Enhancing Loan Performance through Effective Credit Risk Management: Evidence from Commercial Banks in Uganda

Background and Purpose: Credit risk management is a critical determinant of the stability and performance of commercial banks. Despite its importance, poor lending practices and inadequate risk management have led to the collapse of numerous banks worldwide, including notable cases such as Northern Rock Bank in the UK and Crane Bank in Uganda. This study examines the relationship between credit risk management practices and loan performance, with a focus on identifying gaps and proposing strategies to enhance banking stability. Design/Methodology/Approach: The study adopted a cross-sectional research design, collecting data from 219 respondents, including credit clients, staff, and managers of a commercial bank in Uganda. A mixed-methods approach was employed, combining quantitative data from self-administered questionnaires and qualitative insights from face-to-face interviews. Descriptive statistics, correlation analysis, and thematic analysis were used to analyze the data, providing a comprehensive understanding of the factors influencing loan performance and risk management practices. Findings: The results reveal that timely repayments and effective tracking mechanisms are key strengths in loan performance, with borrowers generally making payments on time (mean = 4.37, SD = 0.98). However, gaps were identified in risk mitigation strategies, particularly in minimizing losses from defaults (mean = 2.87, SD = 0.83) and supporting borrowers facing financial difficulties (mean = 3.41, SD = 0.87). Risk management practices, such as client appraisal, were found to be structured but could benefit from enhanced scenario-based planning (mean = 3.76, SD = 0.93) and the use of advanced tools like SWOT analysis (mean = 3.66, SD = 0.87). A strong positive correlation was observed between client appraisal and loan performance (r = 0.87, p < 0.001), underscoring the importance of thorough risk assessment in improving loan outcomes. Practical Implications: The study recommends strengthening risk mitigation strategies, improving borrower support systems, and leveraging technology to enhance risk assessment frameworks. Banks should also foster a culture of proactive risk management through staff training, collaborative approaches, and regular monitoring of risk management practices. These measures will help banks reduce non-performing loans, improve resilience, and achieve sustainable growth. Originality/Value: This study contributes to the growing body of literature on credit risk management by providing empirical evidence from a developing economy context. It offers actionable insights for policymakers and practitioners, highlighting the need for continuous improvement in risk management practices to ensure banking stability and performance. The findings underscore the interconnectedness of risk management and loan performance, providing a roadmap for banks to enhance their operational efficiency and financial resilience.