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University of Zimbabwe

Business ReviewVolume 4, No. 1 January-June 2016 ISSN 1819-2971

UZBReview

UZBR Tel.: +263-4-303211 Ext. 13000Faculty of Commerce Email: [email protected]. Box MP 167 Website: www.uzbr.co.zwMount PleasantHarare

University of Zimbabwe Business ReviewVolume 4, No. 1, January-June 2016, ISSN 1819-2971

EDITOR-IN-CHIEFProf. I. Chaneta

DEPUTY EDITOR-IN-CHIEFDr. N. Kaseke

EDITORIAL BOARD MEMBERSDr. T. Munyanyiwa University of ZimbabweDr. D. Madzikanda University of ZimbabweDr. W. Mkumbuzi University of ZimbabweMr. J. Mutambwa University of ZimbabweDr. A. Mhizha University of ZimbabweMr. Ndamba University of Zimbabwe

EDITORIAL ADVISORY BOARDDr. P. Joubert University of SwazilandProf. S.G. Hosking Nelson Mandela MetropolitanUniversityMr. G. Mandebvu University of Zimbabwe

The University of Zimbabwe Business Review (UZBR) is a quarterly refereed research journal of the Faculty ofCommerce, University of Zimbabwe. The aim of UZBR is to facilitate the publication and dissemination of researchin management, accounting, economics and related fields.

Submissions and correspondence to:

The Editor-in-ChiefUniversity of Zimbabwe Business ReviewFaculty of CommerceP. O. Box MP 167Mount PleasantHarareZimbabwe

Tel: 263-4-303211 ext 13018Email: [email protected]

Contents

Public confidence and its impact on the performance and stability of banks inZimbabwe

Caleb Phiri and Godfrey Muponda .................................................................................. 1

Corporate Reporting in Zimbabwe: An Investigation of the legitimacy ofcorporate disclosures by major public listed companies in 2014

F. Jere, R. Ndamba and F. P. Mupambireyi ...................................................................... 15

Zimbabwe stock exchange trading automation and its impact on thedevelopment of the local capital market — A Zimbabwean perspective

Romeo Musimwa and Nyasha Kaseke .............................................................................. 25

Corporate social responsibility within the banking sector in KuwaitHaneen AlRumaihi andDavid Madzikanda ..................................................................... 41

Does grease money from police roadblocks speed up the wheels of thecommuter omnibus? The case of kombis into and out of Harare

Dr Albert Makochekanwa.................................................................................................. 51

Real options valuation: The modern day technique in capital budgetingand decision-making

Tafirei Mashamba .............................................................................................................. 64

The influence of organizational learning dimensions on the performanceof haulage companies in Harare province, Zimbabwe

K. Sibiya, M. Sandada and M.Mago .................................................................................. 76

Modelling consumer behaviour conceptually through the seven Ps ofmarketing: A revised theoretical generic consumer stimulus-response model

Noel Muzondo................................................................................................................... 89

Regulating the Accountancy Profession: An Examination of the Regulatoryframework for the Accountancy Profession in Zimbabwe

Rodney Ndamba1 and Wilson Matamande..................................................................... 108

Predictors of organizational commitment: Evidence from non-governmentalorganizations in Zimbabwe

P. Zanovhi M. Sandada and M. Mago............................................................................... 117

Public confidence and its impact on the performance and stability of banks in Zimbabwe

University of Zimbabwe Business Review, Volume 4, No. 1, January-June 2016 1

Public confidence and its impact on the performance and stability ofbanks in Zimbabwe

Caleb Phiri and Godfrey MupondaUniversity of Zimbabwe

ABSTRACTThe study sought to assess the factors determining public confidence and its impact on theperformance and stability of banks in Zimbabwe. Empirical data was obtained through theadministration of questionnaires to 131 respondents. The study findings were that publicconfidence in the banking sector was low and it was affected by a number of factors. Thestudy concluded that the low public confidence significantly impacted the performance ofbanks in Zimbabwe. The study recommended the restoration of the role of the RBZ bycapacitating its regulatory, supervisory and monitoring role in the financial sector,strengthening of corporate governance in the banking sector and the review of compensationoffered to depositors by the Deposit Protection Corporation.

Key words: Bank integrity; public confidence; bank stability; deposit protection; return on assets;

1. INTRODUCTION AND BACKGROUND TO THE STUDYAccording to the Global Findex Report (2013), more than 2.5 billion adults, who constitute about half ofthe world’s adult population, do not have a bank account. Access to finance in sub-Saharan Africa remainsone of the key obstacles to economic activity and growth of enterprises and was among the lowest globally(World Bank, 2014). Bank penetration rates are lowest in Sub-Saharan Africa, at 18%. This is compared to28% in Latin America, 44% in Europe and Central Asia, 27% in East Asia and Pacific and 24% in MiddleEast and Northern Africa (Bankscope, 2010).

At independence in 1980, the Zimbabwean banking sector was dominated by foreign-owned banks until1991, when the Economic Structural Adjustment Programme (ESAP) prescribed by IMF, opened up thesector to indigenous owners (Mambondiani, 2013) This development led to the doubling of the number ofbanking institutions by 2002. The newly-licensed indigenous banks were structured in such a way that therewas ownership concentration, with the founders and their families being the controlling shareholders andrepresented at the board of directors’ level and top management (Mumvuma, 2003; Chikukwa, 2004).Hyperinflation afflicted the Zimbabwean economy from the late 1990s to the 2000s, resulting in decliningsavings from depositors and pressuring many banks to explore other means of survival. Many banks werealleged to have used depositors’ funds to invest in speculative and non-core activities and even, in somecases, to support daily transactions (RBZ, 2003).

A temporary suspension of the lender of last resort function by the RBZ in December 2003, placed a numberof banks into a liquidity crisis which led to the collapse of 13 banking institutions (all of which wereindigenous and were beneficiaries of the financial liberalisation from 1991). The banking sector was placedunder the Presidential Powers Act and many bank owners and managers were accused of or arrested forfrauds and abuse of depositors’ money. Some of the bank owners fled to other countries in fear of arrest(Mambondiani, 2013). The financial instability and turmoil in the banking sector, led to a review of theregulatory regime and significant amendments to the laws governing the financial sector were made,culminating in the enactment of the Troubled Financial Institutions Resolution Act (2004) and the settingup of the Troubled Bank Fund (RBZ (2015.

It is generally believed that the central bank played a major role in the collapse of banks (Mambondiani,2013) The Reserve Bank of Zimbabwe as well as the Ministry of Finance, were slow in responding to issuesof market conduct and protecting banking customers from the irrational behavior of bank executives. WorldInvestment Report (2014) highlights that hyperinflation in Zimbabwe culminated in the loss of one hundred

C. Phiri and G. Muponda

2 University of Zimbabwe Business Review, Volume 4, No. 1, January-June 2016

years of savings. The report also adds that after dollarization, Zimbabweans lost their life time savings andthe conversion of pensions and life assurance investments into US dollars, has remained unresolved.Additionally, the high bank charges, together with zero interest rates on positive account balances, highpunitive interest rates on loans and overdraft interest ranging from 12% to 30% further exacerbated confidencein the banking sector.

According to RBZ (2014), low deposit volumes ($5.6 billion in December 2015) continue to pose liquiditychallenges for banks in Zimbabwe. The transient nature of these deposits is a further challenge. The situationis compounded by the lack of the lender of last resort function by the central bank which is a necessarysafety net for banks as they trade their positions (Bloch, 2014). The major sources of funds in Zimbabwe inthe absence of printing money include export revenues, foreign direct investments, foreign aid and remittancesfrom the Diaspora. Export revenues have been subdued due to lack of competitiveness and export capacitywhilst imports have exceeded export revenues by more than 50 percent, leaving the country with the barestof foreign exchange reserves, and this affected money supply (RBZ, 2014).

The World Bank (2014) reports that Foreign Direct Investment inflows into Zimbabwe plummeted since thebeginning of the new millennium due to the perceived country risk, with a mere 1.1 percent of GrossDomestic Product recorded in 2012 declining from the 20 percent levels in the mid-1990s. The drought ofFDIs exacerbated the liquidity challenges. According to this report, Zimbabwe last received foreign aid frommultilateral institutions in the late 1990s and has been receiving humanitarian aid only. The external debtof around US$9 billion rendered Zimbabwe an unattractive destination for international finance (WorldBank, 2014). All these deficiencies led to the chronic liquidity challenges facing the country and consequently,the banking sector.

Zimbabwe attracted foreign investments worth $400 million in 2013, compared to $1.7 billion for Zambiaand $5.9 billion for Mozambique. Investment levels remained subdued with only a few firms investing atvery low levels (World Bank, 2014)). Due to almost 17 years of economic erosion and the demonetisationof the local currency, very few Zimbabweans had resources for investment (Bloch, 2014).

Banks face competition with the emergence of mobile money transfer services (MMTS) which pose a seriousthreat to their survival. According to the RBZ (2014), the total value of card based transactions increased by5.2% to US$399 million in May 2014, from US$379 million in April 2014. The value of mobile and internetbased transactions also increased by 19%, from US$360 million in April 2014, to US$429 million in May2014, as mobile networks push innovations to drive their products. According to the RBZ (2014) the responseto EcoCash has been phenomenal and subscribers grew to 3.5 million with over 10 000 agents countrywideby 2014. Steward Bank reached one million customers, as a direct result of customers signing up for EcoCashSave, one of the products on the EcoCash platform. Steward Bank has become the largest bank in thecountry in terms of customer numbers within a very short space of time. This shows the impact of mobilemoney with many of these customers not having a bank account previously. There is also an increase in thenumber of companies using the EcoCash payroll as well.

Table 1 shows that deposits increased from $1.4 billion in 2009 to $5.1 billion in 2014 while the deposit toGDP increased from 23% in 2009, to 36% in 2014, which indicated that deposits in Zimbabwe were low.

Table 1 Deposits as a Percentage of GDP

YEAR 2009 2010 2011 2012 2013 2014

GDP (billion) 6.1 7.4 11.0 12.4 13.5 14.2

DEPOSITS (billion) 1.4 2.6 3.4 4.4 4.7 5.1

DEPOSITS/ GDP RATIO 23% 35% 31% 35% 35% 36%

Source: RBZ and MMC, (2014)



A 2013 survey by the Zimbabwe National Statistics Agency (Zimstats) shows that 40% of adults do not useany financial products and they turn to family and friends when they want to borrow. If they opt to save,they do so at home. Therefore, a large percentage of the population has no access to financial services.Furthermore, the RBZ (2015) estimates that the money outside the banking system ranges from $2.5 billionto $7 billion. In addition, Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU) (2015) reportsthat the country’s informal sector remains largely unbanked with only 23.8% of players in the sector underthe economic bracket with bank accounts and only half of them using their banks regularly for transactions.The large volume of money outside the banking sector is indicative of the lack of public confidence in thebanking sector and contributes to financial instability which is detrimental to their performance (Strassburgand Khumalo, (2012).

The RBZ (2014) also notes that this lack of confidence in the Zimbabwean banking sector has not beenlimited to the domestic market only but has also impacted international banks willing to do business inZimbabwe, as shown in the high risk premium demanded for short-term funds. This decline in confidencehas not been dramatic and sudden but has gradually built up over a period of time. The World EconomicForum Competitive Survey, 2014-15 ranks Zimbabwean banks 136 of 144 banking sectors in the world interms of soundness.

Generally, the performance of banks in Zimbabwe has been relatively poor. Table 2 shows the individualbanks’ total assets and the return on assets ratio.

Table 2: Individual Banks Assets and Return on assets ratio at 31st December, 2014

Bank Bank Assets (millions) %age of Total Assets Profit after Tax (millions) Return on Assets (%)

CBZ 1,427.83 25.04 17.52 1

CABS 623.31 10.03 18.15 3

BancABC 527.15 9.24 14.20 3

Stanbic 475.03 8.33 18.30 4

Stanchart 424.80 7.45 9.63 2

FBC 322.96 5.66 5.54 2

Barclays 307.81 5.39 2.95 1

NMB 259.48 4.55 -3.32 -1

ZB 257.38 4.51 0.81 0.3

MBCA 179.69 3.15 4.04 2

Metbank 169.02 2.96 -1.79 -1

Ecobank 127.07 2.22 1.36 1

Steward 126.61 2.22 N/A N/A

Agribank 123.89 2.17 -9.27 -7

AfrAsia 108.31 1.89 -16.20 N/A

POSB 89.99 1.57 -0.21 -0.2

FBC BS 78.93 1.38 7.07 10

ZB BS 36.78 0.64 1.95 5

Allied 34.82 0.61 -3.15 -8

Total 5,465.92 100 83.80 1

Source: Bank Financial Statements, RBZ and MMC (2014)

Table 2 shows that six banks made losses as well as recording negative percentage return on assets in 2014,which are signs of extreme poor performance. Furthermore, of the thirteen banks that made a profit, only



seven made a profit of more than $5 million. This implies that 32% of the banks in the banking sector madelosses and had negative returns on assets and 36% of the banks in Zimbabwe’s banking sector are strugglingas they have recorded very low profits and Return on Assets.

Between 2012 and 2014, the Zimbabwean financial sector lost six financial institutions (four commercialbanks, one merchant bank and one building society) as well as thirty-two asset management and microfinanceinstitutions. During this period, there were six banks under the assessment of the central bank which werein danger of collapse due to poor performance and difficulties in raising the new minimum capitalrequirements (RBZ, 2014).

Zimbabwe’s banking sector has been characterized by turmoil and failures in recent years. Five banks wereplaced under curatorship in 2006, with two of the institutions, Intermarket Holdings and CFX Holdings,restructured and successfully resuscitated (RBZ, 2014). The RBZ report further states that Sagit Finance andTime Bank had their licences cancelled and were placed under liquidation in 2006. The curators of TrustBank, Barbican Bank and Royal Bank, sold their assets and liabilities to Zimbabwe Allied Banking Corporation(ZABG). Royal Bank surrendered its licence in 2012 and was placed under liquidation while the licence ofTrust Bank was cancelled in 2013. Genesis Bank surrendered its licence in 2012 after failing to meet theminimum capital requirements and was placed under liquidation. Renaissance Merchant Bank, later calledCapital Bank was placed under liquidation in 2013. Trust Bank was placed under Liquidation in 2015.Interfin Bank was placed under liquidation in 2015, after the expiry of the curatorship period. Allied Bankvoluntarily surrendered the banking licence in 2015 and was placed under liquidation. AfrAsia Bank alsovoluntarily surrendered the banking licence in 2015 and was placed under liquidation.

2. STATEMENT OF THE PROBLEMThe banking sector has been blighted by poor corporate governance practices as well as delayed reactions bythe central bank in addressing these challenges, culminating in a chain of bank collapses since 2004. Thishas resulted in the loss of deposits and savings by the banking public, leading to public skepticism of thebanking sector. At the same time, the performance of the banking sector has been very unsatisfactory.

3. PURPOSE AND OBJECTIVES OF THE STUDYThe purpose of the study was to assess the factors that affect public confidence in the Zimbabwean bankingsector and its effect on the stability and performance of the banks.

The objectives of the study were:i. To determine the level of public confidence in Zimbabwe’s banking sector.

ii. To identify the factors that contribute to the lack of public confidence in Zimbabwe’s banking sector.iii. To recommend ways in which public confidence in Zimbabwe’s banking sector can be enhanced.

4. RESEARCH QUESTIONSThe study preceded on the basis of the following research questions.i. What is the general level of confidence in Zimbabwe’s banking sector?

ii. What factors determine public confidence in Zimbabwe’s banking sector?iii. To what extent do the current measures contribute effectively to public confidence in Zimbabwe’s

banking sector?iv. What measures can be implemented by the Zimbabwean banking sector to improve public confidence?

5. PROPOSITIONThe study is based on the proposition that public confidence has a significant impact on the performance ofbanks in Zimbabwe.



The study is of great significance in that it tries to determine whether there is a causal link between publicconfidence and financial stability and the performance of banks in Zimbabwe. The period under considerationin this study was from 2009 to 2015. The study examined all the banks in Zimbabwe and only coveredbranches of banks located in Harare.

6. LITERATURE REVIEW6.1. Public confidence and bank stabilityAccording to Donovan (2012), public confidence in the banking sector could be defined as a feeling of self-assurance arising from an appreciation of their bank’s own abilities to deliver when required. Bateman(2010) also believes that public confidence in the banking sector is the belief or trust the public have in theirbanks or the banking sector as well as in the ability of the institutions and systems in the sector to act in aproper, trustworthy, or reliable manner. “Stability” is viewed by Dailami and Masson (2009), as the state inwhich a bank is well-balanced and not likely to fail, liable to collapse, overturn, and deteriorate inperformance. Stability in the banking sector is a situation when banks are recording favourable performancesand there are no controversial bank closures, collapses or scandals in the sector.

Bankscope (2010) posits that the smooth operation of the financial sector is strengthened through buildingstability and public confidence in the financial system. According to Donovan (2012), instability and lackof confidence in the financial sector has resulted in the public failing or under-utilising the services of thebanking sector. The two components essential for confidence are trust and certainty (Sprimgford, 2011).Trust creates an obligation on both the bank and the customer while certainty means that the nature of thebeneficiaries must be clear. Three certainties must be satisfied to create a valid trust: certainties of intention,subject and objects of the matter. The three types of trust that matter if financial markets are to operatesmoothly, are between consumers and their agents, between consumers and intermediaries, and betweenconsumers and the market, regulated to protect their interests. First, the consumer needs agent trust: that is,trust that the provider will guard and increase the value of savings or provide the financial service whenneeded in the future, consistent with the terms the consumer agreed to when signing up. Second, consumersneed trustworthy information to make choices, where product quality is not objectively verifiable. Third,they need market trust. They need to trust the marketplace to offer them a choice of agents who will act inconsumers’ interests or else they will not seek out financial products. There is a range of reasons why consumersmight distrust banks, but a necessary condition for trust more broadly is that consumers believe that bankswill fulfill their primary role of looking after their money (Smith, 2011).

According to Ongore and Kusa, (2013), loss of public confidence in the banking system occurs when a bankor some banks in the system experience illiquidity or insolvency, resulting in a situation where depositorsfear the loss of their deposits and a consequent break down of contractual obligations that results in runs onthe bank. Confidence is regained when banks are perceived to be well capitalized, customers can withdrawtheir funds without restrictions and bank charges are not too high Ankrah, 2012).

A study by Kabanda, Brown, Nyamakura and Keshav (2010), analyses whether South African banks thatsubscribe to the Electronic Communications and Transactions (ECT) Act comply with the principles relatingto the protection of a consumer’s personal information. The results show that some banks only compliedwith a few of the ECT Act principles, which, undermines the levels of trust between banks and their consumers.Sir Mervyn King, Governor of the Bank of Sigurjonsson and England (2012), envisaged that the single mostimportant commodity traded in the City of London is confidence. The public, bankers and the marketsneed to believe that the UK will continue to be a global financial centre. They must have trust in the quality,ethics and skills of its bankers and they must believe in the wisdom and careful regulation of its government.According to Garner (2002), the effects of business confidence are hard to measure but regular surveys ofhouseholds, make it easier to assess the effects of consumer confidence.

The literature reviewed indicates that the factors impacting public confidence in the banking sector andcontributing to bank performance are in line with Ameur and Mhiri (2013), who listed them as:



• an effective deposit protection system;

• financial inclusion and customer expectations of financial services and products;• effectiveness of bank monitoring, supervision and regulations; and

• good corporate governance and management.

Shannak (2013), argues that public confidence is the cornerstone of a stable banking system and because ofa bank’s special position of trust in the national economy, corporate governance is a matter of paramountimportance. The management of a banking institution must exhibit impeccable integrity and professionalismin their conduct so as to engender public confidence in the safety of their deposits (Chowdhury, 2009).Banks are highly leveraged institutions, with most of their funds coming from depositors and creditors.Akim (2012), adds that increasing globalisation of financial markets, emergence of conglomerate structures,technological advances and innovations in financial products, have added to the complexity of riskmanagement in the banking sector. For these reasons, the quality of corporate governance expected of bankinginstitutions is high. Corporate governance refers to the processes and structures used to direct and managethe business and affairs of an institution with the objective of ensuring its safety and soundness and enhancingshareholder value (RBZ, 2004).

Berger, Imbierowicz and Rauch (2012), examine the roles of corporate governance in bank defaults duringthe financial crisis. The results show that defaults are strongly influenced by a bank’s ownership structure,and high shareholdings of lower-level management, such as vice presidents, significantly increase defaultrisk while shareholdings of outside directors and chief officers do not have a direct effect on the probabilityof failure. Omankhanlen, Taiwo and Okorie (2013), examine the role of corporate governance in the growthof Nigerian Banks. The results indicate that the problems of corporate governance in the Nigerian bankingsector include instability of board tenures, board squabbles, ownership crises, high level of insider dealings.The weaknesses in corporate governance are attributed to ineffective board oversight functions, disagreementbetween boards and management, resulting in board squabbles, lack of experience on the part of the Boardmembers and weak internal controls (Kosmidou and Zopounidis, 2012).

6.3 Impact of public confidence on fostering financial stabilityThe illiquid nature of bank assets (loans) which are financed by liquid liabilities (deposits) threatens thestability of banks by exposing them to runs by depositors who cannot definitely assess the financial healthof banks, arising from the existence of asymmetric information between depositors and banks (Ugwuanyiand Amanze, 2011). Financial system stability is the resilience of a financial system to internal and externalshocks. Financial stability is evidenced by and reflected through an effective regulatory infrastructure, effectiveand well developed financial markets, and sound financial institutions (Ngaujake, 2004).

Caruana and Avdjiev (2011), argue that the global financial crisis highlighted the point that global financialstability relies on the two-way link between sovereigns and banks and conclude that the interconnectednessof the international financial system, makes the prudential approach to policymaking more important thanever before because policies in one jurisdiction have spillover effects on the other. Governments have toearn back investors’ confidence by providing a countercyclical policy instrument to provide support for thefinancial system and this requires that government remains creditworthy at times of stress through buildingbuffers in good times (Muhammad., Gatawa and Kebbi , (2011).

According to Chitumba (2014), the sources of financial instability can be identified as microprudential andmacroprudential risks. He further asserts that micro-prudential risks occur when problems in individualbanks, caused by either excessive risk taking or weak regulatory supervision, can trigger market wide instability.The common reasons for bank failure are: bad loans due to lowered or compromised credit standards;funding issues caused by general market conditions; asset-liability mismatch arising from repricing riskexposures and regulatory issues that cause illegal activities like money laundering and proprietary trading(Momirovic, SimonoviÊ and MilisavljeviÊ , 2010).



Macro-prudential risks occur when a series of financial institutions are exposed to a similar risk. This systemicrisk arises primarily through common exposures to macroeconomic risk factors across institutions. Thistype of distress carries more significant and longer-lasting real costs. Most of the major crises experiencedaround the world are due to this type of distress and these developments are related to economic cycles(Chitumba, 2014).

6.4 Impact of public confidence on bank performanceSince efficiency and competition cannot be observed directly, various indirect measures in the form ofsimple indicators or complex models have been devised and used both in theory and in practice to measureperformance (Bikker, 2010). Bank performance is the reflection of the way in which the resources of a bankare used in a form which enables it to achieve its objectives. Furthermore, the term bank performancemeans the adoption of a set of indicators which are indicative of the bank’s current status and the extent ofits ability to achieve the desired objectives. Bakare (2011) observes that one of the major macroeconomicvariables that compliment bank performances is availability of capital. He further notes that economictheories show that inadequate capital contributes to bank failures and affects economic growth.

7. METHODOLOGY7.1 Data collectionThe study is based on data collected from 19 financial institutions, consisting of commercial banks, buildingsocieties and a savings bank. The sample was drawn from corporate banking clients (companies), retailbanking clients (small individual clients), and senior executives in the Reserve Bank of Zimbabwe (RBZ)Deposit Protection Corporation (DPC) and the Bankers’ Association of Zimbabwe (BAZ).

The study adopted stratified (convenience) sampling for the corporate clients with the size of the bankdetermining the number of respondents to be selected. Two largest corporate clients (respondents) wereselected from the top five banks and one largest corporate client was selected from each of the rest of thebanks. Stratified (random) sampling was used for the retail clients. A sample of one hundred (100)respondents was selected based on the size of the bank (according to market share) with, for instance, CBZhaving 25 respondents and Allied Bank one client. Stratified (convenience) sampling was used for distributingquestionnaires to the four (4) senior executives selected from banks (two from the largest two banks, CBZand CABS, and two from the smallest two (2) banks, POSB and Agribank), one senior executive each fromRBZ, DPC and BAZ. A total of one hundred and thirty one (131) questionnaires were distributed. Thedistribution of the questionnaires is detailed in Table 3.

Table 3. Sample

Sampling Frame Number of Questionnaires

Corporate bank clients 24

Retail bank clients 100

Banks (CBZ, CABS, POSB, Agribank) 4

Reserve Bank of Zimbabwe 1

Deposit Protection Corporation 1

Bankers Association of Zimbabwe 1

Total 131

7.2 Data AnalysisThe data collected from the returned questionnaires were captured and analysed using the SPSS statisticalpackage. The statistical tools used to analyse data were KOM and Bartlett’s Test for Factor Analysis, Cronbach’s



Alpha for Reliability, Kolmogorov-Smirnov or Shapiro-Wilk for test of Normality, Spearman’s Rank forCorrelations, and Anova for Regression.

8. FINDINGS8.1 General Level of Public ConfidenceFrequencies were used to measure the general level of public confidence and identifying the pre-determinedfactors that had the most significant impact on public confidence and their influence on bank performance.Eight factors that impact on public confidence were identified from literature review and packaged in thequestionnaire and the results are shown in Table 4.

Table 4: General Level of Public Confidence in the Banking Sector

LOC Frequency Percent Cumulative Percent

Very High 7 7.4 7.4

High 20 21.3 28.7

Average 29 30.9 59.6

Low 25 26.6 86.2

Very Low 13 13.8 100.0

Total 94 100.0

The findings indicate that 31% of the respondents felt that the general level of public confidence is “average”,that is it not very high or very low, 27% felt that it was low, 21% felt that it was high and 14% felt that it waslow. Only a very small number (7%) felt that it was very high. The implication was that the majority of therespondents did not view the level of public confidence as neither high nor low whilst the next highestgroup concurred that they had low confidence in the country’s banking sector. This could mean that themajority of the public do not yet have full faith and confidence in the country’s banking sector as there arestill almost six banks that are vulnerable whilst the rest of the banking sector seems stable and profitable.

The factors that were regarded as important for public confidence were identified as:

• Poor customer service and banking experience;• High fees and bank charges;• Fear of loss of deposits;

• Unresolved Zimbabwe Dollar account balances;• Poor corporate governance

• Inadequate bank supervision and regulation• Inadequate deposit protection• Inadequate financial services and products

8.2 Current measures contribution to public confidence in Zimbabwe’s banking sectorThis section discusses to what extent and effectiveness of the current measures have contributed to publicconfidence in Zimbabwe’s banking sector. The measures that were considered are:

• The Deposit Protection System• Insurance cover of $500 per deposit.• Current regulation, supervision and monitoring of the banking sector by the RBZ

• Meausres by the RBZ to effect corrective action



• Measures to improve corporate governance and management practices

• Measures to improve the competence and intergrity of executive officers of banks in Zimbabwe• Measures to introduce financial innovation

The results are summarised in Figure 1 below.

Figure 1 Effectiveness of current measures to imrpove confidence

Figure 1 shows that more than 70% of the respondents stated that theses measures were “inadequate andunsatisfactory” with only a few (17.1%) stating that they were “excellent or satisfactory”. Thus, improvingpublic confidence in the banking sector remains a huge task for the indusrty.

8.3 Tests of NormalityA normality test was carried out to establish the distribution of the data and the results are shown in Table5. Tests of normality use either the Kolmogorov-Smirnov or the Shapiro-Wilk test. This study used a samplesize of 94 respondents which was less than 2000. For a sample size less than 2000, the Shapiro-Wilk test isused.

Table 5 Tests of Normality

Kolmogorov-Smirnov Shapiro-Wilk

Statistic Degrees of Significance Statistic Degrees of Significancefreedom freedom

Level of Public Confidence .135 94 .000 .884 94 .000

Deposit Protection .168 94 .000 .922 94 .000

Innovation .206 94 .000 .891 94 .000

Regulation and monitoring .196 94 .000 .886 94 .000

Corporate Governance .194 94 .000 .907 94 .000

Using the Shapiro-Wilk test, the result gave a statistic value of 0.884 for the level of public confidence, 0.922for Deposit Protection, 0.891 for innovation, 0.886 for RBZ and 0.907 for corporate governance at a level ofsignificance of 0.000 which is less than 0.05 (p<0.05). This indicated that the sample was not normal andwas unevenly distributed and therefore non-parametric tests were carried out.

Excellent Satisfactory Average Inadequate Unsatisfactory

47.9%

25.5%

9.6%

16.0%

1.1%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%



8.4 Factor Analysis

Table 6: KMO and Bartlett’s Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .617

Bartlett’s Test of Sphericity Approx. Chi-Square 510.472

Df 55

Sig. .000

Table 6 shows the KMO value was 0.617, which according to Beaumont (2012),, is a good value to proceedwith the test and would provide valid conclusions as it is above 0.5 and below 0.8 whilst the Bartlett’s Testof Sphericity has a sig value of 0.000 which is less than 0.001 therefore shows that the study can continueand perform a valid factor analysis.

Table 7: Total Variance Explained

Extraction Sums of Rotation Sums of Initial Eigenvalues Squared Loadings Squared Loadings

Cumu- Cumu- Cumu-% of lative % of lative % of lative

Component Total Variance % Total Variance % Total Variance %

1 3.693 28.404 28.404 3.693 28.404 28.404 2.848 21.907 21.907

2 2.730 21.004 49.408 2.730 21.004 49.408 2.756 21.199 43.106

3 2.091 16.082 65.490 2.091 16.082 65.490 2.330 17.920 61.026

4 1.050 8.079 73.568 1.050 8.079 73.568 1.630 12.542 73.568

5 .758 5.833 79.401

6 .741 5.696 85.098

7 .521 4.010 89.107

8 .431 3.315 92.422

9 .348 2.679 95.102

10 .259 1.991 97.093

11 .170 1.304 98.397

12 .120 .926 99.324

13 .088 .676 100.000

Extraction Method: Principal Component Analysis.

Table 7 shows that the first four are the only components that have Eigen values over 1.00 and they have acumulative percentage total of 73.568% of the total variability in the data. This implies that the first fourcomponents noted in the table above are the four most important components of the analysis hence onecould conclude that a four factor solution will be adequate to explain the data. Table 7 also shows that thefirst factor has the highest percentage, followed by the second factor, third factor and finally the fourthfactor which implies that the most important component or factor that contributes the most is the firstfactor followed by the second factor, then the third factor and finally the fourth factor in that sequence.

Figure 2 shows a scree plot that supports the conclusion provided by illustrating the same data visually thatthere are four principal components represented by the first four vertically inclined dots on the scree plotgraph.



Table 8 shows the factor loadings that result from rotated component matrix showing the variables undereach principal component which also assists in interpreting and establishing the identity of each principalcomponent.

Table 8: Rotated Component Matrixa

Component1 2 3 4

High Fees and bank charges .882

Unresolved Zimbabwe Dollar Accounts .807

Fear of loss of deposits .742

Inadequate bank regulation .549

Inadequate deposit protection .859

Insurance coverage .748

Executive officers competence .859

Confidence in the integrity of bank .851

Poor Bank Corporate Governance .775

Inadequate Financial Services and products .879

Financial Innovation and new products .370 .813

Mobile banking impact -.409 .787

Poor Customer Service and experience .581

Notes: Extraction Method: Principal Component Analysis; Rotation Method: Varimax with Kaiser Normalization. The rotationconverged in 6 iterations.

Table 8 shows that under Component 1, which was earlier identified in the table as the most importantfactor or with the highest percentage contribution, had four variables under it. These variables were: high

Figure 2: Scree plot

1 2 3 4 5 6 7 8 9 10 11 12 13

Component Number

Eig

en

va

lue

4

3

2

1

Scree Plot



fees and bank charges, unresolved Zimbabwe dollar accounts, fear of loss of deposits and inadequate bankregulation. The next component, which is Component 2 and had the next highest percentage contributionaccording to Table 8, had two variables namely: inadequate deposit protection and insurance coveragereview. Component 3, which is the next important component according to Table 8, had three variableswhich are: executive officers’ competence, confidence in the integrity of the bank and poor bank corporategovernance, whilst Component 4 had four variables, namely: inadequate financial services and products,financial innovation and new products, mobile banking impact and poor customer service and experience.

Therefore, it seems reasonable to provisionally identify the first rotated factor with the variables high feesand bank charges, unresolved Zimbabwe dollar accounts, fear of loss of deposits and inadequate bankregulation as the RBZ’s role of monitoring and regulating the banking sector; the second rotated factor withthe variables inadequate deposit protection and insurance coverage review as deposit protection; third rotatedfactor with the variables executive officers’ competence, confidence in the integrity of the bank and poorbank corporate governance and corporate governance and management; whilst the fourth rotated factorwith the variables inadequate financial services and products, financial innovation and new products, mobilebanking impact and poor customer service and experience as financial products and services.

These results imply that the four principal components or factors of public confidence in Zimbabwe’s bankingsector are: the monitoring and regulation of the banks; deposit protection; corporate governance andmanagement as well as financial products and services which contribute to the stability of the banks. This isin line with Ameur and Mhiri (2013), who indicate that the factors impacting public confidence in thebanking sector and contributing to bank performance are an effective deposit protection system; financialinclusion and customer expectations of financial services and products; effectiveness of bank monitoring,supervision and regulations; and good corporate governance and management.

8.5 Non-parametric CorrelationsThe non-parametric tests were conducted using the Spearman’s rank correlation. Correlation analysis showsthe direction, significance and magnitude of the relationships. The correlation ranges from -1.0 for a perfectnegative relationship to +1.0 for a perfect positive relationship. The relationships between the independentfactors of deposit protection, innovation, regulation and monitoring and corporate governance and thedependent factor of performance level were shown in Table 9.

Table 9: Nonparametric Correlations

Deposit Regulation and Corporate PerformanceProtection Innovation Monitoring Governance level

Deposit Protection CorrelationCoefficient 1.000

Sig. (2-tailed) —

Innovation CorrelationCoefficient .333 1.000

Sig. (2-tailed) .001 —

Regulation and CorrelationCoefficient .507 .483 1.000

Monitoring Sig. (2-tailed) .000 .000 —

Corporate CorrelationCoefficient .384 .320 .683 1.000

Governance Sig. (2-tailed) .000 .002 .000 —

Performance level CorrelationCoefficient .665 .533 .857 .620 1.000Sig. (2-tailed) .000 .001 .000 .001 —



The results established that there was a strong positive correlation between all the four variables and theperformance level as they all had correlation coefficients above positive 0.5. Furthermore, all their p-valueswere less than 0.05 which means that they all have a significant relationship with performance level. Theseresults imply that an effective deposit protection system; provision of financially innovative services andproducts; effective bank monitoring and regulation as well as good corporate governance and managementin the banking sector has a significantly strong positive impact on the performance level of the banks. Theseresults are in line with Ameur and Mhiri (2013), who indicate that the factors impacting public confidencein the banking sector and contributing to bank performance are an effective deposit protection system;financial inclusion and customer expectations of financial services and products; effectiveness of bankmonitoring, supervision and regulations; and good corporate governance and management.

Therefore, this analysis has established that public confidence in the banking sector brought about by aneffective deposit protection system, provision of financially innovative services and products; effective bankmonitoring and regulation as well as good corporate governance and management in the banking sector,has a significant impact on the performance of the banks in the sector. Hence, the research settled on the thehypothesis that public confidence has got a significant impact on the performance of banks in Zimbabwe

9. SUMMARY AND CONCLUSIONSThe study has shown that the general level of public confidence in the Zimbabwean banking sector is low.The study concluded that the principal factors that contribute to public confidence in Zimbabwe’s bankingsector are effectiveness of bank monitoring, supervision and regulations; effective deposit protection system;good corporate governance and management as well as provision of innovative financial products andservices in that sequence. The effectiveness of DPC’s efforts in ensuring public confidence in the bankingsector has been low. The main reason is that the current insurance coverage of $500.00 provided by DPCdoes not instill confidence in the banking sector. The RBZ has been ineffective in improving public confidencein the banking sector as it has been delaying in resolving problems in the banking sector as well as inadequatelyregulating and monitoring the banking sector which has led to bank failures. Furthermore, the currentcorporate governance and management practices in the banking sector are unsatisfactory in promotingpublic confidence as well as contributing to favourable performance in the Zimbabwean banking sector.This is evidenced by the public’s lack of confidence in the competence and integrity of the executive officersof banks as well as lack of confidence in the integrity of the banking sector in Zimbabwe.

10. RECOMMENDATIONSTo improve public confidence in the Zimbabwean banking sector, it is recommended that the traditionalrole of the Reserve Bank of Zimbabwe as a central bank should be restored by capacitating its regulatory,supervisory and monitoring role in the financial sector. It also recommended that corporate governanceand management processes should be strengthened through amending the relevant legislation, ethicalconduct of directors and management and strict internal systems and controls. Finally, The Deposit ProtectionCorporation should review the compensation upwards and undertake public awareness programs and Banksshould promote the use of mobile financial services and technology in banking, promoting financial inclusionand financial literacy.

11. REFERENCESAlam N. (2012), The Impact of Regulatory and Supervisory Structures on Bank Risk and Efficiency: Evidencefrom Dual Banking System, Macrothink Institute, Asian Journal of Finance and Accounting, ISSN 1946-052X, 2012, Vol. 4, No. 1.

Ameur I. G. B., Mhiri S. M. (2013), Explanatory Factors of Bank Performance: Evidence from Tunisia,International Journal of Economics, Finance and Management, Vol. 2, No. 1, March 2013.



Ankrah E. (2012), Technology and Service Quality in the Banking Industry in Ghana, Information andKnowledge Management, www.iiste.org, ISSN 2224-5758 (Paper) ISSN 2224-896X, (Online), Vol 2, No.8,2012.

Bakare A. S., The trend and growth implications of bank recapitalization in Nigeria, African Journal ofBusiness Management, Vol. 5(14), pp. 5938-5945, 18 July, 2011, Available online at http://www.academicjournals.org/AJBM.

Bikker J. A. (2010), Measuring Performance of Banks: An Assessment, Journal of Applied Business andEconomics, Vol. 11(4) 2010.

Donovan K. P. (2012), Mobile Money, More Freedom? The Impact of M-PESA’s Network Power onDevelopment as Freedom, International Journal of Communication 6 (2012), 2647–2669 1932–8036/20120005.

Kabanda, S.K., Brown, I., Nyamakura, V. and Keshav, J. (2010), ‘South African banks and their online privacypolicy statements: A content analysis’, SA Journal of Information Management 12(1), Art. #418, 7 pages.DOI: 10.4102/sajim.v12i1.4.

Kosmidou K. and Zopounidis C. (2008), Measurement of Bank Performance in Greece, South-Eastern EuropeJournal of Economics 1 (2008) 79-95.

Makoni, T.A. (2010), ‘Overview of Zimbabwean Banking Sector’, http://EzineArticles.com/?expert=Dr.Tawafadza A. Makoni (accessed on 14th September 2012).

Mambondiani L., Zhang Y. and Arun T. Corporate Governance and Bank Performance: Evidence fromZimbabwe.

Momirovic D. M., SimonoviÊ Z. and MilisavljeviÊ Z. (2010), Deposit Insurance System in Serbia - Weaknessesand Improvements, Petroleum-Gas University of Ploiesti BULLETIN, Economic Sciences Series, Vol. LXIINo. 3/2010, 1 – 13.

Muhammad A., Gatawa N. M., and Kebbi H. S. B. (2011), Impact of Information and CommunicationTechnology on Bank Performance: A Study of Selected Commercial Banks in Nigeria (2001 – 2011), EuropeanScientific Journal, March 2013 edition vol. 9, No.7 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431.

Oghojafora B. E. A., Olayemia O. O. O., Okonjia P. S. and Okolieb J. U. (2010), Poor Corporate Governanceand its Consequences on the Nigerian Banking Sector, Serbian Journal of Management 5 (2) (2010) 243 –250.

Ongore V. o. and Kusa G. B. (2013), Determinants of Financial Performance of Commercial Banks in Kenya,International Journal of Economics and Financial Issues, Vol. 3, No. 1, 2013, pp.237-252, ISSN: 2146-4138,www.econjournals.com.

Shannak R. O. (2013), Key Issues in E-Banking Strengths and Weaknesses: The Case of Two Jordanian Banks,European Scientific Journal, March 2013 edition vol.9, No.7 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431.

Sigurjonsson T. O. (2010) “The Icelandic Bank collapse: challenges to governance and risk management”,Corporate Governance: The International Journal of Business in Society, Vol. 10 Iss: 1, pp.33 – 45.

Strassburg S. and Khumalo J. (2012), FinScope MSME Survey Zimbabwe 2012, FinMark Trust, Johannesburg,South Africa.

Ugwuanyi G. O. and Amanze P. G. (2014), Banking Sector Reform: An Approach to Restoring PublicConfidence on the Nigerian Banking Industry, Research Journal of Finance and Accounting www.iiste.org,ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online), Vol.5, No.6, 2014.

Investigation of the Legitimacy of Corporate disclosures by major public listed companies in 2014


Corporate reporting in Zimbabwe: An Investigation of the legitimacy ofcorporate disclosures by major public listed companies in 2014

F. Jere, R. Ndamba and F. P. Mupambireyi

ABSTRACTCorporate reporting practices by public listed companies in Zimbabwe have received littleattention to warrant investigating the legitimacy of corporate disclosures by major listedcompanies. This paper presents findings of an investigation on corporate reporting by publiclisted companies on Zimbabwe Stock Exchange (ZSE). The research surveyed the top 10capitalized companies to investigate the proportion of financial and non-financialinformation disclosure contents in company annual reports of 2014. Non-financialinformation reporting was considered from the perspective of sustainability reporting orenvironmental, social and governance reporting (ESG reporting.) The results showed that86% of annual reports content by pages was predominantly financial information. The resultsconfirmed the hypothetical assumption that corporate reporting by public listed companieson ZSE may not be legitimate due to corporate failings on balanced disclosure of financialand non-financial information as generally practiced internationally and mature corporatereporting. The research findings provide a business case for reform on corporate reportingon Zimbabwe Stock Exchange.

Key words: Corporate Reporting, Sustainability Reporting, Financial Information, Disclosures, ZimbabweStock Exchange

1. INTRODUCTIONCorporate reporting has been a topical issue among accounting professionals and business stakeholders inZimbabwe. Globally, corporate reporting has been implicated in the global financial crisis (Anorld, 2009).The practice has been diverse around the World including developing countries like Zimbabwe. This researchinvestigates the extent and legitimacy of corporate reporting by major public listed companies following anobservation on the need for companies to improve corporate reporting culture in Zimbabwe (Ndamba,2015). The observation was based on a comparative overview of company reporting practices in Zimbabwewhen benchmarked with corporate reporting practices in South Africa and current international trends(Ndamba, 2015). However, observations by Ndamba (2015) needed to be substantiated with empiricalevidence, which this research seeks to do.

Corporate reporting as understood in international practices, provides both financial and non-financialinformation (ACCA, 2007; 2008; 2012; 2013). Further, it fundamentally provides a balanced presentationof the sustainability performance of a company, including both the negative and positive impacts. InZimbabwe, the context of corporate reporting provides an assumption which can be confirmed on whethercorporate reporting is widely understood or not because some companies could be mistaking financialreporting as corporate reporting, hence presenting questions on the legitimacy of corporate reporting inZimbabwe. Therefore, this paper seeks to investigate this assumption by surveying public listed companieson the Zimbabwe Stock Exchange, in building a case study with prime focus to appreciate whether companiesare really providing a balance of both financial and non-financial information in annual reports. Further,this study investigates whether there are any companies, if any, which are applying any international standardson sustainability reporting to provide required non-financial information disclosures.

2. RESEARCH BACKGROUNDEven though corporate reporting is increasingly becoming an instrument for effective communication withstakeholders and investors, the art of mature corporate reporting is still to find its footing in the corporateworld and business culture in Zimbabwe as a contemporary instrument (Ndamba, 2014; KPMG, 2011,2013; Chang et al, 1993). Ndamba, (2014) noted that, while corporate reporting is understood from different

F. Jere, R. Ndamba and F.P. Mupambireyi


perspectives, corporate reporting in the new age of contemporary corporate transparency is set on two aspectsin which company annual reports provides a balanced perspective of financial and non-financial information.Consequently, international practices through the use of the Global Reporting Initiatives (GRI, 2014)guidelines, has been instrumental in advancing non-financial information covering environmental andsocial impacts by companies across sectors (IFAC, 2013).

Therefore, understanding whether public listed companies are achieving this balance in corporate informationdisclosure in annual reports provides a business case for this research to investigate the legitimacy of corporatereporting in Zimbabwe. While there may be a hypothetical belief that companies in Zimbabwe tend toconcentrate more on reporting financial than non-financial information, there is need to substantiate thisclaim with empirical evidence.

This research seeks to confirm or reject this hypothesis from an applied research perspective by quantifyingannual report contents between financial and non-financial information. The hypothetical assumption isthat where financial information page content is over a threshold of 70% of total annual report pages,reporting is financial reporting rather than corporate reporting. Where this assumption is confirmed, thereporting practices may not be legitimately corporate reporting. Legitimate corporate reporting should beable to provide content range between 50% – 60% of both financial and non-financial information content.Where this may be not achieved, it may be inappropriate to confirm legitimate corporate reporting (Brownand Deegan, 1998).

3. LITERATURE REVIEWGlobally, there has been significant shift from financial reporting to corporate reporting, which takes intoaccount non-financial information. In fact, qualitative aspects are now dominating corporate reports (ACCA,2012; Beattie et al, 2004; Al-Shammari, 2008). While noting this development, Leach (2004) pointed outthat, in recent years, there have been enormous changes in public interest in the understanding of corporateannual reports. Informed users of accounts today are no longer solely individual shareholders but equallythe professionals acting for institutional investors and the financial news media (Baker and Haslem, 1973).Similar sentiments were shared by Ernst & Young (2014) that ‘today an organization creates value not onlyfor its shareholders but also for the society as a whole by means of a sustainable strategy’.

While corporate reporting has been evolving in different perspectives, the new age of corporate transparencyhas emerged to provide two fundamental aspects in corporate annual reports which encompasses the broadreporting on financial and non-financial information. Non-financial information being largely attributedto disclosure on corporate governance, economic, environmental and social impacts and opportunities inaddition to normal financial information (Ndamba, 2014; KPMG, 2013; ACCA, 2008, CIPFA, 2006). Theevolution of non-financial reporting into mainstream corporate reporting has not been underestimated bythe growing number of stakeholders’ demanding such information (Wallman, 1996). The rise of Civil SocietyOrganisations (CSO) around the world, echoed a new era in mature corporate reporting which created abusiness case for responsive corporate reporting.

3.1. Critical Perspective of Corporate ReportingCorporate Reporting has been largely defined as a disclosure of how a company creates and sustains valueby bringing together material information about an organisation’s strategy, governance, performance andprospects in a way that reflects the commercial, social and environmental context in which it operates (IIRC2013; IFAC, 2013; Ndamba, 2014). As such, corporate reports provide a concise communication on how anorganization’s strategy, governance, performance and prospects, in the context of its external environment,lead to the creation of value over the short, medium and long term (IIRC, 2013; ACCA, 2013; Lev, 1992).However, ACCA (2009) indicates that the definition of corporate reporting differs depending on the natureof discipline referred to. The rise in corporate transparency globally has been shaping corporate reportingtowards convergence in many disciplines to narrow the gaps (Van Reil, 1997; Miller and Bahnson, 2009;KPMG, 2013).



The evolution of corporate reporting from predominance in financial information, has resulted in newforms of corporate reporting which combines financial and non-financial information with the idea toprovide corporate information which is forward looking and providing readers with all the components ofbusiness value which may affect future opportunities and exposures (KPMG, 2013). This brings out the factthat reporting in this new age is no longer about financial information alone, but a whole range of factorswhich include environmental sustainability and corporate social responsibility (Yuen et al, 2009; Wallman,1996; Van Reil, 1997, Steurer, 2010; IFAC, 2013; Accounting for Sustainability Project, 2010).

The rising attention in corporate reporting in developed economies and capital markets has been a sourceof long term investor attraction. Therefore, providing a balance of non-financial and financial informationcreates a bridge for managing corporate disclosure void and mistrust (Ndamba, 2015; Healy, 2001; Haw etal, 2000). Accordingly, good and effective corporate reporting has potential for access to long term capital,enhance financial performance, builds reputation and helps to minimize corporate disclosure risks (Ernst &Young, 2013; IFAC, 2013; Hooks et al, 2002; Van Reil, 1997; Binh, 2012), This perspective creates an imperativefor effective corporate reporting.

There are a number of researches which emphasize the importance of disclosure of information in publishedannual reports on financial and non-financial information (Binh, 2012; Yuen et al, 2009, Swanson andPintér, 2006; Steurer, 2010; ACCA, 2012). Singhvi and Desai (1971) stated that the quality of corporatedisclosure in annual reports is considerably influencing the extent of reporting. Annual reports are commonlyregarded as an important means of acquitting accountability in corporate and government sectors, andoften improve stakeholders’ perceptions on corporate accountability. Further, there are assertions that annualreports project reporting behaviour of a corporation and its ability to improve the perceptions of accountabilityamong its stakeholders and the wider community (KPMG, 2013; ACCA, 2012). Critically, annual reportsprovide strategic instruments for enhancing a company’s ability in raising capital at the lowest possible cost(Lev, 1992; Healy and Palepu, 2001; Buzby, 1974; Haw et al, 2000; Yuen, 2009). Further, annual reports canbe instrumental as a medium for communicating both financial and non-financial information toshareholders, investors, users and stakeholders (Al-Shammari, 2008).

Nevertheless, Baker and Haslem (1973), Chang et al. (1983), Wallace (1988), Miller and Bahnson (2009)and Yuen et al. (2009) have shown that annual reports have provided inadequate information to users.They concluded that available information on performance of companies in annual reports is poor. However,information required by different types of users is different. Buzby (1974) also argues that many items arebeing inadequately disclosed and there is a gap between users’ needs of information and the actualinformation supplied by companies in annual reports.

However, Ryan (1990) states that voluntary disclosure information in annual reports has increased over thepast years. Haw et al. (2000) and Hooks et al. (2002), found out that many annual reports are introducinglimited amounts of new information, gradually. Critically, a lot of voluntary items which stakeholders believeto be important or even essential, are not being disclosed in annual reports. However, the agreement betweenthe importance of relative items considered by stakeholders and the actual disclosure level could be smallbut there is an opportunity for expanding the extent and improving the quality of voluntary disclosureinformation in annual reports of listed companies (Brennan, 2001, Hooks et al, 2002; Healy and Palepu,2000).

3.2. Principles of Effective Corporate ReportingOver the past 10 years, a number of frameworks have emerged to drive effective corporate reporting whichhas been predominantly financial information following the growth and great prominence of theInternational Accounting Standards Board (IASB, 2014). The rising trend of attempting to achieve convergencein financial reporting standards had implications in the prominence of financial reporting due to globalresponse to International Financial Reporting Standards (IFRS). The emerging trend informed the skewednesstoward financial reporting at the expense of the non-financial information disclosure. At this stage, The



International Federation of Accountants (IFAC) and IASB have not made strides in making non-financialinformation because the standards they provide are superceded by national laws.

In response to this global phenomenon, the International Federation of Accountants (IFAC) formulatedand published ‘The International Guiding Practice Guidance: Principles for Effective Business ReportingProcess (IFAC, 2013). The guidelines provide a new era for corporate reporting framework which guidesnon-financial information reporting in annual reports. The principles made reference to the use of standardssuch as the Global Reporting Initiatives (GRI), ISO26000 and International Integrated Reporting Council’sIntegrated Reporting Framework (IRF) (IFAC, 2013) in addition to financial reporting standards, as guidedby International Financial Reporting Standards (IFRS).

The Global Reporting Initiative (GRI) guidelines are regarded as the global de facto standards in sustainabilityreporting (non-financial information reporting) and have been widely used for corporate reporting (ACCA,2007; 2008). The standards provide for reporting of aspects such as environments (materials, water, waste,energy, biodiversity, effluent etc.), social (society, human rights, gender, Labour practices, health and safety,products responsibility) and governance (board, balance of skills, risk management, stakeholder engagement)(GRI, 2014; ACCA, 2009; GRI, 2005; CIFPA, 2006). However, Integrated Reporting focused on value creationand reporting to providers of financial capital (IIRC, 2014), while ISO26000 is a management tool on non-financial information. Generally, GRI and IIRC provide a balanced approach to corporate reporting coverageof non-financial information (IFAC, 2013, KPMG, 2013). These guidelines have been widely used in capitalmarkets as voluntary instruments for corporate disclosure of non-financial information (Healy and Palepu,2001; IIRC, 2013; KPMG, 2013; Ndamba, 2014; Wallman, 1995).

However, according to Ernst and Young (2013), good corporate reporting helps companies identifyopportunities for revenue growth and cost containment by considering good feedback on annual reportsfrom stakeholders. Corporate reporting has potential for building a brand name and competitive advantage.Global companies like Rio Tinto, BHP Billiton, Veolia Environment, Vancouver City Saving (Vancity), NovoNordisk, Telefonica S.A, Vodacom and Safaricom Kenya have built their brand names based on their goodreporting culture (Ernst and Young, 2013).

3.3. Legitimacy Theory and Corporate ReportingThe subject of corporate reporting has been widely discussed using legitimacy theory formulated by Brownand Deegan (1998). The theory evaluates perceptions on corporate disclosures against what companies areactually doing. Major companies have been citing corporate social responsibility reporting in their annualreports. However, a test of legitimacy theory has confirmed that sometimes companies camouflage their illpractices through CSR (Brown and Deegan, 1998; Steurer, 2010). The testing of theory in the study ofAustralian companies by Brown and Deegan (2012) has shown that disclosure of corporate socialresponsibility by companies has been mainly to attract media attention and project the good side. Therefore,the drive by IFAC (2013) becomes critical for effective business reporting.

To confront legitimacy issues in corporate reporting, a number of assurance standards have emerged for usein auditing non-financial information. These include AA1000AS and ISAE3000 provided by Accountabilityand IFAC respectively, which are used for the audit or confirmation of non-financial information. Thestandards play a critical role in ensuring legitimacy in providing a balance of both financial and non-financialinformation in corporate reporting. The rise of these standards has had far reaching effects in capital markets’demand for accurate corporate information (Wallace, 1998; Wallman, 1995; Beattie and McInnes, 2004), Instock exchanges like Johannesburg, Hong Kong, Sao Paulo, Dow Jones, Australia, and Singapore, there hasbeen a drive to ensure corporate reports are of high standards and reasonably accurate, to prevent questionsbeing raised on the legitimacy of corporate reporting in the stock exchanges (ACCA, 2008; Ernst and Young,2013). Questions of legitimacy in corporate reporting have an impact on how investors and stakeholderscan perceive capital markets (Akerlof, 1970). Therefore, globally, achieving the highest standards provides abusiness case for corporate reporting in the new age of rising interest in corporate reporting by variousstakeholders.



4. METHODOLOGYThis research surveyed the 10 capitalized companies on the Zimbabwe Stock Exchange by employing contentanalysis to identify financial and non-financial information topics using a theoretical approach to separatethe latter two in secondary information published by companies. The research considered the survey of thecompanies as an indicative case study of what could be prevailing in the whole stock exchange. The researchis projectory, which means that the results can be generalised over the whole population (Sekaran andBougie, 2013; Bryman and Bell, 2003; Saunders et al, 12). A survey strategy was adopted for the research tobuild a case study because of its versatility, efficiency and generalisability when triangulated on cross sectionaltime series (Wallace, 1998; Yuen et al, 2009).

By the end of 2014, the ZSE had an estimated total capitalisation of US$5.2 billion (ZSE, 2014). The sampled10 companies made up more than 60% of the total market capitalisation, making the sample appropriatelyrepresentative of the total populations of 61 actively trading the ZSE listed companies. Cross sectional strategywas chosen because it focuses on understanding a phenomenon on a particular period. Content analysiswas employed to collate identified disclosure topics while counts were used to quantify the number ofpages on financial and non-financial information content. The research focused on using secondary datawhich was publicly available and provided a basis for managing ethical issues. Data analysis was based onsimple counts on quantitative data and content analysis.

5. RESULTS AND FINDINGSThis section presents results of data analysis of top 10 listed companies on Zimbabwe Stock Exchangebearing that the overall objective was to investigate the legitimacy of corporate reporting by major listedcompanies on the ZSE. The hypothetical position taken was based on a casual understanding that wherefinancial information contents is more than 70% in pages contents, reporting many not be legitimatelycorporate reporting but financial reporting. The suggested threshold of 70% is not supported by any positionby the International Federation of Accountants (IFAC) or the International Accounting Standards Boards(IASB), but an assumption to demonstrate a position in which dominance can be observed. Legitimatecorporate reporting is expected to provide a balance of both financial and non-financial information inannual report content. Therefore, the results of data analysis are expected to confirm this hypotheticalproposition from an applied research perspective on the Zimbabwe Stock Exchange.

5.1 Financial and Non-Financial Content in Annual ReportsResults of page counts of the 10 companies’ annual reports contents are presented in Table 1 below. Theresults show that 86% of total page content from a total of 664 pages was financial information while 14%were non-financial information. This result shows predominance of financial information disclosure whichis above the hypothetical benchmark of 70%. The results could be associated with a number of factors in thecorporate reporting culture in Zimbabwe. The results presented below are further analysed with a particularattention on other variables.

Table 1: Distribution of Pages by Financial and Non-Financial Information

Distribution Companies Page Count Percentage

Financial Information 10 574 86

Non-Financial Information 10 90 14

Totals 664 100

Source: Authors Compilation

The results presented above, confirm a position that there is an imbalance in the disclosure of financial andnon-financial information by the top 10 listed companies on Zimbabwe. These companies represent over



60% of the total capitalization of the ZSE for the year 2014. As such, the results can be assumed to representthe overall corporate reporting culture and practices of the ZSE listed companies. The results confirm thehypothetical position that where financial information content is above the set target of 70%, this reflectsthat corporate reporting by the ZSE companies may not be legitimately corporate reporting but financialreporting. The extent of non-financial reporting was just 14% of the total content pages which also gives anindication that there is limited use of sustainability reporting practice in the capital market.

The results could be associated with lack of corporate reporting drivers, stock exchange requirements andother instruments that promote disclosure of non-financial information. While non-financial informationdisclosure is voluntary in some capital markets (Bahn, 2012; ACCA, 2008; Yuen et al, 2009), lack of technicalcapacity seem to be a major issue on the ZSE listed companies when considering using standards such asGlobal Reporting Initiative guidelines.

5.2 Proportion of Annual Reports ContentsAn analysis of the proportion of financial and non-financial information in terms of sections, not pages, inannual reports is presented in Table 2 below. The results show that 60% of the sections is largely financialinformation as compared to 40% for non-financial information. The results confirm individual page countproportion presented in Table 1. Consistently, the results show predominance of financial informationdisclosure in annual reports of the sample companies.

Table 2: Proportion of Financial and Non-Financial Information Content Sections

Financial Information Section Non-Financial Information Section

• Financial Highlights and ratios

• Directors responsibility for financial statement

• Independent Auditors Report

• Group Statement of Comprehensive Incomes

• Group Statement of Financial Position

• Group Cash Flow Statement

• Group Statement of Changes in Equity

• Company Statement of Comprehensive Incomes

• Company Statement of Financial Position

• Summary of Significant Accounting Policies

• Notes to the financial statements

• Value added statement

Sections Counts = 12

Percentage = 60%

• Company Profile disclosure (products, services, brandsand markets, administration)

• Narrative Performance reports

• Corporate Governance

• Employee welfare

• Corporate Social Investment

• Sustainability Report

• People and community

• Sustainable Development Report

Sections Count = 8

Percentage = 40%


Table 2 above shows that 60% of the sections in company annual reports provide financial informationwhile 40% provide non-financial information. Annual reports are expected to provide information to variousstakeholders that include shareholders, investors, regulators, communities and others. However, not all thestakeholders are users of financial information. Assumptions are that annual reports provide indications tocorporate behaviour of reporting company and its ability to improve the perceptions of accountabilityamong its stakeholders and the wider community (KPMG, 2013). Therefore, the extent to which a balanceof financial and non-financial information is provided, is an indication of the company’s ability to meet



stakeholder information needs (Healy and Palepu, 2001; Yuen et al, 2009; Buzby, 1974). This may not bethe case in the results above.

Observation from company annual reports show that the majority of companies addressed their annualreport to shareholders who are providers of financial capital. This confirms the results in Table 2 above,showing predominant financial information provisions. It is notable that other stakeholders with interestin non-financial information are less regarded. The results provide an indication of the corporate reportingculture on the ZSE.

5.3. Non-Financial Information Topics ReportingThe research sought to determine the proportions of environmental and social topics covered by the top 10capitalized companies listed on the ZSE. The assessment was meant to establish whether companies preferto disclose more on environmental than social issues, so as to determine their business philosophy.

• Health and Safety

• Art and Culture

• Donation to security

• Food donation

• Sport support

• Youth support

• Agricultural support

• Livelihood

• Social support

• Charity donation

• Education and training

• Social behaviour

• Community health

• Social partnership

Topics Count = 14

Percentage = 61%

• Conservation

• Waste management and recycling

• Biodiversity

• Water Management

• Effluent Management

• Climate change

• Environmental equipment support

• Energy Management

• Environmental protection

Topics Count = 9

Percentage = 39%


Table 3 above gives a summary of environmental social topics reported by the sample companies during the2014 reporting financial year. The results show that 61% of the non-financial information topics wereconcentrated on social issues as compared to 39% on environmental issues. The results provide an indicationthat most companies may be concerned more about public relations or drawing media attention (Brownand Deegan, 1998; Steurer, 2010) than legitimate sustainability reporting. This position indicates a possibilitythat companies use non-financial disclosure for marketing. The analysis above shows that companies havebeen disclosing more on social than environmental issues. This provides an indication that the companiesfollow philanthropic business ideology. The results indicate that non-financial information disclosure isskewed toward social information than environmental.

Table 3: Environmental and Social Activities and Initiatives

Environmental Topics Social Topics



5.4. Non-Financial Information Disclosure Practices by CompaniesThe research sought to establish the practices of non-financial information disclosure by sample companies.The results showed that 43% of the 10 companies reported on the environmental impact while 57% reportedon social impact activities. The results in Table 4 below correlate with results in Table 3 above which showedmore disclosure of social topics.

Table 4: Disclosure Practice

Aspect Count Freq Percentage

Environmental 10 6 43

Social 10 8 57

Totals 14 100


Disclosure practices presented in Table 4 show that only 6 companies out of the 10 disclosed something ontheir environmental impacts while 8 of the 10 companies made disclosures on social issues. Generally, themajority of the sampled companies reported highly on social issues in their annual report. The resultsconfirm Baker and Haslem, 1973; ACCA, 2009; KPMG, 2013’s views that companies should understandand manage their impact on people, clients, suppliers and society in order to deliver increased value to alltheir stakeholders while considering the goal for sustainable development (Bruntland, 1987; ESDN, 2010;OECD, 2010). An analysis on the companies showed that only 2 companies from the 10 companies wereapplying international standards on non-financial information disclosure while none of the companiessubjected the information to external assurance.

6. CONCLUSION AND RECOMMENDATIONThis research shows that companies listed on the ZSE report financial information predominantly incomparison with non-financial information. This provides an opportunity for querying the legitimacy ofcorporate reporting by public listed companies at the Zimbabwe Stock Exchanges. The results showed that86% of the total page contents are predominantly financial information. In addition, the results showed theextent of use of international standards for non-financial information reporting in corporate annual reportsis rather limited. The results confirm a hypothetical position that corporate reporting in Zimbabwe ispredominantly financial reporting rather than corporate reporting as widely known. The research concludesthat corporate reporting by public listed companies may not be legitimate when evaluated againstinternational practices and attributes of corporate reporting which provide for a balance of financial andnon-financial information. Therefore, this research recommends consideration of reforms by the ZimbabweStock Exchange (ZSE) that would enhance and drive effective corporate reporting by public listed companiesin Zimbabwe. The research believes that there are potential future research opportunities in seeking tounderstand the role and technical competences of accounting professionals to drive effective corporatereporting, and the regulatory framework on non-financial information reporting in Zimbabwe.

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ZSE, 2014. Annual Report 2014: ZSE

Zimbabwe Stock Exchange trading automation and its impact on the development of the local market


Zimbabwe stock exchange trading automation and its impact on thedevelopment of the local capital market — A Zimbabwean perspective

Romeo Musimwa and Nyasha KasekeUniversity of Zimbabwe

ABSTRACTThis study investigated the possible impact that trading automation of Zimbabwe StockExchange (ZSE) could have on the development of the local capital market from an ex-anteperspective. An assessment of the current level of development of the local capital marketwas looked at with a view of making recommendations for further improvement from thecurrent levels. In measuring capital market development, four parameters namely, liquidity,volume and value traded, price discovery process and regulation of the market, were used asproxies for capital market development. In determining the current level of capital marketdevelopment in Zimbabwe, a Capital Market Diagnostic Model was used. A survey was usedto collect data from the capital market stakeholders through a structured questionnaire. Theresults indicated that trading automation has got statistical significant relationships withlocal market liquidity, volumes and value traded, price discovery process and local marketregulation. The study concluded that trading automation of ZSE will result in capital marketdevelopment, improvement in liquidity, volume and value traded, price discovery process aswell as regulation of the local market.

Key Words: Stock Exchange Automation, Capital Market Development, Liquidity, Price Discovery

1. INTRODUCTIONCapital market development in a modern economy hinges on an efficient financial sector and capital marketthat pools domestic capital and assembles foreign capital for productive investments. Inefficiency canconsiderably cut development from the levels that might have been possible. Thus the importance of havinga developed capital market enhances the efficiency of investments. A well-functioning capital market isgenerally expected to lead to a lower cost of equity capital for firms allowing individuals to more effectivelyprice and hedge risk (Murinde, 2006). Bruno, Hillion and Spatt, (1997) suggest that automation decreasesliquidity because for important transactions, traders cannot negotiate directly and so have no control ontrading conditions.

Since the main objective of automation is to create a well-functioning stock market, automation may havepositive effects on the capital market’s volumes, price discovery mechanisms, regulatory and liquidity aspects.Pirrong (1996) showed that automated exchanges can be deeper and more liquid than open out-cry exchanges.Naidu and Rozeff (1994) noted an increase in liquidity and an improvement in efficiency, but volatilityincreased following the automation of the Singapore Exchange.

1.1 BackgroundZimbabwe Stock Exchange trading automation has been on the drawing board for a long time. However,funding challenges have been the major stumbling block towards the implementation of the automationprogramme. Notable progress has been witnessed in the automation of settlement and clearing systemwithin the local capital market. Chengetedzai Depository Company Private Limited came on board inDecember 2010 and started operating fully in 2013. The firm operates a Central Securities Depository (CSD)system in the local capital market. The CSD system is purely a settlement vehicle for transactions that havebeen traded on a registered Stock Exchange (ZSE Handbook, 2014).

The ZSE was legally established in 1896 as Rhodesian Stock Exchange. It started operating in Harare in 1974under the ZSE Act Chapter 24:18 and in 2004, the ZSE Act was replaced by the Securities Act Chapter 24:25.By end of December 2014, ZSE had 13 registered and operating stock broking firms, 37 registered and

R. Musimwa and N. Kaseke


practicing stock brokers and 59 listed firms (4 Mining and 55 Industrial). It was opened to foreign investorsin June 1993, following a partial lifting of exchange control regulation. It is headed by a CEO and has ninecommittees and these cover listings, executive, surveillance, central securities depository, settlement, disputes,legal and lobbying, finance and budgeting, membership, management and business development. The ZSEis supervised by the Securities and Exchange Commission of Zimbabwe (SECZ) (ZSE Handbook, 2014).SECZ is a statutory board established in terms of the Securities Act of 2009. It was established to act as aregulator of the securities market. SECZ has the power to intervene in the event that irregularities arise inareas of conduct of licensed members, financial difficulties, and rejection of application or termination ofmembers. SECZ monitors the trading processes to ensure transparency and to prevent manipulation of thecapital market.

Since its formation, the ZSE has been using an ‘open-outcry’ system which is a manual and paper basedsystem in its daily trading activities (ZSE Handbook, 2014). This manual based system has been fraughtwith disputes (some of which are still behind the courts), trading irregularities such as price manipulationand front running of clients by stock brokers which in some instances has affected confidence in the localcapital market. As such, the ZSE being the backbone of the local capital market, its current trading systemhas in some way slowed the development of the local capital market.

1.2 Problem StatementDespite the relative size of the ZSE in terms of listing and its age in Africa, there is still lack of research on thepotential impact trading automation can have on the development of the local capital market. The openout-cry trading call system is no longer in sync with modern day trends and big strides have been made bysome African countries in as far as trading automation is concerned. African countries that have alreadyautomated their trading systems include (in the order of adopting trading automation), Egypt (1992), SouthAfrica (1996), Tunisia (1996), Morocco (1997), Namibia (1998), Nigeria (1999), Ivory Coast (1999),Mauritius (2001), Tanzania (2006), Kenya (2006), Ghana (2008) and Botswana (2012) (Omuchesi, Bosireand Muiru, 2014). Uganda, Rwanda and Zimbabwe are at an advanced stage of implementing tradingautomation. While most studies have often focused on the impact that trading automation can have onspecific market characteristics such as liquidity and volatility ex post, there is limited research on an ex-antestudy regarding the impact that trading automation can have on capital market development. This gap istherefore the motivating factor towards this research study. That is why this study seeks to find out theimpact of ZSE trading automation on the development of the local capital market.

1.3 Research ObjectivesThis study had four principal objectives namely:

1. To enhance the understanding of the relationship between trading automation and capital marketdevelopment

2. To explore the possible influence that liquidity, volume and value traded, price discovery mechanismand regulation have on capital market development.

3. To examine the level of capital market development in Zimbabwe

4. To recommend ways of how trading automation influences the development of local capital market.

1.4 Research HypothesisThe following is the hypothesis that the study sought to test:

H0: ZSE trading automation has no significant impact on the development of the Zimbabwean CapitalMarket.

H1: ZSE trading automation has significant impact of the development of the Zimbabwean Capital Market



2. LITERATURE REVIEW2.1 Stock ExchangeBerk and De Marzo (2008) define a stock exchange as an organized market on which securities of manycorporations are traded. A stock exchange is a place at which securities are bought and sold. Domowitz(1996) explained that an exchange provides ways by which financing is raised by the sale of shares tooutside investors. It provides a mechanism for the evaluation of companies through the process of pricediscovery and a means by which such information is disseminated.

2.2 Stock Exchange Trading AutomationAjasia and Yartey (2007) state that Stock Exchange Trading Automation involves the implementation of acomputerized and electronic system for trading securities and their settlement thereof. An Automated TradingSystem (ATS) is thus a computer program that accepts orders and automatically submits them to a marketcentre or exchange where they are matched. For purposes of this study, Electronic trading refers to tradingthat is conducted on platforms over which clients transact relative to price levels displayed on a screen andorders transmitted via computer systems.

Jian (2005) posits that rapid technological advancements in telecommunications and internet aretransforming the basic business model of stock exchanges. Helen, Hawkins and Sato (1997) as cited inOmuchesi and Bosire (2014) point out that security exchanges have always been found in central locationsfor ease of recording transactions, and the integrated electronic networks powered by modern informationand communication technology ensure speed and less transactions costs in the share trading process. Insuch systems as well, price is basically the first criterion, with priority being accorded to the highest bids andlowest offers (Omuchesi et al., 2014). The issue of trading automation has gained increasing attention inrecent years, particularly in Zimbabwe where a need exists to develop the local capital market. Advances intechnology have led to the development of highly sophisticated computerized trading systems which canimprove liquidity and reduce trading costs in the long run.

2.3 Capital Market DevelopmentCapital market is an open platform for trading long term financial securities including ordinary shares, longterm debt securities such as debentures, unsecured loan stock and convertible bonds (Murinde, 2006). Thestructure of capital markets has three components, the first being the primary market for new capital issuesby private firms and government institutions; followed by the secondary market which is mainly a platformfor the exchange of existing securities (Victor, 2006). The third is the derivative market which serves for theexchange of securities created by the particular exchange and whose value is derived from underlying securities(Victor, 2006).

In order to look and examine the aspect of capital market development, this study will make use of CapitalMarkets Diagnostics model developed by Fredholm and Taghavin-Awal (2006), as diagrammaticallyillustrated in Figure1.

The primary purpose of examining the level of development in a capital market is to get a measure of howwell it is functioning. This is done by examining the institutions that make up the capital market andinteract with it. In order to get a clear understanding of the level of development in capital markets, theresearchers focused on the third part of the model, taking transaction perspective from investment decisionto completion of an investment. Table 1 highlights the model adopted in assessing capital marketdevelopment:



Figure 1: Capital Market Diagnostics Model

Source: Fredholm and Taghavin-Awal (2006), p28.

Table 1: Capital Market Development

Capital Market Development

Pre-trade Trade Post Trade Regulatory

Brokerages Exchange Clearing Ministry of Finance

Investment Banks Settlement Supervision (SEC)

Insurance Companies Off-Exchange Custody Central Bank

Pension Funds

Mutual Funds

Source: Fredholm and Taghavin-Awal (2006)

According to Fredholm and Taghavin-Awal (2006) the financial institutions shown above may be looked atin terms of how they are functioning. For the purpose of this study, a well-functioning capital market meanshigh liquidity, high volumes and value traded, an efficient price discovery process and effective regulatorysystem.

2.4 Pre-conditions for Capital Market DevelopmentFredholm and Taghavin-Awal (2006) describe the capital market as a supply-demand relationship forinvestments and capital. The investor perspective is that, there is a demand for investments that can provide



returns and a supply of potential investments. Conversely, the bond or share issuing entity sees a demandfor and a supply of capital. As modelled by Fredholm and Taghavin-Awal (2006), the extent to which thissupply and demand relationship can satisfactorily be satisfied, is dependent on key factors such as:

2.4.1 Capital availabilityCapital by its own characteristics, always seeks investment opportunities in financial markets. As such, capitalavailability encompasses factors that described different sources of capital either foreign or domestic. Sourcesof capital range from domestic savings to foreign portfolio investment (Fredholm and Taghavin-Awal, 2006).

2.4.2 Investment opportunitiesInvestment opportunities are the financial products and underlying assets available in the capital marketwhich include, but not limited to, the shares of listed companies, government and corporate bonds andother securities. Factors that describe this category range from the number of listed companies in the countryto the availability and diversity of government bonds (Fredholm and Taghavin-Awal, 2006).

2.4.3 Macro environmentAccording to Fredholm and Taghavin-Awal (2006), the level of economic development of a country influencesthe supply and demand dynamics of the capital market as well as the level of transparency and trust thatexist within a country’s institutions. Macroeconomic performance parameters such as the Gross DomesticProduct (GDP), which is correlated to the amount of capital available in the country; and the level ofcorruption, which affects trust and in the investor’s willingness to take on risk for the promise of futurereturns are important considerations in the study of capital market development.

2.5 General Impact of Stock Exchange Trading Automation: A Theoretical EvaluationThe automation of the stock exchange trading systems usually either precedes or is preceded by the adoptionof a Central Depository System (CDS), which is a stepping stone in reducing costs and losses associatedwith default risk by financial market institutions (Yartey and Adjasi, 2007). Further, Capital Markets Authority(2007) posits that the implementation of the Automated Trading System (ATS) was a key to achievingenhanced operational efficiency, transparency, reduced cost of doing business, and enhanced market integrityand investor confidence.

2.6 Challenges of Stock Exchange Trading Automation2.6.1 Mechanical failuresMechanical failures in automated trading systems can be caused by a loss of an internet connection. Thisusually results in trading orders not being sent and executed in the market thereby creating high chances ofloss of income and inefficiencies in trading processes (Amalga Trader Magazine, 2014). Discrepancy betweenthe theoretical trades generated by a certain strategy and the order entry platforms component that turnsthem into real trades, are common features in automated trading system.

2.6.2 MonitoringAutomated trading systems may experience anomalies because of the potential for mechanical failures suchas internet connectivity issues, power losses and computer or system crashes. Such anomalies do requiremonitoring to minimize the negative impact on automated trading systems. In essence, automated tradingsystems may require expensive monitoring and alert systems to avoid potential losses from mechanicalfailures.



2.6.3 Over-optimizationIt refers to excessive curve-fitting that produces a trading plan that is unreliable in live trading. Back testingtechniques are usually employed by traders who can create systems that look great on paper and performpoorly in a live market. As a result, a tweak strategy may be used to achieve exceptional results on thehistorical data on which it was tested. Thus, falsification of the entire trading process is possible.

2.7 Impact of Stock Exchange Trading Automation on Capital Markets: An Empirical OverviewStock exchange trading automation has been implemented in many economies over the years. Thedevelopment of global financial markets has created new opportunities for trading automation, however,with mixed results and diverse experiences.

2.7.1 Effects of Trading Automation Systems on Developed Capital MarketsFrend and Pagano (2000) discuss the mechanics of automated trading systems and the effects of automationon price efficiency. Frend et al. (2000) examine the pre and post trade results of the impact of exchangeautomation relative to price efficiency on the United States’ New York Stock Exchange (NYSE) and theToronto Stock Exchange (TSE). Although they find that automation is associated with an improvement inmarket efficiency on the Toronto Stock Exchange relative to New York Stock Exchange, they do not detectany changes in the non-random pattern in returns before and after automation at the TSE, which led themto conclude that automation did not result in price efficiency on the Toronto Stock Exchange.

The transfer to continuous trading enhanced market liquidity on the Paris bourse (Muscarella and Piwowar,2001). The study by Muscarella and Piwowar (2001) also found out that the stock price increased as a resultof market quality improvement following the shift, and increased liquidity by providing affordable remoteaccess to investors and improved efficiency as transaction costs went down and the availability of informationimproved.

2.7.2 Effects of Trading Automation Systems on Emerging Capital MarketsIn a study of the effects of automation on stock market liquidity, volatility, stock returns and efficiency inTunisia, Sioud and Hmaied (2003) found out that trading automation systems had positive effects on theaforementioned parameters especially micro structure-related characteristics such as volume and volatilityas well as deeper and increased liquidity compared to open outcry exchanges in neighbouring Morocco. Inthat same study of call and continuous markets on the Morocco Stock Exchange, Sioud and Hmaied (2003)found out that trading automation resulted in a permanent stock-price increase for securities transferred,but volatility and efficiency improved only for securities transferred to the call-based trading system.

Naidu and Rozeff (1994) noted an increase in liquidity and an improvement in efficiency, yet detrimentalvolatility experiences following the automation of the Singapore Stock Exchange. They advance thatautomation speeds up the dissemination of prices, making it likely that volatility will increase especiallywhen information is hitting the market. The increased speed with which prices and trading volume areavailable, incites investors to trade to exploit the published information which is likely to improve marketefficiency. Sukcharoensin, Srisopitsawat and Chuenjit (2004) found evidence of increased trading volumeand reduced asymmetric information among market participants after the implementation of the automatedtrading systems on the respective stock exchange.

Dicle and Lavendis (2012) assessed the impact of technological improvements on the Johannesburg StockExchange (JSE) after incorporating the Stock Exchange of Thailand (SET) trading platform from the LondonStock Exchange. It was found that the JSE became more liquid and cheaper after the SET, nearly doubling itstrading activity.

In Nigeria, Sunday, Omah and Oladimeji (2012) evaluated the effect of changing from manual tradingsystem to the automated trading system on the trading effectiveness in the Nigerian Stock Market from



1999-2011. The study revealed that the automated trading system was an effective trading system and that ithad brought an efficient settlement system and fostered new trading opportunities. Additionally, Okereke-Onyiuke (2000) reported evidence of a direct correlation between the level of development of a nation’scapital market and overall social and economic development. The study results thus prompted Mailafia(2011) to posit that there is therefore need for a fast growing capital market through technological innovationto facilitate the speedy growth and development of an economy.

Further, Mailafia (2011) found out that there was a highly significant improvement in the performance ofthe turnover by value, turnover by volume and capitalization on the Nigeria Stock Exchange with theintroduction of the ATS in 1999. He concludes that investor confidence and general transparency have beenenhanced while the volume of stock cleared has significantly increased with the introduction of ATS and thegeneral level of operational efficiency has been significantly enhanced. Mailafia (2011) notes that theregulatory framework in Nigeria has been improved upon with the SEC given more powers and someamendments of some sections of its relevant statutes to enable the smooth operation of the Central SecuritiesClearing System in Nigeria. This thus led to the conclusion that the ATS paradigm has been positivelydriving the NSE towards achieving its mission.

3. RESEARCH METHODOLOGY3.1 Research DesignA descriptive, exploratory and quantitative design was used in order to find out whether or not tradingautomation can lead to capital market development. Since data on more than one factor were collectedusing a questionnaire, a cross sectional design was used in the study. The research recorded informationabout the targeted subjects without manipulating the study environment. The study was exploratory becauseit explored on whether or not trading automation can result in the development of the local capital market.Exploratory research studies what has not been previously studied and attempts to identify new knowledge,new insights, new understandings, and new meanings and explores factors related to the study topic (Brinkand Wood, 1998). The researchers deemed this approach to be suitable for gaining a better understandingof stock exchange trading automation and its effect on the development of the local capital market

3.2 Research StrategyThe study is descriptive. Presentation of facts concerning the nature and status of a situation as it exists at thetime of the study as well as a description of present conditions of events or systems, form a descriptiveresearch. The researchers opted to use this kind of research considering the desire of the research to obtainfirst hand data from the representation of the local capital market. A descriptive research utilises surveys.Surveys are useful in describing the characteristics of a large population and are relatively inexpensive.

3.3 Population and Sampling TechniquesThe population of the study comprises stakeholders within the local capital market which include stockbrokers, asset management companies, regulator (SEC), custodians, ZSE, Chengetedzai (CSD), pensionfunds, central bank (RBZ), insurance companies and the Ministry of Finance.

3.3.1 Sampling for this studyIn this study, a stratified random sampling was used because capital market stakeholders have distinctbackgrounds/characteristics emanating from their work experience in the capital market.

3.3.2 Sample SizeA sample size of 175 respondents was used and the details of the sample are highlighted below.



Table 2: Respondents Structure

Respondent No of Questionnaires

1 Stockbroking firms 51

2 Asset Management Firms 48

3 Pension Funds 15

4 Insurance Firms 30

5 Zimbabwe Stock Exchange 5

6 Securities Exchange Commission Zimbabwe 5

7 Ministry of Finance 5

8 Custodians 6

9 Chengetedzai (CSD) 5

10 Reserve Bank of Zimbabwe 5

Total 175

3.4 Data Collection Procedure3.4.1 QuestionnaireA structured questionnaire with different types of closed ended questions was used. The questionnairereviewed the current level of development of the local capital market based on the perceptions of therespondents. Ideas were sought as to how trading automation could lead to the development of the localcapital market as well as determine the current level of capital market development. A five point Likert Scalewas used to measure concurrence or non-concurrence of the respondents on the statement provided.

3.4.2 Secondary DataA significant amount of published data pertaining to trading automation at the academic level was requiredfor this study. The availability and source of the data have been verified. Empirical results and a considerableamount of data were available from the ZSE, SEC and IPEC as well as academic journals and databases forlocal capital market stakeholders.

4. FINDINGS4.1 Aggregate influence of Trading Automation on Capital Market DevelopmentThe aggregate influence of trading automation on each of the four dimensions is presented below. From theanalysis above, assessed on a 5-point Likert scale, it was established that the greatest influence of tradingautomation would be on price discovery with a mean rating of 4.39 from a maximum of 5 (based on a 5-point Likert scale). The significance of price discovery can further be validated by the observed kurtosisstatistic of 3.608.

Table 3: Aggregate influence of Trading Automation

N Mean Std. Dev Skewness Kurtosis

Statistic Statistic Std. Error Statistic Statistic Std. Error Statistic Std. Error

Local Market Liquidity 132 3.99 .047 .540 .116 .211 .003 .419

Volumes and Traded Values 132 4.24 .043 .490 .439 .211 -1.835 .419

Price Discovery 132 4.39 .054 .624 -1.465 .211 3.608 .419

Regulatory Improvement 132 4.33 .051 .585 -.548 .211 -.630 .419

Valid N (listwise) 132



In essence, positive kurtosis statistics depict a rather leptokurtic distribution, one characterized by a significantpeakedness, or rather high concentration of the respondents about some central tendency. In this case, itwas a sign of the coherence among the respondents being marginally higher for price discovery than for theother variables. The second significant influence of trade automation was observed with regulatoryimprovement which had a mean rating of 4.33, while volumes and traded values had a mean of 4.24, withthe least being local market liquidity with the least mean of 3.99.

The respondents agreed that trading automation will result in an improvement in all the four parametersused to measure capital market development. In essence, by automating the local capital market, thereshould be an improvement in the price discovery process, regulation of the market, liquidity and volumesand value traded. This has an overall effect of boosting investment and trading confidence amongst capitalmarket participants as well as increase market transparency when it comes to reporting aspects.

4.2.1 Trading Automation and Local Market LiquidityWith regards to the link between trading automation and local market liquidity, to test whether there wasan association between the two, the Chi-square analysis was done at the 95% confidence interval - and theresults are presented below.

Table 4: Chi-Square Test - Trading Automation and Local Market Liquidity

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 31.326a 2 .000

Likelihood Ratio 32.401 2 .000

Linear-by-Linear Association 22.694 1 .000

N of Valid Cases 132

a. 1 cells (16.7%) have expected count less than 5. The minimum expected count is 3.75.

Decision: The p-value of 0.000 is less than 0.05. Therefore, we conclude that sufficient statistical evidencewas found at the 95% confidence level to validate that trading automation would have an influence on localmarket liquidity.

4.2.2 Trading Automation and Traded Volumes and ValuesTo test whether there was an association between trading automation and local market liquidity, the Chi-square analysis was done at the 95% confidence interval, and the results are presented below.

Table 5: Chi-Square Test - Trading Automation and Traded Volumes and Values

Value df Asymp. Sig. (2-sided) Exact Sig. (2-sided) Exact Sig. (1-sided)


Continuity Correctionb 28.725 1 .000


Fisher’s Exact Test .000 .000




b. Computed only for a 2x2 table



Decision: The p-value was 0.000. Being less than 0.05, therefore, we conclude that sufficient statisticalevidence was found at the 95% confidence level to validate that trading automation would have an influenceon the traded volumes and values.

4.2.3 Trading Automation and Price DiscoveryAgain, to test whether there was an association between trading automation and price discovery, the Chi-square analysis was done at the 95% confidence interval, and the results are presented in Table 6.

Table 6: Chi-Square Test - Trading Automation and Price Discovery







Decision: The p-value was found to be 0.000, and being less than 0.05, we concluded that sufficient statisticalevidence was found at the 95% confidence level to validate that trading automation would have an influenceon Price Discovery.

4.2.4 Trading Automation and Local Market Regulation

The Chi-square analysis was done at the 95% confidence interval, to test whether there was an associationbetween trading automation and local market regulation, and the results are presented below.

Table 7: Chi-Square Test - Trading Automation and Local Market Regulation







Decision: The p-value was found to be 0.000, we therefore, concluded that sufficient statistical evidencewas found at the 95% confidence level to validate that trading automation would have an influence on localmarket regulation.

It can be concluded that trading automation has been statistically validated to be having a significantrelationship with local market liquidity, volumes and values traded, price discovery process and local marketregulation.

4.3 Antecedents of Capital Market DevelopmentFrom the empirical studies, it has been theorized that besides the economic factors, there are five key socio-political antecedents to capital market development, and these are peace, internal security, governmentcontrol, rule of law and property rights. In this research, the respondents were asked to identify the degreeof importance of each of these antecedents in the Zimbabwean context, on a scale of 1-5, with 1 being the



least important and 5 being the most important. The descriptive measures of central tendency and dispersionfor the ratings by the respondents are presented in Table 8.

Table 8: Antecedents of Capital Market Development



Peace 132 1.97 .089 1.018 .986 .211 .462 .419

Internal Security 132 2.28 .097 1.114 .635 .211 -.247 .419

Government Control 132 2.25 .101 1.162 .388 .211 -.683 .419

Rule of Law 132 4.43 .068 .783 -1.512 .211 2.118 .419

Property Rights 132 4.59 .057 .653 -1.844 .211 4.020 .419


Table 8 shows that the highly rated factor was property rights which had an average rating of 4.59 off amaximum of 5.0. The greater degree of harmony among respondents can be qualified by the relatively lowstandard deviation of 0.653, along with a high kurtosis statistic of 4.020. The second rated antecedent wasthe issue of the rule of law, whose mean rating was 4.43. Once more, there was a greater degree of harmonyamong respondents as can be seen with the rather low standard deviation of 0.783, along with the leptokurticnature of the distribution, with a positive kurtosis of 2.118.

4.3.1 Factor AnalysisFrom the foregoing, to further investigate these antecedents and establish the major factors that underliecapital market development, Factor Analysis was considered as befitting. However, to qualify the use ofFactor analysis, the KMO Kaiser-Meyer-Olkin Measure of Sampling Adequacy and Bartlett’s Tests of Sphericitywere run and the results are presented below:

Table 9: KMO and Bartlett’s Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .558

Bartlett’s Test of Sphericity Approx. Chi-Square 118.595

df 10

Sig. .000

The acceptable KMO statistics should be greater than 0.5, while the significance levels of the Bartlett’s testshould be less than 0.05. From the results above, both assumptions for the use of Factor analysis were met,and hence the conclusion that the data collected was sufficient for the use of Factor Analysis.

Basing on factor loadings greater than 0.4, the rotated component matrix for the analysis of the extractedfactors is presented in Table 10.



Table 10: Rotated Component Matrixa

Component1 2

Government Control .826

Rule of Law -.813

Internal Security .877

Peace .839

Property Rights -.645


Rotation Method: Varimax with Kaiser Normalization.

a. Rotation converged in 3 iterations.

From the analysis above, Component 1 comprised of peace, internal security and property rights whereasComponent 2 comprised of government control and rule of law. In a nut shell, the factor behind Component1 is stability. The factor behind Component 2 is justice. Property rights were negatively correlated to peaceand internal security because even if a country has peace and internal security, that alone is not a guaranteethat property rights will be upheld. Rule of law and government control were negatively correlated becausea government might be in control of its territory but that alone is not a guarantee that there will be independentlegal institutions to enforce laws of the country.

4.4 Supporting Factors for Capital Market DevelopmentThe study shows that local capital market stakeholders believe that out of the five necessary conditions forcapital market development, property rights and rule of law are the most important factors necessary forcapital market development. In addition, stakeholders do not believe that there is capital adequacy to supportcapital market development. This could be a result of the current macro-economic environment whichstakeholders believe is not supportive of capital market development. Despite the lack of supportive factorsfor capital market development, some local capital market stakeholders believe that there are investmentopportunities on the local capital market. This could be a result of some operational inefficiency on thelocal capital market which presents profitable investment opportunities ahead of an inevitable marketcorrection.

4.5 Extent of Capital Market Development in Zimbabwe

Table 11: Rotated Component Matrix - Capital Market Development in Zimbabwe

Component1 2

Sufficiency of pre-trade institutions in Zimbabwe .729

Acceptability of off-exchange trade in Zimbabwe .478

Timeliness and ease of clearing and settlement of trades in Zimbabwe .775

Sufficiency of custodians in Zimbabwe and affordability of custodial fees .869

ZSE playing a central role in the capital market of Zimbabwe .772

Sufficiency of laws regulating the capital market in Zimbabwe .830

Sufficiency of supervision on the capital market in Zimbabwe .795


Rotation Method: Varimax with Kaiser Normalization.

a. Rotation converged in 3 iterations.



From the analysis above, Component 1 comprises of:

• Sufficiency of pre-trade institutions in Zimbabwe

• Acceptability of off-exchange trade in Zimbabwe

• Timeliness and ease of clearing and settlement of trades in Zimbabwe

• Sufficiency of custodians in Zimbabwe and affordability of custodial fees

Component 1 comprises of the operational efficiency factors of capital market development as it constitutedthe trading processes from pre-trade right up to settlement of transactions.

On the other hand, Component 2 comprises of:

• ZSE playing a central role in the capital market of Zimbabwe

• Sufficiency of laws regulating the capital market in Zimbabwe

• Sufficiency of supervision on the capital market in Zimbabwe

Component 2 comprises of the regulatory factors behind capital market development as it constituted theformal platform for trading/transacting with rules and regulations being enforced by separate and independentinstitutions.

It follows from the foregoing that the determination of the extent of capital market development is dual-pronged, and should be measured from an operational perspective and from a regulatory perspective. Withthis in mind, the corresponding variables for each factor were aggregated and the mean rating of the extentof capital market development is presented below, from both an operational standpoint to a regulatorystandpoint.

Table 12: Mean Ratings – Extent of Capital Market Development



Operational Factor 132 2.6818 .05495 .63137 -.740 .211 .318 .419

Regulatory Factor 132 3.2551 .04490 .51584 -.113 .211 -.414 .419


Table 12 shows that the highest mean rating was noted for the regulatory factor, being 3.2551, while that forthe operational factor was 2.6818. Recalling the ranked measures of capital market development, vis-à-visthe extracted components from factor analysis, we can therefore classify the ranked contributions as:

Table 13: Categorized Ranked Measures of Capital Market Development

Rank Factor Nature of Control

1. ZSE playing a central role in the capital market of Zimbabwe REGULATOTY

2. Sufficiency of laws regulating the capital market in Zimbabwe REGULATOTY

3. Sufficiency of supervision on the capital market in Zimbabwe REGULATOTY

4. Sufficiency of pre-trade institutions in Zimbabwe OPERATIONAL

5. Sufficiency of custodians in Zimbabwe and affordability of custodial fees OPERATIONAL

6. Timeliness and ease of clearing and settlement of trades in Zimbabwe OPERATIONAL

7. Acceptability of off-exchange trade in Zimbabwe OPERATIONAL

Table 13 shows that in as much as capital market development is concerned, in Zimbabwe, we are moredeveloped regulation-wise, but however, in as much as the operational issues are concerned, there is need



for improvement. In essence, from an operational perspective, the local capital market is not yet fullydeveloped. There is need for custodial fees which were deemed high by stakeholders to come down and forsettlement and clearing time to be shortened from the current levels. High custodial fees are contributory tohigh transaction costs on the local capital market and as such, they erode investment returns. A longer thandeemed appropriate settlement time affects the speed at which new and relevant information is incorporatedin security prices and in some way affect the capital market’s pricing efficiency. As such, management needsto take this into consideration when making trading decision on the market.

5. CONCLUSIONS5.1 Trading Automation and Capital Market DevelopmentThe researchers conclude that trading automation has got a significant positive relationship with capitalmarket development and that trading automation on the ZSE will result in an improvement in volumes andvalue traded, liquidity, price discovery process and regulation of the local capital market. The expectedimprovement in the four parameters after automation will lead to the development of the overall capitalmarket.

5.2 Extent of Capital Market Development in ZimbabweThe researchers concluded that the determination of the extent of capital market development was dual-pronged, and would have to be measured distinctly from an operational perspective and from a regulatoryperspective. From further analyses, it was established that in as much as capital market development isconcerned, from a regulatory perspective, the local capital market was deemed developed through the highratings. However, in as much as the operational issues are concerned, there is need for improvement on thelocal capital market and as such, was deemed under-developed. Since the determination of the extent ofdevelopment on the local capital market is dual pronged, the researchers can conclude that the local capitalmarket is not yet fully developed from an operational perspective whilst from a regulatory perspective, themarket is developed. This is attributed to an unfavorable macro-economic environment and unavailabilityof capital on the market. High levels of indebtedness at government, household and company levels, elevatedlevels of corruption, de-industrialization, rapid informalisation of the economy, negative Balance of Paymentand high unemployment levels, are all factors negatively impacting on the economic environment. On lackof capital availability, the absence of pension capital (coming on the back of massive company closures)and high country risk rating are impeding on the development of the capital market. However, despite thepresent market conditions, the capital market institutions operate well enough and cannot be regarded as alimiting factor to capital market development.

6. RECOMMENDATIONSIn order to improve and develop the Zimbabwean Capital Market, the researchers recommend the followinginitiations from the local capital market stakeholders:

6.1 GovernmentThe government, through the Ministry of Finance is a key stakeholder on the local capital market. As such,government needs to create an investment environment that attracts capital into the economy. Investmentpolicies should be realigned to uphold property rights and observe the rule of law. Money is a very timidresource and as such, attractive polices are needed if the government is to boost funds inflows on to thelocal capital market. From an administrative perspective, the ministry seems to be doing a good job onformulating government policies. However, the development of the local capital market seems not to be apriority for government as the strengthening of the banking sector seems to be more important than thedevelopment of the local market. This is because the capital market is generally seen as an independententity and does not need support for its development. This is worrisome as government’s active role maylead to the development of the local capital market.



The government also needs to create and promote a conducive macro-economic environment. Specifically,the government needs to deal with the issue of policy clarity and implementation, high debt levels – whichare affecting the country’s credit risk standings, high unemployment levels –which are affecting the propensityto consume and save, stop the rapid informalisation of economy, stop de-industrialisation and reverse thenegative BOP position. A conducive macro-economic environment is one of the key supporting factors tocapital market development.

6.2 Securities Exchange CommissionThe Securities and Exchange Commission (SEC) should appear professional, independent and focused andplay an active and positive role in the development of the local capital market. However, emphasis onenforcement activities seems to be focused mainly on reporting timeliness and too little on insider trading– this has a potential to damage the credibility of the market. Thus the researcher recommends that SECbroadens its scope of enforcement activities in order to further strengthen its regulatory role on the market.

6.3 Zimbabwe Stock ExchangeZimbabwe Stock Exchange should automate its trading platform so that the price discovery process, liquidity,volume and value traded can be improved from the current levels. However, it is important to note that,trading automation has to be accompanied by the necessary and supportive conditions for capital marketdevelopment in order for noticeable changes in price discovery, liquidity, volume and value as well asregulation to be witnessed. In terms of turnover and liquidity, the exchange is not yet fully developed.However most of the challenges causing this situation are outside the control of the exchange namely; lackof capital and a difficult macro-economic environment. Management at the ZSE is professional and active ifnot successful in promoting the capital market and the exchange’s ambitions. In essence, the exchangeshould not be considered itself to be a limiting factor for capital market development.

6.4 Chengetedzai Depository Company (CDC)The CDC should review its operational set up in order to support the development of the local capitalmarket. In terms of settlement and clearing, the current operational set up of CDC which requires investorsor participants to deposit funds and securities ahead of trading result in a cumbersome procedure that mostlikely decreases trading activity to some extent. This is mainly due to illiquidity nature of the market andCDC’s inability to take on risk. However, despite this shortcoming, operations at CDC seem to be efficientand sufficient given low current market activity.

6.5 Pre-Trade InstitutionsThere should be sufficient asset management firms and mutual funds in the local capital market for tradingautomation to be efficient. Pre-trade institutions should come up with permissible new investment productsin order to improve the depth of the local capital market. In addition, looking at brokerage firms, there are37 registered and practicing stockbrokers in the capital market. As at 31 December 2014, they were 13registered and operating stock broking firms and they offer differentiated services like trading, analysis andconsultancy services. Since dollarization, the number of brokers and brokerage firms slightly went down tothe current level due to revoked licenses (Remo Stockbrokers) and insolvency (Interfin Securities) but thecompliance to rules by the remaining firms is perceived to be high. The low availability of dedicated analystsis currently an issue regarding the provision of a good and relevant informational framework. As such, thereis need to improve the availability of analysts in order to ensure well informed investment decisions prevailon the market as well as improve the informational framework.



7. REFERENCESAdjasi, C. K. and Yartey C. A. (2007), Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges, IMF

Working Paper 07/209 Washington: International Monetary Fund.

Allen, H., Hawkins, J. and Sato, S. (2001), Electronic Trading and its Implications for Financial Systems, Working Paper, Bank ofEngland.

Berk, J. and DeMarzo, P (2008). Corporate Finance, NY: Prentice Hall.

Bruno, B., Hillion, P. and Spatt, C. (1997), Price Discovery and Learning During the Pre-Opening Period in the Paris Bourse,Working Paper, Carnegie Mellon University.

Bodie, Z, Kane, A. and Marcus, A.J. (2002), Investments, New Delhi: Tata/McGraw Hill Publishing Co.

Brink, P. J.; Wood, MJ. (1998) Advanced Design in Nursing Research. 2nd edn. Thousand Oaks, California: Sage Publications.

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Domowitz, I. (1996), An Exchange is a Many Splendored Thing: The Classification and Regulation of Automated TradingSystems, in Andrew Lo (ed.), The Industrial Organization and Regulation of Securities Markets, University of ChicagoPress.

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Glen, Jack D., 1994, Automated trading systems and information systems, East Asian Executive Reports, 16.

Helen A, Hawkins J and Sato S (1997) Electronic trading and its implications for financial systems, BIS Papers, Number 7.

IBM (2015). IBM SPSS Statistics Base 22, NY, IBM

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Kereke-Onyiuke, (2000), The Stock Market Option for Project Development. P. 5 (Paper presented at a seminar on UnlockingOur Creative Potential for Development Inno).

Liu, T. (2010). Stock Market Development and Market Efficiency on China Stock Market. EuroJournals Publishing, Inc

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MOF (2014) The 2015 National Budget Statement, Harare. Ministry of Finance and Economic Development.

Muli, M. (2008). Relationship between Electronic Trading and Stock Market Efficiency: A Case Study of the Nairobi StockExchange. Journal of Education and Social Sciences Research Abstracts - JESSRA, Issue 2, 2008

Murinde V. and Lensink, R. (2006), Does foreign bank entry really stimulate gross domestic investment?, Applied FinancialEconomics, Vol. 16, pp. 569-582.

Murinde, V. (2006), Capital Markets Roles and challenges. Birmingham: University of Birmingham.

Muscarella, C. J. and Piwowar, M. S. (2001), Market microstructure and securities values: evidence from the Paris bourse. Journalof Financial Markets, 4, 209–229.

Naidu G.N. and Rozeff, M.S. (1994), Volume, Volatility, Liquidity and Efficiency of the Singapore Stock Exchange Before andAfter Automation. Pacific-basin Finance Journal, vol. 2 (1): 23-42

Omuchesi J. A. and Bosire M. M. (2014). The Effect of Automation on Stock Market Price Volatility: A Case of Nairobi SecuritiesExchange. Journal of Economics and Finance (IOSR – JEF) Volume 5, issue 3 pp 71 – 79

Omuchesi, J., Bosire, M. and Muiru, M., (2014), The Effect of Automation on Stock Market Efficiency: A Case of Nairobi SecuritiesExchange, Journal of Finance and Accounting, Vol 5, No 17 pp27-54

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Sukcharoensin, S., Srisopitsawat, P., and Chuenjit, S. (2004), Market Liquidity and the Impacts of the Computerized TradingSystem: Evidence from the Stock Exchange of Thailand. Investment Management and Financial Innovations, 4/2004

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Corporate social responsibility within the banking sector in Kuwait



Haneen AlRumaihi1 and David Madzikanda2

1Burgan Bank Group, Kuwait, 2University of Zimbabwe, Zimbabwe

ABSTRACTCorporate Social responsibility (CSR) has become a management field because of its influenceon organisations. However, CSR practices in banks in Kuwait are not known and there isalso no consensus on whether the financial crisis has resulted in reduction in CSR activitiesor not. This study, therefore, focuses on gaining a better understanding of how corporatesocial responsibility works in practice in the Kuwaiti banks using a qualitative approach inwhich data were collected through interviews. The study revealed that the financial crisisdid not adversely influence CSR practices in banks in Kuwait. Several CSR activities beingimplemented by the banks in Kuwait were identified leading to a conceptualisation of aCSR framework. It is recommended that CSR should be integrated into every part of thebank and aligned with the vision and values of the bank. Furthermore, CSR budgets shouldnot be compromised during crisis, but instead banks should be more strategic by focusingon the selection of projects, and using new tools for assessment to better measure projectimpacts.

Key Word: Corporate social responsibility, Kuwait, banks, financial crisis.

1. INTRODUCTIONBanks in Kuwait are not isolated institutions but have obligations to society that extend beyond mereprofit-making and therefore should place corporate social responsibility (CSR) firmly on their businessstrategic agenda and demonstrate their commitment to economic, legal, ethical and social responsibilities.However, there is scant research on CSR as it pertains to Banks in Kuwait. CSR studies in Kuwait have tendedto focus mainly on industries such as the Oil and Gas that are acknowledged as problematic in terms ofenvironmental issues. The extensive literature on CSR has remained largely Western centred. This study,therefore, is aimed at obtaining a better understanding of how corporate social responsibility works inpractice from the perspective of the decision makers of CSR in banks in Kuwait. The study will aid theunderstanding of the effect of global financial crisis on the way CSR has been implemented, which aspectsare currently unknown.

2. BACKGROUND AND STUDY OBJECTIVESThe banking sector in Kuwait is composed of five conventional banks (National Bank of Kuwait, Gulf Bank,Commercial Bank, Burgan Bank, and Ahli Bank); ten foreign banks (BNP Paribas, Citi Bank, HSBC, MuscatBank, Bank of Bahrain and Kuwait, Qatar National Bank, Mashreq Bank, Doha Bank, AlRajhi Bank, andNational Bank of Abu Dhabi); and four Islamic banks (Kuwait Finance House, Boubyan Bank, Ahli UnitedBank, and Kuwait International Bank).These banks’ reputations were dented during the 2008 financialcrisis, resulting in stakeholders losing their trust and confidence in the banks. As a result, stakeholders aredemanding the banks in Kuwait to be socially responsible and to demonstrate their commitment to ethicaland social responsibility practices. The Kuwaiti government intervenes excessively in the economy in general,and in the banking sector in particular, through administrative control, subsidised loans, equity injectionsand bail-outs (Limam, 2004).

Up until the financial crisis, CSR was considered trivial and as a result, little research had been conductedon CSR within the banking sector in Kuwait. It is therefore important to explore and understand the CSRapproaches and practices by banks since then and also understand the influence of the financial crisis onthe implementation of CSR in order to understand the characteristics of the CSR framework in the bankingsector in Kuwait.

H. AlRumaihi and D. Madzikanda


3. LITERATURE REVIEW ON CORPORATE SOCIAL RESPONSIBILITYCSR is a cluster concept that overlaps with concepts such as corporate responsibility, corporate citizenship,corporate governance, corporate sustainability and business ethics (Matten and Moon, 2008). Moon et al.(2005) argue that CSR is an ‘essentially contested concept’ because it is ‘appraisive’; ‘internally complex’;and the rules of application are relatively ‘open’. Aguilera et al. (2006) argue that CSR differs according tothe region, nation, industry, and company. This makes the progress of developing a globally accepted andcomprehensible definition and conceptualisation of corporate social responsibility even more challenging.In this study, CSR is considered as ‘doing business that stands for transparency and stakeholder satisfaction,while fulfilling economic obligations and promising to integrate the social and environmental concerns inbusiness operations, and by this means, creating shared value’.

Carroll’s (1979) important four-part definition of CSR suggests that there are four responsibilities that needto be fulfilled to have proper CSR. These four responsibilities are economic, legal, ethical, and philanthropicand at least two of these responsibilities have to be met for it to be considered CSR. Carroll (1979) illustratesthe complexity and the categories of a broadly interpreted corporate responsibility in a pyramid, see Figure1 below that shows how companies’ responsibilities increase over time.

Figure 1: Carolls’ (1979) depiction of Corporate Social Responsibility

According to Carroll (1979), the first two layers of the pyramid are required from all companies becausethey have to be profitable in order to stay in business and also have to obey laws and adhere to the country’sregulations. Whereas the fulfilment of ethical responsibility comes next, as society expects corporations tofulfil this responsibility, yet it is not a legal requirement of business. The final responsibility in the pyramidis the philanthropic responsibility, which is the highest level of responsibility that corporations strive forand it is the focus of CSR in the literature (Yotsumoto, 2010).

Philanthropic responsibilities are ‘expected’ or ‘desired’ by society, and involve corporations making monetarycontributions to community development, community improvement programmes, youth developmentprogrammes and so forth. Employees of these corporations are also encouraged to participate in community

Be

good

corp

orate

citiz

en

Be et

hical

Obligat

ion to

do

what is

right a

nd fair

Avoid

har

m

Obey the law

Law is society's codification

of right and wrong

Be profitable

The foundation upon which all others rest

Philanthropic

Responsibility

EthicalResponsibility

Legal Responsibility

Economic Responsibility



programmes as volunteers. The third and fourth responsibilities in Carroll’s (1979) pyramid are notmandatory requirements, but are anticipated to meet society’s expectations. According to Aupperle (1982),Carroll’s (1979) pyramid has become a benchmark for defining the concept of CSR. Central to the amendmentof Carroll’s (1979) pyramid is the argument that the pyramid structure suggests a hierarchy, similar toMaslow’s (1970) hierarchy of needs and that philanthropic activities are the most valued and the economicdomain is the least, which could lead to the misunderstanding of the priorities of the four CSR domains.

At the company level, a number of factors affect the scope of CSR, such as internal conditions, strategicattributes, contingency attributes, stakeholder pressures and firm size (Brammer and Millington, 2002; Etzion,2007; Henriques and Sadorsky, 1996;). Thus, companies need to adapt their CSR strategies according totheir business as well as these factors, since a ‘one CSR size does not fit all’ (Bhattacharya and Sen, 2004:10).

Friedman (1970) argues that CSR creates an agency problem because engagement in CSR may waste company’sresources. Friedman (1970) believes that the most beneficial way to help society is by making profit andhence, resources are best spent on value-added projects. Friedman’s (1970) view has been widely referred toas an illustration of the classic economic view that corporations only have one responsibility, which is tomaximise profits. Friedman’s conceptualisation of CSR is further criticised because it implies that socialinvestment is an unnecessary expenditure that has no positive benefit to the company.

A significant development of CSR was seen in 1980 when the global debate on sustainable developmentemerged. The World Conservation Strategy (1980) stressed the interdependence of conservation anddevelopment and was the first to conceptualise ‘sustainable development’ (Tilbury and Wortman, 2004). In1987, the World Commission on Environment and Development (WCED) published the Brundtland Report,Our Common Future. The report states that ‘Sustainable development seeks to meet the needs and aspirationsof the present without compromising the ability to meet those of the future’ (World Commission onEnvironment and Development, 1987).

The literature of the 1990s did not expand the definition of CSR. However, the concept of CSR was used asthe base point, building block, or point-of-departure for other related concepts and themes, such as thecorporate social performance (CSP) model, which was presented by Wood (1991) and was based on threedimensions: principles, processes, and policies as well as the Triple bottom-line theory by Elkington (1994),which suggests that the ‘bottom line’ of conducting business should be transformed into the ‘triple bottomline’ of people, profit, and planet, where all are of equal importance to management. Based on this theory,companies should be measured on their economic, environmental, and social performance (Elkington,1994).

In the 2000s, corporations’ obligations to CSR became closely connected to their core business andstakeholders and more focus was placed on corporate citizenship, which describes the role of the corporationin administering citizenship rights for individuals (Matten and Crane, 2005). In actual fact, CSR is nowregarded as an independent management field (Kakabadse et. al., 2005).

Garriga and Mele (2004) maps CSR theories and argues that CSR can fall under one of the four groups: (1)instrumental theories, in which the corporation is seen as an instrument for wealth development and thatsocial activities are only a means to achieve economic results; (2) political theories, which concern themselveswith the power of corporations in society and the use of this power in the political arena; (3) integrativetheories-i.e. how businesses integrate social demands, arguing that businesses depend on society for theirexistence and growth. Hence, the theories of this group focus on the detection and scanning of, and responseto, the social demands that achieve social legitimacy and social acceptance; and (4) ethical theories, whichare based on ethical responsibilities of corporations to society and are based on principles that express theright thing to do, or the necessity to achieve a good society (Garriga and Mele, 2004). These theories focuson four main aspects: (1) meeting objectives that produce long-term profits, (2) using business power in aresponsible way, (3) integrating social demands, and (4) contributing to a good society by doing what isethically correct.



3.1 Global Financial Crisis and CSRThe global financial crisis weakened the Kuwaiti banks significantly. The banks have suffered from liquiditypressure and losses on account of higher provisions (Singh, 2010). Despite the positive signs of recovery, thebanks have continued to clean up their loan books, but their performance is still affected by an undiversifiedoperating environment which is heavily dependent on the oil sector (Singh, 2010), which has seen the priceof oil continue to tumble. The global financial crisis has led to economic recessions in many countriesaround the world. Many countries introduced austerity measures and accordingly, companies started cuttingtheir budgets, including the budgets for CSR, which has produced a challenging environment in which tooperate. What makes this research even more significant is that little was found in the literature about therelationship between CSR survival and recession in any country and whether corporations tend to sweepCSR aside during that time or treat it as a necessity

Many authors have highlighted that the CSR budget should be reduced during a crisis phase because businesseswill have difficulties in finding resources for their social responsibility projects (Karaibrahimoglu, 2010;Özkan, 2009). As Özkan (2009; 2) stated: ‘the greatest social responsibility this year is to keep companiesalive’ and stressed the importance of the survival of business in order to maintain profitability, which is inline with Carroll’s (1979) CSR pyramid and the economic dimension of the pyramid. Furthermore,Karaibrahimoglu (2010) indicated in her research of the top 100 companies chosen from the 500 list, thatthere was a significant reduction in the number and size of CSR projects during the financial crisis. However,other authors (Yelkikalan and Kose’s, 2012) had different views perceiving the crisis as an opportunity forCSR. Hence, this is an area that is still lacking enough research and in-depth conclusive studies.

In conclusion, the remit of CSR has evolved over the years and today it is underpinned by a great proliferationof theories, leading to a variety of approaches and terminologies, as presented and discussed using theclassification of Garriga and Mele (2004). The literature review suggests that the definition andimplementation of CSR is country specific, with local context playing a unique role in how it is shaped inorganizations.

4. DATA COLLECTION AND ANALYSISAn exploratory research was deemed appropriate in view of the little prior knowledge to the problem.Interviews were used to ‘unravel the complexities of large-scale social change’ (Gerson and Horowitz, 2002:201) by examining how individuals experience, interpret and shape their responses to these changes. Therefore,by talking to those involved in the development and implementation of CSR strategy, it was possible tobetter understand the CSR phenomena and obtain an insight into the meanings ascribed to it at an individuallevel.

In a study, the selection of respondents is of utmost importance, since the research can turn out to be invalidif the wrong person is interviewed (Miles and Huberman, 1994). Therefore, efforts were made to make surethat the most appropriate people to speak to within the banks were met. This was done by forming apurposive sample of 16 participants from six banks.

Interview data was analysed through the use of thematic analysis, which is defined by Boyatziz (1998) as awidely used qualitative analytic method for identifying, analysing, and reporting patterns (themes) withindata. The three steps suggested by King and Horrocks (2010) to do the thematic analysis were followed,namely:

1. Descriptive coding: at this stage parts of the transcripts likely to be helpful in addressing the researchquestions were identified as well as highlighting anything that might help in understanding theinterviewees’ views and opinions.

2. Interpretative coding: at this stage, the focus was on interpreting meanings of the codes and groupingcodes that shared common meanings.



3. Defining overarching themes: at this stage a number of overarching themes that characterised keyconcepts in the analysis were identified.

5. FINDINGS AND ANALYSISVarious CSR activities and processes were identified and are discussed below.

Community engagement and communicationAll of the banks highlighted the importance of community engagement. For example, the National Bank ofKuwait (NBK’s) involvement in community engagement and communication is very well known in Kuwaitand the bank is also known for the Holy Ramadan Charity campaign named “Do Good Deeds in Ramadan”,which involves setting up ‘Iftar’ tents in various locations across the city. The event set a record with morethan 150,000 ‘Iftar’ meals being distributed under the supervision of hundreds of NBK staff volunteers allover Kuwait.

Burgan Bank also mentioned that the bank had built a computer laboratory at the Kuwait University’sBusiness School, where occasionally the bank organises seminars and sessions to communicate to the facultyand students about various aspects of the financial and business world. The Commercial Bank of Kuwait(CBK) mentioned on their website that they participated in lighting Yarmouk’s Mayor Building in thecelebration of the National and Liberation Days as part of their community service and part of the commercialbank’s Yarmouk branch, in supporting the social activities of the area in which they operate.

Philanthropic programmesAll the banks handled philanthropic projects as part of their CSR activities and all were committed toallocating donations, time and/or effort for their philanthropic programmes. Ahli Bank of Kuwait (ABK) forinstance, organised a series of lectures for university students to familiarise them with the nature andoperations of finance and banking, while the Gulf Bank gave special attention to students with disabilitiesin schools where they celebrate the first day of returning to school with them. Boubyan Bank mentionedthat a donation to Somalia was part of their philanthropic programme of that year. It is worth mentioningthat the word ‘philanthropy’ was a recurring word in a notable way, as mentioned by NBK:

Locally, our deep commitment to the community by far exceeds the role normally expected from abanking institution and embraces a broad spectrum of social and philanthropic involvement. We proudlyboast that we have fully shouldered this noble and sublime responsibility right from the earliest daysof the Bank’s inception in

While CBK noted that:

In Commercial Bank of Kuwait, social outreaches and contributions to the philanthropic, social andhumanitarian initiatives are of paramount importance.

Corporate governance and compliance with lawAll banks mentioned corporate governance issues and compliance with laws and regulations especially withregards to compliance with the guidelines of the Central Bank of Kuwait and the Kuwait Stock Exchange.They provided information on how the banks are managed through presenting the governance structurethat specifies the distribution of rights and responsibilities among different participants in the bank, such asthe board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders. It isworth mentioning that the Central Bank of Kuwait has taken the initiative – since the early nineties – toissue and update instructions to banks in regard to good governance, in line with relevant internationalcontrol standards and advances in banking. Added to this is the fact that banks and financial institutions aregoverned by the laws and regulations applicable to Kuwaiti companies.



Risk ManagementIt was noted that all banks in Kuwait put emphasis on risk management as part of their CSR framework.ABK, for instance, has dedicated a considerable proportion of annual reports to risk management, andmentioned that risk management is considered to be one of the cornerstones of their success. The KuwaitInternational Bank (KIB) described in detail their compliance with Anti-Monetary Laundering (AML) law,as well as their policies and procedures that are formulated to ensure better compliance with AML laws inKuwait. It is worth mentioning that proper risk management practices from all banks is not a surprise, as theCentral Bank in Kuwait mandates all banks to have a dedicated department in charge of managing riskassociated with banking activities.

Health and safety programmesAll the banks expressed the importance of health and safety programmes. NBK stated that it organisedseveral successful health awareness campaigns for its staff, including the anti-obesity “We Care for YourHealth” initiative, in collaboration with the Kuwait Obesity Association. To ensure the awareness of employeesand customers of the Kuwait International Bank with regard to evacuation processes in case of emergencies,the bank conducted (in cooperation with the Ministry of Interiors and the Fire Service Directorate in Kuwait)mock drills at its head office to help in raising awareness of both employees and customers while dealingwith similar cases.

Employee community involvementAll banks presented programmes that allowed their employees to volunteer for social activities during paidworking hours, such as Ramadan events in NBK to feed needy people who cannot afford to pay for their Iftarmeal, as well as the Gulf Bank’s activities that involve conducting events for children with special needs, andBurgan Bank’s staff visit to paediatric wards of several hospitals as part of their Corporate CitizenshipProgramme.

SponsorshipsAll banks showed a high level of interest in sponsorships. In fact, all CSR programmes in banks in Kuwaitstarted with sponsorship activities and have expanded over time. The main areas of sponsorship in Kuwaitibanks relate to sport, culture, and educational events. The interviews also revealed that sponsorship is amajor contribution from CSR activities; one of the banks is known for its sponsorship of the major footballteam in Kuwait, while another bank is well known for its sponsorship of Kuwaiti public schools. Many ofthe sponsorship activities have a direct impact on the business, such as the sponsorship of schools anduniversities, where in return students and teachers will transfer their accounts to the sponsor. When lookingat the management of environmental impact, it was noted that only three banks confirmed that they supportedenvironmental causes although the support provided was not sustainable and involved short-term campaigns.The representative from the Kuwait International Bank mentioned the types of activities done that areconsidered environmental, all of which were internal within the bank, more tactical than strategic, and fora short period of time, such as a green week. The interviewee from Ahli United Bank justified the limitedenvironmental activity by saying:

“I think the market is not yet ready for environmental causes and that is why we do not do a lot ofenvironmental activities mainly because of the culture and not because we do not want to.

The interviewee from Burgan bank confirmed that environmental protection was not considered to beimportant by the banks when he stated that:

“I think the entire Arab world is late in believing in the importance of sustainability and protecting theenvironment.”



The representative from Ahli United Bank said that banks that do not have any environmental initiativejustify the absence by stating that:

“We are a bank and there are no environmental degradation in what we do unlike in the oil andmanufacturing sector”.

The impact of the financial crisis on CSR conceptualization and practices was explored as an area of interest.This is because it was unknown whether or not there was a negative impact that resulted from the globalfinancial crisis of 2008 on CSR in general and its budget in particular in the Kuwaiti banks. When asked ifthe global financial crisis had any effect on CSR spending, surprisingly, a few banks decreased their CSRbudget as a result of the financial crisis, while the rest either kept it as it was or increased it.

From the responses received, it was found that banks that were affected by the financial crisis generallyincreased their CSR spending, while banks that were not affected either kept the budget as it was every yearor reduced it. This could be a reaction by the affected banks to emphasise that they could still be part of thesociety and gain trust, especially in light of the fact that financial institutes were attacked for being part ofthe causes of the crisis, especially in Kuwait, as one of the banks had dealt with derivatives in an irresponsiblemanner that caused severe losses to shareholders, hence this bank specifically needed to regain trust.

One of the decision makers of a bank that increased its budget despite a severe hit on its earnings statedthat:

“We increased our spending to ensure that we were providing remedies to the financial crisis damagesthat occurred to the society, such as the increase in unemployment where we tried to find suitable jobsfor those people. We also started conducting professional and international seminars that educatedour high net worth customers and provided them with a better understanding of the crisis and how todeal with it”.

This confirms Yelkikalan and Kose’s (2012) view that although the uncertain environment created by a crisiscreates a threat to organisations, it also brings along many opportunities. CSR activities can be also used toovercome some social problems caused by crises.

6. DISCUSSION AND CONTRIBUTION TO KNOWLEDGEThe findings revealed that Banks in Kuwait were very clear in defining their CSR activities which were alignedwith their overall corporate strategy. Most of the time, guidance and directions are given by the Chairman ofthe Board, which reveals that CSR is given a high priority in Kuwaiti banks. It was seen that competitionbetween banks has affected the way CSR is implemented; where banks tend to follow each other in terms oftheir activities. Moreover, it was evident that the national direction dictates the type of activities conductedby banks and also affects their strategic directions.

There were certain categories of initiatives that all banks tended to adopt, such as education, healthcare, andemployment of nationals. Many CSR processes were being implemented but were not considered as part ofthe CSR programme, such as investor relations, risk management, and corporate governance. These processeswere seen as part of compliance with external regulations, rather than being part of CSR. This suggests thatthe integrated concept of CSR is not yet fully understood in Kuwait.

The global financial crisis was seen to have a positive impact on CSR as it prompted the banks to start beingmore selective in choosing initiatives. Although some Kuwait’s banks did not reduce their CSR budgetsduring the crisis, they started to be more selective in terms of the channel of spending, as well as theirapproach to giving. Focus was placed more on transparency, accountability, and governance. These termswere used by banks in Kuwait only after the financial crisis as they realised that scrutiny on responsiblebusiness increased by shareholders and media as a result of the crisis. This confirms that Kuwait banks areconvinced that CSR is an investment and not expenditure and hence, should be taken seriously.



It was also observed that CSR in all banks fell under the Public Relations department, which comes underthe Corporate communication department. This has helped in creating an aligned message to both externaland internal stakeholders, since this department in all banks is in charge of communicating the CSR messageas well as other initiatives. In most cases the Corporate communication department reports directly to theCEO, which makes decision making smoother, as well as being directly involved with corporate strategy.Unfortunately, it was found that none of the banks had a dedicated CSR department or a dedicated CSRprofessional, as public relations professionals tend to be the ones handling CSR activities.

It is worth mentioning that all banks in Kuwait had received awards and recognitions for their CSRprogrammes. However, what distinguished banks from each other with regard to implementation werethree factors: budgeting and allocated spending – which affects the scope of CSR and its exposure;management belief in the role of CSR within the organisation and its impact on the brand value and corporateimage; and having a clear identified framework for CSR that is communicated internally and externally.

In terms of CSR programmes and activities, there were similarities among banks in what was implementedas CSR: education, employment programmes, and health initiatives were the three common directionsfollowed by all banks. In terms of CSR processes, seven processes were followed by all banks: communityengagement, philanthropic activities, corporate governance, risk management, health and safety programmes,employee community involvement, and sponsorships. Little attention was given to environmental initiativeswhere most of the activities were in the form of tactical campaigns, rather than sustainable and long-terminitiatives. This was expected, as public awareness of environmental concerns is very low in Kuwait.

7. RECOMMENDATIONSIt is recommended that CSR should be integrated into every part of the bank and aligned with the visionand values of the bank. It should be embedded in the organisational culture and core business operationsas well as the corporate identity. As banks in Kuwait are now moving away from asking whether or not toengage in CSR, they should be looking for the best way forward to craft CSR programmes that reflect theirbusiness values, while addressing social, humanitarian and environmental challenges. In addition, thereshould be a separate entity or department that should take the responsibility of developing and implementingCSR strategy, rather than having this as part of Public Relations activities. Furthermore, particular attentionneeds to be given to environmental issues.

CSR during crisis and uncertainty: In times of financial crisis and uncertainty, it is more urgent than ever tocommunicate effectively with stakeholders to gain trust and push reputation to the forefront. Hence, CSRshould not be compromised during crisis, but instead should:

1) be more strategic by being more focused in the selection of projects, and using new tools for assessmentto better measure project impacts

2) be more focused on transparency and accountability to regain stakeholders’ trust

3) apply best practices of corporate governance and raise standards to protect the wealth of millions ofshareholders

National concerns: While developing their CSR strategy, banks should look at areas that represent a nationalconcern. In Kuwait for instance, citizens are very concerned with the quality of the educational and healthsystems, youth development, and the increasing rate of unemployment among Kuwaitis. Therefore, banksare expected to intervene in those areas and facilitate sustainable solutions to the challenges faced by Kuwaiticitizens. By so doing, the public will feel that the banks are concerned with the problems of society and aresolving them or contributing to the development of possible solutions. This could be done by providingscholarships to reputable schools, funding governmental schools that suffer from lack of resources,refurbishing hospitals, increasing awareness of certain diseases that are highly spread in the country,sponsoring youth initiatives, conducting summer training schemes for the young in the banks, providingjob opportunities for Kuwaitis in the banks, as well as training and developing them. Also, banks should



not only rely on the media to know the national concerns. Rather, they should approach and be closer totheir stakeholders and listen to them to understand their major concerns by conducting focus groups andsurveys. By so doing banks will demonstrate that they are really aligning their strategy with the needs of thecommunity.

8. REFERENCESAguilera, R.V., Williams, C.A., Conley, J. M. and Rupp, E. D. (2006). ‘Corporate Governance and Social Responsibility: A

Comparative Analysis of the UK and the US’. Corporate Governance: An International Review, 14(3) 147-158.

Aupperle, I.E. (1982) An Empirical Enquiry into the Social Responsibilities as Defined by Corporations: An Examination ofVarious Models and Relationship. Doctoral Dissertation. University of Georgia.

Bhattacharya, C.B. and Sen, S. (2004). ‘Doing better at doing good: When, why, and how consumers respond to corporate socialinitiatives’, California Management Review, (47)9-24.

Boyatzis, R.E. (1998). Transforming Qualitative Information. Cleveland: Sage.

Brammer, S. and Millington, A. (2002). Organizational Slack and the Composition of Corporate Community Involvement. Paperpresented at the Academy of Management Conference, Denver, USA, August 2002.

Carroll, A.B. (1979). ‘A three dimensional model of corporate social performance’. Academy of Management Review, 4(3), 497-505.

Elkington, J. (1994). Cannibals with Forks: The triple bottom line of 21st century business. Oxford: Capstone.

Etzion, D. (2007). ‘Research on Organizations and the Natural Environment, 1992-Present: A Review’. Journal of Management,33(4) 637-664.

Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.

Friedman, M. (1970). ‘The Social Responsibility of Business is to Increase its Profits’. New York Times Magazine, Sept. 13, p.32.

Garriga, E. and Mele, D. (2004). ‘Corporate Social Responsibility Theories: Mapping the Territory’. Journal of Business Ethics, (53)51-71.

Gerson, K. and Horowitz, R. (2002). ‘Observation and Interviewing: Options and Choices in Qualitative Research’. In May T(ed.). Qualitative Research in Action. Sage, London: pp. 199-224

Henriques, I. and Sadorsky, P. (1996). ‘The Determinants of an Environmentally Responsive Firm: An Empirical Approach’.Journal of Environmental Economics and Management, 30(3) 381-395.

Kakabadse, N.K., Rozuel, C. and Lee-Davies, L. (2005). ‘Corporate social responsibility and stakeholder approach: a conceptualreview’. International Journal of Business Governance and Ethics, 1(4) 277-302

Karaibrahimoglu, Y.Z. (2010). ‘Corporate social responsibility in times of financial Crisis’. African Journal of Business Management,4(4) 382-389.

King, N, and Horrocks, C. (2010). Interviews in Qualitative Research. London: Sage.

Limam I. (2004). Measuring Technical Efficiency of Kuwaiti Banks. API-Working Paper Series 0101, Kuwait, Arab Planning Institute.

Maslow, Abraham H. (1970). Motivation and Personality. New York: Harper and Row

Matten, D. and Crane, A. (2005). ‘Corporate Citizenship: Toward an extended theoretical conceptualization’. Academy ofManagement Review, 30(1)166-179.

Matten, D. and Moon, J. (2008). ‘Implicit and Explicit CSR: A Conceptual Framework for a Comparative Understanding ofCorporate Social Responsibility’. Academy of Management Review, 33(2) 404-424.

Miles, M. B. and Huberman, A. M. (1994). Qualitative Data Analysis: an Expanded Sourcebook. California: Thousand Oaks, SagePublications.

Moon, J., Crane, A., Matten, D. (2005). ‘Can corporations be citizens? Corporate Citizenship as a metaphor for businessparticipation in society’. Business Ethics Quarterly, 15(3)427-451.

Özkan, F. (2009). Radikal Gazetesi , Available at http://www.radikal.com.tr/Radikal.aspx?aType=RadikalYazar&ArticleID=920915&Yazar=FUNDA%20%D6ZKAN&Date=01.11.2011&CategoryID=101 (Accessed 6/1/2012).

Sachs, S., Maurer, M., Ruhli, E. and Hoffmann, R. (2006). ‘Corporate Social Responsibility for a stakeholder view perspective:CSR implementation by a Swiss mobile telecommunication provider’. Corporate Governance, 6(4)506–515.

Singh, P. S. (2010). Kuwait Banking Industry: An industry Research. Kuwait: Arab Banking Institute.

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Wood, D.J. (1991). ‘Corporate social performance revisited’. Academy of Management Review, 16(4) 691–718.

World Commission on Environment and Development, (1987). Our common future. New York: Oxford University Press.

Yelkikalan, N. and Kose, C. (2012). ‘The Effects of the Financial Crisis on Corporate Social Responsibility’. International Journalof Business and Social Science, 3(3) 292-300.

Yotsumoto, Y. (2010). Americanizing Japanese firms: The Institutionalization of Corporate Philanthropy and Volunteerism in AmericanCommunities. Maryland: University Press of America.

Does grease money from police roadblocks speed up the wheels of the commuter omnibus?


Does grease money from police roadblocks speed up the wheels ofthe commuter omnibus? The case of kombis into and out of Harare

Dr Albert MakochekanwaUniversity of Zimbabwe

ABSTRACTThe study employed cross section econometrics and tested the “grease the wheels” hypothesisat a micro level. To achieve its objective, the study employed survey data from 188 kombidrivers and/or conductors (i.e., kombi crew) which was collected in the two months ofJanuary and February 2015. Estimated results show that three out of the six variables used inthe model were statistically significant at 1% level of significance. The findings of the studyindicate that profits pocketed by kombi crew (lnprofits) are an important factor in determiningthe daily takings (profitability) of kombis. This result makes economic sense given thatkombi crew are motivated to remain on the road when the extra profits they collect (overand above their wages/salaries) are higher. A positive and significant relationship betweenkombi fare (lnfaire) and daily takings of kombis was also found by this study. In this instance,as the fare charged per given trip increases, ceteris paribus, the total daily takings per givenroute will also increase. This has an overall positive effect on the viability of kombi operations.Lastly, the study found that the more the number of round trips completed per day, the morethe daily takings for a given route. The three variables which have been found to be statisticallyinsignificant are the number of roadblocks (lnrblocks), bribe paid (lnbribes) and number ofroadblock stops (lnstops) in a given route. Although the number of roadblocks variable,lnrblocks, has an unexpected sign, the other two variables have their respective expectedsigns. Whilst paying bribes ensured reduced stoppages at roadblocks along a given route,resulting in more daily takings, the variable is however not statistically significant. The numberof police roadblock stops along a given route had a negative effect on daily takings, althoughthe variable was not statistically significant.

Keywords: grease money; corruption; police roadblocks

1. INTRODUCTIONCorruption, like cockroaches which are a menace to human beings, but which for whatever reason thehuman race can never totally eradicate, has coexisted with human society for a long time and remains asone of the problems in many of the world’s developing economies with devastating consequences. Agbu(2003) contends that corruption as a phenomenon, is a global problem, and exists in varying degrees indifferent countries from the most democratic to the most dictatorial. In terms of culture and religion,corruption continues to exhibit its tentacles throughout the Christian, Muslim, Hindu, and Buddhist cultures(Dike, 2005). Corruption is not an issue that just begins today; but its history is as old as the world (Lipsetand Gabriel, 2000). The World Bank (1997) defines corruption as the abuse of public office through rentseeking activities for private gain when an official accepts, solicits, or extorts a bribe.

The impact of corruption on economic activity remains a controversial issue, especially in the developingworld. On the one side of the debate are those who view corruption as not only detrimental to economicactivities but an act which even ‘sand the wheels’ of economic activity, thus further slowing down an alreadysluggish economic trajectory. Among others, the following scholars Mauro (1995), Brunetti and Weder(1998) and Mo (2001) through their analysis concluded that corruption negatively affects economic growthand investment. On the other extreme, some scholars suggests that corruption and bribery activities notonly propagate economic activities, but they even ‘grease the wheels’, of economic activities and ensurerapid economic growth when compared to situations where corruption and bribes are not given their chanceto influence business activities.

The writers from the latter camp including Leys (1965), Beck and Maher (1986), Lien (1986), Huntington(1968) and Bardhan (1997) argue that corruption is a ‘lubricant’ which facilitates speedy movement in an

A. Makochekanwa


otherwise sluggish economy. Specifically, Leff (1964), Huntington (1968) and Leys (1965), argue that bribesmay act as a dangling carrot in economies that are overwhelmed by bureaucracies, distortions andmalfunctioning institutions. These authors contend that bureaucratic hierarchies are impediment to economicactivities, and as such there is need for some ‘speed’ or grease or lubricant money to ensure that the squeakwheels that slow speed brought by bureaucracy or bureaucratic tendencies are sufficiently oiled for economicbusiness to smoothly progress. The point is that; in most economies, bureaucratic services remain theprerogative of government ministries, agencies or municipalities and these services include: customs, sanitaryinspections, police, electricity providers, water service providers, tax revenue authorities and immigrationservices (e.g. for passports, national identify documents and marriage certificates).

In summary, the ‘grease the wheels’ hypothesis argues that bribes and corruption are potential panacea tobureaucratic tendencies and as such, can potentially improve efficiency which in turn increases investmentand, eventually, growth. On the contrary, the ‘sand the wheels’ hypothesis suggests that corruption not onlyretards economic activities, but may become more harmful when governance is poor (Meon and Sekkat,2005).

The main aim of the study was to test the “grease the wheels” hypothesis at a micro level. The study empiricallyinvestigates the relationship between the impacts of police roadblock bribes (corruption) on viability (dailytakings) of commuter (kombi) transport operations within Harare, Zimbabwe. The next sub-section of thestudy presents the theoretical underpinnings of the “grease the wheels” and the “sand the wheels” hypotheses,and Zimbabwe’s corruption levels. Section two provides a review of literature while section 3 describes themethodology employed to achieve the study aim. Section 4 presents the results. Section 5 has the conclusionfrom the overall study.

1.1 The “grease the wheels” and the “sand the wheels” hypothesis1.1.1. The “grease the wheels” hypothesisThe bureaucratic tendencies exhibited by most government officials, especially those from the developingcountries where salaries for government employees are very low, is considered as the main reason whycorruption tends to increase. According to Huntington (1968): “In terms of economic growth, the onlything worse than a society with a rigid, overcentralized, dishonest bureaucracy, is one with a rigid,overcentralized, honest bureaucracy”. This quotation implies that the existence of excessive taxes andregulations as written in a country’s statutes will remain excessive without bribery. However, if corruptionand bribery are given a chance, the burden of these written taxes and regulations can be lessened as officials,after being bribed, can end up not enforcing all the written rules and regulations. Kaufmann and Wei (2000)enumerated the various aspects of bureaucratic tendencies which may be reduced or eliminated by corruptionand bribery. These include slowness, the quality of civil servants, decision choices by government officials,economic agents escaping consequence of some polices and quality of investment.

With regards to slowness, Lui (1985) employed an economic model and found out that bribes can be able toeffectively reduce the time spent in queues by economic agents. The intuition is that such payments providean incentive to government officials to speed up the process which could, under normal circumstances, bevery slow. Supporting the same argument Huntington (1968), argues that bribes overcome monotonousbureaucratic tendencies and in the process boost economic activities. The author indicates that corruptionby railroad, utility and industrial corporations resulted in faster growth in the case of USA in the 1870s and1880’s.

Leys (1965) and Bailey (1966) pointed out that bribes can improve the quality of civil servants. In this instance,if government officials’ salaries and benefits are very low and insufficient1 , the existence of bribes providesa supplement that may lure skilled civil servants who might have otherwise ventured into other potentialbusinesses and economic activities.

1 Given that money is never enough, insufficient is interpreted in relative terms, in relation say to private sector salaries in the samecountry or location.



Beck and Maher (1986) and Lien (1986) argue that bribes may improve the choice of the right decisions bybureaucrats. The authors suggest that in situations where government officials have limited information orare not able to make competent decisions and associated choices, corruption can provide the outcome of acompetitive auction. In their analysis, the authors modelled a situation of government procurement andsuggest that when it comes to the decision or choice of awarding the contracts, firms which provide thehighest bribes are assumed to be the most efficient. Thus, according to this view, government contracts andlicenses are normally allocated to firms which pay highest bribes who are likely to be more efficient.

Some authors, including Leff (1964), posit that when government spending is insufficient, corruption canpossibly compensate for inadequacy. The intuition is that, corruption will be considered as a means of taxevasion, and if in turn the bribers can invest efficiently in the same economy, the overall investment willincrease, and that will be good for the country. Furthermore, corruption may also increase investment levels.Leff (1964) argues that bribes are a possible way of hedging against other risks especially those which comefrom the political system; such risks include expropriation or violence. In this instance, if bribes can eliminatesuch risks, investment will turn out less risky and may accordingly increase.

1.1.2 The “sand the wheels” hypothesisThe positive impact of corruption on economic activities is premised, among other things, on fixed andexogenously determined regulations and bureaucratic rules. However, in most instances, most of theseregulations can be manipulated by government officials. In fact, and as Myrdal (1968) indicates corruptgovernment officials may intentionally cause unnecessary delays so that they get the opportunity to siphona bribe. Furthermore, the powers of bureaucrats to speed up the process once bribed may be limited ininstances where there are decision making stages involved in approving any request. Thus, in such cases, thecost of corruption may be positively related to the many successive stages involved. Mydal (1968) oncequoted an Indian bureaucrat who said that he may not be able to speed up the process, but he couldintentionally cause administrative delays so that he get more bribes. Meon and Sekkat (2005) suggest thatincreased cases of transactions due to corruption may well negate the increased efficiency with which economicactivities are conducted. Under these scenarios, adding a distortion in the form of corruption and/or bribeis like adding petrol to a fire. In this case, corruption increases instead of decreasing. This is precisely themeaning of the “sand the wheels hypothesis”.

Generally, the impact of bribes on the quality of civil servants at national level in any economy is uncertain.Kurer (1993) pointed out that bureaucrats who are corrupt are motivated to create other distortions in theeconomy to ensure the perpetuity existence of their illegal source of income. For instance, a bureaucrat hasthe motive to ration the provision of a public service so that he or she can be able to decide to whom toallocate that particular service in exchange for a bribe. Although such a bribe can indeed improve the economicsituation of the individual civil servant concerned as he or she will get extra money, nothing is gained fromcorruption at the national level.

The notion that bribes have the ability to enhance the choice of the right decisions by civil servants is alsocontroversial. There are a number of reasons to argue that the firm which pays the highest bribe may not bethe most efficient one once granted the service. Rose-Ackerman (1997) indicates that a firm may be motivatedto pay a higher bribe so that it can be able to compromise (without government restraint) on the quality ofthe goods or service it will produce and provide once granted the government contract or license. Furthermore,in cases where the profitability of a license is uncertain, the winner of the auction may be the more optimisticrather than the most efficient, a situation that is known as the “winner’s curse” (Meon and Sekkart, 2005).In such scenarios, bribes will not be the best route to award a license.

The argument that bribes may boost both the quantity and the quality of investment is debatable. Resultsfrom empirical studies suggest that this may not hold in the case of public investment. Findings fromstudies by, among others, Tanzi and Davoodi (1997) indicates that although higher corruption may be

A. Makochekanwa


associated with higher public investment, such activities will result in a diversion of public spending towardsless efficient allocations. In such cases, bribes mean larger amounts of public investments will be put inunproductive sectors, which are unlikely to improve efficiency and result in faster growth.

The proposition that bribes provides a possible avenue to hedge against risk in a politically uncertainenvironment is also subject to debate. The ability of corruption to be a hedge may only be feasible if it doesnot imply additional risk-taking. In practice, any transaction which involves bribes is a bit complex. Giventhat bribes are illegal, the commitment to abide by the agreement terms and obligations will be very weak,and thus may motivate opportunism in the bribers.

1.3 Zimbabwe’s corruption levelCorruption Perception index (CPI)Zimbabwe is one of the Southern African countries which is considered as having high corruption levels ata national level. Whilst there are various organizations which provide corruption indices, Table 1 providesthe country’s corruption trends over years from 1998 to 2012, using the Transparency International CorruptionPerception index (CPI) series. The CPI measures the perceived levels of public sector corruption in countriesworldwide. Based on expert opinion, countries are scored from 0 to 10 (or 100), with zero indicating highlevels of corruption and 10 (100) indicating low levels or very clean. As the tabulated information shows,although Zimbabwe was relatively a low corrupt country in 1998 and 1999, the country’s index has beendeteriorating since 2000. Since 2001, the index has been below 3 and this indicates tendencies towards veryhigh corruption status. When one considers its comparative performance among the surveyed countries ineach of the tabulated years, the country’s rank was relatively better in the first two years shown in the table,and after 2000, the country has relatively compared badly. Overall, the CPI shown in the table indicates thatZimbabwe is largely a corrupt country.

Table 1: Zimbabwe’s corruption perception index (CPI)

Year CPI Country Rank Total countries

1998 4.2 44 85

1999 4.1 48 99

2000 3 67 90

2001 2.9 65 91

2002 2.7 76 102

2003 2.3 112 133

2004 2.3 121 146

2005 2.6 116 159

2006 2.4 130 163

2007 2.1 153 179

2008 1.8 166 180

2009 2.2 146 180

2010 2.4 134 178

2011 2.2 154 182

2012 2.0 163 174

Source: Tabulated using figures from Transparency International

2. LITERATURE REVIEWIn an essay by Chiweshe (2015), the author indicated that Zimbabwean traffic police have used their positionto collect informal fortunes through bribes especially from public transport operators in urban areas known



as kombis. The essay argues that in Zimbabwe, kombi operators are required by law to be registeredtransporters who should comply with regular vehicle checks and employ licenced drivers. However, becauseof financial economic challenges in the country, many kombi owners flout the rules and many of the driversare involved in illegal driving practices. As a result of this scenario, an elaborate corrupt system between thepolice and operators has emerged in which they pay a daily fee to operate without the police stopping themfor the various offences they commit. In this instance, the police have powers to arrest the drivers and detainthe vehicle. The roadblock police use this power to ensure that kombi owners pay the bribe. The kombiowners have realized that it is cheaper to pay police bribes than to ensure that their cars are roadworthy orhave the necessary permits to operate. Thus, paying of bribes to roadblock police has become part andparcel of public transport system in Zimbabwe.

Anti-Corruption Trust of Southern Africa (2014) investigated the extent to which the Zimbabwe RepublicPolice (ZRP) and the City of Kwekwe (CoK) were responsible for the problems facing small and mediumenterprises (SMEs) in the two towns of Kwekwe and Redcliff. The report found out that corrupt members ofZRP and CoK police were accused of demanding informal payments and bribes from, among others, motorists.The study further found out that the police was pocketing a minimum of US$780,187.50 annually from asample of 285 kombis in the two towns alone. At the same time, the report estimates that the governmentthrough the Ministry of Finance was likely to be losing at least US$2,080,500 annually from the 285 kombisalone.

Richmond and Alpin (2013) conducted a survey on behalf of Afrobarometer in which the main objectivewas to get the perceptions of people on the extent to which they rated their government and public institutionson corruption issues. The study surveyed more than 51,000 people in 34 African countries (includingZimbabwe) between October 2011 and June 2013. Overall, the survey found that across the 34 countries,perceptions of corruption were highest for the police, followed by government officials and tax officials. Onpolice corruption perception, 62 percent of the surveyed Zimbabweans said that most or all of the policewere corrupt. This resulted in Zimbabwe being ranked the fourth country out of the 34 countries wherepolice was corrupt.

Transparency International commissioned a survey entitled “Daily lives and corruption: public opinion inZimbabwe” in 2011 which was authored by Hardoon and Heinrich (henceforth Hardoon and Heinrich,2011). In the study, 1,014 people were surveyed in between 26 April and 5 May 2011 and their corruptionperceptions were sought across more than nine service providers. The data were weighted by age, gender andregion to represent the population of 5,900,000 Zimbabweans. On a scale of 1-5, where 1 means not at allcorrupt and 5 means extremely corrupt, police got a point scale figure of 4.5 and this was the institutionwith the highest scale figure. Interviewees were asked to respond to the question: To what extent do youperceive the following institutions to be corrupt? In response, 72.4% of the surveyed people indicated that thepolice was extremely corrupt. The second institution which was considered extremely corrupt are politicalparties and had 49.9% respondents indicating them as corrupt. Around 53% of respondents indicated thatthey had paid bribes to police, while ‘registry and permit services’ was the second institution from which38% of interviews had paid bribes.

3. METHODOLOGY3.1 Theoretical modelThe model used in this study borrows from McArthur and Teal (2002) in which social infrastructure isconsidered as a determinant of firm (kombi) performance. Corruption (and bribe payments) is consideredas a component of the social infrastructure. The empirical question is whether a link can be found betweenkombis paying bribes and their underlying performance. To assess the grease the wheels hypothesis, thestudy starts by assuming a simple Cobb-Douglas production technology with constant returns to scale:

yij = α

ij (z

ij)(k

ijαl

ij(1-α)) + φ’X+ ε

ij) 1

A. Makochekanwa


Where yij denotes daily transport fare takings (output) of the ith kombi operating in the jth route, α is the level

of technology, k is the capital stock, l is the number of workers, X is a vector of kombi-specific characteristicsand ε

ij is an error term. Corruption is hypothesised to affect the underlying efficiency with which kombis in

any economy operate. It is further hypothesized that the direct effects of roadblock bribe, zij can be shown to

have significant effects on underlying operations of kombi business.

In the model, roadblock police bribe, zij is based on the kombi’s need to smoothly pass through roadblocks

along its route. Such smooth sailing is determined by traffic police, whose official salaries are not linked tothe movement of public transport along a given public road. Each kombi interacts with traffic police inorder to pass through a given roadblock. Traffic police or police officers manning a given roadblock havethe opportunity to extract extra, unofficial payments or bribes, b, from kombis in return for smooth pass ata given roadblock.

3.2 Empirical modelIn measuring kombi performance, daily takings (i.e., the sum of all passenger fares collected by the kombicrew) form our main variable of interest alongside z

ij. Taking logs and rearranging equation (1) into an

empirical specification we have:

1n(yij/l) = â

0 + â

1 + 1n(k

ij/l) + â

2 z

ij + a

0 φ’X+ ε

ij) (2)

In kombi business in Zimbabwe, labour is composed mainly of two individuals, namely the driver and theconductor (assistant), while the major capital is the kombi itself. Thus, in modelling the viability of kombioperations, one can replace the known and fixed labour and capital with number of round trips. Thus, thefinal empirical model estimated is given by Equation (3):

1n = y = â0 + â

1 1n bribes + α

2 1n trips + α

3 + 1n stops + α

4 1n profits + α

5 In rblocks + α

6 1n fare + ε

ij(3)

where:

y = daily takings (i.e. total passenger fares collected by kombi crew)bribes = informal (bribe) payments paid by kombi crew to police manning roadblocktrips = total number of round trips completed by a given kombi per daystops = total number of police roadblocks where a kombi is actually stopped along a given routeprofits = total daily takings minus amount required to be surrendered by kombi crew to kombi ownerrblocks = total number of police roadblock along a given routefare = amount paid by a passenger for each one way route

3.3 Data sourcesThe study’s data was collected using a survey in which face to face interviews were conducted with 188kombi crew (driver and/or assistant). The information was collected from kombis which operate on routesinto Harare and whose radius is around 50 kilometres outside Harare. The information was collected duringthe two months of January and February 2015. To ensure randomness of the interviewed respondents, theresearch team interviewed a maximum of 25 respondents from the following kombi bus terminus in Harare– (1) 4th Street, (2) Charge Office, (3) Copacabana, (4) Market Square, (5) Warren Park, (6) Machipisa, (7)Makoni (Chitungwiza) and (8) Zengeza 3 Shpos (Chitungwiza). Although 200 kombi drivers and/or assistantswere interviewed, only 188 managed to provide useful information for the study.

4. Discussion of findings4.1 Descriptive evidenceThis section provides the descriptive analysis of police roadblocks, and the kombis which were surveyedand their associated characteristics.



4.1.1 Roadblocks in the newspapersThe media have reported on how police roadblocks have become a nuisance to most motorists in thecountry. Annex 1 with Boxes 1 through to 3, which provides snapshots from newspapers on police roadblocks.In short, Box 1 is about a tired kombi driver who is complaining about the unnecessary police roadblocksalong the route he operates in. Box 2 narrates a situation where police manning a roadblock had collectedbribes from motorists, but for fear of being possibly found with the money in their hands by supervisors,they decided to ‘hide’ the loot in a nearby bin. Unexpectedly, a little girl who was scavenging for food pickedthe loot and took it to her parents. In Box 3 a Zimbabwean high court judge bemoans the prevalence ofcorruption in the police force, with special emphasis on roadblock police. According to the judge and inreference to roadblock traffic police, “If it is true, then the department (police) is surely cursed. How can anation continue to condone such a malpractice which creates a breeding ground for corruption?

4.1.2 Basic Characteristics of roadblocksThis section provides the various characteristics of police roadblocks mounted on major roads leading intoand/or out of Harare, with special attention on characteristics such as average number of roadblocks perday, average roadblock stoppages per day, expected informal payments (bribe) to be paid to police manningthe roadblock, and the official fines paid for common road crimes. The analysis utilises primary data froma survey which was done on 188 commuter omnibuses (kombis) which ferry passengers into and out ofHarare. The surveys were done on kombis which carry passengers within a radius of approximately 50kilometres of Harare and some of the routes included to and/fro such towns as Chitungwiza, Machipisa,Borrowdale, Mount Pleasant, Kuwadzana, Budiriro, Domboshava, Marondera, and Norton, among others.There are a number of reasons why such a detailed analysis is important in the case of commuter omnibusoperations in Zimbabwe:

• An evidence based understanding of the level of police roadblock corruption is fundamental for anyradical step to be taken to eradicate this cancerous behaviour if the sector is to become an effectiveeconomic activity.

• Actions and policies to eliminate police roadblock corruption will be highly beneficial if they aretargeted to the most part of the force which practices this behaviour.

Number of police roadblocks and associated stopsOn a daily basis, Table 2 shows that kombis are expected to pass through five police roadblocks on each oneway trip (i.e., when going into Harare or when coming out of Harare). Data also indicates that, on average,the commuter omnibuses are normally stopped five times along their respective routes in one direction.Overall, these police roadblocks and stoppages represent wasted time, and as such this implies unnecessarycosts to the kombi’s optimal operations.

Common crimes and expected bribesAbout 51 percent of the interviewed kombi crews (drivers and/or conductors) indicated that at the majorityof police roadblocks, the common crime which they were allegedly to have committed was passenger overload,whereby there found carrying more than 15 passengers. 28 percent of the interviewees said that the secondcommon crime on the roadblock which was usually levelled against them was that their kombis had notgone for routine mechanical retests. Inability to provide the authorized permit on a given route to the policemanning the roadblock was also considered one of the major crime at the roadblock and this was indicatedby nine percent of the respondents.

Fines and police bribesThe average formal and receipted police roadblock spot fine for most of the common crimes indicatedabove is $20. Given that this figure is relatively high, the kombi crew are enticed to pay an informal payment

A. Makochekanwa


Characteristic Percentage of total

Does consequence affect daily takings?Yes 87No 3

Does wner understand that daily taking can be affected bypolice roadblocks?Yes 89No 9

Does owner allow daily taking to be less than target due topolice roadblocks?Yes 68No 22

Specific names for informal payment to police atroadblocksTollgateKutonyora/mutonyoSeiko-seikoCrawa/kirawaDhosvoChebasaChadonhaMufanawenyuWhatsupBribesYekuoraCorruption/huori

to the police officer if they cannot afford to pay the formal fine. In an effort to entice the ‘culprit’, the policeofficer asks for an informal payment well below the formal fine. As of February 2015, the average informal(bribe) payment given to a police officer at roadblock was $8. This bribe payment is not receipted, butpocketed by the police officer (who will later share with his/her roadblock team). The majority of respondents,56 percent, indicated that they normally pay the informal payment, compared to the 44 percent who saidthey pay the formal fine. Thus, in general, majority of kombi crew pay informal bribes to police at roadblocks,the money which will be converted to private use by the police manning the roadblock, with nothing ofbribe money contributing towards government revenue.

Number of payments at roadblocksAlthough most kombis are stopped five times on each one-way trip, they are however expected to pay theinformal payment to police manning roadblock once per day. The system is coordinated in such a way thatthe police at all the roadblocks along a given route will be aware of their counterparts who will be manningother roadblocks along the route. As such, once a kombi paid their daily informal payment say at roadblock‘A’, the police officer at point ‘A’ will communicate with other police officers in the other roadblocks alongthat route that a given kombi has paid its daily ‘dues’. Some of the common ways in which a given kombiwhich has paid its informal bribe for the day can be recognised include use of secret number plates, codeand facial recognition.

Table 2: Characteristics of police roadblocks

Characteristic Averages

No. of police roadblocks/day 5No. of stops at police roadblocks/day 5Fine charged for common crime $20Expected daily informal (bribe) payment to police $8No. of times expected to pay informal paymentper day 1Daily takings with punishment for refusal topay roadblock police bribe $47

Percentage of total

Common crimesExcess/Overload 51Retest 28Permit/Route 9

Payment of official fineYes 44No 56

Ways of recognising that one has paid roadblock bribe forthe dayNumber plate 44Code 14Face 10

Punishment for refusal to pay police bribeImpounding of kombi 62Ticket/fine 11Arrested 3Asked to drop passengers 8

Source: Author using survey data



Consequence for refusing to pay roadblock police bribeInterviewed respondents indicated that, when one refuses to pay the bribe, there will be consequences. Atotal of 62 percent of interviewed kombi crew said that the police manning the roadblock will impound thekombi if one refuses to pay, while 11 percent of respondents said the police officer will issue the driver witha formal fine ticket. The third common consequence is that the kombi crew will be asked to drop off thepassengers and park at the roadblock for at least an hour. In extreme cases, refusal to pay bribe may result inthe arrest of the kombi driver. All these consequences have the negative impact of reducing daily roundtrips, and eventually result in reduced daily revenue takings. Specifically, 87 percent of interviewees saidthat the punishment instituted by roadblock police when one refuses to pay a bribe will reduce their dailytakings, while only three percent said the consequences does not affect their daily takings.

Specific names given to police roadblock bribesPolice roadblock bribes have become a well known system in Zimbabwean roads to such an extent thatspecific names for such payments have emerged over time. These names are mostly known by kombi crewsand whenever they are stopped at any police roadblock, and when they hear a police officer saying any ofsuch names, the crew will automatically handover the informal payment, and avoid any delay. The nameshowever vary from one route to another, but the common names include: tollgate, kutonyora (mutonyo),crawa (kirawa), dhosvo, chadonha, mufanawenyu, whatsup, bribe, yekuora and corruption/huori, among others.

4.1.3 Basic characteristics of kombi operationsThis sub-section provides basic characteristics of kombi operations for routes into and out of Harare. Table3 provides some of the main features of kombi operations.

Operating timesOn average, most kombis start ferrying passengers from as early as 05:17hrs on each day of the week andnormally stop operations around 20:00hrs. Outside the average times, some kombis start operating as earlyas 04:00hrs and some close business as late as 23:00hrs. These times depend on the routes, with routesgoing to high density suburbs (where the majority resides) being the ones where they start very early andend very late. On average, most kombis will be on the road 14 hours each day of the week and are normallyable to complete six round trips per day.

Table 3: Characteristics of kombi operations

Averages

Starting time 05:17hrs

Ending time 20:00hrs

Average time on road 14:00 hours

Daily round trips 6

Route fare/passenger $1

Daily (normal) target required by owner $72

Daily (Friday/monthend) target required by owner $80

Passenger per trip 18

Daily takings actually collected $132

Daily profits pocket by driver & conductor $60

A. Makochekanwa


Table 3: Characteristics of kombi operations

Percentage of total

Daily target differs for Fridays and monthendYes 45No 50For daily takings shortfall, the driver will…Cash what he managed to collect 56Top up from his pocket 5Get his pay deducted 15Pay next day 3

One-way passenger faire and required daily targetGiven that most of the routes into and out of Harare are less than 50 kilometres, the average one-way fare is$1. On normal days, the kombi owner requires the kombi crew to hand over $72 from daily takings, andthis target increases to $80 during month end and/or Fridays when there are many people travelling intoand out of Harare. In the event that the daily target was missed, the majority of respondents (56%) said theowner would allow the crew to cash (hand over) whatever amount they would have collected that day.However, cashing an amount which was below daily target was considered a rare situation, and not thenorm. With some owners, missing a daily target resulted in the crew either asked to top from their pockets,or top up the next day, and sometimes the owner will deducted from the crew’s monthly/weekly salaries.

Daily takings and profits pocketed by kombi crewAlthough on a daily basis the kombi crew are required to hand over $72 to the owner, the daily target ishowever different from the actual daily takings. On average, most kombis collect around $132 from thepassengers they ferry and when they subtract the required $72, they end up with profits of around $60which they pocket. In kombi business, the normal arrangement between the crew and owner is that thelatter set the daily target, and once that is remitted, the remainder will eventually be taken by the crew. Thus,with daily profits of $60, the crew is motivated to be longer on the road and make as much trips as possible.This also explains why the majority of the crew will be willing to pay roadblock police bribes to avoid beingstopped or having their vehicle impounded.

4.1.4 Regression resultsThis part of the study presents the results from regression estimations. Table 4 provides the results of theregression model. The choice of the explanatory variables is influenced by three factors namely, previousstudies on the subject area, and secondly, suitability and availability of data variables from the surveyconducted by the author. Lastly, variable selection was informed by the descriptive analysis provided inprevious section.

Table 4: Viability of kombi operations (Dependent variable: Daily takings)

Variable Coefficient Std. Error t-Statistic Prob.

lnrblocks 0.044 0.068 0.64 0.52lnprofits 0.052*** 0.018 2.86 0.005lnbribes 0.005 0.021 0.256 0.798lnfare 0.085*** 0.022 3.87 0.000lnstops -0.006 0.066 -0.089 0.929lntrips 0.063*** 0.022 2.91 0.004Constant 3.90*** 0.093 41.54 0.000Obs 188Adjusted-R2 0.56

Key: [*], [**] and [***} significant at 10%, 5% and 1% respectively.

Source: Author simulations



The results in Table 4 show that three out of the six variables used in the model are statistically significant at1% level of significance. It is also interesting to note that all the variables do have expected theoretical signs.The findings of the study indicate that profits pocketed by kombi crew (lnprofits) are an important factordetermining profitability of kombis. A one percent increase in profits collected by kombi crew results in thekombi daily takings increasing by 0.052%. This result makes economic sense given that kombi crew aremotivated to remain on the road when the extra profits they collect (over and above their wages/salaries)are higher.

Tabulated results show a positive and significant relationship between kombi fare (lnfaire) and daily takingsof kombis. Specifically, a 1% increase in kombi fare will result in a 0.085% increase in daily takings for agiven kombi. In this instance, as the fare charged per given trip increases, ceteris paribus, the total dailytakings per given route will also increase. This has an overall positive effect on the viability of kombioperations.

The results show that the more the number of round trips completed per day, the more the daily takings fora given route2. A 1% increase in number of round trips (lntrips) will result in 0.063% increase in the dailytakings for a given kombi.

The three variables which have been found to be statistically insignificant are the number of roadblocks(lnrblocks), bribe paid (lnbribes) and number of roadblock stops (lnstops) in a given route. Although thenumber of roadblocks variable, lnrblocks, has an unexpected sign, the other two variables have their respectiveexpected signs. Whilst paying bribes ensure reduced stoppages at roadblocks along a given route, resultingin more daily takings, the variable is however not statistically significant. Number of police roadblock stopsalong a given route negatively affects daily takings, although the variable is not statistically significant.

5. CONCLUSIONS AND POLICY RECOMMENDATIONS5.1 ConclusionsThe study tested the “grease the wheels” hypothesis at a micro level. Using survey data from 188 kombidrivers and/or conductors (i.e., the kombi crew) which was collected in the two months of January andFebruary 2015, the paper employed an econometric model to achieve its stated objective.

In an empirical model where the dependent variable was daily takings, the regression results show thatthree out of the six variables used in the model are statistically significant at 1% level of significance. Thefindings of the study indicate that profits pocketed by kombi crew (i.e., drivers and conductors) (lnprofits)are an important factor determining profitability of kombis. This result makes economic sense given thatthe kombi crew are motivated to remain on the road when the extra profits they collect (over and abovetheir wages/salaries) are higher. A positive and significant relationship between kombi fare (lnfaire) anddaily takings of kombis was also found by this study. In this instance, as the fare charged per given tripincreases, ceteris paribus, the total daily takings per given route will also increase. This has an overall positiveeffect on the viability of kombi operations. Lastly, the study found out that the more the number of roundtrips completed per day, the more the daily takings for a given route.

The three variables which have been found to be statistically insignificant are the number of roadblocks(lnrblocks), bribe paid (lnbribes) and number of roadblock stops (lnstops) in a given route. Although thenumber of roadblocks variable, lnrblocks, has an unexpected sign, the other two variables have their respectiveexpected signs. Whilst paying bribes ensures reduced stoppages at roadblocks along a given route, resultingin more daily takings, the variable is however not statistically significant. Number of police roadblock stopsalong a given route negatively affects daily takings, although the variable is not statistically significant.

2 It is assumed that the kombi will be full to the legal maximum number of passenger for each trip.

A. Makochekanwa


5.2 Policy recommendationsAlthough the number of police roadblock stops along a given route has been found to be insignificant inaffecting the daily takings, the government is however recommended to reduce the number of roadblocks toensure smooth flow of traffic within the country.

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Bardhan, P. J. 2003. ‘Corruption and development: A review of issues’, in Journal of Economic Literature, 35: 1320–1346.

Bardhan, P. 1997. ‘Corruption and development: A review of the issues. Journal of

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https://www.tni.org/files/download/power_and_corruption_paper.pdf

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Hardoon, D. and Heinrich, F. 2011. ‘Daily lives and corruption: Public opinion in Zimbabwe’. Transparency International Report

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ANNEX 1: POLICE CORRUPTION IN THE MEDIABox 1: Minimise police roadblocks

EDITOR — I’m a commuter omnibus driver plying the City-Epworth route daily and am worried by the conduct of police onthis route (Chiremba Road). It’s only a small stretch of a few kilometres yet you usually find no less than four to fiveroadblocks yet other bigger routes like the City-Glen Norah one have fewer roadblocks, why?

Usually, there is a roadblock near Domboramwari Police Station, then Hatfield Police Station, later the highway police andthe “BMW crew” therefore I beg to ask the police authorities if is this normal?

Fine, we have no problem with the police presence on our roads and we can pay fines if we are at fault but why do thesedifferent groups of police officers refuse to accept a ticket from a previous roadblock on the same road? They simply giveyou another. Is this legal?

And now that the law of the country has spoken about the illegality of spot fines, why is police refusing to observe the law?By the way, where are the anti-corruption units when we are being fleeced daily on these roads?

Tired Driver

The Daily News, 20 February 2015

http://www.dailynews.co.zw/articles/2015/02/20/minimise-police-roadblocks.

Box 2: Example of police roadblock bribe outcome

National Police spokesperson Senior Assistant Commissioner …yesterday said police had launched an investigation intothe case where traffic cops nearly lost about $2,000 stolen money, to a 10-year-old girl…. The money, believed to have beenpart of bribe loot from motorists, was found in a rubbish pit near a roadblock in Beatrice by the 10-year-old scavenging forvaluables along the highway last month.

Details surrounding the incident are that the cops were, on December 24 [2013], manning a roadblock along the Harare-Masvingo road near Gilston Farm, some 40 km outside Harare when they hid the $2 000 loot in a rubbish pit nearby. The 10-year-old discovered the $2 000 loot stashed in a plastic bag with wild fruit (matufu) and gave it to her mother.

Traffic police officers are not allowed to carry personal cash while on duty and are subjected to random spot checks by theirsuperiors and the Anti-Corruption Commission in a bid to curb cases of bribery.

https://www.newsday.co.zw/2014/01/10/roadblock-loot-drama-latest/

Box 3: Judge bemoans corruption on Zimbabwe’s roadblocks

Justice Bere said the police were “cursed” if it was true that the force was superintending co-ordinate collection of “securityfees” to give commuter omnibus drivers free passage at roadblocks. “Quite often, one hers of more illegal collection whichare being made by the police” he said “There is talk of well coordinated collections of security fees on our public roads,particularly from commuter omnibuses, which fees are meant to give commuter free and unhindered passage at the roadblocks

“If it is true, then the department (police) is surely cursed. How can a nation continue to condone such malpractice whichcreates a breeding ground for corruption?

“We talk of determination for the need to rid this country of corruption. How can we achieve this when we allow our policeofficers to conduct themselves in such a corrupt manner? My view is that all these issues must be seriously looked at andcorrective action be taken without further delays”. The Herald (10th February 2015). “Spot fines illegal: High court judge”.Available at:

http://www.herald.co.zw/spot-fines-illegal-high-court-judge/

T. Mashamba


Real options valuation: The modern day technique in capitalbudgeting and decision-making?

Tafirei MashambaGreat Zimbabwe University

ABSTRACTOver the years, the discounted cash flow approach (DCF) has been the valuation techniquechoice of many practitioners, academics and corporate finance managers. Such valuationtechniques include the NPV, IRR and Payback. These techniques are widely employed due totheir intuition and easy computation. However, these techniques do not tell us what to donext after accepting or rejecting a project. The shortcomings of DCF models are addressedby the Real Option Valuation (ROV). The ROV approach takes into account the stochasticnature of underlying project drivers (such as sales volume and the selling price) andmanagerial flexibility. This study sought to test the applicability of the real options to valuemanagerial flexibility. Precisely, this paper sought to determine whether ROV serve as adjunctto the existing DCF techniques, or replaces the existing capital budgeting techniques inemerging markets like Zimbabwe. Two embedded options were identified, namely theabandonment and expansion option. The study found out that apart from DCF valuationtechniques being currently employed by the firm, they can as well incorporate Real OptionsAnalysis to decision making because if accurately valued and timeously executed, real optionsdo add firm value.

Key words: Capital Budgeting, Real Options, Discounted Cashflow, Binomial Option Pricing

1. INTRODUCTIONProject valuation is taken to be one of the fundamental aspects of investment selection and decision makingbecause managers are always faced with the dilemma of allocating scarce financial resources. The allocationis both a strategic and a financial task because they have to choose among the various projects identified,one that maximise shareholder value. If they choose a project with poor prospects in the future, they wouldhave destroyed shareholder value. The ideal project is the one whose net revenues during the productionphase are higher than the initial investment cost (Gumbo, 2009).

Several techniques are used by managers to value projects. Over the years, managers have been relying onstatic DCF techniques such as the NPV, IRR and Pay Back. With the DCF approach, the NPV of a project isdetermined by discounting the future cash flows at the risk-adjusted discount rate. In most cases, the risk-adjusted discount rate is the firm’s WACC, assuming that the firm and the project have the same marketrisks (Brandao et al, 2005). However, as noted by Guthrie (2009), these techniques do not incorporatemanagerial flexibility. This flexibility in capital budgeting and decision making is known as “Real Options”.Managerial flexibility gives managers the freedom to alter the course of the project as new informationfilters in.

The concept of “Real Options” was first discussed by Professor Myers in his (1977) seminal publication.Professor Myers argues that a firm’s investment opportunities can be observed as call options on real assets.In his 1977 persuasive presentation, Myers pointed out the shortcomings of DCF techniques and analysedthe significance of a company’s policy in the capital budgeting practices. Professor Myers is of the opinionthat firms should make investments based on Real Option analysis rather than traditional DCF techniques.This view is shared by Guthrie (2009) who observed that real option analysis give managers the ability tovalue projects in such a way that recognises their flexibility. Following this noble submission by Myers,several academics have taken it as their task to validate his proposition. Among the great contributors to thetopic have been Borison (1985), Trigeorgis (1996), Majd & Pindyck (1989), and Kulatilaka (1993).

Real Options have mainly been applied to the area of natural resources largely because they are traded;hence they offer the opportunity for arbitrage (Damodaran, 1996). Several scholars such as (Keser (1984),

Real options valuation: The modern day technique in capital budgeting and decision-making?


Kulatilaka & Marks (1988), Quigg (1993), Capozza & Sick (1994) and Nichols (1994)) have hailed theadoption of the Real Option methodology.

Regrettably, progress on the implementation of Real Options methodology to the steel industry in Zimbabweis very slow, if ever it exists, despite their wide acceptance and recognition. The goal of this paper is to testthe applicability of the BOPM to value managerial flexibility. The objective is to show that this technique(ROV) may serve as adjunct to the existing DCF techniques, not to replace the existing capital budgetingtechniques. The study seeks to make meaningful contribution to the body of knowledge by illustrating theapplicability of ROV technique to value managerial flexibility in the steel industry, where to date empiricalevidence in the area is scanty.

The rest of the study is organised as follows. Section 2 looks at Literature related to the subject under discussion,both theoretic and anecdotal. Section 3 highlights the research methodology. It describes the model, itsassumptions, input variables and justification of such a model. Section 4 provides an analysis andinterpretation of the data. After having made all the computations in Excel, such findings needed to bediscussed and recommendations made, where appropriate. This was done in Section 5. This section alsorecommended areas of further research.

2. LITERATURE REVIEW2.1 Evolution of Real Option MethodologyThe concept of option pricing is assumed to have started at the end of the 19th Century (Chvalkovska &Hruby, 2000). In 1877, Castelli made the first publication of a book concerning the option pricing and itsrelation to price volatility and the possibility of using options in bond arbitrage and stock exchanges. Bachelier,in 1900, explored the key mathematical principles of option pricing. His findings was the application ofarithmetic Brownian Motion on price movement modelling, which forms the basis of contingent claimsvaluation. However, his works were not widely accepted and recognised because of its too much orientationtowards mathematics of finance and being too complicated for financial economics (Courtault et al, 2000).

The continuous time random walk model was later reintroduced by Paul Samuelson in the 1950s, however,with modification from arithmetic to Geometric Brownian Model (GBM) (McKenzie, 2003). Kassouf &Thorp (1965) further developed the model to illustrate the associationship of warrant prices and theunderlying. They later on applied the theory in actual stock trading, deriving the delta-neutral hedge ratiosto create perfectly hedged portfolios on stocks and bonds, making huge amounts of money. Later on, Merton1973, Black & Scholes 1972, developed the most fascinating theory of contingency claim valuation basedon Brownian motion popularly known as the Black Scholes Option Pricing Model (BSOPM). This modelmarked a new era in the pricing of financial instruments and in 1977, Scholes and Merton were honouredfor their great works through the accordance of the Nobel Prize for Economics. Unfortunately, Black hadpassed away (Chvalkovska & Hruby, 2000).

Professor Myers (1977) noted that the option pricing theory concept could be extended to the pricing ofcorporate and project investments. Later, in his 1984 article, he suggested that the real option methodologyhas the ability to cover the wide gap concerning strategic planning and finance. In his own words, Myers(1984) argues, “Strategic planning needs finance. Present Value calculations are needed as a check on strategicanalysis and vice versa.....Corporate finance theory requires extension to deal with real options.” In thesame article, Professor Myers indicated that deterministic DCF models have both advantages and shortcomingsin project valuation. He highlighted the various shortcomings of DCF techniques and suggested the use ofthe famous BSOPM, to address these shortcomings. Hayes & Abernathy (1980) quoted in (Gui, 2011), alsorecognised that traditional valuation methods are insufficient to capture the value embedded in real options.

Trigeorgis (1987) has made enormous contributions to the real options panacea. His contributions havebeen through developing real options models and his research efforts were towards the subject area. Thestudies of Copeland et al (2000) and Amran & Kulatilaka (1999) have also made key contributions andmade inroads into the Real Options research. Today, the option pricing theory is being applied in many

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areas including R&D, Airlines, Manufacturing, and Biotech etc. The penetration of the option theory intothese fields was facilitated by Cox, Ross and Rubeinstein in 1979, who simplified the model. The Cox et al(1979) model applies to discrete time periods.

Early work on the application is found in the pricing of oil prospects by Paddock (1988), Siegel and Smith(1988). Since then, Real Options have been applied to different sectors of the economy (Kogut & Kulatilaka,2004). The broader concepts of Real Options theory began with the inclusion of the technique in the textbookof Brealey & Myers (1983), who demonstrated its use in Research & Development investments. Ross (1978)examined risky projects and identified inherent investment opportunities in these projects as Real Options.Trigeorgis (1993) outlined the several categories of Real Option according to flexibility differences:abandonment option, staged investment option, switching option, growth options, interacting options,and options to alter operating scale. Mun (2002) also provides a comprehensive list of Real Options that areapplicable to industry using day to day terminology.

2.2 Empirical LiteratureTo date, research indicates that Real Options are gradually being incorporated into capital budgeting anddecision making process of many industries. This has been the case because Real Options are able to capturemanagement flexibility and uncertainty. Flexibility brings a number of actions management may take, toadd value to the firm. This flexibility, as noted by Muharam (2010), comes in different forms mainly; deferral/waiting options, altering options, switching options, growth/expansion options, abandoning or shuttingdown options. Philippe (2005) noted that much of the research on RO applicability has been in the area ofnatural resources. This is largely because natural resources are traded commodities, thus making themappropriate for arbitrage reasoning.

The deferral option is mostly considered in the field of gas and oil exploration (He, 2007). According toBrach (2003), this option gets its price from reduced uncertainty that arise from the postponement of theproject until further information filters in. Amran & Kulatilaka (1999) also observed that investing laterpreserves the time value of money. The pioneering paper in this regard, was the Paddock et al (1988)presentation. Paddock et al, developed a Real Option model to assess the value of an undeveloped oilreserve. The authors found an embedded option in the undeveloped field which is similar to a call optionthat is written on a stock that pays dividends. The proprietor of the undeveloped oil field has the right butnot the obligation to develop the field at a later date. If he does not exercise the option, he forgoes productionrevenue (i.e. the asset dividend). The developed reserve value is assumed to follow the Brownian motion.

McDonald & Siegel (1986) were the first to study the option to wait investing in a project. They assumedthat the project’s present value profits and causes the investment costs to be stochastic hence follow theGeometric Brownian Model. They allowed Project cash flows to jump to zero, thus they added a Poissonjump to the procedure. The authors examined the significance of the value to postpone an investment bysupposing that the company is keen to invest in a synthetic fuel plant which cannot be used for otherpurposes. They found that if the investment expenditure cannot be reversed, then the deferral option is trulyvaluable with an option premium of 10 to 30%. More so, Song (2006) laments that delaying may add valueto the firm if further information and changing conditions are incorporated into the decision making process.

However, Brach (2003) argues that the postponement value could be reduced by the value the firm establishesfrom a competitive position or a pre-emptive technique that does not require postponement. Damodaran(1996) also recognised a number of issues when using options theory to value real options. Firstly, he notedthat the underlying asset (the project) is not tradable. This makes it very hard to approximate its value andvariance. Secondly, the price path followed by project values may not follow the path of option pricingapproaches. He criticised the conjecture that project values pursue a diffusion process, and that variance isconstant for a considerable period. These suppositions may be hard to validate in real life projects. Thirdly,the timeframe for which the company has rights to the venture may perhaps be unstipulated due to the factthat rights to a venture are not legal restrictions; therefore, they can quickly diminish in value. Under theseconditions, the projected maturity time of the project will be indeterminate.



Studies on the topic continued and in 1990, Trigeorgis made an assessment of a multinational naturalresource venture. Despite the fact that the project had negative net present value, Trigeorgis recognised threeoptions using the Binary option pricing methodology namely delay, abandonment and conversion of scaleoptions. Trigeorgis opinion was that the project was worthy undertaking after considering real optionsimplanted in the projects.

In the same year, Myers & Majd (1990) studied the abandonment option. This option bestows the businessthe right but not the obligation to abort the venture if projected cash flows are less than the salvage value.Under these circumstances, the firm can choose to discontinue the project and get the disposal value. Myers& Majd (1990) present a firm with an option between production technology that has a secondary marketand another that does not have a secondary market due to equipment specialisation. Their work shows thatif production is halted before the machines are exhausted; the former machine is more valuable than thelatter because of the imbedded managerial flexibility. In addition, they observed that the option to abandonhas more value in industries that require high capital, financial services industry and new products that arebeing launched in new markets. In contrast, Damodaran (1996) did not observe this abandonment value.He reasons that the abandonment value is uncertain because it may shift during the life span of the venture,thus it becomes difficult to harness option pricing methodologies. Furthermore, it is likely that salvage fromterminating a project may not be realised, rather liquidation may actually be costly, and for example, thefirm may have to incur compensation to the retrenches, thus eating up any salvage value realised.

Grafstrom & Lundquist (2002), assessed whether the value of a North Sea oilfield varies depending onwhether Real Option valuation or Discounted Cash flow approach is employed. They developed a partialdifferential equation to price the option and solve it numerically, subject to set boundaries. Convenienceyield was estimated from market data applying relationships between futures and spot prices. The authorsestablished an option value of $56,720 million, which translates to a premium above the certainty equivalentvalue of nearly thirty seven percent. They concluded that managers need to supplement the Real Optionapproach with a discounted cash flow valuation.

These debates point out the significance of real options in capital appraisal decisions. However, in theZimbabwean context, work in this area is still scanty hence this study will seek to make contributions to theexisting body of knowledge.

3. RESEARCH METHODOLOGY3.1 Research DesignThis study uses the case study research paradigm, in line with the literature of Muharam (2010) and Trigeorgis(1996) to examine the applicability of real options to the steel industry in Zimbabwe. According to Zainal(2007), the case study approach enables us to get a rich understanding of the subject under study. Thechoice of the steel industry was based on significant uncertainty in steel prices and unpredictable demandfor the commodity. These factors make the steel industry to be a candidate for real option analysis (Ozorioet al, 2013).

3.2 The ModelThe paper adopts the Cox, Ross & Rubinstein (1979) – CRR- Binomial Option Pricing model (BOPM). Thebinomial model considers discrete time periods in which the asset price can either rise or fall. On maturity,the option price is given as its intrinsic value i.e.

Max [St – X, 0] for a Call

Max [X – St, 0] for a Put

Using backward alteration, we can work the option value backwards, starting with payoffs on maturity, suchthat we have:

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(1)

Where;

Vt is the option value at time t

is the option value at time t + ∆t given the underlying price at time t + ∆t goes up by a rate of u from

time t.

is the option value at time t + ∆t given that the underlying price at time t + ∆t goes down by a rate

of d from time t.

It is worth to note that as ∆t→0, the Binomial method approaches the BSOPM value.

For American options, a decision has to be made in each time period, whether to exercise the optionimmediately (thus killing it) or else keep it alive (waiting). This choice according to CRR (1979) is determinedby;

3.5

Adopting the CRR (1979) model the general valuation for a call for any number of periods (n) can bewritten as:

(2)

For a put;

(3)

3.3 Model InputsThis case study assumed American options (which can be exercised anytime) on the Ophir Steel (actualname withheld for ethical reasons) in Masvingo-Zimbabwe. The options of my interest were;

• Abandonment and

• The Expansion option

To obtain the value of each option the researcher gathered the following input parameters;

3.3.1 Time to maturity (T)Ophir Steel, Masvingo subsidiary reopened on the 18th May 2012, after shutting down at the height of theeconomic meltdown, in 2008. The current production is expected to run for 9 years, when the owners of thefirm expect to recoup their initial investment, hence the tenure of the abandonment option is 9 years.

3.3.2 The Exercise price (X)This is derived from the current funding put up to resume operations. From the data provided by the company,they injected US$16 million, hence X = $16 million.



3.3.3 The current value of the underlying asset (S)This is the NPV of the investment at today’s expectation of production output and sponge iron price beingfetched on the world markets. The NPV is determined using the following input parameters.

• Annual volume of sponge iron produced. The firm intends to produce 54 000 tons annually for thenext 5 years, and then increase output by 25% annually. They also have the option to double outputafter the same period (5 years).1

• Sponge iron price, as driven by forces of supply and demand to be at a constant $250 per ton.

• Depreciation of Fixed Assets is estimated at $100,000,00.2

• The discount rate. The firm’s borrowing cost was used as the discount rate for calculating the currentvalue of the investment, and was estimated at 20%3. With these input parameters the current value ofthe project was US$-7,574,121,58.

3.3.4 Volatility of the underlying asset (σσσσσ)The logarithmic cash flow returns approach described by Mun (2002:227) was used to calculate the volatilityof the firm’s future cash flow returns and their respective logarithmic results for the period 2012 to 2016.This formula used was:

Volatility (σ) = (4)

This was estimated to be 14,03%.

3.3.5 Risk free interest rateThis was taken to be the average yield on government paper.

3.4 Data AnalysisOption prices and lattices are calculated and illustrated using MS Excel and Spreadsheets designed by Gumbo(2009). NPV computations were done on a simple spreadsheet template that the researcher designed.Sensitivity analysis was also performed on a simple spreadsheet that we developed to show how the RealOption Values and Discounted Cashflow values changes as input parameters are altered.

4. RESULTS AND ANALYSIS OF RESULTS4.1 DCF Valuation4.1.1 Traditional NPV without flexibilityUsing the data provided by the company, an NPV of -$7,574,121,50 was derived.

According to the NPV criterion, projects with NPV less than zero are not worth venturing into. As such, thisproject should be abandoned immediately as it destroys shareholders’ value. However, as earlier discussed,the NPV criterion only tells us whether to accept or reject the project with no further course of action.

1 The author used the first production estimates to value the abandonment option where production will be constant for 5 years then riseby 25% annually. These are the values they used to estimate future cashflows assuming normal operations.The firm expects, provided the operating environment permits to double output in the same period. I then assumed this to be the Expansionoption available to the firm.

2 As provided by the firm.3 As provided by the firm.

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In determining the NPV value, three important assumptions were made:

º The plant will operate at full capacity, and all the sponge iron produced will be sold.

• The price is constant and will not move during the life of the project i.e. it remains $250,00

• A discount rate of 20%.

BUT,

• Is it realistic to operate at full capacity and sell all the sponge iron produced?

• Is it realistic that sponge ore prices will remain fixed?

• The choice of the discount is always subject to debate since there is no way to prove that it is therealistic hurdle rate for the firm.

Even if there are impractical assumptions made in the NPV approach, the method still gives us a yardstick toassess the value embedded in real options.

4.1.2 Traditional IRRThe project’s IRR was estimated to be 6,11%. This rate is below the WACC, therefore, such an investment isnot worth undertaking as it offers shareholders a return far below their expectation on their committedresources. As in the NPV analysis, the IRR does not give us further decisions. Table 1 provides a summary ofDCF values

Table 1: DCF Values

Methodology Value Decision

NPV -$7,574,121,00 Reject the project

IRR 6,11% Reject the project

As shown in the above table and discussed above, the current project should be abandoned immediately asit does not bring any wealth to the shareholders.

4.2 Real Options ValuationAs discussed in the preceding chapter, two Real Options were identified for this project, namely the expansionand abandonment option. To value the options, the Binomial Option Pricing Model built on a simplespreadsheet was applied and used the following input parameters, to work out the value of the options.

Table 2: Summarised Input Variables

Variable Symbol Abandonment Option Expansion Option

Project Life Span (Years) T 9 4

Initial Investment Cost X $16,000,000 $10,000,000

Present Value of Current Project Cashflows S $9,447,936,53 $9,576,393,36

Risk Free Interest rate Rf 10,67% 10,67%

Volatility of Future Cashflows ∆∆∆∆∆ 14,07% 25,9%

4.2.1 Expansion OptionIn order to increase production to the maximum level in line with Kyoto Protocol on environmental pollution,the firm plans to commit additional resources to the tune of US$10 million dollars in year 6. With that, the



additional investment output is expected to double i.e. increase by 100%. This Expansion option wascalculated as a European Call option. The value of the option was estimated to be $13,088,000 and theresultant Flexibility value (NPV due to expansion) was valued at $3,511,606,64. The option payoffs are thefigures in bottom cells e.g. ($17,760,586; $8,605,952) in the lattice tree. The detailed lattice tree is shown inAppendix 1. The payoffs were derived by equation 3.4. For example, the payoff of $17,760,586,00 wasderived as the Max[NPV of expansion, Option value] which turned out to be theMax[$9.152787.00,$17,760,586,00].

The Real Option theory states that; if

Option Value > Current NPV Exercise the option

Option Value < Current NPV Do not exercise the option

In this case, the NPV of expansion now, was $9,152,787,00 and the Binomial Option value was $13,088,000.In this case, the firm should exercise the option to expand by committing an additional $10,000,000,00 inYear 6 for favourable cash flows beyond 2017. If they do not commit the additional resources in future, theycannot capture the upside potential to be brought by the perceived surge in demand.

These findings concur with Muharam (2010) and Gui (2011). Muharam derived an expansion option valueof ¤3.22 million from a project with an initial NPV of ¤-0.56 million, after the firm had committed anadditional ¤5.212 million in the fourth year of operation. The Expanded NPV was ¤2,66 million. On theother hand, Gui carried out a Case Study of Nike when it opened the Beijing flagship. For a project with anNPV of $1,6 million, it had an embedded expansion option value of $2,06 million.

4.2.2 Abandonment OptionThe abandonment option for salvage value was priced as an American Put on the current project. Thevaluation of this abandonment option largely depends on the salvage value, which represents the exerciseprice (X).

Given the above data (in Section 3), the firm’s abandonment option was estimated to be $16,434,693,00and a corresponding NPV due to abandonment of $434,693,00. The option payoffs are the figures in bottomcells e.g. ($16,434,693) in the lattice tree (Appendix 2). Values in red show the option payoffs e.g.$16,434,693,00. This value was derived as the Max [Salvage Value, Call Value] i.e. theMax[$16.434.693.00,$17.760.586.00].

Pursuant to the Real Option theory, if

Present Value of Cashflows < Salvage Value Abandon the project

Present Value of Cashflows > Salvage Value Do not abandon the project

From these results above, the firm should immediately abandon the project and enjoy a salvage value of$16,434,693,00. This is because the present value of future cash flows is far less than the terminal value ofthe project as a result of output prices falling below profitable rates.

Such results were also obtained by Muharam (2010). She applied the Real Option concept to a project withan initial negative NPV of ¤-0.56 million, a salvage value of ¤6.5 million and derived an option value of¤1.84 million with an ENPV of ¤1.28.

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The option values presented above are shown in the table below.

Table 3: Summary of Option Values and corresponding flexible value

Base Case

S = $9,447,936,53 X = $16,000,000,00 Salvage Value = $4,500441,39 Life, T = 9

NPV = -$7,574,121,58 Volatility = 14,03% Risk free interest rate = 10,67%

NPV due to Abandonment = Option Value – Initial Investment (X)

NPV due to Expansion = Option Value – Present Value of Cashflows (S)

Option Type Option Value Flexibility Value

Expansion $13,088,000,00 $3,511,606,64

Abandonment $16,434,693,00 $434,693,00

4.3 Summary of DCF and Real Option ValuesThe results discussed above of DCF and ROV methodologies are presented here for quick analysis.

Table 4: Summary of DCF and Real Option values

Real Options Analysis

NPV IRR Abandon Expand

Value -$7,574,121,00 6.11% $16,434,693,00 $13,088,000,00

Flexible Value N/A N/A $434,693,00 $3,511,607,00

Decision Reject Reject Abandon Now Expand

Using only DCF valuation techniques, the firm should abandon the project immediately as it destroysshareholder value. However, if Real Options implanted in the venture are analysed, managers have a thirdchoice to make. In the case above, managers can exercise the abandonment option by fore going the projecttoday and enjoy a salvage value of $16,434,693,00. If they are optimistic about future demand, they canexercise the flexibility of expanding output to maximum capacity in line with the Kyoto protocol onenvironmental pollution.

These findings highlight the major shortcomings of traditional DCF techniques which are addressed by RealOptions namely;

• Inability to account for the stochastic nature of important parameters e.g. selling price and outputwhich derive revenues.

• Does not incorporate flexibility which managers can exercise during the course of the project.

This leads us to analyse the main advantages of Real options over static DCF models.

1. FlexibilityAccording to Karamitos (2009), managers can change the course of the project in reaction to fluctuatingmarket conditions.

2. TimingBoth Karamitos (2009) and Dalal (2005) identified that real Options can take into account the impactof timing in a project. The option to wait or expand or abandon, derived from Real Option Valuationcan really add considerable value to a project.



3. Large projects valuationGui (2011) find out that for high investment/high risk-return (HI/HRR) such as the steel industry, RealOptions are very useful to value such projects. As supported by Dalal (2005), DCF techniques werefound to be inadequate to make investment decision.

4. Does not incorporate the discount rateOne of the assumptions of the NPV calculation is that the discount rate used for present value calculationsis accurate and the same for all projects. But in reality, this discount rate is difficult to assign a valueDamodaran (1996). Projects carry different risks, so the choice of the discount rate should be alignedto the project’s risk. On the contrary, Karamitos (2009) hails the Real Option methodology because itdoes not incorporate WACC (discount rate) in its calculation. The only problem of the discount rate toReal Options regards the input variables such as the NPV derived from static DCF valuation.

4.4 Analysis of ResultsApplying the Binomial Option Model, the study found out that the firm has two options embedded in thecurrent project namely; the abandonment and expansion options. The results showed the flexibility valuethat could be created by Real Options application. These results demonstrate that Real Options can bemeaningfully applied to the steel industry. In addition to DCF valuation, managers should also look at RealOptions that they currently have and incorporate them into their capital budgeting and decision makingprocess to make better valuations.

These results are consistent with the findings of Muharam (2010) and Gui (2011). Muharam (2010) identifiedfour Real Options embedded in a steel plant in India; namely the deferral, cancellation during construction,expansion and abandonment option. She found out that Real Option Valuation provides managers with aframework for allocating scarce resources, contributing to SMEs strategic management.

Although Real Options add considerable value to a project, they suffer from the following shortcomings.First, as discussed in the work of (Mun (2002), Dalal (2005), Karamitos (2009)) closed form solutions suchas the Black Scholes Option Pricing Model and Simulation are quite complex for managers. Managers canbe scared to adopt such methodologies. Secondly, though the Binomial Option Model is quite user friendlyand intuitive, its computation can become bushy and tedious. Wang (2003) argued that, as the lattice treebecomes very big, there is no cross checking mechanisms to check if the tree is built correctly. Third, oneneeds to devout his time and have the ability to work on minor detail to make Real Option Analysismeaningful Dalal (2005).

Above all, the merits of adopting Real Options should always outweigh the cost of obtaining the benefits, tojustify its adoption.

5.0 CONCLUSION AND RECOMMENDATIONSThe Real Option methodology has proved that it can be effectively used as a supplement to DCF valuationin valuing investments with a lot of uncertainty and requiring huge initial investments. The NPV approachworks well in mature and stable growth industries.

Traditional DCF can be viewed as a special case of ROA in the event there is little or no uncertainty. Whenthe underlying asset’s standard deviation approaches zero, the ROV approaches zero and the project’s valueis defined by a DCF model. Real Options only work in economies that have a high degree of uncertainty andmanagement has the flexibility to alter the project’s course. The NPV is negatively associated to the degree ofrisk in a project because the risk is embodied in higher discount rate (WACC). However, in Real Optionsanalysis the higher the risk, the higher the return. Quoting Mr. P. Knight (the Nike co-founder of Nike), Gui(2011) observed that managers continuously seek new ways to evaluate investments to improve resourceallocation. The Real Options concept is available for such managers.

Although Real Options have not yet been widely accepted as a complimentary tool to DCF valuation, theresults of this research suggest that Real Options will become a valuation tool of choice tomorrow. Although

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managers at first resisted the adoption of DCF valuation in the past, they gradually understood it and todayit is employed widely. A survey by Baker et al (2001) in Canada and Palka & Knapkova4 in Czechoslovakia,showed that Real Options are gradually being incorporated into capital budgeting techniques of manycompanies.

Basing on the research findings, the following recommendations were made:

First, to make the Real Options concept a reality and widely accepted, more literature on the topic must beincluded in the curriculum of MBA, Msc/MCom students in universities. Some of the students are managersand some will become managers tomorrow and equipping them with the framework theoretical thinking ofReal Options, makes the approach easy to introduce. An interesting survey conducted in India showed thatabout 80% of the stock market players are college leavers who would have received a teaching on the topic.Second, with the advent of powerful software such as PDL, RISKOPTIMIZER, DERIVAGem and Crystal Ball,valuation of Real Options is simplified. Managers should make use of these powerful tools. This will makepenetration of Real Option concepts to managers easier. Fourth, managers should accept methods thatprovide compelling value added propositions. Such approaches must provide managers with a comparativeadvantage over competitors. Fifth, for consultants to present and analyse the results to management can bevery trivial. This is because they assume Real Options to be “black boxes”. Start by comparing ROV techniquesand DCF valuation techniques. Then demonstrate the benefits of Real Options, without bringing out thecomplex PDEs. The Real Option process has to be transparent, indicating a step by step process, clearlydemonstrating when the DCF short falls as addressed by ROV.

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Cox et al (1979), ‘Option Pricing: A Simplified Approach’, Journal of Financial Economics, Vol.7, pp 229-263.

Dalal, S (2005), ‘Real Options-novel idea for valuation’, Institute of Chartered Accountants of India, Online document http://scudmargin.com/pdf/real-options-a-naovel-idea-of-valuation-pdf

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K. Sibiya, M. Sandada, M. Mago


The influence of organizational learning dimensions on theperformance of haulage companies in Harare province, Zimbabwe

K. Sibiya, M. Sandada and M.MagoUniversity of Zimbabwe

ABSTRACTThe purpose of this study was to examine the influence of organizational learning practiceson company performance in the case of the haulage sector in Zimbabwe. It sought to providevaluable insights into the effects of the identified causal elements (information acquisition,information interpretation, information sharing, information quality and behaviour andcognitive changes) on employee productivity and organizational performance in Zimbabwehaulage companies. Using a cross-sectional survey design amongst 120 employees fromhaulage companies in Harare, registered with the Zimbabwe Transport Association, the studyestablished a model with an explanatory power of 27.3%. The results indicate that not allthe five constructs are individually significant in enhancing organizational performance.The study has important managerial and academic implications for the management andresource deployments in a developing country such as Zimbabwe.

Key words: Organizational learning practices, haulage sector, organizational performance, cross-sectionalsurvey

1. INTRODUCTIONThe instability of the business environment, forces businesses to adopt organizational learning as a strategyto enhance business survival, boost business performance and competitiveness. Organizational learningenhances business ability to make relevant business changes in time and decisions that are in line with thechanges taking place (Robbins, Judge, Millett and Boyle, 2013). Organizational learning is critical as it leadsto highly performing, competitive and innovative companies (Easterby-Smith and Lyles, 2011). Businessdecision makers cannot afford to ignore the role that organizational learning plays in organizations, giventhe changing business environments of the 21st century. Changes in the business environment will continueto take place and they affect companies not only in Zimbabwe but the world over.

In the Zimbabwe haulage sector, technological changes have seen an increase in competition in the market.The small haulage businesses are now able to fairly wrestle for customers with the large haulage businessoperators in the market. According to the Transport Indaba Report (2014), the volume of private automobilesin Zimbabwe has risen and this has resulted in increased competition in the haulage sector. The small andunregistered haulage operators have become visible and pose a great threat to the large and registered haulageoperators. Faced with the above challenges, the formal and registered haulage business operators do notseem to be taking visible and significant steps or strategies to circumvent the problems and challengesbrought about by change. Many scholars who carried out empirical studies on organizational learning andperformance, conclude that there is a positive relationship between organizational learning and companyperformance (Garcia-Morales, Llorens-Montes and Verdu-Jover, 2008; Jimenez-Jimenez and Sanz-Valle, 2011).

The view that organizational learning practise is a source of business competitive advantage and that itimproves on business performance is supported by Zhao, Li, Lee and Chen (2011). These authors argue thatorganizational learning enables a business to efficiently process information and create valuable knowledgethat is critically important in enhancing business decisions and performance. Garcia-Morales, Jimenez-Barrionuevo and Gutierrez-Gutierrez (2012) argue that organizational learning enhances a business’performance through increasing its adaptation abilities to the changes taking place in the market. Accordingto Haeckel (2013), a business becomes adaptive to changing environments if it is quick at processing and

The influence of organizational learning dimensions on performance of haulage companies in Harare province


disseminating information to its various members. Therefore, organizational learning is worth studying,given the contemporary business environments that are continuously changing and highly unstable.

Evidently, literature shows that organizational learning can be used to solve the problems arising fromchanging business environments, but this strategy does not seem to be benefiting the haulage operators inZimbabwe much. There are no vivid signs that organizational learning is being practised to enhance businessperformance in Zimbabwe’s haulage business sector. There are no new products and new services comingfrom the industry as a sign that organizational learning is benefiting the sector. The low level of innovationin the haulage business sector in Zimbabwe is a sign that the businesses are not making use of organizationallearning to improve on business performance and their competitive standing.

2. RESEARCH PROBLEMThe various challenges faced by the haulage operators in Zimbabwe and the missed opportunities in theform of new products and services, inhibit these firms from benefiting from the positive influence oforganizational learning in their business performance, in-line with literature. If not put in check, this islikely to retard their progress and lead to failure, especially in the current turbulent business operatingenvironment. It was out of this concern that this study endeavoured to examine the relationship betweenorganizational learning and company performance in the haulage sector in Zimbabwe, and proposepossibilities of improving the status quo. The aim was to establish if organizational learning practices canbe used as a tool to enhance the performance of haulage businesses in Zimbabwe and providerecommendations for improving their operations and chances for survival.

3. SIGNIFICANCE OF THE STUDYThe results of the study are expected to benefit both organizational learning practitioners and academics.The results will provide practical insights to haulage business operations in Zimbabwe into effective ways indesigning and implementing organizational learning strategies for their businesses that lead to improvedbusiness performance. To the academics, the study contributes to the existing body of knowledge oforganizational learning literature by developing and validating a conceptual framework that can be furtherdeveloped by future researchers.

3.1 Empirical ObjectivesThe overall objective of the study was to establish the impact of organizational learning dimensions on theperformance of haulage companies in Zimbabwe.

The specific objectives were formulated as follows:

• To establish the impact of information acquisition on the performance of haulage firms in Zimbabwe

• To evaluate the influence of information interpretation on the performance of haulage firms in Zimbabwe

• To investigate the impact of information sharing on the performance of haulage firms in Zimbabwe

• To establish the influence of information quality and behaviour and cognitive changes on theperformance of haulage firms in Zimbabwe.

• To evaluate the impact of behaviour and cognitive changes on the performance of haulage firms inZimbabwe

4. LITERATURE REVIEW, HYPOTHESIS AND REASEARCH MODEL4.1 Information acquisitionThe acquisition of information is critically important for organizational learning process to take place (Huber,1991; Salim and Sulaiman, 2013). Information has to be acquired first before it can be useful to anorganization. There are various techniques that can be used by an organization to acquire information



internally and externally (Salim and Sulaiman, 2013). When an employee attends training, the expectationis that the individual returns to his workplace more equipped with new information that help in solvingproblems being faced. Learning from experience and observing other companies, are two key ways throughwhich information can be acquired by a business (Salim and Sulaiman, 2013). Huber (1991) also arguedthat information acquisition can be achieved through intentional information search by a business. Thiscan be achieved by having employees in an organization whose task is to gather internal and externalrelevant information and disseminate it to the decision makers. This made theorists to generally agree thatthere is need for organizations to continuously monitor and manage their means of information acquisition.The ability of an organization to acquire relevant information is critically important to its success andcompetitiveness (Arthur and Aiman-Smith, 2001). Salim and Sulaiman (2013) found a strong and statisticallysignificant relationship between information acquisition and company performance. Easterby-Smith andLyles (2011) also argue the same by stressing the importance of market research in today’s businessenvironment. The authors reasoned that information acquisition in the form of information gatheringenhances business performance and competitiveness.

4.2 Information sharingInformation sharing is important in organizational learning because it determines the depth of organizationallearning that takes place in an organization (Argote and Miron-Spektor, 2011). Effective organizationallearning takes place in an organization where individuals willingly share their knowledge and importantinformation with others in the organization. The leadership style that is displayed in an organization isimportant in allowing the sharing of information and knowledge. According to Argote and Miron-Spektor(2011), learning is enhanced in an organization with a leadership style that facilitates the smooth sharing ofinformation. Thus, participative leadership of management style is the most important style where anorganization intends to promote organizational learning through sharing of information. According toSalim and Sulaiman (2013), democratic leadership style facilitates information sharing and hence enhancesa business’ learning capabilities. Jones (2010) argues that when information is widely distributed within theorganization, individuals are more likely to learn faster since the information is readily available to them.Increased information sharing enhances information retrieval ability by individuals in the organization(Argote and Miron-Spektor, 2011). Thus, sharing of information in an organization leads to a more broadbased learning and enhances a business’ ability to adapt to the changes in the environment. Many researchersagree that information sharing is positively related to company performance (Chauvel and Despres, 2002;Dantas and Seville, 2006, Li and Lin, 2006, Argote and Miron-Spektor, 2011). According to Lin and Lin(2006), the growing competition in the contemporary market makes information sharing a necessity thatorganizations cannot do without. Individuals in an organization are expected to share information andknowledge with their colleagues so that they have the same and common objective to meet as a team. Itsabsence is detrimental to the survival of an organization, in cases of key employees leaving the organizationfor one reason or the other.

4.3 Information interpretationOrganizational learning can only take place when there is meaning in the information being received by anindividual or an organization (Argote and Miron-Spektor, 2011). According to Argote and Miron-Spektor(2011), more learning in an organization takes place when more people get an understanding and meaningof the different concepts by the different people in the organization. The information that is shared in theorganization must be meaningful to all so that a shared vision is developed (Jones, 2010). If the informationis not clear and confusing to the receiver, learning cannot take place effectively and the individuals will notbe working towards one common purpose. It is, therefore, important that decision makers in an organizationmake sure that information being disseminated is simple and easy to understand. French, Rayner and Rumbles(2011) also argue that when people in an organization have a common understanding of business conceptsand issues, they are more likely to work together in harmony and improve on their collective performance



than a situation where they do not have a common understanding of what is expected on them. Organizationsare supposed to come up with approaches that enhance information interpretation, if they are to gain fromlearning. The contribution of information interpretation towards organizational learning is viewed by manyresearchers as positive (French, Rayner and Rumbles, 2011; Jones, 2010; French, Rayner and Rumbles, 2011).According to Argote and Miron-Spektor (2011), organization learning, in the form of the ability to makesense from information, enhances a business performance (Jones, 2010; French, Rayner and Rumbles, 2011).Jones (2010) also argues that information interpretation enhances a business’ performance as it enhancesan individual’s decision making abilities. Thus, information interpretation is important in enhancing businessperformance as it transforms words into action.

4.4 Behaviour and cognitive changesAccording to Jones (2010), learning takes place where there is behaviour and cognitive change. Behaviouraland cognitive changes are the two main ways through which a business organization changes words intoaction. This construct manifests in the form of enhanced ability by a business to adapt to the change in theoperating environment (French, Rayner and Rumbles, 2011). French, Rayner and Rumbles (2011) agree thatorganisational learning takes place when there is change in individual behaviour as well as change in beliefabout the organization. Cognitive aspect in this construct is about how the organization acquires newknowledge and change beliefs while behaviour aspect is about how adaptive the organization is towards thechanges taking place in the market i.e. the change of behaviour of the individuals and the organization. Thegeneral view of literature is that when individuals display learning in the form of positive behaviour andcognitive changes, the performance of an organization is enhanced (Bontis, Crossan and Hulland, 2002;Rayner and Rumbles, 2011). Bontis, Crossan and Hulland (2002) argue that this construct of learning,behaviour and cognitive changes, represent the stage of learning where words are changed into action. Theyargue that learning of this form enhances a business performance because the individuals will be displayingtheir abilities and reacting to the information they would have received. Sloan, Hyland and Beckett (2002),Bontis, Crossan and Hulland (2002) and French, Rayner and Rumbles (2011) also share the same view thatbehaviour and cognitive changes enhance business performance and managers must ensure that the beliefsand behaviours of the employees are aligned to the corporate objectives of an organization.

4.5 Information qualityThe performance of a business organization is a function of the quality of the decisions that a businessmakes (Gorla, Somers and Wong, 2010; Argote, 2011; Kotnour, 2000). According to Gorla, Somers andWong (2010), the quality of information that is used to make the decisions, determines the quality of thefinal decisions. If poor quality information is used to make decisions, the outcome of the decisions isunlikely to help a business to perform better. Gorla, Somers and Wong (2010), Argote (2011) and Kotnour(2000) maintain that there is positive relationship between information quality and company performance.Also, Argote (2011) and Kotnour (2000) share the same view that quality information is a predictor oforganizational learning. According to Kotnour (2000), the quality of information positively affects theperformance of a business in the form of decisions that are ultimately reached. The quality of informationis measured in terms of how accurate, clear, applicable, concise, consistent and correct the information is.The information’s accessibility and how current it is, is also important in determining the performance of abusiness organization.

4.6 Organizational PerformanceAccording to Mills and Smith (2011), the concept of organizational performance is a multifaceted andcomplex dimension. It is multifaceted in the sense that the dimensions used to measure it are varied. Forinstance, organizational performance can be measured using financial or non-financial measures. Also,various authors have proposed different definitions of organizational performance based on various



stakeholders’ view of the concept (Espinosa and Porter, 2011; Nickels, McHugh and McHugh, 2011). Millsand Smith (2011) define organizational performance as the ability of the organization to achieve its goalsthrough using available resources in an efficient and effective manner. However, there is no one and universalobjective of organizations. The missions of organizations vary from one company to another and this variationalso causes variation in the meaning of organizational performance across different organizations. Accordingto Espinosa and Porter (2011), the traditional objective of an organization is to maximize profit. In thecontemporary business, this has seized to be correct, given the different changes taking place in the market.The responsibility of organizations has increasingly expanded to cover more stakeholders than theshareholders or business owners alone (Nickels, McHugh and McHugh, 2011). The performance of anorganization is now viewed in terms of the business’ ability to meet the needs of various stakeholders. Profitmaximization is no longer the only measure that is used to assess the performance of an organization.Businesses are now required to meet the non-financial objectives of the organization, just like their financialobjectives. For example, the contemporary business environment has seen an expansion in the need forcompanies to meet the needs of the society, government and interest groups and other various stakeholders.There are two main perspectives to organizational performance namely, stakeholders’ perspective andshareholders perspective. The focus of the shareholders perspective has been mainly that of minimizingcosts and maximizing profit in order to maximize shareholders value (Nickels, McHugh and McHugh,2011). Thus, the focus of the shareholders perspective is mainly on the financial measures of organizationalperformance such as profitability, sales growth, return of equity and return on assets to mention but just afew. On the other hand, the stakeholders’ perspective has been focusing on the various needs of the variousstakeholders to the business such as customers, suppliers, government, interest groups and investors.

4.7 Organizational Learning and PerformanceMany research studies were carried out to examine the nature of the relationship between organizationallearning and performance, with the majority showing a positive relationship between the two variables(Eshlaghy and Maatofi, 2011; Morales et al., 2008; Liao and Wu, 2010; Jimenez-Jimenez and Sanz-Valle, 2011and Jimenez-Jimenez and Sanz-Valle, 2011). Garcia-Morales et al. (2008) studied companies in Spain toestablish the relationship between learning and company performance. The conclusion that was reachedwas that there is a statistically significant relationship between learning and organizational performance.

Liao and Wu (2010) studied companies in Taiwan and found a positive relationship between organizationallearning and innovation. The other authors who found a positive relationship between organizational learningand company performance are Jimenez-Jimenez and Sanz-Valle (2011). According to Jimenez-Jimenez andSanz-Valle (2011), a study of Spanish companies in the manufacturing sector revealed that organizationallearning has a positive link with company image, market share and company profitability.

Based on the foregoing discussion, the following hypotheses were formulated:

H1: Information acquisition has a positive influence on firm performance.

H2: Information interpretation positively influences business performance.

H3: Information sharing has a positive effect firm performance.

H4: Information quality has a positive impact on firm performance.

H5: Behaviour and cognitive changes increased firm performance.

This study shall be guided by the aforementioned hypotheses, illustrated in the established conceptualframework as depicted in Figure 1 below and the following research methodology.



Figure 1 Conceptual Framework

5. RESEARCH METHODOLOGY5.1 Target population and sampling methodThe study employed a cross-sectional survey design to investigate the influence of organizational learningdimensions (information acquisition, information interpretation, information sharing, information qualityand behavior and cognitive changes) on firm performance. The quantitative research design was used as it isregarded as an excellent way of determining conclusive results (Sahu, 2013). The population was drawnfrom Zimbabwe Transport Association listed companies. The sample comprised of 120 employees from thehaulage companies in Harare, Zimbabwe’s capital city where the head offices of these companies are located.Simple random sampling was used to select respondents. This is a technique that removes bias in the selectionof a sample as each item in a population gets an equal chance of inclusion in the sample. In each participatingfirm, the company register was split into low level staff, middle management and senior management,before the researcher randomly selected the respondents. This gave each employee at each level an equalchance of being selected to participate in the study. A large number of employees from each firm wereconsidered so as to eliminate bias towards the actual results being obtained in an organization.

5.2 Data collection proceduresA structured questionnaire, which included closed ended and multiple choice questions, was used. 120questionnaires were distributed to targeted managerial staff in the haulage companies in Harare. Thequestionnaires were accompanied by a cover letter which detailed the purpose of the study as well as theinstructions on how to respond to the questions. 105 completed questionnaires were collected. However, 2of the returned questionnaires had missing data and were discarded from analysis. As a result, 85.8% (103/120) of questionnaires were used in the analysis.

5.3 Data analysisThis involved an inspection of the questionnaires for completeness and correctness of the capturedinformation. Data was then captured into SSPS software statistical package and an examination of descriptiveresponses done according to the performed frequency distributions and descriptive statistics. Correlation

Information Acquisition

Information Interpretation

Information Sharing

Information Quality

Behaviour and CognitiveChanges

Firm Performance of Haulage

Firms in Zimbabwe

H1

H2

H3

H4

H5



analyses where performed to assess the degree of association between variables under study. Multipleregression analysis was also conducted so as to identify the extent to which the variables under study influencefirm performance.

5.4 Reliability and validity measuresTo test for reliability, Cronbach’s Alpha (·), which is a measure of internal consistency between measurementitems, was computed and the overall reliability showed a Cronbach’s alpha value of 0.732 which surpassesthe minimum threshold of 0.7 recommended by Bryman and Bell (2015). The spearman’s correlationscoefficients were computed to assess convergent validity. The study reported significant positive correlationsranging from r = 015 to r = 0.434 (at p < 0.01) signifying the attainment of convergent validity. The constructcorrelation matrix is reported in Table 4.5. Regression analysis was used to assess predictive validity. Causalitywas shown by all independent variables, that is, Information acquisition (INFOAQU), informationinterpretation (INFOINT), information sharing (INFOSHA), information quality (INFOQUAL) andbehaviour and cognitive changes (BEH), with a dependent variable (organisational performance) as shownin Table 4.4, demonstrating the attainment of predictive validity.

6. RESULTS OF THE STUDY6.1 Descriptive statisticsDescriptive statistics run show that the arithmetic means for all of the measures of organizational learningmeasures were greater than 3, the midpoint of the 5 point Likert Scale that was used. Information acquisition(INFOAQU) recorded a mean of 4.52, information interpretation (INFOINT) 4.5, information sharing(INFOSHA) 4.11, information quality (INFOQUA) 3.76 and behaviour and cognitive changes (BCC) 4.12.Table 4.1 below summarizes the descriptive statistics findings from the data analysis that was carried out.

Table 4.1: Descriptive Statistics

Mean Std. Deviation Variance

INFOAQU 4.52 0.93 0.87

INFOINT 4.50 1.05 1.10

INFOSHA 4.11 0.87 0.76

BCC 4.12 0.84 0.71

INFOQUA 3.76 0.95 0.89

ORGPERF 3.64 2.36 5.57

These results show low values of variability for organizational learning measures but high variability oncompany performance measures. Information acquisition (INFOAQU) had a variance of 0.87, informationinterpretation (INFOINT) 1.10, information sharing (INFOSHA) 0.76, behaviour and cognitive changes(BCC) 0.71, information quality (INFOQUA) 0.89 and company performance (ORGPERF) 5.57.

6.2 Correlation analysisCorrelation analysis was carried out to establish the nature of relationship between organizational learningand company performance. Since the data were found to be unevenly distributed, Spearman’s correlationwas used. The key independent variables were information acquisition (INFOAQU), informationinterpretation (INFOINT), information sharing (INFOSHA), information quality (INFOQUA) and behaviourand cognitive changes (BCC). The key dependent variable was organizational performance (ORGPERF).The correlation tests results are shown in Table 4.2 below



Table 4.2 Correlation Analysis

INFO INFO INFO INFO ORGAQU INT SHA BCC QUA PERF

INFOAQU Correlation 1.000

Sig. 0.00

N 103

INFOINT Correlation .018 1.000

Sig. .000 0.000

N 103 103

INFOSHA Correlation .015 .434 1.000

Spearman’s Sig. .000 0.000 0.000

Rho N 103 103 103

BCC Correlation .136 .331 .237 1.000

Sig. 0.000 0.000 0.00 0.000

N 103 103 103 103

INFOQUA Correlation .179 .364 .320 .171 1.000

Sig. .000 0.000 0.000 0.000 0.000

N 103 103 103 103 103

ORGPERF Correlation .221* .312** .306** .352** .384** 1.000

Sig. 0.000 .001 .002 .000 .000 .

6.3 Regression analysisRegression analysis was carried out for three purposes: to determine the overall predictive power of thewhole model in predicting the dependent variable, to ascertain the suitability of the model in predicting thedependent variable and to establish the relative predictive power of the individual learning dimensions inestimating the dependent variable. The regression analysis results are shown in the following Table 4.3.

Table 4.3 Regression analysis

Model Unstandardized Coefficients Standardized Coefficients T Sig.B Std. Error Beta

CONSTANT 10.630 3.535 3.007 .003

INFOAQUA .452 .220 .179 2.055 .043

INFOINT .160 .232 .071 .687 .494

INFOSHA .426 .260 .157 1.639 .104

BCC .617 .249 .220 2.478 .015

INFOQUA .700 .243 .280 2.884 .005

R2= 0.309, Adjusted R2=0.273, F= 8.656; p= 0.00

These results show that the explanatory power of the model is 27.3%, as measured by the adjusted R2 whichdemonstrates that 27.3% of variance in the performance of haulage companies in Zimbabwe is explainedby organisational learning variables (information acquisition (INFOAQU), information interpretation(INFOINT), information sharing (INFOSHA), information quality (INFOQUA) and behaviour and cognitivechanges (BCC)). The other 62.7% is explained by other variables which were not investigated in this study.Table 4.3 also shows that the model which is made up of the five organizational learning constructs is a



significant one in explaining organizational performance of haulage business operators in Zimbabwe (Sig.= 0.000, F = 8.656).

The regression analysis reveals that not all of the five constructs are individually significant in enhancingorganizational performance. The three constructs that are significant in enhancing company performanceare namely, information acquisition (p < 0.05, beta = 0.179), behaviour and cognitive change (p < 0.05,beta = 0.220) and information quality (p < 0.05, beta = 0.280). The two, information interpretation (p >0.05, beta = 0.071) and information sharing (p > 0.05, beta = 0.157) were not statistically significant inenhancing company performance.

7. DISCUSSION OF RESULTSThe first hypothesis (H1) predicted a positive relationship between information acquisition andorganisational performance. This hypothesis was confirmed (‚ = 0.179, p< 0.05). The result was supportedby positive correlation (r = 0.221, p < 0.05). The finding is in line with the views of Arthur and Aiman-Smith, (2001), Salim and Sulaiman (2013) and Easterby-Smith and Lyles (2011) that organizations thatgather relevant information in changing business environments are highly adaptive, innovative and performbetter than their counterparts who do not gather relevant information. A business organization that gathersinformation through various means, such as internal and external training of employees, is better placed toadapt to change and achieve better results than the ones that do not gather information in today’s informationera. Those organizations that do not gather information are caught by surprise when changes takes placeand they are unlikely to survive in the contemporary business world that is ever-changing.

The second hypothesis (H2) predicted a positive relationship between information interpretation and firmperformance. This hypothesis was rejected because (‚ = 0.071, p >0.05). Regression analysis results were notconsistent with the views of scholars such as French, Rayner and Rumbles (2011), Argote and Miron-Spektor(2011), French, Rayner and Rumbles (2011), Jones (2010) and French, Rayner and Rumbles (2011) thatinformation interpretation is very important in enhancing company performance. This study failed to supportthe view since the results showed that information interpretation was individually insignificant in enhancingcompany performance. The possible reason for this could be that the haulage businesses, just like any othercompany in Zimbabwe, are facing the prevailing liquidity crunch. Given the scarcity of financial resources,it is highly likely that information interpretation by using external reports and consultancy, is viewed as anunnecessary cost that a business can avoid.

The third hypothesis (H3) predicted a positive relationship between information sharing and firmperformance. This hypothesis was not supported (‚ =0 .157, p > 0.05). The study revealed that informationsharing was not a significant organizational learning practise that enhances business performance. Thesefindings were in contrast with the view of scholars like Chauvel and Despres (2002), Dantas and Seville(2006), Li and Lin (2006) and Argote and Miron-Spektor (2011) that sharing of information and knowledgein organizations enhances the organization’s performance, innovation and creativity. The possible reasonbehind the contrasting findings could be that managers in the haulage business sector are finding it beneficialnot to share information specifically with other organizations, in view of the shrinking markets in Zimbabwe.It could be that the managers in the haulage business sector are too sceptical that if they share the information,they give competitors the edge to wrestle in the small and highly competitive market.

The fourth hypothesis (H4) predicted a positive relationship between information quality and firmperformance. This hypothesis was supported (‚ = .280, p < 0.05). Information quality is, therefore, a veryimportant organizational learning construct that leads to better business performance in the haulage businesssector in Zimbabwe. These findings were in line with the views of Gorla, Somers and Wong (2010), Argote(2011) and Kotnour (2000) that better business decisions are made from quality information and betterdecisions enhance business performance. The quality of information is important because it determines theaccuracy, relevancy and accessibility of information. For example, if the managers make a delayed decisionbecause the information is not easily accessible, then the performance of the organization is negatively



affected. On the other hand, if managers get accurate, relevant and correct information, it follows that thedecisions that they make enhance the performance of their companies.

The fifth hypothesis (H5) predicted a positive relationship between behaviour and cognitive changes firmperformance. This hypothesis was supported (‚ = .220, p < 0.05). Regression results show that behaviourand cognitive changes lead to better business performance of the haulage companies in Zimbabwe. Thesefindings are consistent with the views of Bontis, Crossan and Hulland (2002) and Rayner and Rumbles(2011) that behaviour and cognitive change leads to better company performance. Behaviour and cognitivechanges are important because they translate words into action. Given a working environment that fostersproper employee behaviour, a business organization is bound to perform better. The behaviour of theemployees is supposed to be aligned to the company’s corporate goals and the corporate culture as well.When employee behaviours and beliefs are in sync with the company corporate goals, a business is boundto perform better.

8. LIMITATIONS AND FUTURE RESEARCHDespite the usefulness of this study as aforementioned, the research is not without its limitations. As alreadyoutlined, it was sector specific, concentrating only in the perspective of haulage companies’ employees whoare operating under the constraints of a struggling market and economy.

9. DIRECTIONS FOR FUTURE RESEARCHPerhaps if a research could focus on the whole road transport industry, more comparative results would beobtained. Further researches that look at different sectors may add more value through cross sector comparisonof the findings. Finally, an expansion to involve other haulage companies beyond the periphery of Harare,may enrich the generalization aspect of the findings.

10. CONCLUSIONOrganizational learning has proven to be a predictor of organizational learning. In the form of behaviourand cognitive change, it is critically important in enhancing business performance. It is important to allowindividuals to learn from mistakes because it enhances the individuals’ creativity and innovation.Organizational learning in the form of quality of information has shown that it is very important in enhancingbusiness performance, because the decisions that managers make are a function of the quality of theinformation that they use.

11. RECOMMENDATIONSFrom the above recommendations, the researcher made the following recommendations:

Managers in Zimbabwe’s haulage business sector should focus their attention in practising organizationallearning as a way to circumvent the problems being faced due to changes taking place in the businessenvironments. Given the ever-changing business environments, the haulage business operators need tocontinuously adapt to change and this can be achieved through effective organizational learning practises.Managers should create an environment that ensures effective organizational learning through behaviourchange by the employees. The employees’ behaviour and beliefs, need to be aligned to the corporate objectivesof the organization and this can be achieved through creating an environment where employees are motivatedto be at work e.g. allowing the employees the opportunity to learn from their mistakes.



There ought to be a conducive environment in the haulage business sector for the creation of enablingorganizational learning practices to flourish. Managers should make use of accurate, relevant and timelyinformation when making decisions. This can be achieved by having dedicated individuals whose task is togather the information that is important in the market for decision making.

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Modelling consumer behaviour conceptually through the seven Ps of marketing


Modelling consumer behaviour conceptually through the seven Ps ofmarketing: A revised theoretical generic consumer stimulus-response

model

Noel MuzondoDepartment of Business Studies, Faculty of Commerce, University of Zimbabwe, PO Box MP 167, Mount Pleasant, Harare, Zimbabwe.

Tel: +263 4 303211, Ext 13039, Fax: +263 4 333674, E-mail: [email protected], [email protected]

ABSTRACTHypothesising in the marketing stimuli component of existing consumer stimulus-responsemodels is limited to the traditional four Ps of marketing—i.e. product, price, promotion,and place. This underplays the important role played by the soft elements of marketing —i.e. people, processes, and physical evidence — in shaping consumer behaviour. Thesignificance of the three soft Ps is recognised in emergent specialist marketing literaturesuch as corporate identity, branding, relationship marketing, services marketing and selectedgeneric marketing and consumer behaviour literature. This paper reviews two seminal complexand eight simplified frameworks of consumer behaviour, alongside the above-stated literature,to conceptually validate the notion that the soft elements of marketing influence customerresponse in both tangible goods- and service-dominant sectors. Leading academics haveinsisted on interpreting the soft Ps of marketing as relevant to service organisations only,notwithstanding the growing evidence that the Ps are also suitable to manufacturing firms.Accordingly, the theoretical implication for this paper is that; the marketing stimulicomponent of consumer stimulus-response models should be modified to include the softPs. This implies that marketers, regardless of the sector they work in, should apply the sevenPs of marketing to craft responsive operational marketing strategies. Consequently, the paperproposes a revised theoretical generic consumer stimulus-response model that encompassesthe soft elements of marketing.

Keywords: Consumer behaviour, marketing mix, physical evidence, processes, people, four Ps, seven Ps,soft Ps

1. INTRODUCTIONMarketing practitioners recognise that the knowledge they have on their customers is essential to makingeffective marketing decisions. Hence successful marketing managers focus on understanding their consumers’wants and needs as clearly as possible (Reid, 2006). Successful marketing requires that companies fullyconnect with their customers (Kotler & Keller, 2012). This means that companies have to gain a 360-degreeview of both their customers’ daily lives and the changes that take place during the customers’ lifetime sothat the right products are marketed to the right customers in the right way (Kotler, Keller, Koshy & Jha,2009). Knowledge of consumer behaviour is the crucial foundation on which market understanding is built(Drummond, Ensor & Ashford, 2002).

Consumer behaviour is the study of individuals, groups or organisations and the processes they use toselect, secure, use and dispose of products, services, experiences, or ideas to satisfy needs and the impactsthese processes have on the consumer and society (Hawkins, Best & Coney, 2004). Marketers must fullyunderstand both the theory and reality of consumer behaviour (Kotler & Keller, 2006). Hence companiesand academics have researched heavily on the relationship between marketing stimuli and consumer response(Kotler, Armstrong, Saunders & Wong, 2002). The knowledge gained from the studies enables marketingmanagers to develop sophisticated marketing programmes for specific target market segments (Reid, 2006).

1.1 Problematisation and DelimitationThere are various frameworks that attempt to model customer behaviour. Since the 1960s, most marketing-related textbooks have presented one form of a conceptual consumer stimulus-response model or another,

N. Muzondo


for example, complex models (Engel, Kollat & Blackwell, 1968; Howard & Sheth, 1969; Engel, Blackwell &Miniard, 1995), simple models (Loudon & Bitta, 1993; Peter & Olson, 1994; Kotler, 2000; Schiffman &Kanuk, 2000, 2004, 2007; Schiffman, Kanuk, Kumar & Wisenblit, 2010; Kotler et al., 2002, Hawkins, Best &Coney, 2004; Blythe, 2008; Kotler & Armstrong, 2009; Kotler et al., 2009; Kotler & Keller, 2012), and blackbox models (Smith & Taylor, 2004). Consumer behaviour models assist marketers to understand their targetcustomers before they conceive, design, and implement marketing strategies. The models attempt to explaincustomer decision-making processes and decisions drawing from a variety of internal and external factorsaround the consumer (Figures 1.1, 2.1 to 2.2 below).

Nonetheless, since all the authors cited above suggest a different model (and the list of such authors is notexhaustive), there are too many models of consumer behaviour. The challenge is that some of these modelsdo not only have too many parts but are also complex (e.g. Figure 2.1). Yet despite that Howard and Sheth(1969), Engel, Blackwell and Miniard (1995), Loudon and Bitta (1993), Peter and Olson (1994), Schiffmanand Kanuk (2007), Hawkins, Best and Coney (2004) are among the leading thinkers in consumer behaviourand Kotler and Keller (2012), are among the experts on general marketing, the marketing stimuli componentsof their consumer stimulus-response models (Figures 1.1, 2.1 and 2.2 below) do not include the soft elementsof marketing (i.e. people, processes, and physical evidence) but McCarthy’s (1960) four Ps of marketingonly (i.e. product, price, promotion, and place). Therefore, this paper attempts to address the fundamentalquestion: What should be the essential elements of the marketing stimuli dimension of an ideal complex;simple but comprehensive, or black box model of consumer behaviour? As explained later in the paper,simple models of consumer behaviour are also comprehensive as they have three main parts i.e. input,processing and output, which are also found in complex models.

Figure 1.1: A Model of Consumer Behaviour

Source: Adapted from Kotler and Keller (2012:161)

Given the multiplicity of consumer behaviour models as cited above, the research question is answered inthe context of the marketing stimuli component of simple models of consumer behaviour in general andKotler and Keller’s (2012) model of consumer behaviour (Figure 1.1 above) and Schiffman et al.’s (2010)model of consumer decision making (Figure 2.2 below) in particular. Kotler and Keller’s and Schiffman etal.’s models are the primary focus of this paper as they are the latest and have been reproduced from previousKotler editions (e.g. Kotler et al., 2002; Kotler & Keller, 2006; Kotler & Armstrong, 2009; Kotler et al., 2009)

ConsumerPsychology

OtherStimuli

Buyer's Decision Process

MarketingStimuli

Buyer's Decision

ConsumerCharacteristic

Product and servicesPricePlacePromotion

EconomicTechnologicalPoliticalCultural

MotivationPerceptionPersonalityLearningMemoryAttitude Problem recognition

Information searchEvaluation of alternativesPurchase decisionPost purchase behaviour

Product choiceBrand choiceDealer choicePurchase timingPurchase amountPayment method

CulturalSocialPersonal



and Schiffman and Kanuk editions (e.g. Schiffman & Kanuk, 2000, 2004, 2007) without being revised toclose the identified theoretical gap. This is despite that some of the same Kotler editions acknowledge theimportance of the seven Ps of marketing formulation (e.g. Kotler et al., 2002). The same justification alsoapplies to Schiffman et al.’s model of consumer decision making. The firm’s marketing efforts component ofthis model has remained hardly changed to reflect the emerging knowledge on the marketing mix andbuyer behaviour in subsequent editions of the authors’ leading textbooks on consumer behaviour (e.g. seeSchiffman & Kanuk, 2000, 2004, 2007; Schiffman et al. 2010).

Theorising in the marketing stimuli components of the two pioneering complex models (i.e. Engel, Kollat &Blackwell, 1968; Howard & Sheth, 1969) and seven simplified frameworks of consumer behaviour (i.e.Hawkins, Best & Coney, 2004; Kotler & Keller, 2006; Peter & Olson, 1994; Schiffman et al. 2010; Loudon &Bitta, 1993; Kotler & Keller, 2012) and the enlarged black-box model (Smith & Taylor, 2004) has been, or is,limited to the four Ps of marketing. While the Engel-Kollat-Blackwell model has gone through several revisions(Loudon & Bitta, 1993), a fact also admitted by its revisers (i.e. Engel, Blackwell & Miniard, 1995), therevisions do not categorically acknowledge the importance of the additional Ps of marketing in determiningcustomer behaviour. The same criticism also applies to Kotler’s simple model of consumer behaviourpresented below.

By limiting the marketing stimuli to McCarthy’s (1960) traditional four Ps of marketing instead of the morecomprehensive seven Ps formulation that encompasses the three additional elements, the existing complex,simplified, and black-box models of customer behaviour underplay the significance of the soft Ps. However,there is now little justification, if any, for the continued exclusion of these Ps in consumer stimulus-responsemodels given the growing conceptual and empirical evidence confirming the general applicability of theseadditional Ps to tangible goods and services (Blythe, 2005; Rafiq & Ahmed, 1995; Kotler & Keller, 2012).Blythe’s (2005) basic marketing planning process in Figure 1.2 below shows that the seven Ps of marketingare suitable for both services and tangible products, otherwise he would have limited himself to the originalfour Ps as his textbook does not focus on services.

A study on academics’ satisfaction with the seven Ps of marketing as a general framework for marketingcarried out in Europe, found out that the Ps are relevant for all types of marketing, including introductoryand consumer marketing, where one might have expected stronger adherence to the four Ps framework(Rafiq & Ahmed, 1995). Rafiq and Ahmed’s study confirms what has been, and is being, confirmed bytheoreticians in emergent specialist areas of marketing such as services marketing (Bitner, 1992; Parasuraman,Zeithaml, & Berry, 1985; Palmer, 2001 & 2003; Lovelock & Wirtz, 2004 & 2011), corporate identity, imageand reputation management and branding (Melewar & Saunders, 2000; Keller, 2000 & 2002; Lambert,1989; Suvatjis & de Chernatony, 2005; Laforet, 2010), and relationship marketing (Egan, 2008) that people,physical evidence, and processes determine customer behaviour.

Blythe (2008:414) admits that: “Although the expanded seven Ps model is probably far from comprehensivein terms of explaining what marketers do, it does provide a degree of structure and is a convenient ‘shorthand’device.” Consequently, the paper draws on Blythe’s (2008) general model of consumer behaviour to advancethe argument that the seven Ps, rather than the four Ps, of marketing should be the basis of the marketingstimuli component of consumer stimulus-response models. Blythe’s (2008) model is underpinned on thetricomponent model that is, cognition (thought processes), affect (emotion) and conation (intended behaviour)explained in Schiffman et al. (2010:237-240) and personal and environmental factors (Figure 1.3 below).

Elaborating on his general model of consumer behaviour, Blythe (2008) divides the personal and environmentalfactors component of the framework into three sub elements— (1) psychological issues and consumer behaviour,(2) sociological issues and consumer behaviour and (3) [consumer] decisions and their aftermath. Nevertheless,Blythe’s (2008) model, while easy to understand compared to other simple models of consumer behaviour,may be criticised for being too summarised. The model does not list the key variables in its three main partsand the personal and environmental factors sub dimension. While Blythe’s (2008) general model of consumerbehaviour implies the coverage of the seven Ps of marketing since the textbook in which it is presented

N. Muzondo


concludes with a chapter on “consumer behaviour and the marketing mix”, a review of the very chaptersadly shows that, despite the book having been written for both tangible and intangible goods marketers,Blythe fell into the trap of associating processes, people and physical evidence to services (pages 435-439)which is a departure from Blythe (2005). Therefore, Blythe (2008) trivialises the relevance of the three Ps tomodelling consumer behaviour in the context of tangible goods marketing.

Figure 1.2: The Marketing Planning Process

Source: Blythe (2005:262)

Figure 1.3: A General Model of Consumer Behaviour

Source: Blythe (2008:7)

Productpolicy

Pricepolicy

Promotionpolicy

Placepolicy

Processpolicy

Personnelpolicy

Physicalevidence

policy

Objective setting

Marketing audit

Tactical planning

Feedbackloop

Cognitition(thought

processes)

Personaland

environmental factors

Consumerbehaviour+ =

Affectemotion

Conation(intendedbehaviour)



1.2 Contributions of the PaperThis paper reviews 10 consumer behaviour models and selected specialist marketing literature to demonstratethe importance of the soft elements of marketing in shaping consumer response. It highlights that themarketing stimuli components of complex and simple models of consumer behaviour suggested in leadingtextbooks of marketing (e.g. Kotler & Keller, 2012), marketing communications (Smith & Taylor, 2004), andconsumer behaviour (Hawkins, Best & Coney, 2004; Peter & Olson, 1994; Schiffman et al., 2010; Loudon &Bitta, 1993), have an inherent inadequacy in that they do not include the additional Ps in their marketingstimuli component. In view of the evidence in specialist areas of marketing and some general marketingliterature, the paper argues that the marketing stimuli component of consumer behaviour models shouldbe underpinned on a comprehensive marketing mix formulation such as seven Ps of marketing—i.e. product,price, promotion, place, physical evidence, processes and people instead of just the four Ps. The marketingmix is a blend of all controllable elements required to execute a marketing strategy (Singh, 2012; Kotler etal., 2002; McDonald, 2008; Reid, 2006). While he limits himself to the four Ps, Singh (2012) admits thatcompanies can use the marketing mix to influence the buyers’ responses.

Drawing from Vargo and Lusch’s (2008) service-dominant logic, Lovelock and Wirtz (2011) suggest that allproducts are valued for the services they provide and that the value derived from a physical good, for example,is not the good itself, but the service it provides during consumption. This opinion is further supported bythe definition of a product suggested by Levitt (1981), Blythe (2008), and the five product levels frameworkoriginally developed by Levitt (1981) and extended by Kotler and Keller (2012). A product is a bundle ofbenefits (Blythe, 2008; Levitt, 1981) but those benefits probably go beyond the physical item itself (Blythe,2008:414). The construct of product benefits and its links with services is explained in the five levels of aproduct — i.e. core benefit, basic product, expected product, augmented product, and potential product —which Kotler et al. (2009) refer to as the “customer-value hierarchy” because each level adds more customervalue. Kotler and Keller (2012:326) state that:

“The fundamental level [of a product] is the core benefit: the service or benefit the customer is reallybuying. A hotel guest is buying rest and sleep. The purchaser of a drill is buying holes. Marketers mustsee themselves as benefit providers.”

The irony of the above quotation is that Kotler and Keller (2012) appear to not just realise but also admitthat every product, whether tangible or intangible from a core product or benefit viewpoint, is a service.Since rest, sleep, and holes are benefits, they become services, the ultimate motive for the purchases in thiscase, although they are delivered through tangible products—hotel (room, bed, and linen) and drillingmachine. Extending from the core benefit construct, the paper argues that; at the highest level, tangible andintangible products are services.

In their categories of service mix framework, Kotler and Keller (2012:356) also further support the opinionabove as they admit that “the service component can be a minor or a major part of the total offering”. Theygo on to distinguish five categories of offerings (Kotler and Keller, 2012:356-357):

“1. Pure tangible good—a tangible good such as soap, toothpaste, or salt with no accompanying services.

2. Tangible good with accompanying services—a tangible good, like a car, computer, or cell phone,accompanied by one or more services. Typically, the more technologically advanced the product,the greater the need for high-quality supporting services.

3. Hybrid—an offering, like a restaurant meal, of equal parts goods and services. People patronizerestaurants for both the food and its preparation.

4. Major service with accompanying minor goods and services—a major service, like air travel, withadditional services or supporting goods such as snacks and drinks. This offering requires a capital-intensive good—an airplane—for its realization, but the primary item is a service.

5. Pure service—primarily an intangible service, such as babysitting, psychotherapy, or massage.”

N. Muzondo


Given the arguments raised above, it appears that the marketing stimuli component of existing consumer-stimulus response models cannot be limited to the traditional four Ps of marketing anymore but the sevenPs.

There are several theorisations of the marketing mix; two common ones are the four Ps of marketing, that is,product, price, promotion, and place (McCarthy, 1960) and seven Ps of marketing, that is, the traditional fourPs already stated above plus people, physical evidence, and processes (Booms & Bitner, 1981). Reference tothe seven Ps of marketing as the service marketing mix (e.g. Lovelock & Wirtz, 2011; Kotler & Armstrong,2009) seems to advance the idea that the framework is not relevant to tangible products. Booms and Bitner(1981) intended the extended marketing mix [which is the other name for the seven Ps] to be limited toservices marketing (Rafiq & Ahmed, 1995). However, Rafiq and Ahmed (1995) found empirical evidence insupport of the application of the extended marketing mix for services to other areas of marketing. CitingTheodore Levitt, Rafiq and Ahmed (1995) argue that the position of having a separate marketing mix forservices is difficult to maintain when one can find statements in the services literature such as those byLevitt (1981) that everybody sells intangibles in the marketplace no matter what is produced in the factory.In addition, while they have not revised the model of consumer behaviour to reflect their current thinking,ironically Kotler and Keller (2012:25) state that:

“Given the breadth, complexity, and richness of marketing, however—as exemplified by holisticmarketing—clearly these four Ps [advocated by McCarthy, 1960] are not the whole story anymore. Ifwe update them to reflect the holistic marketing concept, we arrive at a more representative set thatencompasses modern marketing realities: people, processes, programs, and performance…”

Of course, this paper does not concern itself with the Ps for “programs” and “performance” but the first twoin the statement above and “physical evidence” which Kotler and Keller (2012) have omitted above. Theholistic marketing concept, a marketing management philosophy, conceptualised by Kotler in the 1990s, isthe newest in the evolution of marketing. Older business concepts are the production concept, productconcept, finance concept, sales concept, marketing concept, and societal marketing concept. Marketingmanagement philosophies are a framework for diagnosing the marketing culture of organisations regardlessof whether the entities specialise in physical goods or services. Considering the gap in extant models ofconsumer behaviour highlighted above, this paper is significant to marketing academics, practitioners, andstudents.

2. THEORETICAL EXAMINATION OF MARKETING STIMULI COMPONENT OF CONSUMERBEHAVIOUR FRAMEWORKSBuying behaviour is often more complex than it appears (Smith & Taylor, 2004). The complexity is, to alarge extent, added to by the variety of factors that have to be considered to understand how customersmake buying decisions. Several consumer buying behaviour models drawn from various social sciences,including marketing, have been suggested in the literature thus making consumer behaviour a relativelynew field with multi-disciplinary roots. Theoretical frameworks borrowed from psychology, sociology, socialpsychology, cultural anthropology and economics, are now added to by both commercial and academicmarketing research into consumer and industrial buyer behaviour (Smith & Taylor, 2004). Research in thesedisciplines coupled with later research in marketing combined to form a comprehensive model of consumerbehaviour that reflects both the cognitive and emotional aspects of consumer decision making (Schiffman& Kanuk, 2000).

Throughout the 1960s, attempts were made to integrate a variety of theories, research findings and conceptsfrom the behavioural sciences into a general framework that could be used to explain and predict consumerbehaviour (Gilligan & Wilson, 2003). In doing so, Gilligan and Wilson (2003) highlight that the principalwriters, such as Nicosia (1966), Engel et al. (1968), Howard and Sheth (1969), moved away from thegeneral perspective that had previously been adopted by economists and which in a number of ways istypified by Marshall’s work and the Marshallian model of ‘economic man’. Instead of viewing consumer



behaviour simply as a single act made up of the purchase itself and the post-purchase reaction, a far greaterrecognition was given to the consumer’s psychological state before, during and after the purchase (Gilligan& Wilson, 2003). Therefore, both extant complex and simple models of consumer behaviour arecomprehensive. This paper focuses on the marketing stimuli part of these models. In particular, the paperconcentrates on the three additional elements of marketing — processes, people, and physical evidence —as these are excluded from existing leading models of consumer behaviour.

The role of the three additional Ps alongside the traditional fours Ps — adding up to the seven Ps — inshaping consumer response is now widely recognised in specialist areas of marketing like services marketing,corporate identity, image and reputation management, and relationship marketing, extant consumerbehaviour frameworks in basic marketing, marketing management, marketing communications andconsumer behaviour. However, current stimulus-response models exclude the soft Ps. For instance, despitetheir fundamental contributions to the field of consumer behaviour from the perspective of strategic marketingplanning, Gilligan and Wilson (2003 & 2005) have not included marketing stimuli — that is the marketingmix — in their factors influencing consumer behaviour. Furthermore, while fairly recent consumer behaviourtextbooks such as Blythe’s (2008) explain the relationship between the seven Ps of marketing and consumerresponse, Blythe’s general model of consumer behaviour does not include the specific sub factors in eachcomponent, the marketing mix not being an exception. And when Blythe (2008) explain the influence ofthe marketing mix as a determinant of consumer behaviour, he falls into the trap of conceiving the threeadditional elements of marketing as relevant to services marketing only notwithstanding that this is adeparture from his, Blythe’s (2005), generic marketing planning process (Figure 1.3 above).

2.1 Complex Models of Consumer BehaviourComplex models are, perhaps, so named because they attempt to include both the internal and externalvariables in one grand model (Figure 2.1 below). They have been accepted with criticism despite theirseminal explanation of the probable workings of the human mind. Referring to the Howard and Sheth’s(1969) model, for example, Smith and Taylor (2004:104) note that:

“This complex model has been criticized for lacking a clear definition of the relationship betweensome of the variables and for a lack of distinction between the endogenous variables (within themodel) and the exogenous variables (external to the model). The model is, for many readers, difficultto understand and, for many practitioners, impossible to use.”

Purchase

Intention

Attitude

Brandcomprehension

Attention

Intention

Brandcomprehension

Choicecriteria

Motives

Satisfaction

Attitude

Confidence

Attention Perceptualbias

Stimuliambiguity

Overtsearch

Significativea. Qualityb. Pricec. Distinctived. Servicee. Availability

Symbolica. Qualityb. Pricec. Distinctived. Servicee. Availability

Sociala. Familyb. Reference groupsc. Social class

InputsStimulus display Perpetual constructs Learning constructs Outputs

Figure 2 1: Howard and Sheth Model of Consumer Behaviour

Source: Howard and Sheth (1969).

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In addition, since the advent of the early complex models of buyer behaviour (for example, Engel, Kollat, &Blackwell, 1968; Howard & Sheth, 1969), theorising in the marketing stimuli component of these frameworks,has remained fixed on the traditional four Ps of marketing. While Loudon and Bitta (1993) acknowledgethat the Engel-Kollat-Blackwell model has gone through several revisions since 1968, a fact also admitted byits revisers (i.e. Engel, Blackwell & Miniard, 1995), the changes in the framework’s marketing stimulidimension have not gone beyond the four Ps. First referred to as the marketing mix by McCarthy (1960), thefour Ps of marketing are product, price, promotion, and place. The Ps were originally used by fast movingconsumer goods marketers although they were also borrowed and used by service marketers (e.g. restaurants)until the latter designed the seven Ps (Smith & Taylor, 2004). The additional Ps in the seven Ps formulationof marketing are physical evidence, people, and processes.

Unlike the latter simplified models, the Howard and Sheth model (Figure 2.1 above), for example, has fourparts: the inputs (stimulus display), perceptual constructs, learning constructs and outputs. There are three subpartsin the inputs component of the framework, namely significative, symbolic and social. The significative andsymbolic subparts reflect the marketing mix as they both contain the following items: quality, price,distinctiveness, service, and availability. The words quality and distinctiveness can be linked to the ‘P’ for product,availability refers to distribution or ‘P’ for place. Price is what the customer is prepared to pay to get theproduct. Thus the Howard and Sheth model is limited to only three of the original four ‘P’s of marketingunless it is assumed that the service sub element includes the soft elements of marketing. In any case, such anassumption would be questionable given that the Howard and Sheth model of consumer behaviour wasconceived in the late 1960s, way before the emergence of a distinct theory of service marketing.

Although Howard and Sheth’s seminal model has contributed enormously to marketing academics’ andpractitioners’ knowledge of customer behaviour, it fails to recognise not just the fundamental role of thesoft elements of marketing but also promotion, the fourth element of the original marketing mix. Customerchoice is often influenced by familiarity with the brand, or sometimes the level of trust in the brand name(Smith & Taylor, 2004). Familiarity can be generated by actual experience and/or increased awareness boostedby, for instance, advertising (ibid). Surprisingly, leading academics have either taken Howard and Sheth’sframework as given in 1969 or have taken a cue from it to design their own simple models of consumerbehaviour. Nevertheless, in designing their own simple models, it appears they have gone on to make thesame oversight made by Howard and Sheth of excluding the Ps for processes, physical evidence, and people.This is despite the fact that since the early 1980s, there has been wide acknowledgement of the importanceof soft elements of marketing in emergent specialist marketing literature such as relationship marketing(Egan, 2008), corporate identity and/or image and reputation management (Melewar & Saunders, 2000;Keller, 2000 & 2002; Lambert, 1989; Suvatjis & de Chernatony, 2005), marketing communications (Smith& Taylor, 2004; Egan, 2007), services marketing (Booms & Bitner, 1981; Bitner, 1992; Parasuraman, Zeithaml,& Berry, 1988; Palmer, 2001 & 2003; Lovelock & Wirtz, 2004 & 2011) and in general marketing (Blythe,2005; Rafiq & Ahmed, 1995) and consumer behaviour (Blythe, 2008).

2.2 Simplified and Black Box Models of Consumer BehaviourA variety of simple models of consumer behaviour have been suggested in the literature (e.g. Kotler, 2000;Peter & Olson, 1994; Kotler et al., 2009; SSchiffman et al., 2010; Loudon & Bitta, 1993; Kotler & Keller, 2006;Hawkins, Best & Coney, 2004; Kotler & Keller, 2012). While these models have been reviewed in general,this paper focuses on three of them (i.e. Kotler & Keller, 2012; Schiffman et al., 2010) and one black-boxmodel (Smith & Taylor, 2004). The simple models are, perhaps, so-called because they are simplified versionsof complex models. However, simple models of consumer behaviour are also comprehensive as they havethree main parts i.e. input, processing and output found in complex models. Simplified models, just likecomplex models, consider the internal factors of the consumer or the human mind such as perception,attitude, motivation, learning, and personality alongside variables like culture, social and personalcharacteristics. Combined, these attempt to explain how consumers process information in order to makepurchase decisions.



2.2.1 Kotler and Keller’s model of consumer behaviourThe Kotler and Keller (2006 & 2012) model of consumer behaviour, Figure 1.1 above, acknowledges theimportance of psychological factors in determining customer behaviour but does not use the terms input,processor and output, which other simple models like Schiffman et al.’s (2010) use (see Figure 2.1 above &Figures 2.2 & 2.3 below). However, from the visual presentation of the components of the model, it is clearthat the Kotler and Keller model has the three parts too but does not label them. As in complex models thatinform Kotler and Keller’s (2012) framework, the marketing stimuli dimension of their model comprisesonly the four Ps of marketing. In Kotler et al.’s (2002:229) words:

“Marketing stimuli consists of the [traditional] four Ps: product, price, place and promotion. Otherstimuli include significant forces and events in the buyer’s environment; economic, technological,political and cultural. All these stimuli enter the buyer’s black box, where they are turned into a set ofobservable buyer responses [shown on the right-hand side of Figure 1.1 above]: product choice, brandchoice, dealer choice, purchase timing and purchase amount.”

The quotation above is silent on the soft elements of marketing despite that they are now a recognised partof the marketing mix (see Blythe, 2005; Rafiq & Ahmed, 1995). However, services marketing chapters inKotler et al. (2002) and Kotler and Keller (2006) acknowledge the soft ‘P’s, a legacy they have also extendedto their later editions (e.g. Kotler et al., 2009; Kotler & Keller, 2012). Ironically, Kotler et al. (2009:308) statethat:

“Marketing planning begins with formulating an offering to meet target customers’ needs or wants.The customer will judge the offering by three basic elements: product features and quality, services mixand quality, and price.”

Surprisingly, Kotler and Keller (2012:25) repeat the same statements above word-for-word, despite that theydo not go on to recognise the need to update the fours Ps to include among others soft elements like peopleand processes. While their marketing stimuli component now has “product and services”, the paper takesthe words as mere synonyms because the authors did not go on to include the three soft elements in themodel.

2.2.3 Schiffman et al.’s model of consumer decision makingIn Schiffman et al.’s (2010) framework (Figure 2.2 below), the ‘firm’s marketing efforts’, which is the equivalentof marketing stimuli in Kotler and Keller’s (2012) stimulus-response model, only the traditional marketingmix elements of product, promotion, price and channels of distribution [or place] are included. The softelements of marketing — people, physical evidence, and processes — are evidently excluded. This is despitethe fact that elsewhere in their textbook, the two academics acknowledge that all product purchases (tangibleand intangible) have elements of service. “Researchers have tried to integrate the concepts of product qualityand service quality into an overall transaction satisfaction index, on the basis that all product (i.e. tangible)purchases contain some element of service beyond the core tangible offering” (Schiffman & Kanuk, 2000:148).

2.2.4 An enlarged black-box modelWhile their enlarged black-box model has the three main parts contained in simplified models of buyerbehaviour, Smith and Taylor (2004) state that the black-box approach is distinct in that it considers only theinputs and outputs. Black-box models treat the individual and his physiological and psychological make-upas an impenetrable ‘black-box’ (Williams, 1989). So they consider for measurement only the inputs andoutputs processes of consumer behaviour and completely ignore the internal mental (intervening) processes—i.e. motivation, perception, attitude, personality, learning, and memory.

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Source: Smith and Taylor (2004:102).

Figure 2.2: A Model of Consumer Decision Making

Source: Schiffman, Kanuk, Kumar and Wisenblit (2010:18).

Figure 2.3: An Enlarged Black-box Model

ProductPricePlacePromotion: Advertising Selling Sales promotion Publicity Packaging Point-of-sale Merchandising Exhibitions Corporate identity Sponsorship Sales literature Direct marketing Word-of-mouth

Inputs/Stimuli

Buyer

Processor

Product purchase

Brand purchase

Brand loyalty/repeat purchase

Size of purchase

Frequency of purchase

Outputs/Behaviour

Firm's Marketing Efforts1. Product2. Promotion3. Price4. Channels of distribution

Input

Process

Output

External Influences

Post-purchasebehaviour

Socio-cultural Environment1. Family2. Reference groups3. Non-commercial sources4. Social class5. Culture and subculture

Need Recognition

Pre-purchaseSearch

Evaluation ofAlternatives

Psychological Field1. Motivation2. Perception3. Learning4. Personality5. Attitude

Experience

Purchase1. Trial2. Repeat purchase

Post- purchase Evalution

Consumer Decision Making



Interestingly, the inputs/stimuli component of black-box models is restricted to the traditional four Ps ofmarketing just like complex and simplified models of consumer behaviour. Although black-box models asinferred from Smith and Taylor’s (2004) enlarged black box model in Figure 2.3 above have an enlarged ‘P’for promotion which gives a detailed list of the marketing communications mix, their input dimension hasthe same weakness as that of complex and simple models of consumer behaviour. The input componentexcludes the soft elements of marketing.

3. THE SOFT ELEMENTS OF MARKETING: A THEORETICAL DISCUSSIONThis paper has conceptually considered the influence of the soft elements of marketing on consumerbehaviour basing on extant complex, simple, and black-box stimulus-response models and emergent specialistand generic marketing literature. The theoretical review has established that most existing consumer-stimulusresponse models are underpinned by the traditional four Ps of marketing. This is despite that the importanceof the seven Ps of marketing in determining consumer response is confirmed not just in emergent specialistmarketing literature such as relationship marketing, corporate identity and/or image and reputationmanagement, marketing communications, and services marketing, but also in general marketing and customerbehaviour literature. However, when Blythe (2008:435-439) elaborates on the influence of the seven Ps ofmarketing on consumer response, his general consumer behaviour model remains basic as it does notitemise the seven Ps of marketing in its personal and environmental factors. In addition, Blythe (2008)explains the impact of people, processes and physical evidence on customer response from a service marketingviewpoint yet the seven Ps framework is also suitable to physical goods marketing. Surprisingly, the genericmarketing planning process designed by Blythe (2005) is grounded on the seven Ps of marketing formulation.

While Kotler and Keller (2012) suggest that the starting point for understanding consumer behavior is thestimulus-response model, the marketing stimuli component of their framework is confined to the traditionalfour Ps of marketing instead of the modern and more comprehensive seven Ps. Marketing and environmentalstimuli enter the consumer’s consciousness, and a set of psychological processes combine with certainconsumer characteristics to result in decision processes and purchase decisions (Kotler, Keller, Koshy & Jha,2009). The marketer’s task is to understand what happens in the consumer’s consciousness between thearrival of the outside marketing stimuli and the ultimate purchase decisions (Kotler & Keller, 2012). Certainly,the comprehensive seven Ps of marketing, not just the traditional four Ps, should be critical to all this. It haslong been realised that marketing planning is ultimately driven by the marketing planner’s perception ofhow and why customers behave as they do, and how they are likely to respond to the various elements ofthe marketing mix (Wilson & Gilligan, 2003). So the marketing stimuli element of the input component ofany good general consumer-stimulus response model can no longer be limited to McCarthy’s (1960) fourPs of marketing but, at the minimum, the seven Ps.

Despite that consumer behaviour chapters of, and models presented in, some leading marketing textbookssuch as Kotler et al. (2009), Kotler and Armstrong (2009), and Kotler and Keller (2012), Smith and Taylor(2004) omit the soft elements of marketing, some general marketing literature equally recognises theirimportance in marketing tangible products too (e.g. Rafiq & Ahmed, 1995; Blythe, 2005). In addition, allabove-cited Kotler editions and other strategic marketing texts such as Wilson and Gilligan (2003 & 2005),Ferrell and Hartline (2011), Lancaster and Reynolds (2005) recognise the importance of the seven Ps ofmarketing although they still emphasise the point that the soft elements of marketing are relevant to servicesonly. Many tangible products are created and delivered alongside services. According to the levels of a productconstruct (e.g. Levitt, 1981; Kotler & Keller, 2012,) all products, tangible and intangible, are services: a hotelprovides rest and sleep and a drill makes holes. Therefore, it is important that stimulus-response modelsalso consider the impact of people, physical evidence, and processes in determining consumer behaviourrather than simply focusing on the traditional four Ps only which, if combined, constitute the seven Ps ofmarketing. Notwithstanding that the seven Ps model is obviously not exhaustive in explaining operationaland strategic marketing decisions marketers have to make, it is a convenient framework from which to beginconceiving marketing mix decisions. The impact of the original four Ps of marketing — product, price,

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promotion, and place — on consumer response is explained adequately in extant general marketing andconsumer behaviour literature but that for the three soft elements of marketing — people, physical evidence,and processes — is not. The importance of the soft elements of marketing is amplified in many servicemarketing frameworks such as the servuction system (Langeard, Bateson, Lovelock & Eiglier, 1981), servicetriangle (Albrecht & Zemke, 1985), service-profit chain (Heskett, Jones, Loveman, Sasser, & Schelsinger,1994), servicescapes (Bitner, 1992), service quality or SERVQUAL (Parasuraman, Zeithaml & Berry, 1985,1988), and service performance or SERVPERF (Cronin & Taylor, 1992). The challenge is that these modelsare often talked about in the context of service marketing yet if evidence on the universal applicability of theseven Ps of marketing from Rafiq and Ahmed’s (1995) empirical study is taken into account, they areequally critical to general marketing including tangible goods marketing.

Langeard et al.’s (1981) servuction model has at its centre the customer and on the periphery four criticalfactors, namely, other customers, servicesscapes, contact personnel/service providers, and the invisibleorganisation and systems. Servicescapes, contact personnel and systems are the physical evidence, processand people respectively. Consequently, Bitner (1992) might have been influenced by Langeard et al’s servuctionsystems model to design the servicescapes model. The service triangle framework designed by Albrecht andZemke (1985), has at its heart the customer and on the periphery three fundamental constructs i.e. theservice strategy, systems, and employees. Thus the systems and employees represent the processes and peopleelements of the three soft elements. Heskett et al.’s (1994) service-profit chain has at its centre employeesatisfaction and internal service quality including workplace designs, which are all about people and physicalevidence. The five dimensions of service quality, which are also now being regarded as proxy latent variablesof customer satisfaction — tangibles, reliability, responsiveness, assurance, and empathy — in Parasuraman,Zeithaml and Berry’s (1985, 1988) SERVQUAL and Cronin and Taylor’s (1992) SERVPERF models amplifythe importance of physical evidence in the tangibles and employees in the responsiveness, assurance, andempathy constructs.

3.1 People and Consumer BehaviourPeople are a significant aspect of the marketing mix, the elements necessary for the execution of marketingprogrammes and operations. The people element reflects, in part, internal marketing and the fact thatemployees are fundamental to marketing success (Kotler & Keller, 2012). Employee satisfaction and customersatisfaction are clearly interrelated (Hoffman, Bateson, Wood & Kenyon, 2009; Wilson, Zeithaml, Bitner &Gremler, 2012; Heskett et al., 1994). Marketing will only be as good as the people inside the organisationand it also reflects the fact that marketers must view consumers as people to understand their lives morebroadly and not just as they shop for and consume products and services (Kotler & Keller, 2012). Top-levelexecutives know that in the new economics of service, frontline workers and customers need to be the focusof management concern (Heskett et al., 1994). Satisfied employees are loyal to the firm and improve theirindividual productivity (Hoffman et al., 2009). Customer-contact service employees should be the focusbecause “they are the service, they are the organisation in the customer’s eyes, they are the brand, and theyare marketers” (Wilson et al., 2012:249). The assurance dimension of Parasuraman, Zeithaml and Berry’s(1988) SERVQUAL and Cronin and Taylor’s (1992) SERVPERF scales measures the knowledge and courtesyof employees and their ability to convey trust and confidence in external customers (Adetunji, Yadavalli &Malada, 2013).

Rust and Zahorik’s (1993) and Heskett et al.’s (1994) service-profit chain demonstrates the importance ofemployees in creating satisfied and loyal customers, which results in healthy service-profits and growth.Reaching service profits and growth goals begins with taking care of those who take care of customers(Kotler et al., 2002)—i.e. participants/people (Booms & Bitner, 1991) or personnel (Blythe, 2005; Hoffmanet al., 2009). The importance of employees in marketing is also reflected in corporate identity, image andreputation literature. Corporate identity, image and reputation are fundamental to all organisations whetherthey are in the service business or not. Corporate image associations may reflect characteristics of theemployees of the company (Keller, 2000). Kotler et al. (2002) suggest that in order to achieve favourable



service outcomes, service marketing requires more than just traditional marketing but also internal marketingand interactive marketing. While Kotler et al.’s (2002) suggestion is welcome, it somewhat implies, wrongly,that internal marketing is not essential in the general marketing context i.e. tangible goods firms. The goalof internal marketing is to train and motivate employees to perform so that they delight customers and inthe process help the firm to achieve its objectives (Muzondo & Mutandwa, 2011). Keller (2000) says thatretail stores derive much brand equity from employees within the organisation. Considering that manyemployees directly or indirectly interact with consumers, their words and actions must consistently reinforceand support the brand meaning (Keller, Parameswaran & Jacob, 2011; Keller, 2002, 2013).

According to Kotler et al. (2002) ‘interactive marketing means that the perceived service quality dependsheavily on the quality of the buyer-seller interaction. While grocery retailing predominantly involves physicalgoods marketing, it is officially a service industry. Customers buy products from retailers; retailers haveemployees who interact with customers in the shopping and buying process. Parasuman, Zeithaml andBerry’s (1988) SERVQUAL model lists reliability, competence, communication, courtesy, and responsiveness,which all relate to employees in a marketing organisation. Although the seven Ps framework achieved ahigh degree of acceptance as a generic marketing mix in a sample of academic respondents (Rafiq & Ahmed,1995), the study also found out that the participants/people variable is the most widely accepted element ofthe new variables—the soft elements of marketing. Consequently, the paper makes the following proposition:

P1: The variable people is important in determining consumer behaviour.

Moreover, Kotler (2000) states that the marketing concept rests on four pillars: target market, customerneeds, integrated marketing, and profitability. Integrated marketing recognises the importance of people inan organisation’s marketing philosophy and practice regardless of whether the organisation markets servicesor tangible products. Kotler and Keller (2006:285-6) admit that one implication of this new [integrated]marketing approach is that:

“The traditional ‘marketing-mix’ concept and the notion of the ‘4 Ps’ may not adequately describemodern marketing programs... Marketers must now ‘walk the talk’ to deliver the brand promise. Theymust adopt an internal perspective to consider what steps to take to be sure employees and marketingpartners appreciate and understand basic branding notions, and how they can help—or hurt—brandequity.”

3.2 Processes and Consumer BehaviourComparing organisations to computers, this paper regards processes as the software dimension withoutwhich an organisation cannot create and deliver customer value. Smith and Taylor (2004) state that processesinclude the methods used to produce, deliver and consume a service. Hence processes are inseparabilitylinked to the value chain (see e.g. Porter, 1985) even in firms that specialise in tangible goods. The valuechain model explains how the various and otherwise disparate activities of a business can be integrated todesign, produce, communicate and deliver value to target customers. Surprisingly, processes are omittedfrom simple and seminal complex models of consumer behaviour yet they are not just part of the extendedmarketing mix but also the value chain itself. The processes as a generic marketing variable rather than justservices marketing had reasonable support among the respondents in Rafiq and Ahmed’s (1995) study.Thus it is hypothesised that:

P2: The processes are an important variable in determining consumer behaviour.

One of the components of Langeard et al.’s (1981) servuction system is the invisible organisation and system.The component reflects the rules, regulations and processes upon which the organisation relies (Hoffman etal., 2009). In addition, Hoffman et al. argue that although they are not visible to the customer, they have anoverwhelming influence on the consumer’s service encounter. The invisible organisation and systems impactelements such as information forms that customers have to complete, the number of staff working in thecompany at any given time and the policies of the organisation concerning countless decisions that may

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range from the substitution of menu items to whether the company accepts students cards for price discounts(Hoffman et al., 2009). The invisible part is the process element from the extended marketing mix comprisingsystems, backroom procedures and the technology or equipment required to produce the service (Wilson etal., 2012).

3.3 Physical Evidence and Consumer BehaviourThe physical evidence concerns the tangible aspects of an organisation, the atmospherics (Muzondo &Mutandwa, 2011) which reflect the identity of the marketer. Consequently, this paper regards physical evidenceas the hardware side of an organisation. The physical environment is particularly important in creating afavourable impression for such services as banks, retail stores, and professional services because there arefew objective criteria by which consumers can judge the quality of the services they receive (Bitner, 1992).The effect of atmospherics, or physical design and decor elements, on consumers and employees, is recognisedby managers and stated in almost all marketing, retailing, and organisational behaviour contexts, Bitneradds. Given that even tangible goods are also services at the core benefit level, it means that physical evidenceshould be seen as a fundamental variable in modelling consumer response within a general marketingsetting rather than the services marketing context alone.

Nonetheless, the physical evidence variable is the least well-supported of the new variables (Rafiq & Ahmed,1995). The duo note that this is probably because physical evidence is not as well-conceptualised as peopleand process, which are frequently discussed in relationship marketing literature, which, in turn, provides astrong rationale and conceptualisation of these two variables. “The physical evidence variable, on the otherhand, is not discussed much outside the services marketing area and this may be one reason for the weaksupport for it in this research” (Rafiq & Ahmed, 1995:14). Empirical and conceptual support on the relevanceof physical evidence as a generic marketing mix element stated in Rafiq and Ahmed (1995) and Blythe(2005) respectively provides this paper with the basis for making the following proposition:

P3: Physical evidence is an important variable in determining consumer behaviour.

It is essentially true that human behaviour is influenced by the physical setting in which it occurs (Bitner,1992). Interestingly, however, before the 1960s, psychologists generally overlooked the effects of physicalsetting in their attempts to forecast and illuminate behaviour (ibid). The significance of physical evidence asa stimulant for customer behaviour is amply demonstrated in Bitner’s servicescapes model. The effect ofatmospherics, or physical design and decor elements on consumer and workers, is recognised by managersand declared in almost every marketing, retailing, and organisational behaviour text (Bitner, 1992:57).

Physical evidence encompasses all the tangible and even intangible things which affect consumers’ perceptionsof a product including the marketer of the product itself. Thus the atmospherics include offices, officefurniture, company vehicles, company uniforms (or whatever clothes employees wear). In particular, thedimensions of the physical surroundings that can be controlled by the firm to enhance (or limit) employeeand customer actions are endless: lighting, colour, signage, textures, quality of materials, style of furnishings,wall decor, temperature, scent, music (Bitner, 1992:65), brochures, business cards (Hoffman et al., 2009)and others. Within the confines of the servuction model, the visible part is broken into the inanimateenvironment (physical evidence) and the service providers or people who interact with customers duringthe service experience (Wilson et al., 2012).

4. CONCLUSIONS AND IMPLICATIONS4.1 ConclusionsThis article has theoretically assessed and confirmed the significance of the soft elements of marketing —i.e. people, processes and physical evidence — in determining consumer response, basing on a review ofexisting literature. It has been discovered that theorising in the marketing stimuli unit of existing simple,black-box and complex stimulus-response models of consumer behaviour is limited to the four Ps of



marketing—i.e. product, price, promotion and place (see e.g. Kotler & Keller, 2012; Schiffman et al., 2010;Smith & Taylor, 2004). This is despite the fact that selected generic marketing literature (e.g. Blythe, 2005;Rafiq & Ahmed, 1995) and consumer behaviour literature (e.g. Blythe, 2008) and emergent specialistmarketing literature i.e. corporate identify, branding, relationship marketing, marketing communications,and services marketing widely acknowledge the fundamental role of the soft elements of marketing indesigning marketing strategy. In view of these acknowledgements, this paper reasons that the soft elementsof marketing are just as critical to modelling consumer behaviour as the traditional four Ps of marketing. Sothe marketing stimuli dimension of consumer behaviour models should be based on the seven Ps of marketingi.e. the traditional four Ps plus the soft elements of marketing.

Accordingly, the paper proposes that the marketing stimuli sub components of, for example, Howard andSheth’s (1969) ground-breaking complex model of consumer behaviour and its leading simplified versionssuch as Kotler and Keller’s (2012:161) model of consumer behaviour, Schiffman et al.’s (2010:18) simplemodel of consumer decision making, and the enlarged black-box model (i.e. Smith & Taylor, 2004:102)critically reviewed in this paper, should be revised to include the soft elements of marketing. Building onfrom a blend of these models, the paper proposes a modified generic theoretical model of consumer behaviourshown in Figure 3.1 below.

Figure 3.1: A Modified Generic Theoretical Model of Consumer Behaviour

Macro Context

PoliticalLegalEconomicTechnologicalSocio-culturalNaturalInternational

Micro Context

CompetitionCustomersGovernmentMediaIntermediariesGeneral public

Marketing Stimuli

ProductPricePromotionPlacePeopleProcessesPhysicalevidence

Need recognitionInformation search

Evaluation of alternativesPurchase decision

Post-purchase behaviour

Customer black box

Customer's responses

Customer decision-making process

PersonalityPerceptionLearning

MotivationMemoryAttitude

Customer characteristics

Product choiceBrand choiceDealer choice

Purchase timingPurchase amountPayment method

InputComponent

ProcessingComponent

OputComponent

N. Muzondo


The value of this new theoretical framework lies in the marketing stimuli sub component of its inputcomponent. Its marketing stimuli are based on the seven Ps of marketing rather than the four Ps henceacademics and practitioners should always model consumer response drawing on the seven Ps. The role ofthe soft Ps of marketing — i.e. people, processes and physical evidence — in the proposed modified generictheoretical model of consumer behaviour has been clarified in 3.1 to 3.3 above. The primary argument ofthe proposed conceptual model is that; consumer behaviour, whether in the tangible products- or service-dominant context, is influenced by the seven Ps of marketing. This paper does not explain the role of thetraditional four Ps in consumer modelling because this has been done sufficiently in the cited existingcomplex and simple models of consumer behaviour.

Secondly, unlike Kotler and Keller’s (2012) and Schiffman et al.’s (2010), simple but comprehensive models,the proposed conceptual model is significant in that, apart from advocating a marketing stimuli elementbased on the seven Ps of marketing instead of the four Ps, it also offers the most comprehensive inputcomponent based on the micro and macro factors of the marketing environment although these have notbeen covered in the literature review. Kotler and Keller’s (2012) model of consumer behaviour suggests onlyfour elements — i.e. economic, technological, political, and cultural — in its other stimuli sub componentas fundamental to influencing the behaviour of consumers. Similarly, the sociocultural environment subelement of the input component of Schiffman and Kanuk’s (2000) simple model of consumer decisionmaking lists the family, informal sources, other non-commercial sources, social class, and subculture andculture as important determinants of consumer behaviour. Drawn from the construct of the external marketingenvironment, which is also evident in the input components of Kotler and Keller’s (2012) and Schiffman etal.’s (2010) models, the input dimension of the modified generic model of consumer stimulus-responseproposed in this paper, argues that the micro and macro contexts of marketers have important behaviouralimplications for consumers hence marketing strategies of organisations. The micro context of the inputcomponent of the modified conceptual model consists of competition, customers, government, media,intermediaries, and general public. This is basically the stakeholder environment.

The macro elements go beyond economic, technological, political, and cultural factors to include legal(although this can be subsumed in the political variable), social (integrated with cultural), natural, andinternational elements. The international dimension of consumer behaviour can be best understood fromcountry of origin branding perspective (Ahmed & d’Astou, 1995; Kerbouche, Adouka, Belmimoun, &Guenouni, 2012; Laforet, 2010; Josiassen & Assaf, 2009; Dmitrovic & Vida, 2009). The effects of these elementson corporate operations are adequately explained in the business or marketing environment and strategicplanning chapters of some of the textbooks cited in this article. One can infer from the effects of thesefactors on company operations to make further inferences on how they overlap to influence buyer behaviour.The paper does not explain the processing and output components of the suggested model because they areexplained adequately in the existing models reviewed in the paper (e.g. see Kotler & Keller, 2012; Schiffman& Kanuk, 2000; Schiffman et al., 2010).

4.2 Managerial and Academic Implications4.2.1 Managerial ImplicationsThe managerial implications of this conceptual paper are that; marketing practitioners should always takeinto account the seven Ps of marketing when they model consumer behaviour. Consequently, when marketingmanagers craft marketing strategies, they must go beyond the traditional four Ps to include people, physicalevidence, and processes, regardless of whether their marketing plans are for tangible goods or pure services.This is because the seven Ps of marketing is now an acceptable generic model of marketing (e.g. see Rafiq &Ahmed, 1995; Blythe, 2005). For instance, in his general marketing textbook Blythe (2005:262) presents ageneral marketing planning process grounded in the seven Ps of marketing. This theoretical evidence provesthe universal relevance of the seven Ps of marketing to services and tangible products.



4.2.2 Academic ImplicationsThe paper has two important academic implications. The first is that the marketing stimuli component ofconsumer stimulus-response models should be revised to include the three soft elements of marketing. Thisis because the marketing stimuli dimension of extant consumer behaviour models cannot go unchallengedgiven the conceptual arguments and empirical evidence in the general marketing literature and emergentspecialist areas of marketing confirming the importance of the soft elements of marketing in determiningcustomer response and designing marketing mix strategies.

Notwithstanding its fundamental contribution to knowledge, the main argument of this paper is weak as itis based on a review of existing literature alone without the backing of empirical evidence from a primarystudy. Moreover, the ongoing debate on the marketing mix as a marketing management tool has beenlargely fought on a theoretical rather than empirical front (Constantinides, 2006). The marketing mix is nota scientific theory, but merely a conceptual framework that identifies the principal decisions made by managersin configuring their offerings to suit consumers’ needs (Goi, 2009). This is due to lack of reliable researchdata on the way the mix is used by practitioners dealing with marketing problems and lack of data on theexact effects of the Ps on the success or failure of marketing programmes (Constantinides, 2006). Hence thesecond implication of this paper is that academic studies that would test the soft elements or the seven Ps ofmarketing in the proposed modified generic theoretical model of consumer behaviour within a genericmarketing context are welcome.

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N. Muzondo


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R. Ndamba and W. Matamande


Regulating the Accountancy Profession: An Examination of theRegulatory framework for the Accountancy Profession in Zimbabwe

Rodney Ndamba1 and Wilson MatamandeDepartment of Accountancy, University of Zimbabwe

ABSTRACTThe accountancy profession in Zimbabwe has been evolving for the past three decades. Thepast two decades witnessed regulatory framework changes leading to the setting of a regulatorybody under the Public Accountants and Auditors Board (PAAB) through a statutory instrumentof Parliament (PAA Act: 27:12). This research paper examines potential regulatory gaps thatmay exist in the framework, structural setting and legal instrument governing PAAB with theaim to establish evidence to support future developments in the accounting profession inZimbabwe. The research conducted a desk review of legal instruments and organisationaldocuments. Further, a narrative enquiry was explored with audit firms and professionalaccountants in Zimbabwe. The findings show that despite the progressive regulatoryframework developments, there are gaps in the structural setting, framework and regulatoryinstruments governing the accounting profession in Zimbabwe. The findings show that theregulatory framework is predominantly private sector orientated and there is limited inclusionof the public sector and the no-for-profit sectors in framework and structural setting ofPAAB.

Key words: Public Accountants and Auditors Board, Regulatory Framework, Private Sector, Self-Regulation

1. INTRODUCTIONThe accountancy profession in Zimbabwe has received little research attention over the past years. While theprofession may have developed positively on the regulatory framework in Southern Africa, exposing theregulatory framework to research provide opportunities for identifying and addressing any regulatoryframework gaps. This research paper examines regulatory gaps in the accounting profession in Zimbabwewith the aim to demystify the regulatory framework. The objective being set to continue to assess developmentsin the regulation of the profession so as to identify and address any regulatory gaps that may not be receivingappropriate attention. The researchers believe that by carrying out critical review on the regulatory framework,structure and legislative instruments, the accounting profession in Zimbabwe will strongly develop to providea model for other accounting profession regulation in Southern Africa. General observations have shownthat regulation of the accounting profession in Southern Africa tend to be characterized by frameworkswhere one accountancy body plays a dual role of being a regulator and professional accountancy body atthe same time (Odendaal and de Jager, 2008). This perspective raises questions on separation of dutiesbetween being a self-regulator and regulating other accounting bodies in the same country. Besides havingmany players being allowed in Zimbabwe, it would be extremely difficult for one body to be a player andreferee at the same time.

2. RESEARCH BACKGROUNDProper regulations began to be fully emphasised in the US in (1933-1934) following The Great Depression.The state was intervening to protect the public interest. In April 1993, an amendment of the Companies Act(24:03) required organisations in Zimbabwe to follow the regulations as set by the ZAPB being a subsidiaryof PAAB which was meant to curb self-regulation which occurred from (1905-1992). In 2010, after themajor downturn and chronic hyperinflation of 2008, the government of Zimbabwe requested the WorldBank to conduct a review exercise which resulted in the Report on Observation of Standards and Codes(ROSC).

An Examination of the Regulatory framework for the Accountancy Profession in Zimbabwe


The accountancy profession in Zimbabwe had been largely self-regulating through the Chartered AccountantsAct: 27.02 of 1918 (Government of Zimbabwe, 2001). Over the past decades, the accounting professionwent through regulatory reforms which saw the establishment of a regulatory board under the PublicAccountants and Auditors Boards (PAAB) in 1993 through an Act of Parliament, the Public Accountantsand Auditors Act of 1996 (Chapter 27: 12). The Act was formulated in response to the need to address ascenario where chartered accountants had dual role of being a regulator and an accountancy body.

Following the establishment of PAAB, the World Bank review exercise was meant to identify anydevelopmental gaps over the past years within the profession in Zimbabwe. This exercise identified potentialtechnical and financial support areas to strengthen the accountancy profession in Zimbabwe ROSC (WorldBank, 2011). The World Bank report (2011) highlighted a significant case for understanding the regulatoryframework for the accountancy profession in Zimbabwe. While the Report on Observation of Standardsand Codes (ROSC) managed to provide a documentation of the accounting profession regulation, it struggledto outline the regulatory framework of PAAB.

While ROSC was not meant to just provide documentation of the accounting profession, it providedrecommendations for improvement in the regulation of the accounting profession in Zimbabwe (WorldBank, 2011). Major recommendations focused on the functional role and responsibility with particularattention of PAAB developing to be a central regulator of accounting and auditing, member registration andoversight of professional bodies (World Bank, 2011). The other recommendation were the establishment ofAccounting Standards Committee, Auditing Standards Committee, Education Oversight Committee, FinancialReporting Review Panel, Audit Practice Review Panel and the Monitoring and Enforcement Committee(World Bank, 2011). These recommendations provide a business case for this research to provide a descriptiveevaluation of the extent to which these recommendations have contributed to the current regulatoryframework and development of PAAB.

The ROSC report provides the only standing documentation of the accounting profession in Zimbabwe,hence this research follows up to establish the regulatory framework and gaps that may exist. However,there has been little available research that has been done on the regulation of the accounting profession inZimbabwe. Further, this research will contribute to literature and descriptive profiling of the accountancyprofession in Zimbabwe.

The accounting function is a unique profession in that the operations of any organisation are eventuallyreduced to coming in and going out of financial information or money in some instances. Accountantspossess specialized skills, which many corporate officers and executives may not have. This therefore callsfor strong regulatory framework in the profession which this paper examines in the context of Zimbabwe.

3. LITERATURE REVIEWThe accountancy profession has developed in strength since the establishment of the International Federationof Accountants (IFAC) in 1977 (IFAC, 2015). IFAC as a global accountancy body outlined that sustainabilityof the profession hinges on the quality of services provided by members and on profession’s ability torespond effectively and efficiently to demands of the economy and society (IFAC, 2011). Therefore, regulationbecomes the cornerstone for achieving the right quality and consistency in the profession. Literature supportsIFAC’s position with the view that regulation provides a basis for developing the profession, ensure quality,standardize practices and protect public interest (Perry, 1985; Lahey, 2012, OECD, 2009). However,understanding the framework for regulation is critical. The research critically reviewed literature on regulation,structural setting, legal instruments and case study experiences of selected countries.

3.1 Critical Perspective Accounting Profession RegulationRegulation of the accountancy profession is a critical function for protecting interest of the profession’sstakeholders. According to Perry (1985), regulation in the accountancy profession can be through self-



regulation, peer-regulation, legislative regulation (state licensing authorities) or a combination of methods.Lahey (2012) note that self-regulation is one of the most common regulatory form in countries like Canada.Self-regulation allow member bodies to develop and implement agreed policies and procedures of conductin the profession. However, this form of regulation could face challenges where members are in competitionin the market.

Peer regulation provides regulation through a voluntary association which allows members to use codes ofprofessional ethics, which require members to comply with both technical and ethical standards (Perry,1985). However, peer regulation being voluntary can be affected by unwillingness of members with a strongmarket position to be regulated by standards that may impact or affect their market position. Legislativeregulation through state licensing authorities provides a framework in which the state prescribe minimumrequirements for a body to be granted a licence as professional accountancy body (Perry, 1985). However,the approach allows state intervention in the regulation which may be perceived as over involvement inprofessional matters.

Regulation of accountancy profession in Africa shows that Nigeria follows self-regulatory through the FinancialRegulatory Council of Nigeria which oversees the Association of National Accountants of Nigeria (ANAN)and the Institute of Chartered Accountants in Nigeria (FRCof Nigeria, 2013). Mauritius and Namibia alsofollow a self-regulatory approach (Iyambo, 2015; World Bank, 2011). The regulatory approach in manyAfrican countries has been largely self-regulatory.

3.2 Structural setting in Accounting Profession RegulationThe regulatory structure of a regulatory body is a critical legitimacy function in any jurisdiction particularlyin trust related institution like accountants bodies. Regulatory structure has been a critical success factor forthe International Federation of Accountants (IFAC) as noted by Loft et al (2006). While IFAC has beencredited for its regulatory structure, achieving similar structural setting in many countries around the worldhas remained a challenge for a number of reasons. Regulatory structure is important because it is anunavoidable feature in a regulatory function (Wall and Eisenbeis, 1999). Having a clear functional structurein the accounting profession is instrumental in managing functional conflicts that may emerge amongmember bodies. In countries where the accounting profession is regulated through legal instruments, thestructure tends to be designed from a functional perspective.

The regulatory structure provides an indication of division of responsibility and the flow of authority.Structural settings in regulating the accounting profession varies from country to country depending on theregulatory framework. For instance, the structure of Financial Reporting Council in Mauritius uses Panelassigned activities and goals (FRC Mauritius, 2014). The United Kingdom uses Committees that serve underthe Financial Reporting Council which is the regulatory body (FRC UK, 2014, ICAEW, 2012). In SouthAfrica, accounting is regulated through the South African Institute of Chartered Accountants (SAICA) whileauditing is regulated through Independent Regulatory Board for Auditors (IRBA, 2015). South Africa usesCommittees tasked with various functional responsibilities (SAICA, 2014). In Zambia, regulatory structureunder the Zambia Institute of Chartered Accountants (ZiCA) is based on committees with functionalresponsibilities (ZiCA, 2015). Regulatory structure in Namibia follows a similar South African approachbased on committees under the Institute of Chartered Accountants of Namibia (ICAN, 2015). Observationshow that structural setting approach of using committees tends to be associated with countries where theaccounting profession is self-regulatory.

In Kenya, the accountancy profession regulated under the Accountants Act Chapter 531 (2012), laws ofKenya which was enacted on 1 July 1977 and uses Boards as regulatory structures. Kenya has three boardsnamely Kenya Accountants and Secretaries National Examinations Boards (KASNEB), Registration ofAccountants Board (RAB), and the Institute of Certified Public Accountants of Kenya (Trade and Development,2006). The case analysis of the structure of the accounting profession in Kenya reflects a regulatory approachbased on legal instruments where specific functional bodies are established as required by the establishingAct.



Analysis of literature shows that where the regulatory framework approach is based on self-regulation,committees tend to be in use. Where legal instruments are used for regulation, boards tend to be used inthose countries. In most countries, the following professional bodies have been found to be active, includingthe Institute of Chartered Accountants (ICA), Institute of Certified Public Accountants (CPA), Associationof Chartered Certified Accountants (ACCA), Chartered Institute of Management Accountants (CIMA) andChartered Secretaries through local country branches.

3.3 Legal Instruments Regulation of the Accounting ProfessionRegulation of the accounting profession in some cases is through legal instrument or legislative approach.Legal regulation which is also known as external regulation provide a case where governments set up anindependent regulatory body through an Act of Parliament (Hoepplie, 2013). The use of legal instrumentsin regulating the accounting profession has potential value of driving high standards, technical competencesand ethical behaviour (FCM, 2007; Takawira, 2012). Countries like Kenya have realised benefits of legalinstrument approach to regulating the accounting profession through strict accounting governance referencedto the Accountants Act (Chapter. 531) (Trade and Development Board (2006).

A number of countries in Africa use legal instruments in regulating the accounting profession. Typical countriesinclude Kenya, South Africa and Zimbabwe, to name a few, were explored in this section. In Kenya, theaccounting profession is regulated through the Accountants Act (15.531 and the Companies Act (Chapter.486) (Government of Kenya, 2012; World Bank, 2001; Trade and Development Board, 2006). In SouthAfrica, the Independent Regulatory Board for Auditors (IRBA) functions according to the Auditing ProfessionAct, 2005(26 of 2005) (IRBA, 2015) even though it provides for self-regulation. However, it is notable thatSouth Africa separated the legal regulation of accountants in practice (auditors) and accountants in business(IFAC, 2013). In Zimbabwe, the profession is regulated through the Public Accountants and Auditors Act(27:12) (Government of Zimbabwe, 1996). However, it is crucial to note that countries that use legalinstruments in regulating their accounting profession tend to be associated with strong accounting practicesas witnessed in Kenya (Trade and Development, 2006).

4. METHODOLOGYThe research adopted a phenomenological position to examine the regulatory framework of the accountingprofession in Zimbabwe. A similar approach was adopted in examination of the UK accountancy profession(Sikka, 2001; Puxty et al, 2002). The position allowed conducting narrative inquiry so as to provide adescriptive profiling of the regulatory framework of the accounting profession in Zimbabwe. The narrativeinquiry were based on a cross sectional time horizon using the year 2015. The research was designed toallow triangulation of primary data based approach with secondary data based approach. The researchconducted a desk review of legal instruments and other documents providing information on the governanceof the accounting profession in Zimbabwe.

Primary data was collected through focused meetings based on open ended questionnaires to allowinterviewees to reveal more details than could have been revealed in controlled interviews or questionnaires.A sample of 4 big audit firms out of 12 major auditing firms registered with the Public Accountants andAuditors Board (PAAB) were used. These firms were selected because of their long history and involvementin the evolution of the accounting profession in Zimbabwe pre and post-independence 1980. Meetingnotes formed qualitative data for the research analysis to identify gaps and constructing research results andfindings.

Secondary data was collected from desk review of legislative instruments and archival documents on theaccounting profession in Zimbabwe. The secondary data was analysed to provide descriptive research findingson regulatory structure and legal instrument governing the accounting profession. The content analysis wasused to collect factual information which would be analysed through categorisation into the themes ofprofiling the regulation of the accounting profession in Zimbabwe as presented in results and findings.



5. RESULTS AND FINDINGSThis section presents results of secondary data review and interviews conducted. The results are presented inthe order starting with the regulatory framework, regulatory structure of PAAB and regulatory legal instrument.Given the qualitative nature of the research, research findings and results are presented in descriptive format.

5.1 Regulatory FrameworkA review of the regulatory framework in Zimbabwe showed that the accountancy profession is regulatedthrough a legislative approach using a state licencing authority. In Zimbabwe, the establishment of thePublic Accountants and Auditors Board (PAAB) through the Public Accountants and Auditors Act 1996,27:12, evidence a state based approach to regulation of the accounting profession. According to the PAA Act(1996), bodies such as the Institute of Chartered Accountants of Zimbabwe, The Association of CharteredCertified Accountants (Zimbabwe Chapter), The Chartered Institute of Management Accountants (ZimbabweChapter), Institute of Chartered Secretaries and Administrators in Zimbabwe and the Institute of CertifiedPublic Accountants (Zimbabwe Chapter) are recognised and cited in the Act as accounting professionalbodies that can generate professional accountants. Unlike in previous regulatory approach, the Institute ofChartered Accountants in Zimbabwe and Institute of Chartered Secretaries and Administrators in Zimbabwewere self-regulatory through Acts of Parliament establishments. However, the regulatory framework appearto be private sector orientated and excludes public sector and not-for-profit making sector.

An analysis of interview notes showed that regulatory framework is largely driven by the PAA Act (1996).However, the regulatory framework approach can only thrive in jurisdictions with efficient political systemthat attends to regulatory changes in time. The current regulatory framework was also noted by IFAC (2011)as providing for the role of governments so as to protect public interest, manage costs, control quality andensure national consistency in service provision. The PAAB regulatory approach was noted by World Bank(2011) to be effective because of the role of government in regulation. It was also noted that the demand foraccountability and contribution to national economic development had effects on the scope for effectiveregulation.

The registration for licencing of practitioner accountants was noted to be in two (2) categories which are‘Public Auditor’ and ‘Public Accountant’ (PAA Act, 1996). However, the licencing of practicing accountantsis primarily focused on practitioners who provide services to the public on financial information. The licencingof practitioners does not cover those involved in other services relating to non-financial information.

5.2 Regulatory Structure of PAABAn analysis of interviews and secondary data showed that the Public Accountants and Auditors Board structureis based on hybrid approach composed of Boards, Committees and Panels. The structure is highly influencedby the legal instruments approach to the regulation of the accounting profession in Zimbabwe. PAAB hasone board, the Zimbabwe Accounting Practice Board (ZAPB) established in 1977 as a standards settingboard for both the private and public sector. On enactment of the Public Accountants and Auditors Act(PAA, 27:12), in 1996, ZAPB was mainstreamed into PAAB. ZAPB operates along two other committeeswhich includes the Education and Development Committee (EDC) and the Practice Review Committee(PRC).

ZAPB is a statutory body that is responsible for the national accounting standards setting and it includesrepresentatives of preparers, users and auditors of financial statements. ZAPB has three (3) subcommitteesthat includes the Committee for Auditing Standards Setting, Public Sector Accounting Standards Committeeand IFRS Sub Committee. However, all the sub committees are mainly ceremonial on standards settingbecause auditing, public sector accounting and IFRS standard are developed at international level. Therefore,the committees are mainly responsible for formal adoption of standards for national implementation.

The structure presented in Figure 1 reflects the extent to which PAAB has been able to implement WorldBank (2011) ROSC recommendations. However, implementation of the Monitoring and Enforcement



Committee remains an outstanding structure not yet implemented. This structure is a crucial setting thatwould enhance the credibility of PAAB as a regulator.

Under the PAAB structure as guided by PAA Act (27:12), the Zimbabwe branch of the Association of CharteredCertified Accountants (ACCA) and the Institute of Chartered Accountants of Zimbabwe (ICAZ)) are theonly professional accountancy bodies that are granted auditing rights by law. While ZAPB has beenincorporated into PAAB structure, World Bank (2011) noted there is no amendment of the PAA Act (27:12)to reflect the structure outlined in Figure 1.

Figure 1: PAAB Structure

Education and development

committee

PAAB

ZAPPractice review

committee

Financial reporting monitoring panelCommittee for auditing

standards setting

Public sector accounting standard committee

IFRS sub committee

Source: PAAB and Researcher Compilation

An analysis of the regulatory structure show that PAAB operate with a two tier system in which Tier 1 iscomposed of members of IFAC while Tier 2 is composed of non-IFAC registered members. However, thestructure in Figure 1 shows that Tax Practitioners under the Institute for Chartered Tax Accountants (ICTA)are not covered in the structure which mainly focus on accounting and auditing only. A weakness in thecurrent structure of PAAB is that it does not cover consultants and internal auditors who interface with non-financial information such as consultants or advisors on financial information like IFRS Advisors and InternalAuditors. The structure of PAAB assumes that consultants or advisors are regulated somewhere like ZIMRAin the case of tax consultants or tax accountants which may not be the case. The structure does not coverChartered Secretaries who offer company secretarial work on financial statements. The assumption is that



members of the Institute of Chartered Secretaries and Administrators in Zimbabwe are accountants purelywhich raises a number of questions.

Overall members to PAAB includes the Institute of Chartered Accountants of Zimbabwe (ICAZ), Associationof Chartered Certified Accountants (ACCA) Zimbabwe, Chartered Institute of Management Accountants(CIMA) Zimbabwe and the Institute of Certified Public Accountants (ICPA) Zimbabwe in Tier 1. ICPAZtook over the Zimbabwe Institute of Public Finance and Accountants (ZIPFA). However, the name ICPA isassociated with private sector accounting than public sector accounting in countries like Australia and theUSA. While the legitimacy of ICPA as public sectors accounting body is questionable, it will be ideal forPAAB to restore the name ZIPFA to bring a strong significance of public sector accounting in Zimbabwe.

The Tier 2 of PAAB is composed of Institute of Chartered Secretaries and Administrators of Zimbabwe(ICSAZ), Southern Africa Association of Accountants (SAAA) and Institute of Certified Tax Accountants(ICTA) and others. This tier mainly caters for accountants in company secretarial, tax practitioners, accountingtechnicians and internal auditors. However, the structure of PAAB recognise accountants at membershiplevel. Therefore, affiliates are not recognised in any structure.

Table 1: Accountancy Bodies

Level Bodies Criteria

Tier 1 • ICAZ Member of IFAC through direct membership

• ACCA

• ICPA

• CIMA

Tier 2 • ICSAZ Non-members of IFAC based on direct membership

• ICTA

• SAAA

• IIA

• IAC

Source: Researchers Compilation

An analysis of the interviews and secondary data shows that there is little information on how an accountancybody can move from one tier to the other. The tiers seem a permanent feature till one becomes member ofIFAC. Findings show that PAAB is silent on progression by accountancy bodies in lower tier.

5.3 Legal Instruments GapsA mapping of legal instruments governing professional accountants in Zimbabwe showed that accountantsare mainly governed or impacted by the Public Accountants and Auditors Act (27:12); Chartered Secretaries(Private) Act (27:03); Companies Act (24:03); Private Business Corporations Act (24:11); Zimbabwe StockExchange Act (24:18); Chartered Accountants Act (27:02); Banking Act: (27:20); Insurance Act (24:07),Income Tax Act (23:06) and Public Finance Management Act (22:19) (Government of Zimbabwe, 1951;1973; 1987; 1995; 2000; 2001; 2002; 2009; 2014). These legal instruments provide guidance on who canperform accounting or auditing functions. The legal instruments also define standards to be used, level ofeducation and technical competences. However, some of the laws such as the Chartered Accountants Act(27:02) and Chartered Secretaries (Private) Act (27:03) which were superceded by the PAA Act (27:12) havenot yet been repealed in Parliament and remain in force. This creates confusion in the regulation of theaccounting profession in Zimbabwe.

An analysis of the legal instruments against the governance structure showed that Public and NGO sectorsare not incorporated in the PAAB structure. Interviews with informants showed that public sector accountants



participate in governance of PAAB despite there being no separately identifiable public sector accountancybody recognised in the PAA Act. This gap remains to be attended in the legal instruments despite there beingthe Public Finance Management Act (22:19) which governs accounting in the public sector and is behindthe adoption of public sector accounting standards through the Accountant General’s Office under theMinistry of Finance and Economic Planning. This gap also evidences that legal instruments closely associatedwith PAAB are private sector accounting orientated. Further, there is gap in the recognition of Tax Accountants,Internal Auditors and Accounting Technicians in the PAA Act (1996, Chapter 27:12). Analysis showed thatthe Act only focused on accountancy bodies that are registered with the International Federation ofAccountants (IFAC).

6. CONCLUSION AND RECOMMENDATIONThe findings have shown that while regulation of the accounting profession has achieved remarkable progressin ensuring a legitimate regulatory structure, there still remains minor gaps and perception issues. PAAB isperceived as private sector orientated due to the strong structural orientation towards private sector. Thereare sectors such as the not-for-profit making accounting which do not seem to be mentioned in the regulatoryapproach. Further, findings show the public sector accounting structure is largely being represented by anaccounting body associated with private sector regulation in other countries like USA, Ireland and Australia,and this creates misconceptions. The regulatory framework provides strong position for effective regulationdue to the legislatives regulatory approach through the PAAB Act (27:12) as compared to self-regulation.The current regulatory framework through statutory is ideal for Zimbabwe given the past history of corporatefailure where accountants have been involved. In comparison with countries like South Africa, Kenya, Namibiaand Mauritius, Zimbabwe’s PAAB provides a model regulatory approach to the accounting profession inSouthern Africa. The regulatory framework no longer provide for any accounting body to play a dual role ofbeing regulator and professional accountants body unlike countries like Zambia and South Africa.

Findings also demonstrated that there are legal gaps in the inclusion of tax practitioners, internal auditorsand accounting advisors who are not included explicitly in the regulatory framework and legal instrumentsof the accounting profession in Zimbabwe. Further, not-for-profit making institutions are not covered in theregulatory framework of PAAB. On the other hand, findings show that there is weak link between the PublicFinance Management Act and the PAA Act (27:12) as evidence implicit regulatory approach to public sectoraccounting despite what appears to be a camouflaging public sector regulatory inclusion in PAAB structure.The research recommend a holistic approach to the regulation of the accounting profession in Zimbabwe.

It would be highly recommendable for the Accountant General in Ministry of Finance and EconomicDevelopment and Portfolio Committee on Public Finance and Accounts in the Parliament of Zimbabwe torestore the Zimbabwe Public Finance and Accountancy (ZIPFA) through an Act of Parliament so as to buildstrong position and skills development institution dedicated for accountants for the public sector unlikethe current state. The body would stand strongly to represent Public Sector Accountants than through thecurrent CPA route. ZIPFA could be linked with other international public sector accounting bodies like theChartered Institute of Public Finance and Accountancy (CIPFA). CPFA is the only professional accountancybody exclusively dedicated to the public finance in the World (CIPFA, 2015).

The research recommends PAAB to continue to review the regulatory framework, structure and legalinstruments against the operational capacity to administer the framework. While PAAB possess a modelregulatory structure, the ability and capacity to ensure all its structure function effectively given its staffcapacity of just less than four people in secretariat is key threat to the profession’s standing as a legitimateregulator.

While the research focused on regulatory framework, future research could focus on the administrativenature of the regulatory framework in Zimbabwe including the licensing of practitioners in Zimbabwe.



7. REFERENCESCIPFA. 2015 Annual Report 2015, London: Chartered Institute of Public Finance and Accountancy Publication.

FCM. 2007 The Accounting and Auditing profession in Mediterranean countries: a comprehensive study, FCM Publication.

FRC Mauritius. 2014 Annual Report 2014: FRC Mauritius.

FRC UK. 2014 Annual Report 2014: FRC UK

Government of Kenya. 2012 Accountants Act [Chapter 531: Laws of Kenya. No. 15]: National Council of Law Reporting.

Government of Zimbabwe. 2001 Banking Act [24:20]: Government Publications

Government of Zimbabwe. 2001 Chartered Accountants [27:02]: Harare, Government Publications.

Government of Zimbabwe. 2002 Chartered Secretaries (Private) Act [27:03]: Harare, Government Publications.

Government of Zimbabwe. 1951 Companies Act [24:03], Harare: Government Publications.

Government of Zimbabwe. 1973 Zimbabwe Stock Exchange Act [24:18], Harare: Government Publications.

Government of Zimbabwe. 1987 Insurance Act [24:07], Harare: Government Publications.

Government of Zimbabwe. 1995 Public Accountants and Auditors Act [27:12], Harare: Government Publications.

Government of Zimbabwe. 1993 Private Business Corporation Act [24:11], Harare: Government Publications.

Government of Zimbabwe. 2009 Public Finance Management Act [22:19], Harare: Government Publications.

Government of Zimbabwe, 2014 Income tax Act [23:06], Harare: Government Publications.

Hoepplie, T. 2013 ‘The Regulation of the Accountancy Profession in South Africa – draft paper’, in Forum of Accounting Bodies:Halfway House.

ICAEW. 2012 Structure and Regulation of Accountancy Profession: ICAEW Publications.

ICAN, 2015. Institute of Chartered Accountants of Namibia: ICAN

IFAC. 2015 Annual Report 2015: IFAC Publications.

IFAC. 2011 Regulation of the Accountancy Profession: New York. IFAC Publications.

IFAC. 2013 Code of Ethics for Professional Accountants: IFAC Publications

IRBA, 2015. The Independent Regulatory Board for Auditors, IRBA: Johannesburg.

Iyambo, A. 2015 Accounting and auditing regulation in Namibia: San Francisco.

Lahey, W. 2012 Self-Regulation and Unification Discussions in Canada’s Accountanting Profession. S.1.:s.n.

Loft. A, Humphrey. C and Turley. S. 2006 ‘In pursuit of global regulation: Changing governance and accountability structures atthe International Federation of Accountants (IFAC)’, in Accounting, Auditing & Accountability Journal, vol. 19 Issue: 3, pp.428-451.

Odendaal, E.M and de Jager, H, 2008 ‘Regulation of auditing in South Africa’, Southern Africa Journal of Accountability andAuditing, Vol. 8: pp. 1- 13.

OECD, 2009 Competition and Regulation in Auditing and Related Professions, in OECD Publications: Paris, DAF/COMP (19).

Perry. G. L. 1985 ‘The regulation of the accountancy profession and the problem of enforcement’, in Journal of ComparativeBusiness and Capital Market Law, Issue 7, pp.291-304

SAICA. 2014 Annual Report 2014: SAICA.

Sikka, P. 2001 ‘Regulation of accountancy and the power of capital: some observations’, in Critical Perspective on AccountingJournal, Vol 12, Issue 2, pp 199-211.

Takawira, G. 2012 ‘Upholding Accounting Values’, in The Herald, 9 July: Available on: www.herald.co.zw/uphold-accounting-values/.

Trade and Development Board. 2006 ‘Review of Practical Implementation issues of international Financial Reporting Standards –Kenya’, TDB Publications.

Tuxty, A.G, Willmott, H.C, Cooper, D.J and Lowe, T. 2002. ‘Modes of regulation in advanced capitalism: Locating accountancyin four countries’, in Accounting, Organizations and Society Journal: Vol 12, Issue 3, pp 273 – 291.

Wall, L.D & Eisenbeis, R.A. 1999 ‘Financial Regulatory Structure and resolution of conflicts goals’, in Journal of Finance ServicesResearch. Vol.16, Issue 2, pp 223-245.

World Bank. 2011 Report on Observation of Standards and Codes (ROSC): Zimbabwe, s.1.: s.n.

World Bank. 2011 Report on Observation of Standards and Codes (ROSC): Mauritius, s.1.: s.n.

World Bank. 2011 Report on Observation of Standards and Codes (ROSC): Kenya, s.1.: s.n.

ZiCA.2015 Regulation of the Accounting Profession in Zambia. s.1.: ZICA

Predictors of organizational commitment: Evidence from non-governmental organizations in Zimbabwe


Predictors of organizational commitment: Evidence fromnon-governmental organizations in Zimbabwe

P. Zanovhi, M. Sandada and M. MagoUniversity of Zimbabwe

ABSTRACTThe dynamic and harsh environment has led to high employee turnover as employees continueto search for greener pastures. This has pushed Non-governmental organizations (NGOs) tolook for ways to enforce employee commitment to their organizations. The purpose of thisstudy was to investigate the factors that influence organizational commitment amongemployees of NGOs operating in Zimbabwe. Whilst organizational commitment and itsdeterminants have been extensively researched through literature and in other academicplatforms, there is dearth of research on organizational commitment in NGOs operating indeveloping countries, especially Zimbabwe. This cross-sectional study used a quantitativesurvey design. A survey was conducted in which 200 employees were randomly selectedfrom Harare Province to participate in the study. A self-administered questionnaire wasused to collect data which was then analyzed using descriptive, correlation and regressionanalyses. The results indicate that; employee empowerment, organizational support, employeerelationships and teamwork are predictors of organizational commitment. The findings haveimplications to human resource managers of NGOs in Zimbabwe, who are advised to makeefforts of supporting and empowering employees as well as enforcing teamwork andrelationships among employees in order to ensure organizational commitment.

Key words: Organizational commitment, organizational support, employee empowerment, employeerelationships, teamwork, NGOs

1. INTRODUCTIONOrganizational researchers and managers pay special attention to employees’ organizational commitmentbased on the belief that organizations with committed employees achieve superior long-term performance(Fu et al. 2009). Given the dynamic and competitive environment, no organization can perform well unlessif each employee is committed to the organization’s objectives (Dordedic, 2004). The reason is that theperformance of any organization is affected by how committed its workforce is to the organization. Therefore,nowadays, the most important sources of competitive advantage in organizations, is committed, motivatedand conscientious employees (Goudarzvandchegini and Kheradmand, 2013). Employees that are not highlycommitted to the organization are most likely not going to perform well (Ghorbanhosseini, 2012). Lowlevels of employee commitment are associated with high turnover (Mowday, 1998). High employee turnovermay be a source of competitive disadvantage because of recruitment and training costs (Morrow, 2011). Inorder to ensure that employees are committed to their organizations, it is imperative to know the drivers ofemployee commitment.

There are several factors that influence the commitment of employees to their organizations (Ghorbanhossein,2012). Teamwork (Ghorbanhossein, 2012), employee relationship (Chinomona and Sandada, 2012),organizational support (Chinomona and Sandada, 2013), and employee empowerment (Naqvi et al. 2011)are some of them. NGOs in Zimbabwe that are seeking strategies to help improve organizational commitmentin their workforce, should address these key factors. It has been noted that employee commitment is high inorganizations where there is teamwork, where employees have good working relationship, where there isorganizational support and where employees perceive that they are being empowered (Insan et al. 2013).Therefore, in order to ensure employee commitment, NGOs need to move from control oriented tocommitted-oriented work practices by addressing these factors (Bhatnagar, 2005). It is important for thenon-governmental organizations in Zimbabwe to understand factors influencing organizational commitmentso that they focus on ensuring that those factors that affect employee commitment are known. Other scholars

P. Zanovhi, M. Sandada and M. Mago


such as Faisal et al., (2014) recommend that organizations that value commitment among their employeesare able to motivate employees to be committed and hence engage in extra-role behaviors, such as creativenessor innovativeness. In the light of the professed importance of organizational commitment, it is thereforecritical to establish the factors that influence organizational commitment in the NGOs sector.

2. RESEARCH PROBLEMA cross examination of the extant literature on the predictors of organizational commitment indicates thata lot of studies have focused on other sectors, in the developed western countries and Asia. No similarresearch has been undertaken in the NGO sector, as well as in the Sub-Saharan Africa developing countrieslike Zimbabwe. If this situation remains, NGOs in Zimbabwe will not be able to benefit from the factorsthat influence organizational commitment, as highlighted in literature. These firms will continue to beexposed to possibilities of failure, as a consequence of their failure to undertake organizational commitments.In turn, it will have a ripple effect on the Gross Domestic Product (GDP) and subsequently, the nationaleconomy of the country. Therefore, this presents an important research gap that warrants academic scrutiny.Against this background, the objective of this study was to determine the factors that influence employeeorganizational commitment in the NGO sector in Zimbabwe, in order to find ways for the firms in thesector to benefit in the running of their business operations and avoid the detriment possibilities of failure.

3. OBJECTIVESThe overall objective of the study was to determine the factors that influence organizational commitmentamong Non-governmental employees.

The specific objectives were formulated as follows:

• To evaluate the influence of teamwork on employee organizational commitment;

• To investigate the influence of employee relationships on their commitment to the organization;

• To investigate the influence of organizational support on employee organizational commitment; and

• To evaluate the influence of employee empowerment on organizational commitment.

This study will contribute to the literature on organizational commitment by developing and testing aconceptual framework that shows how teamwork, employee relationships, organizational support andemployee empowerment influence employee commitment. It will also provide some practical insights toNGOs and other sectors on how they can enhance employees’ commitment to their respective organizations.

4. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT4.1 The Social exchange theoryThe social exchange theory, according to Emhan (2012) was proposed by Homans in 1958. The basicassumption of this theory is that organizations receive positive contributions from employees in exchangefor providing benefits to their employees. When one person treats another well, the reciprocity norm obligesthe return of favourable treatment (Mohammadi et al. 2014). To the extent that both the employee and theemployer apply the reciprocity norm to their relationship, favourable treatment received by either party isreciprocated, leading to beneficial outcomes for both (Wikhamn & Hall 2012; Cropanzano & Mitchell2005). Drawing from this social exchange theory, this study submits that employees in the NGOs operatingin Zimbabwe become committed to their organisations if they perceive that there is organisational support,teamwork, employee empowerment and if there are good working relations with other employees.

4.2 Organizational commitmentAccording to Filstad (2011), organizational commitment is an attachment to the organization, characterisedby an intention to remain in it, identification with the values and goals of the organization; and a willingness



to exert extra effort on its behalf. It is also defined as the behavioral intention or reaction, determined by theindividual’s perception of the normative pressure (Cohen, 2007). This behavioral aspect of organizationalcommitment is explained through calculative and normative commitments. The calculative or normativeperspective refers to an employee’s commitment to continue working for the organization based on thenotion of weighing cost-benefits of leaving an organization (Filstad, 2011). In the same vein, Dordevic(2004) views organizational commitment as two-dimensional namely, affective and continuance. Whileaffective commitment is a positive feeling of identification with, attachment to and involvement in thework organization, continuance commitment refers to the extent to which employees feel committed totheir organization by virtue of the costs that they feel are associated with leaving. This suggests that theremust be a relationship between the organization and its employees for the two to continue together (Dordevic2004; Saeed et al. 2013).

4.3 TeamworkAccording to Ghorbanhossein (2013), a team is a working group which has all the conditions for a realteam and its members are totally committed to each other’s promotion and success. The authors furthermention that one of the essential elements of a team is its focus toward a common goal and a clear purpose.This demonstrates that teams are an integral part of many organizations. According to Cropanzano andMitchell (2005), successful teamwork relies upon synergism existing between all team members creating anenvironment where they are all willing to contribute and participate in order to promote and nurture apositive, effective team environment. Team members must be flexible enough to adapt to cooperative workingenvironments where goals are achieved through collaboration and social interdependence rather thanindividualized, competitive goals (Ghorbanhosseini, 2012).

4.4 Organizational SupportDawley et al (2007) suggest that organizational support describes employees’ beliefs that the organizationvalues their contribution and well-being. Organizational support develops by meeting employees’ socio-emotional needs and showing readiness to reward employees’ extra efforts and to give help that would beneeded by employees to do their jobs better. The benefits of perceived organizational support often areunderstood in reciprocal terms, an employee who sees the employer as supportive is likely to return thegesture (Cropanzano and Mitchell,2005). The more the organization treats its employees well, the more theemployees respond well and care about the organization (Wikhamn and Hall 2012; Cropanzano and Mitchell2005; Cohen and Veled-hecht 2010).

4.5 Employee EmpowermentAli (2013) defines employee empowerment as a process of giving authority to the employees to make necessaryimportant decisions on their own about their day to day activities. Empowered employees are expected toperform their work more effectively and efficiently than non-empowered employees. Empowerment according(Borghei et al., 2010) is a process which enables others to gain power, authority, and influence over others,institutions or society. This shows that for employees to perceive that they have been empowered, theyshould have decision-making of their own, having access to information and resources for taking properdecisions, ability to exercise assertiveness to collective decision making and having positive thinking on theability to make change. According to Boudrias et al. (2009), employee empowerment is not only implementedto change employee cognitions, but also to foster proactive behaviours that could have an impact onorganizational outcomes.

The notion of empowerment involves the workforce being provided with a greater degree of flexibility andmore freedom to make decisions relating to work. The central tenet is that workers respond more creativelywhen given broad responsibilities, encouraged to contribute, and helped to derive satisfaction from theirwork (Greasley et al., 2008). Empowerment comes when the authority of the organizations makes decisions



and resolve organizational issues and to be delegated to subordinates so that they are able to increaseemployee flexibility and speed. It also comes with the assignment of responsibilities, and authority toemployees, creating conditions for mutual trust between management and employees, involving employeesin decision-making (Insan et al., 2013).

4.6 Employee RelationshipsEmployee relationships refer to an association between two interacting groups of employees (Cropanzanoand Mitchell, 2005). The authors proceed to mention that good employee relationships ensure that employeestake care of each other and this produces effective work behaviour and positive employee attitudes. Employeerelationships are therefore critical in ensuring a conducive working environment and hence an individualemployee to be committed to other employees.

Based on the foregoing discussion, the following hypotheses were formulated:

H1: Teamwork has a significant positive effect on organizational commitment

H2: Organizational support has a positive effect on organizational commitment

H3: Employee relationships have a significant positive effect on organizational commitment

H4: Employee empowerment has a positive effect on organizational commitment

Drawing from the extant literature on organizational behavior and Human Resources Management discussedabove, and the Social Exchange theory, a conceptual framework was developed as depicted in Figure 1. Themodel is comprised of five constructs: four precursors (teamwork among employees, organizational supportto employees, employee relationships and employee empowerment) and one outcome (organizationalcommitment). The study proposes that the identified precursors consequently result in commitment to theorganization by employees.

Figure 1 Conceptual Framework Model

Employee Teamwork Employee Relationship

Organizational Support Employee Empowerment

OrganizationalCommitment

H1 H3

H2 H4



5. RESEARCH METHODOLOGY5.1 Strategy, population and sampleThe research adopted the positivism philosophy. This was the paradigm that guided the data collection andanalysis phases of the research project. The study also utilised the quantitative research approach as it wasappropriate to quantify the cause and effect of teamwork, organisational support, employee empowermentand employee relationships on organisational commitment. A survey method through the use of structuredquestionnaires was adopted as a strategy to collect the data because it ensured economic data collection ina short space of time (Cohen et al, 2005). 200 employees in the NGOs in Harare were invited to participatein the study. The sample contained NGOs obtained from the National Association of Non-governmentalOrganisations (NANGO). A simple random sampling technique was used to come up with a sample fromthe sample frame (list of NGOs). It is a type of probability sampling technique where there is an equalchance (probability) of selecting each unit from the population being studied when creating a sample.

5.2 Data collection proceduresThe employees were requested to complete a self-administered questionnaire that was distributed by researchassistants. Of the 200 questionnaires that were distributed, 97 were returned and this resulted in a 49%response rate. Most of the respondents in the NGOs are found out of offices doing field work, a factor whichreduced the response rate.

5.3 InstrumentationThe scale items for the constructs were adapted from validated scales of previous similar studies. Allen andMeyer’s (2000) instrument was adapted for the organizational commitment construct, Lurie, Schultz andLamanna (2011) for the teamwork construct, Chinomona and Sandada (2013) for employee relationshipsconstruct, Chinomona and Sandada (2014) for the organizational support construct and Hayes (1994) forthe employee empowerment construct. The items were modified to make sure they measure the relevantconstructs. The five point Likert scale was used where “strongly disagree’’ = 1, “disagree” = 2, “Neutral’’ = 3,“Agree’’ = 4, and “Strongly agree’’ = 5.

5.4 Data analysisThe data analysis consisted of inspecting the questionnaires for completeness and correctness of theinformation captured. Data was entered into SSPS statistical software package and an examination ofdescriptive responses done according to frequency distributions and descriptive statistics. Correlation analyseswere performed to assess the degree of association between variables under study. Multiple regression analysiswas also conducted so as to identify the extent to which the variables under study influenced firm performance.

5.5 Reliability and validity measuresThe internal consistency reliability of the instrument was tested by computing Cronbach’s Alpha coefficient.An overall value of 0.903 was achieved which is greater than the acceptable benchmark of 0.60 (Saunders,2009). The reliability of each scale in the study was checked. As shown in Table 1, all the scales yielded analpha value greater than 0.6, teamwork (0.807), organisational support (0.763), employee relations (0.824),employee empowerment (0.793) and organisational commitment (0.850), which implies that the scalesfor all the constructs were reliable. The content validity of the instrument was censured by consulting subjectexperts to review the instrument and also by conducting a pilot study with a few employees to check foradequacy and clarity validity of the instrument. The results of the study were then used to improve theinstrument by making adjustments to some questions that lacked clarity. Table 1 depicts the internal reliabilityof the scales.



Table 1 Reliability statistics

Variables Number of Items Cronbach’s Alpha value

Team work 7 0.807

Organisational support 7 0.763

Employee relations 6 0.824

Employee empowerment 7 0.793

Organisational commitment 9 0.850

Overall Cronbach’s Alpha 43 0.903

6. RESULTS OF THE STUDY6.1 Sample distributionThe gender profile of the respondents revealed that male respondents (n=57 constituting 59%), were morethan female respondents (n=40 constituting 41%) of the total respondents. With regard to the respondents’age, most of the employees (n=39; 40%) are aged between 26-30 years, (n=22; 23%) are aged between 21-25 years, followed by the age group between 31-35 years (n=21; 22%), whilst a few employees 8% were agedbetween 41-45 years with the last 7% being constituted by those aged between 36-40 years. The age distributionresults are almost skewed towards between 20 and 35 years. This age group is representative of the generalworking class in Zimbabwe, especially in the NGOs. These organisations require young adults who can dofield work more than mature adults who will be having more responsibilities to consider. In terms ofemployment type in the NGOs, the greater number of employees (n =83) constituting 86% are on contracttype of employment, whilst (n=13) constituting 13% are employed as permanent workers and one of therespondent constituting 1% did not provide the employment type. Responses regarding the current positionwere as follows: Senior manager (n=6; 6%), junior manager (n=16; 16%), officer (n=68; 70%), generalhand (n=7; 7%). In terms of the educational background of the respondents, the results indicate that mostof them (n=41; 43%) have attained degrees as their highest qualification, followed by those with diplomas(n=25; 26%), those with post graduate degrees (n=17; 18%), those with ordinary level (n=6; 6%), thosewith advanced level (n=5; 5%), and lastly those with certificates (n=3; 3%). The qualifications result isskewed towards degrees as most NGOs do employee personnel from university graduates as field officers,with a few in other departments such as health would have diplomas in their relevant fields.

6.2 Correlation analysis

The results from the correlations were examined using the Spearman’s rank correlation “rho”. This wasnecessitated by the fact that the sample data was non parametric. The Spearman’s correlation is a non-parametric rank-based statistical test for unevenly distributed data (Babin, Kruger and Griffin, 2009). It wasused because the data was ranked and not normally distributed. The correlation takes a range from -1.0 fora perfect negative relationship to +1.0 for a perfect positive relationship (Welman, Kruger and Mitchell,2005). The level of association between independent variables and the dependent variable employeeorganisational commitment are shown in the Table 2 below.

Table 2 Correlation Analysis Results

Factors 1 2 3 4 5

Team work 1 1

Organisational support 2 .730** 1

Employee relations 3 .645** .612** 1

Employee empowerment 4 .600** .767** .584** 1

Organisational commitment 5 .472** .637** .412** .542** 1

**. Correlation is significant at the 0.01 level (2-tailed).



According to the results in Table 2, it was observed that relationships between team work and organisationalcommitment (r=.472), organisational support and organisational commitment (r=0.637, employee relationsand organisational commitment (r=0.412), employee empowerment and organisational commitment (0.542)are positive at p<0.01, demonstrating that all the four predictors are significantly correlated to organisationalcommitment.

6.3 Regression analysisHaving analysed the results of correlations between the variables, the researcher went on further to conducta regression analysis since the correlation analysis simply measures the strength of a relationship whilst itdoes not determine the predictive relationship between the variables. In order to determine how teamwork,organisational support, employee relations and employee empowerment- as the independent variables,predict the employee organisational commitment- which is the dependent variable, a regression analysismodel was computed using the multiple regression analysis. Table 3 shows the results from the regressionanalysis showing the predictive power of each factor on employee organisational commitment.

Table 3. Regression between the independent variables and organisational commitment

Independent Variables Std. Error Beta t-value Sig.

(Constant) .684 0.786 .435

Team work .180 0.143 1.824 .189

Organisational support .194 0.655 4.581 .000*

Employee relations .213 0.412 2.514 .030*

Employee empowerment .242 0.458 2.339 .010*

R=0.658; R Square = 0.433; Adjusted R Square = 0.408; F = 17.543. * significant at p<0.05

The results shown in Table 3 reflect that the goodness of fit is satisfactory with an Adjusted R Square = 0.408.This implies that the factors that influence employee organisational commitment in the non-governmentalsector in Zimbabwe such as teamwork, organisational support, employee relations and employeeempowerment explain about 41% of the variance in employee organisational commitment as indicated bythe predictive power coefficient of 0.408. Therefore, about 59% of employee organisational commitmentremains unexplained.

The beta coefficients reveal that organisational support to employees is generally more powerful and mostsignificant in explaining the contributions of the factors to employee organisational commitment (?=0.655,p<0.01), followed by employee empowerment (?=0.458, p<0.05) and employee relations (?=0.412, p< 0.05).However, teamwork (?=0.143 p>0.05) showed an insignificant result but with a positive contribution to theemployee commitment.

7. DISCUSSION OF RESULTSThese results from the sample statistics could possibly be explained by the assertions of Aube (2007), Soetanto(2008), Morrow (2008) and Armstrong (2012), who recommended that organisational support, teamwork,employee relations and employee empowerment are critical in ensuring employee organisationalcommitment. This supports the findings of other researchers like Ghorbanhosseini (2013). Individuals arelikely to commit themselves to a team and consequently, to an organization that fosters teamwork. Ucarand Otken (2012), Cropanzo and Mitchell (2005) and Mohammadi et al (2014), also found a positiverelationship between organizational support and organizational commitment. The assertion that employeerelations within the organization leads to organization commitment, is also supported by studies carriedout by researchers such as Ahmed (2012), Filstad (2011), Nguyen et al (2014), and Dordevic (2004). Therefore,the three hypotheses, H2, H3 and H4 are supported as they positively influence organisational commitment,while H1 is rejected.



This study provides valuable information to management in the non-governmental sector in Zimbabwe. Itprovides insights in areas of concentration in matters that aim to improve employee commitment inorganizational performance.

8. LIMITATIONS OF THE STUDYThe research was conducted with a target of 200 respondents in Harare alone, because of time and costchallenges. Some potential respondents could not be accessed in the study time because of their nature offield work.

9. DIRECTIONS FOR FUTURE RESEARCHThe researcher proposes the following as possible areas for further studies. Studies that encompass morerespondents and covering a wider area (beyond the capital city of Harare), may be more representative andcould yield different results. More time and financial resources for accessing all the potential informantsshould also be considered. It may also be of good benefit if another study can be done in Zimbabwe tocompare the effects in the non-profit making organization and those in the profit making organization andestablish if the same conclusions can be drawn.

10. CONCLUSIONThe results from the analysis supported all the four hypotheses, showing high correlations between theindividual factors which are independent variables and employee organisational commitment as thedependent variable. It is in line with the basic assumption of the social exchange theory (Emhan, 2012), thetwo-dimensional notion of organizational commitment (Dordevic, 2004), cooperative working environmentfor collaboration and social interdependence in teamwork (Ghorbanhosseini, 2012) and others. However,it was also noted from the findings that organisational support to employees has much influential power inpredicting the employee organisational commitment of employees in the NGO sector in Zimbabwe, whilstteamwork had the lowest level of influence in the sector. All the factors under study indicated a positive levelof correlation with the employee commitment in the NGO sector in Zimbabwe. The hypotheses were allaccepted as they were deemed to have a positive influence on employee organisational commitment. Theconclusion drawn from this study is that teamwork, organizational support, employee relations and employeeempowerment in the NGO sector in Zimbabwe, have a positive effect on their commitment to organizationswhich they work for.

11. RECOMMENDATIONSWhilst all the factors may have a positive influence on organizational commitment, the results infer thatsome factors have a stronger impact than others. Therefore, given the limitation of financial resources inZimbabwe, it could be recommended that to enhance organizational commitment, organizations mayprioritize to implement the factors that have a high impact namely, organizational support and employeeempowerment. The findings do not mean that NGOs should overlook the other two factors (teamwork andemployee relationships). It is critical for NGOs to enforce all the factors and then identify which factorscould need more attention within the organization. It is important for an organization to identify whichfactors lead to organizational commitment among the employees because corrective actions can be taken toenhance and monitor organizational commitment. In terms of the regression analysis results, organizationalsupport and employee empowerment are the most important predictors to ensure organizationalcommitment. This means that management should make sure that employees are supported through variousmeans. In the same vein, management should also ensure that employees are empowered as this enhancestheir commitment to the organization.



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Chinomona, R., Sandada, M., 2013,“Shared Goal, Communication and Absence of Damaging Conflicts as antecedents of employeerelationships strength at institutions of higher learning in South Africa.Mediterranean Journal of Social Sciences, Vol.4.No. 3, pp.137-145.

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Guidelines for Authors

1. NATURE OF MANUSCRIPTS ARTICLESManuscripts articles may be empirical studies, case, survey, experiment, or theoretical studies which,review, advance or synthesize existing theory.

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University of Zimbabwe Business Review, Volume 4, No. 1, January-June 2016

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4. REVIEW PROCESS

1. Each manuscript will be primarily examined by the editor, and then forwarded to two referees forblind review. The research paper shall be published subject to recommendations of referees. Thereview process may take up to a week or one month (maximum two months in extra ordinarycircumstances). If the reviewers disagree in terms of their opinions, the manuscript is sent to the thirdreviewer for further review of the manuscript.

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5. GUIDE TO REFERENCING

a. Citing Sources

Martin’s (1998) clarion call for executives in a crisis is . . .

Beer et al. (1993: 3) emphasize the need to diagnose business problems . . .

b. End-Text Reference

Books

Peters, T.J. and Waterman, R. H. (1995). In Search of Excellence: Lessons from America’s Best-runCompanies, London: HarperCollins Business.

Articles in Journals

Collins, D. J. and Montgomery C. A. (1995). ‘Competing on resources: strategy in the 1990s’, in HarvardBusiness Review, 73, (iv): 118-28.

Articles in Books

1. Beer, M., Eisenstat, R. A. and Spector, B. (1993). ‘Why change programmes don’t produce change’, inMabey, C. and Mayon-White, B. (eds.) Managing Change, London: Paul Chapman Publishing Ltd.

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