Credit risk management and profitability of financial institutions in Uganda:

Abstract

Internationally, it was approved that the stability and reliability of the financial institution was key to economic growth of any economy (Bhatti et al., 2020). Apart from facilitating savings, commercial banks extend credit to individuals who can be used to ease production, acquire capital assets and facilitate trade (Bagale, 2023). All financial institutions get profit through extending credit services to both institutions and individuals (Driga, 2012). Despite of that, the profitability of financial institutions still continues to decline. For instance, insight to European Central Bank (ECB) annual report (Court, 2019), the growth rate of bank loans to firms decreased from 7.1% to 4.3% in 2020 and 2021 respectively with the depreciation of euro by 3.6% affecting the bank’s return on equity (ROE). ROE was well been low bank cost of equity (COE) in 2020. This was important because commercial banks with ROE persistently below their COE are deemed to have an insufficient level of profitability (KPMG, 2021). Also, according to annual report of Industrial and commercial bank of China ltd (UNICEF/WHO, 2019), Profit before provision was RMB627.5 billion, representing a decrease of 5.5% from the previous year. Net profit reduced to RMB350.2 billion, representing also a decrease of 10.2% from the previous year. Return on total average assets and return on weighted average equity remained constant ton the previous year. Capital adequacy ratio stood at 18.02%. NPL ratio was 1.42%, down 0.16% points from the end of the previous year. (Lalon & Morshada, 2020) revealed that the Banking industry of Bangladeshi Bank suffered a considerable amount of classified loan consisting over 8% of nonperforming loan so that the profitability measured with ROA of banking sector was decreased from 1.3% to 0.8% as the bankers were reluctant to lend fresh loans due to heavy burden of non-performing loan prevailing between 2019 to 2018.In sub-Saharan Africa.