The Impact of Loan Defaults on Bank Profitability: A case of First Capital Bank Zambia (FCB) (2013-2023)

Abstract

Commercial banks in Zambia, First Capital Bank Zambia included have a rising concern over their profitability due to the impact of loan defaults. This paper analyses the impact of loan defaults on banks' profitability in a case study of First Capital Bank Zambia from 2013Q1, a period when the full acquisition was made from international commercial bank Zambia to 2023Q2. This timeframe was chosen to identify the impact of loan default on profit before the 2007-2009 financial crisis, during, as well as after the recession, and just before the COVID19 pandemic spread globally from China. The variables used in the study comprised of the dependent which was the return on assets (ROA) and independent variables were nonperforming loans, total bank assets, capital adequacy, and liquidity. The VECM model and various diagnostic tests were employed to explain the variables. There was a positive insignificant relationship between return on assets and bank total assets, a negative insignificant relationship between the dependent variable and non-performing loans, and a positive significant relationship between return on assets and capital adequacy. There was a further negative relationship in the long run and a positive one in the short run between liquidity and return on assets. From the findings, it was concluded that loan defaults have had a negative impact on the bank's profitability over the past 10 years. Furthermore, the researcher recommended that similar studies be done with different banks and microfinance institutions so that numerical data can exist on a comparative basis. The researcher also recommended other studies to be conducted to enhance the process of loan monitoring and supervision to ensure that the loan customer uses the loan funds for the purposes that were agreed upon in the loan contract. This can be done through continuous interaction with the loan customer. Keywords: Return on assets, Non-performing loans, Capital adequacy, Bank assets, Liquidity