1.0 INTRODUCTION 1.1 Background of the study · So the aim of cash management is to maintain control over cash position to keep the organization sufficiently and use excess cash in

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1.0 INTRODUCTION

This chapter presents the background of the study, statement of the problem, Purpose of

the study, objectives of the study, scope of the study and significance of the study.

1.1 Background of the study

The growth of various banking and micro finance institutions has largely contributed to

an increasing lending to borrowers. It is vital to note that, today’s economic growth poses

a big challenge to lenders to predict borrowers’ performance in recessionary conditions.

Macquarie [1995] defined funds management as the way company’s funds such as

investment funds and service funds are put into proper use. He explained that financial

institutions should ensure that optimal funds are properly and effectively used in order for

an institution to avoid cash deficit. He again mentioned that the task of funds

management are to budget all revenues and expenditure for individual responsibility

areas, monitor future funds movement in light of the budget available and to prevent

budget overruns. Schall & Hally (1980) defined Funds management as the process of

managing balance sheet and off-balance sheet instruments to maximize and maintain the

spread between interests earned and paid. He said that funds management indicators

include cash and currency, service funds, investment funds and liquidity funds

Loan assessment was defined by Pandy (1995) as procedures, guidelines laid down for

granting a loan to individual and collecting individual account. Different financial

institutions in Uganda use various loan assessments indicators such as credit score and

loan screening. Loan screening is met to ensure that the loan is advanced to capable and

right customers such that the bank avoids loses from debtors who might fail to refund

back the money borrowed. Pandy[1995] also explained that banks and micro finance

institutions often rely on information from screened loan applicants to judge whether they

can issue a loan to the customer or not. Also financial institutions monitor borrowers

through repeated interaction with their clients to ensure that the loan advanced to them

used according to the loan covenant between the bank and the customer to ensure its

efficiency this normally applies to the subsequent borrowers than the new entrants since

it requires ample time to determine the true credit worthiness of individual borrowers

In the bid to improve on the nature of loan assessment system, Centenary Bank managers

are faced with the problems such as bad debts were by many clients fail to repay back the

loan, Administrative costs which is concerned with paper work and also a challenge of

constant record keeping (Tayebwa, 1992).Managers also face problem associated with

funds management such as planning and monitoring program, control and measure of

results (Macquarie, 1995).

Centenary Bank managers are taking measures to improve on the problem of bad debts, it

is assessing credit worthiness of loan applicants, and banks usually refer to their past

experience with similar borrowers in similar markets (McKenzie, 2000).This may imply

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that, when a bank expands into a new market, the negative effects of lack of expertise

may overcome the benefits from risk diversification. He went further and said that there

is a need to establish strict internal guidelines, which ensures that loans are based on

sound credit analysis if the banks are to realize significant profitability. Despite of the

above measures, Centenary Bank still face a problem of bad debts and also loan recovery

is still low.Hower ever if the problem is not sloved,profitability of the bank will be low

due bad debts and also will fail to meet its cardinal objectives.

1.2 Statement of the problem

Centenary Bank is faced with the problem of bad debts, administrative costs Krugman,

(1990).

In the bid to improve on its loan assessment system., the bank through its enormous

efforts has tried to improve on the nature of loan assessment and to prevent bad debts fro

accumulating by ensuring that they establish strict internal guidelines which ensure that

the loan is based on a sound credit analysis and also to establish a long term customer

relationship between the bank and its customers. This has been done to enable the bank

acquire some considerable valuable information which can be used to assess if the

borrower is eligible for a loan. The problem has not been rectified because bad debts still

exist and there is low loan recovery. The probable cause is that at times banks charge

high interest rates on the loans, which the borrowers at times fail to pay in time or not

able to pay at all. If the problem continues the efficiency of the system will be affected

which may cause loss to the bank.

1.3 Purpose of the study

The study is to establish the relationship between funds management and loan assessment

system for centenary bank

1.4 Objectives of the study

i. To examine the nature of loan assessment systems in Centenary Bank.

ii. To assess the fund management policies in centenary bank

iii. To establish the relationship between funds management and loan assessment

system for financial institutions in Uganda

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1.5 Research Question

i. What is the nature of loan assessment system put in place in centenary

bank?

ii. What are fund management policies are used in centenary bank?

iii. What is the relationship between funds management and loan assessment

system in centenary bank?

1.6 Scope of the study

Geographical scope

The study was carried out at Centenary Bank headquarters at Entebbe road and its

branches at Entebbe road, Namirembe road, Nakivubo road, Speke road in Kampala.

Other Financial institutions like DFCU at Kimathi Avenue, and Stanbic bank Jinja road

will also be visited so as to enable the researcher meet the first objective.

Subject scope

The study focused on funds management and loan assessment system and also analyzing

a loan assessment system as an enabling tool in the decision making process by studying

the bank’s existing system and coming up with a design of a more efficient and reliable

system.

Significance of the study

The study tries to assist centenary bank to improve on its loan assessment policies.

This will result into maximizing profits and reducing loan losses that are met whenever

credit is extended.

i. The study will also be useful to other researchers who are interested in carrying

out study on the same subject.

ii. Centenary bank, a private bank, by improving on its funds management policy

and loan assessment policies, it can maximize profits, and this will be of

importance to the share holders and who maintain deposits with the bank

iii. The study will expose the inherent situations of loan assessment systems in the

financial institutions and thus is an eye opener to such institutions.

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iv. The study will point out the intensity of the loopholes within the loan

assessment systems in Uganda’s financial institutions thus assisting the key

stakeholders to design the appropriate policies and measures towards addressing

the problem.

v. The study will come up with an alternative design regarding loan assessment in

Centenary Bank and this is expected to improve on the quality of the systems

and the bank will benefit.

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CHAPTER TWO

2.0 LITERATURE REVIEW

In this chapter Studies was carried out on various banking institutions worldwide and

Uganda in particular. The main objective is to assess the funds management policies and

examine the nature of loan assessment system in financial institution in Uganda. . It will

be carefully selected from published journals on internet, textbooks and other written

down by different researcher and writers.

2.1FUNDS MANGEMENT

Definition of funds management

Macquarie,( 1998) defined Funds management as the way company’s funds such as

investment funds, service funds, liquidity funds, cash and currency are put into proper

use. He said that large proportion of funds are placed directly or indirectly on government

paper and the reminder lent on overdraft on the basis of general appraisal of the credit

worthiness of customer

2.2 Funds management policies

Macquarie (1995) explained below the comprehensive funds management policies used

by financial institutions and these are,

Funds management committee

Establish a Funds Management Committee to meet at least monthly. The policy should

define the responsibilities of the committee, how the committee will obtain input from the

Board and how the committee results will be reported back to the Board.

The responsibilities of the Board should include the determination of how to best allocate

the bank's available funding sources among various asset categories after reviewing.

Loan pricing

Provide a method of loan pricing, which would include cost of funds, overhead and

administrative costs, and desired profits. Determine when to use fixed rates and when to

use floating rates.

Investment mix

In conjunction with the bank's Investment Policy, determine which types of investments

are permitted, determine the desired mix among those investments, and determine the

maturity distribution

Record keeping

Define and establish record keeping systems to track the volume of rate-sensitive assets

and rate-sensitive liabilities. Rate-sensitive assets and liabilities are generally defined as

those that either mature or can be reprised during a specified time period (90 days, 180

days, 1 year).

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Rate sensitive

Recognize the need to offset volumes and maturities of rate-sensitive liabilities with

equal or similar amounts of quality assets, which mature or can be rate-adjusted at about

the same time. Along these lines, a range of acceptable ratios for rate-sensitive assets to

rate-sensitive liabilities should be made a part of the policy to protect the bank against

excessive interest rate risk and ensure that an adequate net interest margin is maintained.

2.3 Funds management variables

According to Walter and Meigs ([1984) said below are different forms of funds managed

by financial institutions and among these include,

Cash and currency management

Liquidity management

Service management

Investment management

2.3.1 Cash management

Walter (1984) said that cash management efficiency include measures that do;

Prevent losses from fraud or safety.

Prevent unnecessary large amounts of cash from being held idle in bank account which

produce no revenue.

Provided accurate accounting for cash receipts, cash payment and cash balances.

An obvious aim of the firms now days is to manage its cash affairs in such a way as to

keep cash balance at a minimum level and to invest the surplus cash funds in profitable

opportunities. Pandy, (1997) further states that cash flows accurately particularly the

inflows and that is perfect coincidence between inflows and out flows.

So the aim of cash management is to maintain control over cash position to keep the

organization sufficiently and use excess cash in some profitable manner.

Cash management is impotent because of the following objectives;

No payment are made which should be paid

All receipts and payment are promptly and accurately recorded

All sums re received and subsequently recorded

Thomas Fachaber detected the possible negative effect if the organization does not use

cash management effectively which is the disaster that comes s a result of failure to

devote time and attention to critical management jobs

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Again a Fachaber said, effective cash management involves not only establishing

preparation of cash budget which must be integrated with operating flows and balance

sheet’

2.3.2 Cash planning

Cash planning are techniques used to plan and control the use of cash. The techniques are

used protect the financial conditions of an organization by developing a projected cash

statement from a fore cast of expected cash inflows and out flows for a given period.

The forecast may be based on the present operations of anticipated future operations, so

cash plans are crucial in developing the over all operations of the financial institution.

Mnohsin (1980), said the planning of cash involves the formation of cash policies

resulting from normal and abnormal cash requirement. The normal cash requirement

operations and include cash per items new material, salaries and wages

The abnormal cash requirements are these which cannot be anticipated in the routine of

the business process which are replaced for reasons resulting from price deadlines and

interruption of cash flows into reduced receipts corresponding reduction in cash

disbursement. So cash inflows and out flows should be planned to project cash surplus or

deficit for each of the planning period and purpose are cash forecasting and budgeting.

Rao (1994), observed that cash budget help the organization to find out what is

happening to the funds it’s obtaining and in advance for supplementing the resource if

needed The financial institutions have greater confidence for granting a loan if a realistic

objective of how the borrower plans to repay the loan presented to them in a way of cash

budgeting so it is useful to budget the cash thus being a medium of payment.

However, Pandy (1998) suggests that a cash budget is a summary of the firms expected

cash inflow and out flow over a projected period of time.

Cash forecasts help in determining the cash requirements for a predetermined period to

run the organization. If cash requirements are not determined, it would not be possible for

the management to know how much cash balance to keep in hand, what financing is

depended upon and whether surplus funds would be available to invest in Market

securities. To know the operating cash requirements, cash flows projections have to be

made by an organization as to reduce the mismatch between cash inflow and out flow.

The researcher will agree with all other researchers on cash planning as a prerequisite of

cash management, because the information helps, the financial manager to determine the

future cash needs of the organization, plan for the financing of there needs and exercise

control over the cash liquidity of the organization. Some cash budget is the most

significant device to plan for and control cash receipts and payment.

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2.3.3 Cash management controls

The control of cash is of paramount importance with the objective of ensuring that all

sums are received and subsequently accounted for the cash is paid with out properly

authorized invoices. All receipts and payments are properly collected, promptly and

accurately recorded and banked .its preferable that as far as possible, all transactions are

conducted by means of cheques or bank transfers, since controls over cheques payments

are easier to establish and maintain

Cash controls are established by management of an organization to ensure business is

carried out in an efficient and effectiveness manner, current assets are safe guard

against misuse and fraud by employees and accounting records are written in an accurate

and complete manner.

Internal controls are considered important for cash management because the volume of

transactions flowing through cash account is the greatest. Furthermore, cash management

is very susceptible to defalcation given the fact that cash is the most liquid assets.

Management is met to ensure the amount shown as cash in the financial statements

constitute of all cash on hand, cash in bank, in transit and all the cash owned by a

company is written and has not been misappropriated Meigs (1984).

2.4 Investment management

Investment management is the professional management of various securities such as

shares, bonds and assets like real estate. in order to meet specified investment goals for

the benefit of the investors. Investors may be institutions (insurance companies, pension

funds, corporations, charities, educational establishments etc.) or private investors (both

directly via investment contracts and more commonly via collective investment schemes

e.g. mutual funds or exchange-traded funds).

The term asset management is often used to refer to the investment management of

collective investments, (not necessarily) while the more generic fund management may

refer to all forms of institutional investment as well as investment management for

private investors. Investment managers who specialize in advisory or discretionary

management on behalf of (normally wealthy) private investors may often refer to their

services as wealth management or portfolio management often within the context of so-

called "private banking".

The provision of investment management services' includes elements of financial

statement analysis, asset selection, stock selection, plan implementation and ongoing

monitoring of investments. Investment management is a large and important global

industry in its own right responsible for caretaking of trillions of yuan, dollars, euro,

pounds and yen. Coming under the remit of financial services many of the world's largest

companies are at least in part investment managers and employ millions of staff and

create billions in revenue.

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2.4.1 Investment styles

There are a range of different styles of fund management that the institution can

implement. For example, growth, value, growth at a reasonable price (GARP), market

neutral, small capitalization, indexed, etc. Each of these approaches has its distinctive

features, adherents and, in any particular financial environment, distinctive risk

characteristics. For example, there is evidence that growth styles (buying rapidly growing

earnings) are especially effective when the companies able to generate such growth are

scarce; conversely, when such growth is plentiful, then there is evidence that value styles

tend to outperform the indices particularly successfully

2.5 Liquidity management

Banks deal with liquidity. There is number one fact in the banking industry and it applies

to all financial institutions, Commercial Banks often faces a problem of excess liquidity

and they need to find secure profitable financial instrument in which to invest their excess

liquidity and there is need for successful liquidity management. The difficult is based on

account of the fact that while all transactions of the commercial banks rely on the loan

contract on both sides of liquidity management ,that is resource mobilization and fund

utilization .the commercial banks including centenary bank brought a new innovation in

banking industry where by transaction must pass through owning real physical assest.if

such transaction are to generate any acceptable income to either depositors of funds or to

the bank itself .in the absence of these investment funds, the profitability of the bank is

adversely affected.

The purpose of this proposal is to seek to create financial instrument that work as

compatible substitutes of treasury bonds or interest bearing instruments used by

commercial banks as deposits with the Central bank of Uganda.

2.6 Service funds management

Pandy,(1995) said that services refer to any intangible products that are offered to various

categories of people. He went further and said that financial instructions today do offer

competitive services to their customer (account owners) in order to keep them. Also

advertising is done by marketing managers to persuade other to come and open an

account in their banks.

Service management, also called IT service management, is the discipline used in

industries that provide services or a combination of goods and services. While widely

used in the IT industry, specifically the ICT (information and Communication

Technology) sector, service management can be integrated into many other industries.

Service management is usually used in conjunction with operations support systems.

Systems that use service management can include order management, inventory

management, activation, maintenance, performance diagnostics and several other types of

support systems to make sure that these systems are running proficiently and error free.

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Service Management is progressing to the pinnacle as a competent business approach. To

preserve development and customer loyalty in a cutthroat business environment, top

businesses are now identifying the necessity to enhance Service and Service Enabled

competency.

Today various services are offered by various financial institutions and among these

include ATM services (centepoint) the use of automatic telecom machine helps people to

with draw money at any time of their preference ATM deposits are credited to the

customer’s account on the next business (working) day from the date a deposit is made.

Other services include SMS Banking (centelline), PC Banking service. This can be used,

can view account balances and transaction history and download your statements and

much more. Western union money Transfer, Real Gross Time Settlement (RTGS),

Electronic Funds Transfer (EFT), safe guard service and Inter Branch Funds Transfer

2.6.1Components of Service Management

There are several components of service management. Service management usually

incorporates automated systems along with skilled labor. Service management also

usually provides service development. For instance, it is extremely important to first

simplify and then streamline services that you manage (i.e. delivery, support) into a

simple workflow. However, managing your workflow is not enough, another component

is the ability to govern automated controls from a centralized location and make sure that

data security is in effect at all times. Service Management hence becomes an

amalgamation of the following components; Service plan and service offerings, Market

Research plan, Service Portfolio Management, Stock Management, Execution Process &

Logistics, Service Contract & Claims Administration, Field Service Administration,

Billing and Customer Management.

Service Management is usually used with other types of management systems including

Total Quality Management (TQM), Six Sigma, CMMI (Capability Maturing Model and

Integration), and Business Process Management. It can be used with small scale

companies or used with extremely large corporations. The discipline of service

management has been around since the early 1970′s and was originally part of the

Operations Management discipline.

http://www.tech-faq.com/service-management.html

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2.7. LOAN ASSSESSMENT

In any organization financial planning is an integral part of corporate planning is n

integral planning. All corporate plans enunciate a profit objective and financial policy is

designed mainly to achieve profit s an objective, growth and liquidity stability

Brockington, (1987). Among the financial policies of an organization is management of

its debtors through proper loan assessment policies which is the researchers major

concern

Loan assessment this refers to procedures, guidelines laid down for granting a loan to

individual and collecting individual account (Pandy, 1995)

2.8 SOUND LOAN ASSESSMENT TECHINIQUES

Lewis, (1992) described the loan assessment techniques such as credit scoring which is

used to evaluate whether customers should or should not be granted

Credit, loan screening aids such as advances in data technology, changes in regulatory

environment.

2.8.1 Monitoring and supervision

Roland, (1999) argues that monitoring and proper supervision are important aspect when

assessing loan given to a client. He argues that banker never makes a bad loan; they only

get bad after they are made. When monitoring a loan asymmetric information is present

in loan market because lenders have less information about the investment opportunities

and activities of borrowers than borrowers do. This situation leads to two information

producing activities by banks and other finical institutions

Financial institutions carry out monitoring and enforcement of restrictive convents ,

once loan has been made ,the borrowers has an incentive to engage in risky activities

that make it less likely that a loan will be paid off. To reduce this moral hazard ,financial

institutions must adhere to the principle for mongering credit risk that a lender should

write provisions [restrictive covenant] into loan contract that restrict borrowers from

engaging in risky activities . By monitoring borrowers activities to see whether they

complying with the restrictive covenant

2.8.2 Loan screening

Pandy, (1995) encourages Adverse selection in financial institutions which provide

loans require that they should screen out the bad credit risk from the good ones so that

loans are profitable to them .to accomplish effective screening lenders must collect

reliable information from prospective borrowers. Effective screening and information

collection together from an important principle of loan management

When you apply for a loan such as a car loam or mortgages to purchase a house, the first

thing you are asked to do is to fill out forms that elicit a great deal of information about

your personal finances some time loan officers also asks bout your current account, job

description marital status .the lender uses this information to evaluate a credit risk is by

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calculating the credit score. The statistical measure is used to see weather a loam should

or should not be given out.

2.8.3 Credit rationing

According to [kakuru,1998,said that credit rationing is used where by a bank refuses to

make loans even though borrowers are willing to pay the stated interest or even

higher interest rate.. He says that credit rationing takes two forms .the first occurs when a

lender refuses to make a loan of any amount to borrower, even if the borrower is willing

to pay higher interest rate. The second occur when the borrower is willing to make a loan

but restricts the size of the loan to less than the borrower wants

2.8.4 Collateral and compensating balances

Collateral is a security which the client offers in the event of his failure. [Rouse, 1993],

argues that lenders should consider security important because It’s alternative repayment

in case the customer fails to pay.

In addition there is a compensating balance. A firm receiving a loan must keep a

required minimum amount of funds in a checking account at the bank. For example a

business getting a shs 100million loan may be required to keep compensating balances of

at least shs 10 million in its checking account at the bank. This shs 10 million in the

compensating balances can then be taken by the bank to make up some of those losses on

the loan if the borrower defaults.

2.9 Causes of Poor Loan Assessment and Recovery

Loans embrace a wide range of risks. In an economy where survival almost depends on

loans, loan officers have to be careful while assessing borrowers. Where interest rate is

considered as an important factor, a lending officer should not use a single rate of interest

for all loans because it would lead to inappropriate investment decisions. Other things

being constant, a loan should be required to earn a rate that is at least equal to the risk

free rate plus a premium. The premium would compensate for the risk attached to the

loan.

According to the International Monetary Fund, (2003) [16] a key feature of the Ugandan

banking sector is the high degree of concentration on both the loan and deposit sides.

When loans to the top five borrowers for each bank are aggregated, they represent about

40 percent of all loans wit deposit concentration having a smaller percentage. Banking

sector’s exposure to a small number of borrowers and depositors means that a cyclical

downtown or terms of trade shock affecting these borrowers could translate quickly into

asset quality problems for banks. I agree with IMF simply because a loan is a major asset

of a financial institution so if it is not properly managed, there are few chances of

survival.

The International Monetary Fund, (2003) further observed that, banks have higher loan to

deposit-ratios and a higher propensity to be in violation of insider lending limits. The

frequent violations of prudential loan assessment requirements raise serious questions

about their financial performance, governance, and solvency. Still on the credit side, the

high levels of the risk portfolio of banks, the short-term tenure of the portfolio, and the

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current high level of reported on-performing loans, have increased the overall credit risk

exposure. This is very true because if you consider Uganda in particular, you find out that

the frequent violations of prudential requirements have led to closure of Tran Africa, a

small ailing bank, and later facilitated its takeover by Orient bank.

The International Monetary Fund’s observation is actually very right because, the closure

of 3banks (ICB, Greenland, and cooperative bank) was partly as a result of poor insider

loan assessment system in place, which resulted into significant increase in ultimate

losses. This has highlighted the need to minimize disruption through prompt depositor

payout, improved application of creditor rights and remedies to enhance recoveries. This

has encouraged banks to legally pursue debtors, which is helping to cultivate a culture of

repayment.

According to Hahn, (1992) low-income consumers are high-risk borrowers as this is

attributed to inadequate income and lack of income security and hence making it difficult

for them to make repayments on credit commitments. He further adds that this is

compounded by the disproportionately higher cost of credit available to low income

earners and lack of flexibility available to consumers who may experience temporary

difficulty in maintaining repayments. However, he did not explain the extent of the

relationship between poor loan assessment and low-income consumers.

Hannig and Mugwanya, (2000) are in agreement with Hahn’s observation. They also

found out that poor borrowers cannot provide conventional collateral and therefore micro

finance institution will have to make use of alternative repayments of incentives such as

the denial of access to subsequent loans. However they do not explain the way of

determining the credit worthiness of the borrower.

Burki and Perry (1998) are of the same view like Alter and they indicate that fraudulent

practices may create risky or lead to off-balance sheet operations and are a moral hazard

to the bank. This is particularly true especially if officers want to gamble for survival, but

this happens if they are aware that their loan assessment system is poor and hence have

nothing to fear.

Joseph et al., (2002) share the same view as above and adds that, there is a tendency of

banking officers to compromise with credit borrowers and that this largely affects the

loan assessment systems since some of the compromised clients may never repay the

loan. The researcher is in agreement with Joseph simply because, experience shows that

when some of the clients get too used to officers, they may reach an extent of defaulting

expecting officers to pay from their pockets. This has led to an increase in the portfolio at

risk which has also resulted into officers’ loss of jobs.

Krugman attributed poor loan system assessment to poor system of bank restructuring.

He noted that, if restructuring is timely and capital write off and removal of boards and

managers go handing hand, discipline will be e-enforced and bankers will become careful

about the way they run the bank. The researcher actually agrees with Krugman because if

managers or credit officers overstay in branches, they learn some of the fraudulent

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practices and they begin compromising with clients. This has actually led to an increase

in bad debts which is a loss to the bank since the debts have to be provided for.

Burki and Perry, (1998) assert that the bank owners are directly or indirectly involved in

the weakening of the loan assessment systems in that they often turn banks’ credits to

finance their own activities which they in most cases did not pay in time and thus

affecting bank operations.

However they did not explain the procedure that can be undertaken to avoid such

loopholes.

Saudi Arabian monetary agency, (2003) argues that the main causes of the problems

faced by Saudi banks arises from the macroeconomics imbalances which are mainly

created by lack of adequate credit assessment and monitoring procedures in relation to

lack of required technical expertise and that all this therefore made banks so difficult to

recover their loans. However no remedies were advanced to counteract the situation of

poor loan assessment in banks.

Kumar, (2004) further noted that at times banks charge high interest rates on the loans,

which the borrowers at times fail to pay in time or not able to pay at all. His argument

was that even if loan assessment is good, other factors such as high interest rates might

affect the efficiency of the system, which may cause losses to banks.

Alter, (1980) asserts that, financial institutions have failed to determine credit worth

borrowers simply because they have inadequate credit policies, failure of bank officers to

comply with lending policies, inadequate customer relations, low staff morale, and bank

officers’ exposure to fraud. Gingrich, (1989) on the other hand believes that, the

inefficient mechanisms used in assessing loans are attributed by the banks’ pessimism

about the ability of technology to come up with decisions on who qualifies and who

doesn’t. He went ahead to suggest that the failures need to be closely examined because

they reveal deep-rooted weaknesses and limitations about banks.

According to Srinivas, (1993) Poor loan assessment is attributed by poor management of

records by banking institutions especially in keeping records on how the client has been

repaying the loans. He went a head to add that worse still, most technical assistance

providers do not tell the truth to the clients/ borrowers especially on the loan usage. He

however does not express the mechanisms the Bank may employ to counteract poor loan

assessment to the borrowers.

Krugman, (1990) noted that the reasons as to why there was no proper loan assessment

in Asian banks, was partly due to government persuasiveness or order to lend heavily to

particular industries and companies. In other wards they were Captive Banks. This

allowed the companies concerned to become over leveraged (vulnerable to economic

down town) and directed resources into unprofitable investments hence affecting the

bank’s performance. Burki and Perry, (1998) [10] on the other hand have a different

view. They believe that, poor loan assessment in Asian Banks was as a result of lack of

transparency in regional banking systems, which resulted into failure in

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Disclosing the true scale of bad debt problems and henceforth weakening the market

discipline on bank management. This reduced the need for them to face the problems and

hence undermining public confidence in banking systems, which was largely attributed to

lack of credible information from depositors.

2.10 Proposed Solutions to Poor Loan Assessment

Joseph, (2002) in his analysis of loan assessment systems noted that, there is a need for

political will to uphold the root of reform and build a safe and sound financial system that

ensures a level of economic health in relation to proper banking supervision which will

strengthen the systems of loan assessment.

Burki and Perry (1998) argue that, there is a need to establish strict internal guidelines,

which ensures that loans are based on sound credit analysis if the banks are to realize

significant profitability.

However, they did not specify the mechanisms that can be employed. In their analysis of

loans lending, they further argue that banks should not be allowed to engage in activities

which regulators can not be certain that they can monitor other wise; it leads to losses to

the bank. This is significant in that it reduces on unnecessary banks bad debts.

Bofondi and Gobbi, (2003) point out that the long-term relationships established between

lenders and borrowers are vital features of most bilateral credit market in that

considerable valuable information can be acquired; implying that incumbents credit

worthiness tests may well be more precise than those of entrants.

However they do not explain the extent of the genuinity of the information collected to

determine the credit worthiness of the borrower.

According to Fedorowioz, (1993) Banks and other lending institutions must constantly

balance risks and rewards. Too high a price on loan products, you lose the customer, too

low, you starve the profit margin or take a loss, too much capital on reserve, you miss

investment revenue; too little, and you risk regulatory noncompliance and financial

instability. When every department, line of business and region measures and reports

risks differently with desperate risk management systems, it can be difficult to accurately

gauge overall risk exposure and strike the right balance.

McCarthy, (1994) believes that financial ratios and cash flow analysis are used to analyze

the quantitative credit risk. He recommends that financial ratios cannot be analyzed in

isolation because there are no reliable standards to determine what their values should be.

The client’s ratios must be compared with those of peer firms in the industry. However,

cross sectional analysis cannot be adequately performed unless the banks have sufficient

data regarding the ratios of performs, which operate in the same industry. In Malta there

is a lack of statistical data and doubtlessly this makes it very difficult to build a database,

which would help the lending officers to interpret the ratios.

16

2.11 Loan Assessment Models to Support Decision Making.

In order to price a loan correctly, a lending officer should be capable of measuring the

risk attached to the loan, both in isolation and in relation to the portfolio. The problems

which the international banks have encountered during this decade have demonstrated

that classical credit analysis, which relies solely on the expert Judgment of the lending

officer, has serious flaws. To address this issue various credit risk models based on

different concepts have been or are being developed in order to help the banks in their

lending decisions. These models are being applied in a variety of domains such as credit

rating, credit pricing, early financial warnings and others. However, as emphasized by

Caouette (1998) current credit risk models are more in the nature of pioneering efforts to

seek better solutions, rather than the culmination of the search?

According to Alec and Annan (2004) senior portfolio modeling manager, the use of credit

scoring assists in three key areas: identifying those applicants who should receive credit,

determining the amount of credit they should receive, and the steps that should be taken

on an individual basis should there be a failure in commitment. SAS gives us the ability

to develop credit scoring models that support a fully automated assessment system.

According to Alec and Annan (2004) Using SAS loan assessment based models as an

analysis tool, managers are able to identify changes quickly within a portfolio and

through the automated process, modify the assessment strategy for certain products in a

matter of hours. In the event of customers failing to uphold their commitment, loan

assessment information with in models developed is then analyzed and evaluated by the

decision-maker to manage customers consistently and appropriately. Some of these

models include: Financial models and Statistical analysis models.

Financial models provide cash flow, internal rate of return and other investment analysis.

Whereas statistical analysis models provide summary statistics, trend projections, and

hypothesis testing.

In a loan assessment exercise, the software users are the managers and loan officers who

act as

”nodes” in the network and their job is to carry out a particular role in the decision

making process.

The nodes are interconnected and each node uses its own models (computer algorithm

and templates) to guide its information acquisition, analysis and delivery process,

Caouette (1998).

2.10.1 Risk Assessment Model.

According to Fedorowioz, (1993) any enterprise that relies on regular payments from

customers knows that there is credit risk inherent in each customer account. Managing

this risk is a delicate balancing act-assuming too much risk leads to bad debt, not enough

risk means lost opportunities for revenue growth.

Success depends on maximizing income from customers while reducing the impact that

defaulted payments and bad debt have on the bottom line. To achieve this goal requires

that businesses implement a system for evaluating the credit worthiness of current and

potential customers and the best is the credit scoring system.

17

Such systems are valuable not only for curbing bad debt but for identifying possible

cross-sell has opportunities or alternative methods of payment that will reduce risk

whiled maintaining revenue from certain customers.

2.11.2. Credit Valuation Model.

In a world where loan, bond, and credit default swap markets are converging, market-to-

market is gaining importance in the management of loan portfolios. A rigorous market-

to-market process focuses all participants in the credit risk management process on the

contribution of individual loans and the loan portfolio as a whole to the shareholder value

of their financial institution. Credit valuation model provides a comprehensive solution

for the accurate, timely, and secure valuation of loans and loan portfolios. These models

provide data that allow information across credit markets to be used in loan valuation.

Credit valuation is a necessary prerequisite to lending. It ensures a desired quality of the

asset portfolio, and results in loan pricing that correspond to the risks assumed. It also

provides means to reduce the likelihood of substantive losses through portfolio

diversification.

Credit valuation is an objective and quantitative process. It should not depend on the

judgment of a particular person or committee. Instead, it should be based on observable

quantities, most

2.12 Relationships between funds management and loam assessment

Cash and currency management requires a strict code of operation in which it should be

carried out. The cash control procedure in management of cash is implemented

depending on the nature of loan assessment. The loan given to customers does not only

depend on of bank reserves but it also depends on the all system of cash management

(saleemi, 1989).

Liquidity management is necessary to prevent mishandling and safeguard against loss.

Strong liquidity management also helps the bank to increase on its reserves implying that

there will be adequate money stock some of it will be given out as a loan to customers

simplifying the nature of loan assessment.

Investment funds should be care full careered for because when a financials instruction

increases its investment Porto folio it will be able to increase on its on its capital source

and also bank reserves will increase too .however this will increase on the number of

customer who need a loan and this implies a good loan assessment system.

Investment funds management requires good governance, and in a bid to secure your

financial interests at all levels, we pay high attention to the right use of funds when

executing any given project. Whether it is LC or direct remittance or even paying your

bills to Chinese manufacturers / suppliers, we spend your money like our own and keep

you posted with the account activity good investments yield high capital stock of the

bank and the bank will be will to give out more loans and hence improving on its loan

assessment policy.

18

REFERANCES

Brealey R.A &Myers S.T (1998) Principles of Corporate Finance, MC Graw- Hill book

co.

Franks J.R, Broyles J.E, Carleton w.T (1996) financial management in practice. Boston.

Massachusetts: PWs-KENT Publishing Company

Gitman L.J (1982) Principles of Managerial Finance, 3rd ed.New York: Harper & ROW,

Publishers, Inc.

Johnson W.R and Melicher W.R (1995) Financial Management. 5th ed.Boston: Allyn and

BACON Inc.

Pandey I.M (1993), Financial Management and Policy Prentice-Hall.

Van Horne J.V (1989). Financial Management and Policy, 8th Ed. New Jersey: Prentince-

Hall International Editions.

Anon, J. (2004). Performance of Financial Institutions in Uganda. New Vision

Publications,

Kampala, 5(4), pg 7, 6th August 2004

Burki, S. J., Perry, G. E., (1998). Banks and capital markets: The World Bank,

Washington

D.C.

Hanning, A. and Mugwanya, E. (2000). How to Regulate and Supervise Micro finance.

Johns

and Hopkins University Press, Baltimore, MA

International Monetary Fund (2003). Financial system Stability Assessment .Washington

D.C

Myers, M. D. (1997). Qualitative research in information systems [Online]. Available:

http://www.auckland.ac.nz/msis/isworld/ [1997, November 21].

19

Mayo, K.S. (1999).Finance for the Poor: Micro Finance Development Strategy. IADB,

Washinhton D.C.

McKenzie, D. (2002). Payment Systems and Infrastructure; Banks and Banking Reform:

The

World Bank group, Washington D.C

Van Horne C. & wachowicz john M.Jr. (1992). Fundamentals of Financial Management.

Prentice Hall International, Eighth Edition.

Obone A.E (1993) “Monetary Theory Banking and Public Finance”, McGraw-Hill se

Internet

Journals and text books

Kakuru (1998), Financial Management. The Business Publishing Group, Kampala

Uganda

Pandey, I.M. (1997), Financial Management.7th Revision EDITION Vikas Publishing

House, P.V.T Ltd.

Van Horne, J.C. (1995), Financial Management and Policy.11th

edition. Prentice-Hall

International.

Mannasseh Tumuhimbise”Credit Management in Public Utilities in Uganda.” In:

Makerere Business Journal (Discussion paper 2)

^ Fund Management:. [TheCityUK]. 2010-10-11. Retrieved 2008-14-14

David Swensen, "Pioneering Portfolio Management: An Unconventional Approach to

Institutional Investment," New York, NY: The Free Press, May 2000.

http://en.wikipedia.org/wiki/Investment_management#cite_ref-0

http://www.thecityuk.com/assets/Uploads/Fund-management-2010.pdf

http://en.wikipedia.org/wiki/David_Swensen

20

CHAPTER THREE

METHODOLGY

3.1 Introduction

The chapter therefore covers the research design, sampling design and type, survey

population, sampling method and criteria, tools, data sources, variables for the study,

procedures of collecting data, unit of analysis and presentation and limitations to the

study.

3.2 Research design and type

3.2.1 Research design

The researcher used qualitative and quantitative (phenomenological) as well as

descriptive design based on the relationship and results obtained from the questionnaires,

interview and documents from secondary data.

This generated detailed information about the study/research from many sources hence

better findings.

3.2.2 Research type

The researcher engaged in a basic research. This enabled the researcher to generate a

body of knowledge intended to know management of funds and proper loan assessment

procedures.

3.3 Sampling method and design

A stratified random sampling method was used to select the participants and hence

respondents were grouped in strata as management and employees. A simple random

sampling method was also used to select respondents from each stratum. It was the most

appropriate with least bias and offers the most generalisability as well as yielding good

results.

3.3.1 Sampling procedures

Using a sampling fraction, K, the researcher determined the population size (N) and the

sample size (n) and arrange the population in a list. A uniform sampling fraction was

determined by dividing the sample size by the survey population. The sampling fraction

K=N/n will be calculated. A starting point was randomly chosen, which a number

between 1 to k was and the researcher picked the kith item on the list.

3.3.2 Survey population

The survey population was sixty (60), of which they include respondents from employees

of all departments and clients.

3.3.3 Sample size

The sample size of thirty (30) respondents was selected from the targeted population of

sixty (60) employees and clients.

21

Table3.1; distribution of sample size among respondents

respondents numbers

Top management 5

staff 15

clients 10

total 30

Source; primary data

3.3.4 Sampling procedure

Staff members, top management will be selected basing on their knowledge about loan

assessment department. Customers who will come to Centenary Bank with knowledge of

loan assessment will be selected. A simple random and purposive sampling will be used

to select the respondents.

3.4 Data collection

Researcher obtained data on variables using well written closed and open ended

questionnaires; also oral interviews will be used.

3.4.1 Primary data

The study involved use of questionnaires and interviews (face to face) to collect primary

data. Structured questionnaires were also used to administer to enable the researcher

analyze funds management and loan assessment.

3.4.2 Secondary data.

The secondary source was got from the available records, text books, past research work,

journals and different websites on the internet.

3.5 Data collection methods

The data was obtained by use of the questionnaires and interviews.

3.5.1 Questionnaires

The researcher designed the questionnaire basing on the objectives of the study and

research questions. The questionnaires were structured in short and precise sentences,

consisting closed ended questions.

3.5.2 Face to face interview

For the purpose of clarification on unclear issues, the researcher conducted face to face

interview with the respondents.

3.6 Data processing and analysis

3.6.1 Data processing

22

3.6.1.1Editing

This was carried out to ensure that data from the respondent s is accurate, reliable and

consistent. All the questionnaires from the field will be properly and carefully scrutinized

so as to check on the omissions, incompleteness and inconsistencies.

3.6.1.2 Coding

Edited responses given were coded in numerical terms, in order for easy analysis.

3.6.1.3Tabulation

The data is tabulated in appropriate table format and then analysis was carried out..

3.6.2 Data analysis

The findings were analyzed to give a clear overview an insight of the problem under the

study using statistical package for social scientist tools like frequency tables and

percentages.

3.7 Anticipated limitation of the study

Funding; securing funds to finance the research exercise especially for items like

transport, Stationary and secretarial services were hard.

Time frame; the researcher faced a problem of limited time for the whole exercise. It was

for both the researcher and the respondents

Delay by the respondents to fill the questionnaires issued to them is another problem

faced by the researcher.

23

CHAPTER FOUR

PRESENTATION, ANALYSIS AND DISCUSSION OF RESEARCH FINDINGS

This chapter presents the findings that were revealed in the research study.

Questionnaires were self administered using a sample size of 30 respondents. Information

presented was analyzed and interpreted using the following study objectives;

i. To examine the nature of loan assessment systems in Centenary Bank

ii. To assess the fund management policies in centenary bank

iii. To establish the relationship between funds management and loan assessment

system for financial institutions in Uganda

The presentation of findings obtained from primary and secondary data invoices use of

tables, figures and percentages to describe and analyze the findings and draw meaningful

conculusion.This was done with the help of statistical package for social science(SPSS).,

4.1 Bio data.

Findings on the bio information of respondents such as gender, age, academic

qualification and job title.

4.1.1 Findings on the gender of respondents. Findings on the gender of respondents were obtained and presented in the table below:

Table 1: Gender of respondents

respondents Frequency Percentage (%)

Male 18 60

Female 12 40

Total 30 100

Source: primary data

From Table 1 above, it’s evident that 60% of the respondents were male while 40% were

female. This shows that there was no gender bias hence this has no effect on the findings

from the study.

4.1.2 Findings on the age brackets of respondents

The study captured the different age brackets of respondents in order to establish the most

prevalent group, the respondents were asked to state their age. Findings were obtained

and presented in the table below:

Table 2: Age distribution of the respondents

Age bracket Frequency Percentage (%)

24

20-30 years 6 20

31-40 years 6 20

41-50 years 12 37

50 years plus 8 23

Total 30 100


From Table 2 above, 37% of the respondents were between 41-50 years, 20% of the

respondents were between 20-30 years, 20% between 41-50 years of the respondents and

23% of the respondents were above 50 years. This implies that the respondents were old

enough to give reliable information.

4.1.3 Findings on the education level of respondents

The researcher wanted to find out the education level of respondents. The findings were

obtained and presented in the table below:

Table 3: Education level of respondents

Education level Frequency Percentage (%)

Primary level 2 7

Secondary level 10 33

Tertiary level 9 30

University level 9 30

Total 30 100


From Table 3 above, 33% of the respondents attained secondary level of education, 30%

attained secondary level of education, 30% attained tertiary level of education and still

7% attained primary level of education. This implies that the respondents attained a

minimum level of education to read and interpret the questionnaires relating to the topic

under study.

4.2: Findings on the first objective: To examine the nature of loan assessment

systems in Centenary Bank

Examining the nature loan assessment system of Centenary Bank was done through

proper monitoring and supervision of the loan, loan screening and allowing collateral

securities in order to ensure a lenient policy.

4.2.1 Findings on whether Remanding letters were always sent to clients as a process

of loan monitoring

The researcher obtained information from 10 members on whether Remanding letters

were always sent to clients as a process of loan monitoring

The findings were obtained and presented below

Table 4.2.1: Whether Remanding letters were always sent to clients as a process of

loan monitoring

Responses Frequency Percentage (%)

25

Strongly agree 5 50.0

Agree 2 20.0

Not sure 1 10.0

Disagree 2 20.0

Strongly disagree 0 00.0

Total 10 100.0

Source: primary data.

The results from the above table reveals that 50% of the respondents strongly agree that

remanding letters are always sent to clients as a process of loan monitoring, 20%agreed,

10% were not sure while 20% disagreed. This implied that remain dinging letters are

always sent to clients.

4.2.2. Findings on whether the loan is offered according to the authorization from

the loan officer

The researcher obtained information from 20 members on whether the loan was offered

according to the authorization of the loan officer.


Table 4.2.2: Whether loan is offered according to the authorization from the loan

officer

Response Frequency Percentage (%)


Agree 4 20.0

Not sure 0 00.0

Disagree 4 20.0


Total 20 100.0 Source: primary data

The results in table 4.2.2 reveal that 12% of the respondents agreed that the loan is issued

according to the authorization from the loan officer, 20% agreed while 20%disagreed.this

implies that the loan is offered according to authorization from the loan officer.

4.2.3 Findings on whether there is regular supervision of the loan given to

borrowers

The researcher obtained information from 20 members on whether there is regular

supervision of the loan given to borrowers


Table 4.2.3: Whether there is regular supervision of the loan given to borrowers

Responses Frequency Percentage (%)

26


Agree 4 20.0

Not sure 1 5.00

Disagree 0 00.0


Total 20 100.0 Source: primary data

The results from the above reveal that 75% of the respondents strongly agreed that there

is regular supervision of the loan given to the borrowers, 20%agreed and5%were not

sure. This implies that there is regular supervision of loan given to borrowers.

4.2.4: Findings on whether supervisory meetings are held between management and

loan department.

The research information was obtained from 20 respondents on whether supervisory

meetings are held between management and loan department.

The findings were obtained and presented below.

Table 4.2.4: Whether supervisory meetings are held between management and loan

department.


The results reveal that 40% strongly agreed that supervisory meetings are held between

management and loan department, 25% agreed, 20% were not sure while 15% disagreed.

This implies that there is supervisory meetings held between the management and loan

department

4.2.5 Findings on whether adverse selections are always taken by loan officer to

screen out bad credit from good ones

The research information was obtained from 20 respondents on whether adverse

selections is always taken by loan officer to screen out bad credit from good ones


Table 4.2.5: Whether adverse selections are always taken by loan officer to screen

out bad credit from good ones



Agree 5 25.0

Not sure 4 20.0

Disagree 3 150.0


Total 20 100.0



Agree 4 20.0

27


The results reveal that 60% strongly agreed that adverse selections is always taken by

loan officer to screen out bad credit from good ones,20% agreed while 20% disagreed.

This implies that adverse selections is always taken by loan officer to screen out bad

credit from good ones

4.2.6: Findings on whether Personal information is always required when filling out

loan forms

The research information was obtained from 20 respondents on whether Personal

information is always required when filling out loan forms


Table 4.2.6: Whether Personal information is always required when filling out loan

forms


The results reveal that 60% strongly agreed that personal information is required when

filling loan forms, 40%agreed.this implies that personal information is required when

filling loan forms.

4.2.7: Findings on whether the bank can refuse to give loan to an applicant even

though he is willing to pay high interest rate.

The research information was obtained from 20 respondents on whether the bank can

refuse to give a loan to an applicant even though he is willing to pay high interest rate.


Table 4.3.7: Whether the bank can refuse to give loan to an applicant even though

he is willing to pay high interest rate.

Not sure 0 00.0

Disagree 4 20.0


Total 20 100.0



Agree 8 40.0

Not sure 0 00.0

Disagree 0 00.0


Total 20 100.0

28


The result reveals that 60% strongly agreed that the bank can refuse to give a loan to an

applicant even though he is willing to pay high interest rate,40%agreed. This implied that

Centenary Bank can refuse to give loan to an applicant even though he is willing to pay

high interest rate.

4.3.8. Findings on whether the loan is issued as soon as the security is presented to

the bank




Table4.3.8: Whether the loan is issued as soon as the security is presented to the

bank


The result that 45%agreed that the loan is issued as soon as the security is presented to

the bank, 15%was not sure while40% disagreed. This implied that Centenary Bank issues

the loan as soon as the security is presented to the bank.

4. 3.9: Findings on whether the security offered should be of higher value than the

loan issued

The research information was obtained from 20 respondents on whether the security

offered should be of higher value than the loan issued




Agree 8 40.0

Not sure 0 00.0

Disagree 0 00.0


Total 20 100.0



Agree 9 45.0

Not sure 3 15.0

Disagree 8 40.0


Total 20 100.0

29

Table4. 3.9: Whether the security offered should be of higher value than the loan

issued


The results reveal that 60% of the respondents strongly agreed that the security offered

should be of higher value than the loan issued, 40%agreed.this implied that the security

offered should be of higher value than the loan issued

4. 3.10: Findings on whether the borrower must keep a compensating balance in the

checking account at the bank




Table4. 3.10: Whether the borrower must keep a compensating balance in the

checking account at the bank


The3 result reveals that 60% disagre3ed that a borrower must keep a compensating

balance in the checking account at the bank, 40%were not sure. This implied that

Centenary Bank doesn’t require a compensating balance in the checking account at the

bank.

4.4.: FINDINGS ON OBJECTIVE TWO: TO ASSESS THE FUND

MANAGEMENT POLICIES OF CENTENARY BANK

Assessing the funds management policies was done by establishing the fund management

committee and providing a method of loan pricing.

4.4.1: Findings on whether Centenary Bank carries out cash budgeting



Agree 8 40.0

Not sure 0 00.0

Disagree 0 00.0


Total 20 100.0



Agree 0 00.0

Not sure 8 40.0

Disagree 12 60.0


Total 20 100.0

30

The research information was obtained from 20 respondents on whether Centenary Bank

carries out cash budgeting


Table 4.4.4: Whether Centenary Bank carries out cash budgeting


The result reveals that 75%of the respondents strongly agreed that Centenary Bank

carries out cash budgeting, 25% agreed. This implied that Centenary Bank carries out

cash budgeting.

4.4.2: Findings on whether excess cash is invested in income generating activities


carries out cash budgeting

The findings were obtained and presented be

Table 4.4.4: Whether excess cash is invested in income generating activities


The results reveals that 40% of the respondents agreed that excess cash is invested in

income generating activities, 40% were not sure while 20% disagreed. This implied that

Centenary Bank does invest excess cash in income generating activities.

4.4.3: Findings on whether ATM services are frequently available to customers.

The research information was obtained from 20 respondents on whether ATM services

are frequently available to customers.


Response

Frequency Percentage (%)


Agree 5 25.0

Not sure 0 40.0

Disagree 0 00.0


Total 20 100.0



Agree 8 40.0

Not sure 8 40.0

Disagree 4 20.0


Total 20 100.0

31

Table 4.4.3: Whether ATM services are frequently available to customers


The results reveal that 75% of the respondents strongly agreed that ATM services are

frequently available, 25% agreed. This implies that ATM services are frequently

available to customers.

4.4.4: Findings on whether PC Banking service is carried out by Centenary Bank to

its customers efficiently

The research information was obtained from 20 respondents on whether PC Banking

service is carried out by Centenary Bank to its customers efficiently.


Table 4.4.4: Whether PC banking service is carried out by Centenary Bank to its

customers efficiently


The results reveal that 75% of the respondents agreed that PC Banking service is carried

out by Centenary Bank to its customers efficiently, 25% were not sure. This implies that

PC Banking service is carried out by Centenary Bank to its customers efficiently.

4.4.5: Findings on whether excess cash resources are invested in other profitable

business venture.

The research information was obtained from 20 respondents on whether excess cash

resources are invested in other profitable business venture


Table 4.4.5: Whether excess cash is invested in profitable business venture.



Agree 5 25.0

Not sure 0 00.0

Disagree 0 00.0


Total 20 100.0



Agree 15 75.0

Not sure 5 25.0

Disagree 0 00.0


Total 20 100.0

32


The results reveal that 25% strongly agreed that excess cash of Centenary Bank is

invested in profitable business venture, 75%agreed.this implies that excess cash is fully

invested in profitable business venture.

4.4.6: Findings on whether. Investment in financial assets is one of the primary

targets of Centenary Bank

The research information was obtained from 20 respondents on whether Investment in

financial assets is one of the primary targets of Centenary Bank.


Table 4.4.6: Whether investment in financial assets is one of the primary targets of

Centenary Bank.


The results reveal that 80% of the respondents disagreed that investment in financial

assets is one of the primary targets of Centenary Bank, 20% were not sure. This implies

that Investment in financial assets is not one of the primary targets of Centenary Bank.

4.4.7: Findings on whether there is excess liquidity in Centenary Bank.

The research information was obtained from 20 respondents on whether there is excess

liquidity in Centenary Bank.


Table 4.4.7: Whether there is excess liquidity in Centenary Bank.



Agree 15 75.0

Not sure 0 00.0

Disagree 0 00.0


Total 20 100.0



Agree 0 00.0

Not sure 4 20.0

Disagree 16 80.0


Total 20 100.0



Agree 7 30.0

Not sure 0 00.0

33


The results reveal that 70% of the respondents strongly agreed that there is excess

liquidity in Centenary Bank, 30%agreed.This implies that there is excess liquidity in

Centenary Bank.

4.4.8: Findings on whether Centenary Bank invests in financial securities such as

treasury bonds in order to control excess liquidity.


invests in financial securities such as treasury bonds in order to control excess liquidity.


Table 4.4.8: Whether Centenary Bank invests in financial securities such as treasury

bonds in order to control excess liquidity.


The results reveal that 70% of the respondents strongly agreed Centenary Bank invests in

financial securities such as treasury bonds in order to control excess liquidity,

30%agreed.This implies that Centenary Bank invests in financial securities such as

treasury bonds in order to control excess liquidity.

Findings on objective three: The relationship between funds management and Loan

Assessment Techniques.

4.5.1: Findings on factors responsible for poor loan recovery in financial

institutions.

Respondents were also asked to suggest factors responsible for poor loan recovery in

financial institutions and majority suggested that high interest rate which is charged and

also poor customer appraisal, while 2 of the respondents were not sure. None of the

respondents disagreed.

Their responses are illustrated in the table below:

Table 4.5.1: Findings on factors responsible for poor loan recovery in financial

institutions.

Disagree 0 0.0


Total 20 100.0



Agree 7 30.0

Not sure 0 00.0

Disagree 0 0.0


Total 20 100.0

34


Findings reveal that when respondents were asked to suggest factors responsible for poor

loan recovery 90% positively agreed that high interest rate charge and poor customer

appraisal,10% were not sure what were the causes. This implies that high interest rate is

responsible for poor loan recovery.

4.5.2: Findings on suggested ways of minimizing the risk of bad debts.

Respondents were also asked to suggest ways of minimizing the risk of bad debts and

majority of them suggested that customer evaluation should be taken into consideration

and also establishment of loan limit to customers, non of the respondents disagreed on the

above suggestions.

Their respondents are illustrated below.

Table 4.5.2 Findings on suggested ways of minimizing the risk of bad debts


Findings reveal that when respondents were asked to suggest ways of minimizing on the

risk of bad debts 100% positively agreed that customer evaluation and establishment of

loan limit will to a greater extent minimize the risk of bad debts. This implies Centenary

Bank should minimize the risk of bad debts through the above suggested ways.

4.5.3. Findings on the relationship between funds management and loan assessment

system

The Pearson correlation coefficient(r) was used to establish the relationship between

funds management and loan assessment system in Centenary Bank as shown in table

Below



Agree 0 00.0

Not sure 2 10.0

Disagree 0 0.0


Total 20 100.0



Agree 5 25.0

Not sure 0 10.0

Disagree 0 0.0


Total 20 100.0

35

From the above, findings reveal that there is a strong relationship between funds

management and loan assessment in Centenary Bank at a Pearson Correlation

Coefficient r = 0.957 (**). This implies a small change in management of

company funds will bring a big change in loan assessment.

Table 4.5.3: Correlation between funds management and loan assessment

1.000 .957 **

. .000

30 30

.957 ** 1.000

.000 .

30 30

Pearson Correlation

Sig. (2-tailed)

N

Pearson Correlation

Sig. (2-tailed)

N

Funds

Management

Loan

Assessment

Funds

Management

Loan

Assessmen

t

Correlation is significant at the 0.01 level (2-tailed). **.

36

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

Introduction

This chapter presents a summary of major findings, conclusions and recommendations

derived from the study of funds management and loan assessment system in Centenary

Bank.

5.1 Summaries of the major findings

The research was carried to determine the relationship between funds management and

loan assessment in Centenary Bank. This was done in relation to following objective:

i. To examine the nature of loan assessment system in Centenary Bank

ii. To assess the funds management policies of Centenary Bank

iii. To establish the relationship between funds management and loan

assessment

5.1.1 Objective one: 1To examine the nature of loan assessment systems in financial

institutions in Uganda

This objective of the study was achieved and the system that has been designed will

enable managers and credit officers perform their work faster and accurately, reduce the

company costs that have been incurred in providing for bad loans, reduce bias and lead to

customer satisfaction as stipulated in the bank’s mission statement.

5.1.2 Objective two: To assess the fund management policies in centenary bank

In the fund management policy, a committee was established and it was supposed to

define the responsibilities of the committee and how the committee will obtain input from

the Board and how the committee results will be reported back to the Boar. Also good

record keeping was emphasized.

5.13 Objective three: To establish the relationship between funds management and

the loan assessment system

From the analysis in table 4.4.12 the Pearson correlation coefficient was used to establish

the relationship between funds management and loan assessment in Centenary Bank.

Results have revealed that there is a significant positive relationship between funds

management and loan assessment; r = 0.957 (**).

37

5.2 CONCULUSIONS

From the findings the researcher concludes that;

5.2.1 Objective one: To examine the nature of loan assessment system in Centenary

Bank

Proper loan assessment system makes it good for Centenary Bank to properly allocate

credit to efficient and capable customers.

5.2.2 Objective two: to assess the funds management policies. Proper management of funds like cash made it easy for customers to receive some

compatible loan from the bank and also a good lenient policy led to adequate loan

recovery.

5.2.3 Objective three: To establish the relationship between funds management and

loan assessment.

On the relationship between funds management and loan assessment system for

Centenary Bank, the researcher has concluded that proper management of company funds

like cash has made it easy for customers to be able to assess adequate loan thus leading to

a lenient loan system.

5.3 Recommendations

After conclusions the researcher has made the recommendations below:

5.3.1 Objective one: loan assessment

From the analysis, the following recommendations are made:

The researcher recommends that the system that has been designed can be installed in

centenary banks Information Technology System so as to enable Centenary Bank achieve

its goals, objectives and mission statement.

The policy and procedure manuals together with the designed system should strictly be

followed if they are to achieve service quality and customer satisfaction as service

providers.

The researcher recommends research geared towards the development of a monitoring

system to be carried out encompassing all the banks within the country. This system if

developed shall enable all banks to monitor individual accounts’ performance and be able

to reject loan applications for typical defaulters. The bank recommended implementing

that system is bank of Uganda and it will require co-operative effort from commercial

banks and micro finance institutions in order to overcome the challenge of lack of

information about bad customers.

If such information is availed, it can be input in Bout’s database and it will enable banks

by virtue of being interconnected through a network to access and reject to offer loan to

defaulters while not compromising on network security.

This is significant in that it is one of the critical issues in the determination of borrowers’

creditworthiness though it has not yet been seriously addressed.

38

5.3.2 Objective three: funds management

The Bank through its enormous effort should implement good management policies such

as establishment of funds management committee and also Define and establish record

keeping systems to track the volume of rate-sensitive assets and rate-sensitive liabilities.

5.4 Areas of further research

Due to limited time, funds, the researchers were not in position to cover efficiently and

appropriately in areas of interest in study and therefore there is need for more research on

i. Loan management and profitability of commercial banks

ii. Credit risk management and efficiency of management of financial

institutions.

39

APPENDIX 1

QUESTIONNAIRE FOR STAFF

Dear Sir/Madam,

This is an academic research focusing on Funds Management and Loan Assessment

Techniques for Financial Institutions in Uganda, a case study of Centenary Bank. This

exercise is purely academic and it’s actually a partial requirement by Makerere

University for the award of a degree in Commerce. The information provided will be

treated confidentially, so please kindly spare some of your valuable time and respond to

the following questions genuinely. Tick/ fill where applicable.

SECTION A

Tick appropriately in the box.

1. Gender: Male Female

2. Age bracket

20- 30 years 31-40 years 41-50 years 50 years plus

3. What is your highest level of education?

Primary level Secondary level Tertiary level University level

4. Job title ………………………………………

FUNDS MANAGEMEENT

Please respond to the question below by ticking in the right box depending on the degree

to which you agree or disagree with the statement

SECTION: B MANAGEMENT OF CASH

5. Centenary bank carries out budgeting.

Strongly agree agree Not sure disagree Strongly

disagree

6. Excess cash is invested in income generating activities


disagree

7. Expenses are always supported by documents like receipts, vouchers, and in invoices


disagree

40

SECTION C: SERVICE MANAGEMENT

8 ATM services are frequently available to customers


disagree

9. PC Banking service is carried out by centenary bank to its customers efficiently


disagree

SECTION D INVESTMENT MANAGEMENT

10. Excess cash resources are invested in other profitable business venture


disagree

11. Investment in financial assets is one of the primary targets of Centenary Bank


disagree

SECTION D: LIQUDIUTY MANAGEMENT

12. There is excess liquidity in Centenary Bank?


disagree

.

13. Centenary Bank invests in financial securities such as treasury bonds in order to

control excess liquidity.


disagree

LOAN ASSESSSMENT


to which you agree or disagree with the statements.

SECTION E: MONITORING

14. Remanding letters are always sent to clients as a process of loan monitoring


disagree

41

15. The loan is offered according to the authorization from the loan officer?


disagree

SECTION F: SUPERVISION

16. There is regular supervision of the loan given to borrowers


disagree

17. Are there supervisory meetings held between management and loan department?


disagree

SECTION: G LOAN SCREENING

18 Adverse selections is always taken by loan officer to screen out bad credit from good

ones


disagree

19. Personal information is always required when filling out loan forms


disagree

SECTION H: LOAN REFUSAL

20. Credit distribution is efficiently used by Centenary Bank.


disagree

21. The can refuse to give a loan to an applicant even though he is willing to pay high

interest rate.


disagree

SECTION I: COLLATERAL SECURITIES

22. The loan is issued as soon as the security is presented to the bank.


disagree

42

23. The security offered should be of higher value than the loan issued.


disagree

24. A borrower must keep a compensating balance in the checking account at the bank


disagree

SECTION J: The relationship between funds management and loan assessment

amidst financial institutions

25. There is a relationship between funds management and loan assessment amidst

financial institutions in Uganda

Strongly Agree Agree Not Sure Disagree Strongly Disagree

26. What are the factors responsible for poor loan recovery in financial institutions?

…………………………………………………………………………………………..

..............................................................................................................................

27. Suggest ways to improve on loan recovery.

................................................................................................................................................

................................................................................................................................................

............................................................................................

THANK YOU VERY MUCH

GOD BLESSES YOU.

43

QUESTIONNAIRE FOR CLIENT

Dear Sir/Madam,

This is an academic research focusing on Funds Management and Loan Assessment

Techniques for Financial Institutions in Uganda, a case study of Centenary Bank. This

exercise is purely academic and it’s actually a partial requirement by Makerere

University for the award of a degree in Commerce. The information provided will be

treated confidentially, so please kindly spare some of your valuable time and respond to

the following questions genuinely. Tick/ fill where applicable.

SECTION A

Tick appropriately in the box.

1. Gender Male Female

2. Age bracket

20- 30 years 31-40 years 41-50 years 50 years plus

3. What is your highest level of education?

Primary level Secondary level Tertiary level University level

4. Nature of Business ……………………………………………………

FUNDS MANAGEMENT


to which you agree or disagree with the statements.

SECTION B: SERVICE MANAGEMENT

5. ATM services are regularly provided to me.


disagree

6. I can view my bank statement can be viewed using PC Banking


disagree

7. Centenary Bank provides quality services to me.


disagree

44

LOAN ASSESSSMENT


to which you agree or disagree with the statement

SECTION C; COLLATERAL SECURITYT

8. Centenary Bank requires high valued collaterals than loan given


disagree

9. High collaterals prevent me from borrowing.

SECTION D: CREDIT TERM

10. The nature of credit terms is lenient


disagree

11. Interest rate, credit period offered causes failure to pay pack the loan

Strongly agree Not sure disagree Strongly

disagree

12. Some applicants are granted loan period longer than asked.

SECTION E: The relationship between funds management and loan assessment

amidst financial institutions

13. There is a relationship between funds management and loan assessment amidst

financial institutions in Uganda

Strongly Agree Agree Not Sure Disagree Strongly Disagree

14. What are the factors responsible for poor loan recovery in financial institutions?

…………………………………………………………………………………………..

………………………………………………………………………………………………


disagree

Strongly agree

agree Strongly

disagree

disagree Not certain

45

………………………………………………………………………………………………

…………………………………………………………………………………………….

15. What should be done to minimize the risk of bad debts.

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

THANK YOU VERY MUCH

GOD BLESSES YOU.

Documents

1.0 INTRODUCTION 1.1 Background of the study · So the aim of cash management is to maintain control over cash position to keep the organization sufficiently and use excess cash in