1.0 introduction 1.1 background of the study · so the aim of cash management is to maintain...
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1.0 INTRODUCTION
This chapter presents the background of the study, statement of the problem, Purpose of
the study, objectives of the study, scope of the study and significance of the study.
1.1 Background of the study
The growth of various banking and micro finance institutions has largely contributed to
an increasing lending to borrowers. It is vital to note that, today’s economic growth poses
a big challenge to lenders to predict borrowers’ performance in recessionary conditions.
Macquarie [1995] defined funds management as the way company’s funds such as
investment funds and service funds are put into proper use. He explained that financial
institutions should ensure that optimal funds are properly and effectively used in order for
an institution to avoid cash deficit. He again mentioned that the task of funds
management are to budget all revenues and expenditure for individual responsibility
areas, monitor future funds movement in light of the budget available and to prevent
budget overruns. Schall & Hally (1980) defined Funds management as the process of
managing balance sheet and off-balance sheet instruments to maximize and maintain the
spread between interests earned and paid. He said that funds management indicators
include cash and currency, service funds, investment funds and liquidity funds
Loan assessment was defined by Pandy (1995) as procedures, guidelines laid down for
granting a loan to individual and collecting individual account. Different financial
institutions in Uganda use various loan assessments indicators such as credit score and
loan screening. Loan screening is met to ensure that the loan is advanced to capable and
right customers such that the bank avoids loses from debtors who might fail to refund
back the money borrowed. Pandy[1995] also explained that banks and micro finance
institutions often rely on information from screened loan applicants to judge whether they
can issue a loan to the customer or not. Also financial institutions monitor borrowers
through repeated interaction with their clients to ensure that the loan advanced to them
used according to the loan covenant between the bank and the customer to ensure its
efficiency this normally applies to the subsequent borrowers than the new entrants since
it requires ample time to determine the true credit worthiness of individual borrowers
In the bid to improve on the nature of loan assessment system, Centenary Bank managers
are faced with the problems such as bad debts were by many clients fail to repay back the
loan, Administrative costs which is concerned with paper work and also a challenge of
constant record keeping (Tayebwa, 1992).Managers also face problem associated with
funds management such as planning and monitoring program, control and measure of
results (Macquarie, 1995).
Centenary Bank managers are taking measures to improve on the problem of bad debts, it
is assessing credit worthiness of loan applicants, and banks usually refer to their past
experience with similar borrowers in similar markets (McKenzie, 2000).This may imply
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that, when a bank expands into a new market, the negative effects of lack of expertise
may overcome the benefits from risk diversification. He went further and said that there
is a need to establish strict internal guidelines, which ensures that loans are based on
sound credit analysis if the banks are to realize significant profitability. Despite of the
above measures, Centenary Bank still face a problem of bad debts and also loan recovery
is still low.Hower ever if the problem is not sloved,profitability of the bank will be low
due bad debts and also will fail to meet its cardinal objectives.
1.2 Statement of the problem
Centenary Bank is faced with the problem of bad debts, administrative costs Krugman,
(1990).
In the bid to improve on its loan assessment system., the bank through its enormous
efforts has tried to improve on the nature of loan assessment and to prevent bad debts fro
accumulating by ensuring that they establish strict internal guidelines which ensure that
the loan is based on a sound credit analysis and also to establish a long term customer
relationship between the bank and its customers. This has been done to enable the bank
acquire some considerable valuable information which can be used to assess if the
borrower is eligible for a loan. The problem has not been rectified because bad debts still
exist and there is low loan recovery. The probable cause is that at times banks charge
high interest rates on the loans, which the borrowers at times fail to pay in time or not
able to pay at all. If the problem continues the efficiency of the system will be affected
which may cause loss to the bank.
1.3 Purpose of the study
The study is to establish the relationship between funds management and loan assessment
system for centenary bank
1.4 Objectives of the study
i. To examine the nature of loan assessment systems in Centenary Bank.
ii. To assess the fund management policies in centenary bank
iii. To establish the relationship between funds management and loan assessment
system for financial institutions in Uganda
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1.5 Research Question
i. What is the nature of loan assessment system put in place in centenary
bank?
ii. What are fund management policies are used in centenary bank?
iii. What is the relationship between funds management and loan assessment
system in centenary bank?
1.6 Scope of the study
Geographical scope
The study was carried out at Centenary Bank headquarters at Entebbe road and its
branches at Entebbe road, Namirembe road, Nakivubo road, Speke road in Kampala.
Other Financial institutions like DFCU at Kimathi Avenue, and Stanbic bank Jinja road
will also be visited so as to enable the researcher meet the first objective.
Subject scope
The study focused on funds management and loan assessment system and also analyzing
a loan assessment system as an enabling tool in the decision making process by studying
the bank’s existing system and coming up with a design of a more efficient and reliable
system.
Significance of the study
The study tries to assist centenary bank to improve on its loan assessment policies.
This will result into maximizing profits and reducing loan losses that are met whenever
credit is extended.
i. The study will also be useful to other researchers who are interested in carrying
out study on the same subject.
ii. Centenary bank, a private bank, by improving on its funds management policy
and loan assessment policies, it can maximize profits, and this will be of
importance to the share holders and who maintain deposits with the bank
iii. The study will expose the inherent situations of loan assessment systems in the
financial institutions and thus is an eye opener to such institutions.
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iv. The study will point out the intensity of the loopholes within the loan
assessment systems in Uganda’s financial institutions thus assisting the key
stakeholders to design the appropriate policies and measures towards addressing
the problem.
v. The study will come up with an alternative design regarding loan assessment in
Centenary Bank and this is expected to improve on the quality of the systems
and the bank will benefit.
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CHAPTER TWO
2.0 LITERATURE REVIEW
In this chapter Studies was carried out on various banking institutions worldwide and
Uganda in particular. The main objective is to assess the funds management policies and
examine the nature of loan assessment system in financial institution in Uganda. . It will
be carefully selected from published journals on internet, textbooks and other written
down by different researcher and writers.
2.1FUNDS MANGEMENT
Definition of funds management
Macquarie,( 1998) defined Funds management as the way company’s funds such as
investment funds, service funds, liquidity funds, cash and currency are put into proper
use. He said that large proportion of funds are placed directly or indirectly on government
paper and the reminder lent on overdraft on the basis of general appraisal of the credit
worthiness of customer
2.2 Funds management policies
Macquarie (1995) explained below the comprehensive funds management policies used
by financial institutions and these are,
Funds management committee
Establish a Funds Management Committee to meet at least monthly. The policy should
define the responsibilities of the committee, how the committee will obtain input from the
Board and how the committee results will be reported back to the Board.
The responsibilities of the Board should include the determination of how to best allocate
the bank's available funding sources among various asset categories after reviewing.
Loan pricing
Provide a method of loan pricing, which would include cost of funds, overhead and
administrative costs, and desired profits. Determine when to use fixed rates and when to
use floating rates.
Investment mix
In conjunction with the bank's Investment Policy, determine which types of investments
are permitted, determine the desired mix among those investments, and determine the
maturity distribution
Record keeping
Define and establish record keeping systems to track the volume of rate-sensitive assets
and rate-sensitive liabilities. Rate-sensitive assets and liabilities are generally defined as
those that either mature or can be reprised during a specified time period (90 days, 180
days, 1 year).
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Rate sensitive
Recognize the need to offset volumes and maturities of rate-sensitive liabilities with
equal or similar amounts of quality assets, which mature or can be rate-adjusted at about
the same time. Along these lines, a range of acceptable ratios for rate-sensitive assets to
rate-sensitive liabilities should be made a part of the policy to protect the bank against
excessive interest rate risk and ensure that an adequate net interest margin is maintained.
2.3 Funds management variables
According to Walter and Meigs ([1984) said below are different forms of funds managed
by financial institutions and among these include,
Cash and currency management
Liquidity management
Service management
Investment management
2.3.1 Cash management
Walter (1984) said that cash management efficiency include measures that do;
Prevent losses from fraud or safety.
Prevent unnecessary large amounts of cash from being held idle in bank account which
produce no revenue.
Provided accurate accounting for cash receipts, cash payment and cash balances.
An obvious aim of the firms now days is to manage its cash affairs in such a way as to
keep cash balance at a minimum level and to invest the surplus cash funds in profitable
opportunities. Pandy, (1997) further states that cash flows accurately particularly the
inflows and that is perfect coincidence between inflows and out flows.
So the aim of cash management is to maintain control over cash position to keep the
organization sufficiently and use excess cash in some profitable manner.
Cash management is impotent because of the following objectives;
No payment are made which should be paid
All receipts and payment are promptly and accurately recorded
All sums re received and subsequently recorded
Thomas Fachaber detected the possible negative effect if the organization does not use
cash management effectively which is the disaster that comes s a result of failure to
devote time and attention to critical management jobs
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Again a Fachaber said, effective cash management involves not only establishing
preparation of cash budget which must be integrated with operating flows and balance
sheet’
2.3.2 Cash planning
Cash planning are techniques used to plan and control the use of cash. The techniques are
used protect the financial conditions of an organization by developing a projected cash
statement from a fore cast of expected cash inflows and out flows for a given period.
The forecast may be based on the present operations of anticipated future operations, so
cash plans are crucial in developing the over all operations of the financial institution.
Mnohsin (1980), said the planning of cash involves the formation of cash policies
resulting from normal and abnormal cash requirement. The normal cash requirement
operations and include cash per items new material, salaries and wages
The abnormal cash requirements are these which cannot be anticipated in the routine of
the business process which are replaced for reasons resulting from price deadlines and
interruption of cash flows into reduced receipts corresponding reduction in cash
disbursement. So cash inflows and out flows should be planned to project cash surplus or
deficit for each of the planning period and purpose are cash forecasting and budgeting.
Rao (1994), observed that cash budget help the organization to find out what is
happening to the funds it’s obtaining and in advance for supplementing the resource if
needed The financial institutions have greater confidence for granting a loan if a realistic
objective of how the borrower plans to repay the loan presented to them in a way of cash
budgeting so it is useful to budget the cash thus being a medium of payment.
However, Pandy (1998) suggests that a cash budget is a summary of the firms expected
cash inflow and out flow over a projected period of time.
Cash forecasts help in determining the cash requirements for a predetermined period to
run the organization. If cash requirements are not determined, it would not be possible for
the management to know how much cash balance to keep in hand, what financing is
depended upon and whether surplus funds would be available to invest in Market
securities. To know the operating cash requirements, cash flows projections have to be
made by an organization as to reduce the mismatch between cash inflow and out flow.
The researcher will agree with all other researchers on cash planning as a prerequisite of
cash management, because the information helps, the financial manager to determine the
future cash needs of the organization, plan for the financing of there needs and exercise
control over the cash liquidity of the organization. Some cash budget is the most
significant device to plan for and control cash receipts and payment.
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2.3.3 Cash management controls
The control of cash is of paramount importance with the objective of ensuring that all
sums are received and subsequently accounted for the cash is paid with out properly
authorized invoices. All receipts and payments are properly collected, promptly and
accurately recorded and banked .its preferable that as far as possible, all transactions are
conducted by means of cheques or bank transfers, since controls over cheques payments
are easier to establish and maintain
Cash controls are established by management of an organization to ensure business is
carried out in an efficient and effectiveness manner, current assets are safe guard
against misuse and fraud by employees and accounting records are written in an accurate
and complete manner.
Internal controls are considered important for cash management because the volume of
transactions flowing through cash account is the greatest. Furthermore, cash management
is very susceptible to defalcation given the fact that cash is the most liquid assets.
Management is met to ensure the amount shown as cash in the financial statements
constitute of all cash on hand, cash in bank, in transit and all the cash owned by a
company is written and has not been misappropriated Meigs (1984).
2.4 Investment management
Investment management is the professional management of various securities such as
shares, bonds and assets like real estate. in order to meet specified investment goals for
the benefit of the investors. Investors may be institutions (insurance companies, pension
funds, corporations, charities, educational establishments etc.) or private investors (both
directly via investment contracts and more commonly via collective investment schemes
e.g. mutual funds or exchange-traded funds).
The term asset management is often used to refer to the investment management of
collective investments, (not necessarily) while the more generic fund management may
refer to all forms of institutional investment as well as investment management for
private investors. Investment managers who specialize in advisory or discretionary
management on behalf of (normally wealthy) private investors may often refer to their
services as wealth management or portfolio management often within the context of so-
called "private banking".
The provision of investment management services' includes elements of financial
statement analysis, asset selection, stock selection, plan implementation and ongoing
monitoring of investments. Investment management is a large and important global
industry in its own right responsible for caretaking of trillions of yuan, dollars, euro,
pounds and yen. Coming under the remit of financial services many of the world's largest
companies are at least in part investment managers and employ millions of staff and
create billions in revenue.
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2.4.1 Investment styles
There are a range of different styles of fund management that the institution can
implement. For example, growth, value, growth at a reasonable price (GARP), market
neutral, small capitalization, indexed, etc. Each of these approaches has its distinctive
features, adherents and, in any particular financial environment, distinctive risk
characteristics. For example, there is evidence that growth styles (buying rapidly growing
earnings) are especially effective when the companies able to generate such growth are
scarce; conversely, when such growth is plentiful, then there is evidence that value styles
tend to outperform the indices particularly successfully
2.5 Liquidity management
Banks deal with liquidity. There is number one fact in the banking industry and it applies
to all financial institutions, Commercial Banks often faces a problem of excess liquidity
and they need to find secure profitable financial instrument in which to invest their excess
liquidity and there is need for successful liquidity management. The difficult is based on
account of the fact that while all transactions of the commercial banks rely on the loan
contract on both sides of liquidity management ,that is resource mobilization and fund
utilization .the commercial banks including centenary bank brought a new innovation in
banking industry where by transaction must pass through owning real physical assest.if
such transaction are to generate any acceptable income to either depositors of funds or to
the bank itself .in the absence of these investment funds, the profitability of the bank is
adversely affected.
The purpose of this proposal is to seek to create financial instrument that work as
compatible substitutes of treasury bonds or interest bearing instruments used by
commercial banks as deposits with the Central bank of Uganda.
2.6 Service funds management
Pandy,(1995) said that services refer to any intangible products that are offered to various
categories of people. He went further and said that financial instructions today do offer
competitive services to their customer (account owners) in order to keep them. Also
advertising is done by marketing managers to persuade other to come and open an
account in their banks.
Service management, also called IT service management, is the discipline used in
industries that provide services or a combination of goods and services. While widely
used in the IT industry, specifically the ICT (information and Communication
Technology) sector, service management can be integrated into many other industries.
Service management is usually used in conjunction with operations support systems.
Systems that use service management can include order management, inventory
management, activation, maintenance, performance diagnostics and several other types of
support systems to make sure that these systems are running proficiently and error free.
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Service Management is progressing to the pinnacle as a competent business approach. To
preserve development and customer loyalty in a cutthroat business environment, top
businesses are now identifying the necessity to enhance Service and Service Enabled
competency.
Today various services are offered by various financial institutions and among these
include ATM services (centepoint) the use of automatic telecom machine helps people to
with draw money at any time of their preference ATM deposits are credited to the
customer’s account on the next business (working) day from the date a deposit is made.
Other services include SMS Banking (centelline), PC Banking service. This can be used,
can view account balances and transaction history and download your statements and
much more. Western union money Transfer, Real Gross Time Settlement (RTGS),
Electronic Funds Transfer (EFT), safe guard service and Inter Branch Funds Transfer
2.6.1Components of Service Management
There are several components of service management. Service management usually
incorporates automated systems along with skilled labor. Service management also
usually provides service development. For instance, it is extremely important to first
simplify and then streamline services that you manage (i.e. delivery, support) into a
simple workflow. However, managing your workflow is not enough, another component
is the ability to govern automated controls from a centralized location and make sure that
data security is in effect at all times. Service Management hence becomes an
amalgamation of the following components; Service plan and service offerings, Market
Research plan, Service Portfolio Management, Stock Management, Execution Process &
Logistics, Service Contract & Claims Administration, Field Service Administration,
Billing and Customer Management.
Service Management is usually used with other types of management systems including
Total Quality Management (TQM), Six Sigma, CMMI (Capability Maturing Model and
Integration), and Business Process Management. It can be used with small scale
companies or used with extremely large corporations. The discipline of service
management has been around since the early 1970′s and was originally part of the
Operations Management discipline.
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2.7. LOAN ASSSESSMENT
In any organization financial planning is an integral part of corporate planning is n
integral planning. All corporate plans enunciate a profit objective and financial policy is
designed mainly to achieve profit s an objective, growth and liquidity stability
Brockington, (1987). Among the financial policies of an organization is management of
its debtors through proper loan assessment policies which is the researchers major
concern
Loan assessment this refers to procedures, guidelines laid down for granting a loan to
individual and collecting individual account (Pandy, 1995)
2.8 SOUND LOAN ASSESSMENT TECHINIQUES
Lewis, (1992) described the loan assessment techniques such as credit scoring which is
used to evaluate whether customers should or should not be granted
Credit, loan screening aids such as advances in data technology, changes in regulatory
environment.
2.8.1 Monitoring and supervision
Roland, (1999) argues that monitoring and proper supervision are important aspect when
assessing loan given to a client. He argues that banker never makes a bad loan; they only
get bad after they are made. When monitoring a loan asymmetric information is present
in loan market because lenders have less information about the investment opportunities
and activities of borrowers than borrowers do. This situation leads to two information
producing activities by banks and other finical institutions
Financial institutions carry out monitoring and enforcement of restrictive convents ,
once loan has been made ,the borrowers has an incentive to engage in risky activities
that make it less likely that a loan will be paid off. To reduce this moral hazard ,financial
institutions must adhere to the principle for mongering credit risk that a lender should
write provisions [restrictive covenant] into loan contract that restrict borrowers from
engaging in risky activities . By monitoring borrowers activities to see whether they
complying with the restrictive covenant
2.8.2 Loan screening
Pandy, (1995) encourages Adverse selection in financial institutions which provide
loans require that they should screen out the bad credit risk from the good ones so that
loans are profitable to them .to accomplish effective screening lenders must collect
reliable information from prospective borrowers. Effective screening and information
collection together from an important principle of loan management
When you apply for a loan such as a car loam or mortgages to purchase a house, the first
thing you are asked to do is to fill out forms that elicit a great deal of information about
your personal finances some time loan officers also asks bout your current account, job
description marital status .the lender uses this information to evaluate a credit risk is by
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calculating the credit score. The statistical measure is used to see weather a loam should
or should not be given out.
2.8.3 Credit rationing
According to [kakuru,1998,said that credit rationing is used where by a bank refuses to
make loans even though borrowers are willing to pay the stated interest or even
higher interest rate.. He says that credit rationing takes two forms .the first occurs when a
lender refuses to make a loan of any amount to borrower, even if the borrower is willing
to pay higher interest rate. The second occur when the borrower is willing to make a loan
but restricts the size of the loan to less than the borrower wants
2.8.4 Collateral and compensating balances
Collateral is a security which the client offers in the event of his failure. [Rouse, 1993],
argues that lenders should consider security important because It’s alternative repayment
in case the customer fails to pay.
In addition there is a compensating balance. A firm receiving a loan must keep a
required minimum amount of funds in a checking account at the bank. For example a
business getting a shs 100million loan may be required to keep compensating balances of
at least shs 10 million in its checking account at the bank. This shs 10 million in the
compensating balances can then be taken by the bank to make up some of those losses on
the loan if the borrower defaults.
2.9 Causes of Poor Loan Assessment and Recovery
Loans embrace a wide range of risks. In an economy where survival almost depends on
loans, loan officers have to be careful while assessing borrowers. Where interest rate is
considered as an important factor, a lending officer should not use a single rate of interest
for all loans because it would lead to inappropriate investment decisions. Other things
being constant, a loan should be required to earn a rate that is at least equal to the risk
free rate plus a premium. The premium would compensate for the risk attached to the
loan.
According to the International Monetary Fund, (2003) [16] a key feature of the Ugandan
banking sector is the high degree of concentration on both the loan and deposit sides.
When loans to the top five borrowers for each bank are aggregated, they represent about
40 percent of all loans wit deposit concentration having a smaller percentage. Banking
sector’s exposure to a small number of borrowers and depositors means that a cyclical
downtown or terms of trade shock affecting these borrowers could translate quickly into
asset quality problems for banks. I agree with IMF simply because a loan is a major asset
of a financial institution so if it is not properly managed, there are few chances of
survival.
The International Monetary Fund, (2003) further observed that, banks have higher loan to
deposit-ratios and a higher propensity to be in violation of insider lending limits. The
frequent violations of prudential loan assessment requirements raise serious questions
about their financial performance, governance, and solvency. Still on the credit side, the
high levels of the risk portfolio of banks, the short-term tenure of the portfolio, and the
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current high level of reported on-performing loans, have increased the overall credit risk
exposure. This is very true because if you consider Uganda in particular, you find out that
the frequent violations of prudential requirements have led to closure of Tran Africa, a
small ailing bank, and later facilitated its takeover by Orient bank.
The International Monetary Fund’s observation is actually very right because, the closure
of 3banks (ICB, Greenland, and cooperative bank) was partly as a result of poor insider
loan assessment system in place, which resulted into significant increase in ultimate
losses. This has highlighted the need to minimize disruption through prompt depositor
payout, improved application of creditor rights and remedies to enhance recoveries. This
has encouraged banks to legally pursue debtors, which is helping to cultivate a culture of
repayment.
According to Hahn, (1992) low-income consumers are high-risk borrowers as this is
attributed to inadequate income and lack of income security and hence making it difficult
for them to make repayments on credit commitments. He further adds that this is
compounded by the disproportionately higher cost of credit available to low income
earners and lack of flexibility available to consumers who may experience temporary
difficulty in maintaining repayments. However, he did not explain the extent of the
relationship between poor loan assessment and low-income consumers.
Hannig and Mugwanya, (2000) are in agreement with Hahn’s observation. They also
found out that poor borrowers cannot provide conventional collateral and therefore micro
finance institution will have to make use of alternative repayments of incentives such as
the denial of access to subsequent loans. However they do not explain the way of
determining the credit worthiness of the borrower.
Burki and Perry (1998) are of the same view like Alter and they indicate that fraudulent
practices may create risky or lead to off-balance sheet operations and are a moral hazard
to the bank. This is particularly true especially if officers want to gamble for survival, but
this happens if they are aware that their loan assessment system is poor and hence have
nothing to fear.
Joseph et al., (2002) share the same view as above and adds that, there is a tendency of
banking officers to compromise with credit borrowers and that this largely affects the
loan assessment systems since some of the compromised clients may never repay the
loan. The researcher is in agreement with Joseph simply because, experience shows that
when some of the clients get too used to officers, they may reach an extent of defaulting
expecting officers to pay from their pockets. This has led to an increase in the portfolio at
risk which has also resulted into officers’ loss of jobs.
Krugman attributed poor loan system assessment to poor system of bank restructuring.
He noted that, if restructuring is timely and capital write off and removal of boards and
managers go handing hand, discipline will be e-enforced and bankers will become careful
about the way they run the bank. The researcher actually agrees with Krugman because if
managers or credit officers overstay in branches, they learn some of the fraudulent
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practices and they begin compromising with clients. This has actually led to an increase
in bad debts which is a loss to the bank since the debts have to be provided for.
Burki and Perry, (1998) assert that the bank owners are directly or indirectly involved in
the weakening of the loan assessment systems in that they often turn banks’ credits to
finance their own activities which they in most cases did not pay in time and thus
affecting bank operations.
However they did not explain the procedure that can be undertaken to avoid such
loopholes.
Saudi Arabian monetary agency, (2003) argues that the main causes of the problems
faced by Saudi banks arises from the macroeconomics imbalances which are mainly
created by lack of adequate credit assessment and monitoring procedures in relation to
lack of required technical expertise and that all this therefore made banks so difficult to
recover their loans. However no remedies were advanced to counteract the situation of
poor loan assessment in banks.
Kumar, (2004) further noted that at times banks charge high interest rates on the loans,
which the borrowers at times fail to pay in time or not able to pay at all. His argument
was that even if loan assessment is good, other factors such as high interest rates might
affect the efficiency of the system, which may cause losses to banks.
Alter, (1980) asserts that, financial institutions have failed to determine credit worth
borrowers simply because they have inadequate credit policies, failure of bank officers to
comply with lending policies, inadequate customer relations, low staff morale, and bank
officers’ exposure to fraud. Gingrich, (1989) on the other hand believes that, the
inefficient mechanisms used in assessing loans are attributed by the banks’ pessimism
about the ability of technology to come up with decisions on who qualifies and who
doesn’t. He went ahead to suggest that the failures need to be closely examined because
they reveal deep-rooted weaknesses and limitations about banks.
According to Srinivas, (1993) Poor loan assessment is attributed by poor management of
records by banking institutions especially in keeping records on how the client has been
repaying the loans. He went a head to add that worse still, most technical assistance
providers do not tell the truth to the clients/ borrowers especially on the loan usage. He
however does not express the mechanisms the Bank may employ to counteract poor loan
assessment to the borrowers.
Krugman, (1990) noted that the reasons as to why there was no proper loan assessment
in Asian banks, was partly due to government persuasiveness or order to lend heavily to
particular industries and companies. In other wards they were Captive Banks. This
allowed the companies concerned to become over leveraged (vulnerable to economic
down town) and directed resources into unprofitable investments hence affecting the
bank’s performance. Burki and Perry, (1998) [10] on the other hand have a different
view. They believe that, poor loan assessment in Asian Banks was as a result of lack of
transparency in regional banking systems, which resulted into failure in
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Disclosing the true scale of bad debt problems and henceforth weakening the market
discipline on bank management. This reduced the need for them to face the problems and
hence undermining public confidence in banking systems, which was largely attributed to
lack of credible information from depositors.
2.10 Proposed Solutions to Poor Loan Assessment
Joseph, (2002) in his analysis of loan assessment systems noted that, there is a need for
political will to uphold the root of reform and build a safe and sound financial system that
ensures a level of economic health in relation to proper banking supervision which will
strengthen the systems of loan assessment.
Burki and Perry (1998) argue that, there is a need to establish strict internal guidelines,
which ensures that loans are based on sound credit analysis if the banks are to realize
significant profitability.
However, they did not specify the mechanisms that can be employed. In their analysis of
loans lending, they further argue that banks should not be allowed to engage in activities
which regulators can not be certain that they can monitor other wise; it leads to losses to
the bank. This is significant in that it reduces on unnecessary banks bad debts.
Bofondi and Gobbi, (2003) point out that the long-term relationships established between
lenders and borrowers are vital features of most bilateral credit market in that
considerable valuable information can be acquired; implying that incumbents credit
worthiness tests may well be more precise than those of entrants.
However they do not explain the extent of the genuinity of the information collected to
determine the credit worthiness of the borrower.
According to Fedorowioz, (1993) Banks and other lending institutions must constantly
balance risks and rewards. Too high a price on loan products, you lose the customer, too
low, you starve the profit margin or take a loss, too much capital on reserve, you miss
investment revenue; too little, and you risk regulatory noncompliance and financial
instability. When every department, line of business and region measures and reports
risks differently with desperate risk management systems, it can be difficult to accurately
gauge overall risk exposure and strike the right balance.
McCarthy, (1994) believes that financial ratios and cash flow analysis are used to analyze
the quantitative credit risk. He recommends that financial ratios cannot be analyzed in
isolation because there are no reliable standards to determine what their values should be.
The client’s ratios must be compared with those of peer firms in the industry. However,
cross sectional analysis cannot be adequately performed unless the banks have sufficient
data regarding the ratios of performs, which operate in the same industry. In Malta there
is a lack of statistical data and doubtlessly this makes it very difficult to build a database,
which would help the lending officers to interpret the ratios.
16
2.11 Loan Assessment Models to Support Decision Making.
In order to price a loan correctly, a lending officer should be capable of measuring the
risk attached to the loan, both in isolation and in relation to the portfolio. The problems
which the international banks have encountered during this decade have demonstrated
that classical credit analysis, which relies solely on the expert Judgment of the lending
officer, has serious flaws. To address this issue various credit risk models based on
different concepts have been or are being developed in order to help the banks in their
lending decisions. These models are being applied in a variety of domains such as credit
rating, credit pricing, early financial warnings and others. However, as emphasized by
Caouette (1998) current credit risk models are more in the nature of pioneering efforts to
seek better solutions, rather than the culmination of the search?
According to Alec and Annan (2004) senior portfolio modeling manager, the use of credit
scoring assists in three key areas: identifying those applicants who should receive credit,
determining the amount of credit they should receive, and the steps that should be taken
on an individual basis should there be a failure in commitment. SAS gives us the ability
to develop credit scoring models that support a fully automated assessment system.
According to Alec and Annan (2004) Using SAS loan assessment based models as an
analysis tool, managers are able to identify changes quickly within a portfolio and
through the automated process, modify the assessment strategy for certain products in a
matter of hours. In the event of customers failing to uphold their commitment, loan
assessment information with in models developed is then analyzed and evaluated by the
decision-maker to manage customers consistently and appropriately. Some of these
models include: Financial models and Statistical analysis models.
Financial models provide cash flow, internal rate of return and other investment analysis.
Whereas statistical analysis models provide summary statistics, trend projections, and
hypothesis testing.
In a loan assessment exercise, the software users are the managers and loan officers who
act as
”nodes” in the network and their job is to carry out a particular role in the decision
making process.
The nodes are interconnected and each node uses its own models (computer algorithm
and templates) to guide its information acquisition, analysis and delivery process,
Caouette (1998).
2.10.1 Risk Assessment Model.
According to Fedorowioz, (1993) any enterprise that relies on regular payments from
customers knows that there is credit risk inherent in each customer account. Managing
this risk is a delicate balancing act-assuming too much risk leads to bad debt, not enough
risk means lost opportunities for revenue growth.
Success depends on maximizing income from customers while reducing the impact that
defaulted payments and bad debt have on the bottom line. To achieve this goal requires
that businesses implement a system for evaluating the credit worthiness of current and
potential customers and the best is the credit scoring system.
17
Such systems are valuable not only for curbing bad debt but for identifying possible
cross-sell has opportunities or alternative methods of payment that will reduce risk
whiled maintaining revenue from certain customers.
2.11.2. Credit Valuation Model.
In a world where loan, bond, and credit default swap markets are converging, market-to-
market is gaining importance in the management of loan portfolios. A rigorous market-
to-market process focuses all participants in the credit risk management process on the
contribution of individual loans and the loan portfolio as a whole to the shareholder value
of their financial institution. Credit valuation model provides a comprehensive solution
for the accurate, timely, and secure valuation of loans and loan portfolios. These models
provide data that allow information across credit markets to be used in loan valuation.
Credit valuation is a necessary prerequisite to lending. It ensures a desired quality of the
asset portfolio, and results in loan pricing that correspond to the risks assumed. It also
provides means to reduce the likelihood of substantive losses through portfolio
diversification.
Credit valuation is an objective and quantitative process. It should not depend on the
judgment of a particular person or committee. Instead, it should be based on observable
quantities, most
2.12 Relationships between funds management and loam assessment
Cash and currency management requires a strict code of operation in which it should be
carried out. The cash control procedure in management of cash is implemented
depending on the nature of loan assessment. The loan given to customers does not only
depend on of bank reserves but it also depends on the all system of cash management
(saleemi, 1989).
Liquidity management is necessary to prevent mishandling and safeguard against loss.
Strong liquidity management also helps the bank to increase on its reserves implying that
there will be adequate money stock some of it will be given out as a loan to customers
simplifying the nature of loan assessment.
Investment funds should be care full careered for because when a financials instruction
increases its investment Porto folio it will be able to increase on its on its capital source
and also bank reserves will increase too .however this will increase on the number of
customer who need a loan and this implies a good loan assessment system.
Investment funds management requires good governance, and in a bid to secure your
financial interests at all levels, we pay high attention to the right use of funds when
executing any given project. Whether it is LC or direct remittance or even paying your
bills to Chinese manufacturers / suppliers, we spend your money like our own and keep
you posted with the account activity good investments yield high capital stock of the
bank and the bank will be will to give out more loans and hence improving on its loan
assessment policy.
18
REFERANCES
Brealey R.A &Myers S.T (1998) Principles of Corporate Finance, MC Graw- Hill book
co.
Franks J.R, Broyles J.E, Carleton w.T (1996) financial management in practice. Boston.
Massachusetts: PWs-KENT Publishing Company
Gitman L.J (1982) Principles of Managerial Finance, 3rd ed.New York: Harper & ROW,
Publishers, Inc.
Johnson W.R and Melicher W.R (1995) Financial Management. 5th ed.Boston: Allyn and
BACON Inc.
Pandey I.M (1993), Financial Management and Policy Prentice-Hall.
Van Horne J.V (1989). Financial Management and Policy, 8th Ed. New Jersey: Prentince-
Hall International Editions.
Anon, J. (2004). Performance of Financial Institutions in Uganda. New Vision
Publications,
Kampala, 5(4), pg 7, 6th August 2004
Burki, S. J., Perry, G. E., (1998). Banks and capital markets: The World Bank,
Washington
D.C.
Hanning, A. and Mugwanya, E. (2000). How to Regulate and Supervise Micro finance.
Johns
and Hopkins University Press, Baltimore, MA
International Monetary Fund (2003). Financial system Stability Assessment .Washington
D.C
Myers, M. D. (1997). Qualitative research in information systems [Online]. Available:
http://www.auckland.ac.nz/msis/isworld/ [1997, November 21].
19
Mayo, K.S. (1999).Finance for the Poor: Micro Finance Development Strategy. IADB,
Washinhton D.C.
McKenzie, D. (2002). Payment Systems and Infrastructure; Banks and Banking Reform:
The
World Bank group, Washington D.C
Van Horne C. & wachowicz john M.Jr. (1992). Fundamentals of Financial Management.
Prentice Hall International, Eighth Edition.
Obone A.E (1993) “Monetary Theory Banking and Public Finance”, McGraw-Hill se
Internet
Journals and text books
Kakuru (1998), Financial Management. The Business Publishing Group, Kampala
Uganda
Pandey, I.M. (1997), Financial Management.7th Revision EDITION Vikas Publishing
House, P.V.T Ltd.
Van Horne, J.C. (1995), Financial Management and Policy.11th
edition. Prentice-Hall
International.
Mannasseh Tumuhimbise”Credit Management in Public Utilities in Uganda.” In:
Makerere Business Journal (Discussion paper 2)
^ Fund Management:. [TheCityUK]. 2010-10-11. Retrieved 2008-14-14
David Swensen, "Pioneering Portfolio Management: An Unconventional Approach to
Institutional Investment," New York, NY: The Free Press, May 2000.
20
CHAPTER THREE
METHODOLGY
3.1 Introduction
The chapter therefore covers the research design, sampling design and type, survey
population, sampling method and criteria, tools, data sources, variables for the study,
procedures of collecting data, unit of analysis and presentation and limitations to the
study.
3.2 Research design and type
3.2.1 Research design
The researcher used qualitative and quantitative (phenomenological) as well as
descriptive design based on the relationship and results obtained from the questionnaires,
interview and documents from secondary data.
This generated detailed information about the study/research from many sources hence
better findings.
3.2.2 Research type
The researcher engaged in a basic research. This enabled the researcher to generate a
body of knowledge intended to know management of funds and proper loan assessment
procedures.
3.3 Sampling method and design
A stratified random sampling method was used to select the participants and hence
respondents were grouped in strata as management and employees. A simple random
sampling method was also used to select respondents from each stratum. It was the most
appropriate with least bias and offers the most generalisability as well as yielding good
results.
3.3.1 Sampling procedures
Using a sampling fraction, K, the researcher determined the population size (N) and the
sample size (n) and arrange the population in a list. A uniform sampling fraction was
determined by dividing the sample size by the survey population. The sampling fraction
K=N/n will be calculated. A starting point was randomly chosen, which a number
between 1 to k was and the researcher picked the kith item on the list.
3.3.2 Survey population
The survey population was sixty (60), of which they include respondents from employees
of all departments and clients.
3.3.3 Sample size
The sample size of thirty (30) respondents was selected from the targeted population of
sixty (60) employees and clients.
21
Table3.1; distribution of sample size among respondents
respondents numbers
Top management 5
staff 15
clients 10
total 30
Source; primary data
3.3.4 Sampling procedure
Staff members, top management will be selected basing on their knowledge about loan
assessment department. Customers who will come to Centenary Bank with knowledge of
loan assessment will be selected. A simple random and purposive sampling will be used
to select the respondents.
3.4 Data collection
Researcher obtained data on variables using well written closed and open ended
questionnaires; also oral interviews will be used.
3.4.1 Primary data
The study involved use of questionnaires and interviews (face to face) to collect primary
data. Structured questionnaires were also used to administer to enable the researcher
analyze funds management and loan assessment.
3.4.2 Secondary data.
The secondary source was got from the available records, text books, past research work,
journals and different websites on the internet.
3.5 Data collection methods
The data was obtained by use of the questionnaires and interviews.
3.5.1 Questionnaires
The researcher designed the questionnaire basing on the objectives of the study and
research questions. The questionnaires were structured in short and precise sentences,
consisting closed ended questions.
3.5.2 Face to face interview
For the purpose of clarification on unclear issues, the researcher conducted face to face
interview with the respondents.
3.6 Data processing and analysis
3.6.1 Data processing
22
3.6.1.1Editing
This was carried out to ensure that data from the respondent s is accurate, reliable and
consistent. All the questionnaires from the field will be properly and carefully scrutinized
so as to check on the omissions, incompleteness and inconsistencies.
3.6.1.2 Coding
Edited responses given were coded in numerical terms, in order for easy analysis.
3.6.1.3Tabulation
The data is tabulated in appropriate table format and then analysis was carried out..
3.6.2 Data analysis
The findings were analyzed to give a clear overview an insight of the problem under the
study using statistical package for social scientist tools like frequency tables and
percentages.
3.7 Anticipated limitation of the study
Funding; securing funds to finance the research exercise especially for items like
transport, Stationary and secretarial services were hard.
Time frame; the researcher faced a problem of limited time for the whole exercise. It was
for both the researcher and the respondents
Delay by the respondents to fill the questionnaires issued to them is another problem
faced by the researcher.
23
CHAPTER FOUR
PRESENTATION, ANALYSIS AND DISCUSSION OF RESEARCH FINDINGS
This chapter presents the findings that were revealed in the research study.
Questionnaires were self administered using a sample size of 30 respondents. Information
presented was analyzed and interpreted using the following study objectives;
i. To examine the nature of loan assessment systems in Centenary Bank
ii. To assess the fund management policies in centenary bank
iii. To establish the relationship between funds management and loan assessment
system for financial institutions in Uganda
The presentation of findings obtained from primary and secondary data invoices use of
tables, figures and percentages to describe and analyze the findings and draw meaningful
conculusion.This was done with the help of statistical package for social science(SPSS).,
4.1 Bio data.
Findings on the bio information of respondents such as gender, age, academic
qualification and job title.
4.1.1 Findings on the gender of respondents. Findings on the gender of respondents were obtained and presented in the table below:
Table 1: Gender of respondents
respondents Frequency Percentage (%)
Male 18 60
Female 12 40
Total 30 100
Source: primary data
From Table 1 above, it’s evident that 60% of the respondents were male while 40% were
female. This shows that there was no gender bias hence this has no effect on the findings
from the study.
4.1.2 Findings on the age brackets of respondents
The study captured the different age brackets of respondents in order to establish the most
prevalent group, the respondents were asked to state their age. Findings were obtained
and presented in the table below:
Table 2: Age distribution of the respondents
Age bracket Frequency Percentage (%)
24
20-30 years 6 20
31-40 years 6 20
41-50 years 12 37
50 years plus 8 23
Total 30 100
Source: primary data
From Table 2 above, 37% of the respondents were between 41-50 years, 20% of the
respondents were between 20-30 years, 20% between 41-50 years of the respondents and
23% of the respondents were above 50 years. This implies that the respondents were old
enough to give reliable information.
4.1.3 Findings on the education level of respondents
The researcher wanted to find out the education level of respondents. The findings were
obtained and presented in the table below:
Table 3: Education level of respondents
Education level Frequency Percentage (%)
Primary level 2 7
Secondary level 10 33
Tertiary level 9 30
University level 9 30
Total 30 100
Source: primary data
From Table 3 above, 33% of the respondents attained secondary level of education, 30%
attained secondary level of education, 30% attained tertiary level of education and still
7% attained primary level of education. This implies that the respondents attained a
minimum level of education to read and interpret the questionnaires relating to the topic
under study.
4.2: Findings on the first objective: To examine the nature of loan assessment
systems in Centenary Bank
Examining the nature loan assessment system of Centenary Bank was done through
proper monitoring and supervision of the loan, loan screening and allowing collateral
securities in order to ensure a lenient policy.
4.2.1 Findings on whether Remanding letters were always sent to clients as a process
of loan monitoring
The researcher obtained information from 10 members on whether Remanding letters
were always sent to clients as a process of loan monitoring
The findings were obtained and presented below
Table 4.2.1: Whether Remanding letters were always sent to clients as a process of
loan monitoring
Responses Frequency Percentage (%)
25
Strongly agree 5 50.0
Agree 2 20.0
Not sure 1 10.0
Disagree 2 20.0
Strongly disagree 0 00.0
Total 10 100.0
Source: primary data.
The results from the above table reveals that 50% of the respondents strongly agree that
remanding letters are always sent to clients as a process of loan monitoring, 20%agreed,
10% were not sure while 20% disagreed. This implied that remain dinging letters are
always sent to clients.
4.2.2. Findings on whether the loan is offered according to the authorization from
the loan officer
The researcher obtained information from 20 members on whether the loan was offered
according to the authorization of the loan officer.
The findings were obtained and presented below
Table 4.2.2: Whether loan is offered according to the authorization from the loan
officer
Response Frequency Percentage (%)
Strongly agree 12 60.0
Agree 4 20.0
Not sure 0 00.0
Disagree 4 20.0
Strongly disagree 0 00.0
Total 20 100.0 Source: primary data
The results in table 4.2.2 reveal that 12% of the respondents agreed that the loan is issued
according to the authorization from the loan officer, 20% agreed while 20%disagreed.this
implies that the loan is offered according to authorization from the loan officer.
4.2.3 Findings on whether there is regular supervision of the loan given to
borrowers
The researcher obtained information from 20 members on whether there is regular
supervision of the loan given to borrowers
The findings were obtained and presented below
Table 4.2.3: Whether there is regular supervision of the loan given to borrowers
Responses Frequency Percentage (%)
26
Strongly agree 15 75.0
Agree 4 20.0
Not sure 1 5.00
Disagree 0 00.0
Strongly disagree 0 00.0
Total 20 100.0 Source: primary data
The results from the above reveal that 75% of the respondents strongly agreed that there
is regular supervision of the loan given to the borrowers, 20%agreed and5%were not
sure. This implies that there is regular supervision of loan given to borrowers.
4.2.4: Findings on whether supervisory meetings are held between management and
loan department.
The research information was obtained from 20 respondents on whether supervisory
meetings are held between management and loan department.
The findings were obtained and presented below.
Table 4.2.4: Whether supervisory meetings are held between management and loan
department.
Source: primary data
The results reveal that 40% strongly agreed that supervisory meetings are held between
management and loan department, 25% agreed, 20% were not sure while 15% disagreed.
This implies that there is supervisory meetings held between the management and loan
department
4.2.5 Findings on whether adverse selections are always taken by loan officer to
screen out bad credit from good ones
The research information was obtained from 20 respondents on whether adverse
selections is always taken by loan officer to screen out bad credit from good ones
The findings were obtained and presented below
Table 4.2.5: Whether adverse selections are always taken by loan officer to screen
out bad credit from good ones
Response Frequency Percentage (%)
Strongly agree 8 40.0
Agree 5 25.0
Not sure 4 20.0
Disagree 3 150.0
Strongly disagree 0 00.0
Total 20 100.0
Response Frequency Percentage (%)
Strongly agree 12 60.0
Agree 4 20.0
27
Source: primary data
The results reveal that 60% strongly agreed that adverse selections is always taken by
loan officer to screen out bad credit from good ones,20% agreed while 20% disagreed.
This implies that adverse selections is always taken by loan officer to screen out bad
credit from good ones
4.2.6: Findings on whether Personal information is always required when filling out
loan forms
The research information was obtained from 20 respondents on whether Personal
information is always required when filling out loan forms
The findings were obtained and presented below
Table 4.2.6: Whether Personal information is always required when filling out loan
forms
Source: primary data
The results reveal that 60% strongly agreed that personal information is required when
filling loan forms, 40%agreed.this implies that personal information is required when
filling loan forms.
4.2.7: Findings on whether the bank can refuse to give loan to an applicant even
though he is willing to pay high interest rate.
The research information was obtained from 20 respondents on whether the bank can
refuse to give a loan to an applicant even though he is willing to pay high interest rate.
The findings were obtained and presented below.
Table 4.3.7: Whether the bank can refuse to give loan to an applicant even though
he is willing to pay high interest rate.
Not sure 0 00.0
Disagree 4 20.0
Strongly disagree 0 00.0
Total 20 100.0
Response Frequency Percentage (%)
Strongly agree 12 60.0
Agree 8 40.0
Not sure 0 00.0
Disagree 0 00.0
Strongly disagree 0 00.0
Total 20 100.0
28
Source: primary data
The result reveals that 60% strongly agreed that the bank can refuse to give a loan to an
applicant even though he is willing to pay high interest rate,40%agreed. This implied that
Centenary Bank can refuse to give loan to an applicant even though he is willing to pay
high interest rate.
4.3.8. Findings on whether the loan is issued as soon as the security is presented to
the bank
The research information was obtained from 20 respondents on whether the bank can
refuse to give a loan to an applicant even though he is willing to pay high interest rate.
The findings were obtained and presented below
Table4.3.8: Whether the loan is issued as soon as the security is presented to the
bank
Source: primary data
The result that 45%agreed that the loan is issued as soon as the security is presented to
the bank, 15%was not sure while40% disagreed. This implied that Centenary Bank issues
the loan as soon as the security is presented to the bank.
4. 3.9: Findings on whether the security offered should be of higher value than the
loan issued
The research information was obtained from 20 respondents on whether the security
offered should be of higher value than the loan issued
The findings were obtained and presented below.
Response Frequency Percentage (%)
Strongly agree 12 60.0
Agree 8 40.0
Not sure 0 00.0
Disagree 0 00.0
Strongly disagree 0 00.0
Total 20 100.0
Response Frequency Percentage (%)
Strongly agree 0 00.0
Agree 9 45.0
Not sure 3 15.0
Disagree 8 40.0
Strongly disagree 0 00.0
Total 20 100.0
29
Table4. 3.9: Whether the security offered should be of higher value than the loan
issued
Source: primary data
The results reveal that 60% of the respondents strongly agreed that the security offered
should be of higher value than the loan issued, 40%agreed.this implied that the security
offered should be of higher value than the loan issued
4. 3.10: Findings on whether the borrower must keep a compensating balance in the
checking account at the bank
The research information was obtained from 20 respondents on whether the bank can
refuse to give a loan to an applicant even though he is willing to pay high interest rate.
The findings were obtained and presented below.
Table4. 3.10: Whether the borrower must keep a compensating balance in the
checking account at the bank
Source: primary data
The3 result reveals that 60% disagre3ed that a borrower must keep a compensating
balance in the checking account at the bank, 40%were not sure. This implied that
Centenary Bank doesn’t require a compensating balance in the checking account at the
bank.
4.4.: FINDINGS ON OBJECTIVE TWO: TO ASSESS THE FUND
MANAGEMENT POLICIES OF CENTENARY BANK
Assessing the funds management policies was done by establishing the fund management
committee and providing a method of loan pricing.
4.4.1: Findings on whether Centenary Bank carries out cash budgeting
Response Frequency Percentage (%)
Strongly agree 12 60.0
Agree 8 40.0
Not sure 0 00.0
Disagree 0 00.0
Strongly disagree 0 00.0
Total 20 100.0
Response Frequency Percentage (%)
Strongly agree 0 00.0
Agree 0 00.0
Not sure 8 40.0
Disagree 12 60.0
Strongly disagree 0 00.0
Total 20 100.0
30
The research information was obtained from 20 respondents on whether Centenary Bank
carries out cash budgeting
The findings were obtained and presented below
Table 4.4.4: Whether Centenary Bank carries out cash budgeting
Source: primary data.
The result reveals that 75%of the respondents strongly agreed that Centenary Bank
carries out cash budgeting, 25% agreed. This implied that Centenary Bank carries out
cash budgeting.
4.4.2: Findings on whether excess cash is invested in income generating activities
The research information was obtained from 20 respondents on whether Centenary Bank
carries out cash budgeting
The findings were obtained and presented be
Table 4.4.4: Whether excess cash is invested in income generating activities
Source: primary data
The results reveals that 40% of the respondents agreed that excess cash is invested in
income generating activities, 40% were not sure while 20% disagreed. This implied that
Centenary Bank does invest excess cash in income generating activities.
4.4.3: Findings on whether ATM services are frequently available to customers.
The research information was obtained from 20 respondents on whether ATM services
are frequently available to customers.
The findings were obtained and presented be
Response
Frequency Percentage (%)
Strongly agree 15 75.0
Agree 5 25.0
Not sure 0 40.0
Disagree 0 00.0
Strongly disagree 0 00.0
Total 20 100.0
Response Frequency Percentage (%)
Strongly agree 0 00.0
Agree 8 40.0
Not sure 8 40.0
Disagree 4 20.0
Strongly disagree 0 00.0
Total 20 100.0
31
Table 4.4.3: Whether ATM services are frequently available to customers
Source: primary data
The results reveal that 75% of the respondents strongly agreed that ATM services are
frequently available, 25% agreed. This implies that ATM services are frequently
available to customers.
4.4.4: Findings on whether PC Banking service is carried out by Centenary Bank to
its customers efficiently
The research information was obtained from 20 respondents on whether PC Banking
service is carried out by Centenary Bank to its customers efficiently.
The findings were obtained and presented be
Table 4.4.4: Whether PC banking service is carried out by Centenary Bank to its
customers efficiently
Source: primary data
The results reveal that 75% of the respondents agreed that PC Banking service is carried
out by Centenary Bank to its customers efficiently, 25% were not sure. This implies that
PC Banking service is carried out by Centenary Bank to its customers efficiently.
4.4.5: Findings on whether excess cash resources are invested in other profitable
business venture.
The research information was obtained from 20 respondents on whether excess cash
resources are invested in other profitable business venture
The findings were obtained and presented below.
Table 4.4.5: Whether excess cash is invested in profitable business venture.
Response Frequency Percentage (%)
Strongly agree 15 75.0
Agree 5 25.0
Not sure 0 00.0
Disagree 0 00.0
Strongly disagree 0 00.0
Total 20 100.0
Response Frequency Percentage (%)
Strongly agree 0 00.0
Agree 15 75.0
Not sure 5 25.0
Disagree 0 00.0
Strongly disagree 0 00.0
Total 20 100.0
32
Source: primary data
The results reveal that 25% strongly agreed that excess cash of Centenary Bank is
invested in profitable business venture, 75%agreed.this implies that excess cash is fully
invested in profitable business venture.
4.4.6: Findings on whether. Investment in financial assets is one of the primary
targets of Centenary Bank
The research information was obtained from 20 respondents on whether Investment in
financial assets is one of the primary targets of Centenary Bank.
The findings were obtained and presented below.
Table 4.4.6: Whether investment in financial assets is one of the primary targets of
Centenary Bank.
Source: primary data
The results reveal that 80% of the respondents disagreed that investment in financial
assets is one of the primary targets of Centenary Bank, 20% were not sure. This implies
that Investment in financial assets is not one of the primary targets of Centenary Bank.
4.4.7: Findings on whether there is excess liquidity in Centenary Bank.
The research information was obtained from 20 respondents on whether there is excess
liquidity in Centenary Bank.
The findings were obtained and presented below.
Table 4.4.7: Whether there is excess liquidity in Centenary Bank.
Response Frequency Percentage (%)
Strongly agree 5 25.0
Agree 15 75.0
Not sure 0 00.0
Disagree 0 00.0
Strongly disagree 0 00.0
Total 20 100.0
Response Frequency Percentage (%)
Strongly agree 0 00.0
Agree 0 00.0
Not sure 4 20.0
Disagree 16 80.0
Strongly disagree 0 00.0
Total 20 100.0
Response Frequency Percentage (%)
Strongly agree 14 70.0
Agree 7 30.0
Not sure 0 00.0
33
Source: primary data
The results reveal that 70% of the respondents strongly agreed that there is excess
liquidity in Centenary Bank, 30%agreed.This implies that there is excess liquidity in
Centenary Bank.
4.4.8: Findings on whether Centenary Bank invests in financial securities such as
treasury bonds in order to control excess liquidity.
The research information was obtained from 20 respondents on whether Centenary Bank
invests in financial securities such as treasury bonds in order to control excess liquidity.
The findings were obtained and presented below.
Table 4.4.8: Whether Centenary Bank invests in financial securities such as treasury
bonds in order to control excess liquidity.
Source: primary data.
The results reveal that 70% of the respondents strongly agreed Centenary Bank invests in
financial securities such as treasury bonds in order to control excess liquidity,
30%agreed.This implies that Centenary Bank invests in financial securities such as
treasury bonds in order to control excess liquidity.
Findings on objective three: The relationship between funds management and Loan
Assessment Techniques.
4.5.1: Findings on factors responsible for poor loan recovery in financial
institutions.
Respondents were also asked to suggest factors responsible for poor loan recovery in
financial institutions and majority suggested that high interest rate which is charged and
also poor customer appraisal, while 2 of the respondents were not sure. None of the
respondents disagreed.
Their responses are illustrated in the table below:
Table 4.5.1: Findings on factors responsible for poor loan recovery in financial
institutions.
Disagree 0 0.0
Strongly disagree 0 00.0
Total 20 100.0
Response Frequency Percentage (%)
Strongly agree 14 70.0
Agree 7 30.0
Not sure 0 00.0
Disagree 0 0.0
Strongly disagree 0 00.0
Total 20 100.0
34
Source: primary data
Findings reveal that when respondents were asked to suggest factors responsible for poor
loan recovery 90% positively agreed that high interest rate charge and poor customer
appraisal,10% were not sure what were the causes. This implies that high interest rate is
responsible for poor loan recovery.
4.5.2: Findings on suggested ways of minimizing the risk of bad debts.
Respondents were also asked to suggest ways of minimizing the risk of bad debts and
majority of them suggested that customer evaluation should be taken into consideration
and also establishment of loan limit to customers, non of the respondents disagreed on the
above suggestions.
Their respondents are illustrated below.
Table 4.5.2 Findings on suggested ways of minimizing the risk of bad debts
Source: primary data
Findings reveal that when respondents were asked to suggest ways of minimizing on the
risk of bad debts 100% positively agreed that customer evaluation and establishment of
loan limit will to a greater extent minimize the risk of bad debts. This implies Centenary
Bank should minimize the risk of bad debts through the above suggested ways.
4.5.3. Findings on the relationship between funds management and loan assessment
system
The Pearson correlation coefficient(r) was used to establish the relationship between
funds management and loan assessment system in Centenary Bank as shown in table
Below
Response Frequency Percentage (%)
Strongly agree 18 90.0
Agree 0 00.0
Not sure 2 10.0
Disagree 0 0.0
Strongly disagree 0 00.0
Total 20 100.0
Response Frequency Percentage (%)
Strongly agree 15 75.0
Agree 5 25.0
Not sure 0 10.0
Disagree 0 0.0
Strongly disagree 0 00.0
Total 20 100.0
35
From the above, findings reveal that there is a strong relationship between funds
management and loan assessment in Centenary Bank at a Pearson Correlation
Coefficient r = 0.957 (**). This implies a small change in management of
company funds will bring a big change in loan assessment.
Table 4.5.3: Correlation between funds management and loan assessment
1.000 .957 **
. .000
30 30
.957 ** 1.000
.000 .
30 30
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Funds
Management
Loan
Assessment
Funds
Management
Loan
Assessmen
t
Correlation is significant at the 0.01 level (2-tailed). **.
36
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Introduction
This chapter presents a summary of major findings, conclusions and recommendations
derived from the study of funds management and loan assessment system in Centenary
Bank.
5.1 Summaries of the major findings
The research was carried to determine the relationship between funds management and
loan assessment in Centenary Bank. This was done in relation to following objective:
i. To examine the nature of loan assessment system in Centenary Bank
ii. To assess the funds management policies of Centenary Bank
iii. To establish the relationship between funds management and loan
assessment
5.1.1 Objective one: 1To examine the nature of loan assessment systems in financial
institutions in Uganda
This objective of the study was achieved and the system that has been designed will
enable managers and credit officers perform their work faster and accurately, reduce the
company costs that have been incurred in providing for bad loans, reduce bias and lead to
customer satisfaction as stipulated in the bank’s mission statement.
5.1.2 Objective two: To assess the fund management policies in centenary bank
In the fund management policy, a committee was established and it was supposed to
define the responsibilities of the committee and how the committee will obtain input from
the Board and how the committee results will be reported back to the Boar. Also good
record keeping was emphasized.
5.13 Objective three: To establish the relationship between funds management and
the loan assessment system
From the analysis in table 4.4.12 the Pearson correlation coefficient was used to establish
the relationship between funds management and loan assessment in Centenary Bank.
Results have revealed that there is a significant positive relationship between funds
management and loan assessment; r = 0.957 (**).
37
5.2 CONCULUSIONS
From the findings the researcher concludes that;
5.2.1 Objective one: To examine the nature of loan assessment system in Centenary
Bank
Proper loan assessment system makes it good for Centenary Bank to properly allocate
credit to efficient and capable customers.
5.2.2 Objective two: to assess the funds management policies. Proper management of funds like cash made it easy for customers to receive some
compatible loan from the bank and also a good lenient policy led to adequate loan
recovery.
5.2.3 Objective three: To establish the relationship between funds management and
loan assessment.
On the relationship between funds management and loan assessment system for
Centenary Bank, the researcher has concluded that proper management of company funds
like cash has made it easy for customers to be able to assess adequate loan thus leading to
a lenient loan system.
5.3 Recommendations
After conclusions the researcher has made the recommendations below:
5.3.1 Objective one: loan assessment
From the analysis, the following recommendations are made:
The researcher recommends that the system that has been designed can be installed in
centenary banks Information Technology System so as to enable Centenary Bank achieve
its goals, objectives and mission statement.
The policy and procedure manuals together with the designed system should strictly be
followed if they are to achieve service quality and customer satisfaction as service
providers.
The researcher recommends research geared towards the development of a monitoring
system to be carried out encompassing all the banks within the country. This system if
developed shall enable all banks to monitor individual accounts’ performance and be able
to reject loan applications for typical defaulters. The bank recommended implementing
that system is bank of Uganda and it will require co-operative effort from commercial
banks and micro finance institutions in order to overcome the challenge of lack of
information about bad customers.
If such information is availed, it can be input in Bout’s database and it will enable banks
by virtue of being interconnected through a network to access and reject to offer loan to
defaulters while not compromising on network security.
This is significant in that it is one of the critical issues in the determination of borrowers’
creditworthiness though it has not yet been seriously addressed.
38
5.3.2 Objective three: funds management
The Bank through its enormous effort should implement good management policies such
as establishment of funds management committee and also Define and establish record
keeping systems to track the volume of rate-sensitive assets and rate-sensitive liabilities.
5.4 Areas of further research
Due to limited time, funds, the researchers were not in position to cover efficiently and
appropriately in areas of interest in study and therefore there is need for more research on
i. Loan management and profitability of commercial banks
ii. Credit risk management and efficiency of management of financial
institutions.
39
APPENDIX 1
QUESTIONNAIRE FOR STAFF
Dear Sir/Madam,
This is an academic research focusing on Funds Management and Loan Assessment
Techniques for Financial Institutions in Uganda, a case study of Centenary Bank. This
exercise is purely academic and it’s actually a partial requirement by Makerere
University for the award of a degree in Commerce. The information provided will be
treated confidentially, so please kindly spare some of your valuable time and respond to
the following questions genuinely. Tick/ fill where applicable.
SECTION A
Tick appropriately in the box.
1. Gender: Male Female
2. Age bracket
20- 30 years 31-40 years 41-50 years 50 years plus
3. What is your highest level of education?
Primary level Secondary level Tertiary level University level
4. Job title ………………………………………
FUNDS MANAGEMEENT
Please respond to the question below by ticking in the right box depending on the degree
to which you agree or disagree with the statement
SECTION: B MANAGEMENT OF CASH
5. Centenary bank carries out budgeting.
Strongly agree agree Not sure disagree Strongly
disagree
6. Excess cash is invested in income generating activities
Strongly agree agree Not sure disagree Strongly
disagree
7. Expenses are always supported by documents like receipts, vouchers, and in invoices
Strongly agree agree Not sure disagree Strongly
disagree
40
SECTION C: SERVICE MANAGEMENT
8 ATM services are frequently available to customers
Strongly agree agree Not sure disagree Strongly
disagree
9. PC Banking service is carried out by centenary bank to its customers efficiently
Strongly agree agree Not sure disagree Strongly
disagree
SECTION D INVESTMENT MANAGEMENT
10. Excess cash resources are invested in other profitable business venture
Strongly agree agree Not sure disagree Strongly
disagree
11. Investment in financial assets is one of the primary targets of Centenary Bank
Strongly agree agree Not sure disagree Strongly
disagree
SECTION D: LIQUDIUTY MANAGEMENT
12. There is excess liquidity in Centenary Bank?
Strongly agree agree Not sure disagree Strongly
disagree
.
13. Centenary Bank invests in financial securities such as treasury bonds in order to
control excess liquidity.
Strongly agree agree Not sure disagree Strongly
disagree
LOAN ASSESSSMENT
Please respond to the question below by ticking in the right box depending on the degree
to which you agree or disagree with the statements.
SECTION E: MONITORING
14. Remanding letters are always sent to clients as a process of loan monitoring
Strongly agree agree Not sure disagree Strongly
disagree
41
15. The loan is offered according to the authorization from the loan officer?
Strongly agree agree Not sure disagree Strongly
disagree
SECTION F: SUPERVISION
16. There is regular supervision of the loan given to borrowers
Strongly agree agree Not sure disagree Strongly
disagree
17. Are there supervisory meetings held between management and loan department?
Strongly agree agree Not sure disagree Strongly
disagree
SECTION: G LOAN SCREENING
18 Adverse selections is always taken by loan officer to screen out bad credit from good
ones
Strongly agree agree Not sure disagree Strongly
disagree
19. Personal information is always required when filling out loan forms
Strongly agree agree Not sure disagree Strongly
disagree
SECTION H: LOAN REFUSAL
20. Credit distribution is efficiently used by Centenary Bank.
Strongly agree agree Not sure disagree Strongly
disagree
21. The can refuse to give a loan to an applicant even though he is willing to pay high
interest rate.
Strongly agree agree Not sure disagree Strongly
disagree
SECTION I: COLLATERAL SECURITIES
22. The loan is issued as soon as the security is presented to the bank.
Strongly agree agree Not sure disagree Strongly
disagree
42
23. The security offered should be of higher value than the loan issued.
Strongly agree agree Not sure disagree Strongly
disagree
24. A borrower must keep a compensating balance in the checking account at the bank
Strongly agree agree Not sure disagree Strongly
disagree
SECTION J: The relationship between funds management and loan assessment
amidst financial institutions
25. There is a relationship between funds management and loan assessment amidst
financial institutions in Uganda
Strongly Agree Agree Not Sure Disagree Strongly Disagree
26. What are the factors responsible for poor loan recovery in financial institutions?
…………………………………………………………………………………………..
..............................................................................................................................
27. Suggest ways to improve on loan recovery.
................................................................................................................................................
................................................................................................................................................
............................................................................................
THANK YOU VERY MUCH
GOD BLESSES YOU.
43
QUESTIONNAIRE FOR CLIENT
Dear Sir/Madam,
This is an academic research focusing on Funds Management and Loan Assessment
Techniques for Financial Institutions in Uganda, a case study of Centenary Bank. This
exercise is purely academic and it’s actually a partial requirement by Makerere
University for the award of a degree in Commerce. The information provided will be
treated confidentially, so please kindly spare some of your valuable time and respond to
the following questions genuinely. Tick/ fill where applicable.
SECTION A
Tick appropriately in the box.
1. Gender Male Female
2. Age bracket
20- 30 years 31-40 years 41-50 years 50 years plus
3. What is your highest level of education?
Primary level Secondary level Tertiary level University level
4. Nature of Business ……………………………………………………
FUNDS MANAGEMENT
Please respond to the question below by ticking in the right box depending on the degree
to which you agree or disagree with the statements.
SECTION B: SERVICE MANAGEMENT
5. ATM services are regularly provided to me.
Strongly agree agree Not sure disagree Strongly
disagree
6. I can view my bank statement can be viewed using PC Banking
Strongly agree agree Not sure disagree Strongly
disagree
7. Centenary Bank provides quality services to me.
Strongly agree agree Not sure disagree Strongly
disagree
44
LOAN ASSESSSMENT
Please respond to the question below by ticking in the right box depending on the degree
to which you agree or disagree with the statement
SECTION C; COLLATERAL SECURITYT
8. Centenary Bank requires high valued collaterals than loan given
Strongly agree agree Not sure disagree Strongly
disagree
9. High collaterals prevent me from borrowing.
SECTION D: CREDIT TERM
10. The nature of credit terms is lenient
Strongly agree agree Not sure disagree Strongly
disagree
11. Interest rate, credit period offered causes failure to pay pack the loan
Strongly agree Not sure disagree Strongly
disagree
12. Some applicants are granted loan period longer than asked.
SECTION E: The relationship between funds management and loan assessment
amidst financial institutions
13. There is a relationship between funds management and loan assessment amidst
financial institutions in Uganda
Strongly Agree Agree Not Sure Disagree Strongly Disagree
14. What are the factors responsible for poor loan recovery in financial institutions?
…………………………………………………………………………………………..
………………………………………………………………………………………………
Strongly agree agree Not sure disagree Strongly
disagree
Strongly agree
agree Strongly
disagree
disagree Not certain
45
………………………………………………………………………………………………
…………………………………………………………………………………………….
15. What should be done to minimize the risk of bad debts.
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
THANK YOU VERY MUCH
GOD BLESSES YOU.