Research proposal on the effect of credit risk management on loan recovery in Tanzania
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The effect of credit risk management on loan recovery in Tanzania
Loans constitute a proportion of CR as they normally account for 10-15 times the equity of bank (Kitua, 1996), banking business is likely to face difficulties when there is a slight deterioration in the quality of loans. Poor loan quality has its roots in the information processing mechanism. Lending has been, and still is, the mainstay of banking business, true in Tanzania where capital markets are not yet well developed. Tanzania in particular, lending activities have been controversial and difficult matter as because business firms on one hand are complaining about lack of credits and the excessively high standards set by banks, while CBs on the other hand have suffered large losses on bad loans (Richard, 2006).
There is a need to investigate through primary
and secondary resources several effects of credit risk management on loan
recovery in Tanzania. There has to engage in a case study analysis of credit
risk models affecting loan recoveries of the country. The need to report cases
References and further reading may be available for this article. To view references and further reading you must purchase this article.in Tanzania. The need to investigate certain credit policies as sufficient to overcome fragmentation of financial markets because of structural and institutional barriers to interactions across different market segments, the financial liberalization and bank restructuring in Tanzania context should be accompanied by complementary measures to address institutional and structural problems, such as contract enforcement and information availability, and to improve the integration of informal and formal financial markets. The purpose of research will be to develop conceptual model to be used further in understanding credit risk management system of commercial banks in an economy with less developed financial sector. Tanzania, less developed economy, provides an excellent case for studying how CBs operating in economies with less developed financial sector manage their credit risk. The research will identify issues to be studied further in order to establish CRM system by CBs operating in Tanzania.
Loans that constitute a large proportion of the assets in most banks' portfolios are relatively illiquid and exhibit the highest CR (Koch and MacDonald, 2000). The theory of asymmetric information argues that it may be impossible to distinguish good borrowers from bad borrowers (Auronen, 2003) which may result in adverse selection and moral hazards problems. Adverse selection and moral hazards have led to substantial accumulation of non-performing accounts in banks. The very existence of banks is often interpreted in terms of its superior ability to overcome three basic problems of information asymmetry, namely ex ante, interim and ex post. The management of CR in banking industry follows the process of risk identification, measurement, assessment, monitoring and control. It involves identification of potential risk factors, estimate their consequences, monitor activities exposed to the identified risk factors and put in place control measures to prevent or reduce the undesirable effects. Effective system that ensures repayment of loans by borrowers is critical in dealing with asymmetric information problems and in reducing the level of loan losses, thus the long-term success of any banking organization (IAIS, 2003).
Effective CRM involves establishing an appropriate CR environment; operating under a sound credit granting process; maintaining an appropriate credit administration that involves monitoring process as well as adequate controls over CR (Greuning and Bratanovic, 2003). Considerations that form the basis for sound CRM system include: policy and strategies that clearly outline the scope and allocation of a bank credit facilities and the manner in which credit portfolio is managed, i.e. how loans are originated, appraised, supervised and collected (Greuning and Bratanovic, 2003). Thus, also been observed that high-quality CRM staffs are critical to ensure that the depth of knowledge and judgment needed is always available, thus successfully managing the CR in the CBs (Wyman, 1999). Marphatia and Tiwari (2004) have argued that risk management is primarily about people, how people think and how they interact with one another.
Tanzania economy being in a transition makes information asymmetry more pronounced. Effective CRM system minimizes the CR, hence the level of loan losses. There is an extensive literature on management of CR in CBs, which allowed the formulation of a deductive research design. Most literature is from the developed world. Empirical studies show differences in approaches to CRM when different contexts are considered (Menkhoff et al., 2006; Mlabwa, 2004). The nature of study will require understanding of the CRM phenomena within Tanzanian context. The CRM as phenomenon is a process whose understanding required rich data in its respective context to be collected. The case study approach will be appropriate strategy in collecting the required empirical data. The information required was qualitative and contextual in nature and was therefore analyzed qualitatively.
The principle in the selection of the case is that it has to be information rich (Yin, 2003). The bank that was active in lending activities, had both foreign and local characteristics in its operations, had been in operations for relatively longer period and was willing to avail the required information provided the best case for the study (Johnson and Christensen, 2004). Three top officials in the credit management department have to be interviewed for the purpose of not only verifying the information obtained from the studied documents, ensuring data validity but obtain clarification on some issues that will either not clear to the researcher while reading and analyzing the documents. The research will review existing literature that consists of evidence from developed countries. The study model is proposed with amendment to fit Tanzania's environment, will be achieved through the use of secondary (various relevant documents) and primary (interviews) information from CB and key management officials dealing with credit management. The selected CB is active in lending, has foreign and local characteristics in its operations and has been in operation for a relatively longer period. The need to imply that environment within which the bank operates is an important consideration for CRM system to be successful.
Auronen, L. (2003), "Asymmetric information: theory and applications", paper presented at the Seminar of Strategy and International Business, Helsinki University of Technology, Helsinki, May
Greuning, H., Bratanovic, S.B. (2003), Analyzing and Managing Banking Risk: A Framework for Assessing Corporate Governance and Financial Risk, 2nd ed., The World Bank, Washington, DC
Johnson, B., Christensen, L. (2004), Educational Research: Quantitative, Qualitative and Mixed Approaches, 2nd ed., Pearson Education, Harlow
Kitua, D.Y. (1996), "Application of multiple discriminant analysis in developing a commercial banks loan classification model and assessment of significance of contributing variables: a case of National Bank of Commerce"
Koch, T.W., MacDonald, S.S. (2000), Bank Management, The Dryden Press/Harcourt College Publishers, Hinsdale, IL/Orlando, FL
Marphatia, A.C., Tiwari, N. (2004), Risk Management in the Financial Services Industry: An Overview, TATA Consultancy Services, Mumbai, .
Menkhoff, L., Neuberger, D., Suwanaporn, C. (2006), "Collateral-based lending in emerging markets: evidence from Thailand", Journal of Banking & Finance, Vol. 30 No.1, pp.1-21.
Mlabwa, A (2004), "Usefulness of collateral as a means of mitigating risk by banks in Tanzania: a case study of CRDB Bank Limited", .
Richard, E. (2006), Credit Risk Management Policy and Strategies: The Case of a Commercial Bank in Tanzania, BA Publications, .
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