Analyzing the lending practices of commercial banks: a case study of Centenary Bank Uganda

Abstract

This study analysed the lending practices of commercial banks in Uganda, using Centenary Bank Uganda as a case study. The objectives were to examine the lending procedures and credit appraisal mechanisms employed by the bank, to identify the challenges affecting effective lending practices, and to propose strategies for improving lending efficiency and minimizing loan default risks. Guided by Information Asymmetry Theory, which distinguishes the adverse selection that arises before a loan is issued from the moral hazard that arises after disbursement, the study adopted a descriptive research design and a quantitative approach. From a target population of 80 credit, operations, risk management and customer service staff, a sample of 66 was determined using Krejcie and Morgan (1970) and selected through simple random sampling. Primary data were collected using a structured five-point Likert scale questionnaire of 36 items and analysed using SPSS version 28, yielding a response rate of 100%. Findings revealed that the majority of respondents considered the bank’s lending procedures effective in their administrative dimension, particularly in the automated tracking of loan repayments and the use of borrowers’ repayment history. However, respondents were moderately uncertain about the analytical aspects of lending, particularly the ability to detect potential defaulters during appraisal and identify repayment difficulties at an early stage. The majority identified repayment difficulties among borrowers with seasonal incomes and irregular income patterns as the leading challenges, alongside the need for additional credit risk training and difficulties in maintaining communication with some borrowers. In contrast, the minority considered technological inadequacy to be a significant constraint. Regarding proposed strategies, the majority strongly supported continuous staff training and the use of automated and real-time loan monitoring as key measures for improving lending efficiency and reducing loan default risks. The study concluded that the bank records accurately what its borrowers have done but anticipates poorly what they are about to do, and that a structural mismatch exists between the irregular income of its target borrowers and repayment schedules that are not calibrated to that irregularity. It recommended aligning repayment schedules to borrower income cycles, converting the existing tracking infrastructure into a predictive early warning capability, redirecting credit training towards appraisal-stage default prediction, and treating borrower non response as a risk trigger. The study contributes context-specific evidence on the asymmetric application of Information Asymmetry Theory in commercial bank lending. Findings are limited by the single-institution focus and the purely quantitative design. Future research should compare lending practices across several Ugandan commercial banks and examine repayment outcomes from the borrower's perspective.