Credit Risk Management and Performance of Commercial Banks in Hargeisa Somalia

ABSTRACT The study sought to assess the effect of credit risk management on Performance of Banks in Hargeisa Somalia. It was guided by three specific objectives, that included; to determine the effect of credit risk identification on Performance of Banks in Hargeisa Somalia, to establish the effect of credit risk monitoring on Performance of Banks in Hargeisa Somalia and to establish the effect of credit risk analysis on performance of Banks in Hargeisa Somalia. This research employed a descriptive research design to describe the variables and the questionnaire and interview guide were used as the research instruments. Descriptive statistics were used in this study included frequencies, means and regression analysis on variables. The findings revealed the following: credit risk identification significantly affects the performance of Banks in Hargeisa Somalia, this effect therefore implies that credit risk identification highly contribute to the Performance of Banks in Hargeisa Somalia, the findings revealed that there is a significant effect credit risk monitoring has on performance of Banks in Hargeisa Somalia, findings of this study proved a weak positive significant effect credit risk analysis has on Performance of Banks in Hargeisa Somalia. Still the conclusions were that; According to the findings credit risk identification has a strong positive significant effect on Performance of Banks in Hargeisa Somalia. According to the findings credit risk monitoring has a significant effect on Performance of Banks in Hargeisa Somalia. Effective risk management requires a reporting and review structure to ensure that risks are effectively identified and assessed and that appropriate controls and responses are in place. The planned risk responses which are integrated into the project management plan by the process integrated change control are therefore executed if the risk triggers fire. Credit risk analysis should involve screening clients to ensure that they have the willingness and ability to repay a loan. The researcher recommended that: The banks in Hargeisa Somalia should develop a good system to monitor, record and track all the risks so that there is effectiveness in credit risk management and ensure to cover loopholes in the system to enhance Performance of Banks. The bank managers in Hargeisa should develop an effective credit risk monitoring system which makes credit risk monitoring easy and flexible so as to boost Performance of Banks. Contribution to knowledge was; credit risk management being an important aspect for any organization still lag behind in Hargiesa Somalia‘s banking sector given that most employees in the country stay in the prevalence of an environment supported by mixed managerial capabilities with limited regulations especially for the credit. Credit risk management is an important predictor of bank‘s financial performance because the bank‘s success depends on credit risk management. The contribution to knowledge indicated that; credit risk management being an important aspect for any organization still lag behind in Hargiesa Somalia‘s banking sector given that most employees in the country stay in the prevalence of an environment supported by mixed managerial capabilities with limited regulations especially for the credit

TABLE OF CONTENT

DECLARATION.................................................................................................................................i

APPROVAL.......................................................................................................................................ii

DEDICATION .................................................................................................................................iii

ACKNOWLEDGEMENTS................................................................................................................iv

TABLE OF CONTENT .....................................................................................................................v

LIST OF TABLES............................................................................................................................ix

CHAPTER ONE................................................................................................................... 1

INTRODUCTION............................................................................................................... 1

1.0 Introduction ........................................................................................................................ 1

1.1.1 Background of the Study............................................................................................... 1

1.1.1 Historical Perspective ..................................................................................................... 1

1.1.2 Theoretical Perspective.................................................................................................. 3

1.1.3 Conceptual Perspective.................................................................................................. 4

1.1.4 Contextual Perspective .................................................................................................. 5

1.2 Problem Statement ............................................................................................................ 5

1.3 Purpose of the study ......................................................................................................... 6

1.4 Research Objectives .......................................................................................................... 6

1.5 Research Questions ........................................................................................................... 7

1.6 Hypothesis........................................................................................................................... 7

1.7 Scope of the study ............................................................................................................. 7

1.7.1 Geographical Scope........................................................................................................ 7

1.7.2 Content Scope................................................................................................................. 8

1.7.3 Time Scope ...................................................................................................................... 8

1.8 Significance of the study................................................................................................... 8

1.9 Operational definition of key terms................................................................................. 9

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CHAPTER TWO................................................................................................................ 10

LITERATURE REVIEW ................................................................................................... 10

2.0 Introduction ...................................................................................................................... 10

2.1 Theoretical Review........................................................................................................... 10

2.2 Conceptual framework .................................................................................................... 11

2.3.1 Effect of Risk identifications on performance of commercial banks ..................... 14

2.3.2 Effect of credit risk monitoring on the performance of commercial banks ......... 17

2.3.3 Effect of credit approvals on the performance of commercial banks ................... 20

2.5 Research Gaps.................................................................................................................. 29

CHAPTER THREE ............................................................................................................ 31

METHODOLOGY.............................................................................................................. 31

3.0 Introduction ...................................................................................................................... 31

3.1 Research Design............................................................................................................... 31

3.2 Study population .............................................................................................................. 31

3.3 Sample Size....................................................................................................................... 31

3.4 Sampling technique ......................................................................................................... 32

3.5 Sources of data................................................................................................................. 33

3.5.1 Primary data .................................................................................................................. 33

3.6 Research Instruments ..................................................................................................... 33

Questionnaires......................................................................................................................... 33

3.7 Validity and Reliability of Research Instruments......................................................... 34

3.7.1 Validity............................................................................................................................ 34

3.7.2 Reliability........................................................................................................................ 34

3.8 Data gathering procedure............................................................................................... 35

3.9 Data Analysis .................................................................................................................... 35

3.10 Ethical Considerations ................................................................................................... 36

3.11 Limitations of the study ................................................................................................ 37

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CHAPTET FOUR............................................................................................................... 38

DATA PRESENTATION, ANALYSIS AND INTERPRETATION ................................. 38

4.0 Introduction ...................................................................................................................... 38

4.1: Demographic characteristics of the Respondents ..................................................... 39

4.2 Credit risk management.................................................................................................. 40

4.3 Performance of Banks ..................................................................................................... 43

4.4 Objective one; effect of credit risk identification on Performance of Banks in 

Hargeisa Somalia .................................................................................................................... 45

4.5 Objective two; the effect of credit risk monitoring on Performance of Banks in 

Hargeisa Somalia .................................................................................................................... 47

4.6 Objective three; effect of credit risk analysis on Performance of Banks in Hargeisa 

Somalia ..................................................................................................................................... 49

4.7 Multiple Linear Regression ................................................................................................. 51

CHAPTER FIVE................................................................................................................ 52

DISCUSSIONS, CONLUSIONS AND RECOMMENDATIONS ................................... 52

5.0 Introduction ...................................................................................................................... 52

5.1 Discussions........................................................................................................................ 52

5.1.1 Objective one; the effect of credit risk identification on Performance of Banks 52

5.1.2 Objective two; the effect of credit risk monitoring on Performance of Banks.... 53

5.1.3 Objective three; the effect of credit risk analysis on Performance of Banks ...... 55

5.2 Conclusions ....................................................................................................................... 56

5.2.1 Objective one; the effect of credit risk identification on Performance of Banks 56

5.2.2 Objective two; the effect of credit risk monitoring on Performance of Banks .... 57

5.2.3 Objective three; the effect of credit risk analysis on Performance of Banks ...... 57

5.3 Recommendation ............................................................................................................. 57

5.4 Contribution to knowledge ............................................................................................. 58

5.5 Areas for further research .............................................................................................. 58

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REFERENCES................................................................................................................... 59

APPENDICES................................................................................................................... 63

Appendix 1: QUESTIONNARE ............................................................................................... 63