AN ASSESSMENT OF THE CAUSES OF NON PERFORMING LOANS IN
TANZANIA COMMERCIAL BANKS:
A CASE OF NMB BANK PLC
BY
Phides Selestine Mchopa
A Dissertation Submitted to School of Business in Partial Fulfillment of the Requirements for the Award of Master Degree in Business Administration (MBA - Corporate Management) of Mzumbe University
2013
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CERTIFICATION
We, the undersigned, certify that we have read and hereby recommend for acceptance by the Mzumbe
University, a dissertation/thesis entitled an assessment of the causes of non-performing loans in
Tanzania commercial banks; a case of NMB bank PLC, Kenyatta road branch (Mwanza), in partial/fulfillment of the requirements for award of the degree of Master of Business Administration of Mzumbe University.
______Major Supervisor
______Internal Examiner
Accepted for the Board of School of Business
______DEAN, BOARD OF SCHOOL OF BUSINESS
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DECLARATION AND COPYRIGHT
I, Phides Selestine Mchopa, declare that this Dissertation is my own original work and that it has not been presented and will not be presented to any other university for a similar or any other degree award.
Signature ______
Date______
©
This dissertation is a copyright material protected under the Berne Convention, the Copyright Act 199 and other international and national enactments, in that behalf, on intellectual property. It may not be reproduced by any means in full or in part, except for short extracts in fair dealings, for research or private study, critical scholarly review or discourse with an acknowledgement, without the written permission of Mzumbe University, on behalf of the author.
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ACKNOWLEDGEMENT
First of all I would like to express my exceptional thanks to almighty God for energizing me and make me able to fulfill my academic responsibilities.
The successful of this report is the result of the commitment of many individuals all of whom deserve my appreciation. So I would like to express my sincerely gratitude to my research supervisor Jasinta Msamula whose encouragement, tolerance, patience, and full support from the initial to the final stage enabled me to come up with this report together with Mr. Makoye.
Also I would like to thank my Family, particularly my beloved husband Lucas Mniko, my beloved children Lulu, Loreen and Lisa, for their courage and support for the whole time since I started my studies.
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ABREVIATIONS
BOT – Bank of Tanzania
GDP – Gross Domestic Product
MSE’s – Micro and Small Enterprises
NMB – National Microfinance Bank
SME’s – Small and Medium Enterprises
SPSS – Statistical Package for Social Science research
US – United States
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ABSTRACT
This study aims at assessing the causes of non-performing loans in Tanzania Commercial banks. The study specifically aimed at assessing causes of nonperforming loans that related to bank operations and causes of nonperforming loans that related to customers operations. The research questions guided this study aim at probing causes of nonperforming loans that directly were related to bank operations and customer operations respectively.
The study was guided by a survey research methodology whereby findings from the studied sample were generalized to the entire population. The study sample was 50 respondents comprises of 40 loan customers and 10 bank officials. Customers were selected by using simple random sampling where by every tenth customer was included in the sample. Bank officials were selected using convenience sampling techniques. Data were collected through interview guide and questionnaire.
The study found that causes of nonperforming loans related to customer operations were related to moral hazards, inadequate business, financial, marketing, entrepreneurship and management skills, fund diversion and multiple loans. On other hand, causes of nonperforming loans related to banking operations were related to adverse customer selection problem, poor loan policy, inadequate loan monitoring and recovery, long queue in banking hall, poor customer services and corruptions of bank officers.
The study recommends that financial institutions should incorporate training of business, entrepreneurship, financial management and accounting skills. Financial institution should also design appropriate loan policy that will reduce credit risks, improve loan monitoring and collection.
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TABLE OF CONTENTS
CERTIFICATION ...... i
DECLARATION AND COPYRIGHT ...... iii
ACKNOWLEDGEMENT; ...... iv
ABREVIATIONS; ...... v ABSTRACT ...... 1
CHAPTER ONE ...... 7
INTRODUCTION ...... 7
1.1 Background of the Problem ...... 9 1.2 Problem Statement ...... 10 1.3 Objectives of Study ...... 11 1.3.1 The General Objectives ...... 11 1.3.2 The specific objectives of the study ...... 11 1.3.3 Research Question ...... 11 1.4 Scope of the Study ...... 11 1.5 Significance the Study ...... 12 1.6 Limitations of the Study...... 12 CHAPTER TWO ...... 13
LITERATURE REVIEW ...... 13
2.1 Theoretical Literature Review ...... 13 2.1.1 The theory of Information Asymmetric in explain cause of non-performing loans ...... 13 2.1.2 Framework for Monitoring the Development of Non-performing loans ...... 13 2.1.3 Relationship of Non-performing loans and Macro Economic conditions ...... 14 2.1.4 Relationship between Non performing loans and Eeconomic performance ...... 15 2.2 Empirical Literature ...... 16 2.2.1 Non performing loans and Interest rates as a variable ...... 16 2.2.2 The relationship between Non performing Loans and Size of the Bank...... 16 2.2.3 The relationship between Non performing Loans and Bank Policy ...... 17 2.2.4 The relationship between Non performing loans and Ownership concentration ...... 17 2.2.5 The relationship of Non-performing loans and Ownership structure ...... 18 2.3 Conceptual Framework ...... 19 2.3.1 Dependent Variable...... 19 2.3.2 Independent Variable ...... 19 2.3.2 Variable Related to Bank Operations ...... 19 2.3.3 Variable Related to Customer Operations ...... 19 2.4 Research Gap ...... 21 CHAPTER THREE ...... 22
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RESEACH METHODOLOGY ...... 22
3.1 Research Design ...... 22 3.2 Study Area...... 22 3.3 Units of Study...... 23 3.4 Population of the Study ...... 23 3.5 Sampling Frame ...... 23 3.6 Sample size ...... 23 3.7 Sampling technique ...... 24 3.8 Data Collection Method ...... 24 3.8.1 Primary Data ...... 24 3.8.2 Secondary Data ...... 24 3.8.3 Field Experience ...... 24 3.9 Research Methods ...... 25 3.9.1 Quantitative Research Methodology...... 25 3.10 Tools of Data Collection ...... 26 3.11 Measurement and measuring scale ...... 26 3.12 Data Reliability and Validity ...... 26 3.12.1 Test of Reliability ...... 26 3.12.2 Test of Validity ...... 26 Data Editing ...... 27
Data Processing...... 27
CHAPTER 4 ...... 28
4.0 FINDINGS PRESENTATION AND ANALYSIS ...... 28
4.1. DEMOGRAPHIC CHARACTERISTICS OF RESPONDENTS ...... 28 4.1.1 Primary occupation of respondents...... 28 5.0 DISCUSSION OF FINDINGS ...... 39
5.1 Demographic Characteristics of Respondents ...... 39 5.1.1 Analysis of the sample ...... 39 5.1.1.1 Primary Occupation of respondents ...... 39 5.1.1.2. Working capacity of respondents ...... 40 5.1.1.3 Education level of the respondents ...... 40 5.1.1.4 Reasons for starting business...... 41 5.1.4 Reasons for choosing type of business ...... 42 5.1.1.5 Possibility for leaving the current job ...... 43 5.1.1.6 Ways of starting business; ...... 44 5.1.1.7 Source of starting business; ...... 45 5.1.1.8 Marital status ...... 46 5.1.1.9 Sources of credit ...... 46 5.1.10 Critical business problem; ...... 47 5.1.1.11 Income obtained from business; ...... 48 5.1.12 Change in amount of business ...... 48 3
5.2. CAUSES OF NON-PERFORMING LOANS RELATED TO CUSTOMERS OPERATION ...... 50
5.2.1 General business management skills ...... 50 5.2.2. Financial Management Skills ...... 50 Figure 5.2.2 financial management skills ...... 51 5.2.3 Accounting and book- keeping skills ...... 51 5.2.4 Sales and marketing skills ...... 52 4.2.5 Entrepreneurship skills...... 52 4.2.6. Transport services skills ...... 53 5.3. CAUSES OF NON-PERFORMING LOANS RELATED TO BANK OPERATIONS ...... 57
SUMMARY, CONCLUSSION AND RECOMENDATION ...... 58
6.1. SUMMARY ...... 58 Financial Management Skills ...... 58 Accounting and book- keeping skills...... 58 Entrepreneurship skills ...... 59 Transport services skills ...... 59 6.1.3 Causes of non-performing loans related to Bank Opoperations ...... 59 6.2 Conclusion; ...... 59 6.3 Recommendations; ...... 60 Reference ...... 62
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LIST OF TABLES
Table 4.1.1 Primary Occupation of Respondent……………………………..……32
Table 4.1.2: Respondents working capacity………………………………………..33
Table 4.1.3 Education level of respondent…………………………………………33
Table 4.1.4 Reasons for starting business…………………………………….……34
Table 4.1.5 Reason for choosing business………………………………………….34
Table 4.1.8 Source of money for starting…………………………………………..36
Table 1.4.9 marital status of respondent……………………………………….…..36
Table 4.1.10 Source of credits for business………………………………….………37
Table 4.1.11 Critical business problem…………………………………………...…37
Table 4.1.12 Amount of income received from Business……………………………38
Table 4.1.13 Change in volume of business………………………………………….38
Table 4.1.14 Customers of business………………………………………………….48
Table 4.2.1 General business management skills….………………………………..39
Table 4.2.2 Financial management skills……………………………….…………...40
Table 4.2.3 Awareness of accounting and book keeping………………….………...40
Table 4.2.4 Sales and marketing skills…………………………………………….....41
Table 4.2.5 Received service of awareness of Entrepreneurship skills……………...41
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LIST OF FIGURES
Figure 5.1.1 Primary occupation of respondents…………………...……..…43
Figure 5.1.2 working capacity of the respondents…………………….…….43
Figure 5.1.3 Education level of respondents………………………….……..45
Figure 5.1.4 Reasons for starting business……………………………..……46
Figure 5.1.4 Reason for choosing Business………………………….……....46
Figure 5.1.5 Possibility for leaving current business……………………..….48
Figure 5.1.6 Ways of starting business………………………………….…...48
Figure 5.1.7 Sources of starting business………………………………….…49
Figure 5.1.8 Marital status…………………………………………………....50
Figure 5.1.9 Source of credit ………………………………………………….51
Figure 5.1.10 Critical business problems………………………………………..51
Figure 5.1.11 Amount of income obtained from Business……………………...52
Figure 5.1.12 Change in amount of business……………………………………53
Figure 5.2.1 Received general business management skills……………………54
Figure 5.2.2 Financial management skills……………………………………..55
Figure 4.2.3 Awareness of accounting and book keeping……………………...56
Figure 5.2.4 Awareness of sales and marketing skills………………………….57
Figure 5.3.1 Non-performing loans related to bank operation ………………...58
Figure 4.2.6 Transport services skills……………………………………..……58
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CHAPTER ONE
INTRODUCTION
This study aims at assessing the causes of non-performing loans in Tanzania Commercial bank. The study specifically aims at assessing causes of nonperforming loans that related to bank operations and causes of nonperforming loans that related to customers operations.
Loans form 80% portion of the total assets in commercial banks in Tanzania (BOT annual reports, 2012). These assets generate huge interest income for banks which to a large extent determines the financial performance of banks. However, some of these loans usually fall into non-performing status and adversely affect the performance of banks. In view of the critical role banks play in an economy, it is essential to identify causes of non-performing loans. This is because non-performing loans can affect the ability of banks to play their role in the development of the economy. The study focused on National Microfinance Bank Abbreviated as NMB due to the reason that NMB bank has more than 140 branches across Tanzania, the case of Kenyatta road Mwanza branch.
According to NMB Credit Policy 2012, a non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 90 days. The policy continues to describe that “A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue.
A financial intermediary is an institution that acts as an intermediary by matching supply and demand of funds (Beck, 2001). Heffernan (1996) defines banks as intermediaries between depositors and borrowers in an economy which are distinguished from other types of financial firms by offering deposit and loan products. Bossone (2001) agrees arguing that banks are special intermediaries because of their unique capacity to finance production by lending their own debt to agents willing to accept it and to use it as money.
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Commercial banks are the dominant financial institutions in most economies (Rose, 1997). Greuning and Bratanovic (2003), argue that commercial banks play a critical role to emerging economies where most borrowers have no access to capital markets. Well functioning commercial banks accelerate economic growth, while poorly functioning commercial banks are an impediment to economic progress and aggravate poverty (Barth et.al, 2001; Khan and Senhadji, 2001) in Richard (2011).
The traditional role of a bank is lending and loans make up the bulk of their assets (Njanike, 2009). According to the research by Havrilesky and Boorman (1994), interest on loans contributes significantly to interest income of commercial banks. Reed and Gill (1989) pointed out that traditionally 85 percent of commercial banks‟ income is contributed by interest on loans. Loans therefore represent the majority of a bank’s asserts (Saunders and Cornett, 2005). Lending is not an easy task for banks because it creates a big problem which is called non performing loans (Chhimpa J, 2002) as cited in (Upal, 2009). Due to the nature of their business, commercial banks expose themselves to the risks of default from borrowers (Waweru and Kalami, 2009).
According to Alton and Hazen (2001) non performing loans are those loans which are ninety days or more past due or no longer accruing interest. Hennie (2003) agrees arguing that non performing loans are those loans which are not generating income. This is further supported by Caprio and Klingebiel (1996), cited in Fofack (2005), who define non performing loans as those loans which for a relatively long period of time do not generate income that is, the principal and or interest on these loans have been left unpaid for at least ninety days. Non- performing loans are also commonly described as loans in arrears for at least ninety days (Guy, 2011). Therefore in this study, non performing loans are loans that are ninety or more days delinquent in payments of interest and/or principal (Bexley and Nenninger, 2012).
The term “bad loans” as described by Basu (1998) in Fofack (2005) is used interchangeably with non- performing and impaired loans. Berger and De Young, (1997) also consider these types of loans as “problem loans”. In effect, these would be considered bad or toxic assets on the bank’s books (Bexley and Nenninger, 2012). These descriptions were used interchangeably during the study. According to Berger and De Young (1997), non performing loans could be injurious to the financial performance of banking institutions. 8
According to Kroszner (2002) in Waweru and Kalami (2009), non-performing loans are closely associated with banking crises. Greenidge and Grosvenor (2010), argue that the magnitude of non- performing loans is a key element in the initiation and progression of financial and banking crises. Guy (2011) agrees arguing that non performing loans have been widely used as a measure of asset quality among lending institutions and are often associated with failures and financial crises in both the developed and developing world. Reinhart and Rogoff (2010) as cited in Louzis et al (2011) point out that non- performing loans can be used to mark the onset of a banking crisis. Despite ongoing efforts to control bank lending activities, non performing loans are still a major concern for both international and local regulators (Boudriga et al, 2009)
1.1 Background of the Problem
Over the years, there have been an increased number of significant bank problems in both, matured as well as emerging economies (Brownbridge and Harvey, 1998; Basel, 1999, 2004) cited in Richard (2011). Bank problems, mostly failures and financial distress have afflicted numerous banks, many of which have been closed down by regulatory authorities (Brownbridge, 1998). This in turn led to contraction of activities, decline in output, and imposition of substantial costs on the economy (Chijoriga, 1997; Brownbridge and Harvey, 1998) cited in Richard (2011). Borio and Lowe (2002) observed that the cost of banking crises in terms of output loss has been high; typically double digit percentage of GDP
Studies in other countries show that most of bank failures have been caused by non performing loans (Brownbridge, 1998). Ahmad (2002), in analyzing the Malaysian financial system, reported a significant relationship between credit risk and financial crises and concluded that credit risk had already started to build up before the onset of the 1997 Asian financial crisis, and became more serious as non performing loans increased. Li (2003) and Fofack (2005) also found this relationship to be significant. There is evidence that the level of non -performing loans in the US started to increase substantially in early 2006 in all sectors before the collapse of the sub-prime mortgage market in August 2007 (Greenidge and Grosvenor, 2010).
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Nishimura et al (2001) studied the situation in Japan and concluded that some of the loans made to companies during the bubble era became non- performing when the bubble burst. The findings of Caprio and Klingebiel (2002) cited in Fofack (2005), show that in Indonesia, non-performing loans represented about 75% of total loan assets which led to the collapse of over sixty banks in 1997. While some countries such as Sweden, Norway, Finland, Australia and Spain do not seem to be exposed to non performing loans (less than 1 percent) other countries such as Egypt, Nigeria, Philippines, Morocco, Algeria and Tunisia (more than 15 percent) suffer severely from bad loans (Boudriga et al, 2009).
Palubinskas and Stough (1999) note that the failure of a bank is mainly seen as a result of mismanagement because of bad lending decisions made with respect to wrong appraisal of credit status, or the repayment of non-performing credits and excessive focus on giving loans to certain customers. Goodhart et al (1998) also state that poor credit control, which results in undue credit risk, causes bank failure. Chimerine (1998) adds that a bad lending tradition leads to a large portfolio of unpaid loans. This results in insolvency of banks and reduces funds available for fresh advances, which eventually causes a financial crisis. Goodhart et al. (1998) add connected lending to the causes of bank failure. Palubinskas and Stough (1999) note that lack of dependable financial information on borrowers to help in assessing creditworthiness causes a bank failure.
1.2 Problem Statement
According to the Mid-Year Fiscal Policy Statement (2012) the upward trend in non-performing loans and recent bank failures in Tanzania is a cause for concern. Despite lessons obtained from the 2008 World financial crisis, banks are still suffering from non performing loans.
The loan-to-deposit ratio of NMB, calculated on the basis of total bank deposits increased from 84.6 percent in May 2012 to 86.2 percent in December 2012 (NMB Loan Report, 2012). According to the Mid-Year Quarterly SME loan performance Statement presented on the 18th of July, non-performing loans were 9.9 percent as at 30 June 2012. The report also indicates that non performing loans in NMB Bank increased from 6 percent on average at end-December 2011 to 8 percent at end-June 2012. This is higher than the prudential threshold of 2 percent stipulated in Basel II (Basel, 2004; 10
ADF, 2012). Non-performing loans could rise further with the ongoing deceleration in economic activity. This gives a reasonable concern for scholars to assess causes of nonperforming loans in commercial bank. The study assessed casuses related to both banking and customer operations.the study area was NMB Kenyatta Road Branch located in Mwanza City Tanzania.
1.3 Objectives of Study
1.3.1 The General Objectives
The general objective of the study is to assess the causes of non-performing loans in Tanzania commercial banks.
1.3.2 The specific objectives of the study
The specific objectives of the study is 1.3.2.1 To assess the causes of non- performing loans related to banking operations 1.3.2.2 To assess the causes of non- performing loans related to customers operations,
1.3.3 Research Question
The study addressed the following research questions 1.3.3.1 How do bank- related causes contribute to non-performing loans? 1.3.3.2 How do customers-related causes contribute to non-performing loans?
1.4 Scope of the Study
The study focuses on the causes of non-performing loans that related to banking and customers operation. The study area is NMB Bank Limited; one of Tanzania largest banks in terms of deposit and branch network. This is premised on the fact that the Bank has been operating long enough to give the kind of academic insight the study seeks to offer. Besides, the bank lends to almost all the major sectors of the economy. Again, the nation-wide operation of the bank presents an opportunity for a national outlook of the issues under the study.
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1.5 Significancece the Study
The findings of this study added new knowledge to the existing knowledge gap of causes of non- performing loans related to banking and customer operations. The study is of benefits to Banking monitoring master plan and indicator information, financial institutions, financial markets, Policy maker, business community, and the community at large. The study is going to explore and recommends potential areas that bankers and customers need to put more efforts when utilizing loans services. On the other hand, policy makers benefited in the sense that, the findings provided informed suggestion on how credit policy should be improved to accommodate the causes of non-performing loans related to bank operations and causes of non-performing loans related to customer operations. With good and sound credit policy and easy implementation of the policies, more individuals, businesses, and the community at large will be able to access, utilize and benefit from financial capital service.
1.6 Limitations of the Study
This study was limited by interruption of our respondents by customers especially in collection of data. This is due to the fact that as we were collecting data in their working place (shops) so data collection was sometimes interrupted by customers who come to buy products in their shops, so it takes a very long time to complete a single questionnaire. But also the study face the limitation of respondents (especially SME’s customers) they afraid providing cooperation thinking that we were government agency trying to investigate their income for the aim of deducting high taxes from their business. So, researcher was required to educate them on the reasons for conducting this study. Also shortage of funds was among limitations.
1.7 Organization of the study; This study is organized in five chapters. Chapter one presents background introduction, problem statement, research objectives, research questions and significance of the study Chapter two review of literature both theoretical and empirical related to cause of non performing loans in commercial banks, Chapter three presents study methodology, chapter four presents research findings and lastly chapter five presents discussion, summary and conclusion
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CHAPTER TWO
LITERATURE REVIEW
2.1 Theoretical Literature Review
2.1.1 The theory of Information Asymmetric in explain cause of non-performing loans
The theory of asymmetric information tells us that it may be difficult to distinguish well from bad borrowers (Auronen, 2003) in Richard (2011), which may result into adverse selection and moral hazards problems. The theory explains that in the market, the party that possesses more information on a specific item to be transacted (in this case the borrower) is in a position to negotiate optimal terms for the transaction than the other party (in this case, the lender) (Auronen, 2003) in Richard (2011). The party that knows less about the same specific item to be transacted is therefore in a position of making either right or wrong decision concerning the transaction. Adverse selection and moral hazards have led to significant accumulation of non-performing loans in banks (Bester, 1994; Bofondi and Gobbi, 2003).
2.1.2 Framework for Monitoring the Development of Non-performing loans
In scholar studies, problem loans are often used as an exogenous variable to explain other banking outcomes such as bank performance, failures, and bank crises. However, some studies investigate problem loans as an endogenous variable; GDP growth, inflation and interest rates are common macro-economic factors, while size and lending policy are micro-economic. These variables are by no means exhaustive, but they provide a useful framework for monitoring the development of non- performing loans (Guy, 2011).
More recent researches started examining the fragility of the Argentinean Banking system over the 1993-1996 period; they argue that non performing loans are affected by both bank specific factors and macroeconomic factors. To separate the impact of bank specific and macroeconomic factors, the 13
authors employ survival analysis. Using a dynamic model and a panel dataset covering the period 1985-1997 to investigate the determinants of problem loans of Spanish commercial and saving banks, Salas and Saurina (2002) reveal that real growth in GDP, rapid credit expansion, bank size, capital ratio and market power explain variation in non- performing loans. Furthermore, Jimenez and Saurina (2005) examine the Spanish banking sector from 1984 to 2003; they provide evidence that non performing loans are determined by GDP growth, high real interest rates and lenient credit terms. This study attributes the latter to disaster myopia, herd behaviour and agency problems that may entice bank managers to lend excessively during boom periods (Guy, 2011).
2.1.3 Relationship of Non-performing loans and Macro Economic conditions
Meanwhile, Rajan and Dhal (2003) utilize panel regression analysis to report that favourable macroeconomic conditions and financial factors such as maturity, cost and terms of credit, banks size, and credit orientation impact significantly on the non performing loans of commercial banks in India. Babihuga (2007), in an IMF working paper, explores the relationship between several macroeconomic variables and financial soundness indicators (capital adequacy, profitability, and asset quality) based on country aggregate data.
She explained the cross-country heterogeneity by differences in interest rates, inflation, and other macroeconomic factors. However, the study does not consider the impact of industry specific drivers of problem loans. Most empirical studies examine the influence of the macroeconomic environment on non performing loans (Louzis et al, 2011). Rinaldi and Sanchis-Arellano (2006) analyze household non performing loans for a panel of European countries and provide empirical evidence that disposable income, unemployment and monetary conditions have a strong impact on non performing loans.
Berge and Boye (2007) find that problem loans are highly sensitive to the real interest rates and unemployment for the Nordic banking system over the period 1993–2005. Lawrence (1995) examines the theoretical literature of life-cycle consumption model and introduces explicitly the probability of default. This model implies that borrowers with low incomes have higher rates of default due to increased risk of facing unemployment and being unable to settle their obligation. Additionally, in equilibrium, banks charge higher interest rates to riskier clients. Rinaldi and Sanchis-Arellano (2006) 14
extend Lawrence’s model by assuming that agents borrow in order to invest in real or financial assets. They argue that the probability of default depends on current income and the unemployment rate, which is linked to the uncertainty regarding future income and the lending rates.
Breuer (2006), using Bankscope data, analyses the impact of legal, political, sociological, economic, and banking institutions on problem bank loans. Nevertheless, her study suffers from a representativeness bias due to the fact that Bankscope data on non performing loans are only available for a very limited number of countries and for a few numbers of banks. Other studies focusing on the macroeconomic determinants of non-performing loans include Cifter et al. (2009), Nkusu (2011) and Segoviano et al. (2006).
2.1.4 Relationship between Non performing loans and Eeconomic performance
Carey (1998) argues that “the state of the economy is the single most important systematic factor influencing diversified debt portfolio loss rates” (Carey, 1998, p. 1382). Quagliarello (2007) finds that the business cycle affects non performing loans for a large panel of Italian banks over the period 1985–2002. Furthermore, Cifter et al. (2009) provides empirical evidence for a lagged impact of industrial production on the number of non performing loans in the Turkish financial system over the period 2001–2007.
Salas and Saurina (2002) estimate a significant negative contemporaneous effect of GDP growth on non performing loans and infer the quick transmission of macroeconomic developments to the ability of economic agents to service their loans (Bangia et al., 2002; Carey, 2002). Nkusu (2011) investigating the macroeconomic determinants of loan defaults through panel regressions and panel vector autoregressive models. The author suggests that hike in interest rates result in deterioration of borrower’s repayment capacity and hence, cause of increase in non-performing loans.
There is significant empirical evidence to suggest that local economic conditions explain to some extent, the variation in non-performing loans experienced by banks (Keeton and Morris, 1987; Sinkey and Greenwalt, 1991; Salas and Saurina, 2002; Rajan and Dhal, 2003) as cited in (Greenidge and Grosvenor, 2010) Research conducted in the Caribbean includes that of Khemraj and Pasha (2009), 15
who examined the determinants of non-performing loans in Guyana. The empirical results revealed that with the exception of the inflation rate and bank size, all other factors have a significant relationship with the non performing loan ratio (Greenidge and Grosvenor, 2010).
2.2 Empirical Literature
2.2.1 Non performing loans and Interest rates as a variable
Causes and treatment of non-performing loans were studied in detail by Bloem and Gorter (2001). They agreed that “bad loans” may considerably rise due to abrupt changes in interest rates. They discussed various international standards and practices on recognizing, valuing and subsequent treatment of non-performing loans to address the issue from view point of controlling, management and reduction measures.
A study conducted by Espinoza and Prasad (2010) focused on macroeconomic and bank specific factors influencing non-performing loans and their effects in GCC Banking System. After a comprehensive analysis, they found that higher interest rates increase non performing loans but the relationship was not statistically significant.
2.2.2 The relationship between Non performing Loans and Size of the Bank
Salas and Saurina (2002) find a negative relation between bank size and non performing loans and argue that bigger size allows for more diversification opportunities. Hu et al. (2004) and Rajan and Dhal (2003) report similar empirical evidence
Another strand of literature has focused on the degree of loan concentration in various sectors, and proposes that vulnerabilities within sectors of high loan concentration tend to exacerbate the non performing ratio (Herring and Wachter, 1999) as cited in (Guy, 2011). However, Stiroh (2004) does not find evidence of benefits from diversification in the form of reduced risk, for the US banking system, since non-interest income growth was highly correlated with net interest income during the 1990s. 16
2.2.3 The relationship between Non performing Loans and Bank Policy
The moral hazard of too-big-to-fail banks represents another channel relating bank-specific features with non performing loans (Louzis et al, 2011). A policy concern is that too-big-to-fail banks may resort to excessive risk taking since market discipline is not imposed by its creditors who expect government protection in case of a bank‟s failure (Stern and Feldman, 2004). Consequently, large banks may increase their leverage too much and extend loans to lower quality borrowers (Louzis et al, 2011). Boyd and Gertler (1994) argue that in the 1980s the tendency of US large banks towards riskier portfolios was encouraged by the US government’s too-big-to-fail policy. On the other hand, Ennis and Malek (2005) examine US banks‟ performance across size classes over the period 1983– 2003 and conclude that the evidence for the too-big-to-fail distortions is in no way definite. Hu et al (2006) also show that bank size is negatively related to non performing loans.
In a seminal study, Berle and Means (1933) in Louzis et al. (2011) argue that dispersed ownership of corporate equity may lead to a poorer performance of the firm as the incentive of shareholders to monitor the management weakens. An opposing view is that an efficient capital market imposes discipline on firm’s management and therefore dispersed ownership should not have an effect on firm’s performance (Fama, 1980) as cited in (Louzis et al., 2011). A strand in the empirical literature tests these contrasting views using loan quality as an indicator of riskiness but evidence is inconclusive (Louzis et al, 2011).
2.2.4 The relationship between Non performing loans and Ownership concentration
Iannotta et al. (2007) find a link between higher ownership concentrations and loan quality using a sample of 181 large banks over the period 1999–2004, thus lending support to the Berle and Means view. On the other hand, Laeven and Levine (2009) employ data on 279 banks and find a positive association between greater cash flow rights of a large owner and risk taking. Furthermore, Shehzad et al. (2010) present empirical evidence, from a data set comprising 500 banks from 2005 to 2007, 17
that ownership proxied by three levels of shareholding (10%, 20% and 50%) has a positive impact on the non performing loans ratio when the level of ownership concentration is defined at 10% but a negative impact when the level of level of ownership concentration is defined at 50%. Therefore they suggest that sharing of control may have adverse effects on the quality of loans extended up to a level, but in cases of a strong controlling owner, bank’s management becomes more efficient leading to lower non performing loans. Azofra and Santamaria (2011) find that high levels of ownership concentration benefit both the bank’s profitability and efficiency for a sample of Spanish commercial banks.
2.2.5 The relationship of Non-performing loans and Ownership structure
Empirically, Novaes and Werlang (1995) report lower performance for state controlled banks in Brazil and Argentina due to high proportion of problem loans given to government. Micco et al. (2004), analyze 50,000 financial institutions with different ownership types covering 119 countries. They conclude that non performing loans tend to be higher for banks with state ownership than for other groups. Hu et al. (2004) use a panel of Taiwanese banks and find a positive correlation between capital share owned by the state and the level of non- performing loans. Garcia-Marco and Robles- Fernandez (2007) investigate the relationship between risk taking and ownership structure. They document that commercial banks (mainly private owned) are more exposed to risk than deposit banks (mainly state owned). More recently Hu et al (2006) analysed the relationship between non performing loans and ownership structure of commercial banks in Taiwan with a panel dataset covering the period 1996-1999. The study shows that banks with higher government ownership recorded lower non-performing loans. Using a pseudo panel-based model for several Sub-Saharan African countries, Fofack (2005) finds evidence that economic growth, real exchange rate appreciation, the real interest rate, net interest margins, and inter-bank loans are significant determinants of non-performing loans in these countries. The author attributes the strong association between the macroeconomic factors and non-performing loans to the undiversified nature of some African economies.
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2.3 Conceptual Framework
2.3.1 Dependent Variable
Dependent variable that guides this research is non-performing loans. Non-performing loans depends on numerous of variables that can be grouped mainly into bank operations variables and customer operations variables.
2.3.2 Independent Variable
Independent variables are grouped into banking operations variables and customer operations variable
2.3.2 Variable Related to Bank Operations
Variables that related to bank operations are credit policy, credit appraisal, competition, queue, and under or over financing
2.3.3 Variable Related to Customer Operations
Variable those are related to customer operations are moral hazards, inadequate business, financial, marketing, entrepreneurship and management skills, fund diversion and multiple loans
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CONCEPTUAL FRAMEWORK
Independent variable Dependent variable
Poor credit appraisal
Poor banking policy BANK OPERATION
Under/Over financing
NON PERFORMING LOANS
Inadequate of general business management skills
Little awareness of financial management skills SME’s LOAN CUSTOMERS Inadequate accounting & B. keeping skills OPERATION
Inadequate marketing skills
Inadequate Entrepreneurship skills
Source: Researcher Developed Model, 2013
Poor credit appraisal; credit appraisal is an important part of determining the eligibility for loan, and
the quantity of the loan. A prospective borrower has to go through the various stages of the credit
appraisal process of the bank to assure the repayment capacity of the borrower - whether the borrower
is capable of repaying the loan and on due times. Failure to conform to this leads to the state of Non-
performing loans.
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Competition from other credit institution also leads to non-performing loans. SMEs loan customers tend to have more than one loan from different financial institutions which make it hard for them to make loan repayment timely, so this lead to non-performing loans.
Long banking queue in banking hall; this discourages SMEs loan customers in repaying their loans, due to the reason that they are required to spend long time in banking queue something which demoralizes customers and eventually non-performing loans.
Poor banking policy; other banking policy does not assure loan repayment by the SME’s loan customers, so these kinds of policies lead to Non-performing loans due to the fact that banking policies especially credit policies when they are not conducive.
On the other hand, business skills like financial management skills, Accounting and Book-keeping skills, marketing skills and entrepreneurship skills are very important in business operation, so inadequacy skills affect loan repayments leading to non-performing loans.
2.4 Research Gap
From the above empirical studies, authors attribute association factors and non performing loans to the undiversified nature of African economies. While it might true to Tanzanian commercial banks, this research study grouped non-performing loans factors into two groups; factors related to bank operations and factors relating to customers operations. The aim is to enable each group to come with strategies to reduce non performing loans in Tanzania commercial banks.
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CHAPTER THREE
RESEACH METHODOLOGY
3.1 Research Design
The study adopted the use of a descriptive case research design. The case study approach was preferred by the researcher due to time constrain and also on the availability and reliability of data from the NMB Plc Kenyatta Road – Mwanza. Also the researcher works within the banking sector thus it was easier to collect data from the respondents. This descriptive case research was aimed at getting detailed information regarding the Causes of nonperforming loans to Tanzania Commercial
Banks. A descriptive study is concerned with finding out the what, where and how of a phenomenon
(Ngechu, 2004). Descriptive research design was chosen because it enabled the researcher to infer the findings to a larger population with high level of accuracy. The focus of the study was both quantitative and qualitative in order to gain a better understanding and more insightful interpretation of the results. According to Coopers and Schindler (2004) descriptive studies are more formalized and typically structured with investigative questions.
3.2 Study Area
The study was conducted at NMB Bank PLC, Kenyatta road branch, Mwanza City Tanzania. Kenyatta Raoad Branch was the first Branch of National Microfinance Loan to lend to SMEs Customers since 2000. This has brought enough experience to Bank officer and large base of experienced SMEs borrowers. In 2012 he branch recorded high Non performing loan of 21% compared to other NMB branches offering the same product
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3.3 Units of Study
The units of study of study were Bank officers and SMEs Loan customers.
3.4 Population of the Study
The individual study population was drawn from NMB Kenyatta road records. According to NMB Kenyatta road records of March 2013, SMEs customers were 400. The branch has 6 Loan officers, 1 branch manager and 1 commercial manager and 2 officers from MNB court brokers
3.5 Sampling Frame
The sampling frame was determined using professor Arsham assumptions which requires for the population below 100 units to take the whole population , 10% for the population above 100 but below 500 units, 20 percent for the population above 500 but below 100,00 units and 5 percent for the population above 100, 000 units. Fig1. Sampling Frame Unity of Study Population Sample size Branch Manager 1 1 Commercial Manager 1 1 Officers of NMB Court broker 2 2 SMEs Loan Officers 6 6 SMES Customers as at June 30th 400 40 2013
3.6 Sample size
Total sample size studied were 50 units as calculated above, where 10 were bank officers and 40 respondents were SME’s loan customers
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3.7 Sampling technique
The study employed random sampling where every participant had a chance to be included in the sample, where in the total number of 400 SME’s loan customers, 40 respondents were picked randomly by using the random number table.
3.8 Data Collection Method
3.8.1 Primary Data
Primary data were obtained using interview schedules and questionnaire. The researcher conducted face to face interviews with Branch Managers, Commercial managers, SMEs loan officers and SMEs customers. Interviews with bank staff explored financial institutional framework, policy and experience of credit administration and performance trends. Causes of nonperforming loans related to bank was established. The SMEs questionnaire included structured questions from which the interviewer noted down respondents’ responses that best matched their views or experiences, giving inference on causes of nonperforming loans related to customers of SMES loans. The use of questionnaire to extract perception is rationalized by public role as intended ultimate SMEs loans
3.8.2 Secondary Data
Secondary data were collected from NMB published annual and quarterly reports, financial markets, businesses and governments annual reports, Bank of Tanzania performance reports, Poverty related reports, National Surveys, SMEs customers credit files and other literature.
3.8.3 Field Experience
Field data were collected from 15th June 2013 to 29th June 2013. The researcher approached NMB PLC staffs and SME’s Loan customers to collect data from them. Participants from NMB Plc include; commercial manager, SME’s loan officer, ME loan officer, Customer service officer, and bank teller. Also, the researcher chose randomly 40 SME’s loans customers from Liberty Street, City Center- Mwanza. On 15th June 2013, the questionnaires were given to all key informants and were collected back after five days.
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Assisted by two trained researchers, data were managed to be collected from SME’s Loans customers from 21st to 29th June 2013. Data were collected from 40 SME’s loans customers in Liberty Street. SME’s loans customers provided a very good cooperation during the interview and were relaxing when responding to questions. But some of them were worried that perhaps the government agency was trying to spy on their income, so as to pay high tax. But we tried to explain that the purpose of research that it was mainly for academic purpose.
3.9 Research Methods
This study is a quantitative one. The aim was to quantify the cause relationship of nonperforming loans in commercial bank related to banking and customer operations.
3.9.1 Quantitative Research Methodology
To obtain information about causes of nonperforming loans related to banks and customers, quantitative approach was used, because most causes are well documented by banks. The studies rank them and identify which cause contributes most and which cause contributes least.
Since the focus was on causes of nonperforming loans, it was scientific to start with the survey where a large amount of general information was gathered towards the different causes. But, the outcomes resulting from the survey was not taken as valid immediately. By use of in-depth interviews possible remarkable errors was investigated as well as additional information that can contribute to the validity of statistical outcomes.
Because the survey as well as the in-depth interviews contained with help of individuals, businesses and government agencies another method was needed. This method was a field experiment; focus groups were established. These focus groups specifically addressed causes of nonperforming loans from bank and customers perspectives
This sequential design was dominated by quantitative method that aimed at assessing the factors causing non-performing loans. The field study complements and deepened the survey results followed by an experiment to check for the results for both steps (Flick 2007, 95) 25
And for the case of Research design, this study descriptive technique was employed.
3.10 Tools of Data Collection
Data was collected through interview schedules and questionnaire. The interview schedules contained a set of questions, which were filled by enumerators. The researcher enumerated the answers by cross-examination in order to find out the truth. During enumeration the researcher explained the aims and objects of the study and also removed difficulties which respondents failed to understand.
3.11 Measurement and measuring scale
The study employed nominal and ordinal scales. Numbers were assigned to category of respondents and questions. For instance male were assigned no. 1 and female no. 2. Causes were ranked in order. Arbitrary scales measuring method were developed in order to demonstrate causes of nonperforming loans
3.12 Data Reliability and Validity
3.12.1 Test of Reliability
In order to ensure reliability of interview guide, the study standardized the measurement for all categories of respondents. This enabled to reduce external source of variation such as boredom, fatigue and biases. Designing measurement directions that had no variation from one group to group and broadening the sample of items tested reliability.
3.12.2 Test of Validity
The study tested internal validity of the interview guide ability to measure causal relationship of nonperforming loans. In order to be confident with the instrument, the researcher administered the instrument to focus group discussion in order to test the adequacy and coverage of the causes of nonperforming loans. Participants agreed in principle for items to include in the interview guide to adequately covering causes of nonperforming loans under study. Using panel of staffs who are
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responsible issue and approve loans (loans officer) form NMB Kenyatta road who judged how well the instrument meets the standard,
More over the instrument was tested to see if it was in conformity with predicted correlation with other theoretical propositions. This brought confident for the instrument to produce intended results
3.12.3 Data analysis In data analysis the following was employed
Data Editing Data editing was employed during the point filling the questionnaire, also further editing of primary data was done in the stage of sorting and analysis. Thus, in both the stages, the researcher reviewed the reasons lead to non-performing loans in Tanzania commercial banks.
Data Processing The researcher also processed data at the process of answering the research questions, whereby percentages and frequency distribution were used to process data.
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CHAPTER FOUR
FINDINGS PRESENTATION AND ANALYSIS
4.1. Demographic Characteristics of Respondents
Table 4.1.1 Primary Occupation of Respondents
Occupation of Respondents percentage Frequency Unemployed 11 27.5 House Wife 7 17.5 In School 3 7.5 Employed in formal sector 9 22.5 Worked for someone else in this same line 9 22.5 Farmer 1 2.5 Total 40 100.0 Source; field data, 2013
4.1.1 Primary occupation of respondents
The total numbers of loan customer respondents were 40. Respondents who were unemployed before
starting the business were 11(27.5%), 7(17.5%) respondents house wives, 3(7.5%) were in school,
9(22.5%) were employed in formal sectors, 9(22.5%) worked for someone else in the same line of
business and 1(2.5%) was a farmer
Table 4.1.2: Respondents working capacity
Response Frequency Percent Yes 11 27.0 No 29 73.0 Total 40 100.0 Source; field data, 2013
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4.1.2 Respondents working capacity
Respondents were asked to if there were still working in the same capacity as before they started
business. The response rate was 11(27%) continued to work in the same capacity while 29(73%) they
do not work in the same capacity as before.
Table 4.1.3 Education level of respondent
Education level Frequency Percent Std 1- 4 4 10.0 Std 5- 7/8 23 47.5 Form 3-4 6 17.5 College 3 15.0 University 4 10.0 Total 40 100.0 Source; Field data, 2013
4.1.3 Education level of the respondent
The response rate indicated that 4 respondents (10%) Completed standard 1 – 4, 23 respondents
(47.5%) completed standard 5 – 7/8, 6(17.5%) completed secondary education (form 3 – 4). 3(15%)
completed college and the remaining 4(10%) completed university.
Table 4.1.4 Reasons for starting business;
Percentage Reasons Frequency Parents/relatives were in this business 3 7.5 Too few wage opportunity 3 7.5 Saw profitable opportunity 17 42.5 Was encouraged to start by relatives/friends 8 20 Need to supplement my income 6 15 Interest/Hobby 3 7.5 Total 40 100 Source; Field data, 2013
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4.1.4 Reasons for starting business
The response rate indicates that 3(7.5%) started new business because their parents/relatives were in business.3 (7.5%) due to few wage opportunities. 17(42.5%) choose to start business because they saw that it is profitable opportunity to them, 8(20%) said that they started business because they were encouraged to start business by their friends/ Relatives.6 (15%) due to the need to supplement their income, 3(7.5%) start businesses because of interests/Hobby.
Table 4.1.5 Reason for choosing business
Reason for choosing business Frequency Percent Had Experience/skills in this line of business 14 35 Friends/relatives in this type of business 3 7.5 Felt there was a market for this type of business 13 32.5 Encouraged to start by friends/relatives 10 25.0 Total 40 100 Source; Field data, 2013
4.1.5 Reason for choosing type business
14 respondents (35%) choose to do their current business because they had experience/Skills in business kind of business they are doing. 13(32.5%) felt that there was the market for type of business they are doing.3(7.5%) their Friends/relatives are in this type of business, and 10(25%) respondents were encouraged to start by their friends/relatives
Table 4.1.6 Possibility for leaving the current job;
Response Frequency Percentage Yes 4 10 No 26 65 Not sure - would depend on salary 10 25 Total 40 100 Source; Field Data
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4.1.6 Possibility of leaving business for Paid job;
Findings show that 26(65%) respondents said it is impossible for them to leave their business for a paid job 4(10%) said it is possible for them to leave their business for paid job, 10(25%) said it would depend on salary.
Table 4.1.7 ways of starting business
Ways Frequency Percent Started from scratch 28 70 Purchased 9 22.5 Inherited 3 7.5 Total 40 100 Source, Field data 2013
4.1.7 Ways of starting Business
Response rate shows that, 28(70%) they started their business from scratch, 9(22.5%) purchased their business from other, and 3(7.5%) they have inherited their business
Table 4.1.8 Source of money for starting
Source of capital Frequency Percentage loan from family/friends 5 12.5 Given free from family/friends 3 7.5 Own saving from agriculture 6 15 own saving from employment 16 40 Inherited business 3 7.5 loan from banks and other formal financial institutions 7 17.5 Total 40 100 Source; Field data, 2013
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4.1.8 Principal source of money for starting Business;
Response rate indicates 16 (40%) Obtained capital for starting their business from their own saving from their previous employments. 6(15%) saving from agriculture, 7(17.5%) banks and other formal financial institutions, 3(7.5%) inherited Business. 5(12.5%) loan from family and 3(7.3%) free from family/friends.
Table 1.4.9 marital status of respondent
Marital status Frequency Percentage Married 32 80 Divorced/Separated 2 5 Widowed 6 15 Total 40 100 Source field data, 2013
4.1.9 Marital status of respondent;
Response rate indicate that 32(80%) of respondents were married, 6(15%) widowed the remained
2(5%) Divorced/separated
Table 4.1.10 Source of credits for business
Source Percentage Frequency Loan (not free) from family 6 15 Formal credit institution 20 50 Microfinance program 12 30 Saving clubs 2 5 Total 40 100 Source, Field data, 2013
4.1.10 Sources of Credits
The response rate indicated that 20(50%) from formal credit institutions, 12(30%) Micro finance programs, 6(15%) family, and 2(5%) saving clubs.
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Table 4.1.11 Critical business problem
Business problems Frequency Percentage High competition from other business 10 25 High costs of inputs 2 5 Insufficient working capital 19 47.5 Lack/poor market for products 1 2.5 Lack of skilled workers 4 10 Harassment from authorities 4 10 Total 40 100 Source; field data, 2013
4.1.11 Critical business problems
Response rate indicated that 19(47.5%) mention insufficient capital as critical business problem.10
(25%), high competition from other business.4 (10%) harassment from authorities (like TRA), 2(5%)
high costs of inputs, and 4 (10%) lack of skilled workers.
`4.1.12 Table amount of income received from Business
Amount Frequency percentage More than half of all income 29 72.5 About half of income 2 5 Less than half 9 22.5 Total 40 100 Source; Field data 2013
4.1.12. The amount of income obtained from business as compared to other sources
Response rate shows 29(72.5%) contribute more than half of all income. 2(5%) business contribute to
more than half of the total income. 9(22.5%) contributed to less than half of the total of their total
income.
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Table 4.1.13 change in volume of business
Changes Frequency Percentage Large increase 4 10 Small increase 19 47.5 No change 9 22.5 Small decrease 8 20 Total 40 100 Source; Field data, 2013
4.1.13 Business Changes for the past two years;
Out of 40 respondents interviewed 19(47.5%) said that there is a small increase in the. 9(22.5%) no change 8(20%) there is small decrease in the volume of business. And the remaining 4(10%) there is small increase in the volume of business for the past two year
Table 4.1.14 customers of business
Customers Frequency Percentage Final consumers 31 77.5 Traders 9 22.5 Total 40 100 Source; Field data, 2013
4.1.14 Customers of business
The response rate indicates that 31(77.5%) said that their customers are largely the final consumers.
While 9(22.5%) of the total interviewed respondents said that their customers mainly are traders
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4.2. CAUSE OF NON-PERFORMING LOANS RELATED TO CUSTOMERS OPERATION
4.2.1 General business management skills
The response rate indicate that 3(7.5%) received service of awareness on general business management skills and the rest 37(92.5%) they have never receive service of awareness on general business management skills.
Unawareness of general business management skills to a large extent contribute to Non-performing loans, This is due to the fact that running any kind of business need some skills which will enable smooth running of all business activities. For the case of our study the awareness on business management skills are very low, where out of 40 respondents only 4 of them they have received business management skills.
Table 4.2.1 General business management skills
Response Frequency Percentage yes 3 7.5 No 37 92.5 Total 40 100 Source; field data, 2013
4.2.2. Awareness of financial services skills
The result shows that 37(92.5%) they have never received financial management skills.3 (7.5%) have financial management skills. unawareness on financial management has implications on the loan repayment which result to non-performing loans. This is due to the reason that financial management skills increase the possibility of the loan customer (Business man) to run the business smoothly and thus the high possibility for the business to prosper. But the case is different in our study which shows that almost 92.5% of the businessmen they do not have financial management skill.
Table 4.2.2 financial management skills
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Response Frequency Percentage Yes 3 7.5 No 37 92.5 Total 40 100 Source; field data, 2013
Table 4.2.3 Awareness of accounting and book keeping
Response Frequency percentage Yes 6 15 No 34 85 Total 40 100 Source; Field data, 2013
4.2.3 Awareness of Accounting and book- keeping skills
Response rate indicates that only 6(15%) have received service of awareness of accounting and book
keeping skills. 34(85%) said never receive accounting and book keeping skills
4.2.4 Sales and marketing skills
Response Frequency Percentage Yes 3 10 No 37 90 Total 40 100 Source; field data, 2013
4.2.4 Sales and marketing skills
Field response indicate that 3(10%) has received service of awareness of sales and marketing skills
and 37(90%) has never received service of awareness on sales and marketing skills.
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4.2.5 Entrepreneurship skills
Table 4.2.5 Received service of awareness of Entrepreneurship skills; Response Frequency Percentage Yes 8 20 No 32 80 Total 40 100 Source; field data, 2013
Response rate in the table above indicated that 8(20%) they received service of awareness of
Entrepreneurship skills, 32(80%) they have never received services of awareness of entrepreneurship skills.
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4.2.4 CAUSES OF NON-PERFORMING LOANS RELATED TO BANK OPERATIONS
On the other hand the total number of 10 bank officers was interviewed, on the question of the cause of non-performing loans different reasons/ causes were provided, where 3(30%) said that non- performing loans is caused by Fund diversion. 3(30%) it is due to poor credit appraisal, 2(20%) it is caused by multiple loans from other banks, 1 it is due to competition from other institutions and
1(10%) said non-performing loans are caused by long queue in banking hall.
Table 4.2.4 Non-performing loans related to bank operation
Causes Frequency Percentage Poor credit Appraisal 3 30 Long queue in banking Hall 1 10 Multiple loans from other banks 2 20 Fund Diversion 3 30 Competition from other institutions 1 10 Total 10 100 Source; Field data
Table 4.2.5 Direct contact with loan customers; Response Frequency Percent Valid Yes 7 70.0 No 3 30.0 Total 10 100.0 Source; file data, 2013
4.2.5. Direct contact with loan customers
Response rate shows that 7(70%) respondents they do not have direct contact with customers, 3(30%) they have direct contact with loan customers. This means that direct contact of bank officers
(especially those in SME’s loan department) with loan customers reduce the incidences of non- performing loans
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CHAPTER FIVE
5.0 DISCUSSION OF FINDINGS
This chapter gives the analysis and the discussion of findings of the Causes of non-performing related to Bank and customers operations
5.1 Demographic Characteristics of Respondents
5.1.1 Analysis of the sample
The sample was made up of 50 respondents where by 10 were the key informants who were bank officers and 40 SME’s Loan customers (Business men
5.1.1.1 Primary Occupation of respondents
In the total number of 40, respondents 27.5 percent were unemployed, 17.5 percent were house wife,
7.5 percent were in school 22.5 percent were employed in formal sector, and other 22.5 percent worked for someone else in in this same line, 1 percent were farmer.
Figure 5.1.1 primary occupation of respondents;
Source, Field data 2013 39
5.1.1.2. Working capacity of respondents
The response rate indicates that 27.5 percent were still working in the same capacity, 70.3 percent were not working in the same capacity.
Figure 5.1.1.2 working capacity of the respondents
Source, Field data 2013
5.1.1.3 Education level of the respondents
General education level of respondents is analyzed in figure where, 10 percent completed Std 1-4,
47.5 percent completed Std 5-7/8, 17.5 percent completed form 3-4, 15 percent completed College and 10 percent completed University.
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Figure 5.1.1.3 Education level of respondents
Source, Field data 2013
5.1.1.4 Reasons for starting business
When respondents were asked to state the reasons which make them to start Business 42.5 percent of the respondents said that they started business because they saw it is a profitable opportunity, 20 percent was encouraged to start by relatives/friends, 20 percent were encouraged to start business by relatives/friends, 7.5 percent say they started business because of too few wages opportunities, also other 7.5 percent said they started business simply because it is their hobbies, 7.5 percent said their relatives/parents were in this business.
Figure 5.1.4 Reasons for starting business
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Source, Field data; 2013
5.1.4 Reasons for choosing type of business
In choosing the type of business different respondents underlines different reasons made them to choose their business 35 percent they choose because they had experience/Skills in this line of business, 32.5 percent they felt that there was a market for this type of business, 10 percent were
Encouraged by Friends/relatives to choose the types of business they are running, 7.5 percent they said that Friends and relatives are in this type of business.
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Figure 5.1.1.4 Reason for choosing Business
Source, Field Data; 2013
5.1.1.5 Possibility for leaving the current job
In the question whether the respondents will be ready to leave their current business for a paid job, 65 percent of the respondents said that they will not leave their business for a paid job, 10 percent said that “Yes” they can leave their current business for a paid job, and the rest 25 percent said that they are not sure, It would depend with the salary
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Figure 5.1.1.5 possibility for leaving current business
Source, Field Data; 2013
5.1.1.6 Ways of starting business;
Response rate shows that 70 percent of the population they started business from scratches, 22.5 percent purchased their business, and 7.5 percent inherited their business.
Figure 5.1.1.6 ways of starting business
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Source, Field Data; 2013
5.1.1.7 Source of starting business;
Response rate indicates 40 percent Obtained capitals for starting their business from their own saving from their previous employments.15 percent saving from agriculture, 17.5 percent from banks and other formal financial institutions, 7.5 percent inherited Business. 12.5 percent loan from family and
12.5 percent free from family/friends.
Figure 5.1.1.7 sources of starting business
Source, Field Data; 2013
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5.1.1.8 Marital status
Out of 40 respondents interviewed 80 percent were married, 5 percent were divorced, and the remaining 2 percent were divorced
Figure 5.1.8 marital status
Source; field data, 2013
5.1.1.9 Sources of credit
The respondents was asked whether they have ever received credit from any source, 50 percent said that they have received credit from formal credit institutions, 30 percent said they have received from
Microfinance programs, 15 percent said they have received from their family, and 5 percent said that they have received from saving clubs.
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Figure 5.1.1.9 Source of credit
Source, Field data; 2013
5.1.10 Critical business problem;
38 percent highlighted insufficient working capital as their critical business problem, 25 percent mention high competition from other business, 10 percent said harassment from authorities,10 percent lack of skilled workers and 2.5 Lack/poor market for products.
Figure 5.1.10 Critical business problems
Source, Field data; 2013
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5.1.1.11 Income obtained from business;
72.5 percent of the interviewed respondents said that business contributed to more than half of
Households income, 9 less than half and 2 about half of income obtained from business.
Figure 5.1.1.11 Amount of income obtained from Business
Source, Field data; 2013
5.1.12 Change in amount of business
Respondents were asked to state whether in a period of two last years there has been any changes in the volume of their business, 47.5 percent said that there has been a small increase in the volume of business, 22.5 percent said that there is no change in the volume of business, 8 percent said there is
Small increase, and 4 percent said there is Large increase in volume of business for last two years.
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Figure 5.1.12 Change in amount of business
Source, field data: 2013
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5.2. CAUSES OF NON-PERFORMING LOANS RELATED TO CUSTOMERS OPERATION
5.2.1 General business management skills
The response rate indicate that 7.5 percent received service general business management skills and the rest 92.5 percent they have never received service on general business management skills.
Unawareness of general business management skills to a large extent contribute to Non-performing loans, This is due to the fact that running any kind of business need some skills which will enable smooth running of all business activities which in turn enable timely loan repayment. For the case of our study the awareness on business management skills are very low, where out of 40 respondents only 4 of them they have received business management skills.
Figure 5.2.1 Received general business management skills
Source, Field data; 2013
5.2.2. Financial Management Skills
The response rate indicates that 92.5 percent they have never received financial management skills.
7.5% percent have financial management skills.
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This to large extent unawareness on financial management has implications on the loan repayment which result to non-performing loans. This is due to the reason that financial management skills increase the possibility of the loan customer (Business man) to run the business smoothly and thus the high possibility for the business to prosper.
But the case is different in our study which shows that almost 92.5% of the businessmen they do not have financial management skill
Figure 5.2.2 financial management skills
Source; field data, 2013
5.2.3 Accounting and book- keeping skills
Response rate indicates that only 15 percent have received service of awareness of accounting and book keeping skills. 85percent said never receive accounting and book keeping skills.
Inadequate accounting and book keeping skills led to poor recording keeping of business transactions and repayment history. This affects repayment trends and hence non performing loans.
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Figure 4.2.3 Awareness of accounting and book keeping
Source; Field data, 2013
5.2.4 Sales and marketing skills
Field response indicate that 7.5 percent has received service of awareness of sales and marketing skills and 92 percent has never received service of awareness on sales and marketing skills.
Figure 5.2.4 awareness of sales and marketing skills
Source; field data, 2013
4.2.5 Entrepreneurship skills Response rate indicated that 20 percent they received service of awareness of Entrepreneurship skills, 80 percent they have never received services of awareness of entrepreneurship skills Figure 5.2.5 Received service of awareness of Entrepreneurship skills;
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Source; field data, 2013
4.2.6. Transport services skills
92 percent of the interviewed respondents they have received services of awareness on transport services skill, while the rest 7.5 percent they have never receive services of awareness on transport services skills
Figure 4.2.6 Transport services skills.
Source; field data, 2013
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4.3 regression analysis;
Variables Entered/Removedb
Model Variables Entered Variables Removed Method
1 general business . Enter management skillsa a. All requested variables entered. b. Dependent Variable: Non-performing loans
Model Summaryb
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .113a .013 -.111 5.59443 a. Predictors: (Constant), general business management skills b. Dependent Variable: Non-performing loans
In the mode summary above the general business management skills control the chance of existence of non-performing loans in commercial banks.
ANOVAb
Model Sum of Squares df Mean Square F Sig.
1 Regression 3.219 1 3.219 .103 .757a
Residual 250.381 8 31.298
Total 253.600 9 a. Predictors: (Constant), general business management skills b. Dependent Variable: Non-performing loans
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Coefficientsa
Standardized Unstandardized Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 13.190 5.321 2.479 .038
general business 1.238 3.861 .113 .321 .757 management skills a. Dependent Variable: Non-performing loans
Residuals Statisticsa
Minimum Maximum Mean Std. Deviation N
Predicted Value 14.4286 15.6667 14.8000 .59806 10
Residual -7.66667 4.57143 .00000 5.27448 10
Std. Predicted Value -.621 1.449 .000 1.000 10
Std. Residual -1.370 .817 .000 .943 10 a. Dependent Variable: Non-performing loans
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5.3. CAUSES OF NON-PERFORMING LOANS RELATED TO BANK OPERATIONS
10 bank officers were interviewed, about cause of non-performing loans related to bank operation. 30 percent said that non-performing loans is caused by Fund diversion. 30 percent said it is due to poor credit appraisal, 20 percent said it is caused by multiple loans from other banks, 10 Percent said it is due to competition from other institutions and 10 percent said non-performing loans are caused by long queue in banking hall.
Figure 5.3.1 Non-performing loans related to bank operation
Source; Field data, 2013
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CHAPTER SIX
SUMMARY, CONCLUSSION AND RECOMENDATION
6.1. SUMMARY
The objective of this study was to assess the causes of nonperforming loans related to bank and customer operations
The study found the following
6.1.2 Causes of Non-Performing Loans Related to Customer Operations
General business management skills
The response rate indicate that 7.5 percent had received training in general business management skills and the rest 92.5 percent they have never received training on general business management skills
Financial Management Skills
The response rate indicated that 92.5 percent had never received training in financial management skills. 7.5% percent had received training in financial management skills.
Accounting and book- keeping skills
Response rate indicated that only 15 percent had received training of accounting and book keeping skills. 85percent did never receive accounting and book keeping skills.
Sales and marketing skills
Field response indicated that 7.5 percent had received training of sales and marketing skills and 92 percent had never received service of awareness on sales and marketing skills.
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Entrepreneurship skills
Response rate indicated that 20 percent they received service of awareness of Entrepreneurship skills,
80 percent they have never received services of awareness of entrepreneurship skills.
Transport services skills
92 percent respondents had received training on transport services skill, while the rest 8 percent had never received training on transport services skills
6.1.3 Causes of non-performing loans related to Bank Opoperations
The response rate for 10 bank officers interviewed about cause of non-performing loans related to bank operation were 30 percent Fund diversion, 30 percent poor credit appraisal, 20 percent frauds from bank officers, 10 Percent competition from other institutions and 10 percent long queue in banking hall.
6.2 Conclusion;
Loans form 80% portion of the total assets in commercial banks in Tanzania (BOT annual reports,
2012). These assets generate huge interest income for banks which to a large extent determines the financial performance of banks. However, some of these loans usually fall into non-performing status and adversely affect the performance of banks. This is because non-performing loans can affect the ability of banks to play their role in the development of the economy
Findings indicated that non-performing loans in commercial Banks are caused by both factors related to bank operations and factors related to customers operations. Factors related to bank operation
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identified were poor credit appraisal, poor credit policy, frauds from bank officials, competition from other financial institutions and long queue in banking halls.
Factors related to customers operations identified are inadequate general business management skills, inadequate of financial services skills, and inadequate accounting and book keeping skills
6.3 Recommendations;
The study, based on the findings mentioned above recommends the following in order to mitigate causes of nonperforming loans
Causes of nonperforming loans related to Bank Operation
Bank should have adequate and reliable information about clients, good credit policy, conduct appropriate credit appraisal, and train their customers on business, management, financial, entrepreneurships and book keeping skills.
Causes of nonperforming loans related to Customer Operation
For the case of non-performing loans related to customers operations loan customers should be trained on different business skills like the General business management skills, financial services skills, and Accounting and book keeping skills. These will facilitate smoothly operations of business activities on their side.
Area of further studies;
The study recommends further studies to:
The relationship between business management skills and nonperforming loans:
In this case the researcher should investigate clearly on how business management skills can lead to non performing loans, which is how far does business management skills influence the performing loans. 60
The relationship between credit policy and non-performing loans:
In this case, further researchers should show deeply how non-performing loans can be caused by credit policy as long as it is through the credit policies of the bank which govern the credit issues.
Effects of nonperforming loans on bank performance
A clear assessment of the effects of non-performing loans to bank performance should be researched by the further researchers.
The contribution of nonperforming loans on financial crisis
In this case the researcher should assess the contribution of non-performing loans to the financial crisis
Risk management of nonperforming loans;
Further research should be conducted on how non-performing loans as a risk should be managed.
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Annex 2: Questionnaire
CAUSES OF NON PERFORMING LOANS IN COMMERCIAL BANK
PART 1:
CAUSES OF NON PERFORMING LOANS RELATED TO CUSTOMER OPERATIONS
SECTION A: Ask to speak with the OWNER of the business. If not present, try to locate him/her. If unable
to locate the owner, conduct the interview with SPOUSE or an INFORMED worker or family member.
Demographic Characteristics of Respondents
A.1 What was your primary occupation 1 [ ] Unemployed
2 [ ] Housewife (home maker) before you started this business? 3 [ ] In school
4 [ ] Employed in formal sector
5 [ ] Worked for someone else in this same line
6 [ ] Ran another business in this same line
7 [ ] Worked for another business in another line
8 [ ] Ran another business in another line
9 [ ] Other (EXPLAIN:
A.2 Do you still work in that capacity? 1 [ ] Yes
2 [ ] No
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A.3 What level of education did you 1 [ ] None
2 [ ] Std 1 - 4 complete? 3 [ ] Std – 5 – 7/8
4 [ ] Form 1 - 2
5 [ ] Form 3 - 4
6 [ ] Form 5 - 6
7 [ ] College
8 [ ] University
9 [ ] Other (e.g. literacy classes ______)
A.4 Including this business and any
others, for how many years have you [ ] been in this type of business, either
employed or as the owner?
A.5 Why did you decide to start your own 1 [ ] Parents/relatives were/are in business
2 [ ] Too few wage opportunities business? 3 [ ] Saw a profitable opportunity
4 [ ] Was encouraged to start by relative/friend
5 [ ] Needed to supplement my income
6 [ ] Had no better options
7 [ ] Other [EXPLAIN:
A.6 Why did you choose this type of 1 [ ] Had experience/skills in this line of business business 2 [ ] Friends/relatives in this type of business 3 [ ] Felt there was a market for this type of business
4 [ ] Was encouraged to start this type by friends/r’tives
5 [ ] Start-up capital could only afford this type of b.
6 [ ] No apparent reason
7 [ ] Other (EXPLAIN:
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A.7 If you were to get a paid job now, 1[ ] Yes would you leave your business? 2 [ ] No
3 [ ] Not sure – would depend on salary
A.8 Did you start the business from 1 [ ] Started from scratch scratch, purchase it, or did you inherit 2 [ ] Purchased
it? 3 [ ] Inherited 4 [ ] Other (EXPLAIN:
A.9 How much money did you spend to Tshs : start this business
A.10 What was the principal source of your 1 [ ] Loan from family/friends
2 [ ] Given free from family/friends money/assets to start the business? 3 [ ] Moneylender
4 [ ] Own savings from agriculture
5 [ ] Own savings from employment
6 [ ] Own savings from other business
7 [ ] Inherited business
8 [ ] Loan – from banks and other formal fin. institutions
9 [ ] Loan - Microfinance program
10 [ ] Loan – Savings association
11 [ ] Loan from Rotating Savings & Credit Ass.(ROSCAs)
12 [ ] Loan – from other (explain
13 [ ] Other (EXPLAIN:
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A.11 Have you received credit for your 1 [ ]None
2 [ ] Loan (not free) from family/friends business from any of the following? 3 [ ] Moneylender Consider all types of credit – family, 4 [ ] Formal credit institution moneylenders, rotating credit 5 [ ] Microfinance program
societies, banks, etc. 6 [ ] Supplier credit
7 [ ] Savings clubs
8 [ ] Other (EXPLAIN:
A.12 Thinking about all the sources of cash 1 [ ] More than half of all income
2 [ ] About half of income income for your household (including 3 [ ] Less than half of income farming, employment, and any other 4 [ ] Don’t know income), how much of your
household’s income comes from this
particular business?
A.13 When were you born? Year ______-
A.14 What is your current marital status 1 [ ] Single – never married
2 [ ] Married
3 [ ] Divorced/separated
4 [ ] Widowed
A.15 How many dependents are you
[ ] responsible for?
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A.16 What are your THREE MOST CRITICAL 1 [ ] None a)
2 [ ] Low demand for service business problems now, in order of 3 [ ] High competition from other businesses importance? 4 [ ] High cost of inputs b) 5 [ ] Low prices for products sold
6 [ ] Insufficient working capital
7 [ ] Lack of funds to buy equipment/fixed assets 8 [ ] Lack/poor market for products c) 9 [ ] Shortage/unavailability of inputs/products to sell
10 [ ] Lack of proper workspace
11 [ ] Lack of skilled workers
12 [ ] Lack of trusted workers
13 [ ] Harassment from authorities
14 [ ] Lack of access to utilities (water/electricity/tel)
15 [ ] Poor access roads to business
16 [ ] Lack of proper management skills (EXPLAIN)
17 [ ] Other (EXPLAIN)
A.17 Over the past two years (or since your 1 [ ] Large increase
2 [ ] Small increase business started), how has the 3 [ ] No change volume of your business changed? 4 [ ] Small decrease
5 [ ] Large decrease
6 [ ] Don’t know
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A.18 To whom do you sell your products or 1 [ ] Final Consumer
2 [ ] Traders provide services? (TICK THE TWO 3 [ ] Other Businesses MOST IMPORTANT) 4 [ ] Export
5 [ ] Manufacturer
6 [ ] Marketing Board
7 [ ] Other (EXPLAIN:
SECTION B. BUSINESS MANAGEMENT SKILLS
Aware of How Received If not Business Management Skills any of the services FOR THOSE WHO HAVE RECEIVED following important aware of? received, Level of Cost of Who paid? Who business 1 = Yes Service skills? are these Why? satisfaction 1=Self provided the 1 = Yes (in 2 = No skills to 1=Cost 1=Very 2=Supplier service? 2 = No Tshs)
your 2=Availabil satisfied 3=Govt 1=Relative
business? ity 2=Fairly 4=NGO/ /friend
1=Very 3=Time Donor/Ass 2=Supplier satisfied
aa) ab) important 4=Compet 5=Customer 3=Govt 3=Not 2=fairly ence of 6 =Other 4=NGO/ V P satisfied important provider Donor/Ass 3=Not
5=Timing 5=Customer important e)
6=Duratio 6 =Another f) c) n MSE 7=Other g) 7=Private b) d) firm
8=Other
h)
1. General business management Skills
2. Financial management Skills
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3. Sales &marketing Skills
4. Entrepreneurship Skills
5. New technologies mgt skills
6. B’ness counselling/advisory skills
7. Sales and market promotion skills
8. Market information skills
9. Financial services skills
10. Transport services skills
11. Accounting/B. keeping services skills
12. Communication services skills
13. Secretarial services
14. Advisory services on legal matters skills
15. Advisory services in taxation skills
16. Others skills (EXPLAIN)
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C.02 If you had the opportunity, what 1 [ ] Training in business management - general
THREE SKILLS would you consider 2 [ ] Training in financial management
most IMPORTANT for you to access 3 [ ] Training in sales and marketing
4 [ ] Entrepreneurship training in relation to your business? 5 [ ] Training in new technologies
6 [ ] Business counselling and advisory services
7 [ ] sales and marketing promotion
8 [ ] Market information
9 [ ] Financial services
10[ ] Transport services
11[ ] Accounting/ book-keeping services
12[ ] Communication services
13[ ] Secretarial services
14[ ] Advisory services on legal matters
15[ ] Advisory services in taxation
16[ ] Others (EXPLAIN)
C.03 From whom do you purchase your 1 [ ] Manufacture Equipment 2 [ ] Wholesaler 3 [ ] Retailers
4 [ ] Other MSEs 5 [ ] Other (EXPLAIN)
C.04 Does any of your input suppliers 1 [ ] Business training
provide: 2 [ ] Advisory services
3 [ ] Other services (EXPLAIN ______)
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C.05 1 [ ] Households To whom do you sell your products/services? 2 [ ] Institutions e.g. Government
3 [ ] Large enterprises
4 [ ] Other MSEs
5 [ ] Others (EXPLAIN)
Does any of your customers 1 [ ] Business training C.06 provide: 2 [ ] Advisory services
3 [ ] Other services (EXPLAIN ______)
That is the last of my questions. Could you remind me of your name?
RESPONDENT NAME:
THANK YOU FOR YOUR TIME!
TIME INTERVIEW STARTED: ______TIME INTERVIEW COMPLETED: ______
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PART 2:
CAUSES OF NON PERFORMING LOANS RELATED TO BANK OPERATIONS
Causes of Nonperforming loans related to Bank operations
A.1 What is your Employment Title 1 [ ] Branch Manager
2 [ ] Commercial Manager
3 [ ] Team Leader
4 [ ] SME Loan Officer
5 [ ] MSE Loan officer
6 [ ] Bank Teller
7 [ ] Customer Services officer
8 [ ] Back office officer
9 [ ] Other (EXPLAIN:
A.2 Do you have a direct contact with 1 [ ] Yes
2 [ ] No loan customer?
A.3 What Service do you officer loan 1 [ ] Responding to loan customer inquiries
2 [ ] opening account customer? 3 [ ] telling services
4 [ ] bank statement and balance inquiries
5 [ ] Other (e.g. literacy classes ______)
A.4 What is your experience in lending 1 [ ] 1-3 Years
2 [ ] 4-6 Years
3 [ ] 7-9 Years
4 [ ] 10 and above
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A.5 What do you think are Significant 1 [ ] lack of bank credit ownership
2 [ ] Inadequate market information factors causing non performing loans 3 [ ] Poor credit policy related to banking operations 4 [ ] Integrity of bank officer
5 [ ] Change in Government Policy
6 [ ] Inadequate market information
7 [ ] Insider loan
8 [ ] Poor Credit Appraisal
9 [ ] Poor Credit Monitoring
10 [ ] Poor Customer Services from bank officer
11 [ ] Long queue in banking hall
12 [ ]Long credit processing
13 [ ]Poor credit timing
14 [ ]abrupt changes in interest rate
15 [ ]loan concentration in few sector
16 [ ] Rapid Credit expansion
17 [ ] High bank Charges
18 [ ] Other Factor [Please explain ______]
That is the last of my questions. Could you remind me of your name?
RESPONDENT NAME:
THANK YOU FOR YOUR TIME!
TIME INTERVIEW STARTED: ______TIME INTERVIEW COMPLETED:
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