Factors affecting loan repayment in commercial banks in Uganda: A case of Centenary bank, Mapeera branch Kampala.

Abstract

The study examined the factors affecting loan repayment in Commercial banks in Uganda using Centenary bank, head office as a case study. The specific objectives of the study include: to assess the effect of interest rates on loan repayment; to examine the effect of credit rating on loan repayment; to assess the effect of collateral security on loan repayment; and to examine the effect recovery mechanism on loan repayment at Centenary bank. A sample size of 70 respondents was selected from a study population of 85 using Krejcie and Morgan (1970) table. Data was collected by using a Likert scale based questionnaire containing five choices; strongly agree, agree, not sure, disagree and strongly disagree. Data was analyzed using Mean and standard deviation, Pearson correlation and regression analysis with the help of Statistical package for social sciences (SPSS) version 20. The results showed a significant positive relationship between: Interest Rate (IR) and Loan Repayment at (r = .519**), Credit rating (CR) and Loan Repayment at (r = .383**), Collateral Security (CS) and Loan Repayment at (r = .351**), and Recovery Mechanism and Loan Repayment at (r = .304*). The study concluded that interest rates, credit ratings, collateral security and recovery mechanisms are significant predicators of loan repayment, where a change made in one of the independent variables can lead to a change in loan repayment. It was recommended that Commercial banks should pay attention to interest rates and credit rating methods, since they are significant factors that affect loan repayment rates. There should be a reduction in interest rates because high interest rates make loans more expensive, hence increasing default rates. Commercial banks should also always consider the collateral pledged, because clients who pledge tangible assets are less likely to default as compared with those who pledge intangible assets. In case of default, the bank can easily sell off the tangible asset and recover the money back.