Title
The title for the proposed study is Credit Risk Management: Its Impact on Savings and Loans. This paper will show the different approaches, methods and instruments to be used in order to implement the future study and meet its objectives and aims.
Background of the Study/Literature Review
Financial institutions (FIs) are very important in any economy. Their role is similar to that of blood arteries in the human body, because FIs pump financial resources for economic growth from the depositories to where they are required (Shanmugan and Bourke, 1990). Commercial banks (CBs) are FIs and are key providers of financial information to the economy. They play even a most critical role to emergent economies where borrowers have no access to capital markets (Greuning and Bratanovic, 2003). There is evidence that well-functioning CBs accelerate economic growth, while poorly functioning CBs impede economic progress and exacerbate poverty (Barth et al., 2004).
CBs face various risks that can be categorized into three groups; financial [with credit risk (CR) being a component], operational and strategic (Cornett and Saunders, 1999). These risks have different impact on the performance of CBs. The magnitude and the level of loss caused by CR compared to others is severe to cause bank failures (Chijoriga, 1997). Over the years, there have been an increased number of significant bank problems in both matured and emerging economies. Various researchers have studied reasons behind bank problems and identified several factors (Basel, 2004). Credit problems, especially weakness in credit risk management (CRM), have been identified to be a part of the major reasons behind banking difficulties. Loans constitute a large proportion of CR as they normally account for 10-15 times the equity of a bank (Kitua, 1996). Thus, 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. BrownBridge (1998) observed that these problems are at their acute stage in developing countries. The problem often begins right at the loan application stage (Liuksila, 1996) and increases further at the loan approval, monitoring and controlling stages, especially when CRM guidelines in terms of policy and strategies/procedures for credit processing do not exist or weak or incomplete.
Lending has been, and still is, the mainstay of banking business, and this is more true to emerging economies like Tanzania where capital markets are not yet well developed. To most of the transition economies, however, and Tanzania in particular, lending activities have been controversial and a difficult matter. This is 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). It has been found out that in order to minimize loan losses and so as the CR, it is essential for CBs to have an effective CRM system in place (Santomero, 1997; Basel, 1999). Given the asymmetric information that exists between lenders and borrowers, banks must have a mechanism to ensure that they not only evaluate default risk that is unknown to them ex ante in order to avoid adverse selection, but also that can evolve ex post in order to avoid moral hazards.
Aims and Objectives
The main aim of the study is to analyze the impact of credit risk management on the savings and loans. In line with this the following are the specific objectives of the study:
· To analyze the different credit risks faced by financial institutions;
· To evaluate the different credit risks management activities implemented by financial institutions; and
· To assess the impact of credit risk management on savings and loans.
Methodology
The research study to be used in the proposed study will be descriptive method. According to Creswell (1994) it intends to present facts about the nature and status of a situation as it exists at the time of the study. In addition, it also concerns with the relationships and practices that exist, beliefs and processes that are ongoing, effects that are being felt or trends that are developing (Best 1970). Therefore, it can be helpful in order to describe the current conditions and situations based on the impressions and perceptions of the respondents of the study (Creswell 1994). Both qualitative and quantitative data will be gathered for this study. This is to ensure that both non-statistical and statistical data will be used in order to support the findings and result of the study.
References
Barth, J.R., Caprio, G. Jr, Levine, R. (2004), “Bank regulation and supervision: what works best?”, Journal of Financial Intermediation, Vol. 13 pp.205-48.
Basel (1999), “Principles for the management of credit risk”, Consultative paper issued by the Basel Committee on Banking Supervision, Basel.
BrownBridge, M. (1998), “Financial distress in local banks in Kenya, Uganda and Zambia: causes and implications for regulatory policy”, Development Policy Review Journal, Vol. 16 No.2, pp.173-89.
Chijoriga, M.M. (1997), “Application of credit scoring and financial distress prediction models to commercial banks lending: the case of Tanzania”, Wirts Chaftsnnversitat Wien (WU), Vienna.
Cornett, M.M., Saunders, A. (1999), Fundamentals of Financial Institutions Management, Irwin/McGraw-Hill, Boston, MA.
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.
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”.
Liukisila, C. (1996), “IMF Survey”, Healthy Banks are Vital for a Strong Economy, Finance and Development, Washington, DC.
Richard, E. (2006), Credit Risk Management Policy and Strategies: The Case of a Commercial Bank in Tanzania, BA Publications.
Santomero, A.M. (1997), Commercial Bank Risk Management: An Analysis of the Process, The Wharton School of the University of Pennsylvania, Philadelphia, PA
Shanmugan, B., Bourke, P. (1990), The Management of Financial Institutions: Selected Readings, Addison-Wesley Publishing, Reading, MA.
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