MAKERERE UNIVERSITY
CREDIT RISK MANAGEMENT AND PERFORMANCE OF FINANCIAL INSTITUTIONS IN UGANDA: A CASE STUDY OF HOUSING FINANCE BANK, KAMPALA BRANCH
BY BALUNGI
DAMALIE
2016/HD06/905U
A RESEARCH REPORT SUBMITTED TO COLLEGE OF BUSINESS AND MANAGEMENT SCIENCES IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE A WARD OF THE DEGREE OF MASTERS OF ARTS AND FINANCIAL SERVICES OF MAKERERE UNIVERSITY
NOVEMBER, 2018.
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1 DECLARATION
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APPROVAL
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DEDICATION This piece of work is dedicated to my father and mother, Mr. and Mrs Waako who have supported me throughout this whole journey. Thanks to the almighty God who has enabled me to accomplish my academic expedition.
I would also like to dedicate the success of this study to my friends and family for their continued support, their encouragement and patience. Their ideas and moral support extended to me to achieve this.
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ACKNOWLEDGEMENT It’s essential to recognize different individuals without which this report wouldn’t have been possible.
I would first extend my earnest appreciation to the almighty God for enabling and guiding me through the academic life. I’m grateful to Makerere University for admitting me to the MFS programme.
I would like to express my deepest appreciation to my supervisor Dr.Nuwagaba Geoffrey whose tireless encouragement and guidance made the completion of this study possible.
Special thanks go to the management and employees of Housing Finance Bank for sparing their time to fill in questionnaires, without them this would have not been successful. I thank my friends for the continue support.
May the almighty God bless you all!
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TABLE OF CONTENTS DECLARATION ...... i APPROVAL ...... ii DEDICATION ...... iii ACKNOWLEDGEMENT ...... iv TABLE OF CONTENTS...... i LIST OF ACRONYMS ...... …..iv LIST OF FIGURES ...... v CHAPTER ONE: INTRODUCTION ...... 1 1.1 Introduction...... 1
1.2 Background of the study ...... 1
1.3 Statement of the problem ...... 3
1.4 Purpose of the study ...... 4
1.5 Research objectives...... 4
1.6 Research Questions ...... 4
1.7 Scope of the study ...... 4
1.7.1 Geographical scope ...... 4
1.7.2 Subject scope ...... 5
1.8 Significance of the study...... 5
CHAPTER TWO: LITERATURE REVIEW ...... 7
2.1 Introduction...... 7
2.2 Theoretical Review ...... 7
2.2.1 Modern Portfolio Theory ...... 7
2.2.2 Agency Theory...... 8
2.2.3 Liquidity Preference Theory ...... 9
2.3 Credit Risk ...... 10
2.4 Credit Risk Management (CRM) ...... 12
2.5. Credit risk Management Frame Work...... 12
2.6 The Credit Risk Management Process ...... 13
2.7 Financial Performance of financial institutions...... 13
CHAPTER THREE: RESEARCH METHODOLOGY...... 17
3.1 Introduction...... 17
3.2 Research design ...... 17
3.3 Study population ...... 17
3.4 Sample size and selection ...... 18 i | P a g e
3.5 Sampling techniques ...... 19
3.6 Data collection methods...... 19
3.7 Data Collection Instruments...... 20
3.8 Procedure ...... 21
3.9 Data Quality Control (Validity and Reliability)...... 21
3.10 Data processing and analysis ...... 22
3.11 Measurement of variables ...... 23
DATA PRESENTATION, DISCUSSION AND INTERPRETATION ...... 24
4.1 Introduction...... 24
4.2 Background information on the respondents...... 24
4.2.1 Findings on the general characteristics of the respondents ...... 24
4.2.2Findings on the academic level of the respondents...... 24
4.3 CREDIT RISK MANAGEMENT ...... 25
4.3.1 Finding whether the bank involves training in respect to credit risk ...... 25
4.3.2 Finding whether the Bank involves or uses credit risk management process and techniques in its operations...... 26 4.3.3Findings on credit risk minimization ...... 26
4.3.4 Findings on when the bank reminds a defaulting customer...... 27
4.3.5.Findings on the future banking and increase in customer base in line with effective credit risk management...... 28 4.4.2 Response on how much the bank has lost due to fraud committed last year ...... 29
4.4.3 Responses on the number of customers who have failed to pay back loan obligations ...... 30
4.4.4 Findings on the hindrances to financial performance improvements ...... 30
CHAPTER FIVE ...... 31
SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS ...... 31
5.1 Introduction...... 31
5.1.1 Summary of the main findings...... 31
5.1.2 Credit risk management ...... 32
5.1.3 FINANCIAL PERFORMANCE...... 32
5.1.4 CREDIT RISK MANAGEMENT AND FINANCIAL PERFORMANCE...... 33
5.2 Conclusions...... 34
5.3 RECOMMENDATIONS...... 34
5.4.Areas for further Research...... 35
REFERENCES ...... 36
APPENDICES ...... 38
APPENDIX I: QUESTIONNAIRE ...... 38 ii | P a g e
LIST OF TABLES
Table 1: Sample size and selection ...... 18
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LIST OF ACRONYMS BCP Business Continuity Planning
COBAM College of Business and Management
CVI Content Validity Index
DRP Disaster Recovery Planning
DV Dependent Variable
ESOPs Employee Stock Ownership Plan
G-10 Group of Ten
GDP Gross Domestic Product
HFB Housing Finance Bank
IRP Incident Response Planning
ISO International Standards Organization
IV Independent Variable
MPT Modern Portfolio Theory
No. Number
NPV Net Present Value
NR Non Relevance
NSSF National Social Security Fund
R Relevance
SPSS Statistical Package for Social Sciences
TAT Threat Assessment Team
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LIST OF FIGURES
Figure 1: An illustration of the credit risk management and performance of financial institutions 6
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CHAPTER ONE: INTRODUCTION
1.1 Introduction
The study examined the effect of credit risk management on the performance of financial institutions in Uganda with a case study of Housing Finance Bank (HFB) Uganda Limited.
Credit risk management is the independent variable and performance of financial institutions the dependent variable.
This chapter presents the introduction, background to the study, problem statement, purpose of the study, objectives, research questions, scope of the study, significance of the study and conceptual framework.
1.2 Background of the study
Housing Finance Bank is a full service retail bank that is primarily involved in mortgage banking. Founded in 1967 as a housing finance company, Housing Finance Bank became a fully licensed commercial bank in January 2008, having acquired a commercial banking license from the Bank of Uganda. The bank is the leading mortgage lender in the country, with approximately
60 percent of all Ugandan mortgage accounts. As of December 2016, HFB had an asset base valued at USh680.2 billion ($185.9 million).
In August 2017, the two largest shareholders in the bank, the Uganda government and NSSF
Uganda, each contributed $8.2 million (for a total of $16.4 million) in fresh capital, to boost the bank's ability to lend to more mortgage borrowers and improve the lender's liquidity.
Housing Finance Bank is 50 percent owned by the Uganda National Social Security Fund. The government of Uganda, through the Uganda Ministry of Finance, Planning and Economic
Development, owns 45 percent. The remaining 5 percent is owned by the National Housing and
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Construction Company, a parastatal company jointly owned by the government of Uganda (51 percent) and the government of Libya (49 percent).
Housing Finance Bank had planned to list its shares on the Uganda Securities Exchange in 2012, however, those plans were postponed.
Housing Finance Bank maintains its corporate headquarters and main branch at its newly constructed headquarters building on Wampewo Avenue, on Kololo Hill. Housing Finance
Bank's former main branch is located on Kampala Road.
Another branch within the Kampala central business district is located in Nakasero, across
Nakasero Road from the Nigerian High Commission. There are two other branches in Kampala, one each in the suburbs of Namuwongo and Ntinda.
In February 2009, Housing Finance Bank opened a branch in Mbarara in western Uganda. In
March 2009, HFB opened a branch in an area of Kampala known as Kikuubo. In June 2009,
Housing Finance Bank opened a branch in Mbale, promising at the opening ceremony to launch
Internet banking and rural mobile banking later in 2009. In July 2009, Housing Finance Bank opened a branch in Arua, its eighth in the country.
While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties. This experience is common in both G-10 and non-G-10 countries.
Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximize a bank’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as
2 | P a g e well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organisation.
For most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off the balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions. This study intends to examine the significance of this credit risks in the context of Housing Finance Bank.
1.3 Statement of the problem
In the world of volatile cash movements and increasing global lending and borrowing of funds , few banks if any remain un affected by borrower’s late and nonpayment of loan obligations. This result from the bank's inability to collect anticipated interest earnings as well as loss of principal resulting from loan defaults.Financial Institutions carry out credit risk management as a measure of administering credit to borrowers’. This is done by having a well developed credit mechanism and procedure, that is to say, credit appraisal, training of staff and setting credit standards and terms to offset the possibility for loss and improve on financial performance.
Commercial banks thus develop strategies to either eliminate or reduce this credit risk. In the management of this risk, banks are concerned about their financial performance.
However, despite the efforts made to address the poor credit risk management, financial institutions still have difficulties resulting from the credit risk management processes undertaken and changes in customer base leading to decreasing financial performance. To most banks, their credit risk management goal is to arrange the bank’s financial affairs in such a way that however much borrowers fail to pay back the loan in the future, the effect on their return is diminished.
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This has ended up affecting the intended purpose of the credit facility and impacted significantly on the performance and recovery.
1.4 Purpose of the study
The purpose of the study was to examine the effect of credit Risk Management to the performance of financial institutions in Uganda with a focus on Housing Finance Bank.
1.5 Research objectives
This research was guided by the following specific research objectives
1. To determine the degree of credit risk management of Housing Finance Bank
2. To establish the relationship between credit Risk management and financial performance of Housing Finance Bank
3. To discuss the other factors that may hinder financial performance of Housing Finance
Bank apart from credit risk control.
1.6 Research Questions
This study aimed at answering the following research questions
1. What is the degree of credit risk management of Housing Finance Bank?
2. What is the relationship between credit Risk management and financial performance of
Housing Finance Bank?
3. What are other factors that may hinder financial performance of Housing Finance Bank apart from credit risk control?
1.7 Scope of the study
The scope looked at in the geographical and subject scope.
1.7.1 Geographical scope
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The research was intended to be carried out in Housing Finance Bank, Mortgage and Business
Centre, Kampala district, Central Uganda.
1.7.2 Subject scope
The study covered credit risk management and performance of financial institutions.
1.8 Significance of the study
i. The research will help the researchers to acquire academic knowledge.
ii. The study will help government develop a policy to regulate credit lending institutions.
iii. Successful completion of the study will help the Housing Finance Bank to develop better
strategies for managing credit risks.
iv. The study will help House Finance Bank to improve the credit services.
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1.9 Conceptual framework
INDEPENDENT VARIABLE (IV) DEPENDENT VARIABLE (DV)
CREDIT RISK MANAGEMENT PERFORMANCE OF Risk Avoidance FINANCIAL INSTITUTIONS
Return on Investment Profitability Risk Transference Insurance Market share Capital Liquid capital Risk mitigation Collateral security Assets Minimum deposit on Sales volume loan
Risk Acceptance Compensations Bad debts
Intervening Variables
Risk transfer
Risk diversification
Risk retention analysis
Figure 1: An illustration of the credit risk management and performance of financial institutions
Source: Adapted from Ekaju (2011) and modified by the researcher
The conceptual framework shown in Figure 1 shall guide the study in examining the effect of
credit risk management on the performance of financial institutions in Uganda with reference to
Housing Finance Bank. The study presupposes that good credit risk management that involves
avoidance, transference, mitigation and acceptance are key ingredients for the performance of
financial institutions especially with respect to credit issues.
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CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
This chapter covers the critical review of the literature on the credit risk management and performance of financial institutions, strategies for effective credit risk management and the influence of credit risk management and performance of financial institutions.
2.2 Theoretical Review
There have been several theoretical studies on credit risk and determinant of credit risk. Majority of this theoretical frameworks relating to credit risk emphasize on risk concept, macroeconomic policies as well as structural and governance failures. Highlighted below are Modern Portfolio
Theory, Agency Theory and Routine Activity Theory.
2.2.1 Modern Portfolio Theory
Modern portfolio theory (MPT) was developed by Harry Markowitz in 1952. The theory posits that an investor would theoretically be able to maximize his expected return while minimizing the variability of returns by investing in a diversified portfolio of assets that had different price movements in a given market. Most importantly, for the first time, portfolio risk could be summarized into a number that could then be measured and tracked. MPT breaks risk into two parts: systematic risk and unsystematic risk. Systematic risk is the risk inherent in the market.
Unsystematic risk is the idiosyncratic risk that exists with the investment of a particular security.
An important conclusion of MPT is that one can minimize the unsystematic risk through diversification. Studies have shown that you only need a minimum of 20 securities to substantially diversify a portfolio. According to MPT, whether credit risk is diversifiable or not, it’s all depends with its determinants. This implies that governance structure of commercial banks cannot eliminate credit risk determined by macroeconomic variable by diversifying the
7 | P a g e portfolio within the country. Consequently, risk attributable by the unsystematic factors which in this study are also referred to a microeconomic factors can be well be diversified through sector lending.
2.2.2 Agency Theory
Agency theory sometime referred to as principal-agent theory explains the conflict of interest the shareholders hereby referred to as the principals and the managers and debt holders here referred to as the agents (Jensen and Mecling, 1976). The theory defines agency relationship as a contract that the principal engages the agent to perform some duties on their behalf; similarly, the principal from time to time may delegate some duties to the agent. On this premise of the agency relationship, agency conflict may arise because the agent in executing the duties of the principal may also affected by his own welfare interest which impair him from acting at the best interest of the principal. Once banks managers are well remunerated by the shareholders, they are left in loft and do not seek any diligence since they have gotten all that was need to have them work prudently. They may engage in activities that depart from shareholder value maximization. To ensure their social power, loans approvals are done without proper vetting and credit scoring. It’s for this reason they may approve projects with negative NPV (Rajan, 1994). However, theoretical and empirical studies have established that agency conflict in commercial banks is largely attributed by moral hazard, earnings retention, risk aversion and time horizon. The factors therefore determine the extent to which credit quality is likely to be affected as a result of agency conflict. Effective governance structure is therefore imperative in commercial banks to institute balance performance incentives to the managers. ESOPs scheme are good pointers of encouraging the employees serve as part owners to minimize principal-agents conflicts (Fenn and Liang, 2001)
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2.2.3 Liquidity Preference Theory
The third theory that guided the study was liquidity preference theory proposed by United
Kingdom economist John Maynard Keynes. Keynes observed that all factors held constant, people prefer to hold cash (liquidity) rather than any other form of assets and they will demand a premium for investing in illiquid assets such as bonds, stocks and real estates. The theory continues to contend that the compensation demanded for parting with liquidity increases as the period of getting liquidity back increases.
Liquidity preference theory continue to dominate the central concepts in economic and finance in its application on the theory of demand for money. With regards to Keynes theory, central banks set the rate of interest in order to control the price of assets though the demand for money. On emphasis on why people will at all times prefer holding cash, the economist explained these to the existence of three motives: the motive to keep cash of daily transactional need, the motive to keep cash for precautionary tendencies and finally the speculative motive so as to take advantage of opportunities (Bibow, 1995). The analogy of Keynes theory in imperative on the assets and liabilities functions of a commercial bank. The theory explains why banks will undertake to compensate for liabilities and also provides essence of why banks will seek compensation for their assets. This compensation describes the interest rate factor which is a risk factor affecting credit risk in commercial banks. Therefore, banks will charge higher interest rates where possibility of default is higher hence liquidity preference theory.
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2.3 Credit Risk Christian Bluhm et. al (1964) define Risk as the possibility of loss while credit Risk is associated with the failure of a counter party with whom a particular financial transaction has taken place .Credit risk includes both credit default risk and transaction risk.
They further said that credit default risk is the most frequently addressed risk for commercial bank. It’s the risk to earning or capital due to barrower’s late and non payment of loans obligations. It encompasses both the loss of income resulting from the bank’s inability to collect anticipated interest earnings as well as the loss of principle resulting from loan defaults.Transaction risk refers to the risk with in individual loans. The higher the percieved risk,
The higher the rate of interest that investors will demand for lending their capital .Credit risk is calculated based on the borrowers overall ability to repay.
Peter Rose(1992) says that the factor that is causing interest rates to differ from others is the degree of risk. Investors in securities face many different kinds of risk, of course , but one of the most important is default risk that a borrower will not meet all promised payments at the time agreed upon.The yield on a risky security is positively related to the risk of borrower default as perceived by investors. Specifically, the yield on risky security is composed of at least two elements.
The yield to Maturity, that will be earned by the lender or investor if borrower makes all the payments pledged when they are due and the risk premium.
Default risk Premium = Promised yield on a risky security - Risk free interest rate.
He further says that it is increasingly in the recent years that some of the banks and even local government units have been forced into bankruptcy and into default on their bonds. Most banks have experienced highly publicized financial problems and require government help to survive.The volatile changes in business and consumer spending, interest rates and prices
10 | P a g e frequently have led to serious financial crisis, for this reason banks today have learned to look at the expected rate of return or yield on a loan or security as well as its promised yield. The expected yield is simply the weighted average of all possible yields to maturity from risky security. Thus if there are possible yield from a risky security;
Expected Yeild = ∑mi=1PiYi.
Where PiYi = expected yield is all possible yields
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2.4 Credit Risk Management (CRM)
Dictor Devendra Jain (2010) says, we are in a dynamic uncertain word where the economic climate and developments in lending agencies can affect changes in interest rates. He further says that it is impossible to eliminate all the risk in any business activity
Credit risk management is the process of managing the probability or the severity of the loss arising from loss of interest and principle due to barrowers default to an acceptable range or with in limits set by the commercial bank.
Credit risk management is a method to devise a plan to measure the credit risk and develop management strategies to counter the credit risk.
2.5. Credit risk Management Frame Work.
This is a guide for commercial banks managers to design an integrated and comprehensive risk management system that helps them focus on the credit risk in an effective and efficient manner. Therefore a CRM framework is a consciously designed system to protect the bank from undesirable surprise and enable it to take advantage of opportunities.
According to Okello,et. el (1999), a good CRM framework integrates into banks operations to set systematic processes for identifying, measuring and monitoring the risk to help management keep an eye on the big picture.The credit rating agencies try to ascertain the risk associated with the barrowers .They use the credit rating model.The credit rating model is a preventive risk management tool and provides the detail analysis of the counter party .However its not a complete risk elimination for commercial banks.
The banks have derivatives like credit default swaps that can eliminate the credit default risk.
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2.6 The Credit Risk Management Process
According to the Chattered Institute of Bankers (1999) CRM process evolves around various departments of an organization such as, treasury, sales, finance, legal and taxation. The process evolves around banks capabilities to face the uncertainty of lending out.
Broadly speaking, there are three parts in the credit risk management process. The first part is to identify and understand the risk the second part is associated with the measurement and reporting of credit risk and the third part of the process is to implement an effective credit risk management plan. However, Preager (1964),Commercial banks can reduce and control credit risk through use of internal financial controls. These are so classified because they do not utilize external financial markets. They can use the credit swaps.
2.7 Financial Performance of financial institutions. In determination of a company’s overall performance, its investment of funds in assets, profits from operations, the business risk and credit risk must be considered. The idea is to acquire assets and invest in products and services where expected return exceeds their costs. Performance is an element of financial statements and frequently, maximization of profits is regarded as the determinant of financial performance or as a basis of other measures.
Pandy, (1996) says a company should earn profits to survive and grow over a long period of time. Information about financial performance is useful in predicting the capacity of a firm top generate cash flows from its existing resource base.
Measurement of financial performance is based on accounting information contained in financial statements used by management, creditors, investors and others to form judgment about performance of a firm.
According to Chirwa (2003), profitability is the most used financial performance indicator for companies. It generally shows the ability of a company to generate returns for the shareholders in light of the investment committed.
Commercial banks being deposit taking institutions allow a variety of deposits from their customers, these include, demand deposits, savings deposits, and time deposits. Its these deposits that are used by the commercial banks in the generating profits through lending and investing in
13 | P a g e securities. Without significant deposits therefore, banks’ ability to generate returns will be constrained.
However on the other hand, loan performance is the best indicator of financial institutions performance as regards the credit lines (AMFIU, 2004). This loan performance indicates the extent to which money lent out by a financial institution is being recovered. Bad debts to both insiders and outsiders are the commonest indicator of credit riskiness of a bank and its financial performance.
2.8 Relationship between Credit Risk Management and Financial Performance of financial institutions.
Policy details out ways of establishing the customers credit worthiness. These include use of financial statements. To establish the capital structure of the customer as a basis of determining whether the customer has the capacity to repay the loan, commercial banks manager have put up means of reducing the credit risk and thus stimulate financial performance.
Financial statements help to establish the gearing of a customer. High gearing may imply that customer has over borrowed and may be risky to extend additional loan.
Financial statements may also reveal the ability of the customer to generate adequate revenue for repayment of the loan.
According to Mark Hirschey (2000) Credit risk is the chance that another party will fail to abide by its contractual obligations. A number of banks have lost substantial sums because other parties that is, borrowers were either unable pr unwilling to provide financing at agreed on prices. A bank must first define the exposure to loss from lending out to borrowers and decide whether it will attempt its self against the possibility of loss from exposure created by the use of different interest rates while lending.
First a credit risk management goal is very important. Should it attempt to eliminate all interest rate gains and losses? Should it try to minimize financial losses? Or is it willing to accept credit gains? (Dominguez and Teasar, 2004)
The sound practice setout specifically to address the following areas:
Maintaining an appropriate credit administration, measure and monitoring process.
Establishing an appropriate credit risk environment, and
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Operating under a sound credit-granting process and ensuring adequate controls over credit risk.
Although specific credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities, a comprehensive credit risk management program will address these four areas. These practices should also be applied in conjunction with sound practices related to the assessment of asset quality the adequacy of provisions and reserves, and the disclosure of credit risk, all of which have been addressed in other recent Basel committee documents. This helps to increase the financial performance of commercial banks.
Supervisory expectations for the credit risk management approach used by individual banks should be commensurate with the scope and sophistication of the bank’s financial performance. For smaller or less sophisticated banks, supervisors need to determine that the credit risk management approach used is sufficient for their activities and that they have instilled sufficient risk- return discipline in their credit management processes to stimulate financial performance.
Internationally, to reduce credit risk, Euro credits have been adopted. These are short to medium loans of Euro currency extended by euro banks to corporations, sovereign governments. International organizations. The loans are denominated in currencies other than the home currency of the euro bank.
The credit risk on these loans is greater than on loans to other banks in the inter- bank market. Thus the interest rate on these loans must compensate the bank for the added credit risk
The lending rate on this credit is stated as;
LIBOR + X% (Percent)
In summery however, Peter .S. Rose (1992) concludes that, careful studies of the relationship between default or credit risk and financial performance points to the fundamental principles in the field of finance. Default risk and expected return are positively related. The bank and investor seeking higher expected return must also be willing to accept greater risk of ruin. Moreover credit risk is correlated with both internal borrowers specific factors associated with loan and external factors, especially the state of the economy and demand for a particular banks service.
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2.9 Other factors that have hindered financial performance of financial institutions apart from the credit risk.
Un due concentration of loans to single activities, individuals or groups, poor corporate governance with ion managers and bank officers, un educated and ill experienced credit risk control personals, low levels of advertisement, the substance economy where most people in Uganda are farmers and un educated in that they don’t borrow from commercial bank, and in case they have borrowed, it’s possible that they shall fail to pay back.
Conclusion
Mr. Leo Omolo of the Bank of Uganda says that although banks have a great role to play, credit risk has been identified as a serious threat to their performance. Banks finds difficulties in lending out to customers / borrowers due to failure or nonpayment. For an improved financial performance, the bank needs to incorporate credit risk management into its operational and long range planning activities.
Thus there are reforms being introduced by bank of Uganda to help curb credit risk and stimulate financial performance. (Mr. Kasekende) the Central Bank will introduce a capital charge that is in compliance with the Basel I Accord and eventually introduce a capital charge for credit risk based on the Basel II Cord.
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CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction
This chapter consists of the research design, study population, sample size and selection techniques, data types and collection methods, validity and reliability of data collection instruments, data processing and analysis.
3.2 Research design
This study used a cross-sectional survey research design in which both quantitative and qualitative data shall be collected. The cross-sectional survey research design was used because of the nature of the study that requires views from the different respondents from different sections of the bank at a single stage in time. Besides, although quantitative data is basically targeted, qualitative data was used for purposes of triangulating the information and making conclusions
3.3 Study population
A study population generally refers to the totality of items under investigation. The target population for this study shall constitute branch managers, relationship managers, relationship officers, credit officers and credit evaluation officers in Kampala. According to the Head Of
Human Resource of Housing Finance Bank there are sixty five (65) persons in that category across all HFB Branches in Kampala and distributed as; branch managers (9 No.), relationship managers (27 No.), and credit officers (29 No.). Therefore, in terms of data collection, Kampala would be cost effective and accessible to the researcher. Although there are many categories under which financial institutions can be placed, the study basically targeted, Credit Evaluation
17 | P a g e and Credit recovery for the fact that this is the area in the banking sector that experiences the highest level of risks.
3.4 Sample size and selection
The researcher stratified the accessible population by category (credit managers, relationship managers and credit officers), then adopt the generalized scientific guidelines developed from a table of Krejcie and Morgan (1970) as extracted from Amin (2005) to determine the sample size.
The sample obtained will then be distributed across the three categories using stratified random sampling to get a sample proportional to each category. This will help in drawing inferences about specific roles played by each category with respect to credit risk management. From a total population of 65, a sample size of 56 respondents was selected using Krejcie and Morgan (1970) sample size selection table. The following formula was used [s = (p/P) x S] where s is the sample of each category required, p is the number of the accessible population in each category,
S the total sample computed for the study and P the total number of the accessible population from all the categories in the study. A total of 56 respondents will constitute the sample size as shown in table 1 below.
Table 1: Sample size and selection
Category Population size Sample size Sampling technique
Branch Managers 9 8 Purposive sampling
Relationship Managers 15 14 Simple random
sampling
Credit Officers 11 10 Simple random
sampling
Total 35 32
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3.5 Sampling techniques
Purposive sampling was used to choose branch managers so as to ensure that the right respondents with the relevant knowledge, authority and experience on the different themes are adequately selected (Sekaran 2000). In order to limit researcher bias, simple random sampling was used to choose the respondents from each of the remaining subcategories (relationship managers and credit officers) in the study as a way of ensuring an equal chance of representation among all categories (Mugenda and Mugenda, 1999).
3.6 Data collection methods
This study used both primary and secondary data. Primary data was captured using the questionnaire, interviews, and focus group discussions. Documentary reviews constituted secondary data and were used including their double application to ensure triangulation, where necessary.
3.6.1 Survey
This is data collection method that employed both closed and open ended questionnaire survey to generate primary data from respondents. Considering the sample size for this research, this was a suitable method since it is time saving and makes it easy to quantify and analyze responses. This method was used for relationship managers and credit officers using closed ended questionnaires.
3.6.2 Interviews
An interview is a data collection method where the respondent is asked questions so that s/he gives answers so as to generate primary data. For this study, a face to face interaction was adopted during data collection. This method was applied to branch managers to get in-depth information regarding credit risk management and performance in HFB.
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3.6.3 Documentary review
This was mostly applied for collection of secondary data by analyzing documents that provide explicit information on credit risk management and performance of financial institutions.
3.7 Data Collection Instruments
3.7.1 Questionnaires
The researcher structured questionnaires for data collection from respondents at credit officer level. The questionnaire adopted a 5-point likert scale ranging from 5(strongly agree) to
1(strongly disagree), the higher the number, the greater the influence on performance of financial institutions. A likert-scale provides consistent responses and allows a respondent to provide feedback that is slightly more expansive than a simple closed ended question, but much easier to quantify than a completely open ended response (Patrick, 2007). Open ended questionnaires were used for collecting data from relationship managers so as to allow them give an expansive response to the subject matter since they are the initiators and implementers of the credit facilities.
3.7.2 Interview guide
Semi structured interview guides was used for branch managers to stimulate them into detailed discussions of the credit risk factors, their management and influence on performance of HFB through a face to face interaction.
3.7.3 Documentary checklist
For the collection of this data, existing literature on previous studies and cotemporary practices on credit risk management and performance of financial institutions was reviewed to provide both qualitative and quantitative data.
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3.8 Procedure
The researcher sought an introductory letter from the College of Business and Management
(COBAM) of Makerere University Kampala. Thereafter; the researcher will contact the administration of HFB to seek permission to carry out a study. Once granted permission the researcher will ensure that the respondents are informed that the research was purely for academic purpose. The researcher approached the respective branch managers of the participating branches to interview the respondents Time shall be given upon which each selected respondents should fill in the questionnaire. Thereafter, unfilled and wrongly filled questionnaire and other properly filled ones were taken for data analysis. After data analysis and measurement, the researcher compiled the report of the study and make appropriate recommendations.
3.9 Data Quality Control (Validity and Reliability)
3.9.1 Validity of data collection instruments
Validity is the extent to which an instrument is capable of yielding the response on which it is supposed to (Carole, Kimberlin & Winterstein, 2008). Validity is established by correlating the scores with a similar instrument or through expert method whereby after designing the instrument the researcher presents it to the experts for advice and necessary amendments was made to that effect.
In order to ensure validity of the instrument, the drafted questionnaire shall be given to supervisors and colleagues for critical assessment of each item. They will then be requested to state the relevance (R) of non-relevance (NR) of each item. The content validity index (CVI) will thus be computed using standardized measures so that appropriate adjustment is made. The CVI was generated from the formula below;
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CVI = Items rated relevant Total number of items on the questionnaire
For the instruments to be valid, the CVI should be within the acceptable statistical range of 0.5 to
1.
3.9.2 Reliability of data collection instruments
According to Carroll (2002), a test is reliable to the extent that whatever it measures, it measures it consistently. In respect to reliability, the data collection instruments was pretested on a small number of respondents from each category of the population to ensure accuracy and vanity of questions in line with each of the objective of the study. The reliability of the instrument will then be analyzed using Cronbach’s Alpha Coefficient with the help of SPSS computer program.
When the reliability coefficient, alpha is greater than 0.5 (α>0.5), it implies high level of reliability of instruments (Amin, 2005). It should be noted that the respondents who will participate in the pre-test exercise of the instruments will not be included in the final sample during data collection.
3.10 Data processing and analysis
Data processing is the collection and manipulation of items of data to produce meaningful information. After completion of questionnaires administration, they was edited for accuracy, consistency and completeness and then entered into Statistical Package for Social Sciences
(SPPS) version 21 for processing. Data analysis is a body of methods that help to describe facts, detect patterns, develop explanations and test hypotheses about a set data (Berkowitz, 1997).
Data was analyzed using SPPS in order to obtain mean, standard deviations, regression and correlation analysis to establish the relationship between Credit Risk Management and
Performance of Financial Institutions. Qualitative data was analyzed by comparing the findings and the descriptions with generalizations that already exist on the issues being investigated to
22 | P a g e establish whether they agree or not agree and giving possible explanations of the discrepancies before making deductions and implications of such findings to the study.
3.11 Measurement of variables
It has been observed that social science research involves the understanding of the relationship between variables that will determine causes (Kothari, 2004). By analyzing inferential statistics such as correlations and regressions, this study intends to investigate the relationship between credit risk management and performance of Housing Finance Bank.
Levels of measurement in the data collection tools will consider the use of the following;
The nominal scale was applied to variables that are mutually exclusive and exhaustive and where there is no order of category that may suggest one category to be better than the other. Such variables will include sex, marital status and area of residence.
The ordinal scale was used to order or rank categories to imply level of importance. Ordinal scale was applied to such variables such as education, position, and duration in the work place.
The interval scale applied to this study. Such variables suggest the use of equal interval settings or meaningful distance between ranks. Such variables include age range of respondents.
A 5-point liker scale was used in the study and encompasses all the above scales. This likert scale has the options of 1,2,3,4, and 5 which were used to measure various variables in this study. The range continuum of response categories included for the likert scale was:-
5 to mean strongly agree, 4 to mean agree, 3 to mean undecided, 2 to mean disagree and 1 to mean strongly disagree.
The five options given represent alternative strengths of answers to each question given by the various respondents.
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CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF RESEARCH FINDINGS
4.1 Introduction The purpose of the study was to examine the effect of credit Risk Management to the performance of financial institutions in Uganda with a focus on Housing Finance Bank.
4.2 Background information on the respondents.
4.2.1 Findings on the general characteristics of the respondents Table 4.1 showing sex of respondents
Response Frequency Percentage(%)
Male 14 70
Female 6 30
Total 20 100
Source; Primary data
The observation of the responses indicated that the percentage of male respondents was 70% while that of females was 30%.
4.2.2Findings on the academic level of the respondents
Table 4.2 showing the education levels.
Level Frequency Percentage
Diploma 3 15
Degree 13 65
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Masters and above 3 15
Others 1 5
Total 20 100
Source; Primary data.
From table 4.2, Respondents were found to be of a different academic background. Most of them were University graduates. Within this group, 15% were holding diplomas in business studies,65% were holding degrees from business institutes, masters degree and above were 15% and the rest of the respondents included 5%.This implied that most of the staff had the skills required for credit risk management and able to improve on service delivery, quality and financial performance of the bank..
4.3 CREDIT RISK MANAGEMENT
4.3.1 Finding whether the bank involves training in respect to credit risk management processes and techniques
Table 4.3 Showing whether there was any training taken in respect to credit risk management.
Response Frequency Percentage
Yes 6 30
No 14 70
Total 20 100
Source; primary data
From table 4.3, 30% of the respondents took trainings in respect to credit risk management, trainings like financial computing, risk management short courses and certificates ,CFA , and internal audit workshops with ICPAU, Housing Finance Bank bank seminars and workshops on risk management. Majority of the respondents with a percentage of 70 don’t have the additional
25 | P a g e necessary trainings of risk management but use their experience and on job trainings to manage risks.
4.3.2 Finding whether the Bank involves or uses credit risk management process and techniques in its operations.
Table 4.4 Showing the bank’s involvement of credit risk management process and techniques in its operations.
Response Frequency Percentage(%)
Yes 19 95
No 1 5
Total 20 100
Source; primary data
95% of the respondents responded positively on the question of whether the bank involves credit risk management techniques in its operations, while 5% think that the bank does not. The above response shows that the bank involves the credit risk management processes like evaluation of the risk .
4.3.3Findings on credit risk minimization Table 4.5 Showing credit risk minimization.
Response Frequency Percentage (%)
Strongly Agree 2 10
Agree 9 45
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Not Sure 9 45
Dis Agree NIL NIL
Total 20 100
Source; Primary data.
From table 4.5, 45% of the respondents are not sure and agree while 55% of the respondents agree and strongly agree that to some extent credit risk is minimized by reducing connected party lending, renegotiated exposure to related parties as well as reducing exposure to the economic sector. This is so because the banks aims at reducing defaults of clients and want always to be in a better position of recurring on its services.
However, the respondents in their opinion gave the factors that have hindered the credit risk minimization and they cited the following factor to include;
Failure to recognize early warning systems for potential loss and problems
Poor and inefficient allocation of resources, especially failing to fund credit risk
reduction ventures.
Poor information systems especially on potential consequences, there is a backward
thinking organization culture which hinders managers from identifying, measuring and
assessing the risk to the bank.
4.3.4 Findings on when the bank reminds a defaulting customer. Table 4.6 Showing when the bank reminds a defaulting customer
Respondent Frequency Percentage
Immediately 2 10
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Every month 4 20
Every after a month 12 60
Not at all 2 10
Total 20 100
Source; primary data.
10% of the respondents indicated that the bank reminds a defaulting customer immediately after the due date but the other 10% say that the bank does not remind the defaulting customer.20% indicated that every after a month while the 60% indicated that every after two month.
The large percentage of 60% reveal that the bank takes a long period to remind the customers and consequently this could be one of the reasons why the loan defaulters take long to pay back loan obligations. In this case, they find themselves in financial problems and fail to pay back loan obligations.,
Thus the level of failure of borrowers to honor debt obligations is still high and the bank has lost out on its finances.
4.3.5.Findings on the future banking and increase in customer base in line with effective credit risk management. Table 4.7 Showing the future banking and increase in customer base in line with effective risk management.
Response Frequency Percentage
Strongly Agree 5 25
Agree 13 65
Not Sure 2 10
Disagree NIL NIL
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Strongly Disagree NIL NIL
Total 20 100
Source; primary data.
From table 4.6. 90% of the respondents agreed and strongly agreed and only 10% are not sure that future banking and customer base will increase in line to effective credit risk management. This is so because customer switching will reduce if they are given secure services by Housing Finance Bank bank and as a result the future of banking will be promising and the customers will continue increasing with time.
4.4 THE FINANCIAL PERFORMANCE.
Findings indicated that 20% of the response showed that the bank has lost much due to fraud committed last year, 60% indicated that thebank has lost little and 20% indicated that the bank has lost non due to fraud.
Also, 75% indicated that above 20 customers failed to pay back loan obligatyions , 15% indicated that 11-20 while 10% indicated 1-10 customers who failed to payback loan obligations.
4.4.2 Response on how much the bank has lost due to fraud committed last year Table 4.10: Shows response on how much the bank has lost due to fraud committed last year
Response Frequency Percentage (%)
Much 4 20
Little 12 60
None 4 20
Total 20 100
Source; Primary data
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20% of the respondents were found to have indicated that the bank has lost much and non due to fraud committed last year and 60% indicated that the bank has lost little.
4.4.3 Responses on the number of customers who have failed to pay back loan obligations Table 4.11 shows the responses on the number of customers who have failed to pay back loan obligations.
Response Frequency Percentage (%)
I-10 2 10
11-20 3 15
Above 20 15 75
Total 20 100
Source; Primary data
75% of the respondents indicated that above 20 customers failed to pay back loan obligations on due time, 15% said that the number of customers who failed to honor their debt obligations to babk at due time were 11 to 20, while 10 % said that the number was 1 to 10 customers.
4.4.4 Findings on the hindrances to financial performance improvements When asked about the hindrances to financial performance improvement apart from credit risk management, respondents gave the following ideas;
Housing Finance Bank crashing ATMs tests customer’ patience which caused the services level and Housing Finance Bank lost a lot of clients as a result and this reduced the bank’s profits. The long lines made each day by customers while making transactions by either use of ATMs or counter trading has led some of the customers to shift from keeping their money on to the bank account to holding their money in cash form. Thus the bank has lost a great deal of customers and financial performance has decreased dramatically. Switching; many Ugandan switch from bank to bank and thus meaning that the profit margin can never be stable.
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CHAPTER FIVE
SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
5.1 Introduction This chapter gives the summary of the main findings, conclusions and recommendations that are in line with the study objectives and questions. The recommendations are related to the findings of this study but others were drawn from similar studies on credit risk management.
5.1.1 Summary of the main findings. Findings from the study indicated that the financial performance of Housing Finance Bank is very well seen to be highly attributed to the level of credit risk management carried out by the management of Housing Finance Bank bank, amidst internal and external factors like; sensitization and education, economic and political stability mention it. The general characteristics of the respondents gives a clear impression that credit risk management is at a fore front of the banks objectives. All the employees are equipped with the knowledge regarding financial performance improvement and credit risk reduction.
With that, 65% are university degree holders,20 % masters and above, and 15% hold diplomas.
The findings also reveal that the credit risk is mainly due to financing, lending and investment objectives as indicated by 90%of the respondents.
However, findings indicate that the the level of perfomance has been increasing though the respondents cited some other hinderences to financial performance improvement to include the following,
High level of non perfoming loans
ATMs tests customer’ patience which caused the services level and Housing Finance
Bank lost a lot of clients as a result and this reduced the bank’s profits.
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The long lines made each day by customers while making transactions by either use of
ATMs or counter trading has led some of the customers to shift from keeping their
money on to the bank account.
5.1.2 Credit risk management Findings indicated that 70% of the respondents did not agree that there is any training being carried out by the bank as far as credit risk management is concerned while the 30% agreed . Findings also indicate that the bank involves credit risk management techniques and procedures in its operations, as indicated by 95%of the respondents who agreed and the 5% did not agree.
Regarding credit risk minimisation, 45% of the respondents agreed that the bank has managed to curb credit risk while the 45% were not sure but the 10% strongly agreed on the issue.
However, respondents cited factors that have limited credit risk minimisation to include the following;
Failure to recognize early warning systems for potential loss and problems
Poor and inefficient allocation of resources, especially failing to fund credit risk reduction ventures Poor information systems especially on potential consequences, there is a backward thinking organization culture which hinders managers from identifying, measuring and assessing the risk to the bank. Findings show that the bank reminds the defaulting customers every after a month as indicated by 60% of the response .20% say that it does this every month and the 10% say that the bank reminds them immediately after the due date.
Also 90% of the respondents indicated that they agree that in the future the bank will be able to achieve effective effective credit risk management and to increase the customer base, but the 10% were not sure.
5.1.3 FINANCIAL PERFORMANCE The assessment of the financial perfomance indicated that there was an increase in the cash and balances at the central bank from 9.95% in 2009 to 19.60% in 2010, the results for the full year 2010 showed an increase in the profit from 6,978,720 before tax to 6,995,498 after tax in
2009.The profit remained static after and before the tax at 14,987,102 in 2010.
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Findings indicated that 20% of the response showed that the bank has lost much due to fraud committed last year, 60% indicated that thebank has lost little and 20% indicated that the bank has lost non due to fraud.
Also, 75% indicated that above 20 customers failed to pay back loan obligatyions , 15% indicated that 11-20 while 10% indicated 1-10 customers who failed to payback loan obligations.
However, financial performance improvement is still low at Housing Finance Bank bank and the respondents attributed this to ;
Crashing ATMS.
Poor banking methods employed by customers.
Concentration of loans to non productive projects.
5.1.4 CREDIT RISK MANAGEMENT AND FINANCIAL PERFORMANCE. Findings indicated that there is a very strong correlation (relationship) at 0.804 which is approximately 80.4% between credit risk management and financial performance out of a sample of 20 respondents.
The successful and good financial performance of Housing Finance Bank bank alongside credit risk management has helped and favored several branches of the bank in different regions and parts of Uganda, risk management has been instrumental to the commercial business of Housing Finance Bank bank and its survival in the competitive business environment at large, therefore inefficiency and unlimited delays in transactions especially loan distribution services among the big number of clients attended to has been eased.
Going deep into the future of credit risk management in relation to financial performance, top managers and employees indicated that the future of Housing Finance Bank bank is promising and that with effective credit risk management, financial performance will to a large extent increase.
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5.2 Conclusions. Financial perfomance will be seen to increase due to the strong correlation of 84% implying that the financial performance of Housing Finance Bank bank Uganda is greatly attributed to the effective credit risk management aspects carried out by the management and employees of the bank. The number of customers increased fundamentally due to the advent credit risk management forwarded and expertise.
Conclusively, therefore, credit risk management is a worthwhile venture to expertise and put in more resources to enhance and frame a better performance and generation of the banking sector, and other sectors of the economy which share the same strategies for their better beings and optimism.
5.3 RECOMMENDATIONS. Housing Finance Bank Bank should be able to train its staff on credit risk management so as to stimulate its financial performance.
Risk management short courses and seminars like; in financial computing and CFA, telephone banking, research and development frameworks, marketing facilities like sales promotions, advertisements and customer care, technological installations like advanced ATMcards,internet banking, posting and withdrawing charges, installation of toll free numbers for customers consultations and advices, feedback loops and interactive systems as well as mobile
The management should also look at the changes in risk management criteria and financial performance in the banking business.
It should also look at the costs incurred to acquire a good risk management framework,regulation and supervision of the reserve bank towards risk management in the financial sector.
Management should also address the employee’s knowledge,experience,capacity and seniority as far as service delivery are concerned to enhance good financial performance of Housing Finance Bank.
Therefore, managers and other financial experts should realize that credit risk management is not all that Housing Finance Bank bank needs to perform so well, but there are other factors that
34 | P a g e need to be considered and integrated with the risk management strategy to yield and ascertain the synergy of resource (profitability).
5.4.Areas for further Research. The following areas have not been addressed by this research report and are therefore open to any willing researcher for further studies about the financial system of Uganda.
The impact of information technology on the level of financial performance.
The impact of politics on the level of financial performance.
The impact of motivation on the financial performance of banks.
Risk management and the teasing laws of finance.
Risk management and motivation of banks.
Financial performance and electronic banking.
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REFERENCES
Khambata, Dara (1996), monde and finance in Africa
Christian Bluhm; Ludger over Beck, Christoph Wagner (1964), international banking and money markets
Dr. Devendra Jain in 2010, lecturer note of financial risk management (Treasury Management)
Okello, George, Candiya (1999), credit risk and financial sustainability of micro finance institutions in Uganda
Chattered institute of bankers, (1999) ed ‘lending study’ test London
Preagar (196 4), money and finance in Africa
International Banking and Money Markets (www. Bis.org/ Wikipedia, nov 2010)
Peter.S.Rose (1992) money and capital markets (the financial system in an increasingly
Chirwa, 2003, credit risk assessment and performance of micro finances (FINCA UGANDA ltd)
Pritaman, Shanek And Singal, 2003 credit risk management and finance management of banks,
Mark Hirschey (2000) managerial economics (revised edition) university of Kansas
Uganda commercial bank ‘credit manual 1995’
Bank of Uganda’s Mr. Leo Omolo and Mr. Kasekende
SEMUKONO FREDRICK (1996) MBA dissertation on role of credit risk management in the performance of Uganda Commercial Bank Rural farmes schemes.
John W. K & Melicher W. R (1982) 5 ED "Financial Management" Allyn & Bacpn Inc. Boston
Pandey I. M (1996) Financial Management Vikas Publishing house PUT India.
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Van Horne J.C and Wachwitch J.M (1992) ed "Fundamentals of Financial Management"
Prentice Hall of Indial Private Ltd
Chattered institute of bankers, (1999) ed ‘lending study’ test London
Preagar (196 4), money and finance in Africa
International Banking and Money Markets (www. Bis.org/ Wikipedia, nov 2010)
Peter.S.Rose (1992) money and capital markets (the financial system in an increasingly
Chirwa, 2003, credit risk assessment and performance of micro finances (FINCA UGANDA ltd)
Pritaman, Shanek And Singal, 2003 credit risk management and finance management of banks,
Mark Hirschey (2000) managerial economics (revised edition) university of Kansas
Uganda commercial bank ‘credit manual 1995’
Bank of Uganda’s Mr. Leo Omolo and Mr. Kasekende
SEMUKONO FREDRICK (1996) MBA dissertation on role of credit risk management in the performance of Uganda Commercial Bank Rural farmes schemes.
John W. K & Melicher W. R (1982) 5 ED "Financial Management" Allyn & Bacpn Inc. Boston
Pandey I. M (1996) Financial Management Vikas Publishing house PUT India.
Van Horne J.C and Wachwitch J.M (1992) ed "Fundamentals of Financial Management"
Prentice Hall of Indial Private Ltd.
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APPENDICES
APPENDIX I: QUESTIONNAIRE Dear respondent,
I am Balungi Damalie, a student of Makerere University carrying out research
On the effect of credit Risk Management to the performance of financial institutions in Uganda with a focus on Housing Finance Bank.to be submitted to the college of business and management sciences as a partial fulfillment of the requirements for the a ward of masters of arts in financial services of Makerere University. I request you to spare part of your valuable time and answer the questions below. This research is purely academic and maximum confidentiality is promised. Thank you very much for your assistance.
SECTION A: Background of the respondents
1. Name ………………………………………………………………………………………. 2. Sex: Male Female 3. Position held 4. Marital status: Married Single 5. Academic qualification: Degree Diploma P ro fessional Course
lf others specify…………………………………
6. For how long have you worked in this bank?
1-5 5-10 Above 10
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SECTION B: Credit Risk Management
1. Does your ban k involve any kind of training in respect to credit risk management? Yes No 2. Could the following processes and techniques be applicable as far as credit risk management is concerned?
Strongly Disagree Undecided Strongly Agree disagree agree
Identify and understand the risk Measurement and reporting of the credit risk. Implementing an effective credit risk management plan Credit Default Swamps CDS . 3. Has your bank tried to reduce credit or default risk?.
Strongly Disagree Undecided Strongly Agree disagree agree
4. Since credit risk is associated with default of borrowers, when do you remind a defaulting customer? Immediately Every month Avery after two months Not at all 5. Following effective credit risk management plan, the bank expects future banking and increase in customer base. To what extent do you agree? Strongly Disagree Undecided Strongly agree Agree disagree
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SECTION C: Financial performance
1. What is the current probability level of the bank?
High Moderate Low Not sure
2. How many customers do you think have failed to pay back loan obligations?
1-10 11-20 Above 20
3. In your opinion, how much has the bank lost due to fraud committed this year?
Much Little None
4. To increase financial performance of the bank, which measures have been put in place? Commonly used (CU), Used (U) Fairly used (FU) Not used (NU) No opinion (NO)
CU U FU NU NO Cost Reduction Risk Reduction Capital Adequacy
5. What do you think may hinder financial performance improvement, apart from credit risk? ……………………………………………………………………………………………… ………………………………………………………………………………
6. How do you think this problem can be improved upon to realize an increase in the financial performance of a bank? ……………………………………………………………………………………………… ……………………………………………………………………………………………… ………………………………………………………………………
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SECTION D
The relationship between credit risk management and financial performance of the bank 1. Credit risk management affects the financial performance of the bank
Strongly agree Agree Not sure Disagree Strongly agree
2. Credit risk management processes and techniques result into high profitability levels
Strongly agree Agree Not sure Disagree Strongly agree
3. To what extent has credit risk management affected the financial performance of your bank?
Great Less
4. To what extent should your bank respond to credit risk management so as to achieve a sound financial performance?
Great Less
5. What do you think will happen to the financial performance of your bank lf it pays a deaf ear on credit risk management? ………………………………………………………………………………………… ………………………………………………………………………………………… ………………………………………………………………………………………… …………………………………………………………………………………………
Thank you for your cooperation
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Appendix II: Table of Krejcie and Morgan for determining sample sizes for finite population
N S N S N S N S N S
10 10 100 80 280 162 800 260 2,800 338
15 14 110 86 290 165 850 265 3,000 341
20 19 120 92 300 169 900 269 3,500 346
25 24 130 97 320 175 950 274 4,000 351
30 28 140 103 340 181 1,000 278 4,500 354
35 32 150 108 360 186 1,100 285 5,000 357
40 36 160 113 380 191 1,200 291 6,000 361
45 40 170 118 400 196 1,300 297 7,000 364
50 44 180 123 420 201 1,400 302 8,000 367
55 48 190 127 440 205 1,500 306 9,000 368
60 52 200 132 460 210 1,600 310 10,000 370
65 56 210 136 480 214 1,700 313 15,000 375
70 59 220 140 500 217 1,800 317 20,000 377
75 63 230 144 550 226 1,900 320 30,000 379
80 66 240 148 600 234 2,000 322 40,000 380
85 70 250 152 650 242 2,200 327 50,000 381
90 73 260 155 700 248 2,400 331 75,000 382
95 76 270 159 750 254 2,600 335 100,000 384
(Source: Amin, 2005)
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