Strategic responses to the challenge of non-performing loans by Commercial Bank of Africa

Abstract

Non-Performing Loans are a reflection of problems in the banking and corporate sectors. NPLs create problems for the banking sector's balance sheet on the asset side. They also create a negative impact on the income statement as a result of provisioning for loan losses. In the worst scenario, a high level ofNPLs in a banking system poses a systemic risk, inviting a panic run on deposits and sharply limiting financial intermediation, and subsequently investment and growth.

The objective of this study was to investigate the strategic responses to the challenge of Non Performing Loans by commercial bank of Africa. The study sought to find establish the strategic responses which were used by Commercial Bank of Africa to the challenge of Non-Performing Loans. An interview guide was used to guide the researcher in collecting data from ten members of management team who comprised the managing director, two executive directors, four general managers and three employees of the bank who are involved in the disbursement and collection of loans.

Content analysis was used to analyze the qualitative primary data which had been collected by conducting interviews and secondary information from the organization. It was established that the main causes of NPL in the bank were poor credit and risk management practices, use of qualitative methods of debt collection, over reliance on the collateral granted for the loan, long association of the borrower with the bank, and the historical financial capability, poor monitoring systems, poor management, economic downturn and inadequate government monetary policy.

The study found out that the bank has responded to the challenge by introduction of new policies and procedures, the subjecting of credit proposals to rigorous risk assessment by the lending officers, the use of informal means to get additional information on borrowers, vetting credit proposals by senior management for objectivity and avoiding lending to seasonal or non performing sectors, use of turnaround strategy, restructuring, adoption of new technology, aggressive marketing, change of leadership and organizational culture change.