The Effect of Credit Management on Loan Performance in Maendeleo Bank Ltd, Tanzania

Abstract

Loan performance is a fundamental concern for banks and overall health of the economy. Loan performance is directly linked to the profitability of banking industry and macroeconomic indicators of GDP and employment rate. Loan nonperformance is a huge concern and can lead to bank failure and exacerbate unemployment levels in the economy. In Tanzania, the standard NPL ratio set by the authority is 5% however, the average NPL ratio for 2022 was at 7.75%. Loan non-performance is often associated with borrower factors however, this research set out to explore effect of bank’s factors on loan performance. The purpose of this study was to explore the effect of credit management on loan performance in Maendeleo bank. The study aimed at examining the effect of the credit policy, credit collection policy, and credit risk control on Maendeleo bank loan performance. Information asymmetry theory, 5C of credit model and theory of performance guided the study. A descriptive research design approach was used. The study population consisted of 56 banking staff of Maendeleo bank. The study sampled 33 staff from the finance and credit department. Data was collected by use of questionnaires. Content validity was estimated by incorporating the views of content experts consisting of two lecturers from Africa Nazarene University. Cronbach’s alpha for internal consistency was used to test reliability. The analysis of data was done with the use of Microsoft Excel and SPSS. Collected data was run for statistical analysis such as frequencies and percentages as well as regression model which was used to assess the relationship between variables. The hypotheses were tested at 95% confidence level using regression analysis. The findings indicate that; credit policy has a significant positive effect (β1 = 0.536, t = 3.559, p < 0.05) on loan performance, collection policy has a significant positive effect (β2 = 0.484, t = 2.758, p < 0.05) on loan performance, and credit risk control has an insignificant negative effect (β2= -0.274, t= -0.923, p= 0.368>0.05) on loan performance. It was concluded that credit policy and collection policy have a significant effect on loan performance. This study recommends that bank put more emphasis on credit management as it explains almost fifty percent of loan performance. Further, to attain good loan performance levels, much caution should be taken during borrower onboarding as credit risk control measures taken after onboarding a high-risk borrowers will result to a negative but insignificant change. The findings of this study may assist banking and government policy makers to formulate better policies concerning credit management in financial institution across the country.