Bank lending policy, credit scoring and the survival of Loans: A case study of banks X and Y

Abstract

The study examined Bank Lending policy, credit scoring and the survival of loans in Uganda. Two prominent lending Institutions Banks X and Y were selected in Uganda. These institutions were chosen to represent financial lending institutions which provide long term development credit facilities. The significance of the study was to contribute to the existing knowledge in the area of banking lending services through creation of more income earned from bank’s credit facility.

The objectives of the study were to examine the effect of bank lending interest rates of Banks X and Y on the loan amounts to clients; Establish the relationship between bank lending interest rates and the survival of loans, and determine the relationship between credit Scoring and the survival of loans in the loan portfolio of X and Y.

A conceptual frame work that links the study objectives named above was used. A longitudinal survey with quantitative data for the period 1998-2004 was used. For purposes of relating the variables, correlation survey design and regression analysis were used.

The findings from the study show that Bank lending Policy and Credit worthiness affect the survival of loans in Banks X and Y. High interest rates hurt private sector credit which is the engine of growth thus future growth of the economy will be affected.

It was recommended that government should come up with alternative sources of funding to compete with large in flows of external funding. Banks should vary interest rates according to the credit worthiness of the borrower and also proactively monitor their loans from the day the decision to grant the loan is made up to the end of the Loan cycle. This would have created a sense of ownership in both the stakeholders involved that is the lender and the borrower.