The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Uganda Case Study: Centenary Rural Development and Dfcu Bank (U) Ltd

Abstract

The study examines the impact of credit risk management on financial performance of commercial banks (Centenary Rural Development Bank & DFCU Bank).

The dimensions of the independent variable include; Non-performing loans, credit guarantee scheme and credit approval & evaluation whereas the dimensions of the dependent variable are; Returns on assets, returns on equity and level of competition.

The objectives of the study of the study are; finding out the impact of non-performing loans on the financial performance of commercial banks, examining the effect of credit guarantee scheme on the financial performance of commercial banks, and assessing the relationship between credit approval/evaluation and the financial performance of commercial banks.

The study employed a case study research design and also adopted a quantitative approach for the study. The sample size was determined by the Krejcie and Morgan (1970) table which obtained a sample size of 44 respondents and used closed ended questionnaires largely to collect data for the study.

The study findings found out that credit risk management determinants such as non-performing loans, credit guarantee and credit approval and evaluation affect the financial performance of commercial banks and noted that to increase the financial profitability of commercial banks, banks must employ credit risk management strategies such as credit securitization, use of credit bureau, adopt a sound internal lending policy, compliance with Basel Accord and use of credit derivation.

The study findings revealed that non-performing loans affect the financial performance of commercial banks as a result of increased default rates thereby making banks write off the loan borrowers from their balance sheets since these loans borrowers are dubbed uncollectible by the lenders. The study also revealed that commercial banks should examine the borrowers thoroughly so that all the available information regarding his or her collateral and credit trustworthiness is known to reduce on the default rates hence securing loans repayments as NPLs reduces.

The study revealed that commercial banks activities through credit guarantee scheme affect the financial performance of financial institutions and promote growth and development in the whole economy since various sectors, institutions and individuals can access the loans from banks through the CGS. This therefore implies that the growth and proper utilization of CGS improve the financial performance of commercial banks and economic growth and development as well.

The study concludes that all financial institutions must carry out the credit approval/evaluation and monitoring of the borrowers so as the activities, collateral securities’ eligibility and borrower’s credit trustworthiness are closely monitored and right information availed thereby decreasing the occurrence of NPLs, default rates which necessitate loan repayments in time. It can be recommended that commercial banks do carry out proper screening, relax their loan pre-qualification policies to encourage more people to borrow as this will reduce incidence of reduce loan demand.

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