A study of the effect of macroeconomic factors on the profitability of commercial banks in Zambia

This study investigates the impact of key macroeconomic factors; exchange rates, Gross Domestic Product (GDP), inflation, and unemployment on the profitability of commercial banks in Zambia, where the banking sector faces significant challenges due to economic fluctuations. Recent trends reveal an increase in bank losses and closures, as demonstrated by the Bank of Zambia’s (2016) seizure of Intermarket Banking Corporation Zambia Limited, reflecting the broader vulnerability of Zambian banks to external economic shocks. Despite Zambia’s commercial banks showing lower profitability levels compared to the Southern African Development Community (SADC) average, there is limited research addressing how macroeconomic variables influence their profitability. This study adopts a correlational research design using the Johansen cointegration test to identify long-term effects and employs secondary annual time series data spanning from 1996 to 2022 from sources including the World Bank and Bank of Zambia. Regression analysis, conducted using Stata 14, specifies bank profitability as a function of exchange rate, GDP, inflation, and unemployment, with diagnostic tests such as the Augmented Dickey-Fuller (ADF) test for stationarity, the Durbin-Watson test for autocorrelation, and the Jarque-Bera test for normality to ensure robustness. Findings indicate that exchange rate fluctuations and inflation negatively impact profitability, as exchange rate depreciation and inflationary pressures contribute to deteriorating asset quality and increase non-performing loans (NPLs), thus lowering bank profitability. Similarly, high unemployment adversely affects banks by reducing demand for loans and increasing loan default rates, as unemployed borrowers struggle to meet financial obligations. Conversely, GDP growth positively correlates with profitability, as economic expansion bolsters demand for financial products, supports creditworthiness, and enhances the bank's asset quality. Comparative analysis with studies from other emerging markets, such as Kenya and Central and Eastern Europe, reveals regional economic conditions uniquely shape these effects, underscoring the significance of context-specific factors in understanding bank profitability. Based on these findings, the study recommends that Zambian banks diversify loan portfolios to mitigate the effects of exchange rate fluctuations and unemployment, implement robust risk management strategies, and adopt sustainable funding models that reduce exposure to economic volatility. Such measures are essential for fostering resilience in Zambia’s banking sector and promoting financial stability, which is crucial for the country’s economic development. This study thus contributes to the literature on bank performance in emerging economies, providing valuable insights for policymakers and banking institutions seeking to navigate macroeconomic uncertainties and enhance the financial stability of Zambia’s banking sector.