Credit management practices, loan portfolio quality, and profitability of commercial banks in Uganda

Abstract

Bank profitability is widely accepted measure of financial stability of banks worldwide. It enables banks to build capital reserves which can be used to absorb losses during economic recessions. The current study sought to establish the influence of credit management practices and loan portfolio quality on the profitability of commercial banks in Uganda. The specific objectives of the study were; to establish the effect of credit management practices on commercial banks’ profitability, to examine the effect of Loan portfolio quality on commercial banks’ profitability and to assess the combined effect of credit management practices and Loan portfolio quality on commercial banks’ profitability in Uganda. The study was anchored on the Modern Portfolio Theory to explain the hypothetical relationship between the study variables. A cross-sectional research design with a quantitative approach was adopted. Data were collected from 133 respondents drawn from 21 commercial banks licensed by the Bank of Uganda through structured questionnaires. Statistical analysis was conducted using SPSS Version 22, employing descriptive statistics, correlation, hierarchical regression, and multiple regression analyses. The findings revealed that credit management practices significantly enhanced profitability. Similarly, loan portfolio quality had a strong positive and significant effect on profitability. The combined effect of credit management practices and loan portfolio quality on profitability was also positive and statistically significant, implying that improvements in both areas jointly contribute to higher bank profitability. These results affirm that sound credit governance and a high-quality loan portfolio are critical drivers of profitability in Uganda’s commercial banking sector. The study concludes that profitability in commercial banks largely depends on the strength of their credit management systems and the quality of their loan portfolios. The study recommends that banks should strengthen their credit appraisal, documentation, and approval processes while improving monitoring mechanisms to sustain loan quality. Regulators such as the Bank of Uganda should continue enforcing prudent credit management frameworks to enhance financial stability and sustainable profitability.