Credit Risk Management Practices and Loan Performance of Commercial Banks in Uganda. A Case Study of Commercial Banks in Mbarara City
The study was about the relationship between Credit Risk Management Practices and Loan Performance of Commercial Banks in Mbarara City. The study had a problem statement as shown Commercial banks in Uganda have established various credit risk management practices which include credit risk identifica...
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2023
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| author | Agaba, Francis |
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| description | The study was about the relationship between Credit Risk Management Practices and Loan Performance of Commercial Banks in Mbarara City. The study had a problem statement as shown Commercial banks in Uganda have established various credit risk management practices which include credit risk identification, credit assessment, credit monitoring and credit risk control hoping that this would improve Loan Performance (BoU, 2020). However, with all these practices in place, Uganda’s banking sector has experienced poor Loan Performance over the years, where both portfolio at risk and bad debts written-off have scaled upwards due to non-performing loans (Bank of Uganda Annual Supervision Reports, 2014-2020). A critical analysis of the Bank of Uganda Annual Supervision Reports (2014-2020) indicate that the asset quality of commercial banks which is measured by Loan Portfolio at Risk (PAT) also referred to as NPL ratio increased from 4.2% in December 2012 to 5.6% in December 2013, reduced marginally to 4.1% in December 2014 and again rose to 5.3% in December 2015. The NPL ratio further increased greatly to 10.7% in December 2016 and reduced to 5.6% in December 2017 and 3.4% in December 2018. NPL ratio then increased to 4.7 percent in December 2019 and further to 6.0% in 2020 (Bank of Uganda Annual Supervision Reports, 2014-2020). The above deteriorating trend has resulted to several bank failures of once leading banks such as Crane Bank in 2016 after incurring a sharp increase in NPLs of 122.9% from Shs19.36bn in 2014 to Shs142.3bn in 2015 (Senyonyi T. , 2017). This resulted to a significant loss of about Shs53.7bn in 2014 to Shs3.1bn in 2015 down from a net profit of Shs50.6bn in 2014 (Aine, 2018). Against the above scenarios, the researcher relates credit risk management and Loan Performance, drawing experience from Uganda’s commercial banks. Scanty research has been done to find out the relationship between Credit Risk Management Practices and Loan Performance of commercial banks in the Ugandan context hence the need for the study.
The study was guided by the following objectives: To determine the relationship between Credit Risk Identification and Loan Performance of Commercial banks in Uganda; to find out relationship between Credit Assessment and Loan Performance of Commercial banks in Uganda; to establish the relationship between Credit Monitoring and Loan Performance of Commercial banks in Uganda; and to find out relationship between Credit Risk Control and Loan Performance of Commercial banks in Uganda.
The research also had research design, research design involves a blue print followed to ensure that the research questions are appropriately answered. This includes appropriately selecting the tools for data collection, and data analysis (Kumar, 2011). It sets the boundaries in which the investigation will be confined. The correlational research design which is normally used by scholars to establish relationships between variables (Kowalczyk, 2014). In this study, correlational design will be used to establish the relationship between different credit risk management practices and Loan Performance in selected commercial banks in Mbarara city. Hence, the study used a quantitative approach to collect numeric and categorical data using structured questionnaires to generate inferential statistics (correlations and regressions).xiii Quantitative method have been used because it produces results that are easy to summarize, compare, generalize and confirm whether the hypotheses hold true or false.
The study comprised 19 commercial banks in Mbarara City out of which the credit and management staff were investigated. A sample size of 115 was selected from a population of 153 people. The study found significant relationships between credit risk identification and loan performance; credit risk assessment and loan performance; credit risk monitoring and loan performance; and credit risk control and loan performance. The study concluded that a strong and significant relationship exists between credit risk management practices and loan performance. The study however, found that some commercial banks do not have experts to accurately predict credit risks nor evaluate the consequences of the decisions taken by loan officers.Therefore, Commercial banks should have stringent credit risk controls that are likely to register superior loan performance. Stringent credit controls take the form of pledging collateral securities that are equivalent to the loans granted, limiting the ceiling of the loan an individual client can take, and ensuring borrowers have the capacity to pay their loans Commercial Banks should ensure proper credit risk assessment are done will register superior loan performance. Banks should take time to analyze clients’ cash flow statements and other financial records, and make a thorough assessment of the key risks that clients face and the strategies they have put in place to mitigate the risks
Commercial Banks should ensure credit risk monitoring is done on how their clients will use the loans not outside the agreed purpose will recover their loans. Commercial banks should reexamine their clients’ profile from time to time, and ensuring that changes in clients’ credit quality change from time to time will always standout of others in terms of performance Commercial banks should ensure that effectiveness of credit risk controls are done well by looking out for collateral securities from clients before extending loans. Besides collateral securities, ensuring that clients do not take credit that exceeds a certain limit minimizes the level of default. The study also recommended that Commercial banks should as well consider having in place effective credit standards, credit policy, credit terms and collection policies or procedures as mechanisms to guide their business, since the effectiveness of credit management is important to the successful management of banking institutions; that Commercial banks should as well operate their credit businesses based strictly by the established lending guidelines that outline the business growth priorities of the senior management, as well as the conditions to satisfy in order to qualify for loan approval; and that there should be prior customer evaluation before xiv loans are granted, and a continuous process of assessment before and during the course of loan repayment. This study’s contribution to knowledge is its ability to add to the body of existing knowledge on financial and credit management discipline and bridging. In conclusion therefore the research will help different stakeholders and commercial to improve on areas of credit risks management for better loan performances |
| format | Thesis |
| id | oai:idr.kab.ac.ug:20.500.12493-956 |
| institution | KAB-DR |
| language | en_US |
| publishDate | 2023 |
| record_format | dspace |
| spelling | oai:idr.kab.ac.ug:20.500.12493-9562024-01-17T04:45:37Z Credit Risk Management Practices and Loan Performance of Commercial Banks in Uganda. A Case Study of Commercial Banks in Mbarara City Agaba, Francis Credit Risk Management Practices Loan Performance Commercial Banks Mbarara City Uganda The study was about the relationship between Credit Risk Management Practices and Loan Performance of Commercial Banks in Mbarara City. The study had a problem statement as shown Commercial banks in Uganda have established various credit risk management practices which include credit risk identification, credit assessment, credit monitoring and credit risk control hoping that this would improve Loan Performance (BoU, 2020). However, with all these practices in place, Uganda’s banking sector has experienced poor Loan Performance over the years, where both portfolio at risk and bad debts written-off have scaled upwards due to non-performing loans (Bank of Uganda Annual Supervision Reports, 2014-2020). A critical analysis of the Bank of Uganda Annual Supervision Reports (2014-2020) indicate that the asset quality of commercial banks which is measured by Loan Portfolio at Risk (PAT) also referred to as NPL ratio increased from 4.2% in December 2012 to 5.6% in December 2013, reduced marginally to 4.1% in December 2014 and again rose to 5.3% in December 2015. The NPL ratio further increased greatly to 10.7% in December 2016 and reduced to 5.6% in December 2017 and 3.4% in December 2018. NPL ratio then increased to 4.7 percent in December 2019 and further to 6.0% in 2020 (Bank of Uganda Annual Supervision Reports, 2014-2020). The above deteriorating trend has resulted to several bank failures of once leading banks such as Crane Bank in 2016 after incurring a sharp increase in NPLs of 122.9% from Shs19.36bn in 2014 to Shs142.3bn in 2015 (Senyonyi T. , 2017). This resulted to a significant loss of about Shs53.7bn in 2014 to Shs3.1bn in 2015 down from a net profit of Shs50.6bn in 2014 (Aine, 2018). Against the above scenarios, the researcher relates credit risk management and Loan Performance, drawing experience from Uganda’s commercial banks. Scanty research has been done to find out the relationship between Credit Risk Management Practices and Loan Performance of commercial banks in the Ugandan context hence the need for the study. The study was guided by the following objectives: To determine the relationship between Credit Risk Identification and Loan Performance of Commercial banks in Uganda; to find out relationship between Credit Assessment and Loan Performance of Commercial banks in Uganda; to establish the relationship between Credit Monitoring and Loan Performance of Commercial banks in Uganda; and to find out relationship between Credit Risk Control and Loan Performance of Commercial banks in Uganda. The research also had research design, research design involves a blue print followed to ensure that the research questions are appropriately answered. This includes appropriately selecting the tools for data collection, and data analysis (Kumar, 2011). It sets the boundaries in which the investigation will be confined. The correlational research design which is normally used by scholars to establish relationships between variables (Kowalczyk, 2014). In this study, correlational design will be used to establish the relationship between different credit risk management practices and Loan Performance in selected commercial banks in Mbarara city. Hence, the study used a quantitative approach to collect numeric and categorical data using structured questionnaires to generate inferential statistics (correlations and regressions).xiii Quantitative method have been used because it produces results that are easy to summarize, compare, generalize and confirm whether the hypotheses hold true or false. The study comprised 19 commercial banks in Mbarara City out of which the credit and management staff were investigated. A sample size of 115 was selected from a population of 153 people. The study found significant relationships between credit risk identification and loan performance; credit risk assessment and loan performance; credit risk monitoring and loan performance; and credit risk control and loan performance. The study concluded that a strong and significant relationship exists between credit risk management practices and loan performance. The study however, found that some commercial banks do not have experts to accurately predict credit risks nor evaluate the consequences of the decisions taken by loan officers.Therefore, Commercial banks should have stringent credit risk controls that are likely to register superior loan performance. Stringent credit controls take the form of pledging collateral securities that are equivalent to the loans granted, limiting the ceiling of the loan an individual client can take, and ensuring borrowers have the capacity to pay their loans Commercial Banks should ensure proper credit risk assessment are done will register superior loan performance. Banks should take time to analyze clients’ cash flow statements and other financial records, and make a thorough assessment of the key risks that clients face and the strategies they have put in place to mitigate the risks Commercial Banks should ensure credit risk monitoring is done on how their clients will use the loans not outside the agreed purpose will recover their loans. Commercial banks should reexamine their clients’ profile from time to time, and ensuring that changes in clients’ credit quality change from time to time will always standout of others in terms of performance Commercial banks should ensure that effectiveness of credit risk controls are done well by looking out for collateral securities from clients before extending loans. Besides collateral securities, ensuring that clients do not take credit that exceeds a certain limit minimizes the level of default. The study also recommended that Commercial banks should as well consider having in place effective credit standards, credit policy, credit terms and collection policies or procedures as mechanisms to guide their business, since the effectiveness of credit management is important to the successful management of banking institutions; that Commercial banks should as well operate their credit businesses based strictly by the established lending guidelines that outline the business growth priorities of the senior management, as well as the conditions to satisfy in order to qualify for loan approval; and that there should be prior customer evaluation before xiv loans are granted, and a continuous process of assessment before and during the course of loan repayment. This study’s contribution to knowledge is its ability to add to the body of existing knowledge on financial and credit management discipline and bridging. In conclusion therefore the research will help different stakeholders and commercial to improve on areas of credit risks management for better loan performances 2023-02-06T07:10:16Z 2023-02-06T07:10:16Z 2022 Thesis http://hdl.handle.net/20.500.12493/956 en_US Attribution-NonCommercial-NoDerivs 3.0 United States http://creativecommons.org/licenses/by-nc-nd/3.0/us/ application/pdf |
| spellingShingle | Credit Risk Management Practices Loan Performance Commercial Banks Mbarara City Uganda Agaba, Francis Credit Risk Management Practices and Loan Performance of Commercial Banks in Uganda. A Case Study of Commercial Banks in Mbarara City |
| title | Credit Risk Management Practices and Loan Performance of Commercial Banks in Uganda. A Case Study of Commercial Banks in Mbarara City |
| title_full | Credit Risk Management Practices and Loan Performance of Commercial Banks in Uganda. A Case Study of Commercial Banks in Mbarara City |
| title_fullStr | Credit Risk Management Practices and Loan Performance of Commercial Banks in Uganda. A Case Study of Commercial Banks in Mbarara City |
| title_full_unstemmed | Credit Risk Management Practices and Loan Performance of Commercial Banks in Uganda. A Case Study of Commercial Banks in Mbarara City |
| title_short | Credit Risk Management Practices and Loan Performance of Commercial Banks in Uganda. A Case Study of Commercial Banks in Mbarara City |
| title_sort | credit risk management practices and loan performance of commercial banks in uganda a case study of commercial banks in mbarara city |
| topic | Credit Risk Management Practices Loan Performance Commercial Banks Mbarara City Uganda |
| url | http://hdl.handle.net/20.500.12493/956 |
| work_keys_str_mv | AT agabafrancis creditriskmanagementpracticesandloanperformanceofcommercialbanksinugandaacasestudyofcommercialbanksinmbararacity |