Credit Management and Loan Performance in Selected Commercial Banks in Bujumbura, Burundi

ABSTRACT

This study was aimed at determining the effect credit management on loan performance. The study was based on four specific objectives; to assess the effect of credit standards on loan performance in commercial banks, to determine the effect of implementation of credit policy on loan performance in commercial banks, to analyze how credit terms affect loan performance in commercial banks and to establish the effect of collection policies on loan performance in commercial banks in Burundi. A review of existing literature revealed that very few studies have been done on factors affecting credit management as many of the studies concentrated largely on non-financial loans and credit allocation yet it is through improved credit management that banks’ loan portfolios can enlarge and banks would meet their ultimate goal of stimulating growth and performance in the economy. Despite many researches it is quite clear that very little research studies has been done on factors affecting credit management as many of the researches concentrates largely on nonfinancial loans and credit allocation yet it is through improved credit management that banks would be able to expand their loan portfolios. The study aims to fill that knowledge gap. The study adopted a descriptive survey design, with the study population comprised of 58 employees of 3 selected commercial banks. Data was collected using questionnaires and was analyzed using descriptive and regression analysis to determine the effect of credit management on loan performance. The findings of the study revealed that the various components of credit management, that is credit standards (average mean 4.73 and standard deviation 0.68), credit policy (average mean 4.71 and standard deviation 0.63), credit terms (average mean 4.57 and standard deviation 0.57) and collection policy (average mean 4.63 and standard deviation 0.61), have a positive and significant effect on loan performance in commercial banks in Bujumbura, Burundi. The study concluded that having objective and appropriate parameters for credit standard, enabling banks to adequately assess the credit records, and clear guidelines in the processing and issuance of loans and monitoring their repayment schedules has a direct bearing on the levels of default and repayment. It was also concluded that the policy on loan repayment collections is another key determinant of loan performance, where the rate of asset recovery and transfer of loans is directed related to the level of losses from loan default. The study recommended that Commercial banks should consider having in place effective credit standards, credit policy, credit terms and collection policies or procedures as mechanisms to guide their business, since the effectiveness of credit management is important to the successful management of banking institutions; that Commercial banks should operate their credit businesses based strictly on established lending guidelines that clearly outline the business growth priorities of the senior management, as well as the conditions to satisfy in order to qualify for loan approval; and that there should be prior customer evaluation before loans are granted, and a continuous process of assessment before and during the course of loan repayment. This study’s contribution to knowledge is its ability to add to the body of existing knowledge on financial and credit management discipline and bridging xi gaps in credit management research as a whole, by informing policy makers and managers of the best practices in appraising their credit policies and to review their operations critically for more result oriented approaches in the dealing with credit facilities.

TABLE OF CONTENTS

DECLARATION....................................................................................................................i

APPROVAL ..........................................................................................................................ii

DEDICATION......................................................................................................................iii

ACKNOWLEDGEMENT....................................................................................................iv

TABLE OF CONTENTS ......................................................................................................v

LIST OF ACRONYMS ......................................................................................................viii

LIST OF TABLES................................................................................................................ix

ABSTRACT ..........................................................................................................................x

CHAPTER ONE..................................................................................................................1

INTRODUCTION ...............................................................................................................1

1.0 Introduction......................................................................................................................1

1.1 Background to the Study .................................................................................................1

1.1.1 Historical perspective ...................................................................................................1

1.1.2 Theoretical perspective.................................................................................................4

1.1.3 Conceptual perspective.................................................................................................5

1.1.4 Contextual Perspective .................................................................................................8

1.2 Problem Statement...........................................................................................................9

1.3 Purpose of the Study........................................................................................................9

1.4 Specific Objectives........................................................................................................11

1.5 Research Questions........................................................................................................11

1.6 Hypotheses.....................................................................................................................12

1.6 Scope of the study..........................................................................................................12

1.6.1 Geographical Scope ....................................................................................................12

1.6.2 Content scope..............................................................................................................12

1.6.3 Theoretical Scope .......................................................................................................12

1.6.4 Time Scope .................................................................................................................13

1.7 Significance of the study ...............................................................................................13

1.8 Operational Definition of Key Terms............................................................................14

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CHAPTER TWO...............................................................................................................15

LITERATURE REVIEW .................................................................................................15

2.0 Introduction....................................................................................................................15

2.1 Theoretical Review........................................................................................................15

2.1.1 Modern Portfolio Theory............................................................................................15

2.1.2 Capital Asset Pricing Model (CAPM)........................................................................19

2.2 Conceptual Review........................................................................................................20

2.3 Related Literature ..........................................................................................................21

2.3.1 The effect of credit standards on loan performance ...................................................21

2.3.2 The effect of credit policy on loan performance ........................................................24

2.3.3 The effect of credit terms on loan performance..........................................................26

2.3.4 The effect of collection policy on loan performance..................................................28

2.4 Empirical Review ..........................................................................................................29

2.5 Summary and Gaps........................................................................................................33

CHAPTER THREE...........................................................................................................35

METHODOLOGY ............................................................................................................35

3.0 Introduction....................................................................................................................35

3.1 Research Design ............................................................................................................35

3.2 Research population.......................................................................................................35

3.3 Sample size ....................................................................................................................35

3.4 Sampling Procedure.......................................................................................................35

3.5 Research Instruments.....................................................................................................36

3.5.1 Questionnaires ............................................................................................................36

3.6 Validity and reliability of instruments...........................................................................36

3.7 Data Gathering Procedure..............................................................................................37

3.7.1 Before data gathering..................................................................................................37

3.7.2 During data gathering .................................................................................................38

3.7.3 After data gathering ....................................................................................................38

3.8 Data Analysis.................................................................................................................38

3.9 Ethical Consideration.....................................................................................................39

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CHAPTER FOUR .............................................................................................................41

PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS...............41

4.1 Introduction....................................................................................................................41

4.2 Demographic Characteristics of Respondents...............................................................41

4.3 Credit standards and loan performance .........................................................................43

4.4 Credit policy and loan performance ..............................................................................45

4.5 Credit terms and loan performance................................................................................46

4.6 Collection policy and loan performance........................................................................47

4.7 Regression Analysis.......................................................................................................48

CHAPTER FIVE ...............................................................................................................51

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS........51

5.1 Introduction....................................................................................................................51

5.2 Summary of Findings ....................................................................................................51

5.3 Conclusions of the Study...............................................................................................55

5.4 Recommendations..........................................................................................................56

5.5 Suggestions for further Research...................................................................................57

REFERENCES. .................................................................................................................58

APPENDIX I .......................................................................................................................64

Questionnaire.......................................................................................................................64

APPENDIX II......................................................................................................................69

Introduction Letter...............................................................................................................69