Modelling of corporate exposure at default (EAD) in emerging financial markets: The case for counters listed on the Zimbabwe stock exchange (ZSE) in the dollarization era

Abstract

This study explores the exposure at default (EAD) emanating from credit events undertaken by listed banking corporations trading on emerging markets, such as Zimbabwe’s Stock Exchange (ZSE) or Market in the dollarization era, namely period 2010-12. The dollarization of the Zimbabwean economy in 2009 coincided with the recovery of the global financial economy from the worst worldwide economic recession ever experienced in this world. The study used audited and published data drawn from financial statements of two banking corporations for the period 2010 to 2012 that were accessible on ZSE website. These data were presented and analyzed using Eviews7. The study revealed that there was a lot of non-performing loans drawn from EADs of banking corporations trading on the ZSE in the period under review. The study further noted that credit exposures issued by commercial banks in the period 2010-2012 were also exposed to risk from the nature of the borrowers, banks’ internal and external market variables. The variables that impacted on banks’ credit exposures include political, social, industrial, unemployment, technological challenges, state of financial markets, their capitalization and liquidity statuses. We therefore conclude that banks in emerging markets need to efficiently and effectively manage their credit portfolios in their desire to grow towards sustainable development. The study also concludes that banks in emerging markets that are into lending activities should adopt and implement financial econometric (EAD) models that are easy to apply, practical, pragmatic and adjusted for market friction. The study recommends that listed banking corporations in emerging markets need to adhere to the requirements of the Basel II and III Capital Accords if they are to make meaningful business out of their credit exposure operations. It also recommends that banks should come up with capitalization and investment strategies that suit their economic conditions if they are to grow and develop sizeable market shares and wealth from their lending businesses. Finally the study recommends that banks in emerging economies should adapt to international business standards, strategies, ethics and corporate governance parameters if they are to grow towards greater similarity with those in developed nations in their service delivery to the stakeholders and contribution to nation building and sustainable development.