International Journal of Economics, Commerce and Management

United Kingdom Vol. II, Issue 11, Nov 2014

http://ijecm.co.uk/ ISSN 2348 0386

PREDICTING CORPORATE FAILURE

INSIGHTS FROM THE FINANCIAL SECTOR IN ZIMBABWE

Ncube, Titshabona
Lupane State University, Bulawayo, Zimbabwe
Faculty of Commerce, Department of Accounting and Finance
[email protected]; [email protected]

Abstract
The collapse of the some of the financial institutions indicates a need for Zimbabwe to utilise
and even develop a reliable model which accurately predicts corporate health within companies.
This study examines corporate failure prediction in a developing country in Southern Africa
using Altman’s Z-score model. A sample of financial institutions listed on the Zimbabwe Stock
Exchange is tested for the Z-score to predict possible failure or bankruptcy within the financial
sector in Zimbabwe. Using financial data from the years 2011 to 2013 the study concludes that
83.33% of listed financial sector firms are under distress, 16.67% are under the grey area and
no financial sector institution is in the safe zone. This study adds to the discourse on the stability
of the financial sector in Zimbabwe, and seeks to assist the general public and investors on the
financial health of institutions in the financial sector in Zimbabwe.

Keywords: Z-score, corporate failure, financial institutions, financial health, bankruptcy

INTRODUCTION
The genealogy of the Zimbabwean banking crisis can be traced back to 2004 when the Reserve
Bank of Zimbabwe (RBZ) placed nine financial institutions under curatorship, these are
Barbican Bank Limited; CFX Bank Limited; CFX Merchant Bank; Intermarket Banking
Corporation Limited; Intermarket Building Society; Intermarket Discount House; Royal Bank;
Time Bank and Trust Bank and during the same year Barbicairn Asset Management, Century
Discount House and Rapid Discount House were placed under liquidation (RBZ, 2006).This
resulted in depositors losing their investments in these institutions and therefore eroding the
public confidence on the banking sector, and has resulted in a lot of citizens being unbanked.

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Consequently after this crisis, most banks regularised their operations but in 2012, Interfin Bank
was put under curatorship and Genesis Investment Bank was closed by the RBZ due to failure
to meet new capital requirements (RBZ, 2012).
The crisis is far from over as most banks are failing to meet the minimum capital
requirements set by the Reserve Bank of Zimbabwe in 2012. As at September 2013, seven
banks were being monitored by the Reserve Bank, these are Allied, Agribank, Capital Bank,
Kingdom, Tetrad, Trust and ZB Building Society (RBZ, 2013). In 2013, the central bank
cancelled Trust Bank’s banking licence over allegations of abuse of depositors’ funds and
violation of the Banking Act, and in June 2014 Capital Bank was closed.
The troubled banks are currently facing liquidity challenges and hence failure to meet
depositors’ requirements for withdrawals and other cash related transactions.
All this has resulted in the depositors and shareholders rising questions on how the collapse of
banks can be detected so as to protect depositors funds and to reduce the effects of a bank
collapsing on the economy.
The collapse of these financial institutions indeed indicates the need for Zimbabwe to
utilise and even develop a reliable model which accurately predicts corporate health within
companies. The purpose of this study was to predict the collapse of financial institutions in
Zimbabwe so as to assist in early detection of a looming collapse, and for remedies to be
undertaken, so as to booster public confidence in the financial sector.
The global financial crisis has also resulted in concerns being raised about the going concern
status of major huge global companies. This has renewed the debate among concerned
stakeholders to identify companies with bankruptcy alerts (Gerald, 2002).

LITERATURE REVIEW
According to the Association of Certified Chartered Accountants (ACCA, 2008) corporate failure
models can be divided into two categories, these are the quantitative models and the qualitative
models as discussed below:

Quantitative Models
Argenti (2003) indicates that quantitative models identify financial ratios with values which differ
markedly between surviving and failing companies, and which can subsequently be used to
identify companies which exhibit the features of previously failing firms. These fall under the
Univariante Analysis and Multiple Discriminate Analysis (MDA).

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Univariate Analysis
Patrick (1932) is assumed to be the earlier author who used ratio analysis to predict corporate
failure; this was then followed by studies done by William Beaver. In 1966, he pioneered the use
of corporate failure prediction models and applied the Univariante model to separate each ratio
(ACCA, 2008).
Beaver selected a sample of 79 failed firms and 79 non-failing firms and investigated the
predictive power of 30 ratios when applied five years prior to failure. This work systematically
categorised 30 popular ratios into six groups, and found that some ratios, such as cash
flow/total debt ratio, demonstrated excellent predictive power in corporate failure models.
Although this was a useful beginning, Univariante analysis was later found to be limited and
better results were obtained from including a number of ratios that combined to give a more
robust model with improved predictive power (ACCA, 2008).

Multiple Discriminate Analysis

Altman’s Z-score
Following Beaver, Altman (1968) proposed ‘multiple discriminant analysis’ (MDA).This
technique dominated the literature on corporate failure models until the 1980s and is commonly
used as the baseline for comparative studies (ACCA, 2008).
In the MDA model, the ratios are combined into a single discriminant score, termed a ‘Z-
score’, with a low score usually indicating poor financial health. The initial sample was
composed of 66 publicly listed manufacturing companies in the United States of America (USA)
between the periods 1946-1965. Altman classified the companies into two mutually exclusive
groups, bankrupt and non-bankrupt. Failed and non-failed companies were matched by size and
industry and selected on stratified random basis. The discriminant function was developed using
33 firms in each group as estimation sample, He related 22 accounting and non-accounting
ratios which experiment resulted in a single cut-off point of 5 financial ratios that were
statistically momentous in predicting liquidation from zero to two years before the actual event
occurred. Altman’s original Z-score equation was:
Z=0.012X1+0.014X2+0.33X3+0.006X4+0.999X5
Where:
X1= working capital/total assets
X2= retained earnings/total assets
X3= profit before interest and tax/total assets
X4= market value of equity/book value of total liabilities
X5= sales/total assets

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With the following zones of discrimination:

Z>2.67 ‘safe’ zone
1.81<Z<2.67 ‘grey’ area
Z<1.81 ‘distress’ zone

Working capital encompasses the liquidity of the company and this is calculated by the
difference between current assets and current liabilities. A negative working capital shows that a
firm might be facing challenges in paying short term obligations.
The X2 ratio measures the earning power of the company. Low retained earnings may indicate
that the firm is not profitable.
The X3 ratio indicates the funds available to clear interest and tax creditors, taxation and to pay
dividends out.
With reference to the X4 ratio, this relates to the market capitalisation, this shows the firms
worth, and when its expressed as a ration to total liabilities, the ratio indicates whether the firm
is under financial distress or not.

The original formula was modified by Altman and LaFleur (1981) to accommodate the private
sector. The new formula was as below:
Z= 1.2X1+1.4X2+3.3X3+0.6X4+1.0X5
In its initial test, the Altman Z-score was found to be 72%accurate in predicting
bankruptcy two years prior to the event, with a type II error of 6%. In a series of subsequent
tests covering three different periods up to 1999, the model was found to be approximately 80-
90% accurate in predicting bankruptcy one year prior to the event, with a type II error of
approximately 15-20% (Altman, 1968).
The formula has been used in different context and countries, although it was designed
originally for listed manufacturing companies with assets over more than $1 million, later
variations by Altman were designed to be applicable to privately held companies(the Altman Z’-
Score) and non-manufacturing companies(the Altman Z”-Score) ACCA (2008).
The Z”-score estimated for non-manufacturing companies is as follows:
Z”=6.56X1+3.26X2+6.72X3+1.05X4
With the following zones of discrimination
Z > 2.6 ‘safe’ zone
1.1 < Z < 2.6 ‘grey area’
Z < 1.1 ‘distress’ zone

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Springate
According to ACCA (2008) the Springate model was developed by Gordon Springate following
the procedure used by Altman. Springate selected four out of 19 popular financial ratios using
step wise multiple discriminate analysis. The selected ratios distinguished between sound
business and those that actually failed.
The Springate model was used to test 40 companies and achieved an accuracy rate of 92.5%.
Botheras (2000) tested the Springate model on 50 companies with an average asset size of
$2.5million and found an 88% accuracy rate. The model was also used by Sands (2001) to test
24 companies with an average asset size of $63.4million and found an accuracy rate of 83.3%.
The Springate model takes the following form:
Z=1.03A+3.07B+0.66C+0.4D
Where: A= Working capital/Total Assets
B=Profit before Interest and Tax/Total Assets
C=Profit before taxes/current liabilities
D=Sales/Total Assets

Ca-score Model
This model was developed using step-wise multiple discriminate analysis. In this model thirty
financial ratios were analysed in a sample of 173 manufacturing industries in Canada having
annual sales of approximately $1,20million.This model has an average reliability rate of 83%
and is restricted to evaluating manufacturing companies (Bilanas, 2004).

Qualitative Models
This category of model rests on the premise that the use of financial measures as sole
indicators of organisational performance is limited. Qualitative models are based on non-
accounting or qualitative variables. One of the most notable of these is the A score model
attributable to Argenti (2003), which suggest that the failure process follows predictable
sequence:
Defects Mistakes Made Symptoms of failure
Defects can be divided into management weaknesses and accounting deficiencies these
include autocratic CEO; passive board of directors; weak finance director; poor response to
change and accounting deficiencies include no budgetary control, no cash flow plans and no
costing system.
Each weakness is given a mark or given zero if the problem is not present. The total
mark for defects is 45, and Argenti suggests that a mark of 10 or less is satisfactory.

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If a company’s management is weak, the Argenti suggests that it will inevitably make mistakes
which may not become evident in the form of symptoms for a long period of time. The failure
sequence is assumed to take many years, possibly five or more.
The final stage of the process occurs when the symptoms of failure become visible. Argenti
classifies such symptoms of failure using the following categories
1. Financial signs-in the A score context, these appear only towards the end of the failure
process, in the last two years
2. Creative accounting
3. Non-financial signs e.g. frozen management salaries, delayed capital expenditure, falling
market share, rising staff turnover
4. Terminal signs
The overall pass mark is 25. Companies scoring above this show many of the signs preceding
failure and should therefore cause concern. The A score has therefore attempted to quantify the
causes and symptoms associated with failure. Its predictive value has not been adequately
tested, but a misclassification rate of 5% has been suggested.
In this study the Quantitative Model of predicting the financial health of the financial
institutions was used, following Altman’s Multiple Discriminate due to the fact that previous
studies, namely by Altman(1993),the MDA was found to be 80-90% accurate in predicting
corporate failure.

Country studies
Various case studies in different countries have been conducted and using different models.
Most of the case studies have been conducted in the developed world. This study focused on a
developing African country.
Wang and Campbell (2010) studied data from Chinese publicly listed companies for the
period 2000 to 2008 to test the accuracy of Altman’s Z-score model in predicting failure of
Chinese companies. All Altman’s models were found to have significant predictive ability. This
study indicates that the Z-score model is a helpful tool in predicting failure of a publicly listed
firm in China.
Yim and Mitchel (2005) noted that a number of studies using discriminant analysis have
been carried out in Brazil. They reviewed empirically those notable studies these are:
Elizabetsky (1976) analysed 99 Brazilian firms that failed and 274 non-failed firms. The best
model correctly classified 63% of the failed firms and 74% of the non-failed firms.

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Siqueira and Matias (1996) applied the logit model to a sample of 16 Brazilian banks that failed
during 1994-1995 and 20 non-failed banks. The best model correctly classified 87% of the failed
banks and 95% of the non-failed banks.
Castagna and Matolcsy (1986) applied linear and quadratic discriminant models to a
sample that consisted of 21 failed firms matched to 21 non-failed firms over a period 1963-1977
in Australia. The results one year before failure show that the model correctly classified 81% of
the failed firms and classified correctly non-failed firms by 95%.
With regards to African countries, various studies have been conducted in Nigeria,
Kenya, South Africa and Ghana. Unegbu and Onojah (2013) did a study that focused on the
empirical investigation of the effectiveness of Z-score corporate insolvency prediction model on
selected industrial sectors of a developing economy, specifically in Nigeria. The research
covered a ten year period from 2001 to 2010. The outcome of the research shows that Z-score
is a significant effective tool for predicting corporate failures in emerging economies.
A study by Ani and Ugwunta (2012) focused on predicting corporate business failure in
the Nigerian manufacturing sector. The sample consisted of eleven Nigerian firms and utilised
financial information for the period from the year 2000 to 2004. A multi discriminant analysis
model was used in predicting and detecting failing businesses in the manufacturing sector of the
Nigerian economy. The results revealed that MDA is a veritable tool for assessing the financial
health of firms in Nigeria. It was also noted that MDA not only predicts business failure but
revealed most importantly that the warning signs of impending failure can be revealed one to
two years before the actual failure.
Appiah (2011) did a study on corporate failure prediction on listed firms in Ghana. The
study examined the phenomenon of bankruptcy prediction from a developing economy
perspective using the Altman’s Z-score model. A sample of 15 non-failed and failed companies
listed on the Ghana Stock Exchange, the author tested Altman (1968) model via a cross section
of different firms with dataset with 2004 and 2005. The findings from the study are that Altman’s
Z-score is applicable in predicting bankruptcy in Ghana depending on the nature and size of the
company.
According to Boritz et. al (2007) a variety of models have been developed in the
academic literature using techniques such as MDA, logit, probit, recurvise portioning, hazard
models, and neural networks. Despite the variety of models available, both the business
community and researchers often rely on the models developed by Altman (1968) and Ohlson
(1980). A survey of literature shows that the majority of international failure prediction studies
employ MDA (Altman, 1984; Charitou, Neophytou & Charalambous, 2004).

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Numerous studies have documented evidence of the effectiveness of Altman’s Z-score in

predicting corporate financial distress for example (Wang and Campbell 2010, Lugovskaya,
2010, Gerantonis et.al 2009, Xu and Zhang 2009).
Gerantonis et al (2009) checked whether Z-score Altman model can predict correctly
company failures. They found that Altman model performs well in predicting failure. Similarly
Arrawi, et al (2008) used Altman Z-score and ratio analysis approaches to conclude their views
why firms under study went bankrupt. They concluded that Altman’s model may be used as an
indicator and perhaps evidence to determine the forms bankruptcy in the future.
There is also evidence that a hybrid approach, which combines a market-based model
and an accounting based model i.e. Altman’s provides better bankruptcy prediction than either
model alone (Li & Miu 2010). This is consistent with the findings of Das (2009) that a model
incorporates both accounting-based information and market based information out performs
either model. A hybrid model appears to be also useful in predicting the bankruptcy of Japanese
listed companies (Xu and Zhang 2009).
In light of the evidence presented above on the predictive nature of Altman’s model this
study seeks to therefore utilise Altman’s Z-score model for non-manufacturing firms, specifically
publicly listed financial firms on the Zimbabwe Stock Exchange, to predict failure and non-failure
firms utilising data for the period 2011 to 2013.

METHODOLOGY
The purpose of the study was to predict corporate failure within the banking and financial sector
in Zimbabwe, using Altman’s Z-score model for predicting corporate failure in non-
manufacturing companies.
Most of the studies on the African continent are based on whether Altman’s model is
predictive of corporate failure. The approach in this study is to use Altman’s model to predict the
failure of financial institutions.
The data for this analysis was gathered from a sample of six listed companies in the
banking and financial services. As at 30 June 2014, the RBZ reported that Zimbabwe has 20
banking institutions. The sample therefore is representative at 30%. The sample size was based
on a non probabilistic sampling technique due to the availability of data only from the listed
counters, thereby leaving out banks which are not listed on the Zimbabwean Stock Exchange.
The study focused on the period from 2011 to 2013, due to the fact that Zimbabwe started fully
reporting using the foreign currency, mainly the United States Dollar(USD) in 2010, and more
bank closures were witnessed between 2011 and early 2014. The research focused on the four
variables for Z-score for non-manufacturing companies.

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Financial ratios were computed with regards to each company and for each year, these ratios
covered liquidity ratios, profitability ratios, operating efficiency and market related fluctuations on
security prices. Statistical weights were given to the various ratios in the order of importance as
follows: 6.56, for X1; 3.26 for X2; 6.72 for X3; and 1.05 for X4 within the model. The Z-score
was then computed for each company and for each year to indicate the financial health of each
company and an analysis undertaken for each company for the period 2011 to 2013. One of the
listed companies BancABC has its primary listing on the Botswana Stock Exchange has the
financial results are presented in the Botswana Pula (BWP)

ANALYSIS & RESULTS

Analysis of accounting ratios and z-scores for 2011
Working capital/Total Assets for 2011
This ratio measures the liquidity of the financial institutions. The ratio of working capital to total
assets was calculated for the banks and Table 1 below summaries the findings:

Table 1 Working capital to total assets: 2011

BANK Current Assets Current Liabilities Working Capital Total Assets X1
BWP BWP -BWP BWP
BANCABC 5,497,924,000.00 7,299,383,000.00 1,801,459,000.00 9,183,888,000.00 - 0.20

USD -USD
BARCLAYS USD 219,364,687.00 224,472,649.00 5,107,962.00 USD 260,035,404.00 - 0.02

USD -USD USD

CBZ USD 700,076,258.00 830,404,352.00 130,328,094.00 1,055,697,496.00 - 0.12

USD USD
FBC USD 221,280,754.00 198,012,784.00 23,267,970.00 USD 279,592,710.00 0.08

USD USD
NMB USD 157,074,656.00 143,915,752.00 13,158,904.00 USD 167,287,333.00 0.08

USD -USD
ZB USD 182,022,960.00 213,314,319.00 31,291,359.00 USD 272,579,415.00 - 0.11

For the computation of X1 the working capital for each financial institution is calculated as
current assets less the current liabilities. From Table 1 only FBC and NMB have positive
working capitals hence a positive ratio of Working Capital to Total Assets, indicating their ability
to meet short term obligations. The other banks have negative working capitals therefore
resulting in negative ratios (X1.). 66.67% of the financial institutions have negative working

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capital meaning that they are not able to meet their short term obligations, and 33.33% of the
financial institutions have working capital to meet their short term obligations.

Retained Earnings to Total Assets for 2011

The Table 2 below show the computation of the ratio of retained earnings to total assets
calculated for each of the six banks:

Table 2 Retained Earnings/Total Assets 2011

BANK Retained Earnings Total Assets X2
BANCABC BWP 182,593,000.00 BWP 9,183,888,000.00 0.02

BARCLAYS USD 1,730,778.00 USD 260,035,404.00 0.01

CBZ USD 57,565,187.00 USD 1,055,697,496.00 0.05

FBC USD 13,106,111.00 USD 279,592,710.00 0.05

NMB USD 6,486,333.00 USD 167,287,333.00 0.04

ZB USD 1,705,652.00 USD 272,579,415.00 0.01

X2= Retained Earnings/Total Assets

From Table 2 above all the financial institutions have positive X2 with the highest being 0.05 for
CBZ and FBC.100% of the firms are profitable in terms of their capacity to retain part of their
earnings, which can be transferred to reserves when the need arises.

Profit before Interest and Tax/Total Assets

The ratio calculated as X3 indicates the cash supply available to pay interest and tax obligations
and also dividends to shareholders. Table 3 below shows the results for the ratio of profit before
interest and tax/total assets.

Table 3 Profit before interest and tax/total assets

BANK PBIT Total Assets X3
BANCABC BWP 107,684,000.00 BWP 9,183,888,000.00 0.01
BARCLAYS USD 2,118,100.00 USD 260,035,404.00 0.01
CBZ USD 38,206,193.00 USD 1,055,697,496.00 0.04
FBC USD 15,674,998.00 USD 279,592,710.00 0.06
NMB USD 6,193,653.00 USD 167,287,333.00 0.04
ZB USD 8,968,877.00 USD 272,579,415.00 0.03
X3=Profit before interest and tax/total assets

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100% of the sampled firms earned a profit in 2011 indicative that the firms may be able to pay
their corporate tax obligations, interest payable and shareholder’s dividends.

Market Value of Equity/Total liabilities

The ratio X4 is a more accurate ratio used to predict financial distress in listed companies. Table
4 below shows the results of the ratio market value of equity/ total liabilities for 2011.

Table 4 Market value of equity/total liabilities

BANK Market Value of Equity Total Liabilities X4

BANCABC BWP 139,422,000.00 BWP 8,571,321,000.00 0.02

BARCLAYS USD 92,622,000.00 USD 226,524,538.00 0.41

CBZ USD 87,580,059.14 USD 936,448,154.00 0.09

FBC USD 38,397,976.89 USD 205,373,878.00 0.19

NMB USD 322,817,338.24 USD 143,915,752.00 2.24

ZB USD 32,561,975.40 USD 218,123,193.00 0.15

X4=market value of equity/total liabilities

The Z-scores for 2011

Table 5 shows the calculated Z-scores for the year 2011 for the six financial institutions:

Table 5: Z-scores 2011

BANK X1 X2 X3 X4 Z-Score
BANCABC - 0.20 0.02 0.01 0.02 - 1.13

BARCLAYS - 0.02 0.01 0.01 0.41 0.38

CBZ - 0.12 0.05 0.04 0.09 - 0.29

FBC 0.08 0.05 0.06 0.19 1.27

NMB 0.08 0.04 0.04 2.24 3.25

ZB - 0.11 0.01 0.03 0.15 - 0.35

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The calculations for the z-score in 2011 indicate that only one of the financial institutions is in
the safe zone that is NMB, representing 16.67% whilst FBC is the only one in the grey zone,
representing 16.67% of the firms and BANCABC, Barclays and ZB are all in the distress zone,
representing 66.66%.

Analysis of accounting ratios and Z-scores for 2012

Working Capital/Total Assets
The Table below shows the computation of X1, which is the ratio of working capital/total assets.

Table 6 Working capital/Total assets

BANK Current Assets Current Liabilities Working Capital Total Assets X1
BWP BWP BWP BWP
BANCABC 12,598,581,000.00 11,886,283,000.00 712,298,000.00 13,407,765,000.00 0.05

USD USD USD USD

BARCLAYS 239,635,145.00 237,339,310.00 2,295,835.00 281,526,923.00 0.01

USD USD USD USD

CBZ 1,077,497,829.00 1,062,415,992.00 15,081,837.00 1,223,093,227.00 0.01

USD USD USD USD

FBC 333,261,349.00 299,785,379.00 33,475,970.00 392,054,851.00 0.09

USD USD USD USD

NMB 214,205,004.00 178,967,766.00 35,237,238.00 226,533,682.00 0.16

USD USD -USD USD -

ZB 254,509,032.00 255,986,151.00 1,477,119.00 326,729,967.00 0.00

With regards to 2012, working capital, only 16.67% of the financial institutions have a negative
working capital indicating that the firm may not be liquid enough to meet its short term financial
obligations.83.33% of the financial institutions have a healthy working capital position.

Retained Earnings/Total Assets

Table 7 shows the results for the ratio of retained earnings/total assets. It indicates that 100%
of the financial institutions are profitable.

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Table 7 Retained Earnings/Total Assets

BANK Retained Earnings Total Assets X2

BANCABC BWP 337,691,000.00 BWP 13,407,765,000.00 0.03

BARCLAYS USD 3,517,975.00 USD 281,526,923.00 0.01

CBZ USD 100,943,928.00 USD 1,223,093,227.00 0.08

FBC USD 24,738,249.00 USD 392,054,851.00 0.06

NMB USD 12,778,583.00 USD 226,533,682.00 0.06

ZB USD 6,573,057.00 USD 326,729,967.00 0.02

X2= retained earnings/total assets

Profit before interest and tax/total assets

Table 8 below shows the results calculated from the ratio of profit before interest and tax/total
assets. It indicates that 100% of the financial institutions are in a financial position to be able to
pay creditors and shareholders, including statutory obligations.

Table 8 Profit before interest and tax/Total assets

BANK PBIT Total Assets X3

BANCABC BWP 212,273,000.00 BWP 13,407,765,000.00 0.02

BARCLAYS USD 3,052,563.00 USD 281,526,923.00 0.01

CBZ USD 55,555,622.00 USD 1,223,093,227.00 0.05

FBC USD 16,892,650.00 USD 392,054,851.00 0.04

NMB USD 10,002,224.00 USD 226,533,682.00 0.04

ZB USD 8,919,339.00 USD 326,729,967.00 0.03

X3=Profit before interest and tax/total assets

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Market Value of Equity/Total Liabilities

Table 9 below shows the computations for the ratio of market value of equity/total liabilities.

Table 9 Market value of equity/total liabilities

BANK MVE TOTAL LIABILITIES X4

BANCABC BWP 128,043,005.20 BWP 12,251,681,000.00 0.01

BARCLAYS USD 55,978,000.00 USD 240,998,310.00 0.23

CBZ USD 68,414,454.60 USD 1,062,415,992.00 0.06

FBC USD 44,388,759.53 USD 303,902,218.00 0.15

NMB USD 183,160,260.27 USD 195,591,599.00 0.94

ZB USD 14,015,251.36 USD 261,203,812.00 0.05

X4=market value of equity/total liabilities

Z-scores for 2012

The following data relates to the calculated Z-scores for the six banks for 2012.

Table 10: 2012 Z-scores

BANK X1 X2 X3 X4 Z-Score
BANCABC 0.05 0.03 0.02 0.01 0.55

BARCLAYS 0.01 0.01 0.01 0.23 0.41

CBZ 0.01 0.08 0.05 0.06 0.72

FBC 0.09 0.06 0.04 0.15 1.21

NMB 0.16 0.06 0.04 0.94 2.48

ZB - 0.00 0.02 0.03 0.05 0.28

The Z-scores for 2012 indicate that no bank is in the safe zone, with NMB and FBC in the grey
area (33.33%) and all the other banks are in the distress zone (66.67%).

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Analysis of accounting ratios and Z-scores for the year 2013

Working Capital/Total Assets
The table below shows the results for the ratio of working capital to total assets. Table 11
indicates that 33.33% of the financial institutions have a negative working capital, therefore very
low X1 ratio, and 66.67% of the firms are able to meet their working capital requirements.

Table 11 Working capital/Total assets

BANK Current Assets Current Liabilities Working Capital Total Assets X1
BWP BWP BWP BWP
BANCABC 1,683,876,000.00 1,431,331,000.00 252,545,000.00 1,799,337,000.00 0.14

USD USD USD

BARCLAYS 266,350,327.00 USD 258,453,719.00 7,896,608.00 307,806,497.00 0.03

USD USD USD USD

CBZ 1,446,971,331.00 1,242,288,486.00 204,682,845.00 1,558,667,011.00 0.13

USD -USD USD

FBC 261,596,175.00 USD 345,347,859.00 83,751,684.00 460,778,310.00 - 0.18

USD USD USD

NMB 243,421,202.00 USD 198,426,446.00 44,994,756.00 259,483,112.00 0.17

USD -USD USD

ZB 248,112,191.00 USD 255,148,134.00 7,035,943.00 332,030,902.00 - 0.02

Retained Earnings/Total Assets

Table 12 below shows the results for the ratio retained earnings/total assets. The table indicates
that 100% of the firms are profitable.

Table 12 Retained earnings/total assets

BANK Retained Earnings Total Assets X2
BANCABC BWP 32,228,000.00 BWP 1,799,337,000.00 0.02

BARCLAYS USD 6,862,523.00 USD 307,806,497.00 0.02

CBZ USD 36,652,342.00 USD 1,558,667,011.00 0.02

FBC USD 37,575,558.00 USD 460,778,310.00 0.08

NMB USD 9,604,191.00 USD 259,483,112.00 0.04

ZB USD 11,814,783.00 USD 332,030,902.00 0.04

X2= retained earnings/total assets

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Profit before interest and tax/Total assets

The Table 13 below shows the results of the ratio profit before interest and tax/Total assets.

Table 13 Profit before interest and tax/total assets

BANK PBIT Total Assets X3

BANCABC BWP 30,022,000.00 BWP 1,799,337,000.00 0.02

BARCLAYS USD 5,184,146.00 USD 307,806,497.00 0.02

CBZ USD 42,222,985.00 USD 1,558,667,011.00 0.03

FBC USD 16,220,524.00 USD 460,778,310.00 0.04

NMB -USD 3,951,865.00 USD 259,483,112.00 -0.02

ZB USD 1,069,983.00 USD 332,030,902.00 0.00

X3=Profit before interest and tax/total assets

Table 13 shows that 16.67% of the financial institutions are not able to meet their regulatory
obligations and shareholders payments, whilst 83.33% of the firms are in a healthy position to
pay regulatory creditors and government liabilities.

Market value of equity/Total Liabilities

The table below shows the results for the ratio of market value of equity to total liabilities.

Table 14 Market Value of Equity/Total liabilities

BANK MVE TOTAL LIABILITIES X4
BANCABC BWP 144,377,466.00 BWP 1,634,304,000.00 0.09

BARCLAYS USD 75,790,534.00 USD 263,465,446.00 0.29

CBZ USD 102,721,588.00 USD 1,352,819,939.00 0.08

FBC USD 77,274,242.00 USD 354,562,794.00 0.22

NMB USD 15,377,094.00 USD 216,041,709.00 0.07

ZB USD 10,511,439.00 USD 264,739,152.00 0.04

X4=market value of equity/total liabilities

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Z-scores for 2013

Table 15 below shows the calculated Z-scores for the six banks for the year 2013.

Table 15 Z-scores 2013

BANK X1 X2 X3 X4 Z-Score
BANCABC 0.14 0.02 0.02 0.09 1.18

BARCLAYS 0.03 0.02 0.02 0.29 0.66

CBZ 0.13 0.02 0.03 0.08 1.20

FBC -0.18 0.08 0.04 0.22 - 0.46

NMB 0.17 0.04 - 0.02 0.07 1.23

ZB -0.02 0.04 0.00 0.04 0.04

The results above indicate that no bank is in the safe zone. The NMB, BancABC and CBZ are in
the grey area (indicating 50%) and the other remaining three banks are under distress,
indicating a 50% of the sample.

Average Z-scores for the period 2011 to 2013

The table below summaries the average Z-scores for the three- year period (2011-2013), under
review.

Table 16 Average Z-scores

BANK 2011 2012 2013 Average
BANCABC - 1.13 0.55 1.18 0.20
BARCLAYS 0.38 0.41 0.66 0.48
CBZ - 0.29 0.72 1.20 0.54
FBC 1.27 1.21 - 0.46 0.67
NMB 3.25 2.48 1.23 2.32
ZB - 0.35 0.28 0.04 -0.01

The average Z-scores for the three year period under study indicate that no bank is under the
safe zone, with only one financial institution in the grey area. The remaining five financial
institutions are under distress.
From this sample we can deduce that only 16.67% of the financial institutions under
study are in the grey area, the majority of 83.33% are under distress.

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CONCLUSION
This study was based on Altman’s’ Z-score for non-manufacturing firms, and financial
institutions listed on the Zimbabwe Stock Exchange were under study. The data was based on
the financial reports for the period 2011 to 2013. The findings showed that on average most of
the firms in the financial sector are under distress i.e. 83.33%, whilst only 16.67% of the firms
are in the grey zone. No financial sector firm is in the safe zone. The current study by way of
recommendation to the financial sector players, recommends the use of Altman’s Z-score model
in predicting corporate failure in the financial services and banking sector in Zimbabwe.
The current study contributes to the field of accounting and finance, with special
emphasis on a country that is recovering economically, and a developing country from Southern
Africa. The study is limited only to the six financial institutions listed on the Zimbabwean Stock
exchange, thereby leaving out institutions not listed on the local bourse. The other limitation of
the study is that the financial sector in Zimbabwe is made up of other entities like the insurance
sector and the micro finance institutions which this study did not investigate, and again the study
was only limited to the listed entities of the Zimbabwe Stock Exchange. The study also focused
on only one method of predicting corporate failure, which was quantitative leaving out the other
qualitative methods that could assist in corporate failure prediction.
Areas that need further research, include testing the failure prediction model on other
financial institutions that are not listed on the Zimbabwean Stock Exchange, this includes
enlarging the sample of financial institutions. Another area for further research will be to utilise
data from a failed company to determine whether the failure prediction model would have
assisted in identifying that the failed company was going down. Other models may also be
tested i.e. the Springate Model, Ca Score Model and qualitative models like the A score by
Argenti.

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