ABSTRACT

Loan management is one of the most vital activities in any Commercial Bank and cannot be overlooked by any economic enterprise engaged in loan irrespective of its business nature. Sound loan management is a prerequisite for a Commercial bank stability and continuing profitability, while deteriorating loan quality is the most frequent cause of poor financial performance and condition.

As with any Commercial bank, the biggest risk in Commercial bank is lending money and not getting it back. The study sought to determine the effect of loan management on the financial performance of Commercial Banks in Cameroon with particular interest in the Littoral region. The study adopted a descriptive survey design. The population of study consisted of Commercial Banks in Littoral region. Primary data was collected using questionnaires where all the issues on the questionnaire were addressed.

Descriptive statistics were used to analyze data. Furthermore, descriptions were made based on the results of the tables. The study found that client appraisal; Loan risk control and collection policy had effect on financial performance of Commercial Banks. The study established that there was strong relationship between financial performance of Commercial banks and client appraisal, Loan risk control and collection policy.

The study established that client appraisal, Loan risk control and collection policy significantly influence financial performance of Commercial Banks. Loan risk control was found to have a higher effect on financial performance and that a stringent policy is more effective in debt recovery than a lenient policy. The study recommends that Commercial banks should enhance their collection policy by adapting a more stringent policy to a lenient policy for effective debt recovery.

Keywords: Loan Risk Management, Financial Performance, Client Appraisal, Collection Policy, BICEC Bank, Douala.

CHAPTER ONE

INTRODUCTION

• Background to the Study

Loan procedures policy plays an important role in economic development of different sector of the country such as industrial, commercial, business sector and so on. In past, loaning or lending policy was not in a discipline manner, but with the development of advancement of modern financial activities loaning has been recently developed in a discipline manner. Banking sector acts a vital role in the economic development of the country. Commercial banks are one of the important aspects of this sector, which deals in the process of channeling and available resources in the needed sector. Commercial banks are major financial institutional, which occupy quite important place in the framework in every economy because they provide capital for the development of industry. Commercial banks formulate sound investment policies to make it more effective, which eventually contribute to the economic growth of country. The bound policies help commercial banks maximizing quality and quantity of investment and hereby achieve the own objective of profit maximization and social welfare. Formulation of sound investment policies and co-ordinate and planned efforts pushes forward the forces of economic growth.

A Loan is an essential aspect of a commercial bank. “First, income from loan contributes substantially to the revenues and profit of the bank. Second, lending money to people in the community strengthens the community-bank relationship. Third, loaning money encourage business development and supports a growing economy” • Loaning operation of commercial banks is very risky one. For these commercial banks have to pay due consideration while formulating loaning policy. A well loaning policy attracts of borrowers and lenders, which help to increase the volume and quality of deposits, loans and investment. Loan procedure strongly recommends analyzing and managing the credit risks. Credit risk is defined as the possibility that a borrower will fail to meet its obligations in accordance with the approved terms and conditions. The goal of the credit risk strategy is to maximize a bank’s risk adjusted rate of return by maintaining the credit risk exposure within acceptable parameters. For most banks, loan is the largest and most obvious sources of credit risk. However, other sources of credit risk exist throughout the activities of a bank, including in the banking book, trading book and both increasingly facing credit risk in various financial instruments other than land, including acceptances, interbank transactions and guarantees and the settlement of transactions. The loaning policy of a firm provides the framework to determine whether or not to extend credit and how much credit to extend. A firm has to establish and use standards in making loaning decision, develop appropriate sources of credit information and method of loaning.

• Loan Management

Loan Management as define by Allianz Trade is the process of granting credit to customers, setting payments terms and condition to enable them to pay their bills on time and in full, recovering payments, and ensuring customers comply with the company’s credit policy.

Loan management is a method or strategy adopted by a firm to ensure that they maintain an optimal level of credit and effective management as define by Bagh et al.

Stability and profitability of financial institutions depends on the loan management policies in that institution which poor performance is attributed to low credit quality. There are steps on managing Loan risk. The first step is to ensure lending staffs complies with the laid down policies of the institution.

Secondly, Financial institutions should ensure that their credit policies manage other areas of credit risk such as loans, they should create a good relationship with their clients, Monitoring of a loan portfolio should be on a continual basis in order to establish that the current performance matches up to the projected expectations.

Loan risk management is a process that involved the identification of potential risks the appropriate treatment and actual implementation of risk models (Tony van Bastel and Bart baesens 2XXX).

Loan risk management forms a key part of a company’s overall risk management strategy. Weak credit risk management is a primary cause of many business failures. Many small businesses for example, have neither the expertise nor the resources to operate a sound credit management system. When a company grants credit to its customers, it incurs the risk of nonpayment.

Gregory (2010), credit risk occurs when counterparty is not in a position or is unwilling to meet his or her obligation. It may be distinguished in terms of an actual default or declining of counterparty’s credit quality. Owing to the fact that credit risk exposure goes on as the foremost basis of tribulations in financial institutions globally, these institutions draw constructive lessons from these past occurrences.

1.1.2 Financial Performance

Financial performance as define by Gibson (2012) may be referred to as the extent to which financial goals and objectives of a financial institution have been accomplished or are being attained. It is a process of matching up the revenue generated to the institution’s set policies. It is a key measure for assessing the financial health of a particular organization within the set time. Several financial institutions to measure their financial stability and performance utilize profitability ratios. These ratios are key indicators of credit analysis in most banks, as they are linked to the results that are attributable to the performance of management (Gibson, 2012) a Commercial bank is said to be financially stable when its operating costs and expenses are fully covered by its operating income Thus, if the non-performing loans and portfolio at risk escalates, the stability of the commercial bank is susceptible. Commercial bank’s lending interest rates, repayment rate, and portfolio quality are key determinants in measuring the financial stability and performance of Commercial bank.

1.1.3 Loan Risk Management and Financial Performance

Loan risk management is crucial for the financial performance of the commercial banks, as it directly impacts profitability, stability, and operational efficiency. Effective risk management minimizes credit risk, reducing non-performing loans (NPLs) and ensuring steady interest income. Banks that maintain strong capital reserves and diversify their loan portfolios improve their stability and resilience against economic downturns. Additionally, efficient risk assessment and debt recovery mechanisms lower operational costs and enhance profitability. Poor loan risk management, on the other hand, leads to higher default rates, capital erosion, and financial instability. In conclusion, a well-structured loan risk management system is essential for sustainable growth and long-term success in the banking sector. Loan risk has been cited to be and continue to be an impediment in the performance and growth of this very important sector.

1.1.4 Commercial Bank institutions  

In Douala, as Cameroon’s economic hub, hosts a diverse array of commercial banks that cater to both individual and corporate financial needs. Here’s an overview of some prominent institutions: BICEC, AFRILAND FIRST BANK, CBC (Commercial Bank Cameroon), ACCESS BANK, BANGE BANK, CCA (Common Credit Account), ECOBANK, SOCIETE GENERAL CAMEROON, SCB (Societe Commerciale de Banque Cameroun), CITIBANK, NFC BANK (National Financial Credit), UBA (United Bank for Africa).

1.2 STATEMENT OF THE PROBLEM

Loan procedures (Lending) is one of the most important terms of investment method. So, ever financial institution should concentrate on loaning as important means of investment. But the sufficient return cannot have been found to be cared as well stable and appropriate loaning policy hasn’t been followed by these commercial banks.

Loan enrolling is the major important factor for promoters, Shareholders and managers. Fund enrolling policy of joint venture banks may differ from each other but there is no optimum utilization of shareholder’s fund to have greater return in any bank.

BEAC Central Bank played vital role to make commercial bank enroll their fund in good sector. For this purpose, BEAC Central Bank has imposed many rules and regulations as the bank can have sufficient liquidity and security. Also, the central Bank provided a platform that helps to regulate and control the loan procedures in all the commercial banks in the country know as Central Risk Center. None of the commercial banks can survive without implementing its lending functions efficiently. In present situation liquidity with public is quite high and banks are not getting promising lending opportunities properly.

Loaning portfolio position of the banks is not satisfactory. They are not following a sound diversification principle. At one time commercial bank’s lending had invested a large proportion of their loan to garment, hotel, carpet industries but these sectors became weak and banks are in trouble of their loan repayment. Commercial banks in Cameroon have been facing several challenges, some of them arising from lack of smooth functioning of economy, some of them arising due to confused policies and many of them arising due to default of the borrowers. Thus, in this scenario of Cameroon commercial banking sector this study deals with the following listed issues.

• What step should be taken under consideration in order to improve the loaning policy of commercial banks?
• Inadequate documents provided by the lender to the commercial bank according to its loan procedures.
• Loan repayment by weak sectors of activities.
• Lenders accumulating debts from various commercial banks.
• How the commercial bank measures the liquidity position and impact of deposit on liquidity?

1.3 Research Questions

1.3.1 Main Research Question

What is the effect of Loan risk management on the financial performance of commercial bank?

1.3.2 Specific Research Questions

1. What is the effect of loan risk control loan on the financial performance of commercial bank?
2. What is the effect of collection policy on the financial performance of commercial bank?
3. What is the effect of liquidity risk on the financial performance of commercial bank?

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