Evaluation of non-performing loans in Ugandan commercial banks: a case of equity bank Uganda

Abstract

This study examined non-performing loans and bad debts written off at Equity bank Uganda. The study was based on four objectives; to find out the key factors contributing to non-performing loans at Equity Bank Uganda ltd, to establish the key factors contributing to bad debts written off at Equity Bank Uganda ltd, to establish the effectiveness of Equity Bank’s current credit risk management practices in mitigating non-performing loans and to suggest appropriate strategies to improve loan portfolio quality, enhance borrower assessment, and reduce future credit risk. The study employed a cross-sectional and descriptive research with a mixed study approach which involved collecting numerical data from 76 general staff and interviewing 7 key informants (mangers and department heads). Quantitative Data was analyzed using the statistical package for social science (SSPS Version 27) while qualitative Data was analyzed using Atlas ti. The study found that non-performing loans at Equity Bank Uganda Ltd were mainly driven by macroeconomic factors (mean = 3.95, SD = 0.862), political and regulatory shifts (mean = 3.87, SD = 0.984), inadequate credit assessment (mean = 3.70, SD = 1.02), and weak loan monitoring (mean = 3.54, SD = 1.171). Bad debts were associated with lenient lending policies (mean = 3.42, SD = 1.257), poor borrower evaluation (mean = 3.34, SD = 1.457), and ineffective controls on approval and disbursement (mean = 3.24, SD = 1.345). Credit risk management practices showed moderate effectiveness, with credit bureaus (mean = 3.64, SD = 1.303) and credit policies (mean = 3.53, SD = 1.172) rated highest, while staff competence and appraisal procedures lagged behind. Proposed strategies included portfolio reviews (mean = 3.29, SD = 1.209) and stricter loan approval (mean = 3.25, SD = 1.223), though financial literacy and predictive analytics drew mixed reactions. Therefore, the study recommends a multi-pronged strategy to strengthen credit risk management at Equity Bank Uganda Ltd. This includes enhancing borrower assessment through rigorous appraisal methods and dynamic profiling, conducting regular portfolio reviews for early risk detection, and enforcing stricter loan approval standards with stronger collateral requirements and credit scoring models. It also advocates for continuous staff training to boost analytical and decision-making capabilities, alongside expanding the use and collaboration with credit reference bureaus to improve borrower vetting and reduce exposure to high-risk clients. Key words; non-performing loans, Loan Interest Payment, Credit policy, loan defaults, financial institution, Bad debts