Credit Management and Loan Performance in Selected Commercial Banks in Bujumbura, Burundi

ABSTRACT 

This study was aimed at determining the effect credit management on loan performance. The study was based on four specific objectives; to assess the effect of credit standards on loan performance in commercial banks, to determine the effect of implementation of credit policy on loan performance in commercial banks, to analyze how credit terms affect loan performance in commercial banks and to establish the effect of collection policies on loan performance in commercial banks in Burundi. A review of existing literature revealed that very few studies have been done on factors affecting credit management as many of the studies concentrated largely on non-financial loans and credit allocation yet it is through improved credit management that banks’ loan portfolios can enlarge and banks would meet their ultimate goal of stimulating growth and performance in the economy. Despite many researches it is quite clear that very little research studies has been done on factors affecting credit management as many of the researches concentrates largely on nonfinancial loans and credit allocation yet it is through improved credit management that banks would be able to expand their loan portfolios. The study aims to fill that knowledge gap. The study adopted a descriptive survey design, with the study population comprised of 58 employees of 3 selected commercial banks. Data was collected using questionnaires and was analyzed using descriptive and regression analysis to determine the effect of credit management on loan performance. The findings of the study revealed that the various components of credit management, that is credit standards (average mean 4.73 and standard deviation 0.68), credit policy (average mean 4.71 and standard deviation 0.63). credit terms (average mean 4.57 and standard deviation 0.57) and collection policy (average mean 4.63 and standard deviation 0.61), have a positive and significant effect on loan performance in commercial banks in Bujumbura. Burundi. The study concluded that having objective and appropriate parameters for credit standard, enabling banks to adequately assess the credit records, and clear guidelines in the processing and issuance of loans and monitoring their repayment schedules has a direct bearing on the levels of default and repayment. It was also concluded that the policy on loan repayment collections is another key determinant of loan performance, where the rate of asset recovery and transfer of loans is directed related to the level of losses fi’orn loan default. The study recommended that Commercial banks should 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 successfLll management of banking institutions; that Commercial banks should operate their credit businesses based strictly on established lending guidelines that clearly 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 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 x gaps in credit management research as a whole, by informing policy makers and managers of the best practices in appraising their credit policies and to review their operations critically for more result oriented approaches in the dealing with credit facilities.

TABLE OF CONTENTS

DECLARATION •

APPROVAL

DEDICATION

ACKNOWLEDGEMENT iv

TABLE OF CONTENTS v

LIST OF ACRONYMS viii

LIST OF TABLES ix

ABSTRACT

CHAPTER ONE i

INTRODUCTION 1

I .0 Introduction I

I . I Background to the Study

1.1.1 Historical perspective I

I . I .2 Theoretical perspective 4

I . I .3 Conceptual perspective 5

I . 1 .4 Contextual Perspective 8

1 .2 Problem Statement 9

1.3 Purpose of the Study 9

1.4 Specific Objectives II

1 .5 Research Questions i i

1 .6 Hypotheses 12

1.6 Scope of the study 12

1.6.1 Geographical Scope 12

I .6.2 Content scope 12

I .6.3 Theoretical Scope 12

1.6.4 Time Scope 13

1.7 Significance of the study 13

1 .8 Operational Definition of Key Terms 14

CHAPTER TWO .15

LITERATURE REVIEW 15

2.0 Introduction 1 5

2.1 Theoretical Review 1 5

2.1 .1 Modern Portfolio Theory 15

2.1.2 Capital Asset Pricing Model (CAPM) 19

2.2 Conceptual Review 20

2.3 Related Literature 21

2.3.1 The effect of credit standards on loan performance 21

2.3.2 The effect of credit policy on loan performance 24

2.3.3 The effect ol’ credit terms on loan performance 26

2.3.4 The eflect of collection policy on loan performance 28

2.4 Empirical Review 29

2.5 Summary and Gaps 33

CHAPTER THREE 35

METHODOLOGY 35

3.0 Introduction 35

3.1 Research Design 35

3.2 Research population 35

3.3 Sample size 35

3.4 Sampling Procedure 35

3.5 Research Instruments 36

3.5.1 Questionnaires 36

3.6 Validity and reliability of instruments 36

3.7 Data Gathering Procedure 37

3.7.1 Before data gathering 37

3.7.2 During data gathering 38

3.7.3 After data gathering 38

3.8 Data Analysis 38

3.9 Ethical Consideration 39

CHAPTER FOUR .41

PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS 41

4.1 Introduction 41

4.2 Demographic Characteristics of Respondents 41

4.3 Credit standards and loan performance 43

4.4 Credit policy and loan performance 45

4.5 Credit terms and loan performance 46

4.6 Collection policy and loan performance 47

4.7 Regression Analysis 48

CHAPTER FIVE 51

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS 51

5. I Introduction 5 i

5.2 Summary of Findings 51

5.3 Conclusions of the Study

5.4 Recommendations 56

5.5 Suggestions for further Research 57

REFERENCES 58

APPENDIX I 64

Questionnaire 64

APPENDIX II 69

Introduction Letter 69