Credit risk management and loan portfolio quality in commercial banks in Uganda: case study Centenary bank

Abstract

The study examined the effect of credit risk management on Loan portfolio quality in commercial banks in Uganda and examined three research objectives namely; to examine the effect of risk identification on loan portfolio quality at Centenary bank; to examine the effect of risk assessment on loan portfolio quality at Centenary Bank and to examine the effect of risk monitoring and control on loan portfolio quality. The study adopted a cross – sectional research design which blended both qualitative and quantitative research approaches on a sample of 201 drawn from a population of 420 employees who were all employees of Centenary bank in credit risk associated sections/ departments. By collecting the data through questionnaires and interviews coupled with adaptation of SPSS for processing, the results were summarized in tables and graphs and in a threefold with univariate level considering only mean and a standard deviation, bivariate level analysis paying attention to correlations while multiple regression was performed at multivariate. With a response rate of 80.6%, the study results revealed that all the examined measures of credit risk management were positively and significantly correlated with loan portfolio quality. Risk identification had a correlation value of r = 0.565; p<0.01, risk assessment had a correlation value of r = 0.225; p<0.01 while risk monitoring and control has a correlation value of r = 0.197; p<0.05. Similarly, regression analysis revealed that both risk identification and risk assessment positively affect loan portfolio quality while risk monitoring and control negatively affect loan portfolio quality with β = 0.803; β = 0.162 and β = -0.360 respectively. Relatedly, a value of R- Square of 0.419 implies that all the examined measures of credit risk management explain 41.9% of the variation in loan portfolio quality at Centenary. The researcher concludes that much all the measures of credit risk management are positively and significantly associated with loan portfolio quality, risk identification and risk assessment positively affect loan portfolio quality while risk monitoring and control negatively affects loan portfolio quality. The researcher recommends that the management of the bank should optimize risk identification practices particularly through authenticating the information generated from clients, identifying the risks associated with repayment ability, collateral, loan tenure and total debt exposure among others aimed at harnessing loan portfolio quality. With regard to risk monitoring and control, management of the bank should focus maximum efforts to activities that lead to granting a loan. This is because a loan usually goes bad at appraisal stage and hence monitoring may hardly change what is messed up during the preamble to reaching a loan a decision.