The Effect of Credit Risk Management on Profitability - The Case of United Bank S.C.
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Date
2019-06
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Addis Ababa University
Abstract
The overall objective of the study was to establish the effect of credit risk management on profitability - the Case of United Bank S.C. Specific objectives were to; to establish the effects of client appraisal, credit risk control, collection policy and terms of credit on profitability practice of United Bank S.C.A descriptive case-study and explanatory research method was adopted. 112 management level employees were the targeted population. The respondents used in the study were selected using the method of stratified sampling. The sample size was 88 respondents. Questionnaires were used in the study for collection of primary type information. Secondary data was used and was collected from financial reports and the internet. Collected data was analysed using descriptive statistics.It revealed that Client appraisal significantly and positively relate with profitability practice of private commercial banks; Credit risk control and profitability United Bank S.Care significantly and positively related; Collection policy and profitability practice of United Bank S.Chad significant and positive relation; Terms of credit and profitability United Bank S.C had significant and positive association. Recommendation of the study is for united banks to improve methods of appraising clients to avoid clients who are not worthy of credit who might lead to delinquency of loans. The result will improve performance by having loan repayment and loan portfolios performing positively. It is therefore recommended that United Bank S.C need to improve the way they deal with risk accruing from credit through improvement of credit risk control; this can be done by having databases that assesses profiles of creditors both current and prospective and guarantors which private commercial banks can share amongst themselves to lower levels of NPLs and therefore improving the performance of the banking institutions. The bank need to involve clients greatly in coming up with terms of credit, since they’re individuals directly involved and understand better on what terms should be applied. Entities responsible for creation of policies need to come up with prudential guides that are effective and policies that will strengthen management of risks. The bank need to embrace stringent credit policies that help them develop a lasting association with clients, come up with information and requirements of the client. This will help in development of distinct strategies in the context of granting of credit, credit terms and client service that enable growth of sales. Management of the bank should consider formulating a universal credit policy document that will be adopted by all banks from which rating of their financial performance through credit risk management can be measured and regulated. Also stringent policies should always be useful in regulating the whole process of loan application, loan appraisal issue and loan repayment.
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Keywords
Credit risk, Credit risk management, Collection policy, Terms of credit