Credit Risk Management and Financial Performance of Savings and Credit Cooperatives in Bushenyi District.

International Journal of Research and Innovation in Social Science (IJRISS) | Volume VI, Issue I, January 2022 | ISSN 2454–6186

Credit Risk Management and Financial Performance of Savings and Credit Cooperatives in Bushenyi District.

Elias Mugooha*, Dr. Mohammad Ssendagi
School of Graduate Studies and Research, Team University, Plot 446, Kabaka Ajagara.rd, Kampala-Uganda
*Corresponding Author

ABSTRACT:- The study investigated the relationship between credit risk management and the financial performance of SACCOs in Bushenyi District. Specifically, the study examined the relationship between credit risk identification and financial performance, established the relationship between credit risk assessment and financial performance, investigated the relationship between credit monitoring and financial performance of SACCOs in Bushenyi District and investigated the moderating influence of management structure. A cross sectional case study design which was both quantitative and qualitative in approach was used to study a sample of 86 respondents who were purposively and systematically selected. This sample was arrived at using Krejcie & Morgan (1970) Table for sample size determination. Data was collected using self-administered structured questionnaire, interview guide and documentary review. Quantitative data were analyzed using descriptive and inferential statistics in SPSS (21.0 version) while qualitative data was thematically integrated into quantitative results after content analysis. Generally, the study established a positive significant relationship (r=0.633, p<0.01) between credit risk management and the financial performance of SACCOs. Specifically, the study established a negative significant correlation (r=-0.492, p<0.01) between credit risk identification and the financial performance of SACCOs, a positive significant correlation (r=0.245, p<0.05) between credit risk assessment and the financial performance of SACCOs and a positive significant correlation (r=0.245, p<0.01) between credit risk monitoring and the financial performance of SACCOs. It was concluded that improving on credit risk management would significantly improve on the financial performance of SACCOs in Bushenyi District. The researcher recommended that credit risk assessment and credit risk monitoring be improved in order to improve the financial performance of SACCOs while credit risk identification process be overhauled in order to eliminate its negative contribution. It was further recommended that the oversight role of management should be aligned with specific areas of risk management such as consumer or commercial loans risk for it has a significant contribution on the financial performance of these institutions,

Keywords: credit risk management, credit risk identification, credit risk assessment, credit monitoring and financial performance.

INTRODUCTION

1.1 Background to the study

The growth in management of credit risk is among the most significant developments in commercial banking in the past 20 years. These developments hold the potential to permanently reduce the risk profile and improve the financial performance of commercial banks (Berger & Udell, 2003). Ultimately, credit management policy grew out of the need to improve the financial performance of the large corporate loan portfolios in lending institutions. It is however, paradoxical that credit risk management among portfolios is still the biggest problem hindering the financial performance of most lending institutions and Savings and Credit Cooperatives (SACCOs) in particular leading to their ultimate failure (Fallon, 2016). There is therefore need for further research to explore the relationship between credit risk management and financial performance of SACCOs.
This study undertook the Harry Markowitz’s portfolio theory as propounded in 1950s which states that the selection of portfolios will maximize the expected returns consistent with the acceptable levels of risk (Brealey, Myers & Allen, 2008). The theory provides a framework for specifying and measuring investment risk and to develop relationship between risk and expected returns. Its main basic assumption is that investors often want to maximize returns from their investments for a given level of risk. The full spectrum of investments must be considered because the returns from all these investments interact hence the relationship between the returns for assets in the portfolio is important (Reilly & Brown, 2011). In the context of this study, the theory suggests that SACCOs should give credit portfolios that will maximize returns at the acceptable levels of credit risk that will not lead to their failure. Hence the theory suggests that the financial failure of SACCOs is attributed to high credit risk which reduces the rate of returns on the portfolio.
Credit risk is defined as the potential that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms (Brealey, et al., 2008). Relatively, the Basel Committee on Banking Supervision (2003) defines credit risk as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. According to the Basel Committee on Bank Supervision (2006), credit risk is most prominent in financial institutions and its effect on the financial performance of these institutions is more significant as compared to other risks as it directly threatens its solvency. While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of credit risk continue to be directly related to laxity in its management and particularly setting credit standards for borrowers, setting credit terms and collection policy (Basel Committee on Bank Supervision, 2003).

Read More