An Evaluation of Loan Appraisal Techniques Adopted by Commercial Banks in Uganda: Case-study of Centenary Bank

Abstract

The purpose of the research was to make an evaluation of loans appraisal techniques adopted by Commercial Banks in Uganda. A case study was carried out at Centenary Bank in Uganda. For any financial institution, the biggest risk is lending money and not getting it back. Commercial banks have started providing unsecured loans, that is to say loans without any collateral. In case a client defaults, the bank does not have any asset to compensate loss, which makes the credit even riskier. The literature was structured into empirical literature, conceptual framework and a recap of the review of literature which gives a summary of the different gaps identified and documented in the process of carrying out the review of relevant literature. The study aimed at identifying the loan appraisal techniques used by Centenary Bank in Uganda, to establish causes of loan default in Centenary Bank Uganda Limited, to provide suggestions on how to minimize credit default levels in Centenary Bank and other Commercial Banks, the research questions included, What are the loan appraisal techniques used by Centenary Bank in Uganda, What are the causes of loan default at Centenary Bank Uganda Limited, How can Centenary Bank and other Commercial Banks minimize credit default? A purposive sampling technique was used to select the 4 Credit Managers and the 12 Mortgage specialists. Primary data type was considered in this study, this data was obtained from Loan Officers, Bank Beneficiaries, Personal Bankers and Asset Finance Officers through sampling procedures, instrumentation, pilot study, data collection procedures and the data sources included Primary data and Secondary data sources which included questionnaires, these data sources provided necessary information for this study. The research findings further indicated that majority of the respondents had worked for Centenary Bank for long and had beyond 8 years of experience in credit administration, the researcher recommends that Centenary bank should provide strict appraisal policies based on the prevailing economic environment as this will ensure uniformity in administration of credit facilities, the researcher recommends the bank to come up with loan differentiation strategies by segmenting the customers based on their needs, the researcher further concludes that, the main factors that lead to loan default in centenary bank are; lending to borrowers with questionable characters, loan defaulters, high interest rates that make it hard for some to pay, and diversion of funds by borrowers. These causes make many borrowers not to honor their obligations as and when they fall due thus the desire to carry out research at Centenary Bank Uganda Limited.