BANKING SYSTEMS AND CREDIT CONTROL IN SELECTED COMMERCIAL

BANKS IN KAMPALA DISTRICT — UGANDA

A Thesis

Presented to the College of

Higher Degrees and Research of

Kampala International University

Kampala, Uganda

In Partial Fulfillment of the Requirements for the award of

Degree of Master of Business Administration

By:

Mbogga Sarah Kintu

MBA/24126/102/D(J

September, 2012

II ~ DECLARATION A I declare that this thesis is my original work and has not been presented for a Degree or any other academic award in any University or Institution of Learning

Mbogga Sarah Kintu

Date: DECLARATION B I confirm that the work reported in this thesis was conducted by the candidate under my supervision.

Mabonga Eric

Date: -~[L~~ APPROVAL SHEET

This thesis entitled “Banking Systems and Credit Control in Selected Commercial Banks in Kampala District, Uganda” prepared and submitted by Mbogga Sarah Kintu in partial fulfillment of the requirements for the degree of Master of Business Administration has been examined and approved by the panel on oral examination with the grade of

PAtED1

Name and Sig. of Chairman

Name and Sign of Supervis’~r Name and Sign of Panelist

Name and Sign of Panelist Name and Sign of Panelist

Name and Sign of Director, CHDR

Name and Sign of DVC, CHDR ACKNOWLEDGEMENT The research acknowledges the Lord Almighty God, without whose inspiration, guidance and wisdom enabled the researcher accomplish her studies.

The researcher acknowledges the assistance of the following different persons who she encountered during the course of her research:

The Deputy Vice Chancellor Dr. Novembrieta R. Sumil and the entire College of Higher Degrees and Research (CHDR), the Management of Kampala International University, the participation of respondents especially the staff and management of Stanbic Bank, Bank of Africa and FINCA Uganda Ltd, for having enabled me to carry out this research.

To the entire Viva Voce panel members for the selfless efforts and guidance throughout the course and the research process particularly Dr. Manuel N. Sumil, Mr. Sande Arthur and Mr. Sendagi Muhamed.

The researcher greatly appreciates the guidance provided by her supervisor Mr. Mabonga Eric for the successful design and presentation of her research.

Futherstill, the researcher would like to thank the following people whose assistance enabled her to accomplish her studies; special thanks go to Mr. Malinga Ramadhan, Mr. Ronald Mbago, Ms. Catherine Bokello, Mrs Semakula Esther, Mr. Oundo Phillip, Ms. Janet Mugena, Ms Catherine Zawedde and Kabiru Mohammed Atiku, for the moral and spiritual support they rendered her towards the successful completion of her education.

Last but not least, she also wish to thank her family members and friends who provided her with vital moral and spiritual support particularly her Children; Nampeera Joyce, Nakasenge Jennifer, Mirembe Teddy and Ssempeera Emmanuel.

vi ABSTRACT The study on Banking systems and Credit control in selected Commercial Banks in Kampala District, Uganda was guided by five research objectives that were set to: (i) identify the social demographic characteristics of the respondents in terms of gender, age, marital status and level of education; (ii) identify the levels of banking system; (iii) the level of credit control; (iv) establish if there is a significant difference between the level of banking systems and level of credit control and (v) establish if there is a significant relationship between the level of banking system and the level of credit control in selected Commercial Banks in Kampala, Uganda. The study findings revealed that majority of the respondents fell in the following categories, in gender majority were female, in age brackets of 24 — 30 years, married dominated, degree holders dominated in education category, banking officers and operations dominated position and department respectively. Results also indicate that the level of both banking systems and credit control were high with means of 3~40 and 3.27 respectively. The study went ahead to reveal that banking systems and credit controls differed significantly; and lastly that banking systems are positively correlated with credit control (r=686, sig=000). These findings led to the rejection of the null hypothesis which said that there was no significant relationship between banking systems and credit control in the selected commercial banks in Uganda. The researcher therefore recommends that Banks train in banking systems’ use to improve efficiency of services offered to their customers. It is also recommended therefore that access to banking systems be restricted with frequent change of passwords in order to improve credit controls in the banking industry; schedule periodic refresher courses for all staff and come up with standardized procedures for handling credit and banking in order to improve the quality of services in the Banking Industry.

vii LIST OF ACRONYMS

MS Australian Administration Services ANOVA Analysis of variables ATM Automated Teller Machine CHDR College of Higher Degrees and Research CRB Credit Reference Bureau DVC Deputy Vice Chancellor KIU Kampala International University NPL Non Performing Loans PLCC Pearson’s Linear Correlation Co-efficiency RTGS Real Time Gross Settlement System SEE South Eastern European SPSS Statistical Package for Social Sciences ‘UCBL Uganda Commercial Bank Limited

viii LIST OF TABLES

Table 1: Category of Respondents 17 Table 2: Respondents’ Profile 22 Table 3: Extent of Banking Systems 25 Table 4: Level of Credit Control 28 Table 5A: Difference in extent of banking systems according to Gender 30 Table 5B: Difference in extent of banking systems according to Education 31 Table 5C: Difference in extent of banking systems according to Experience 32 Table 6A: Difference in the level of Credit Control according to Gender 33 Table 6B: Difference in the level of Credit Control according to Education 33 Table 6C: Difference in the level of Credit Control according to Experience 34 Table 7A: PLCC results for Banking Systems and Credit Control 35 Table 7B: Regression Analysis for Credit Control and Banking Systems 35

ix TABLE OF CONTENTS Chapter Page Declaration A ii Declaration B iii Approval Sheet iv Dedication v Acknowledgement vi Abstract vji Ust & Acronyms viii Ust of Tables ix Table of Contents ONE PROBLEM AND ITS SCOPE 1. Background & the Study 1 Statement of the Problem 3 PurposeoftheStudy 3 Research ObjectIves 4 General Objective 4 Specific Objectives 4 Research Questions 4 Hypothesis 5 Scopeofthestudy 5 Significance of the Study 6 Operational Definition 6 TWO REVIEW OF RELATED LITERATURE 7 Concepts/Ideas from Authors and Experts 7 Theoretical Perspective 13 THREE METHODOLOGY 16 Research Design 16 Study Population 16 Sample Size 16 Sampling Procedure 17 Research Instrument 17 Vaildity and Reliability of the Instrument 17

x Data Gathering Procedure 18 Data AnalysIs 19 Ethical ConsIderation 19 Umltatlon & the Study 20 FOUR ANALYISIS AND INTERPRETATION OF DATA 21 Profile of Respondents 21 Extent of Banking Systems 24 Level of Credit Control 26 Difference between Banking systems and Credit Control 29 RelationshIp between Banking systems and Credit Control 33 FIVE FINDINGS, CONCLUSIONS AND RECOMMENDATION 36 Summary of FIndings 36 Conduslon 37 kecommendatlon 40 Areas for Further Research 41 REFERENCES 42 APPENDICES 46 Appendix I A: Transmittal Letter 46 Appendix I B: Transmittal Letter 2 47 Appendix II: Clearance from Ethics Committee 50 Appendix III: Informed Consent 51 AppendIx IV: Research Instrument 52 Appendix V: Content Validity Index 56 Appendix VI: Sloven’s Formula 58 Appendix VII: Researcher’s CV 59

xi Xli CHAPTER ONE THE PROBLEM AND ITS SCOPE Background

The first recorded banking transaction was said to have occurred many centuries ago, in the era where the empire of Assyrian was established in the form of barter method between ancient Peoples (Basle 1996). Usually the assets that were accepted were those that had great value such as stones. This kind of exchange among traders was incorporated in the idea of banking system. The history of banking systems can be traced back as early as 12,000 years ago. In this era, it was said that the banking system already existed faultlessly (Basle 2001). The first pieces of evidence in the existence of banking system were first uncovered in 1890 by Heilpretch. The clan of Engadi — were the family who first built the banking system that ruled and facilitated the business and investment of the Assyrian Empire.

Through the history of banking systems, there were so many empires and civilizations that have folded to the increase and plunge of the valuable metals and other stuff that were being used in banking. This process is inevitable and therefore the banking institutions should also be flexible in order for them to cope very effectively on the changes that the fluctuations of money they create. (Brealey 1996)

Technology has influenced many aspects of business but one of the areas affected the most is the financial processing of transactions. Technology has made global business possible by allowing businesses around the world to exchange funds online. Banks can now offer a wide variety of services to customers internationally that could not be offered without the Internet and dedicated applications. Electronic banking systems are general structures that let these transactions take place at a distance. (Taylor Lacoma2OlO) The past decade however, has seen dramatic losses in the banking industry because firms that had been performing well, suddenly announced large losses due to credit exposures that turned sour, interest rate positions taken, or derivative exposures that may or may not have been assumed to hedge balance sheet risk. In response to this, commercial banks have almost universally embarked upon an upgrading of their risk management and control systems (Martin BrownBridge 2008)

The banking industry in Uganda’s banking sector has evolved over time from a period of “financial repression” during the 1970s and 1980s to a period of liberalization that started in the late 1980s. The reforms were initiated with a view to addressing major misalignments in the financial sector that were believed to impede economic growth through inefficient performance of the banking sector (Brealey 1996). Major concerns included inefficient allocation of credit and limited access to financial services by the larger population. While cognizant of these important concerns in the banking sector was critical, equally important was the need, on the part of the central bank to ensure soundness of banks to guarantee security of depositors’ money, among other things. Accordingly, the financial sector reforms Uganda implemented were aimed at achieving efficiency in financial intermediation on the one hand and strengthening the banking sector through efficient and effective supervision by the central bank study on the other (Basel II)

According to MS Training Limited (2008) competitive pressures mean that many businesses have to give their customers trade credit. Credit is an unsecured, interest-free loan to customers. The normal credit period offered to customers is 30 days, the average debt collection time is nearer 90 days because of slow payers.

2 Often small firms suffer most because they have fewer administrative staff available to chase debt. They are also reluctant to apply pressure to their larger customers for fear of losing them.

Statement of the ProWem The lack of confidence in the banking system and uncertainties and difficulties faced by the population and business people provides severe challenges and implications on the role of banking systems and credit control today. This is equally made difficult by the rigid process within which a number of these institutions rely almost exclusively on the long-established, inefficient, informal banking system. Commercial banks, including deposit taking, the provision of credit, and foreign exchange operations have had difficulties providing the necessary services which would help in managing credits within the private commercial bank spectrum. Credit control is equally not effectively managed due to poorly structured systems, which have lead to failure to recover funds. Further, the inability of the staff to follow the laid down rules and regulations governing all the lending and recovery procedures of the credit is a big problem in credit control.

Purpose of the Study

The proposed study (1)Tested the hypothesis of no significant relationship between the level of banking system and the level of credit control; (2) Validated existing information related to the theory to which the study was based; (3) Generated new information based on the findings of the study; (4) Bridged the gaps identified in the previous studies.

3 Research Objectives Genera~ To identify the relationship between banking system and credit control in selected commercial banks in Kampala district, Uganda.

Specific The study was based on the following study objectives: 1. To identify the social demographic characteristics of the respondents in terms of gender, age, marital status and level of education 2. To determine the extent of banking system in selected banks in Kampala, Uganda. 3. To determine the level of credit control in selected banks in Kampala, Uganda 4. To establish if there is a significant difference between the level of banking systems and level of credit control among selected banks in Kampala, Uganda. 5. To establish if there is a significant relationship between the level of banking system and the level of credit control in selected banks in Kampala, Uganda.

Research Questions The study was guided by the following research questions: 1. What is the social demographic characteristic of the respondents in terms of gender, age, marital status and educational level? 2. What is the extent of banking systems in selected banks in Kampala Uganda? 3. What is the level of credit control in selected banks in Kampala, Uganda? 4. Is there a significant difference between the level of banking system and level of credit control in selected banks in Kampala, Uganda? 5. Is there a significant relationship between the level of banking system and the level of credit control in selected banks in Kampala Uganda

4 Hypothesis The study was based on the following hypothesis. Ho 1 There is no significant relationship between the level of banking system and the level of credit control in selected Commercial Banks in Kampala District, Uganda. Ho 2 There is no significant differences in the levels of banking system in selected Commercial Banks in Kampala according to relevant profile variables Ho 3 There is no significant difference in the level of credit control in selected banks in Kampala according to relevant profile variables.

Scope of the study Geographica’ Scope The study was conducted in three banks in Uganda. These are Stanbic bank, Bank of Africa and Finca Uganda Ltd, Kampala, Uganda. The reason for selecting these banks is that bank offices fall in the capital city where there is an elite population that will give the researcher a good sample in the area of study. Time Scope The study covered the period from December 2011 to July 2012, Theoretica’ Scope System Theory by Ludwig von Bertalanffy (1950) discovered principles that can be applied to all types of systems. System in an organization consists of components which are made up of inter related components which work together to produce desired outcome. Banks use the system for daily operations and control purposes. Content Scope The study intended to examine banking systems and credit control. Banking System focused on infrastructure and practices while credit control, focused on policies and procedures,

5 Significance of the Study The findings of the study added new knowledge to the existing knowledge about banking system and credit control literature. This helped the bank users to get new knowledge about the banking sector. The study enabled the bank employees to offer efficient and effective banking services to its customers. This service enabled the bank attain its objectives of credit control. The findings were a basis of formulation of credit policies for banks and other financial institutions. The findings helped bank authorities see how to improve on credit control

Operational Definitions ofKey Terms Banking system concerns the infrastructure and practices which support financial institutions.

Credit controD is just a set of simple steps taken to ensure your loan money is paid on time.

CommerciaD bank - A commercial bank is a type of financial institution and intermediary. It is a bank that provides transactional, savings, money market accounts and accepts time deposits.

6 CHAPTER TWO

REVIEW OF RELATED LITERATURE Concepts, Ideas, Op~nions from Authors/Experts A system is a set of interconnected components that form a whole and show properties of the whole rather than of the individual components. This definition is valid for a cell, an organism, a society, or a galaxy. Therefore, as Joanna Macy expressed it, a system is less a thing than a pattern. Banking has sprouted from the very primitive Stone-age banking, through the Victorian-age to the technology-driven Google-age banking, encompassing automatic teller machines (ATM5), credit and debit cards, correspondent and internet banking. Credit risk has always been a vicinity of concern not only to bankers but to all in the business world because the risks of a trading partner not fulfilling his obligations in full on due date can seriously jeopardize the affairs of the other partner (www.essays.se) The main development objective of the Financial System Infrastructure is to ensure that successful implementation of financially enabled services has been duly achieved. This, according to Hart et al, (1994) involves using highly integrated computer systems to improve commercial bank operations. This is so to put in place an enabling infrastructure for basic financial services, primarily by modernizing the inter-bank payments system for large-value transactions and by developing norms, and standards for low-value payments systems. Key components address: 1) the development of a modernized inter-bank payments system, allowing to process electronic fund transfers, and facilitate secure, rapid transfers. A Real Time Gross Settlements System (RTGS) will be established, to be managed, and operated by the commercial banks. For this purpose, procedures will be incorporated to control credit risk, fraud, and maintain integral, confidential transactions. Subcomponents include: computerization, technical assistance and training and studies to identify interface standards for clearing banking activity payments; 2) the information systems of the commercial

7 banks, which will include the technical infrastructure for the RTGS system, computer hardware and software, supported by technical assistance, and training for both the RTGS system, and information systems in general; 3) telecommunications infrastructure support, involving a high capacity telecommunications optical ring network in Uganda, with links around the country; telecommunications hardware, and software installation; and training for telecommunications engineering, and security audits; and, 4) project management support, which includes, inter alia, and training to strengthen the project management unit capacity. Online banking is meant for the entire banking system, which involves all the departments of the company. Each department in a company has some sort of data about the customer, may be not in the format required, may be shabbily maintained, which needs to be accessed and analyzed and made available to all the departments. If we take an example of a call center, they have a screen pop, which is a software application connected to their phone system. (Petersen, 1997) The term credit may be defined in a broad or narrow sense. In broad terms, credit is finance made available by one party — lender, seller, or shareholder / owner — to another party — borrower, buyer, or a business firm.

The former could be a pure lender — a financial institution or a private money lender, a seller / supplier of goods on the promise of the buyer to make payment in future, or a shareholder / owner of a firm making funds available to the firm recognized as a separate entity. More commonly, the term credit is used in a narrow sense that is only for debt finance. Credit is simply the opposite of debt; both are created instantly by the same contract. It is a special sort of exchange transaction involving future payments, interest added to debt as its time value. It is this view of credit that lies at the heart of modern commercial banking (www.mpra.ub.uni-muechen.de).

8 According to Onyeagocha (2001), the term credit is used specifically to refer to the faith placed by a creditor (lender) in a debtor (borrower) by extending a loan usually in the form of money, goods or securities to debtor. Essentially, when a loan is made, the lender is said to have extended credit to the borrower and he automatically accepts the credit of the borrower. Credit can therefore be defined as a transaction between two parties in which the creditor or lender supplies money, goods and services or securities in return for promised future payments by the debtor or borrower. There are three major types of credit. These are commercial credit, consumer credit and investment credit. Commercial credit can be bank credit such as overdraft, loans and advances; trade credit from suppliers; commercial papers (or note); invoice discounting; bill finance; hire purchase; factoring, etc. Consumer credit is a kind of permission granted an individual or a household to purchase goods like refrigerator, television, car, electronic sets, which could not be paid for immediately but for which installment payments are made over a period of time.( Brigham et al 1985) The functions of credit are primarily two: it facilitates the transfer of capital or money to where it will be most effectively and efficiently used; and secondly, credit economizes the use of currency or coin money as granting of credit has a multiplier effect on the volume of currency or coin in circulation. Perhaps, we need to add here that the cost of credit (notably interest and discount rates) is one of the essential tools used to control and regulate money by the Central Bank through its monetary policy.

Credit Contro~

Is just a set of simple steps taken to ensure you loan money is paid on time. Effectiveness of credit control lies in procedures employed for judging a

9 prospect’s creditworthiness, rather than in procedure extracting the owed money.

Credft PoNdes A technique for internal control of active management is the use of position limits, and/or minimum standards for participation. In terms of the latter, the domain of risk taking is restricted to only those assets of pre-specified quality standard. Then, even for those investments that are eligible, limits are imposed to cover exposures to counterparties, credits, and overall position concentrations relative to various types of risks. While such limits are costly to establish and administer, their imposition restricts the risk that can be assumed by any one individual, and therefore by the organization as a whole. In general, each person who can commit capital will have a well-defined limit. This applies to traders, lenders, and portfolio managers. Summary reports show limits as well as current exposure by business unit on a periodic basis. In large organizations with thousands of positions maintained, accurate and timely reporting is difficult, but even more essential.( Brigham et al 1985) According to Brigham et. al. (1985), the success or failure of a business depends primarily on the demand for its products as a rule, the higher its sales, the larger its profits and the healthier the firm. Sales, in turn, depend on a number of factors, some uncontrollable yet others controllable by the firm. The major controllable variables which affect demand are sales prices, product quality, advertising and the firm’s credit policy. Credit policy, consists of four variables which are: credit period, which is the length of time buyers have before they must pay for their purchases; the credit standards, which refer to the minimum financial strength of acceptable credit customers, the firm’s collection policy, which is measured by its toughness or laxity in following up on slow-paying accounts and any discounts given for early payment. The credit manager is responsible for administering the firm’s

10 credit policy. However, because of the pervasive importance of credit, the credit policy itself is normally established by the executive committee. One of the traditional methods of measuring credit quality is to investigate the potential buyer with respect to five factors called the five Cs of credit, which include: Character which refers to the probability that customers will try to honor their obligations. This factor is of considerable importance, because every credit transaction implies a promise to pay; Capacity is a subjective judgment regarding customers’ ability to pay. It is gauged in part by their past records and their business methods, and it may be supplemented by physical observation of customers’ plants or stores; Capital is measured by the general financial condition of a firm as indicated by an analysis of its financial statements. Special emphasis is given to risk ratios like the debt / assets ratio, the times-interest-earned ratio, and the fixed charge coverage ratio; Collateral is represented by assets that a customer may offer as security to obtain credit; Conditions refer to any general economic trends or special developments in certain geographic regions or sectors of the economy that might affect customers’ ability to meet their obligations. Information on these five factors is obtained from the firm’s previous experience with each customer, supplemented by a well-developed system of external information-gathering groups. More and more firms and industries are setting up computerized data bases for storing and retrieving information on their customers and potential customers and of course, once the information on the five Cs is developed, the credit manager must still make a final decision on the potential customer’s overall credit quality. This decision is normally judgmental in nature, and credit managers rely on their acquired skills and instincts. A typical credit report would include the following pieces of information: A summary balance sheet and income statement, a number of key ratios, with trend information, Information obtained from the firm’s suppliers telling whether it has been paying promptly or slowly and whether it has failed to make

11 payments; a verbal description of the physical condition of the firm’s operations backgrounds of the firm’s owners, including any previous bankruptcies, lawsuits, divorce settlement problems, and a summary rating, ranging from A + for the best credit risks down to F for those that are most likely to default. Although a great deal of credit information is available, it must still be processed in a judgment manner. Computerized information systems can assist in making better credit decisions, but, in the final analysis, most credit decisions are really exercises in informed judgment. Even credit scoring systems require judgment in deciding where to draw the lines, given the set of derived scores (Brigham et al 1985). The credit reference bureau was introduced by Financial Institution Act (2004) and requires all clients to register before applying for a loan.CRB gathers information about how borrowers use credit. This information is used by loan providers to decide whether or not to grant credit to borrowers in the future. Through the CRB the institution that is lending money will have enough information about the way you repay the loans you already have so that they can make responsible decisions about granting credit. Modern credit managers practice management by exception. Under such a system, customers are first classified into five or six categories according to degree of risk, after which the credit manager concentrates time and attention on the customers that are most likely to cause problems Collection policy refers to the procedures the firm follows to collect past-due accounts. For example, a letter may be sent to such accounts when the bill is 10 days past due; a more severe letter, followed by a telephone call, may be used if payment is not received within 30 days; and the account may be turned over to a collection agency after 90 days. The collection process can be expensive in terms of both out-of-pocket expenditures and lost goodwill, but at least some firmness is needed to prevent an undue lengthening of the collection period and to minimize outright losses. Again, a balance must be struck between the costs and benefits of different collection policies.

12 Credit control is a vital process for every business and is the dialogue initiated with customers through various means of communication. It is generally a simple procedure that escalates as the time between invoicing and payment increases.

Theoretica Perspectives Systems theory provides a knowledge base that goes beyond disciplinary boundaries; it seeks isomorphism between and among concepts, principles, laws, and models in various realms of experience; it provides a framework for the transfer and integration of insights relevant to particular domains of research; and it promotes the unity of science through improving communication among disciplines. The theoretical aspect of credit control is about determining the level of managing credit through various channels as evidenced in the commercial banks. In addition to borrowing from commercial banks, firms may be financed by their suppliers. Although there are many theories explaining why non-financial firms lend money, there are few comprehensive empirical tests of these theories. This research attempts to explain banking system and credit control. We focus on a sample of three major banks in Uganda which provide credit to their clients. We find evidence that the banks control credit through specific regulations that is illustrated by the banks in order to successfully manage and control risks associated with lending.

R&ated Studies Sastrosuwito and Suzuki (2011) studied Post Crisis Indonesian Banking System Profitability in Japan. The impact of loan intensity (credit/total assets) on bank profitability is found positive and significant; indicates the good quality of credit extended by the banks. The quality of the credit can be confirmed with the low level of non-performing loans (NPL) during the considered period. Athanasoglou et al. (2006) examine the profitability behavior of bank specific, industry-related and macroeconomic determinants, using an unbalanced

13 panel dataset of South Eastern European (SEE) credit institutions over the period 1998-2002. The estimation results indicate that, with the exception of liquidity, all bank-specific determinant significantly affect bank profitability in the anticipated way. According to Omuodo (2003), as pressure amounts on the banking industry, profitability resulting from over reliance on interest income by banks is bad business, it is strategically imperative that banks focus on other revenue streams. Kapoor R. Jack and et al (2007), argue that most lenders build credit around the five Cs of credit- character, capacity, capital, collateral and conditions. Northcott (2004) examined the traditional perception that the trade-off exists between economic efficiency and stability in the banking system: a competitive banking system is more efficient and therefore important to growth, but market power is necessary for stability in the banking system. However the assertion that this trade-off exists is not clear because market power can have positive implications for efficiency and the potentially negative implications of competition on stability may be manageable through prudential regulation.

Banking Sector Structure and Performance

The banking sector is characterized by a large share of foreign ownership and high concentration. Following the privatization of Uganda, Commercial Bank Limited (UCBL), four foreign owned banks dominated the banking sector in Uganda and account for 73 percent of total sector assets 68 percent of sector loans and 75 percent of deposits. The State owned Uganda Commercial Bank Limited (UCBL) has traditionally been Uganda’s largest bank accounting for as much as 50 percent of the banking system deposits and loans in the mid 1990s. It also had the most extensive nationwide branch network (189 branches in 1990 but reduced to 68 at the time of its privatization).

14 In addition to the large foreign owned banks there are three medium size banks representing some 14 percent assets and eight very small banks. The presence of foreign commercial banks and the recent repositioning of Stanbic, as the lead player should strengthen the stability of the system ,contribute to improvements in financial markets and enhance competition .While it is too early to judge, there are already some signs of new competitive forces at play.(www I. world. Bank.org/Finance/Assets/Images/ugandaJFssA) Gaps identified: No study has been carried out on banking system and credit control in Kampala Uganda. Sastrosuwito and Suzuki (2011) studied Banking System Profitability in Japan. Therefore their study did not focus on credit control as their interest was on profitability

15 CHAPTER THREE METHODOLOGY Research Design The researcher used descriptive correlation research design because the study measured the level of relationship between the study variables that is (Banking system and Credit Control). Also used a descriptive comparative design because the study also measured the level of difference between the independent and dependent variables.

Research Popu’ation The study was conducted in three different banks; Stanbic bank City Branch, Bank of Africa Kabalagala, and Finca Uganda Ltd Nateete Branch, Kampala, Uganda. The category of people involved in this study, were senior staff (management) and junior staff of the bank. The target population included a total of 134 members of staff. The operational staff, were involved because they are the planning body and implementers of the organizations.

Samp~e Size The participants of this study were staff of Stanbic bank, Bank of Africa, and Finca, Uganda Ltd in Kampala. Out of the population of 134 staff, the sample size was 100 respondents, determined by the Sloven’s formula, which states as follows:

N 1 1 -~-N

Where: n = the required sample size, N = the known population size, and e = the level of significance, fixed at 0.05.

So, e2 = 0.05 x 0.05 = 0.0025

Therefore, n = 100

16 Table 1 Category of Respondents Name of branch Target Population Sample size Stanbic Bank 90 67 Bank of Africa 20 15 Finca Uganda Ltd 24 18 Total 134 100 Samphng Procedure The target population of 134 (which included 90 staff from Stanbic Bank, 20 staff from Bank of Africa and 24 staff from FINCA Uganda Ltd) respondents being large, a sample of 100 respondents used, got using stratified random sampling to reduce costs, time of doing research and to increase the degree of accuracy of the study. Regarding sample size, the sampling frames (i.e. employees) in the selected banks companies was stratified according to branches in selected banks in Kampala, Uganda. Then proportionate systematic random samples were chosen from the respective stratum sampling frames or lists.

Research Instrument A standardized researcher made closed questionnaire was used as the main tools of data collection. The selection of tools has been guided by the nature of data collected, the time available as well as the objectives of the study. Questionnaires were used because they collected a lot of information over a short period of time as the information needed was easily put in writing.

Validity and Reliability of the Instrument

To ensure the validity and reliability of the instrument, the research employed the expert judgment method. After constructing the questionnaire, the researcher contacted experts in the study area to go through it to ensure that it measured what it was designed to measure and necessary adjustments were made after consultation and this ensured that the instrument was clear, relevant, specific and logically arranged. Secondly, a pre-test was conducted in order to

17 test and improve on the reliability of the questionnaire. Thirdly, a content validity index (CVI) of 0.97 was obtained using the formula:

CVI = The number of r&evant questions

The tot& number of questions

Calculations are indicated in the appendix (IV). CVI was greater than 0.70 thereby declaring the instrument valid. Reliability of the instrument was tested using the Cronbach’ coefficient alpha (a) and the results obtained a = 0.88 (SPSS results) which was greater than 0.70 indicating that the instrument was highly reliable.

Data Gathering Procedures Before the administration of the questionnaires 1. An introduction letter was obtained from the College of Higher Degrees and Research for the researcher to solicit approval to conduct the study from respective managers. 2. When approved, the researcher secured a list of the qualified respondents from the selected Branches in charge and selected through simple random sampling from this list to arrive at the minimum sample size. 3. The respondents were explained about the study and were requested to sign the Informed Consent Form (Appendix 3). 4. Reproduce more than enough questionnaires for distribution. 5. Selected research assistants who assisted in the data collection; briefed and oriented them in order to be consistent in administering the questionnaires.

During the Administration of the Questionnaire 1. The respondents were requested to answer completely and not to leave any part of the questionnaires unanswered.

18 2. The researcher and assistants emphasized retrieval of the questionnaires within five days from the date of distribution. 3. On retrieval, all returned questionnaires were checked if all are answered. After the Administration of the Questionnaires The data gathered was collated, encoded into the computer and statistically treated using the Statistical Package for Social Sciences (SPSS).

Data Analysis The data collected was analyzed using the Statistical Package for Social Sciences (SPSS) for the final completion of the report and frequency tables was drawn to the results of each research question and objective. These statistical parameters were employed to compute for the following (1) the frequency and percentage distribution for the demographic characteristics of the respondents; (2) the mean and item analysis for the level of banking systems and the level of Credit control. (3) ANOVA was used to analyze the level of difference between the study variables. (4) PLCC was used to analyze the relationship between the study variables.

Answer Range Response mode Interpretation 1.00-1.75 Strongly disagree very low 1.76-2.50 Disagree Low 2.51-3.25 Agree Moderate 3.26-4.00 Strongly agree High

Ethical Considerations To ensure confidentiality of the information provided by the respondents and to ascertain the practice of ethics in this study, the following activities were implemented by the researcher: 1. The respondents and firms were coded instead of reflecting the names. 2. Solicited permission through a written request to the concerned officials of the selected firms in the study. 3. Requested respondents to sign in the Informed Consent Form

19 4. Acknowledged the authors quoted in this study and the author of the standardized instrument through citations and referencing. Presented the findings in a generalized manner. llJmftations of the Study In view of the following threats to validity, the researcher claimed an allowable 5% margin of error at 0.05 level of significance. Measures were also indicated in order to minimize if not to eradicate the threats to the validity of the findings of this study. 1. Extraneous variables were beyond the researcher’s control such as respondents’ honesty, personal biases and uncontrolled setting of the study. 2. Instrumentation: The research instruments on banking system and credit control are not standardized. Therefore a validity and reliability test were done to produce a credible measurement of the research variables. 3. Testing: The use of research assistants brought about inconsistency in the administration of the questionnaires in terms of time of administration, understanding of the items in the questionnaires and explanations given to the respondents. To minimize this threat, the research assistants oriented and briefed on the procedures to be done in data collection. 4. Attrition/Mortality: Not all questionnaires may be returned completely answered nor even retrieved back due to circumstances on the part of the respondents such as travels sickness, hospitalization and refusal/withdrawal to participate. In anticipation to this, the researcher reserved more respondents by exceeding the minimum sample size. The respondents were also reminded not to leave any item in the questionnaires unanswered and were closely follOwed up as to the date of retrieval.

20 CHAPTER FOUR

PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

Profile of respondents The researcher described respondents profile in terms of gender, age, and marital status, level of education, position, department and experience. Respondents were requested to state their characteristics for purposes of classifying them. The study utilized a structured researcher made self administered questionnaire to classify respondent’s profiles and their responses were analyzed using frequencies and percentage distributions as shown in the table below.

Tab’e 2 Respondents’ Profile Category of Respondents Frequency Percent Gender ~Male 34 34.0 Female 66 66.0 Total 100 100.0 Age 24-30 years 46 46.0

31 - 36 years — 24 24.0

37 - 42 years 12 12.0

43 - 49 years io io.o 50 years and above 8 8.0 Total 100 100.0 Marital status Single 26 26.0 Married 68 68.0 Divorced 4 4.0 Widowed 2 2.0 Total 100 100.0 evel of Education certificate 16 16.0 Diploma 22 22.0 Bachelors 52. 52.0 Postgraduate 10 10.0 Total 100 100.0

21 Position Teller 42 42.0 Banking Officer 26 26.0 Supervisory position 8 8.0 Managerial position 5 5.0 Head of Department 6 6.0 Technician 8 8.0 Customer Consultant 5 5.0 Total 100 100.0 Department Operations 16 16.0 Risk 11 11.0 Credit 10 10.0 Human Resource 11 11.0 Finance 9 9.0 Legal 8 8,0 Transaction 7 7.0 Personal Banking 7 7.0 Executive Banking 10 10.0 Business Banking 6 6.0 Insurance and Audit 5 5.0 Total 100 100.0

Experience 1 - 5 years 71 71.0

6 - 10 years 9 9.0

11 - 15 years 12 12.0

16 - 20 years 8 8.0 Total 100 100.0 Source: Primary data, 2012

Table 2 shows that most respondents (66%) were female, while male were only 34%. This indicates gender inequality in employment in the selected commercial banks in Kampala, Uganda. This gender inequality could be due to the fact that ladies are good as far as customer care is concerned yet customer care is a very essential factor as far as the banking sector is concerned. When it came to age, the study discovered that most respondents belonged to the age group of 24 — 30 years (46%), this was followed by age bracket 31 — 36 years (24%), then age brackets,37 — 42 years, 43 — 49 years and 50 years above followed in that order with (12%, 10%, and 8%)

22 respectively. This implies banks employee young people most fresh from institution of learning with the desire to explore and learn more their jobs In regard to marital status, the study showed that majority of the respondents (68%) were married, followed by single (26%), divorced came third (4%) and in the last position were widowed (2%). This indicates that respondents were responsible with family attachments and dependants which motivate them to work hard and stabilize on the job because they have responsibilities. On the level of education, results revealed that banks employ majorly graduates; degree holders (52%); diploma holders (22%), certificate holders (16%) and those with postgraduate came last with (10%). This revealed adequate distribution of education among employees and high level of professionalism. The study revealed that majority of respondents were Credit Officers with (42%), followed by Banking officers (26%), supervisors and technicians both tied with (8%), heads of departments (6%), managers and customer consultants also tied with (5%). This implies that all the relevant stakeholders participated in this study. Concerning departments, the study revealed that majority of the respondents were from Operations department (l6%), followed by both Risk and Human Resource departments at (ll%), Credit and Executive banking departments both with (lO%), followed by Finance department (9%), legal department (8%) transaction and personal banking departments also tied with (7%), followed by business banking department with (6%) and insurance and audit department came last with (5%) The study indicated that (71%) had been in banking industry for a period of 1 — 5 years, 12% had served for 11 — 15 years, followed by (9%) and (8%) with experience of 6 — 10 years and 16 — 20 years respectively. These results reveal that fewer employees have got enough experience leading to a conclusion that there is some level of employee turnover in the banking sector.

Li The Extent of Banking Systems in s&ected Banks in Kampa~a, Uganda The independent variable in this study was set to determine the level of banking systems in selected commercial banks in Kampala, Uganda, for which the researcher intended to find out how satisfactorily these banking systems were the degree at which they stand when compared to other systems. Banking systems were broken into thirteen items and all the aspects were measured using qualitative questions in the questionnaire, with each question having four

points answer range, where 1= strongly disagree; 2 = disagree; 3=agree; and 4

= strongly agree. Respondents were required to rate how satisfactory each item was by showing the degree to which they agree or disagree with each. In doing this each respondent was directed to tick a number corresponding to his or her own best opinion, perception and thinking. Their responses were analyzed using SPSS and summarized using means. In order to get the means, we got an average result of each question from which we got the average mean of the total results as indicated in table 3;

Tab~e 3 Extent of Baj~pg Systems in S&ected Banks in Kampa’a, Uganda Banking Systems Rank The Bank has a computerized system that stores and analyses ~~HIgh customer information 1 The bank has a system notification on the loan limit per customer 3.60 High 2 The system alerts the Supervisor before limits are exceeded 3.57 High 3 The system generates timely reports on customer loan status 3.57 ______High 3 There is a limit on system information access 3.51 High 5 The system reflects collateral given and its value 3.46 ______High 6 The system generates penalty reports for overdue clients 3.45 High 7 The bank records guarantors’ details and their security 3.45 _____ High 7 The system recovers interest and all fees on the loan 3.33 High 9 The system sends periodic loan status messages to the clients 3.22 Moderate 10 The system has loan approval limits for every authorized officer 3.21 Moderate 11 There is controlled access to customer information in the system 3.16 Moderate 12 The system enables management to make informed credit Moderate decisions 2,99 13 Average mean 3.40 High Source: Pr/mary dataf 2012

24 Rating Scalle Answer Range Response mode Interpretation 1.00-1.75 Strongly disagree very low 1.76-2.50 Disagree Low 2.51-3.25 Agree Moderate 3.26-4.00 Strongly agree High

Table 3; show that banking systems in the selected commercial banks in Kampala were rated at different levels. Of the thirteen items, nine were rated

high with means ranging from 3.33 — 3.65 which is equivalent to strongly agree on our rating scale and four items were rated moderate with means ranging from

2.99 — 3.22 an equivalent to agree. Three items which were highly rated included banks offering mortgage services/property to customers (mean=3.65), here the bank allows its clients to own property but these properties are still in the names of the bank until the respective loans are paid off. In case the default the loan or fail to service the loan as agreed upon between the bank and the customer, the banks takes over the property and sell it to another person who will settle the loan. In this the bank does not make any loss; followed by banks having an overdraft facility (mean~3.60), customers with current account are allowed to over draw their accounts beyond the money possessed and this offered to majority top customers with clean records and proper functional accounts in the past and second they should be having security; and two items which tied in the third position and these were banks offering insurance on loans and bank requiring personal guarantors on loans both at (mean=3.57) all these are equivalent to strongly agree on the rating scale used. Personal guarantors help bank tress customers who have defaulted loans and decided to hide or run out of either that place of out of the country. In case a guarantor fails to tress the customer he/she guaranteed he/she will be liable to settle the loan. This means that employees agreed with no doubt that their respective banks were doing well as far as the above mention items were concerned.

25 Some items which did not score well although they were at moderate level which is an equivalent to agree on the rating scale included bank having a range of products they offer to clients (mean=3.22), followed by the numbers of clients who have fully paid the loans have increased in the last six month (mean=3.21), bank offering credit funds (mean=3.16) and ATMs are efficient 24 hours a day (mean=2.99). By following their means you find that these items were not rated very poorly but compared to the rest, they did not score well. This means that yes respondents agreed that banks are doing well in those areas; however, there is still room for improvement if these banks are to adequately control their credit. To sum up the whole thing, the level of banking systems in selected commercial Banks in Kampala, we get an overall mean index (grand average mean) for all the 13 items computed in banking system category, we get a mean of 3.40, which confirms that banking systems policies in selected commercial banks are excellent (high level) indicating that if properly followed, banks will be in position to control their credit.

The Lev& of Credft Contr&s ~n s&ected Banks ~n Kampa’a, Uganda The dependent variable in this study was credit controls, broken down into eighteen aspects and all were measured using qualitative questions in the questionnaire and each question had an answer scale ranging between one to four; where 1=strongly disagree; 2=Disagree; 3=agree; 4=strongly agree. Respondents were required to rate these credit controls on each of the items by ticking the relevant number in the corresponding box in the table. Their responses were analyzed using SPSS and summarized using descriptive statistics showing means as indicated in table 4;

26 Table 4 Level of Credft Control in Selected Banks in Kami Credit Control The bank analyses customers’ ability to pay The bank has a limit on credit given to a customer The number of clients who have fully paid the loans have increased in the last five years The bank has an overdraft facility The bank offers mortgage loans Credit control is centralized The bank is very strict on payments terms and conditions The bank considers market value of the collateral The bank charges penalty on late payments The bank charges interest and commitment fees on loans A customer is required to have security before accessing loan The bank has an excess or top up facility for clients The bank is very strict on payment terms and periods Overdue accounts are reviewed regularly The bank requires full customer documentation and identification before lending The bank has a credit recovery department that handlc~ collection of credit in default The bank has a credit operations manual The bank ensures that credit is not diverted to undesired purposes Average mean Source: Primary data, 2012

Table 3; show that banking systems in the selected Commercial banks in Kampala were rated at different levels. Of the eighteen items, eleven were rated

high with means ranging from 3.27 — 3.54 which is equivalent to strongly agree on our rating scale and six items were rated moderate with means ranging from

2.98 — 3.16 an equivalent to agree and one was rated low with mean=2.48. Items which were highly rated included client being charged for exceeding their limit and Banks ensuring that credit is not directed to undesirable purposes both with (mean=3.54), here banks charge a small fee to customers who have overdrawn their accounts, this charge is not necessarily equivalent to interest

27 rate on a loan but it helps bank to earn something substantive from its clients for the money they have used which does not belong to them. This kind of charge saves the customer the hustling of processing the loan and other related challenges. Another thing is about bank ensuring that credit is not directed to undesirable purposes; for example, some customers go in banks and get loan or credit to buy cloths and deceive banks that it is for business investment. If a bank detects this, according to finding, such a customer will not be given loan. Second position were; in the process of opening new accounts the banks obtain proof of customer’s identity and customers having security when applying for a loan both with (mean=3.51), all these are equivalent to strongly agree on the rating scale used. This helps banks to tress and track customers who go in bank with the intention to default banks. When a banks asks customer’s personal information, like contact, employment identity, helps bank before giving this clients any loan to first contact his/her employers to verify whether is an employee of that person and he is a good person to offer credit. This implies that respondents employees agreed with no doubt that their respective banks were doing on those respective items. However, one item was rated low and this was that there exist a standardized procedures for handling credit recovery, whether at general operation manual or guideline with (mean=2.48) and this is an equivalent to disagree. This implies that respondents who were contacted unanimously agreed that there their banks do not have a clearly standardized procedure for handling credit recover within their operational manuals and guidelines and this poses a risk to banks because even staffs seem to be a dilemma whenever they face such challenges. The finds revealed that the level of credit control among selected commercial Banks in Kampala, was at high level basing on the overall mean index (grand average mean) for all the 18 items computed in credit control category, with (mean=3.26), which confirms that credit control in selected

28 commercial banks are admirable (high level) indicating that if properly implemented, the rate of credit loss or fraud in banks will be minimized.

Difference in the Level of Banking Systems in selected Banks in Kampala, Uganda according to relevant profile Variables

The fourth objective in this study was to determine whether there is a significant difference in the level of Banking Systems in selected Banks in Kampala, Uganda for which it was hypothesized that there is significant difference between the levels of banking systems among selected banks in Kampala according to relevant profile variables. To test this hypothesis, the researcher compared the mean perceptions computed in table 3 and the relevant profile variables in table 2 using Fisher’s one way Analysis of Variance (ANOVA), results of which are indicated in table 5.

Differences in the Extent of Banking Systems According to Gender The underlying assumption was the extent of banking systems do not differ significantly between male and female staff among selected commercial banks in Kampala. The students’ independent t-test was used to verify this hypothesis and as indicated in Table 5A.

Table 5A Difference in the Extent of Banking Systems Accordinq to Gender Gender Mean t F 1 Sig~ Interpretation si~j~jjH~j Banking Male 3.56 1.997 1 Significant Rejected ~tem Female 3.31 2.5 10 6.278 .014 difference Source: Primary data 2012

As indicated in Table 5A, the extent of banking systems significantly differed between male and female staff with male staff, basing on the means male were found to be more compliant compared to their female counter parts.

(F = 6.278, Sig. = 0.014). This led to the rejection of the null hypothesis that the

29 level of banking systems does not significantly differ according to gender (between male and female staff).

Differences in the Extent banking systems according to Education Level The underlying hypothesis here was that the extent of banking systems among the selected commercial banks in Kampala does not significantly differ according to one’s education level. The Fisher’s One Way Analysis of Variance (ANOVA) was used to test this hypothesis and as indicated in Table 5B, Tab’e 5B Difference in the Extent of Bankino~y~ems According to Education Education Mean F S~. Interpretation ~cision on Ho

Banking System D~loma______3.44 Insignificant Accepted Bachelors 3.32 difference .706 .551 ~ 3.47

Source: Primary data 2012

As indicated in Table 5B, the extent of banking systems did not significantly differ according to education level (sigs. > 0.05). These results revealed that staffs level of education has less to do with compliance to the level of banking systems (F = 0.706, Sig = 0.551). This means that the null hypothesis that there is no significant difference in the extent of banking systems according to one’s level of education was accepted.

Differences in the Extent of Banking Systems According to Experience The underlying hypothesis here was that the extent of banking systems do not differ according to experience on the job. Fishers’ One Way ANOVA was used to test this null hypothesis, results which are indicated in Table 5C; Table 5C Difference in the Extent of banking systems according to Experience Experience Mean F Sig. Interpretation Decision on Ho

Banking System 1 - 5 years 3.32 Insignificant Accepted

6 - 10 years 3.68 difference 1.509 .217 11 - 15 years 3.57

16 - 20 years 3.51 Source: Primary data 2012

Results in Table 5C indicate that the extent of banking systems did not

differ significantly according to experience on the job or position (F = 1.509, Sig

= 0.217). Basing on these results the null hypothesis that there is no significant difference in the extent of banking systems according to staff’s experience was accepted, leading to a conclusion that more years one spends on the job, does not lead to any improvement or deterioration in compliance to banking systems.

Difference in the Level of Credit control in selected Banks in Kampala, Uganda according to relevant profile Variables

The fourth objective in this study was to determine whether there is a significant difference in the level of credit control in selected Banks in Kampala, Uganda for which it was hypothesized that there is significant difference between the levels of credit control in the selected banks in Kampala according to relevant profile variables. To test this hypothesis, the researcher compared the mean perceptions computed in table 4 and the relevant profile variables in table 2 using Fisher’s one way Analysis of Variance (ANOVA), results of which are indicated in table 6

Differences in the level of Banking systems according to Gender The underlying assumption was the level of credit control does not differ significantly between male and female staff in selected commercial banks in Kampala. The students’ independent t-test was used to verify this hypothesis and as indicated in Table 6A

31 Tab’e 6A Difference in the ~ev& of credit contro’ according to Gender Gender Mean t F Sig. Interpretation ~ Credit Male 3.51 3.909 10.150 .002 Significant Rejected ~ Control Female 3.13 4.777 difference Source: Primary data 2012 As indicated in Table 6A, the level of credit control significantly differed

between male and female staff (F = 10.150, Sig. = 0.002). According to the study findings the null hypothesis that there is no significant difference in the level of credit control according to gender (between male and female) was rejected.

Differences in the ~eve~ banking systems According to Education The underlying hypothesis here was that the credit control in the selected commercial banks in Kampala does not significantly differ according to one’s education level. The Fisher’s One Way Analysis of Variance (ANOVA) was used to test this hypothesis and as indicated in Table 6B, Tab~e 6B Difference in the Iev& of credit contro~ according to Education Education Mean F Sig. Interpretation Decision on Ho Credit Control Diploma 3.19 3.577 .017 Significant Rejected Bachelors 3.16~ difference Masters 3.37 PhD 3.66 Source: Primary data 2012

As indicated in Table 6B, the level of credit control significantly differ according to education level (F = 3.577, Sigs. = 0.017). These results revealed that staffs level of education has much to do in compliance and understanding credit control and this led to the rejection of the null hypothesis that there is no significant difference in the level of credit control according to ones level of education. Differences in the Level of Credit control According to Experience The underlying hypothesis here was that the levels of credit control do not differ according to experience on the job. Fishers’ One Way ANOVA was used to test this null hypothesis, results which are indicated in Table 6C;

Table 6C Difference in the level of credit control according to Gender Experience Mean F Sig. Interpretation Decision on Ho

Credit Control 1 - 5 years 3.15 4.522 .005 Significant Rejected 6-loyears 3.51 difference

11 - 15 years 3.57

______16 - 20 years~ 3.49 Source: Primary data 2012

Results in Table 6C indicate that the level of banking systems significantly differed according to experience on the job or position (F = 4.522, Sig = 0.005). Basing on these results the null hypothesis that there is no significant difference in the level of credit control according to experience was rejected, leading to a conclusion that more years one spends on the job, the more knowledgeable he/she is in line with credit control and vice versa.

Relationship between Banking Systems and Credit Controls in Selected Banks in Kampala, Uganda The fourth objective in this study was to establish whether there is a significant relationship between banking systems and credit controls in the selected commercial banks in Kampala, Uganda. Here the researcher stated a null hypothesis that there is no significant relationship between banking systems and credit control in the selected commercial banks in Kampala, Uganda. To achieve this last objective and to test this null hypothesis, the researcher correlated the means for banking systems items and those on credit control using the PearsonTs Linear Correlation Coefficient, as shown in table 7. Table 7A Pearson’s Linear Correlation Coefficient Test Results for Banking Systems and Credit Control in Selected Banks in Kampala, Uganda Variable Correlated R- Value Sig Interpretation Decision on Banking System Vs 686 000 Positive and Significant Rejected Credit Control relationship Source: Primary data, 2012 Level ofsignificance at 0.05

Table 7A indicates that Banking systems are significantly correlated with

credit controls in the selected commercial banks in Kampala — Uganda (sig. <0.05). Results also indicate that Banking systems are positively correlated with

aspects of credit control in the selected commercial banks in Kampala — Uganda (r-values>0). This implies that an improvement in the banking systems significantly improves credit controls as per this study. Basing on these results, the stated null hypothesis is rejected at a 0.05 level of significance. These results lead to a conclusion that an improvement in the banking systems is likely to

improve credit controls in the selected commercial banks in Kampala — Uganda by a coefficient of 0.686 (r-value on credit control index) see table 7B.

Table 7B Regression Analysis between Credit Control Index and Banking Systems in Selected Commercial Banks in Kampala, Uganda Variables Regressed Adjusted R2 F Sig~ Interpretation Decision on Ho ~ Credit Control Vs ~ Banking Systems .466 87.343 .000 SignificantPositive andeffect Rejected Level ofsignificance at 0.05

Source: Primary data, 2012

The Linear regression results in Table 7B above indicate Banking Systems significantly affects Credit control (F=87.343, sig. =0.000). The results indicated the dependent variable affect over 46% on the independent variable among the

34 selected commercial banks in Kampala — Uganda (Adjusted R2 =0.466). This implies that streamlined banking systems should be put in place and the existing ones be improved for these selected commercial Banks in Kampala are to control their credit.

35 CHAPTER FIVE FINDINGS, CONCLUSIONS AND RECOMMENDATIONS Summary of Findings The study on Banking Systems and Credit Controls in selected Commercial Banks in Kampala, intended to test the hypothesis of no significant relationship between the level of banking system and the level of credit control; validate existing information related to the theory to which the study is based; generate new information based on the findings of the study; and bridge the gaps identified in the previous studies. And it was based on five specific objectives; (a) to identify the social demographic characteristics of the respondents in terms of gender, age, marital status and level of education, position, department and experience; (b) the level of banking system in selected banks in Kampala, (c) the level of credit control in selected banks in Kampala; (d) establish if there is a significant difference between the level of banking systems and level of credit control in selected banks in Kampala; and (e) establish if there is a significant relationship between the level of banking system and the level of credit control in selected banks in Kampala, Uganda.

Socia~ Demographic Characteristics of Respondents Data analysis done using SPSS’s descriptive statistics, revealed that majority of the respondents were female, and were married in the age bracket of

24 — 30 years, degree holders dominated the study, Credit Officers contributed the largest percentage when it came to position and operations was highly represented compared to other departments whereas most respondents had a working experience of 1 — 5 years.

Lev& of Banking Systems in Se’ected Banks in Kampa~a The analysis revealed that the level of banking systems was at high level (average mean=3.40). The reasons behind this level are imbedded in all the nine

36 items among which were the existence of computerized systems in banks, the ability of the systems to notify on the loan limit per customer, the loan reports which help managers make the right decisions; and only four being rated moderate as was depicted in the table 3 under Chapter four in which we had controlled access to customer information, loan approval limits and the ability of the system to send periodic loan status messages to the clients.

Level of Credit Control in Selected Banks in Kampala The level of credit control also stood at high level (mean=3.27) here, eleven items were rated high, six moderate and only one rated low. This was evidenced by the value of responses like the bank’s ability to analyse customers’ ability to pay, its limit on the credit given to a customer, credit control being centralized and having charges on late loan payments. This implies that banks are keen on implementing Credit Controls and minimizing risk the of loan loss.

Establish if there is a significant difference between the level of Banking Systems and level of Credit Control in selected banks in Kampala Results using Pearson’s Linear Correlation Coefficient establish that banking systems are significantly and positively correlated with credit control performance (r=O.686, sig.=O.000). Regression analysis results indicated that banking systems were found responsible for over 46% variation towards credit control in the selected commercial banks in Kampala with (Adjusted r2=O.466). Please note that in Uganda there is limited literature on banking systems.

Conclusions In this section, the researcher gives a conclusion to the study findings in relation to the purpose of the study: (a) tested the hypothesis of no significant relationship between the level of banking system and the level of credit control; (b) Validated existing information related to the theory to which the study was based; (c) Generated new information based on the findings of the study; and (d) Bridged the gaps identified in the previous studies. The study concluded that there is a positive and significant relationship between banking systems and credit controls among selected commercial banks in Kampala, Uganda; implying that banking systems help banks control systems when fully implemented and applied. So it further confirms the literature review on systems theory that a system’s components work together to produce the desired outcome. The theory used was validated according to study findings and it was very relevant and applicable as far as this study is concerned. New information in areas of credit control was generated and will be useful by future researchers and other relevant organizations. The gap was bridged since there was no study on Banking Systems and Credit Control in Kampala, Uganda. Respondents’ profile The first study objective was set to determine respondents profile in terms of gender, age, marital status, highest level of education, position, department and experience, and this led to a conclusion that banks employ more female staff, aged between 24 — 30, with degrees and Credit Officers are more and operations department is more staffed and retention of staff is not emphasized a lot since they see potential in fresh graduates more than those who have experienced the field for a longer time.

The level of Banking Systems in selected Banks in Kampala

The second objective was set to identify the level of Banking Systems used in selected commercial banks in Kampala and it was concluded that the level of banking systems was at a high level (mean=3.40) and this is due to the fact that nine items were rated high and only four being rated moderate. This meant therefore that banks are keen on establishing systems which enable them

38 to work more efficiently in terms of credit control as a key to all operations of the banking institutions.

The ~eveI of Credit contro~ in s&ected Banks in Kamp&a

The third objective of the study was set to identify the level of Credit Controls in selected commercial banks in Kampala, Uganda and it was concluded that the overall level of credit control was at high level (mean=3.27) due to eleven items being high, six moderate and only one being low. This implied that the banks implemented credit controls in order to manage credit transactions and control risk of loss. It was further found that credit controls help to alert the managers of the likely risk events which helps them to take the desirable measures and precautions in order not to lose the loaned funds.

The r&ationship between Banking Systems and Credit Contr&s in s&ected banks in Kamp&a

The last objective sought to confirm whether there was a significant relationship between Banking systems and credit controls in the selected commercial banks in Kampala for which it was hypothesized that there was no significant relationship between banking systems and credit controls in the selected commercial banks in Kampala. Basing on the findings, the null hypothesis was rejected leading to a conclusion that the level of banking systems positively and significantly influences credit controls in the selected commercial banks in Kampala. The justification to this is revealed by the level of significant value that is less than 0.05 for example (r=0.686, sig=O.000). The same results were supported by the Linear regression results which also indicate that banking systems influence credit controls in the selected commercial banks in Kampala (F=87.343, sig.=0.000). The same results also indicate that aspects of banking systems included in the regression model contribute over 46% towards variations in credit control in the selected commercial banks in Kampala (Adjusted

R2 = 0.466).

These results meant that the existence of banking systems is valid in controlling credit and that their absence can lead to great loan loss since the absence of Banking systems reduces efficiency levels in monitoring the loaned funds. The major reason for such results is because if the computerized systems cannot control the credit then the manual one is more cumbersome and makes work more tiresome and so staff loose morale to work with a particular banking institution.

To the customers the existence of banking systems helps to provide them with the required information on request instead of waiting for confirmation after they have left the bank’s premises. In addition, existence of banking systems and credit controls enables management to make fast decisions in case of assessing the customers’ eligibility for loan facilities since they are now networked through the credit reference bureau (CRB) which helps them to know which customer is heavily indebted in a sister institution and their payment behavior so that they can determine whether to advance more credit to the customer or not. It should thus be noted that Banking systems enable efficient application of credit controls.

Recommendations Basing on the findings, the researcher made the following recommendations to both the management and all the key stakeholders in the selected commercial banks in Kampala, Uganda. i) It has been seen that banks recruit staff more often but the rates of training in banking systems’ use and efficiency are not up to the mark. It is recommended therefore, that training in banking systems’ use and efficiency should be stepped at all times in order for new staff to always be knowledgeable and helpful to the institutions and customers as well.

40 ii) From the findings, it was also found out that some staff accessed systems and tampered with customers’ information which was detrimental to safety of the banks’ information. It is recommended therefore that access to the banking systems be restricted with frequent change of passwords in order to improve credit controls in the banking industry. iii) The study also revealed that there was laxity in the implementation of operations and credit policies which affected the quality of credit. It is therefore recommended that refresher courses be scheduled on the annual institution’s plan so that all staff undergo training in the adjusted policies and are hands on about what is required of them in order to operate more efficiently and reduce credit risk in the banking institution. iv) Banks should improve the assessment of customers’ eligibility for the loan facilities in order to improve the quality of loan recovery rates. v) Banks should come up with standardized procedures for handling credit recovery, whether at general operation manual or guideline.

Areas for future Research The researcher recommends that future researchers need to conduct a study on banking system and profitability and also lending policies and credit access in financial Institutions in Uganda so that an assessment is done to examine how these policies either facilitate or deter borrowers from accessing credits from financial institutions.

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45 APPEN DICES

APPENDIX IA: TRANSMITTAL LETTER

KAMPALA INTERNATIONAL UNIVERSITY

OFFICE OF THE HEAD OF DEPARTMENT hCONOMXCS AND MANAGEMENT SCIENCES COLLEGE OF HIGHER DEGREES AND TESEARCN (CHDR)

RI RI QI I~SI SHONN S S ~R 511 S1~ HIT lIlD 11)2/NI I) ~ O\I>t ( RI H \R( I I 05 5 (51 5 (JiSi, 5’~ IJ 1

rho above rnonl need s a hnn~e ~ swrlc’S a I a r~ al Heel IJDvI 1 Sit~ pursutnc1 Masters DI Rus~n st Anme ISLrHI( C ~ 12/SIT N)

She 5 cu’roney corlcuctlng a 10102/cd onus d ‘Bank~ng System and CredIt Control in Selected CommercIal Banks ~n Kampaa Dicrnct, Uganda~”

YOui organization has been idea hod ~ niel so 2/ A For mohoi pertaining to Is r rcsedr( 1 proJect The per Dose OSVF is to spriest zoo to dzâi her sit I pr-r~ 12 2 1 ~ IL

Ar p’ ir I era let iDfl she d oath Dr ‘i h am / Ii hr Sr so ted wrth uLnr~s1 r onhrderrti~I)ty

Any sssislencc rnrrdered to nor will a~ aighty app

Your, II ole,

Mr Matrnqa Ramadh~n Head of Department, Economics and Management Sciences, (CHDR)

NOTED BY: - Dr SeIr,s So! F Geite Princrp,rSCHDR U

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46 APPENDIX IB: Acceptance Letter 1

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47 APPENDIX IB: Acceptance Letter 2

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48 APPENDIX IC: Acceptance Letter 3

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49 APPENDIX II: CLEARANCE FROM ETHICS COMMITTEE Date______Candidate’s Data Name______

Reg.# ______Course ______Title of Study

Ethical Review Checklist The study reviewed considered the following: Physical Safety of Human Subjects Psychological Safety Emotional Security Privacy Written Request for Author of Standardized Instrument Coding of Questionnaires/Anonymity/Confidentiality Permission to Conduct the Study Informed Consent Citations/Authors Recognized Results of Ethical Review Approved Conditional (to provide the Ethics Committee with corrections) Disapproved/ Resubmit Proposal Ethics Committee (Name and Signature) Chairperson ______

Members ______

50 APPENDIX III: INFORMED CONSENT

In signing this document, I am gMng my consent to be part of the research study of Miss Mbogga Sarah that will focus on communication and business success. I shall be assured of privacy, anonymity and confidentiality and that I will be given the option to refuse participation and right to withdraw my partidpatlon anytime. I have been informed that the research is voluntary and that the results wIll be given to me if I ask for it.

Name and Signature of Respondent

Da~______

51 APPENDIX IV: RESEARCH INSTRUMENT

Dear Respondent, This questionnaire is meant to obtain information regarding a study on banking system and credit control in selected banks in Kampala, Uganda. The study is meant for the partial fulfillment of the award of Masters of Business Administration of Kampala International University. Its success depends on your completing this questionnaire with honesty. All the answers provided will only be used for academic purpose and with strict confidentiality. Thank you for your cooperation.

SECTION A: Respondents demographic Characteristics Instructions: Please circle or fill the blank space where applicable. Gender:

____ 1. Male

____ 2. Female Age: 1. 24-30 years 2. 31-36 years 3. 37-42year 4. 43-49 years 5. 50 years and above Marital Status ~1. Single 2. Married 3. Divorced 4. Widowed Education Level 1. Certificate 2. Diploma

52 __3. Degree ~4. Postgraduate Position held in the bank Department you work in Number of years in service

__1. 1 — 5 years

2. 6 — 10 years

__3. 11 — 15 years

__4. 16 — 20 years

5. 21 — 25 years 6. 26 years & above

SECTION B: Lev& of Banking Systems Direction: On the table provided below tick the appropriate option, indicate your best choice by using the rating system below:

Response Mode Rating Description Interpretation

4. Strongly Agree 3.26 — 4.00 You agree with no doubt at all High

3. Agree 2.51 — 3.25 You agree with some doubt Moderate

2. Disagree 1.76 — 2.50 You disagree with some doubt Low

1. Strongly disagree 1.00 — 1.75 You disagree with no doubt at all Very low

Lev& of Banking system 1 2 3 4 1 The bank has computerized system that stores and analyze customer information 2 The bank has a system notification on the loan limit per customer. 3 The system alerts the Supervisor before limits are exceeded. 4 The system generates timely reports on customer loan status

5 There is a limit on system information access — 6 The system reflects collateral given and its value. 7 The system generates penalty reports for overdue clients

8 The bank records guarantors details and their security —

9 The system recovers interest and all fees before the loan — 10 The system sends periodic loan status messages to the clients 11 The system has loan approval limits for every authorized officer 12 There is controlled access to customer information in the system 13 The system enables management to make informed credit decisions

SECTION C: Level of Credit Control Direction: Please tick your rating on the space after each option which corresponds to your best choice in terms of the level of Credit Control in your bank. Kindly use the scoring system below:

Response Mode Rating Description Interpretation

4. Strongly Agree 3.26 — 4.00 You agree with no doubt at all High

3. Agree 2.51 — 3.25 You agree with some doubt Moderate

2. Disagree 1.76 — 2.50 You disagree with some doubt Low

1. Strongly disagree 1.00 — 1.75 You disagree with no doubt at all Very low

Level of credit control 1 2 3 4 14 The bank analyses customer’s ability to pay 15 The bank has a limit on credit given to a customer 16 The number of clients who have fully paid the loans have increased in the last five years 17 The bank has an overdraft facility 18 The bank offers mortgage loans

54 19 Credit control is centralized 20 On new accounts the bank obtains proof of customer’ identity. 21 The bank considers market value of the collateral 22 The bank requires personal guarantors on loans 23 The bank charges penalty on late payments

24 The bank charges interest and commitment fee on loans — — 25 The bank has a top up facility for clients

26 A Customer is required to have security before accessing — — — the loan 27 Overdue accounts are reviewed regularly

28 The bank requires full customer’s documentation and — — — identification before lending 29 The bank has a credit recovery department that handles collection of credit in default. 30 The bank has a credit operations manual 31 The ensures that credit is not diverted to undesired purposes

THANK YOU IN ADVANCE

55 APPENDIX V: VALIDITY TEST Level of Banking system No of Items CVI items dedared vaNd The bank has computerized system that stores 3 3 1 and analyze customer information The bank has a system notification on the loan 3 3 1 limit per customer. The system alerts the Supervisor before limits are 3 3 1 exceeded. The system generates timely reports on customer 3 3 1 loan status There is a limit on system information access 3 2 0.67 The system reflects collateral given and its value. 3 3 1 The system generates penalty reports for overdue 3 3 1 clients The bank records guarantors details and their 3 3 1 security The system recovers interest and all fees before 3 3 1 the loan The system sends periodic loan status messages 3 3 1 to the clients The system has loan approval limits for every 3 3 1 authorized officer There is controlled access to customer information 3 3 1 in the system Average 3 3 0.97

Level of credit contrel —~ The bank analyses customer’s ability to pay 3 3 1 The bank has a limit on credit given to a customer 3 3 1 The number of clients who have fully paid the 3 3 1 loans have increased in the last five years The bank has an overdraft facility 3 3 1 The bank offers mortgage loans 3 3 1 Credit control is centralized 3 3 1 On new accounts the bank obtains proof of 3 2 0.67 customer’ identity. The bank considers market value of the collateral 3 3 1 The bank requires personal guarantors on loans 3 3 1 The bank charges penalty on late payments 3 3 1 The bank charges interest and commitment fee 3 3 1 on loans The bank has a top up facility 3 2 0.67j

56 APPENDIX VI: SLOVEN’S FORMULA

N =134

= 0.0025

= 134 n 1+134 (o~OO2s~

134 n 1+O~33S

134 n 1~33S n 100.37

58 APPENDIX VII: RESEARCHER CV Personal Profile Surname : Mbogga Other Names: Sarah Kintu Date of Birth: l7th/August/1953 Nationality: Ugandan Contact Address: P.O. Box 33487 KAMPALA Mobile 0772606696 Email: sarahmbogga©yahoo.com Educational Background ‘EAR INSTITUTION QUALIFICATION

010 — 2012 Kampala International University MBA — Finance and Banking

009 — 2010 Kampala International University BBA — Finance and Banking

006 — 2007 Kampala International University DBA — Finance and Banking

972 — 1973 Kings College Budo Uganda Advanced Certificate of Education 968-1971 Kings College Budo Uganda Certificate of Education 960-1967 Budo Junior School Primary Living Examinations Work Experience

• 1974 — 1983 worked in Uganda Commercial Bank, City Branch, Entebbe branch, and Masaka as a Banking assistant.

• 2000 — 2002 worked as a banking officer in the City branch. • 2003-2010 Service center Head, Stanbic Bank, Bwamiramira branch. Referees -Mr Byarugaba Kosea -Mr. Baguma Daniel -Manager Stanbic bank, City Branch -Manager Stanbic bank, -Mobile: 0774 455 361 -FortPortal Branch -Mobile: 0772-669 788 -Mr. Kalibala Vincent -Namutidde Audit Firm P.O Box 4494, Kampala -Mobile:0772-504 037