INTRODUCTION A bank’s profitability is of utmost concern in the modern economy, commercial banks are in the business of receiving deposits (liabilities) and to issue debt securities on one hand and create or invest in assets on the other hand during these transactions banks incur costs for their liabilities and earn income from their assets. Asset – liability management is therefore very critical for the sound management of the finances of any organisation that invests to meet its future cash flow needs and capital requirements.
An efficient asset-liability management requires maximising the bank’s profits as well as controlling and lowering various risks. The ultimate goal is to identify the best possible strategy to manage the composition of financial institution’s assets and liability by controlling the various types of business strategies to maximise profitability. Thus profitability of banks is directly affected by management of their assets and liabilities. BACKGROUND TO THE STUDY
The instability of the financial sector and the fact that it keeps upgrading to keep up with the demand for better products and services by clients puts operators in the industry under considerable pressure to improve upon their profit margins by finding effective strategies for managing their asset and liability portfolios. An efficient asset –liability management deals with the optimal investment of assets in view of meeting current goals of future liabilities, maximising firms profit as well as controlling and lowering various risks.
The rewards from such improvements in the asset liability management techniques will spread across firm, industry and economic levels. At the national level for example the financial services sector is of central importance to the overall Zimbabwean economy as it influences, directs and engineer growth. Thesector provides market, liquidity, reduces transaction costs, provide investment opportunities and ensure competition in economic activities.
This study will seek to examine some of the best practices in the management of asset and liability portfoliosgiven the Zimbabwean economy and culture. PROBLEM STATEMENT The landscape of Asset –Liability Management for the financial sector is ever changing. Various academic and practicing financial professionals have even questioned the strengths of the traditional methods of identifying, measuring and managing risk.
Several attempts have been and continue to be in the area of exploring up to date risk measurement, management and control in financial institutions and how the credit process integrates with the overall strategy of the firm in order to increase its profitability Although impact of the management of banks’ asset and liability on their profitability has been studied by a number of researchers including Kosmidouet et al,2004 and Asiri,2007,the issue of banks’ profitability in developing countries has not received much attention from those researchers.
This study is an attempt to close this gap to bring the issues of banks’ assets and liabilities management in developing countries squarely into focus for assisting better performance of underperforming banks in these countries.
In developed countries a variety of sources and use of funds are available for banks allowing them to diversify asset and liability portfolios, but in a developing economy like Zimbabwe banks are constrained by the low breadth and depth of financial market and as such their asset and liability-base are narrower than those of their counterparts in developed countries therefore the efficient management of these portfolios is more critical than ever.
For example, banks in developed countries such as USA and Australia, can invest their excess cash reserves in short term trading and investment securities unlike Zimbabwe where there is limited existence of short term trading securities such as government bills and bonds, Commercial banks have not been able to invest their excess cash reserves for adequate return. However empirical evidence on the applicants of both the traditional and contemporary techniques of assets-liability managementin the risk management process by financial institutions in Zimbabwe is scanty.
Therefore this study will seek to examine and document the effect of asset liability management on profitability of commercial banks in Zimbabwe. RESEARCH OBJECTIVES The main objective of the study will be to identify and examine some of the key asset-liability management strategies employed by different commercial banks in Zimbabwe to either maintain its profit margins or increase them and to propose a multi objective decision model to reach an optimal strategy.
Secondly this study will seek to co-ordinate asset and liability management as a means of achieving internal consistency and maximising the spread between revenue and cost and minimising of risk exposure. To achieve the broad objective of the study, the following specific objectives are going to be examined. This study aims to evaluate the effect of management’s strategic decisions (regarding assets and liability management) on the banks profitability, while also assessing the effect of economic policies on profitability of financial institutions.
The other objective of this study is to evaluate various ways of investing excess funds in the case where there is limited existence of short term trading securities such as government bills and bonds. This research also aims to unearth different cash matching techniques that can be done in order to manage liquidity risk using various measures of balance sheet sensitivity to interest rate changes.
RESEARCH QUESTIONS Given a certain level of risk, governmentregulation, globalisation,competitors,and alternative choices of investment, and liquidity and interest rate changes in the market, what should be the composition of a bank’s assets and liabilities in order to maximise the bank’s profits? Do the international banks generate higher return on asset and incur lower cost on liabilities than local banks?
How does a bank coordinate asset and liability as the means of maximising profit? Is there any difference between high earning and low earning banks, and between small and large banks in terms of return from assets and cost of liabilities, if so then to what extent? STATEMENT OF HYPOTHESIS H0: asset liability management has a significant effect on the profitability of a bank H1: asset liability management has no significant effect on the profitability of a bank
JUSTIFICATION OF THE STUDY This research will contribute to our understanding of best practices in managing different risks in the Zimbabwean business and economic environment This study will provide the management of commercial banks further insights into the best management risk practices that may be useful and appropriate for specific asset and liability portfolio in order to increase their profit margin.
It will also contribute to the existing body of knowledge in the area of asset-liability management in general and the role of risk management strategies to increase the profitability of commercial banks in Zimbabwe Finally and yet importantly the study might contribute and form the basis for further research into the application of innovative asset and liability management strategies by similar industry player since it has direct bearing with institutional profitability. ASSUMPTIONS OF THE STUDY
For the purposes of this study we will assume that profitability of a bank is solely contributed to by the efficient portfolio management of the assets and liability bank. SCOPE OF THE STUDY In order to achieve the objectives of this study, the researcher will investigate the impact of different of asset liability management techniques on the profitability of commercial banks in Zimbabwe given the economy and the culture that they operate in for the period 2009-2012. LIMITATIONS OF THE STUDY
The findings of this study may have some limitations: The competitive nature of the Zimbabwean financial market may lead to the limitation of gathering some key data that would enable me to analyse in detail the risk aspect of commercial banks loan management process. The socio-cultural characteristics of the Zimbabwean environment, the volume, the vigour of financial market activity and efficiency among other factors could affect the validity of the results for international comparison may therefore be affected.
Despite the limitations outlined in the previous paragraphs ,these findings could be treated as part of a larger body of research contribution, towards the understanding of similar subject matters relating to the management of assets and liability by firms especially those in the financial services sector in the context of the environment like developing countries like Zimbabwe. BRIEF REVIEW OF LITERATURE
Gup and Brooks, (1993), Define Asset-liability management (ALM) as the simultaneous planning of all asset and liability positions for a bank, considering the different bank management objectives and the legal, managerial and market constraints, for the purpose of enhancing the value of the bank, providing liquidity, and mitigating interest rate risk . An efficient asset-liability management system aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of the assets and liabilities as a whole, so as to earn a predetermined, acceptable risk/reward ratio.
The framework of asset-liability management broadly covers the areas of interest rate risk, liquidity risk, exchange risk and credit risk. There is a considerable number literature addressing asset-liability management in banks. One of the key motivators of asset-liability management worldwide was the Basel Committee. The Basel Committee on Banking Supervision (2001) formulated broad supervisory standards and guidelines and recommended statements of best practice in banking supervision. The purpose of the committee was to encourage global convergence toward common approaches and standards.
In particular, the Basel II norms (2004) were proposed as an international standard for the amount of capital that banks need to set aside to guard against the types financial and operational risks they face. Basel II proposed setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.
This would ultimately help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. A number of authors including Kosmidou et el,(2004) and Asiri,(2007) have studied about the influence of the composition of assets and liabilities on the profitability of a bank. Hester and Zoeler (1966) employed statistical cost accounting method on US banks. Their study examines whether significant relationship exists between assets/liabilities standardized with total assets with return on assets of individual banks.
Vasiliou (1966) investigated portfolio of assets and liabilities between high profits and low profit Greek banks by employing the Statistical Cost Accounting method. His regression results suggest that it is the asset management rather than the liability management that play a more prominent role in explaining interbank differences in profitability. This study implies that high profit banks earn higher return on their assets than that of low profit banks. At the same time high profit banks enjoy lower expenses for their liabilities.
These findings contrast with the findings of Kosmidou et al(2004) who find that liability management contributes more in creating the profitability differences among the banks. Kwast and Rose(1982) provided the most comprehensive study on the impact of bank’s asset portfolio composition on its earnings. This study expanded these Statistical cost accounting models by including a firm’s income to its asset liability mix ,the authors focused on the large US banks and used data from1970 to 1977 for their estimation.
Their model found no evidence that differential returns and costs on different categories of assets and liabilities exist between high and low profit banks. Asiri (2007) has also applied Statistical Cost Accounting method on 8 Kuwaiti banks. The study found that assets are positively and liabilities are negatively related to the profitability of the Kuwaiti banks. Vaidyanathan (1999) discussed issues in asset-liability management and elaborates on various categories of risk that require to be managed in the Indian context.
In the past, Indian banks were primarily concerned about adhering to statutory liquidity ratio norms; but in the changed situation, namely moving away from administered interest rate structure to market determined rates, it became important for banks to equip themselves with some of these techniques, in order to immunize themselves against interest rate risk. Ranjan and Nallari (2004) used canonical analysis to examine asset-liability management in Indian banks in the period 1992-2004. They found that SBI and associates had the best asset-liability management in the period 1992-2004.
They also found that, other than foreign banks, all other banks could be said to be liability-managed; i. e. they all borrowed from the money market to meet their maturing obligations. Private sector banks were found to be aggressive in profit generation, while nationalized banks were found to be excessively concerned about liquidity. There have been several applications of mathematical models in the field of bank management. The deterministic linear programming model of Chambers and Charnes (1961) was the first of its kind in Asset Liability Management.
Cohen and Hammer (1967), Robertson (1972) have realized successful applications of Chambers and Charnes’ model. Even though these models have differed in their treatment of disaggregation, uncertainty and dynamic considerations, they all have in common the fact that they are specified to optimize a single objective profit function subject to the relevant linear constraints. Fong and Guin  discussed cash-flow matching, as an alternative to duration-based immunization in asset-liability management.
They noted that cash-flow matching is appealing because the investment practitioner only needs to select securities to match the amount and timing of a future liability. Specific assets in an investor’s portfolio are chosen to fund specific liabilities. Its ease of use also makes cash-flow matching appealing to practitioners because it is easy to implement and easy to explain to the client. RESEARCH METHODOLOGY This research is going to be more of a quantitative research rather than qualitative, it will be based on Census Method.
For the purpose of conducting the study, a total of 10 commercial banks will be selected for comparison purposes. DATA COLLECTION The study will be based on secondary information, and all the relevant information will be collected from various issues of Statistical Tables Relating to Banks, Report on Currency and Finance published by the Reserve Bank of Zimbabwe, In addition to that some information will also be collected from different issues of Economic Survey published by the Government of Zimbabwe and certain important books and journals. * RESEARCH INSTRUMENTS Data can be classified into two categories namely primary and secondary data. According to Grim et al (2010), primary data is data collected first hand by the researcher for a particular purpose while secondary data is gathered by the researcher from sources already collected by others for some other purposes. In this research primary data will be collected through self-administered questionnaires.
There are three research instruments that are commonly used in primary data collection methods in survey studies namely interviews, observations and questionnaires INTERVIEW An interview is a kind of conversation or discussion between two people with a purpose (Henry, 1990). It is conducted by the researcher for a particular purpose for obtaining research relevant information and focused content specified by research objective.
This view is supported by Robson (2002), who argues that an interview appears quiet straight forward and is a non- problematic way of finding things out and a semi-structured instrument that allows further probing of interesting responses and that also takes advantages of messages from non-verbal to help understand verbal responses. However Fraenkel and Wallen (1996), view it as having a prevalence of high chance of researcher bias and lack standardization which arises concerned about reliability besides being time consuming, as such the method was not be used in this study.
It will be advantageous for me to use interviews for this research because I will have that one on one advantage and pry until I get the information that I otherwise wouldn’t have gotten with questionnaires. These interviews will be done with the ALCO department in banks. OBSERVATION This technique involves watching what is being done and records the action in some way and then describes, analyse and interpret what has been observed. The advantage of this approach lies in its directness. Respondents are not asked about their views, feeling or attitudes but watch what they do and listen to what they say.
Charles (1995), views this method as most suitable for non-human animals like the work of ethnologist and as such this method was not used in this study because the nature of the problem involves people. QUESTIONAIRES According to Gillham (2008), a questionnaire is a research instrument consisting of a series of questions and other prompts for the purpose of gathering information from people about their knowledge, beliefs, attitudes and behaviour in a research survey or within clinical trials or epidemiological studies (Oppenheiman, 2000).
Continwm International Publishing Group Limited (1993), views the term questionnaire as a general term used in describing a technique of data collection in which each person is asked to respond to the same set of questions in a predetermined order. A survey questionnaire takes the form of telephone interviews, structured face to face interviews, postal and self-administered questionnaires. The questionnaire can be divided into two categories that are the interviewer administered and self-administered questionnaire.
The interview administered questionnaire includes telephone and structured interviews whereas a self-administered questionnaire includes electronic or online questionnaire, postal, delivery and collection questionnaires. The questionnaires that I will administer will be simple enough to be understood by the person reading them and straight to the point so as to facilitate ease of analysis of responses. EXPECTED RESULTS The research expects to derive a regression equation with profitability as a dependant. BIBLIOGRAPHY:
Basel Committee on Banking Supervision (2001), Principles for the management and supervision of interest rate risk, Bank for International Settlements Basel II (2004), International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Bank for International Settlements Black, R. and Brown, K. (2002), Asset And Liability Management: What Does The Future Have In Store? Balance Sheet, Boston Ranjan, R. and Nallari, R. (2004), “Study of Asset Liability Management in Indian Banks Canonical Correlation Analysis,” Spandan.
Rao, A. V. (2005), “ALM systems in Banks,” Treasury Management, April 2005 Ravikumar, T. (2002), Asset Liability Management, ICFAI Press Vaidya, P. and Shahi, A (2001), “Asset Liability Management in Indian Banks,” Spandan. Tokat, Y. , Rachev, S. T. , and E. S. Schwartz (2003). Asset liability management:a review and some new results in the presence of heavy tails. In Handbook of Heavy Tailed Distributions in Finance, ed. , S. T. Rachev. New Jersey, USA: Elsevier