Nshala, Ambrose Ntangeki
(2017)
The Effect of Credit Risk Management on the Financial Performance of Commercial Banks in Tanzania.
Masters thesis, The Open University of Tanzania.
Abstract
The purpose of this study was to determine the effect of credit risk management on the profitability of commercial banks in Tanzania. Secondary panel data was collected from published financial statements of a sample of 19 commercial banks covering a period of 11 years, from 2005 to 2015 and used for the analysis. Financial profitability of the banks was proxied by Return on both assets and equity ratios.Independent variables included, nonperforming loan ratio, capital adequacy ratio,total loans to total deposits ratio and loan loss provision to nonperforming loan ratio.Panel data regression analysis were used to run the estimation model, specifically pooled regression model. Results reveal that there was a significant negative relationship between the NPL/TL ratio and ROE. Also, there was a significant negative relationship between the LLP/NPL ratio with both ROE and ROA. It was also revealed that CAR had an insignificant positive relationship with ROE but significant positive relationship with ROA. However, TL/TD ratio had negative but insignificant relationship with both ROE and ROA. It is concluded that increasing nonperforming loans relative to total loans reduces the profitability of a bank or financial institution and so is increasing loan loss provisions relative to nonperforming loans. Therefore, management and all stakeholders are required to put in place a robust credit risk management structure that will strengthen the loan assessment process so as to minimize possibility of issuing potentially bad loans. Furthermore, management should put in place an effective credit portfolio management mechanism so as to effectively follow up on all issued credit facilities so as they do not turn bad.
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