The effect of nonperforming loans on financial institutions in Uganda: a case of FINCA Uganda Limited
Abstract
This research investigated the effect of nonperforming loans on financial institutions in Uganda with reference to FINCA Uganda limited. The study focused on assessing the level of Non-Performing Loans at FINCA Uganda limited, establishing a trend in the Capital Adequacy Ratio of FINCA Uganda Limited, to analyze the level of impairment on loans and advances at FINCA Uganda Limited and to assess strategies for improving loan performance at FINCA Uganda limited. To achieve these objectives, the study employed a correlational and descriptive research design with a quantitative approach that entailed the collection of numerical secondary data from FINCA Uganda Financial reports from 2011 to 2023. Data was analyzed using the statistical package for social science (SSPS Version 27). The study found that Non-Performing Loans (NPL) at FINCA Uganda exhibit significant variation, with rates ranging from 13.28% to a concerning 38% in 2020, and an average of 13.78% accompanied by a standard deviation of 8.505%. This volatility highlights challenges in maintaining loan quality and indicates a pressing need for improved risk management strategies. In terms of the Capital Adequacy Ratio, the average stands at 28.46%, fluctuating between 20.00% and 41.03%. While this suggests a generally strong capital base, the variations underscore periods of lower capital adequacy, necessitating ongoing efforts to stabilize the ratio and ensure regulatory compliance. Lastly, the average impairment on loans and advances is 5,511,789.62, with a small standard deviation, indicating stability despite fluctuations in non-performing loans. Effective management of impairment levels is crucial for maintaining the integrity of the loan portfolio and protecting depositors and shareholders’ funds. Therefore, strengthening credit risk assessment processes by adopting innovative evaluation methods and data analytics to better predict borrowers' repayment capabilities, thereby reducing default rates. Periodic stress testing is also advised to identify potential vulnerabilities in the loan portfolio under various economic scenarios. Additionally, improving loan monitoring and collection practices through proactive tracking of key performance indicators and flexible repayment options can help mitigate defaults and enhance recovery rates. Optimizing capital management by maintaining sufficient capital buffers and diversifying funding sources is crucial for weathering economic downturns. The study emphasizes the importance of regularly reviewing impairment provisions to ascertain the health of the Loan portfolio, promoting transparency and accurate reporting of financial assets.