CREDIT POLICY AND FINANCIAL PERFORMANCE IN BARCLAYS BANK IN KAMPALA UGANDA BY WAZILINDA LONG WE BBA/41 196/1421DF A RESEARCH REPORT SUBMITTED TO THE COLLEGE OF ECONOMICS AND MANAGEMENT IN PARTIAL FULFILMENT OF THE REQUIREMENTS FORTHE AWARD OF BACHELORS DEGREE IN BUSINESS ADMINSTRATION (BANKING AND FINANCE) OF KAMPALA INTERNTIONAL UNIVERSITY APRIL, 2017
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CREDIT POLICY AND FINANCIAL PERFORMANCE IN BARCLAYS BANK IN
KAMPALA UGANDA
BY
WAZILINDA LONGWE
BBA/41 196/1421DF
A RESEARCH REPORT SUBMITTED TO THE COLLEGE OF ECONOMICS AND
MANAGEMENT IN PARTIAL FULFILMENT OF THE REQUIREMENTS
FORTHE AWARD OF BACHELORS DEGREE IN BUSINESS
ADMINSTRATION (BANKING AND FINANCE) OF
KAMPALA INTERNTIONAL UNIVERSITY
APRIL, 2017
DECLARATIONI WAZILINDA LONGWE, declare that this research proposal entitled “Credit Policy and
Financial Performance in Barclays Bank in Kampala Uganda” with the exception of
references, ideas and concerns is my own personal work and has never been presented to any
organization or institution of higher learning for a degree or any other academic award.
Signature ~ DateS
WAZI LINDA LONGWE
(Candidate)
APPROVAL
This research proposal has been compiled and submitted to the College of Economics and
Management of Kampala International University with my approval.
41SignatureS /
DR. KIRABO JOSEPH. B. K
(Supervisor)
Date:...c2~fr{
TABLE OF CONTENTS
DECLARATION.
APPROVAL ii
TABLE OF CONTENTS iii
LIST OF TABLES vi
LIST OF ACRONYMS vii
CHAPTER ONE 1
INTRODUCTION I
1 .0 Introduction 1
1 .1 Background of the Study
1 .1 .1 Historical perspective
1 .1 .2 Theoretical perspective 2
1 .3 Conceptual perspective 3
1 .1 .4 Contextual perspective 4
1.2 Statement of the problem 4
1.3 The purpose of the study 5
1 .4 General objectives 5
1 .4.1 Specific objectives 5
1 .5 Research questions 5
1.6 1-lypotheses of the study 5
1.7 Scope of the study 6
1.7.1 Geographical Scope 6
1.7.2 Content Scope 6
1.7.3 Time Scope 6
1.8 Significance of the study 6
1 .9 Operational Definition of key terms 7
CHAPTER TWO 8
LITERATURE REVIEW 8
2.0 Introduction 8
2.1 Conceptual Framework 8
2.2 Theoretical review 9
2.3 Review of related literature 10
2.3.1 .1 Credit standards 10
2.3.1.2 Credit risk controls 10
2.3.1.3 Collection policy 11
2.3.2.1 Financial Performance 1 3
2.3.2.2 Liquidity 14
2.3.2.3 Profitability 15
2.4 Related Studies 15
2.5 Gaps 18
CHAPTER THREE 19
METI-IODOLOGY 19
3.0 Introduction 19
3.1 Research design 19
3.2 Population of the study 19
3.3 Sample size 19
3.4 Sampling procedure 20
3.5 Sources of data 20
3.5.1 Primary sources 20
3.5.2 Secondary sources 21
3.6 Research instrument 21
3.6.1 Questionnaire 21
3.6.2 Interview guide 21
3.7 Validity and reliability of the instrument 21
3.7.1 Validity 21
3.7.2 Reliability 22
3.8 Data gathering procedure 22
3.9 Data Analysis 22
3.10 Ethical considerations 23
3.11 Limitations of the study 24
iv
CHAPTER FOUR .25
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS 25
4.0 Introduction 25
4.1 Profile of Respondents 25
4.2 Credit policy 26
4.3 Financial performance 29
4.4 Relationship between credit standards and financial performance 30
4.5 Relationship between Credit risk controls and financial performance 30
4.6 Relationship between Collection policy and financial performance 3 1
4.7 Regression analysis 32
CHAPTER FIVE 33
DISCUSSIONS, CONLUSIONS AND RECOMMENDATIONS 33
5.0 Introduction 33
5.1 Discussions 33
5.2 Conclusions 35
5.3 Recommendation 36
5.4 Areas for further research 37
REFERENCES 38
APPENDICES 41
APPENDIX 1: SECTION A: DEMOGRAPHIC CHARACTARISTICS OF RESPONDENTS ..41
V
LIST OF TABLES
Table 3.1: Population and Sample Size 20
Table 4.1: Profile of respondents 25
Table 4.2A: Extent of credit policy 27
Table 4.2B 28
Table 4.3: Level of financial performance of Barclays Bank 29
Table 4.4. Significant relationship between credit standards and financial performance 30
Table 4.5 Significant relationship between Credit risk controls and financial performance 31
Table 4.6 Significant relationship between collection policy and financial performance 3]
Table 4.7 Regression Analysis between the Dependent and Independent Variables 32
vi
LIST OF ACRONYMS
CAMEL: Capital Adequacy, Asset Quality, Management Quality, Earnings &
Liquidity
LADST: Liquidity Asset Deposit Short Term
NLTA: Net Loan Total Asset
NLDST: Net Loan/Total Deposits and Short Term Borrowings
ROA: Return on Asset
ROE: Return on Equity
EDDB: East Africa Dev’t Bank
LRGL: Loan Reserve Gross Loans
SPSS: statistical Package for Social Sciences
PMS: Performance Measurement System
USA: United States of America
Fl’s: Financial Institutions
PLCC: Pearson’s Linear Correlation Coefficient
VII
CHAPTER ONE
INTRODUCTION
1.0 IntroductionThis chapter will include the background of the study. The background is drawn from the
following perspectives i.e. historical, theoretical, conceptual and contextual perspectives. It
also includes the statement of the problem, general objectives, specific objectives, research
questions, scope of study, significance of the study and conceptual framework.
1.1 Background of the Study
1.1.1 Historical perspectiveThe concept of credit policy can be traced back in history and it was not appreciated until and
after the Second World War when it was largely appreciated in Europe and later to Africa
(Ahmed. 2010). Banks in USA gave credit to customers with high interest rates which
sometimes discouraged borrowers hence the concept of credit didn’t become popular until the
economic boom in (USA in 1 885) when the banks had excess liquidity and wanted to lend the
excess cash (Baxler, 2011). In Africa the concept of credit was largely appreciated in the
1 950’s when most banks started opening the credit sections and departments to give loans to
white settlers. In Africa credit was initially given to the rich people and big companies and
was not popular to the poor. Most suggestions were for the evaluation of customer’s ability to
repay the loan, but this didn’t work as loan defaults continued (Humphrey, 2012). The
concept of credit policy became widely appreciated by financial Institutions (Fl’s) in the late
1990s, but again this did not stop loan defaults to this date (Brand, 2010).
Credit policy is the ability to intelligently and efficiently manage customer credit lines. In
order to minimize exposure to bad debt, over-reserving and bankruptcies, companies must
have greater insight into customer financial strength, credit score history and changing
payment patterns. The ability to penetrate new markets and clients hinges on the ability to
quickly and easily make well-informed credit decisions and set appropriate lines of credit.
According to Brealey (2010), sound credit policy would help improve prudential oversight of
asset quality, establish a set of minimum standards, and to apply a common language and
methodology (assessment of risk, pricing, documentation, securities, authorization, and
ethics), for measurement and reporting of non- performing assets, loan classification and
provisioning. The credit policy set out the bank’s lending philosophy and specific procedures
1
and means of monitoring the lending activity. Credit policy is the general guideline governing
the process of giving credit to bank clients. The policy sets the rules on who should access
credit, when and why one should obtain the credit including repayment arrangement and
necessary collaterals.
Financial performance refers to measuring the results of a firms policies and operations in
monetary terms. These results are reflected in the firm’s return on investment, return on
assets, value added (Bureu & Dijk 2010) performance is a subjective measure of how well a
firm can use assets from its primary mode of business to generate revenues. Performance is a
general measure of a firm’s overall flnancial health over a given period of time, and can be
used to compare similar firms across the same industry or to compare industries or sectors in
aggregation. There are many different ways to measure performance, but all measures should
be taken in aggregation. Line items such as revenue from operations, operating income or
cash flow from operations can be used, as well as total unit sales and debtors/receivable.
Furthermore, the analyst or investor may wish to look deeper into financial statements and
seek out margin growth rates or any declining debt (Obala, 2012).
1.1.2 Theoretical perspective
This study is based on the theory of self-efficacy which was developed by Bandura 1995.
Bandura (1 995) hypothesized that self-efficacy affects choice of activities, effort, persistence,
and achievement. Compared with persons who doubt their capabilities, those with high self-
efficacy for accomplishing a task participate more, work harder, persist longer when they en
counter difficulties, and achieve at a higher level. Self-efficacy is a major component of
Bandura’s social-cognitive theory, which contends that behavior is strongly stimulated by
self-influence. Self-efficacy is also related to goal setting (Farlex, 2012), as well as work in
self-regulation (Finlay, 2010), particularly with respect to leadership (Berger, 2012). People
acquire information to appraise self-efficacy from their performances, vicarious
(observational) experiences, form of persuasion, and physiological reactions. One’s
performances offer reliable guides for assessing self-efficacy.
Successes raise efficacy and failures lower it, but once a strong sense of efficacy is developed
a failure may not have much impact (Bandura, 1999). People also acquire self-efficacy
information from knowledge of others through social comparisons. Those who observe
similar peers perform a task are apt to believe that they, too, are capable of accomplishing it.
2
To remain credible, however, information acquired vicariously requires validation by actual
performance (Home, 1994). Self-efficacy is not the only influence on behavior. High self-
efficacy will not produce a competent performance when requisite knowledge and skill are
lacking. In this instance, a sense of self-efficacy for learning is beneficial because it motivates
individuals to improve their competence, outcome expectations, or beliefs concerning the
probable outcomes of actions, are important because people strive for positive outcomes.
Out-come expectations and self-efficacy often are related (Home. 1994).
1.1.3 Conceptual perspectiveCredit policy was the independent variable in this study while financial performance was the
dependent variable. According to Mishkin (2010), credit policy is the guidelines governing
the process of giving credit to bank clients. Credit policy was conceptualized credit standards.
credit risk control and collection policy, whereas as financial performance was
conceptualized in relation to liquidity and profitability.
Credit standardsCredit standards are a set of terms that a company or bank uses to determine whether to
extend a loan or line of credit to an applicant (Campbell, 2012). Credit standards may include
having a certain FICO score, recent good credit history, and a certain income (Falex, 2012).
According to Pandey (1995), a credit standard is one of the controllable decision variables
that directly influence investment in trade credit.
Credit risk controlsPandey (2010) noted that credit risk controls involve evaluating the creditworthiness of the
prospective borrower. This involves establishing the willingness and ability of the beneficiary
to meet obligations as they fall due. Credit risk controls is an important aspect in designing a
credit policy since it culminates into the seasons regarding the amount of loan granted to the
applicants (Ogilo, 2012).
Collection policy
Collection policy involves monitory receivables to spot trouble and obtaining payment on
past due accounts (Finlay, 2010). Finlay identified 6c’s as measurement parameters in setting
collection policy and these include character, capacity, and condition, control, capital and
collateral.
3
LiquidityAccording to Mishkin (1995), liquidity indicates whether the firm has sufficient funds to
enable it pay its short-term financial obligations as they fall due, and liquidity is the life and
blood of a commercial bank.
ProfitabilityThis indicates the ability of the firm to earn returns on investment. Long—term profitability
derives from the relations between cost and revenue; it is a necessary but not sufficient
condition for growth. Revenues may be held up by entry barriers and costs pushed down by
management ingenuity (Arnold-, 2013). A low-profit firm will lack the finance for expansion,
but a high-profit business may conclude the risk and rewards of expansion are inadequate. In
a life style’ SSB, an owner may trade profitability today against profitability tomorrow
(Ahmed, 2010).
1.1.4 Contextual perspectiveThe study was carried out in Barclays bank in Kampala Uganda. non-performing loans and
increased cost of doing business are some of the negative consequences limiting financial
performance of Barclays bank in Kampala Uganda. Unfavorable government policies on
credit policies, inadequacy resource, customer dissatisfaction and lack of security are
challenges to financial performance of Barclays bank in Kampala Uganda.
1.2 Statement of the problemPoor financial performance is a problem facing commercial banks in Kampala like Barclays
bank in particular. There is a declining trend of average profits for commercial banks, while
their liabilities are increasing (Bank of Uganda, 2012). Unfavorable government policies on
Table 3.1: Population and Sample SizeS/no Categories Populat Sample Data Sampling
ion size collection methodsmethods
I Barclays bank Kampala road 100 60 Questionnair Simple randombranch e
2 Barclays bank Kikuubo branch 80 50 Questionnair Simple randome
3 Barclays bank Room street 60 40 Questionnair Simple randombranch e
4 Total 240 150
3.4 Sampling procedure
Simple random sampling and purposive sampling was used to select the respondents.
Purposive sampling was used to select employees from the Barclays bank and these included
managers, and bank employees. Simple random sampling was used to select bank employees.
This ensured that all top employees are represented in the study and all had a chance of being
selected to participate in this study as respondents.
3.5 Sources of data
A number of sources of data were used to facilitate data collection from the respondents.
These included questionnaires, interview guide and observation guide and document analysis.
3.5.1 Primary sourcesQuestionnaire
A questionnaire was used as source of data collection since it had instructions on paper to
guide and explain to the participant, according to the response. According to Paul (2013) a
questionnaire is suitable for source of data collection since it goes deep within minds or
attitudes, feeling or reactions of people. Therefore the researcher had to distribute the
questionnaires to the bank staff in order to collect the required information.
Interviews
This is a data collection source which was used in interviewing of respondents. An interview
is a source of data collection in which a researcher obtains information from the respondents
by face-to-face interaction, oral or telephone conversation. It was used because of the
relatively high response rate and suitability to gather information.
20
3.5.2 Secondary sources
This was sourced by reviewing of already existing documented resources such as
newspapers, journals, reports, presentations, magazines. This was done in order to first
identify the existing information on the research topic and to understand how much the
respondents know about the research topic in order to avoid lies.
3.6 Research instrument
3.6.1 QuestionnaireA questionnaire was the malor method used for data collection. The questionnaire was
preferred for this study because it enabled the researcher reach a larger number of
respondents within a short time, thus can make it easier to collect relevant information. The
first section in the questionnaire was the face sheet, to collect data on profile of respondents.
The second section in the questionnaire will be credit policy .The third section of the
questionnaire had questions on financial performance. All the questions are Likert Scaled on
four points ranging from 1= strongly disagree, 2 = disagree, 3 = agree, and 4 = strongly agree.
The questionnaire contained close-ended questions to collect quantifiable data relevant for
precise and effective correlation of research variables. It was preferred to save time. enable
respondents to easily fill out the questionnaires and keep them on the subject and relatively
objective.
3.6.2 Interview guideThe interview guide was used to collect key information about the study from key
respondents who were some of the managers of the Barclays bank from different branches.
The respondents were asked questions including opinions on the subject matter. This aimed at
collecting information that couldn’t be put down in writing.
3.7 Validity and reliability of the instrument
3.7.1 ValidityHere the questionnaire was given to three lecturers (experts) to judge the validity of questions
according to the objectives. After the assessment of the questionnaire, the necessary
adjustments were made bearing in mind the objectives of the study. Then a content validity
index (CVI) was computed using the following formula,
CVI =
21
A minimum of 0.75 of CVI will be used to test validity of the research instrument
3.7.2 ReliabilityTo ensure the reliability of the instrument, the researcher used the test-retest method. The
questionnaire was given to 1 0 people and after two weeks, the same questionnaire was given
to the same people and the Cronbatch Alpha was computed using SPSS. The minimum
Cronbatch Alpha coefficient of 0.75 was used to declare an instrument reliable (>0.75).
3.8 Data gathering procedure
Before the administration of the questionnaires
Before the administration of the questionnaires the researcher had to take an introductory
letter from the College of Economics and Management (CEM). the researcher had to first
seek authorization from the proposed respondents to conduct research and review the
questions to avoid errors and ensure that only qualified respondents are approached.
During the administration of the questionnaires
The respondents were requested to sign and answer the questionnaires. The researcher
emphasized retrieval of the questionnaires within three days from the date of distribution.
And lastly, all returned questionnaires were checked if all were answered.
After the administration of the questionnaires
The data gathered was collected, coded into the computer and statistically treated using the
Statistical Package for Social Sciences (SPSS).
3.9 Data Analysis
The frequency and percentage distribution were used to determine the demographic
characteristics of the respondents. The mean and standard deviations were applied for the
extent of credit policy and financial performance. An item analysis illustrated the strengths
and weaknesses of the respondents based on credit policy and financial performance in terms
of mean and rank. From these strengths and weaknesses, the recommendations were derived.
22
The following mean ranges and descriptions were used to interpret responses:
For credit policy
Mean Range Response Mode Interpretation
3.26-4.00 Strongly agree Very satisfactory
2.51-3.25 Agree Satisfactory
1 .76-2.50 Disagree Unsatisfactory
1 .00-1.75 Strongly disagree Very unsatisfactory
For financial performance
Mean Range Response Mode Interpretation
3.26-4.00 Strongly agree Very satisfactory
2.51-3.25 Agree Satisfactory
1 .76-2.50 Disagree Unsatisfactory
1 .00-1.75 Strongly disagree Very unsatisfactory
The researcher used Pearson’s linear correlation coefficient (PLCC) to analyze the
relationship between credit policy and financial performance.
3.10 Ethical considerations
To ensure confidentiality of the information provided by the respondents and to ascertain the
practice of ethical in this study, the following activities were implemented by the researcher:
1. Requested the respondents to sign in the inform consent form
2. Acknowledged the authors quoted in this study and the author of standardized
instrument through citations and referencing.
3. Presented the findings in a generalized manner.
23
3.11 Limitations of the study
In view of the following threats to validity, the researcher allows 0.05 level of significance.
Measures are also indicated in order to minimize if not to eradicate the threats to the validity
of the findings of the study.
I. Extraneous variables were beyond the researcher’s control such as respondent’s
honesty, personal biases and uncontrolled setting of the study
2. Testing the use of research assistants can bring about inconsistency in the
administration of the questionnaires in terms of time of administration, understanding
of the items in the questionnaires and explanations given to the respondents. To
minimize the threat, the respondents were briefed on the procedures to be done in data
collection.
3. Attrition/Mortality: Not all questionnaires were returned completely answered or
even retrieved back due to circumstances on the part of the respondents such as
travels, sickness, hospitalization and refusal/withdrawal to participate. In anticipation
to this, the researcher reserved more respondents by exceeding the minimum sample
size. The respondents were also reminded not to leave any item in the questionnaires
unanswered and were closely followed up as to the date of retrieval.
24
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS
4.0 Introduction
This chapter presents the extent of credit policy, level of performance, significant relationship
between credit standards and financial performance. significant relationship between Credit
risk controls and financial performance and the significant relationship between Collection
policy and financial performance of Barclays Bank in Kampala Uganda.
4.1 Profile of Respondents
Respondents in this study were described according to their age, gender, level of education
qualification and work experience. In each case, respondents were asked through a
questionnaire to provide their profile information to enable the researcher classify and
compare them accordingly. Their responses were analyzed using frequencies and percentage
distributions as summarized in table 4.1 below;
Table 4.1: Profile of respondents
Category q~çy_ PercentGenderMale 107 71Female 43 29Total 150 100Age20-30 years 35 233 1-40 years 53 3541-50 years 47 315 1 and above years 15 1 1Total 150 100Education_qualificationCertificate 15 1 1Diploma 41 27Bachelor 58 38Master 29 19PH.D 7 5Total 150 100Working experienceLess than one year 34 231-3 years 60 404-6 years 40 267-9 years 1 0 71 0 Years and above 6 4Total 150 100Source: primary data, 2017
25
The results from the above table indicated that majority of respondents in this sample were
male (71 %) and yet female respondents were 29%. This implied a gender gap among both
employees and customers of Barclays in Kampala Uganda. The findings of the study showed
that 23% of the respondents were between 20-30 years, while 35% were between 31-40
years. 31% were 41-50 years, and also finally 11% of the respondents had 51 years and
above, this implied that majority of respondents in this sample were in their middle
adulthood,
With respect to education background, 11% of the respondents were certificate holders, the
second group of the respondents were diploma holders (27%), 38% of the respondents were
bachelors’ degree holders, 19% were master’s degree holders and finally 5% of the
respondents were PhD holders. This implied that the majority of respondents in this sample
were relatively qualified in academics. In the case of working experience 23% of the
respondents had worked for less than one year, 40% had an experience of 1 to 3 years, 26%
of the respondent worked for 4-6 years, 7% had a working experience of 7 to 9 years, while
4% of the respondent had a working experience of 10 years and above in the same field,
hence implying that the respondents in this sample were relatively experienced in the same
field.
4.2 Credit policyThe independent variable in this study was credit policy which was broken into three
constructs and these were; credit standards (measured with ten questions), credit risk controls
(with ten questions) and collection policy (with ten questions). These questions were based
on a four point Likert scale, in which respondents were asked to rate the extent of credit
policy by indicating the extent to which they agree or disagree with each question in the
questionnaire. The SPSS software was used to analyze their responses using means and ranks
as indicated in table 4.2. To interpret the means in table 4.2, the following mean ranges and
their descriptions were used;
Key to interpretation of means
Mean range Response range Interpretation3.26 - 4.00 strongly agree Very satisfactory2.51 -3.25 Agree Satisfactory1.76 - 2.50 Disagree Unsatisfactory1 .00 - 1 .75 strongly disagree Very unsatisfactory
26
Table 4.2A: Extent of credit policyItems on Credit policy Mean Interpretation RankCredit standardsBank collects reliable and timely credit information as a measure of 78 Very satisfactory Icredit standard
Bank’ credit application form is always properly worded like a legal 41 Very satisfactory 2agreement
Bank always ensure an effective and efficient credit standards Satisfactory 3. .
i m p1 em e ntat ins
The bank credit application form is a key factor considered 2.98 Satisfactory 4
The bank considers history of potential applicant as a credit standard 2 89 Satisfactory 5measure.
Some credit applicants leave without being offered credit 2.74 Satisfactory 6
Credit application is considered an essential credit policy here at the 2 70 Satisfactory 7bank
The bank scrutiny the individual account as a base of determining client 2 69 Satisfactory 8credit applicant
Bank management embraces the credit standard as a norm in credit 2 56 Satisfactory 9policy
The six C’s of credit i.e. character, capacity, collateral, conditions, ~ 45 Unsatisfactory 10control and capital of applicant arel 00% evaluated.
Average mean 2.94 Satisfactory
Credit risk controls Very satisfactoryBorrower provide the bank management with business capital setup and 3 63cash flow statement
The bank management is aware of the locality of the client business and ~ Very satisfactory 2all collateral attached to it 3.
Your bank client provide legal entity name and the prmciple as a Satisfactory 3guarantee for accepting application
Bank management evaluate the ability and creditworthy of the 19 Satisfactory 4prospective client to meet obligation as they fall due
Client provide bank with evident like land title, business license as a risk 2 99 Satisfactory 5guaranteeing factor
Bank client provide Management with information such as telephone, 2 85 Satisfactory 6P.O. Box, e~niail addresses for contact
Bank monitor information of the client statement of financial position, 2 74 Satisfactory 7statement of comprehensive income and equity
Your bank collected sufficient information before extending the credit to 2 60 Satisfactory 8applicant as risk measurement
Bank management considered past payment history of client as a means 2 42 Unsatisfactory 9of avoiding occurrence of risk
Bank maintain the legal contract document as a source and references ~, Very unsatisfactory 10for future claim to defaulter’s
Average mean 2.85 Satisfactory
Results in table 4.2A indicated that the extent of credit policy is generally satisfactory and
this was indicated by the overall mean of 2.87, implying that Barclays Bank in Kampala
27
Uganda have a good credit policy that ensures operational consistency and adherence to
uniform and sound practices. Results further denoted that the extent of credit policy differs on
different items and in different perspectives; for example, credit standards, the respondents
rated this construct generally satisfactory (average mean=2.94), implying that Barclays Bank
in Kampala Uganda always collect reliable and timely credit information as a measure of
credit standard.
With respect to credit risk controls, this variable was rated satisfactory on average and this
was indicated by the average mean of 2.85, hence implying that Barclays Bank in Kampala
Uganda always make sure that the borrowers provide the bank management with business
capital setup and cash flow statement, results in table 4.2A further indicated that of the ten
items used to measure this construct; only two items were rated very satisfactory, six items
were rated satisfactory, one time was rated unsatisfactory and only one item was rated very
unsatisfactory.
Table 4.2B
Collection policy
The bank client provide bank management with collateral securities as a 63 Very satisfactory iguarantee
The bank designed collection policy that is restrictive and critical for 2~ Satisftictory 2stability of trade and business growth
Bank management make reasonable judgment regarding the rate of 09 Satisfactory 3defaulter’s of borrowers
The bank built its policy on courtesy, fear treatment and persuasion 2.97 Satisfactory 4
The bank follow strictly general guidelines in collection as provided by ~ 87 Satisfactory 5mission statement of business —.
Bank management provide the client with information on contract and the 2 85 Satisfactory 6penalty that may happened if they fail to pay on time the liability accrued
Bank establish a unique collection policy appropriate to client accessibility ‘? 81 Satisfactory 7to product on time
The bank have average collection period at which the loan remain Satiskictory 8uncollectable as incentive allowed to client for strategy competitive 2.78advantage
The bank identify and authorized a staff to represent bank for follow ~ 2 ~8 Unsatisfactory 9and recovery of dues .3
The bank keenly follow and monitor the receivable and obtain the client ~ Very unsatisfactory 10payment on past due accounts
Average mean 2.81 Satisfactory
Overall mean 2.87 Satisfactory
Concerning collection policy, still ten items each were used to measure this construct and was
rated satisfactory on average which was indicated by the average mean of 2.81, one item was
28
rated as very satisfactory, seven items were rated satisfactory, one item was rated
unsatisfactory and one item was rated very un satisfactory. hence implying that the bank
clients always provide collateral securities as a guarantee to bank management.
4.3 Financial performanceThe dependent variable in this study was financial performance, this variable was broken into
two parts and these are; liquidity (with 10 questions each in the questionnaire) and
profitability (with ten questions each in questionnaire). Most of these questions were based
on a four point Likert scale and respondents were asked to rate the extent to which the level
of financial performance is satisfactory by indicating the extent to which they strongly agree,
agree, disagree, and strongly disagree with each question or item. Their responses were
analyzed using SPSS and summarized using means and ranks as indicated in table 4.3 below;
Table 4.3: Level of financial performance of Barclays BankItems on financial perform a nec ~ lean In terpreta lion Rank
Liquidity Very satisfactoryYour turnover is adequate to meet short—term obligations 3.70
The hank liquidity is sufficient to finance long—term project and continue to remain with • Very satisfactory 2cash to carry on short—term operation
Your bank management assess the potential growth rate and uncertaint coy i ron ment. e.g. ., Satis factory 3economic boom, high inflation and recession
Your hank consider current ration and compared to current I isbi I tv to determine the firm Satisfactory 4
- ~.0l
I quid pos tion
Your hank see the business as a going concerned 2.98 Satisfactory 5
Cash flow statement is prepared to assess financial position of l3ank 2.81 Satisfactory 6
Your bank compare the revenues and costs annually asa factor to now the liquidity 2.72 Satisihetory 7
You ltave adequate controls on managing cash and cash equivalents 2.66 Satisfactory 8
You are able to meet current liabilities on timely and effective manner 2.51 Satisfactory 9
Your collection period of debtor is favorable to Bank 2.06 Unsatisfactory 10
-~verage mean 2.92
~rotitabilitv Very satisfactoryfhe bank records annual retained earnings 3.55
Flie bank shareholders receive their dividends annually as a sign to hank profitable 3.33 Very satisfactory 2
3ank management set aside a proportion of profit as a reserve for unseen losses 3.30 Very satisfactory 3
3ank has the ability to generate adequate income consistently 3.08 Satisfactory 4
3ank evaluate the return on equity as an indicator of hank growth 3.01 Satisfactory 5
~ank management has the ability to meet its long term obligation when fall due 2.97 Satisfactory 6
tank assets are annually growing 2.93 Satisfactory 7
The bank management compared income generated by different branches to know which ~ 77 Satisfactory Sne is doing better
tank management have adequate cash deposit available for expansion of business 2.59 Satisfactory 9
lank has sufficient revenues to cover the costs and other operation and administrative 737 Unsatisfactory 10xpenses —.
Lverage mean 2.99 Satisfactory
)verall mean 2.96 Satisfactory
29
Results in table 4.3 indicated that the extent of financial performance of Barclays Bank is
generally satisfactory and this was indicated by the overall mean of 2.96, hence implying that
Barclays Bank in Kampala Uganda~always use their assets and other resources effectively
and efficiently. With respect to liquidity as the first construct on the dependent variable was
measured using ten items in each Barclays Bank and this was rated satisfactory on average
(mean=2.92), this implies that the Banks’ turnover is adequate to meet short-term obligations.
Concerning profitability; on average this construct was rated satisfactory and this was
indicated by the average mean of 2.99. this implies that the Banks’ shareholders receive their
dividends annually as a sign to high levels of profits, still results indicated that only one item
was rated unsatisfactory (mean=2.37).
4.4 Relationship between credit standards and financial performanceThe first objective in this study was to establish the effect of credit standards on financial
performance in Barclays Bank in Kampala Uganda, to achieve this objective and to test this
null hypothesis, the researcher used the Pearsons Linear Correlation Coefficient as indicated
in table 4.4;
Table 4.4. Significant relationship between credit standards and financial performanceVariables correlated r-value Sig Interpretation Decision
on HoCredit standards
Vs .896 .000 Significant RejectedFinancial performance correlation
Source: Primary Data, 2017
Results in table 4.4 indicated a positive significant relationship between credit standards and
financial performance, since the sig. value (0.000) was less than 0.05 and which is the
maximum level of significance required to declare a significant relationship. This implies that
good credit standards highly contribute to the financial performance in Barclays Bank in
Kampala Uganda, and unfavorable credit standards reduces it; here the stated null hypothesis
was rejected basing on these results and hence concluding that high levels of credit standards
contribute to the financial performance of Barclays Bank in Kampala Uganda.
4.5 Relationship between Credit risk controls and financial performanceThe second objective in this study was to establish whether there is a significant relationship
between credit risk controls and financial performance, for which it was hypothesized that
credit risk controls and financial performance were not significantly correlated. To test this
null hypothesis, the researcher correlated the mean indices on credit risk controls and those
30
on financial performance using the Pearson’s Linear correlation Coefficient (PLCC) and
results are indicated in table 4.5 below;
Table 4.5 Significant relationship between Credit risk controls and financialperformanceVariables correlated r- Sig Interpretation Decision
value on HoCredit risk controls
Vs .922 .000 Significant RejectedFinancial performance - correlation
Source: Primary Data, 2017
The Pearson’s Linear correlation Coefficient (PLCC) results in table 4.5 indicated a positive
significant relationship between credit risk controls and financial performance, since the sig.
value (0,000) was far less than 0.05, which is the maximum level of significance required to
declare a significant relationship in social sciences. Therefore this implies that high credit risk
controls improves the level of financial performance and poor credit risk controls reduces it.
Basing on these results the stated null hypothesis was rejected and a conclusion made that
satisfying credit risk controls enhances the financial performance of Barclays Bank in
Kampala Uganda.
4.6 Relationship between Collection policy and financial performanceThe last objective in this study was to establish whether there is a significant relationship
between collection policy and financial performance. Since the researcher stated a null
hypothesis that there is a significant relationship between collection policy and financial
performance. To achieve this last objective and to test this null hypothesis, the researcher
correlated the average mean on collection policy and that on financial performance using the
Pearson’s Linear Correlation Coefficient, as indicated in table 4.6;
Table 4.6 Significant relationship between collection policy and financial performanceVariables correlated r- Sig Interpretation Decision on
value HoCollection policy
Vs .925 .000 Significant RejectedFinancial performance I correlation
Source: Primary Data, 2017
Results in table 4.6 indicated a positive significant relationship between collection policy and
financial performance in Barclays Bank in Kampala Uganda, since the sig. value (.000) was
far less than 0.05, which is the maximum level of significance required to declare a
31
significant relationship in social sciences: Therefore this implies that good collection policy
increases the level of financial performance in Barclays Bank in Kampala Uganda and poor
collection policy reduces it. Basing on these results the stated null hypothesis was rejected
and a conclusion made that good collection policy enhances the financial performance of
Barclays Bank in Kampala Uganda.
4.7 Regression analysis
Adjusted~ Variables regressed r F-value Sig. Interpretation H02
Performance of Barclays BankVS .893 415.187 .000 Significant Rejected
Credit policy effect
Coefficients Beta t-value Sh~ J-~.
(Constant) Insignificant i-\ccepted.520 .604
effectCredit standards Significant Rejected
.221 3.359 .001effect
Credit risk control Significant Rejected.348 4.467 .000
effect
Source: Primary Data, 2017
Regression analysis results in table 4.7 above connoted that credit policy accounted for 89%
on the financial performance of Barclays Bank in Kampala Uganda and this was indicated by
adjusted r squared of 0.893 leading to a conclusion that credit policy significantly affect the
financial performance of Barclays Bank in Kampala Uganda. The coefficients table denoted
that of all the aspects of credit policy, collection policy accounted for the biggest influence on
the financial performance of Barclays Bank in Kampala Uganda (~0.407. SigO. 000).
Table 4.7 Regression Ana1~sis between the Dependent and Independent Variables
Collection policy.407 .000
Significant Rejectede ffèct
32
CHAPTER FIVE
DISCUSSIONS, CONLUSIONS AND RECOMMENDATIONS
5.0 IntroductionThis chapter focuses on the findings, conclusions; recommendations based on the conclusions
of this study and suggested areas that need further research following the study objectives and
study hypothesis.
5.1 DiscussionsThis study was set to find out the relationship between credit policy and financial
performance in Barclays Bank in Kampala Uganda, three specific objectives guided this
study and these were i) identify the effect of credit standards on financial performance; ii)
determine the effect of credit risk controls on financial performance and (iii) to evaluate the
effect of collection policy on financial performance.
Objective one; Relationship between credit standards and financial performance
The first objective in this study was to determine the effect of credit standards on financial
performance, the findings indicated that there exists a positive and significant relationship
between the extent of credit standards and flnancial performance in Barclays Bank in
Kampala Uganda (Sig=O.000), this relationship therefore implies that good credit standards
highly contribute to the financial performance in Barclays Bank in Kampala Uganda, and
unfavorable credit standards reduce it.
Objective two; Relationship between credit risk controls and financial performance
The second objective in this study was to determine the effect of credit risk controls on
financial performance in Barclays Bank in Kampala Uganda, from which the second
hypothesis of the study was also stated that; there is no significant relationship between credit
risk controls and financial performance. However this study revealed that there is a
significant relationship between credit risk controls and financial performance, the null
hypothesis was rejected meaning that credit risk controls and financial performance are
significantly correlated, this also leads to a conclusion that high credit risk controls improve
the level of financial performance in Barclays Bank in Kampala Uganda and poor credit risk
controls reduces it.
Objective three; Relationship between collection policy and financial performance
The third objective in this study was to evaluate the effect of collection policy on financial
performance in Barclays Bank in Kampala Uganda, from which the third hypothesis of the
33
study had also been stated that; there is no significant relationship between collection policy
and financial performance. But the findings of this study proved a positive significant
relationship between collection policy and financial performance in the Barclays Bank in
Kampala Uganda, this therefore implies that good collection policy increases the level of
financial performance in Barclays Bank in Kampala Uganda and poor collection policy
reduces it.
The study further revealed that credit policy significantly affect the financial performance of
Barclays Bank in Kampala Uganda, this was also evidenced by the adjusted r squared (0.893)
which denoted that credit policy contributed 89% on financial performance of Barclays Bank
in Kampala Uganda, the coefficients section also revealed that of all the aspects on credit
policy, the collection policy accounted for the biggest influence on financial performance of
Barclays Bank in Kampala Uganda (~O.407, SigO.000).
Extent of credit policy
Data analysis using means indicated that the extent of credit policy was rated satisfactory,
hence confirming that Barclays Bank in Kampala Uganda have a good credit policy that
ensures operational consistency and adherence to uniform and sound practices, this finding is
also in line with McNaughton (1 996) who noted that credit policy is as a set of guidelines
designed to minimize costs associated with creditworthiness while maximizing the benefits
from it. McNaughton also added that a good credit policy should be one that ensures
operational consistency and adherence to uniform and sound practices.
The extent of credit standards as the first construct on the independent variable (IV) was rated
satisfactory, hence confirming that that Barclays Bank in Kampala Uganda always collect
reliable and timely credit information as a measure of credit standard, this also agrees with
Campbell (2012) who argued that credit standards are a set of terms that a company or bank
uses to determine whether to extend a loan or line of credit to an applicant.
Credit risk controls as the second construct on credit policy was rated satisfactory, hence
confirming that Banks in Barclays Bank in Kampala Uganda always make sure that the
borrowers provide the bank management with business capital setup and cash flow statement.
These findings are also in line with Kakuru (2001) who argues that credit risk controls are
done to minimize losses resulting from investigating in unrecoverable clients and that sources
of such information include; banks, companies, associated competitors, supplies and
34
individuals applicants and the collection of such information is not free but the cost is
justifiable.
The extent of collection policy was rated satisfactory, hence confirming that the bank clients
always provide collateral securities as a guarantee to bank management. this finding is also in
line with Finlay (1 998) who asserts that collection policy involves monitory receivables to
spot trouble and obtaining payment on past due accounts, he also added that it measures the
number of days for which a credit transaction remains outstanding and thus determines the
speed of payment by clients.
Financial performance
The extent of financial performance of Barclays Bank is generally high. hence leading to an
implication that Barclays Bank in Kampala Uganda always use their assets and other
resources effectively and efficiently, this finding is also in agreement with Lawrence &
Charles (1 995) who asserted that financial Performance is a general measure of a firms
overall financial health over a given period of time, and can be used to compare similar firms
across the same industry or to compare industries or sectors in aggregation, Lawrence &
Charles also added that line items such as revenue from operations, operating income or cash
flow from operations can be used, as well as total unit sales and debtors (Lawrence &
Charles, 1995).
5.2 Conclusions
Objective one; relationship between credit standards and financial performance
There is a positive and significant relationship between credit standards and financial
performance in Barclays Bank in Kampala Uganda, hence concluding that good credit
standards highly contribute to the financial performance of Barclays Bank in Kampala
Uganda, and unfavorable credit standards reduce it.
Objective two; relationship between credit risk controls and financial performance
There is a positive and significant relationship between credit risk controls and financial
performance in Barclays Bank in Kampala Uganda, hence concluding that that high credit
risk controls improve the level of financial performance in Barclays Bank in Kampala
Uganda and poor credit risk controls reduces it.
35
Objective three; relationship between collection policy and financial performance
There is a positive and significant relationship between collection policy and financial
performance in Barclays Bank in Kampala Uganda, hence concluding that good collection
policy increases the level of financial performance in Barclays Bank in Kampala Uganda and
poor collection policy reduces it.
Also the researcher concluded that credit policy significantly affect the financial performance
of Barclays Bank in Kampala Uganda, and the credit policy contributed 89% on the level of
financial performance of Barclays Bank in Kampala Uganda.
Extent of credit policy
The extent of credit policy was rated satisfactory. hence concluding that Barclays Bank in
Kampala Uganda has a good credit policy that ensures operational consistency and adherence
to uniform and sound practices.
Extent of financial performance
The financial performance of Barclays Bank is generally high, hence leading to a conclusion
that Barclays Bank in Kampala Uganda always use their assets and other resources
effectively and efficiently.
5.3 Recommendation
The researcher recommends to the management of Barclays Bank in Kampala Uganda to
make sure that the six C’s of credit such as character, capacity, collateral, conditions, control
and capital of applicant arel 00% evaluated.
2. The researcher recommends to the management of Barclays Bank in Kampala Uganda to
consider past payment history of client as a means of avoiding occurrence of risk.
3. The researcher recommends to the management of Barclays Bank in Kampala Uganda to
maintain the legal contract document as a source and references for future claim to defaulters
and this will increase on the level of financial performance.
4. The researcher recommends that Barclays Bank in Kampala Uganda should identify and
authorize a staff to represent the bank for follow up and recovery of dues, and this will
improve on the collection procedures.
5. Barclays Bank in Kampala Uganda should keenly follow and monitor the receivable and
obtain the client payment on past due accounts, hence also improving on the collection
procedures.
36
6. Barclays Bank in Kampala Uganda should make sure that they have sufficient revenues to
cover the costs and other operation and administrative expenses.
5.4 Areas for further research -
Prospective researchers and even students are encouraged to research on the following areas;
Credit standards and financial performance of commercial Banks in Kampala Uganda.
2. Credit risk controls and financial performance of commercial Banks in Kampala Uganda.
3. Credit policy and Profitability of commercial Banks in Kampala Uganda.
4. Collection policy and liquidity performance of commercial Banks in in Kampala Uganda,
37
REFERENCESAhrned, M., B. (2010). Measuring the Peilbrmance of Islamic Banks by Adapting
Conventional Ratios German University in- Cairo Faculty of Management
Technology Working Paper No. 16 pp 1-26.
Amin, M. E. (1999). Social science research; Conception, iviethodology & Analysis:
Kampala, Makerere University.
Bandura A,&Bussey K. (1999). Social cognitive theory of gender development and
A2. Age (a) 20-30. (b) 31 -40, (c)~:41~50 and (d) 51 years and above
A3. Education level
(a). Certificate (b).Diploma
(c)._ Bachelors (d)._Masters
(e).PhD
A4. Number of years of experience
1. Less than one
2. 1 year- 3 years
3. 4years-6years
4. 7years- 9years
5. 10 years and above
SECTION B: Questionnaire on credit policy in selected branches of Barclays BankDirection: Please tick your rating on the scale space below each option which corresponds to
your best choice. Kindly use the scoring system below.
Scales/n Items 1 2]34A Credit standardsI Bank management embraces the credit standard as a norm in
credit policy2 The bank considers history of potential applicant as a credit
standard measure.3 Some credit applicants leave without being offered credit — —
4 The bank credit application form is a key factor considered — —
41
5 Bank always ensure an effective and efficient credit standardsimplementations
6 Credit application is considered an essential credit policy here atthe bank
7 Bank collects reliable and timely credit information as ameasure of credit standard
8 Bank’ credit application form is always properly worded like alegal agreement
9 The six C’s of credit i.e. character. capacity, collateral,conditions, control and capital of applicant are 100% evaluated. — —
10 The bank sêrutiny the individual account as a base ofdetermining client credit applicant
B Credit risk controls • •I Your bank collected sufficient information before extending the
credit to applicant as risk measurement2 Bank management considered past payment history of client as a
means of avoiding occurrence of risk3 Your bank client provide legal entity name and the principle as a
guarantee for accepting application4 The bank management is aware of the locality of the client
business and all collateral attached to it5 Bank monitor information of the client statement of financial
position, statement of comprehensive income and equity —
6 Bank client provide Management with information such astelephone, P.O. Box, e-mail addresses for contact
7 Borrower provide the bank management with business capitalsetup and cash flow statement
8 Client provide bank with evident like land title. business licenseas a risk guaranteeing factor
9 Bank management evaluate the ability and creditworthy of theprospective client to meet obligation as they fall due
1 0 Bank maintain the legal contract document as a source andreferences for future claim to defaulter’s
C Collection policyI The bank keenly follow and monitor the receivable and obtain
the client payment on past due accounts2 Bank management provide the client with information on
contract and the penalty that may happened if they fail to pay ontime the liability accrued
3 The bank have average collection period at which the loanremain uncollectable as incentive allowed to client for strategycompetitive advantage
4 The bank built its policy on courtesy, fear treatment and — —
persuasion5 Bank management make reasonable judgment regarding the rate
of defaulter’s of borrowers6 The bank follow strictly general guidelines in collection as
provided by mission statement of business — —
7 The bank identify and authorized a staff to represent bank for — —
42
follow up and recovery of dues8 The bank designed collection policy that is restrictive an
critical for stability of trade and business growth9 The bank client provide bank management with collateral
securities as a guarantee10 Bank establish a unique collection policy appropriate to client
accessibility to product on time
SECTION C: QUESTIONNAIRE ON FINANCIAL PERFORMANCEDireètion: Please tick your rating on the scale space below each option which corresponds to
your best choice. Kindly use the scoring system below.
DescriptionStrongly agreeAgreeDisagree
_______ Strongly disagree
Numerical GuideMean Range
4Scale
s/no Items 1 2 3 4D Liquidity1 Your bank see the business as a going concerned —
2 Cash flow statement is prepared to assess financial position ofBank
3 The bank liquidity is sufficient to finance long-term projectand continue to remain with cash to carry on short—termoperati on
4 You are able to meet current liabilities on timely and effectivemanner
5 Your collection period of debtor is favorable to Bank —
6 Your bank compare the revenues and costs annually as afactor to now the liquidity
7 Your turnover is adequate to meet short-term obligations8 Your bank management assess the potential growth rate and
uncertainty environment, e.g. economic boom, high inflationand recession
9 Your bank consider current ration and compared to currentliability to determine the firm liquid position —
10 You have adequate controls on managing cash and cashequivalents
E ProfItability1 Bank management have adequate cash deposit available for
expansion of business2 Bank has sufficient revenues to cover the costs and other
operation_and administrative_expenses —
3 Bank evaluate the return on equity as an indicator of bankgrowth
43
4 I The bank management compared income generated bydifferent branches to know which one is doing better
5 Bank management set aside a proportion of profit as a reservefor unseen losses
6 The bank shareholders receive their dividends annually as asign to bank profitable
7 Bank assets are annually growing8 Bank has the ability to generate adequate income consistently9 Bank management has the ability to meet its long term
obligation when fall due1 0 The bank records annual retained earnings — —
COLLEGE OF ECONOMICS AND MANAGEMENTDEPARTMENT OF ACCOUNTING AND FINANCE
February, 27th 2017
To the ManagerBarclays Bank, Kampala Branch
Dear Sir/Madam,
RE: INTRODUCTORY LEHER FOR WAZILINDA LONGWE, REG NO~BBA/41196/142/DF
This is to introduce to you the above named student, who is a bonafide studentof Kampala International University pursuing a Bachelor’s Degree in BusinessAdministration, Third year Second semester.
The purpose of this letter is to request you to avail her with all the necessaryassistance regarding her research.
Topic~ CREDIT POLICY AND FINANCIAL PERFORMANCE INBARCLAYS BANK IN KAMPALA UGANDA~
Any information sj~iared-with her from your organization shall be treated withutmost confidenttait~y
7We shall be grateful for your positIve response
Yours tr~Z~ ‘L~i ~U z~
Dr KIRABO KYE~UNE BOUNtY JOSEPHHOD — ACCOUNTING~ FINANCE0772323344
• BARC~YSBarclays Bank of Uganda LtdP.O. Box 7101Hannington roadKampala UgandaTel: +256779092369.
We are pleased to inform you that we have given you permission in respect of yourresearch request of collecting data from our organisation. Your initiative is appreciableand Barclays bank is ready to support this research at the best. Wazilinda Longwe willbe conducting a research study from Barclays bank of Uganda on “CREDiT POLICYAND FIANCIAL PERFORMANCE IN BARCLAYS BANK IN KAMPALA UGANDA”. She hasinformed us on the design of the study as well as the targeted population. We assureyou that our staffs are ready to cooperate with you at all times in relation to what yourequested.