CREDIT RISK MANAGEMENT AND LOAN PERFORMANCE IN DEVELOPMENT FINANCING IN UGANDA: A CASE STUDY OF CENTENARY BANK, KAPCHORW A BRANCH

TABLE OF CONTENTS

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

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

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

ACK.NOWLEDGMENT ................................................................................................................ iv

TABLE OF CONTENTS ................................................................................................................ v

CHAPTER ONE ............................................................................................................................ I

I .0 Introduction ............................................................................................................................... 1

1.1 Background of the Study ............................................................................................................ I

I .1.1 Historical Perspective ............................................................................................................. 1

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

1.1.3 Conceptual Perspective ........................................................................................................... 3

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

1.2 Staten1ent of the Proble1n .......................................................................................................... 6

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

I .4 Specific Objectives of the Study ................................................................................................ 6

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

I. 6 Scope of the Study .................................................................................................................... 7

1.6.1 Geographical Scope ................................................................................................................. 7

1.6.2 Conceptual Scope ................................................................................................................... 7

1.6.3 Ti1ne scope .............................................................................................................................. 7

I. 7Significance of the Study ........................................................................................................... 7

V

1.8 Organization of the Report ........................................................................................................ 7

CHAPTER TWO ........................................................................................................................... 8

LJTERA TURE REVIEW ............................................................................................................. 8

2.0 Introduction ............................................................................................................................... 8

2.1 Over view of the study ............................................................................................................... 8

2.2 Review of Theories .................................................................................................................. I 0

2.2.1 Liquidity Theory of Credit ................................................................................................... 10

2.2.2 Portfolio Theory ................................................................................................................... 10

2.2.3 Tax Theory of Credit ............................................................................................................ 11

2.2.4 Credit Risk Theory ............................................................................................................... 11

2.3 Conceptual Frainework ............................................................................................................ 12

2.3 Conceptual Fran1e ,vork ........................................................................................................... 12

2.4 Related studies ......................................................................................................................... 13

2.4.1 Appraisal (Avoidance) .......................................................................................................... 13

2.4.2 Credit Rating ......................................................................................................................... 13

2.4.3 Risk Transfer ........................................................................................................................ 17

2.4.4 Loan Trading ........................................................................................................................ 18

2.4.5 Portfolio securitization ..................................................................................... ., .................... 18

2.4.6 Derivatives and Credit-enhancement Mechanisms .............................................................. 19

2.4.7 Alternative Risk Transfer(ART) ........................................................................................... 20

2.4.8 Risk Diversification .............................................................................................................. 21

2.4.9 Risk Retention .................................................................................................................... 22

VI

2.4.10 Loan Perfonnance ......................... .................. ...... ............ ...................... .. ................ .......... 23

2.4.11 Relationship between Loan Appraisal and Loan Performance ............ .......... .... .... .. .... ...... 24

2.4.12 Relationship between other Risk Management Techniques and Loan Performance ...... ... 24

CHAPTER THREE ....... .... ..... ...... .. ..... .......... ................. ... ... .. ........ .. .. .... ...................... ... ... ......... 27

RESEARCH METHODOLOGY ...... ........................................... ... .... ...... ...... ... ........... ............ . 27

3.0 Research Methodology ........................... .... ............. .... .......... ..... ........ .. ............. ....... ..... ....... ... 27

3.1 Research Design ............. ..... ... ......... ... ... ... ...... ...... .......................... .............................. .. ......... 27

3.2 Population ..................... .. ..................................... ......... ..... ...... ... ............................................. 27

3.3 San1ple size .. ............. ..... .............. ..... ...... ... ..... ......... ... .. ........... ..... ... .. ...... ... .... .. ....................... 27

3.4 Data Collection Instruments .................. .... .... ....................... .. .... .. ..... ...................... .... .... .. .... .. 28

3.5 Sources of Data ................... ...... ................ ....... ................. ... ....... ....... .... .... .. .. .... ..................... 28

3.5.1 Prin1ary Data ...... ............... .... ........... .. .......... .... ........ .... ... ......... ...... .......... .. .. ......................... 28

3.5.2 Secondary Data ...... .................................... .. ... .............. ..... .... ........ .... .... .... ... .. .... .................. 28

3.6 Measurement of variables ...... ....... ...... .. .. ... ....... .. .... ......... ... ............................................ ... .... .. 28

3.7 Validity and Reliability Tests .. ........... .. .... .... ................................................................... .. ...... 29

3.8 Data Analysis ............... ...... .. ..... ....... ........................... ........ .... .... ... ... .. ................. ........ ............ 29

CHAPTER FOUR ................. .... ..... ............... ... .... ...... ... ... ... .... .. .. .... .. ....... .................... .. ... ... ....... 30

DATA ANALYSIS, INTERPRETATION AND PRESENTATION ....... ...... ........ .... .. .. ...... .. . 30

4.0 Introduction ..... ........... ...... ... .... ........... ..... ... ...... .............................................. .... ......... ... .... .. ... 30

4.1 Den1ographic Data ... .................. .......... ... ....... ... ... ... .... ... .. ..... ............... .... ....... .. ....................... 30

4.2 .2 Gender of Respondents ........... ........ ... .... ......... ....... ... .. ...... ..... ........ ... .. .... ... .. .... .. ................... 31

Vil

4.2.3 Qualification of Respondents ............................................................................................... 32

4.2.4 Working Experience in the Bank. ......................................................................................... 33

4.2.5 Status of Respondents by Age .............................................................................................. 34

4.2.6 Working Experience in the Banking Sector. ........................................................................ 35

4.3 Factor Analysis ...................................................................................................................... 35

4.4 Relationship between Variables .............................................. Error! Bookmark not defined.

4.4.1 Relationship between Loan Appraisal and Loan Performance ............ Error! Bookmark not

defined.

4.4.2 Relationship between Financial Viability and Loan Performance ...... Error! Bookmark not

defined.

4.4.3 Relationship between Technical Feasibility and Loan Performance ... Error! Bookmark not

defined.

4.4.4 Relationship between Credit Rating and Loan Performance Error! Bookmark not defined.

4.5 Relationship between Other Risk Management Techniques and Loan Performance ..... Error!

Bookmark not defined.

4.5.1 Relationship between Risk Transfers with Loan Performance . .......... Error! Bookmark not

defined.

4.5.2 Relationship between Risk Diversification and Loan Performance .... Error! Bookmark not

defined.

4.5.3 Relationship between Risk Retention and Loan Performance ............. Error! Bookmark not

defined.

CIIAPTER FIVE ......................................................................................................................... 39

SUMMARY OF THE FINDINGS, CONCLUSION AND RECOMMENDATION ............. 39

5.0 Introduction ............................................................................................................................. 39

5.2 Interpretation and Discussion of Results ................................................................................. 39

Vlll

5.2.1 Examining the Relationship between Loan Appraisal and Loan Performance .. .................. 39

5.2.2 Examining the Relationship between Financial Viability, Financial Analysis and Loan

Perfonnance .... .. ..... .. .. ... ........... ...... .. .... ... ... .... ..... ............. ..... .. ...... ....................... ........... .. ....... ...... 40

5.2.3 Examining the Relationship between Technical Feasibility and Loan Performance ...... .... .40

5.2.4 Examining the Relationship between Credit Rating and Loan Perfonnance ...................... .41

5.3 Examining the Relationship between other Risk Management Techniques and Loan

Perfonnance ........ ...... ....... .... ..... ......... ... ...... ... .... ..... ............. ...... ... .......... .... ........ .... .. ............... ...... 41

5 .3 .1 Examining the Relationship between Risk Transfer and Loan Performance .. .... .... .. .......... .41

5.3.2 Examining the Relationship between Risk Diversification and Loan Performance ... .... .. .. .41

5.3.3 Examining the Relationship between Risk Retention and Loan Performance ..... .. .. .. ........ . .42

5.4 Conclusions .......... .......... .. ..... ... .... ............... ................... .......... .. .... ...... ......... ... .. ... ....... ..... ... .. . 42

5.5. Recon11nendations ....... ... .... ... .... .... .......... .... .... .. ...... .. .. ....... ... ... .... ........................ ... .... ........... 43

5.6 Areas for Further Research ............... ........ ....... ............. .. .... ...... ... ................. ............... .... ....... 44

REFERENCES ....... ... .... ..... ....... ........... ........... ............. ........ ....... ... ................... ........ ...... ............ 45

APPENDICES ................... ....... ... ... ..... ..................... ..... ... .... ......... ......... .................. .................... 47

APPENDIX I: RESEARCH QUESTIONNAIRES .. ... .... .. .... ... .. ..................... .... ....... ... ............. . .47

APPENDIX II: RESEARCH PROJECT SCHEDULE ...... ....... .... .. ... ..... .. ............... .... .. .. .... .... ..... 55