and offer only partial support for the Resource-Based View and Capital Buffer Theory in Zimbabwe's dual-currency, high-inflation setting. To the authors’ knowledge, this is the first study to test these three frameworks simultaneously using dynamic econometric methods in Zimbabwean banking, and it closes with regulatory, fiscal and managerial recommendations anchored to the estimated coefficients.

cost efficiency; bank profitability; ARDL bounds testing; Zimbabwe; cost-to-income ratio; Efficiency Structure Hypothesis

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