Credit risk management and financial performance of banks, a case study of five Ugandan banks

Abstract

The study focused on examining the relationship between credit risk management and financial performance of banks. The study was premised on the following research objectives: to establish the relationship between credit criteria and financial performance of Banks, to investigate the relationship between credit policies and financial performance of Banks and to investigate the relationship between risk mitigation measures and financial performance of Banks. The study adopted a descriptive cross sectional survey design where both quantitative and qualitative approaches were used. In this study, five banks were sampled that is Housing Finance Bank, Stanbic Bank, DFCU Bank, Eco Bank and Barclays Bank. A total number of 190 respondents were expected but 185 respondents returned the survey instruments representing a response rate of 98%. The data was collected using questionnaires and interviews and analysis was done using regression analysis and correlation for the quantitative findings. Qualitative analysis was done using content and thematic analysis. The findings revealed that there is a significant positive relationship between credit criteria, credit policies and risk mitigation and financial performance of Banks. The results on credit criteria and financial performance of Banks were r = 0.197, p = 0.000 < 0.05, the results for credit policies and financial performance of Banks indicated that r = 0.353(**), p = 0.001 > 0.05 and the results for risk mitigation and financial performance of Banks revealed that r = 0.457(**), p = 0.000 < 0.05. The findings indicated that credit criteria, credit policies and risk mitigation explained 20.0% of the variation in financial performance of Banks (adjusted R2 = 0.200). Findings revealed that credit is extended to borrowers based on capacity, valuation of security is done before credit is extended to the borrower in the banks. Banks have strong credit policies that have been operational for some time now. The risk management teams are in place to ensure that everyone at the branches and head office manages credit risk. Committees such as Branch credit committees (BCC), Management credit committees (MCC) and Executive credit committees (ECC) are all well constituted to manage credit risk right from the branch level to executive level depending on loan amount. There is a board credit committee to manage credit risk and compliance risk. It was recommended that instead of focusing on the credit criteria that has gaps, banks should cast their eyes on low cost fund sources through intensive mobilization for example focusing on agency banking and the use of platform fees for services like checking account balances using ATM, mobile banking and collection of utilities. Banks should also strengthen the implementation of their existing credit policies by ensuring enough resources and manpower is in place to implement these policies. There is also a need to identify and determine the extent of risk at an early stage.