Credit risk management and financial performance of commercial banks in Uganda (2013-2017)

Abstract

The main purpose of the research is to examine the relationship between credit risk management and financial performance of commercial banks in Uganda for a period 2013-2017 using panel data for a sample of 22 commercial banks. In the research model, Return on Asset and Return on Equity are defined as proxies of financial performance while Non-performing loans, Capital Adequacy and Loan loss provisions are defined as proxies of credit risk management. Bank size was employed as a control variable in the model. The target population of the study was 24 licensed commercial banks which were in operation in Uganda by 31st December, 2017. The study purposively selected sample size of 22 commercial banks in Uganda which were in operation from 2013 to 2017. The study used secondary data from the financial statements and annual reports which were sourced from the individual bank websites, Newspapers and Bank of Uganda. The 22 commercial banks were categorized into three groups namely; large, medium and small sized respectively. The study employs descriptive statistics, correlation and regression analysis using random effects approach. Regression models are to estimate the magnitude of significance of credit risk management on the performance of commercial banks in Uganda. The findings revealed that credit risk management has a positive relationship with financial performance of commercial banks. Between the three proxies of credit risk management, NPLR has an insignificant negative relationship with both ROE and ROA, CAR has a significant positive relationship with both ROE and ROA while LLPR has a significant negative relationship with both ROA and ROE. Bank size has a positive significant relationship with both ROA and ROE. Large banks had the highest average returns in terms of both ROA and ROE. Medium sized banks had the second highest Return on Equity but with the least Return on Assets while small banks registered the second highest ROA and the lowest ROE of the three groups. The results further revealed that bank size has a significant control effect on the relationship between credit risk management and financial performance of Commercial banks. Thus, given such results, the researcher recommends that banks need to enhance their credit risk management. Unpopular lending methods to most customers, should be abolished. The institutions need to invest more in research to discover new and innovative customer-friendly lending techniques to increase the number of less labour loan portfolios in order to lower default rates, reduce costs and increase earnings. And finally Bank of Uganda should set uniform policies for all licensed commercial banks in regard to educating clients before their engagement with the lender.