Credit Risk Management and Loan Performance in Commercial Banks in Mogadishu Somalia

ABSTRACT The purpose of the study was to establish the effect of risk management on Loan performance in commercial banks in Mogadishu Somalia. The objectives were to assess the effect of risk identification on Loan performance of commercial banks in Mogadishu Somalia, to determine the effect of risk assessment on Loan performance of commercial banks and to assess how risk monitoring affect Loan performance commercial banks in Mogadishu Somalia. The study was conducted in selected banks of Mogadishu Somalia, the data was collected from 131 respondents using closed ended questionnaires. The data collected reveal that risk identification had a significant effect on loan performance (Sig=0.000) while risk assessment also had significant effect on loan performance (0.008) and risk monitoring had an insignificant effect on loan performance (0.087). The study findings imply that credit risk management has an effect that is paramount on loan performance in Mogadishu Somalia. The study results regarding the first objective, the study conclude that risk analysis is fundamental in enhancing Loan performance. The study conclude that effective risk identification is necessary for Loan performance indicating that utmost work performance is fundamental for loan portfolio response. The study on the second research objective concludes that risk assessment in the banks in Mogadishu Somalia had a significant effect on Loan performance. The study concludes further that managing the state of risks concerning loans can generate the Reponses in payment for loans. The study finally on the third objective conclude that risk monitoring though occurred in the commercial banks of Mogadishu Somalia did not generate high Loan performance. The result indicates that risk monitoring didn’t lead to resonate loans recovery. The study recommend that there is need for strong cost reduction by management through credit risk analysis so as to save on the finances lost through operations for recovery of the none responding or performing Loans. There is need for the banks to conduct analysis in clear form and develop the mode for tracking risks before their actual occurrence to curb insurgencies. The management needs to institute management teams for enhancing direct operations for the organizational establishments. Thirdly, on there is need for detailed information on integrated risk management at their company and weigh these risks against those of new investments.

TABLE OF CONTENTS

DECLARATION ............................................................................................................................. i

APPROVAL ................................................................................................................................... ii

DEDICATION...............................................................................................................................iii

ACKNOWLEDGEMENT............................................................................................................. iv

ABSTRACT................................................................................................................................. viii

CHAPTER ONE............................................................................................................................. 1

INTRODUCTION......................................................................................................................... 1

1.0 Introduction......................................................................................................................... 1

1.1 Background of the Study....................................................................................................... 1

1.1.1 Historical Perspective......................................................................................................... 1

1.1.2 Theoretical Perspective ...................................................................................................... 3

1.1.3 Conceptual Perspective ...................................................................................................... 4

1.1.4 Contextual Perspective....................................................................................................... 5

1.2 Problem Statement ................................................................................................................ 6

1.3 Purpose of the Study ............................................................................................................. 6

1.4 Objectives of the Study ......................................................................................................... 6

1.5 Research Questions............................................................................................................... 6

1.6 Hypothesis............................................................................................................................. 7

1.7 Scope of the study ................................................................................................................. 7

1.7.1 Geographical Scope............................................................................................................ 7

1.7.2 Content Scope .................................................................................................................... 7

1.7.3 Time Scope......................................................................................................................... 7

1.8 Significance of the Study ...................................................................................................... 8

1.9 Operation Definitions of Key Terms..................................................................................... 8

CHAPTER TWO .......................................................................................................................... 9

LITERATURE REVIEW ............................................................................................................ 9

2.0 Introduction ........................................................................................................................... 9

2.1 Theoretical Review ............................................................................................................... 9

2.2 Conceptual Framework ....................................................................................................... 10

2.3 Review of Literature............................................................................................................ 10

vi

2.3.1 Risk Identification and Loan Performance....................................................................... 10

2.3.2 Risk Assessment and Loan Performance of Organizations ............................................. 13

2.3.3 Risk Monitoring on Loan Performance of Organizations................................................ 16

2.4 Risk Management and Loan Performance .......................................................................... 17

2.5 Research Gaps..................................................................................................................... 23

CHAPTER THREE.................................................................................................................... 25

METHODOLOGY ..................................................................................................................... 25

3.0 Introduction ......................................................................................................................... 25

3.1 Research Design.................................................................................................................. 25

3.2 Research Population............................................................................................................ 25

3.3 Sample Size......................................................................................................................... 26

3.3.2 Response Rate .................................................................................................................. 27

3.4 Sampling Procedure ............................................................................................................ 27

3.5 Sources of Data ................................................................................................................... 27

3.5.1 Primary Data .................................................................................................................... 27

3.6 Research Instruments .......................................................................................................... 28

3.6.1 Questionnaires.................................................................................................................. 28

3.7 Validity and Reliability ....................................................................................................... 28

3.7.2 Validity............................................................................................................................. 28

3.7.2 Reliability......................................................................................................................... 29

3.8 Data Gathering Procedures.................................................................................................. 30

3.9 Data Analysis ...................................................................................................................... 30

3.9 Ethical Considerations......................................................................................................... 31

CHAPTER FOUR....................................................................................................................... 32

DATA PRESENTATION, ANALYSIS AND INTERPRETATION ..................................... 32

4.0 Introduction .................................................................................................................... 32

4.1 Demographic Information................................................................................................... 32

4.1.1 Gender of Respondents .................................................................................................... 32

4.1.2 Age of the Respondents.................................................................................................... 33

4.1.3 Education of Respondents................................................................................................ 33

4.1.4 Marital Status of Respondents.......................................................................................... 34

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4.2 Effect of risk identification on Loan Performance of Commercial Banks in Mogadishu

Somalia...................................................................................................................................... 34

4.2.1 Risk identification in Commercial banks in Mogadishu Somalia.................................... 35

4.2.2 Loan Performance of Commercial Banks in Mogadishu Somalia................................... 36

4.2.3 Effect of Risk Identification on Loan Performance of Commercial Banks in Mogadishu

Somalia...................................................................................................................................... 37

4.3Effect of Risk Assessment on Loan Performance of Commercial Banks in Mogadishu..... 39

4.3.1 Risk Assessment of Commercial Banks in Mogadishu ................................................... 39

4.3.2 Effect of Risk Assessment on Loan Performance of Commercial Banks in Mogadishu. 40

4.4 Effect of Risk Monitoring affect Loan Performance Commercial Banks........................... 42

4.4.1 Risk Monitoring in Commercial Banks in Mogadishu Somalia ...................................... 42

4.4.2 Effect of Risk Monitoring affect Loan Performance Commercial Banks in Mogadishu

Somalia...................................................................................................................................... 43

CHAPTER FIVE ........................................................................................................................ 46

DISCUSSION OF FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS ............. 46

5.0 Introduction ......................................................................................................................... 46

5.1 Discussion of Findings........................................................................................................ 46

5.2 Conclusions......................................................................................................................... 48

5.3 Recommendations............................................................................................................... 49

5.5 Areas of further Study......................................................................................................... 50

REFERENCES............................................................................................................................ 51

Appendix i: Research Instrument: Questionnaire ......................................................................... 56