CREDIT RISK MANAGEMENT AND LOAN REPAYMENT IN COMMERCIAL BANKS IN UGANDA A CASE STUDY OF CENT AN ARY BANK LIMITED KABALAGALA BRANCH.

TABLE OF CONTENTS

DECLARATION ............................................................................................................................ ii

APPROVAL .................................................................................................................................. iii

DEDICATION ............................................................................................................................... iv

ACKNOWLEDGEMENT .............................................................................................................. v

TABLE OF CONTENTS ............................................................................................................... vi

LIST OF TABLES .......................................................................................................................... x

LIST OF ABBREVIATIONS ........................................................................................................ xi

ABSTRACT .................................................................................................................................. xii

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

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

1.0 Introduction ............................................................................................................................... I

1.1. l Historical Perspective ............................................................................................................ I

1.1.2 Theoretical perspective .......................................................................................................... 2

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

1.1.4 Contextual perspective ........................................................................................................... 5

1.2 Statement of the problem .......................................................................................................... 6

1.4 General Objective ..................................................................................................................... 7

1.4.1 Specific Objectives ................................................................................................................ 7

1.5 Research Questions ................................................................................................................... 7

1.6 Scope of the Study .................................................................................................................... 7

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

1.6.2 Content Scope ........................................................................................................................ 7

1.6.3 Time Scope ............................................................................................................................ 7

1. 7 Significance of the Study .......................................................................................................... 7

1.8 Conceptual Framework ............................................................................................................. 8

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

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

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

2.1 The concept of Credit Risk in Commercial Bartles ................................................................... 9

2.1.1 Credit Risk Management in Commercial Banks ................................................................. I 0

2.1.2 Loan repayment ................................................................................................................... 12

vi

2.1.2 Risk management Processing Commercial Banks ............................................................... 14

2.2 Credit Policy in Commercial Banks ....................................................................................... I 6

2.2. l Identification and prioritization of Market Targets ............................................................. 17

2.2.2 Credit Initiation and evaluation ........................................................................................... 18

2.2.3 Credit Evaluation ................................................................................................................. 18

2.2.4 Credit Negotiation and Approval ......................................................................................... 19

2.2.5 Credit Documentation and Disbursement ............................................................................ 20

2.2.6 Credit Risk Measurement, Monitoring and Control ............................................................ 20

2.2.7 Relationship between Credit Risk Management and Loan Repayment in Commercial Banks··············································21

CHAPTER THREE .................................................................................................................... 22

METHODOLOGY ..................................................................................................................... 22

3.0 Introduction ............................................................................................................................. 22

3. I Research Design ...................................................................................................................... 22

3.2 Population of the Study ........................................................................................................... 22

3 .3 Sample Size and sampling strategy ......................................................................................... 22

3 .4 Arca of the Study .................................................................................................................... 23

3 .5 Data Collection Instrument and Methods ............................................................................... 23

3.5. I Data Collection Methods ..................................................................................................... 23

3.5. I .2 Interview ........................................................................................................................... 23

3.5.2. I Questionnaires ................................................................................................................... 23

3.6 Data Analysis .......................................................................................................................... 23

3.7 Limitations of the Study .......................................................................................................... 24

CHAPTER FOUR ....................................................................................................................... 25

PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS .................................. 25

4.0 Introduction ............................................................................................................................. 25

4.1 Distribution ofrespondents in Centenary Bank ....................................................................... 25

4.2 Findings about the demographic background ofrespondents ................................................. 25

4.2. I Gender of the Respondents .................................................................................................. 26

4.2.2 Age of respondents .............................................................................................................. 26

4.2.3 Education levels attained by the respondents ...................................................................... 27

4.2.4 Response on the Period of employment.. ............................................................................ 27

4.3 Solutions on improving credit risk management in commercial banks in Uganda ................ 28

4.3.1 Increased monitoring and supervision ................................................................................. 28

4.3.2 More staff training and mentoring ....................................................................................... 29

4.3.3 Establishing a clear process for approving new credit and extending the existing credit. .. 29

4.3.4 Establishing sound lending policies ..................................................................................... 30

4.3.5 Designing risk profiles to guide the lending profiles ........................................................... 31

4.4 The effects of credit risk management on loan repayment in commercial banks in Uganda. 31

4.4.1 Aspects of credit risk management that exist within Centenary bank ................................. 31

4.4.2 Identification and priotisation of markets ............................................................................ 32

4.4.3 Credit origination ................................................................................................................. 32

4.5 Credit evaluation ..................................................................................................................... 33

4.6 Negotiation .............................................................................................................................. 33

4. 7 Credit approval. ....................................................................................................................... 34

4.8 Credit documentation and disbursement. ................................................................................ 35

4.9 Credit monitoring .................................................................................................................... 35

4.10 Response on whether the respondents believed credit risk management has an effect on loan repayment............................................... 36

4.11 Effects credit risk management on loan repayment.. ............................................................ 36

4.12 Credit risk management is vital in assessing the risk of losses associated with credit extended to customers, financial investments and counterparty risks .......................................... 37

4.13 Credit risk management Enhances cross-functional cooperation especially between the credit and other banks departments ................................... 37

4.14 Increased profitability due to reduced Bad debts written off. ............................................... 38

4. 15 Leads to reduced credit risk due to involvement of Credit committees' in making decisions regarding loans ............................................... 39

4.16 The relationship between credit risk management and loan repayment in commercial banks in Uganda .......................................................... 40

CHAPTER FIVE ........................................................................................................................ 41

DISCUSSIONS, CONLUSIONS, AND RECOMMENDATIONS ................................................... 41

5.0 Introduction ............................................................................................................................. 41

i.l Discussion of findings ............................................................................................................. 41

i.2 Conclusion .............................................................................................................................. 43

5.3 Recommendations ................................................................................................................... 43

5.4 Areas for further research ....................................................................................................... 45

REFERENCES ............................................................................................................................ 46

APPENDIX I: ACTIVITY CHART ............................................................................................. 49

APPENDIX II: QUESTIONAIRE FOR CENTENARY BANK EMPLOYEES ......................... 50

APPENDIX III: INTRODUCTORY LETTER .......................................................... 54 

ABSTRACT

The study was done on credit risk management and loan repayment in commercial banks in Uganda. The study was carried out at Centena;y Bank, Kabalagala branch. The researcher collected both primary and seconda;y data, using the survey method and review of the existing literature respectively. Questionnaires were used for data collection. The researcher collected both prima1y and secondary data, using the survey method and review of the existing literature respectively. Questionnaires were used for data collection. The study advanced several solutions that could help in improving credit risk management for loan repayment. Some of the solutions advanced .fi'om the study .findings include: Increased monitoring and supervision, more staff training and mentoring, this aims at making sure that staffe have the right skills and knowledge to handle credit management processes for better loan repayment, Establishing sound lending policies, Designing risk profiles to guide the lending profiles. The study also established several effects a/credit risk management on loan repayment in commercial banks in Uganda. Some of the effects realizedfi·om the study_findings include: Credit risk management is vital in assessing the risk of losses associated with credit extended to customers, financial investments and counterparty risks. Credit risk management Enhances cross-functional cooperation, especially between the credit and other bank departments. Increased profitability due to reduced Bad debts written off Leads to reduced credit risk due to the involvement of Credit committees in making decisions regarding loans. The study also revealed that there was a significant effect between credit risk management and loan repayment in the centenary bank. There was a positive relationship of between credit risk management. The study further recommended that to strengthen the process of credit risk management Centenary bank should put stronger emphasis in identifying and prioritising their market segments. During the process of documentation, prior to credit approval and disbursement, there is great need for credit officers to ascertain that all loan advances are completely secured by collateral securities which have higher values and are very marketable. The Bank should also adopt credit policies that would help improve prudential oversight of asset quality and to establish a set of minimum standards that should be applied before credit is advanced to customers. Further, as borrower selection is the key to successful lending, banks should focus on the selection of true borrower.