Analysis of credit risk management in commercial banks in Uganda

Abstract

Commercial banks extend credit to their clients as part of their business. Whereas it one of the major income generating ventures in the banking industry, it is categorized as one of the major risky areas in the banking business and therefore requires high level and critical management if results are to be achieved. This study therefore was aimed at assessing the process of credit risk management among commercial banks and determining the trend of NPA. The objectives of this study were to evaluate the process of credit risk identification, analysis and monitoring, to assess the trend in non-performing loans ratio from 2011-2017 and to identify strategies of improving credit risk management process in commercial banks in Uganda. Using a simple random sample of five commercial banks and 35 respondents from the credit and risk departments of these commercial banks data was obtained using questionnaires on the major study variables. Secondary data on the NPAs in commercial banks was obtained from BoU. Descriptive statistics on the study variables were obtained using a statistical package SPSS and a trend analysis was done in excel. The findings of the study reveal that most commercial banks have designed policies, procedures and practices as regard to credit risk identification, assessment and measurement, monitoring and control and the management of NPLs. However, these policies and practices are not effectively and efficiently used in the management of credit risk which has resulted in the NPA increasing steadily from year to year in commercial banks. Based on the findings of the study, the following recommendations were made: i) Commercial banks should ensure strict implementation of their credit risk policies and procedures and these policies and procedures should be reviewed regularly to factor in economic, social and political changes that affect credit risk and ii) In order to reduce on the NPAs, all commercial banks should institute a fully-fledged separate department independent of the loans department charged with the assessment of the credit risk and a separate department charged with the recovery of bad loans.