Lending policies and loan performance in commercial banks in Uganda

Abstract

The study investigates the effect of Lending Policies on Loan Performance in Commercial Banks in Uganda and uses a case of Post Bank Uganda to pursue this purpose. The study examines three research objectives namely: i) To examine the effect of interest rates Policy on Loan performance in Post Bank Uganda; ii) To examine the effect of Credit Limits policy on Loan Performance in Post Bank Uganda; iii) To assess the effect of Collateral Policies on Loan Performance in Post Bank Uganda. Adopting a descriptive survey design and combining both qualitative and quantitative research approaches as well as utilizing a sample of 80 respondents drawn from the departments and units of Post Bank, the researcher collected both primary and secondary data on all the tenets of lending policies through a questionnaire and an interview guide was entered and analyzed with aid by SPSS and MS Excel. With a response rate of 96.1% (74/77), the study findings generated by running correlations reveal that Interest Rate Policies is negatively associated with loan Performance with a correlation coefficient of r = - 0.398; p < 0.01, Collateral Policies are also negatively associated with loan performance with a correlation coefficient of r = -0. 283;p<0.01 and also that Credit Limits Policies are negatively and significantly associated with loan performance with correlation coefficientr = - 0.272; p< 0.05. Relatedly, results of regression analysis reveal that Credit Limits Policy and Collateral policy have a bigger positive contribution on loan performance indicated by a beta value of (β = 0.758 ) and β = 0.645 respectively while Interest Rates Policy contributes a portion to loan performance with beta values of β= 0.028. Further still, the results of the regression model summary indicate that the dimensions of lending policies account of only 17.8% (R square = 0.178) of the variation in loan performance and thus there is sufficient evidence to conclude that overall, measures of lending policies are weak in predicting loan performance and as such, the observed feedback appears to be widely spread from the fitted regression line. Based on the findings, the researcher concludes that the bank registers better Loan performance if staff effort is devoted effectively managing credit limits and defining flexible collateral choices and that Post Bank may only need to establish how it manages the interest rates for competitive loan performance. The researcher therefore recommends that the bank should devote more efforts in managing credit limits so as mitigate both over and under funding of loan applications as well as their associated consequences. The bank should also define and adopt flexible collateral choices since for stimulated loan performance