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An Assessment of the Causes of Non Performing Loans In 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 i 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 ii 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. iii 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. iv 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 v 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. 1 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 ......................................................................................................................................
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