Analysis of non-performing loans in commercial banks in Uganda: a case study of Eco-bank Uganda Limited.

Abstract

The purpose of the study was to analyze Non-Performing Loans in Ugandan Commercial Banks using Eco-Bank Uganda Limited as a case study. The study focused on identifying causes of Non-performing loans in Ugandan Commercial Banks, establishing impact of Non-performing loans on the financial performance of these Banks as well as recommending appropriate strategies to improve the loan performance at Eco-Bank Other Commercial Banks.

The study adopted a descriptive survey research design and used both quantitative and qualitative approaches. The study population was the 51 staff who were working at the three (3) branches of of Entebbe Road, Head Office and Kikuubo Branch. Further, the study targeted 17 staff from each of three (3) Eco-Bank branches. Out of the 51 staff, 42 staff were sampled and 14 from each of the 3 branches. All the 14 respondents from each of the 3 branches were reached out by self-administered questionnaires. The study adopted purposive sampling to select all the key informants. Primary data was collected directly through questionnaires. Quantitative data was analyzed using SPSS version 22.

The study established that the major causes of non-performing loans at are, high repayment interest rates, unfavorable macroeconomic environment in the country, weak lending policies, lack of collateral security to back up the loan in case of default, adverse effects of COVID’19 and stiff competition more so from mobile money services. The outstanding appropriate strategies to improve on the performance of loans in Commercial banks included; proper monitoring and supervision of loan beneficiaries to avoid loan diversion, frequent performance of due diligence during loan appraisal and obtaining of proper information on customers concerning their loan repayment ability, thorough vetting of applicants before loan disbursement, Banks making clear and effective credit policies and procedures and regularly review them, Collateral and guarantees should be considered as credit risk reduction strategies as well as strengthening and monitoring monitory policies by BOU. The study concludes that the importance of monitoring the level of Non-Performing Loans (NPLs) in a Commercial Bank like Eco-Bank cannot be over-emphasized as NPLs has had a negative impact on the financial performance of many commercial banks globally. Therefore, Commercial banks should prioritize a risk management approach that is holistic, all- encompassing, and embedded across the business to ensure a resilient foundation that reduces rising levels of Non-performing loans in the long term. Basing on the findings, the study suggested more recommendations that can help in improving loan performance of Eco-Bank and other Commercial Banks and these included; regular monitoring of loan performance by clients, assessing which sectors/clients are most at risk of defaulting and re-examine loan loss provisions under different economic scenarios and performing rigorous credit loss assessments to assist in better risk assessment and pricing of their credifacilities.