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DEBT RECOVERY AND FINANCIAL PERFORMANCE OF
COMMERCIAL BANKS IN RWANDA
A CASE STUDY OF KCB BANK RWANDA
VINCENT SAKINDI
MBA/2015/31849
A Research Project Submitted in Partial Fulfilment of the Requirement for
the Award of Master in Business Administration Submitted to School of
Business Management of Mount Kenya University
JUNE 2017
ii
DECLARATION
This research project is my original work and has not been presented for a degree in any
other University or for any other award.
Students Name: Sakindi Vincent
Reg. Number: MBA/2015/31849
Signature: ______________________________ Date _________________________
Declaration by the supervisor(s)
This project has been submitted for examination with my approval as the university
supervisor
Supervisor(s)
Dr. Rusibana Claude, PhD
Signature: _____________________________ Date __________________________
iii
DEDICATION
First of all, this research project is dedicated to God the almighty who has freely given me
life and wisdom to conduct the study. To my parents for their entire social, moral and
financial support without which the compilation of this research project would not have been
possible.
iv
ACKNOWLEDGEMENTS
The completion of this research project would not have been possible without the
contribution of several people to whom I owe gratitude.
I first and foremost direct my special thanks to my supervisor, Dr Rusibana Claude, who
kindly accepted to supervise this work despite many other tasks allocated to him. Without his
support, this work would not have been completed.
Second, I would like to express my sincere gratitude to the Mount Kenya University for
putting in place resources required for my training and allowing me to carry out this research.
My thanks are also extended to all lecturers of MKU especially those in the School of
business and economics, Kigali Campus, for their contribution to my intellectual
development.
In the same way, I owe heartfelt thanks to my family members for all they did to have this
work completed.
My thanks are also addressed to my classmates for their support and advice they provided to
me during my studies.
My thanks are finally addressed to all other people who contributed to the completion of this
work in one way or in another.
v
ABSTRACT
Debt recovery refers to the process of making people or companies pay the money that they
owe to other people or companies, when they not paid back the debt at time that was
arranged by two parties. There was problem of lack determining efficient and effective
mechanisms to be applied during recovery time, harsh economic environment, lack of proper
skills among loan officer, and quality of debt monitoring that this study taken as the problem
statement. The main objective was to assess the contribution of debt recovery to the financial
performance of KCB and specific objectives are following: to assess the determinants of debt
recovery policy in KCB, to analyze the tools used by KCB in debts recovery, to establish the
relationship between debt recovery and financial performance of KCB. The research used
descriptive research design because of this design was suitable to this research. The target
population of this research comprised the whole staff of KCB with a number of 127. The
sample size was taken by using simple Random Sampling as the sample techniques The
research used a sample size of 56 selected population using Yamane’s formula. The data
collection was be analyzed by using SPSS program 18 version employees of KCB. The
research project instrument was self-administered questionnaire that was designed in
consideration with the research objectives and the literature review. The instrument was pre-
tested and rating was done in accordance with the Likert scale of strongly agree, Agree, Not
sure, Disagree and Strongly Disagree. The researcher was assessed the contribution of debt
recovery on financial performance of KCB as commercial bank.With regard to objectives of
this study, the majority of the respondents strongly agreed to the determinants of debt
recovery policy and strategies used by KCB. This led the researcher to understand that, debt
recovery is viewed as being very important in the financial performance of commercial banks
without which failure can be guaranteed. The researcher got intercept a = 0.678 and slope b =
0.15 Thus the linear equation was Y = 0.678 + 0.15X, Where Y was the financial
performance of commercial bank and X was debt recovery of commercial bank. The
conclusion of the study revealed that the relationship of debt recovery and financial
performance is positively associated with project performance. As debt recovery is enriched,
financial performance effect turned positive. The strength of this relationship depends upon
debt recovery. Banks managers should hire external experts to facilitate to set system of
recovering. For make sure that all debt are recovered. Banks managers ought to select
appropriate strategies of debt recovery in order to assess all documents of clients
(Borrowers). The result of this research project was important to the Commercial bank for
making strategies of debt recovery and government for making policies related to
commercial bank.
vi
TABLE OF CONTENTS
DECLARATION..................................................................................................................... ii
DEDICATION........................................................................................................................ iii
ACKNOWLEDGEMENTS .................................................................................................. iv
ABSTRACT ..............................................................................................................................v
TABLE OF CONTENTS ...................................................................................................... vi
LIST OF TABLES ...................................................................................................................x
LIST OF FIGURES ............................................................................................................... xi
LIST OF ACRONYMS & ABBREVIATIONS ................................................................. xii
DEFINITION OF KEY TERMS ........................................................................................ xiii
CHAPTER ONE: INTRODUCTION ....................................................................................1
1.0 Introduction ..........................................................................................................................1
1.1.Background to the study ......................................................................................................1
1.2. Statement of the problem ....................................................................................................5
1.3. Objectives of the study........................................................................................................6
1.3.1. General objective .............................................................................................................6
1.3.2. Specific objectives. ..........................................................................................................6
1.4. Research Questions. ............................................................................................................6
1.5. Significance of the study .....................................................................................................6
1.6. Limitation of the study ........................................................................................................7
vii
1.7. Scope of the study ...............................................................................................................7
1.7.1. Contents scope .................................................................................................................7
1.7.2. Geographic scope .............................................................................................................7
1.7.3. Time scope .......................................................................................................................7
1.8 The organization of the study ..............................................................................................8
CHAPTER TWO: REVIEW OF RELATED LITERATURE ............................................9
2.0. Introduction. ........................................................................................................................9
2.1. Theoretical literature ...........................................................................................................9
2.1.1. Debt ..................................................................................................................................9
2.1.2. Recovery ........................................................................................................................10
2.1.3. Loan ...............................................................................................................................10
2.1.5. Policies of debt recovery ................................................................................................11
2.1.6. Types of debt recovery...................................................................................................11
2.1.7. Techniques and strategic tools of loan recovery ............................................................13
2.1.8. The determinants of debt recovery policy .....................................................................14
2.1.9. Financial performance ...................................................................................................16
2.2. Empirical review ...............................................................................................................23
2.3. Critical review and research gap identification ................................................................24
2.4. Theoretical Framework .....................................................................................................26
2.4.1. Theory of Markowitz .....................................................................................................26
viii
2.4.2. Theory of debt maturity .................................................................................................27
2.4.3. Theory of multiple lending ............................................................................................27
2.5 Conceptual Framework ......................................................................................................28
2.6. Summary ...........................................................................................................................34
CHAPTER THREE: RESEARCH METHODOLOGY ....................................................35
3.0 Introduction ........................................................................................................................35
3.1 Research design: ................................................................................................................35
3.2. Target population ..............................................................................................................35
3.3. Sample design ...................................................................................................................36
3.3.1. Sample size ....................................................................................................................36
3.3.2. Sampling techniques ......................................................................................................36
3.4. Data collection Methods ...................................................................................................37
3.4.1. Data collection instruments............................................................................................37
3.4.2.Administration of data collection instruments ................................................................38
3.4.3.Validity and Reliability ...................................................................................................38
3.5.Data analysis procedures....................................................................................................39
3.6.Ethical consideration ..........................................................................................................39
CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSION .................................40
4.0 Introduction ........................................................................................................................40
4.1 Demographic Characteristics of Respondents. ..................................................................40
ix
4.1.1 Distribution of Respondents by Gender ..........................................................................40
4.2. Presentation of findings ....................................................................................................45
4.2.1. Objective one: To assess the determinants of debt recovery policy in KCB .................45
4.3. Coefficients of linear regression Analysis ........................................................................51
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS .......53
5.0. Introduction .......................................................................................................................53
5.1 Summary of Findings .........................................................................................................53
5.1.1. Research Question one: what are the determinants used by KCB in debt recovery? ....55
5.1.2. Research Question Two: What are strategies used by KCB in debt recovery? .............55
5.1.3. Research Question Three: Is there any relationship between debt recovery and
financial performance of commercial bank? ............................................................................55
5.2. Conclusion ........................................................................................................................56
5.3. Recommendations .............................................................................................................57
5.4. Areas for further research .................................................................................................57
REFERENCES .......................................................................................................................59
APPENDICES ........................................................................................................................64
APPENDIX ONE: QUESTIONNAIRE ...............................................................................65
APPENDIX TWO: AUTHORIZATION LETTER OF MKU ..........................................69
APPENDIX THREE: ACCEPTANCE LETTER...............................................................70
x
LIST OF TABLES
Table 3.1 Target Population .................................................................................................... 36
Table 3.2 Sample size ............................................................................................................. 36
Table 4.1: Distribution of respondents by Gender ...................................................................41
Table 4.2: Distribution of Age of Respondents .......................................................................42
Table 4.3: Distribution of education level of Respondents ......................................................43
Table 4.4: The extent of KCB for using client appraisal in debt recovery ..............................45
Table 4.5: The extent of KCB for using credit risk control in debt recovery ..........................46
Table 4.6: The extent of KCB for using collection policies in debt recovery .........................46
Table 4.7: Tools used by KCB in debt recovery ......................................................................48
Table 4.8: Determinants of debt recovery policy in KCB .......................................................47
Table 4.9: Relationship between debt recovery and financial performance of commercial
banks ........................................................................................................................................50
Table 4.10: Coefficients of Linear Regression Analysis .........................................................51
xi
LIST OF FIGURES
Figure 2.1: Conceptual Framework .........................................................................................29
Figure 4.1: Distribution of respondents by Gender .................................................................41
Figure 4.2: Distribution of Age of Respondents ......................................................................42
Figure 4.3: Distribution of education level of Respondents ....................................................44
xii
LIST OF ACRONYMS & ABBREVIATIONS
ASIC : Australian Securities and Investments Commission
BCR : Bank Commercial of Rwanda
BPR : People Bank of Rwanda
CBR : Central Bank of Rwanda
CD : Certificates of Deposit
BNR : Nation Bank of Rwanda
IPO : Initial Public Offering
KCB : Kenyan Commercial Bank
KYC : Know Your Customer
MINECOFIN : Ministry of Finance and Economic Planning
MKU : Mount Kenya University
NPL : Non-Performing Loans
REITs : Real Estate Investment Trusts
ROA : Return on Assets
ROE : Return on Equity
ROI : Return on Investment
SPSS : Statistical Package for the Social Sciences
xiii
DEFINITION OF KEY TERMS
Commercial bank: is a bank done money transaction in term of lending, borrowing, and
savings.
Debt recovery: is a way of gaining money from debt provided by a bank or finance
institutions.
Debt: is an accounting entry that results in either an increase in assets or a decrease in
liabilities on a company's balance sheet or in one’s bank account. A debt on an accounting
entry will have opposite effects on the balance depending on whether it is done to assets or
liabilities, with a debit to assets indicating an increase and vice versa for liabilities.
Financial performance: Financial performance is a subjective measure of how well a firm
can use its’ assets from its ‘primary business to generate revenues.
Recovery: refers to the action or a process of regaining possession or control of something
stolen or lost.
1
CHAPTER ONE: INTRODUCTION
1.0 Introduction
The chapter one discussed the background to the study, statement of the problem, objectives,
research questions, significance of the study, limitations of the study, scope of the study, and
organization of the study.
1.1. Background to the study
Debt is an alternative mode for raising additional funds to meet the day to day needs of a
given organization. It refers to resources which are borrowed with expectations of repayment.
Thorough analysis of the statement of financial position of the commercial banks under study
reveals that the proportion of funds borrowed was progressively increasing between 2010-
2014. This translates into the firms becoming highly dependent on debt in their capital
structure. Prior studies on the effect of debt on firm performance found diverse results. Some
researchers found that debt negatively affects firm performance for example Luper and Isaac
(2012) while others for example Valeriu and Nimalathasan (2010) found a positive effect
existed between debt and firm performance.
Debt recovery refers to the process of making people or companies pay the money that they
owe to other people or companies, when they not paid back the debt at time that was
arranged by two parties (Cambridge school of finance 2016). The Developed countries
banking industry is one of the sectors of their economy, whose services are ever needed by
individuals and corporate organizations and one of the key players in this industry is the
commercial banks. The popularity of commercial banks is not because they are the only
legally or commercially recognized intermediary in the system but because of their branch
2
network, large customer base and the ease with which people transact business with them
(Afolabi, 1991). The intermediary role of the commercial banks culminates in the extension
of credit facilities such as loans/advances and investments through which they make funds
available for individuals and corporate organizations. With this single function commercial
banks helps to increase the levels of economic activities in the society.
The contribution of credit facilities in Kenya in the banking sector towards achieving
economic growth and development of Kenya in general and cannot be overemphasized
(Drahamen, 2009). Credit facility plays a crucial role to the survival of any business
organization. The growth and development of every nation starts when the domestic needs
are satisfied. Such needs include food security, shelter, and education and reduced
unemployment rate. The banks through their services contribute immensely toward achieving
these needs. The success or failure of Commercial banks depends greatly on its ability to
grant credit facilities and make substantial profits from them.
For most people therefore, commercial banks’ lending represent the heart of the industry.
Loans dominate banks asset holding and generate the largest share of their operating income.
Loan department/ officers are among the most visible, while loan policies typically determine
how fast a community develops and what types of business spring up. The greatest challenge
to the banks today is granting profitable loans at reasonable risks in the face of intense
competition. (Olalusi, 1999).
Therefore, the credit analysts and other concerned managers in commercial banks should put
in place effective strategies and design possible solutions to reduce and eliminate causes of
lending risks, non-performing loans and bad debts. To achieve that, the first step is to identify
the risk factors associated with each loan transaction. There the few tools used to manage the
3
perceived lending risks associated with commercial loans (Harry & Fradram, 2004). If these
tools used judiciously ,actually help to strengthen the borrower’s financial condition and can
serve to make collateral more valuable in case of a strong debt service coverage ratio. The
relationship between borrowers and their banks is a contract. Both parties must derive value
for relationship to be a healthy one. A mutually beneficial relationship is the ultimate goal, so
by strengthening the borrower through reduction of lending risk, a stronger relationship is
created which benefits both parties. (JoAnn N.Mills, 2004). However, banks should also
work with the recommended board institutionalized by the law like CRB that help and fight
against such kind of customers who don’t pay back the loan but rather divert and go to other
banks to look for other loans yet they haven’t cleared the previous ones, so those boards will
somehow somewhere help to provide timely and accurate information of the bellowers,
availing an improved pool of bellowers, and as well as reducing default rates. So all above
mechanisms work hand in hand with ones from within each respective bank to fight against
debt defaulters and as well helping debt recovery policy inherited by each bank.
It is a known fact that not all credit facilities provided by banks are collected back. Many
banks in several African countries especially in Rwanda have been facing losses as a result of
bad debts with higher trend of non-performing loans. The current state of our economy is a
pointer to the fact that banks need to improve on their services as it relates to bridging the
gap between the surplus and deficit units of the economy. Thus, a good management scheme
will help to reduce the amounts which may be lost as bad debts and also in the collection
process and period. (Nnanna, 2001).
It is obvious that the banks face more challenges now than ever in the light of the global
economic meltdown. The credit crunch is impacting negatively on the capital raising
activities of commercial banks. What is happening now is that credit has become more
4
expensive than it used to be (Ebong, 2008). It is believed that the liquidity squeeze in
Rwanda is peculiar in the sense that the problem is not just of inadequate liquidity, but
people are becoming more conscious of what is going on and are trying to conserve what
they have that is why banks like BCR, BPR allowed a joint with foreign bank investors just
for them to avoid such issues and others that may arise or they get deposits from other big
financial institution on higher rate just to bridge inadequateness of liquidity but this in turn
cost the customer when they are getting loan in form of higher interest rates and as well
cause bank to increase all banking costs to recover what spent.
This banking industry occupies a key position in the nation economic development and
growth and as such, must not be allowed to collapse as that will have enormous catastrophic
consequences on the economy of our nation (Soludo, 2005) .The industry has a positive or
negative impact on the growth, employment, risk, size and survival of the nation economy
depending on the management and performance of the sub-sector, of the economy. The credit
management and debt recovery has been the key challenge to the improvement on the
performance of financial institutions in Rwanda and investment is not yet grown to the
desirable levels in financial sector. Hence, nowadays no sooner that bank declares huge
profits than they resort to the capital market to source for funds.
This study aimed to identify the key elements which, in terms of the debt recovery,
contributed to financial performance of commercial banks. For this purpose, the paper
defined a research framework to analyze the influence of debt recovery on financial
performance.
5
1.2. Statement of the problem
The citizens and corporate organizations in the country must enhance their access to factors
of production especially credit facilities. This is the catalyst of stimulating sustainable
economic growth and development. With access to credit the capacity of small scale
industries and corporate organizations to operate optimally would be enhanced hereby
providing the teeming population with employment opportunities, enhancing household
incomes and creating wealth (Soludo, 2004). The role of credit extension by the commercial
banks has been impaired to some extent due to some fundamental problems. The sacking,
replacement of some bank directors and recovery officers by commercial banks is a pointer
to the fact that all is not well with commercial bank’s loan & debt management in general
(Calem & Canner, 2003). However, non-performing debt caused by harsh economic
environment, lack of proper skills among loan officers, quality of credit monitoring are also
other factors that always contribute to the Non-Performing Loan that act as sole source of
recovering. A review of the financial statement of commercial banks over the years shows
that the huge amounts of money that are always written off as bad debts each year has been
on the increase (Omino, 2012). Maybe, it is because commercial banks extend credits to the
wrong people or that they don’t do enough in terms of collection efforts. The main gap in this
study as the problem statement of this study was lack of determining efficient and effective
mechanisms to be applied during recovery time, harsh economic environment, lack of proper
skills among loan officer, and quality of debt monitoring (KCB report, 2015). Those were
main cause of this study seeks to assess whether the debt recovery makes contribution to the
financial performance of commercials banks. It was in this regard that researcher decided to
conduct a study on Kenyan Commercial Bank as a case study.
6
1.3. Objectives of the study
The study had the general objective and specific objectives as follows:
1.3.1. General objective
The main objective of the study was to establish the relationship between debt recovery and
financial performance of KCB.
1.3.2. Specific objectives.
The study was split up in the following specific objectives:
i. To assess the determinants of debt recovery policy in Kenya Commercial Bank.
ii. To analyze strategies used by KCB in debts recovery for enhancing debt recovery.
iii. To assess the contribution of debt recovery to the financial performance of
commercial banks
1.4. Research Questions.
The research was being guided by the following questions:
i. What are determinants of debt recovery policy in Kenya Commercial Bank (KCB)?
ii. What are strategies used by KCB in debts recovery for enhancing debt recovery?
iii. Is there any relationship between debt recovery and financial performance of KCB?
1.5. Significance of the study
The study was expected to evaluate the contribution of debt recovery to the financial
performance of commercial bank. The results were being importantly useful to the
commercial bank especially KCB related to the debt recovery and financial performance. The
7
results also were being important to the academicians and researchers who used it as a
springboard for other researches/studies.
1.6. Limitation of the study
During the period of data collection, some individual as employees of Kenyan Commercial
Bank (KCB) may being reluctant to answer the questions from the questionnaire of study,
because of their availability and the privacy of debt recovery and financial performance of
commercial bank. In this regard, researcher informed the respondents to fulfil questionnaire
at the end of their job. And also researcher was explained respondents that this research was
the academics issues didn’t use in the other interest ways.
1.7. Scope of the study
The scope of the study was split in the contents scope, geographic scope, and time scope.
1.7.1. Contents scope
This study was evaluated the contribution debt recovery to the financial performance of
commercial bank in finance sector.
1.7.2. Geographic scope
Geographical, study was covered in 12 branches of KCB in Rwanda.
1.7.3. Time scope
For the time, the study was taken the period of 3 years from 2012-2014.
8
1.8 The organization of the study
This research project was organized in five chapters; the first chapter is the general
introduction, which includes background of the study, statement of the problem, objectives of
the study, research questions, the significance of the study, limitations of the study, the scope
of the study, and organization of the study. The second chapter is Review of related
literature, which includes the theoretical literature, empirical literature, theoretical
framework, critical and research gap, and conceptual framework. The third chapter is titled
research methodology, which includes the research design, target population, sample design
and techniques, data collection instruments, reliability and validity, data analysis and ethical
consideration. The fourth chapter is research findings and discussion, and finally fifth chapter
is summary, conclusion, and recommendation.
9
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.0. Introduction.
This chapter was revolved around the theories about the relationship between logistics
capability and organizational performance. It was consisted of two main parts namely
conceptual/theoretical literature, and empirical literature.
2.1. Theoretical literature
This section focused on reviewing the literature related to debt recovery and financial
performance of commercial bank. It started with a definition of some key concepts used in
the study. These were provided profound insight into the topic and facilitated the
interpretation of the findings.
2.1.1. Debt
Debt is an accounting entry that results in either an increase in assets or a decrease in
liabilities on a company's balance sheet or in one’s bank account (Ebaid, 2009). A debt on an
accounting entry will have opposite effects on the balance depending on whether it is done to
assets or liabilities, with a debit to assets indicating an increase and vice versa for liabilities.
In fundamental accounting, debts are balanced by credits, which operate in the exact opposite
direction. When a debt is made to one account of a financial statement, a corresponding
credit must occur on an opposing account (Crabtree & DeBusk, 2008). This is the
fundamental law of bookkeeping accounting. For instance, if a firm were to take a loan to
purchase equipment, one would debit fixed assets and credits a liabilities account, depending
on the nature of the loan, a debt is an accounting entry that either increases an asset or
10
expense account, or decreases a liability or equity account. It is positioned to the left in an
accounting entry.
2.1.2. Recovery
Recovery refers to the action or a process of regaining possession or control of something
stolen or lost. In other words, a 'Bad Debt Recovery' refers to a debt from a loan, credit line
or accounts receivable that is recovered either in whole or in part after it has been written off
or classified as a bad debt (Hyvonen, 2007). Because it generally generates a loss when it is
written off, a bad debt recovery usually produces income.
2.1.3. Loan
According to Kumar and Mitta (2002), in their study ,a loan is a financial transaction in
which one part (Lender) agrees to give another part (the borrower) a certain amount of
money with expectation of total requirements, the Lender can ask interest payment in
addition to the original amount of the principal. A Loan is also an arrangement in which a
lender gives money or property to a borrower and the borrower agrees to return property or
repay the money, along with interest at predetermined time. According to Kuritzes (1998).
Managers who fail to move towards active portfolio management will weaker lending and
eroding competitive is of valuable measures to performance, growth, liquidity and
profitability of the banks.
11
2.1.5. Policies of debt recovery
In the policies of debt recoveries on financial performance of commercial bank are:
The first step in limiting credit risk involves screening clients to ensure that they have the
willingness and ability to repay a loan. Commercial Banks use the 5Cs model of credit to
evaluate a customer as a potential borrower (Abedi, 2000). The 5Cs help commercial banks
to increase loan performance, as they get to know their customers better. Key Credit controls
used in commercial banks in order to recovery debts include loan product design, credit
committees, and delinquency management. (Churchill and Coster, 2001).
There are various policies that an organization should put in place to ensure that credit
management is done effectively, one of these policies is a collection policy which is needed
because all customers do not pay the firms bills in time. Some customers are slow payers
while some are non-payers. The collection effort should, therefore aim at accelerating
collections from slow payers and reducing bad debt losses (Kariuki, 2010).
2.1.6. Types of debt recovery
There are two types of debt recovery. Those are secured debt recovery, and unsecured debt
recovery.
2.1.6.1 Secured debt recovery
Secured loans are those loans that are protected by an asset or collateral of some sort. The
item purchased, such as a home or a car, can be used as collateral, and a lien is placed on
such item. The finance company or bank will hold the deed or title until the loan has been
paid in full, including interest and all applicable fees. Other items such as stocks, bonds, or
12
personal property can be put up to secure a loan as well (Makuch, 2001). Secured loans are
usually the best (and only) way to obtain large amounts of money. A lender is not likely to
loan a large amount with assurance that the money will be repaid. Putting your home or other
property on the line is a fairly safe guarantee that you will do everything in your power to
repay the loan. Secured loans are not just for new purchases either. Secured loans can also be
home equity loans or home equity lines of credit. Such loans are based on the amount of
home equity, which is simply the current market value of your home minus the amount still
owed. Your home is used as collateral and failure to make timely payments could result in
losing your home (Liebman, 2002).
Secured loans usually offer lower rates, higher borrowing limits and longer repayment terms
than unsecured loans. As the term implies, a secured loan means you are providing ‘security’
that your loan will be repaid according to the agreed terms and conditions. It's important to
remember, if you are unable to repay a secured loan, the lender has recourse to the collateral
you have pledged and may be able to sell it to pay off the loan (Lewis, 2002).
2.1.6.2 Unsecured debt recovery
On the other hand, unsecured loans are the opposite of secured loans and include things like
credit card purchases, education loans, or personal (signature) loans. Lender stake more of a
risk by making such a loan, with no property or assets to recover in case of default, which is
why the interest rates are considerably higher. If you have been turned down for unsecured
credit, you may still be able to obtain secured loans, as long as you have something of value
or if the purchase you wish to make can be used as collateral. When you apply for a loan that
is unsecured, the lender believes that you can repay the loan on the basis of your financial
resources. You will be judged based on the five (5) C’s of credit -character, capacity, capital,
13
collateral, and conditions – these are all criteria used to assess a borrower's creditworthiness.
Character, capacity, capital, and collateral refer to the borrower's willingness and ability to
repay the debt. Conditions include the borrower's situation as well as general economic
factors (Hynes, 2006).
2.1.7. Techniques and strategic tools of loan recovery
Techniques and strategic tools of loan recovery were:
Techniques 1: Adopt Proactive Strategies to control negligence before it Starts
Addressing the problem before there is a problem proves to be one of the most effective
strategies available in reducing delinquency. Preventive action is less costly, and the best
collections activities are those that manage clients who are not yet past due carefully
(Lawrence & Charles; 1995). There are a number of proactive strategies that commercial
bank may employ in the management of those clients before their loans are due. These
proactive strategies used by commercial bank are: educate borrower about product features
and collection fees and charges, establish mutually agreeable payment dates, address
customer service complaints quickly, rewarding clients who pay on time by offering them
immediate access to renewals, larger loan amounts, lower interest rates, certificate of good
payment (Cleaver, 2002).
Techniques 2: Improve Internal Productivity of the debt recovery area
It could be said that a debt recovery department is only as good as the staff working in it. A
well designed debt recovery strategy weighs the strengths and weaknesses of the institution,
addressing general questions such as whether recovery should be handled internally or
externally through a third party as well as considering what measures should be in place to
14
ensure staff are properly trained, motivated, and measured (Orlando, 1990). Also, it can
promote healthy competition among the recovery employees. To promote debt recovery
employees it’s better to determine the appropriate debt recovery procedures, to select and
train staff members of debt recovery department, to create staff incentives of debt recovery
department (Munir et al.; 2012).
Techniques 3: Ensure Quality Information Gathering and Management
The precise and opportune information about the delinquent clients, loan situation and
important information that bring feedback about the credit cycle is relevant for the successful
on collections (Antony, 2006). To ensure quality information gathering and management,
commercial banks must develop efficiency information and support systems, ensure quality
of client information, establish an internal past-due committee, and establish internal
methodological control units (Drake, 2010).
Techniques 4: Develop well defined strategies for recovering debt
Developing a strong collections unit requires clearly defined, documented and consistent
policies and procedures that guide staff through the collections process and instruct them on
how to respond in particular situations. Such policies and procedures should include a variety
of strategies (Nelson & Kalani, 2009). Commercial banks must establish client contact
policies, and risk-based recovery.
2.1.8. The determinants of debt recovery policy
Capital is the amount of own fund available to support the bank's business and act as a buffer
in case of adverse situation (Athanasoglou et al., 2005). Banks capital creates liquidity for
the bank due to the fact that deposits are most fragile and prone to bank runs. Moreover,
15
greater bank capital reduces the chance of distress (Diamond, 2000). However, it is not
without drawbacks that it induce weak demand for liability, the cheapest sources of fund
Capital adequacy is the level of capital required by the banks to enable them withstand the
risks such as credit, market and operational risks they are exposed to in order to absorb the
potential loses and protect the bank's debtors. According to Dang (2011), the adequacy of
capital is judged on the basis of capital adequacy ratio (CAR). Capital adequacy ratio shows
the internal strength of the bank to withstand losses during crisis. Capital adequacy ratio is
directly proportional to the resilience of the bank to crisis situations. It has also a direct effect
on the profitability of banks by determining its expansion to risky but profitable ventures or
areas (Sangmi and Nazir, 2010).
The bank's asset is another bank debt recovery specific variable that affects the profitability
of a bank. The bank asset includes among others current asset, credit portfolio, fixed asset,
and other investments. Often a growing asset (size) related to the age of the bank
(Athanasoglou et al., 2005). More often than not the loan of a bank is the major asset that
generates the major share of the banks income. Loan is the major asset of commercial banks
from which they generate income. The quality of loan portfolio determines the profitability
of banks. The loan portfolio quality has a direct bearing on bank profitability. The highest
risk facing a bank is the losses derived from delinquent loans (Dang, 2011). Thus,
nonperforming loan ratios are the best proxies for asset quality. Different types of financial
ratios used to study the performances of banks by different scholars. It is the major concern
of all commercial banks to keep the amount of nonperforming loans to low level. This is so
because high nonperforming loan affects the profitability of the bank. Thus, low
nonperforming loans to total loans shows that the good health of the portfolio a bank. The
lower the ratio the better the bank performing (Sangmi and Nazir, 2010).
16
It is represented by different financial ratios like total asset growth, loan growth rate and
earnings growth rate. Yet, it is one of the complexes subject to capture with financial ratios.
Moreover, operational efficiency in managing the operating expenses is another dimension
for management quality. The performance of management is often expressed qualitatively
through subjective evaluation of management systems, organizational discipline, control
systems, quality of staff, and others. Yet, some financial ratios of the financial statements act
as a proxy for management efficiency. The capability of the management to deploy its
resources efficiently, income maximization, reducing operating costs can be measured by
financial ratios. One of this ratios used to measure management quality (Bol, 2003).
Liquidity refers to the ability of the bank to fulfil its obligations, mainly of depositors.
According to Dang (2011) adequate level of liquidity is positively related with bank
profitability. The most common financial ratios that reflect the liquidity position of a bank
according to the above author are customer deposit to total asset and total loan to customer
deposits. Other scholars use different financial ratio to measure liquidity. For instance
Ilhomovich (2009) used cash to deposit ratio to measure the liquidity level of banks in
Malaysia. However, the study conducted in China and Malaysia found that liquidity level of
banks has no relationship with the performances of banks (Said and Tumin, 2011).
2.1.9. Financial performance
A firm’s financial performance, in the view of the shareholder, is measured by how better off
the shareholder is at the end of a period, than he was at the beginning and this can be
determined using ratios derived from financial statements; mainly the balance sheet and
income statement, or using data on stock market prices, these ratios give an indication of
whether the firm is achieving the owners’ objectives of making them wealthier, and can be
17
used to compare a firm’s ratios with other firms or to find trends of performance over time
(Berger and Patti, 2002).
Charreaux, (1997), states that an adequate performance measure ought to give an account of
all the consequences of investments, on the wealth of shareholders and the main objective of
shareholders in investing in a business is to increase their wealth. Thus the measurement of
performance of the business must give an indication of how wealthier the shareholder, has
become as a result of the investment over a specific time. The financial performance
indicators of commercial bank:
2.1.9.1 Return on Investment
Return on Investment is a performance measure used to evaluate the efficiency of an
investment or to compare the efficiency of a number of different investments. To calculate
ROI, the benefit (return) of an investment is divided by the cost of the investment; the result
is expressed as a percentage or a ratio (Murthy and Sree, 2003). According to (Murthy and
Sree, 2003) continue saying that there are many other ROI definitions in the literature, each
definition focuses on certain ROI aspects. Such definitions reflect the fact that approaches to
ROI and even ROI concepts vary from company to company and from practitioner to
practitioner; most likely every consultant has a particular variation. Despite the diversity of
the definitions, the primary notion is the same: ROI is a fraction, the numerator of which is
“net gain” (return, profit, benefit) earned as a result of the project (activity, system
operations), while the denominator is the “cost” (investment) spent to achieve the result.
18
2.1.9.2 Cash flow
Cash flow is defined as the balance of the amount of cash collected (revenue) and the amount
of cash paid out (expenses) during a given period of time. During times of reduced revenue,
even profitable trucking companies can fail from a lack of positive cash flow. Managing cash
flow becomes even more critical when credit markets tighten up and access to cash reserves
(borrowing) becomes increasingly restrictive. There are actions trucking companies can take
to improve their cash flow (Lipson & Sandra, 2008).
In accounting, cash flow is the difference in amount of cash available at the beginning of a
period (opening balance) and the amount at the end of that period (closing balance). It is
called positive if the closing balance is higher than the opening balance, otherwise called
negative. Cash flow is increased by selling more goods or services, selling an asset, reducing
costs, increasing the selling price, collecting faster, paying slower, bringing in more equity,
or taking a loan. The level of cash flow is not necessarily a good measure of performance,
and vice versa: high levels of cash flow do not necessarily mean high or even any profit; and
high levels of profit do not automatically translate into high or even positive cash
flow(Velnamphy & Niresh,2012).
2.1.9.3 Equity and Return on Investment
When investors provide equity capital to a firm, they acquire a right to the future dividends
of that firm given that they become partial owners of the company and that these dividends
cannot be determined from the onset (Michael, 1992). Pandey, (2006), noted that businesses
have an option of raising capital internally by retaining earnings. Therefore, equity
financing has a higher return on investment than debt financing since there is no periodic
interest payment. ROE is more than a measure of profit; it's a measure of efficiency. A rising
19
ROE suggests that a company is increasing its ability to generate profit without needing as
much capital (Abdul, (2012).It also indicates how well a company's management is
deploying the shareholders' capital. In other words, the higher the ROE the better, Falling
ROE is usually a problem. However, it is important to note that if the value of the
shareholders' equity goes down, ROE goes up. Thus, write-downs and share buybacks can
artificially boost ROE. Likewise, a high level of debt can artificially boost ROE; after all, the
more debt a company has, the less shareholders' equity it has (as a percentage of total assets),
and the higher its ROE is (Kamau, 2009).
Some industries tend to have higher returns on equity than others. As a result, comparisons of
returns on equity are generally most meaningful among companies within the same industry,
and the definition of a high or low ratio should be made within this context, most investments
can be categorized as either debt investments or equity investments. In an equity investment,
you buy an asset and your profit is related to the performance of that asset (Khan& Jain,
2007). If you buy a taco stand, your profit is based upon the net revenue of the taco stand. If
you buy a thousand shares of IBM, your profit is based upon the stock dividend which IBM
pays (if any) and upon the rise (or fall) of the value of IBM shares. Equity based investments
are seen as higher risk and therefore typically earn a higher rate of return over the long term.
This is why we even bother with equity-based investments, instead of putting our money into
(theoretically) safer debt based investments. Equity based investments include: Stocks,
Mutual Funds, Real Estate, Real Estate Investment Trusts (REITs) and Businesses
(Velnampy & Niresh, 2012).
20
2.1.9.4 Debt and Return on Investment
Michael, (1992), in his scholarly works noted that among the two most popular forms of
external financing, debt to most business operations looks cheaper and thus many businesses
are easily tempted to utilize debt in preference to other forms of financing.
Advanced arguments for utilization of debt in one's capital structures sighting advantages
like the effect of tax shields on corporate financing. In a debt investment, you loan money to
a person, a business, or a government institution. With a debt investment, your profit is not
directly related to the performance of the borrower. If you buy a $1,000 corporate bond from
IBM and IBM makes a record profit, your profit is the same as if IBM has earned no profit at
all. On the other hand, there is always a risk with debt investments that the borrower will be
unable to pay back the debt. If the borrower doesn’t have the money to pay their lenders or if
they file bankruptcy to legally avoid paying their lenders, you could be faced with a complete
loss of your investment (Modigliani &Miller, 1958).
Debt based investments are seen as lower risk and therefore usually earn a lower rate of
return (again, over the long term). However, debt based investments struggle against hidden
risk inflation. Many debt based investments offer a rate of return which is less than the rate of
inflation. Every day you hold those investments, the real value of your investment capital
decreases. For example, if you hold money in a savings account which earns 4% interest and
the rate of inflation is 5% per year, you lose 1% of the value of your investment every year.
Debt based investments are, Savings Accounts, Certificates of Deposit (CDs),Corporate
Bonds, Government Bonds, Municipal Bonds, Annuities (Myers,2002).
21
2.1.9.5 Equity and Liquidity
Liquidity is a terms that refer to an enterprise’s state of financial health, but with some
notable differences. Liquidity refers to an enterprise’s ability to pay short-term obligations;
the term also refers to its capability to sell assets quickly to raise cash (Myers, 2002). On the
other hand, a company with adequate liquidity may have enough cash available to pay its
bills, but it may be heading for financial disaster down the road. Equity fund is a fund that
invests in Equities more commonly known as stocks. Such funds are typically held either in
stock or cash, as opposed to Bonds, notes, or other securities. This may be a mutual fund or
exchange-traded fund. The objective of an equity fund is long-term growth through capital
appreciation, although dividends and interest are also sources of revenue. Specific equity
funds may focus on a certain sector of the market or may be geared toward a certain level of
risk. Liquidity fund is a fund that can be characterized by a high level of trading activity and
also known as marketability. It can be bought or sold in the market without affecting its price
(Garry, 2010).
2.1.9.6 Debt and Liquidity
The empirical evidence shows that throughout history, money (broadly defined to constitute
assets that circulate widely as media of exchange) takes the form of debt. In the past we saw
banknotes redeemable in coin with senior claim to bank assets. Today we have government-
insured demandable bank liabilities redeemable in government fiat. More broadly, it is
notable that the collateral objects that "circulated" in the repo market were debt instruments
(Lipson and Sandra, (2008).
22
2.1.9.7 Market expansion
According to Berger and Mester, (1997), the process of offering a product or service to a
wider section of an existing market or into a new demographic, psychographic or geographic
market this require both equity and debts. The aim of market expansion services providers is
to enable companies in expanding their products to new geographic regions or in growing
their business in existing markets. Market expansion services providers generally support
companies at different steps along the value chain, including marketing, sales and
distribution as well as customer service and support. The combination of local experience
and focus on front-end processes allows market expansion services providers to reduce
complexity and costs for clients wishing to expand their products or grow their market share
The landscape of market expansion services providers is still quite diverse. While some
specialize in specific regions or steps in the value chain, others offer integrated services
across multiple regions. The offering can range from standardized services to highly
customized solutions which are tailored to the individual client's or customer's need. Since
the industry for market expansion services is still rather young, providers are often compared
to single-service contractors. These contractors are generally engaged by companies to fulfill
a specific service or function oftentimes marketing, logistics or maintenance (Altman 1968).
23
2.2. Empirical review
The banking sector worldwide has experienced major transformations in its operating
environment. Countries have eased controls on debt recovery, interest rates, reduced
government involvement and opened their doors to international banks.
Olufunso, Herbstand and Lombard (2009) in their study they did an investigation into the
impact of the usage of debt recovery on the financial performance in the Buffalo city
municipality, South Africa and concluded that the usage of debt has a significantly negative
impact on the financial performance of commercial banks. The study however did not link
debt collection practices and profitability of commercial banks.
Nelson and Kalani (2009) conducted a study on commercial banking crises in Kenya: cause
and remedies. The statement of the problem for the study is many financial institutions that
collapsed in Kenya since 1986 failed due to non-performing loans. This study investigated
the causes of nonperforming loans, the actions that bank managers have taken to mitigate that
problem and the level of success of such actions. Using a sample of 30 managers selected
from the ten largest banks the study found that national economic downturn was perceived as
the most important external factor. Customer failure to disclose vital information during the
loan application process was considered to be the main customer specific factor.
Sindani (2012) in her study on Effectiveness of debt recovery Management System on
financial performance: Empirical Evidence from Commercial banks in Kenya found out that
Credit terms formulated by the microfinance institutions do affect loan performance; the
involvement of credit officers and customers in formulating credit terms affects loan
performance. Interest rates charged had a negative effect on the performance of the loans, the
higher the interest rates the lower the loan performance.
24
Soke Fun Ho and Yusoff (2009), in their study on debt risk management strategies of
selected commercial banks in Malaysia the majority of commercial banks losses stem from
outright default due to inability of customers to meet obligations in relation to lending,
trading, settlement and other financial transactions. Credit risk emanates from a bank’s
dealing with individuals, corporate, financial institutions or sovereign entities. A bad
portfolio may attract liquidity as well as credit risk.
Achou and Tenguh (2008) also conducted research on financial performance and debt risk
management found that there is a significant relationship between financial institutions
performance (in terms of profitability) and credit risk management (interms of loan
performance). Better credit risk management results in better performance. Thus, it is of
crucial importance that financial institutions practice prudent credit risk management and
safeguarding the assets of the institutions and protect the investors’ interests.
2.3. Critical review and research gap identification
To the study of Olufunso, Herbstand and Lombard (2009) did an investigation into the
impact of the usage of debt recovery on the financial performance in the Buffalo city
municipality, South Africa and concluded that the usage of debt has a significantly negative
impact on the financial performance of commercial banks. This investigation did not show
clearly how debt recovery generate the financial performance of commercial banks.
To the study of Nelson and Kalani (2009) conducted a study on commercial banking crises in
Kenya: cause and remedies. The statement of the problem for the study is many financial
institutions that collapsed in Kenya since 1986 failed due to non-performing loans. The bank
debt to the bank clients is not worse but necessary is to set strategies of recovery those bank
debt. This study did not clarify the strategies can used by bank for recovering bank debt.
25
When commercial banks don’t make strong strategies on the debt management system can
make negative effect on financial performance, the higher the interest rates the lower the loan
performance (Sindani, 2012).
Debt risk management strategies of selected commercial banks in Malaysia. Managers of the
commercial bank must think that loans are source of the performance of the bank but it is
necessary to think again how to recovery loans provided to the bank clients. Credit risk
emanates from a bank’s dealing with individuals, corporate, financial institutions or
sovereign entities (Soke Fun Ho & Yusoff, 2009).
Bank financial performance and debt risk management. There is strong relationship between
bank performance and credit risk management because management of credit risk provide
high income to the bank then lead to the performance (Achou & Tenguh, 2008).
The research gap in debt recovery and financial performance of commercial banks is lack of
determining efficient and effective mechanisms to be applied during recovery time, harsh
economic environment, lack of proper skills among loan officer, and quality of debt
monitoring.
26
2.4. Theoretical Framework
The financial bank performance particularly commercial banks was well researched and has
received increased attention over the past years. There have been a large number of theories
on debt recovery and financial commercial bank performance around the world.
2.4.1. Theory of Markowitz
The bank debts are generally considered free in terms of the variability of returns receivable.
In view of the remoteness of the risks, this theory in essence explains how commercials
banks functions in terms of the fundamental consequences that debt risk would have on their
performance. Thus banks in certain circumstances reserve the right to appoint receivers to
manage their debts in place of existing management. Van Horne (1998) believes that
economic conditions and the banks debt management policy are very important influences on
the level of banks account receivable. Economic conditions of course are beyond the control
of the credit officer. As with other current assets, however, the debt management teams of
banks can vary the level of receivables in keeping with the trade-off between profitability and
risk (Latif & Nasser, 2012). Lowering quality standards for loans may stimulate demand for
loans which in turn should lead to higher profit and productivity all things being equal and
ultimately economic growth. But there is a cost to carrying the additional receivables as well
as a greater risk of bad and doubtful debt losses (Mwega, 2009). Van Horne emphasize that
the debt management and collection policies of one bank are not independent of those of
other banks. If products and capital markets are reasonably competitive, the debt
management and collection policies of one bank will be influenced by what other banks are
doing.
27
2.4.2. Theory of debt maturity
This theory states that maturing risky short-term debts can impose a stronger debt overhang
effect than long-term debt do, thus altering a firm’s investment decisions according to. The
theory is said to aid in understanding implications of debt maturity structure, excessive
defaults and underinvestment during recession, among others (Gil & Diaz, 2004). The theory
further postulates that if assets display higher volatility due to interim bad news, then equity
holders with short-term debt are bound to be knocked out and lose more of the investment
benefits that come in the future. The theory predicts that, granted everything else is equal;
firms with higher degree of countercyclical volatilities will employ long-term debt if they
object to maximize their incentive to invest. It was argued that, maturity and leverage are
jointly endogenously determined (Byfuglien & Johnson, 2010). He established a positive
relationship between maturity and growth opportunities. In tandem, it was asserted that early
default for growth firms might be more costly which pushes optimal maturity structure
towards long-term. It was further noted that, default receivables (debts) recording and
verification have gained a great deal of attention (Flower, 2009). In tandem, banks are called
upon to be more efficient in accounting due to the fact that it would enable them to develop
the risk of default. Consequently, banks’ management can determine the overall strength of
the banking system and its ability to handle adverse debt default conditions
2.4.3. Theory of multiple lending
In line with this theory, commercial banks should be less inclined to share lending (that is,
loan syndication) when there is well developed equity markets and after a process
consolidation It is further noted that, both outside equity and mergers and/or acquisition
enhances lending capacity of banks, thus minimizing the need of greater diversification and
28
monitoring through share lending (Zwich, 2006). The theory is highly applicable in
commercial banks since their primary activity through which they earn profits is lending. The
aforementioned theory also addresses credit market theory. This is due the argument that
lending and credit are closely related. A model of neoclassical credit market avers that the
storms of credit clear the market (Ruitenberg & Beer, 2012). In tandem, holding collateral
and other agreements constant, the interest rate is argued to be the only price mechanism with
an increasing demand for credit and a given customer supply, the interest rate goes up, and
the reverse is true. In other words, the higher the interest rates, the higher the chances of
defaulting in credit repayment (Fitzgerald, 2008). When formulating strategies to circumvent
credit risk, it would be essential for commercial banks to factor in inherent characteristics of
the credit market and as such be able to determine the interest rate to fix on loans. In line
with the theory of multiple lending, it is fundamental for commercial banks to assess their
lending capacity prior to advancing any credit to prospective borrowers.
2.5 Conceptual Framework
The conceptual framework was the foundation on which the entire research project is based.
It identifies the network of relationships among the variables considered important to the
study of a given problem. The dependent variable was financial performance of commercial
banks with the following indicators: return on equity, return on asset, return on investment,
net interest margin, market expansion, which can result into independent variable that was
debt recovery with the following indicators: debt, equity, and loan. Variable that explains a
relation or provides a causal link between other variables was called mediating variable or
intervening variable. Indeed, in this study the intervening variable are Government policy,
organizational strategies, legal, and knowledgeable and innovative employees.
29
Independent Variable Dependent Variable
Figure 2:1. Conceptual Framework
Source: Researcher, 2017
In the dependent variables as the result of independent variable, debt recovery may result the
important impact for financial performance of commercial banks. The independent variables
were capital adequacy, asset quality, management efficiency, and liquidity management.
2.5.1 Capital adequacy
Capital is the amount of own fund available to support the bank's business and act as a buffer
in case of adverse situation (Athanasoglou et al. 2005). Banks capital creates liquidity for the
Debt recovery
Capital adequacy.
Asset quality.
Management efficiency.
Liquidity management.
Financial performance of
commercial banks
Return on equity.
Return on asset.
Return on investment.
Leverage ratio.
Market expansion.
Intervening variable
Government policy.
Organizational strategies.
Legal.
Knowledgeable and
innovative.
30
bank due to the fact that deposits are most fragile and prone to bank runs. This bank deposits
covering the banks in time of bad debt then make financial of the bank for continuing
performance of the bank financial.
2.5.2 Asset quality
The bank's asset is another bank debt recovery specific variable that affects the profitability
of a bank. The bank asset includes among others current asset, credit portfolio, fixed asset,
and other investments. Often a growing asset (size) related to the age of the bank
(Athanasoglou et al., 2005). More often than not the loan of a bank is the major asset that
generates the major share of the banks income. Loan is the major asset of commercial banks
from which they generate income. The quality of loan portfolio determines the profitability
of banks. The loan portfolio quality has a direct bearing on bank profitability. The highest
risk facing a bank is the losses derived from delinquent loans (Dang, 2011). Thus,
nonperforming loan ratios are the best proxies for asset quality. Different types of financial
ratios used to study the performances of banks by different scholars. It is the major concern
of all commercial banks to keep the amount of nonperforming loans to low level. This is so
because high nonperforming loan affects the profitability of the bank. Thus, low
nonperforming loans to total loans shows that the good health of the portfolio a bank. The
lower the ratio the better the bank performing (Sangmi and Nazir, 2010).
2.5.3 Management efficiency
It is represented by different financial ratios like total asset growth, loan growth rate and
earnings growth rate. Yet, it is one of the complexes subject to capture with financial ratios.
Moreover, operational efficiency in managing the operating expenses is another dimension
for management quality (Wanyama & Mutsotso, 2010). The performance of management is
31
often expressed qualitatively through subjective evaluation of management systems,
organizational discipline, control systems, quality of staff, and others. Yet, some financial
ratios of the financial statements act as a proxy for management efficiency. The capability of
the management to deploy its resources efficiently, income maximization, reducing operating
costs can be measured by financial ratios (Yancey, 2012). One of this ratio used to measure
management quality.
2.5.4 Liquidity management
Liquidity refers to the ability of the bank to fulfil its obligations, mainly of depositors.
According to Dang (2011) adequate level of liquidity is positively related with bank
profitability. The most common financial ratios that reflect the liquidity position of a bank
according to the above author are customer deposit to total asset and total loan to customer
deposits. Other scholars use different financial ratio to measure liquidity. For instance
Ilhomovich (2009) used cash to deposit ratio to measure the liquidity level of banks in
Malaysia. However, the study conducted in China and Malaysia found that liquidity level of
banks has no relationship with the performances of banks (Said & Tumin, 2011).
The dependent variable in this study is financial performance of commercial banks that has
the return on equity, return on asset, return on investment, and market expansion as the
attributes of dependent variables.
2.5.5Return on equity (ROE)
ROE is a financial ratio that refers to how much profit a company earned compared to the
total amount of shareholder equity invested or found on the balance sheet. ROE is what the
shareholders look in return for their investment. A business that has a high return on equity is
32
more likely to be one that is capable of generating cash internally (Zwich, 2006). Thus, the
higher the ROE the better the company is in terms of profit generation. It is further explained
by Khrawish (2011) that ROE is the ratio of Net Income after Taxes divided by Total Equity
Capital. It represents the rate of return earned on the funds invested in the bank by its
stockholders. ROE reflects how effectively a bank management is using shareholders’ funds.
Thus, it can be deduced from the above statement that the better the ROE the more effective
the management in utilizing the shareholders capital.
2.5.6 Return on asset (ROA)
ROA is also another major ratio that indicates the performance of a bank. It is a ratio of
Income to its total asset (Khrawish, 2011). It measures the ability of the bank management to
generate income by utilizing company assets at their disposal. In other words, it shows how
efficiently the resources of the company are used to generate the income. It further indicates
the efficiency of the management of a company in generating net income from all the
resources of the institution (Khrawish, 2011). Wen (2010), state that a higher ROA shows
that the company is more efficient in using its resources.
33
2.5.7 Return on investment (ROI)
ROE is also another major ratio that indicates the performance of a bank. It is a ratio of net
profit to its total investment. It shows how performance of bank related to the bank
investment.
2.5.8 Leverage ratio (LR)
Leverage ratio is the ratio between total debt and total equity. It shows debt provided by the
bank and capital and share of the bank.
2.5.9 Market expansion
Market expansion is another attribute shows the performance of commercial banks. It shows
the performance of several branches in different regions of commercial banks.
Table 2:1. Measurements of independent variables
Variable Measurement
Capital adequacy Level of capital required by the banks to the
risks such as credit, market risk, and
operational risks
Asset quality Loan provided by the bank to income
generated by the bank.
Management efficiency Evaluation of management systems,
organizational discipline, control systems,
quality of staff
Liquidity management Ratio of customer deposit to total asset and
total loan
34
Table 2:2. Measurements of dependent variables
Variables Measurement
Return on Asset (ROA) Net income to Total assets
Return on Equity (ROE) Net income to Total Equity
Return on Investment (ROI) Net income to Total Investment
Leverage Ratio (LR) Total debt to Total Equity
Non Performing Loans (NPL) Nonperforming Loans to Gross loans and
advances
Market expansion Ratio Number of branches to different Regions
2.6. Summary
Debt recovery done many activities for achieving to its objectives of increasing the financial
performance of commercial banks. After implementing these objectives, there were some
outcomes like return on equity, return on asset, return on investment, net interest margin, and
market expansion. The organizational performance cannot be assumed to be automatic
outcome of the debt recovery without combination of government policy, organizational
strategies, legal, and knowledgeable and innovative employees. For evaluating the
contribution of debt recovery to the financial performance of commercial banks, researcher
used debt recovery as independent variables for analyze dependent variable as financial
performance of commercial banks.
35
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Introduction
This chapter presented the methodology being used in this study. It discussed the research
design, the population and sample of the study, sampling techniques, instruments and
procedures of data collection, and eventually methods of data analysis.
3.1 Research design:
The research adopted a descriptive research design. Descriptive research design chooses
because it enables the researcher to generalize the findings to a population. According to
Mugenda and Mugenda (2009) stated that the purpose of descriptive research is to determine
and report the way things are and it helps in establishing the current status of the population.
3.2. Target population
This research has aimed to evaluate the contribution of debt recovery to the financial
performance of commercial banks in Kenyan Commercial Bank (KCB) as case study. It was
being therefore, focusing on a population who were employees of this bank. The target
population of this study was 127 employees of KCB.
36
Table 3.1 Target Population
Category Number
Loan officers
Manager
75
52
Total 127
Source: KCB Files
3.3. Sample design
3.3.1. Sample size
In order to carry out this study, researcher used sample size form target population. For
estimating this sample size from population, the researcher used Yamane’s formula
21 *( )
Nn
N e
where n is the sample size, N is the total population and e is the error. By
using this formula above n =127
1+127∗(0.1)2= 56, then sample size is 56 employees of KCB.
Table 3.2 Sample size
Source: KCB
3.3.2. Sampling techniques
The sampling technique that was being used was simple random sampling for selecting
sample size that was being used in this study that had aim of evaluating contribution of debt
recovery to the financial performance. The simple random sampling was being used for
Category Population Sample Ratio
(56/127)
Sample Size
Loan Officers 75 0.44 33
Managers 52 0.44 23
Total 127 56
37
selecting each element of the population the opportunity of having independent and equal
chance of being represented in the sample of 56 respondents as the sample size.
3.4. Data collection Methods
The researcher expected to gain the information from the primary data obtained through a
structured questionnaire, and documentary search was being applied as to obtain secondary
data.
3.4.1. Data collection instruments
In data collection instruments, researcher used Questionnaire, and documentary analysis.
3.4.1.1 Questionnaire
To carry out this study, a questionnaire was being designed to collect information from the
employees of KCB. The questionnaire in this study was a form containing a series of
questions and providing space for their replies to be filled in by the respondent them self. The
questionnaire contained closed ended questions. For closed-ended questions, alternative
responded presented to the respondents was being filled in the space provided on the form
according to the respondents ‘choice. This questionnaire contained two sections. Section one
was about respondents ‘demographic, section two discusses was about before questions
related to the topic.
3.4.1.2 Documentary analysis
In documentary analysis as the researcher on logistics capability and organizational
performance, researcher read and analyzed reports of KCB as the case study in order to gain
much information about debt recovery and financial performance of commercial banks, in
order to provide the conclusion and the recommendation in the last chapter of the study.
38
3.4.2. Administration of data collection instruments
They researcher opted to use the questionnaire because of many reasons. Krathwohl (1998)
points out that the advantages of using the questionnaire as a data collection tool are that
questionnaires are useful where a large amount of data needs to be; they are quick and
economical. In addition, questionnaires, as one of the most common forms of data collection
tools, can easily be assessed in terms of reliability. In this respect, reliability refers to the
ability of questionnaire to produce the same results in different implementations, leading to a
consistency and dependability of the results (Leftwich, 2007). The other strengths of
questionnaires lie in accuracy, generalizability, and convenience (Marshall, 1999). All of the
above advantages have motivated me to choose a questionnaire for this study. However,
besides these strengths, the questionnaires usually fall short in examining complex social
relationships or intricate patterns of interaction (Rossman, 1999). The questionnaire was be
administered face to face. This was helped extract more on questions, save time and
resources. Leaving questionnaires to respondents may provide biased information and may
incur the additional costs of coming back to pick them. One data collector was being hired,
and was being inducted. The modalities of administering the questionnaire was being
adequately discussed with data collector before the actual data collection.
3.4.3. Validity and Reliability
According to Ochieng (2009), for a study to be of real meaning, it ought to apply valid and
reliable instrument. Before, actual research was done, the researcher had to make sure that
the instrument was checked for validity and pre-tested to determine its reliability. Reliability
refers to the consistency with which repeated measures produce the same results across time
and across observers (Patton, 2002). In order to ensure reliability of the data in this study,
39
two methods of data collection were being used. Questionnaire and documentary in the
reports of KCB to the debt recovery and financial performance of commercial bank.
Questionnaire was being developed in line with the research objectives and questions. To
ensure validity of the instrument, Research advisors and experts was checked the
questionnaire for the consistency of the items, conciseness, intelligibility and clarity.
3.5. Data analysis procedures
In the data analysis procedures, researcher was focused on the data analysis and the data
presentation. In the data analysis, researcher was planned to use Statistical Programs for
Social Sciences (SPSS) 18 version. By use this statistics program, Researcher was entered
the data in the software then researcher was started to assign a number to each response item,
enter a clear code, clean data, and also produce descriptive statistics, graphics, and cross
tabulations. In the data analysis, researcher was presented the findings from the data by using
the descriptive statistics graphics, and regression equation for showing relationship between
debt recovery and financial performance of commercial.
3.6. Ethical consideration
The researcher while carrying out the research tried to remain honest and with confidence
about the research to be carried out. The researcher makes sure that the views given by
respondents are kept with utmost confidence and typically used for academic purposes.
40
CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSION
4.0 Introduction
This chapter was focused on the analysis and interpretation of data collected from the field of
the study. The data was compiled, categorized and then presented using statistical tables and
other descriptive methods that was backed up by frequency and percentage presentation.
Interpretation of findings was done based on percentage responses to each particular question
and each objective had been addressed by the analysis.
4.1 Demographic Characteristics of Respondents.
This section concentrated on describing data collected on the respondents’ gender, age group,
and level of education. The main findings were presented in tables with brief interpretations
in the subsequent sections.
4.1.1 Distribution of Respondents by Gender
Both males and females participated in providing the data which allowed the researcher to
gather the information and analysed it to empirically establish the relationship between debt
recovery and financial performance of commercial bank.
41
Table 4.1: Distribution of respondents by Gender
Frequency Percent
Male 35 62.5
Female 21 37.5
Total 56 100.0
Source: Primary Data, 2016
Figure 4.1: Distribution of respondents by Gender
Source: Primary Data, 2016
As seen in Table 4.1, and Figure 4.1, male respondents were the majority with the percentage
of 62.5% while their counterparts the female respondents took a slightly smaller portion of
37.5% respondents. These respective gender percentages were significant because it called
for the views and inferences that respected gender equalities a key factor in the contemporary
gender sensitive world. Therefore, views and inferences were represented by both male and
42
female respondents. This may further imply that the problem laid in other issues but not in
gender inequality.
Table 4.2: Distribution of Age of Respondents
Frequency Percent
20-25 1 1.8
26-30 24 42.9
31-35 20 35.7
36-40 8 14.3
Above 40 3 5.4
Total 56 100.0
Source: Primary Data, 2016
Figure 4.2: Distribution of Age of Respondents
Source: Primary Data, 2016
43
Table 4.2 and Figure 4.2 show that, the respondents that were selected fall in four respective
age groups; thus the age bracket of 26-30 year was the majority with the frequency of 24
(around 43%). This was followed by the age bracket of 31-35 with the frequency of 20
(around 36%). The employees between the ages of 36-40 were 14.3% yet only 5.4% of the
employees were between the age of 40 years and above and finally smallest frequency is
between 20-25 with 1.8% of respondents. This meant that most employees of Kenya
Commercial Bank were in the active age of employment, which implied that the respondents
were actively engaged in the debt recovery process and therefore able to provide reliable
information for analysis by the researcher.
Table 4.3: Distribution of education level of Respondents
Frequency Percent
Diploma 15 26.8
Bachelors 27 48.2
Masters 14 25.0
Total 56 100.0
Source: Primary Data, 2016
44
Figure 4.3: Distribution of education level of Respondents
Source: Primary Data, 2016
According to Table 4.3 and Figure 4.3, the majority of the respondents of Kenya Commercial
Bank had bachelor’s Degrees with the frequency of 27 (around 48%) which is an appropriate
level of qualification for professional staff in any organizations especially in the banking
sector. Holders of masters had the percentage of 25%. The respondents with Diploma had the
frequency of 15 (around 26%). Such people had professional knowledge and skills about debt
recovery especially because they were highly educated people with a wide range of
knowledge and skills about debt recovery for increasing.
45
4.2. Presentation of findings
In this section, the researcher presents the findings of the study as extracted from the data
collection instruments namely questionnaire. The collected data was then presented using
tables while analysis and interpretation was based on the frequencies and percentages of
respondents’ views. Each objective was handled chronologically as presented in chapter one
of this study.
4.2.1. Objective one: To assess the determinants of debt recovery policy in KCB
This objective of this study focused on appraisal in debt recovery, risk control in debt
recovery, collection policy in debt recovery, and determinants of debt recovery policy in
KCB.
Table 4.4: The extent of KCB for using client appraisal in debt recovery
Frequency Percent
Very great extent 15 26.8
Great extent 32 57.1
Moderate extent 8 14.3
Low extent 1 1.8
Total 56 100.0
Source: Primary Data, 2016
According to table 4.4 showed that many respondents responded that they were great extent
with 57.1% to KCB for using client appraisal in debt recovery, around 27% were very great
extent to KCB for using client appraisal in debt recovery, 14% of respondents were moderate
extent to KCB for using appraisal in debt recovery, and 1.8% were low extent to KCB for
using appraisal in debt recovery.
46
Table 4.5: The extent of KCB for using credit risk control in debt recovery
Frequency Percent
Very great extent 17 30.4
Great extent 22 39.3
Moderate extent 16 28.6
Low extent 1 1.8
Total 56 100.0
Source: Primary Data, 2016
According to table 4.5 showed that many respondents responded that they were great extent
with 39% to KCB for using credit risk control in debt recovery, around 30% were very great
extent to KCB for using credit risk control in debt recovery, 28.6% of respondents were
moderate extent to KCB for using credit risk control in debt recovery, and 1.8% were low
extent to KCB for using credit risk control in debt recovery.
Table 4.6: The extent of KCB for using collection policies in debt recovery
Frequency Percent
Very great extent 17 30.4
Great extent 27 48.2
Moderate extent 12 21.4
Total 56 100.0
Source: Primary Data, 2016
According to table 4.6 showed that many respondents responded that they were great extent
with 48% to KCB for using collection policies in debt recovery, around 30% were very great
extent to KCB for using collection policies in debt recovery, and 21.4% of respondents were
moderate extent to KCB for using collection policies in debt recovery.
47
Table 4.7: Determinants of debt recovery policy in KCB
Determinants of debt recovery policy in KCB Mean Std. Deviation
Imposing loan size limits is a viable strategy in debt
recovery
1,72 ,686
The use of credit checks on regular basis enhance debt
recovery
1,83 ,747
Flexible repayment periods improve loan repayment 1,73 ,554
Penalty for late payment enhances clients commitment to
loan repayment
1,61 ,855
The use of clients credit application forms improve
Monitoring and Credit Management as well
1,53 ,599
Credit committees involvement in making decisions
regarding loans are essential in reducing default / credit
risk
1,51 ,644
Source: Primary Data, 2016
Table 4.7: illustrates determinants of debt recovery policy in KCB. The imposing loan size
limits is a viable strategy in debt recovery has mean of 1.72 and standard deviation of 0.686.
The use of credit checks on regular basis enhance debt recovery has mean 1.83 and standard
deviation of 0.747. Flexible repayment periods improve loan repayment has mean of 1.73
and standard deviation of 0.554. Penalty for late payment enhances clients’ commitment to
loan repayment has mean of 1.61 and standard deviation of 0.599. The use of clients’ credit
application forms improve monitoring and credit management as well has mean of 1.53 and
standard deviation of 0.599. Credit committees’ involvement in making decisions regarding
loans are essential in reducing default / credit risk has mean of 1.51 and standard deviation of
0.644.
48
Based on these findings and considering the Likert scale rating, values of mean and standard
deviation confirmed that many respondents had a dispersive tendency to strongly agree for
the determinants of debt recover policy in KCB. The findings of this study are in agreement
with literature review as cited by Zwich (2006), who stated that determinants of debt
recovery policy in KCB play important in debt recovery and financial performance.
Objective Two: To analyse strategies used by KCB in debt recovery
This objective analyse strategies, researcher used strong agree, agree, neutral, disagree, and
strong disagree for evaluating doing effective client appraisal in the process of providing a
loan, competent personnel for carrying out client appraisal in the process of providing a loan,
checking value of collateral before providing a loan to clients, assessing clients capacity to
repay results in loan defaults, checking a very document of loan requirements to clients
before providing a loan.
Table 4.8: Strategies used by KCB in debt recovery
Strategy used by KCB in debt recovery Mean Std. Deviation
Doing effective client appraisal in the process of
providing a loan
1,70 ,853
Competent Personnel for carrying out client appraisal in
the process of providing a loan
1,83 ,747
Checking value of collateral before 1,98 1,747
Providing a loan to clients 1,56 ,773
Assessing clients capacity to repay results in loan
defaults
1,68 ,809
Checking every document of loan requirements to
clients before providing a loan
1,72 ,826
Source: Primary data
49
According to table 4.8, clarify strategies used by KCB in debt recovery for enhancing
financial performance. To the doing effective client appraisal in the process of providing a
loan has mean of 1.70 and standard deviation of 0.853. To the competent personnel for
carrying out client appraisal in the process of providing a loan has mean of 1.83 and standard
deviation of 0.747. To the checking value of collateral before has mean of 1.98 and standard
deviation of 1.747. To the assessing clients capacity to repay results in loan defaults has
mean of 1.68 and standard deviation of 0.809. To the checking every document of loan
requirements to clients before providing a loan has mean of 1.72 and standard deviation of
0.826.
Based on these findings and considering the Likert scale rating, values of mean and standard
deviation confirmed that many respondents had a dispersive tendency to strongly agree for
the strategies used by KCB in debt recovery. The findings of this study are in agreement with
literature review as cited by Flower (2009), who stated that strategies used by KCB in debt
recovery are important to the financial performance.
Objective Three: To establish the relationship between debt recovery and financial
performance of KCB
Researcher analyzed relationship between debt recovery and financial performance of KCB
in term of debt recovery increases return on equity of the KCB, debt recovery increases
return on asset if the KCB, debt recovery increases return on investment of KCB, debt
recovery increases customer satisfaction, an debt recovery increases flexibility and
innovative of KCB.
50
Table 4.9: Relationship between debt recovery and financial performance of
commercial banks
Mean Std. Deviation
Debt recovery increases return on equity of the KCB 1,50 ,641
Debt recovery increases return on Asset of KCB 1,78 ,698
Debt recovery increases return on investment of KCB 1,60 ,672
Debt recovery increases customer satisfaction of KCB 1,78 ,832
Debt recovery increases flexibility and innovative of
KCB
1,70 ,687
Source: Primary data
To the table 4.9 shown relationships between debt recovery and financial performance clarify
that debt recovery increases return on equity of KCB has mean of 1.50 and standard
deviation of 0.698. Debt recovery increases return on Asset of KCB has mean of 1.78 and
standard deviation of 0.698. Debt recovery increases return on investment of KCB has mean
of 1.60 and standard deviation of 0.672. Debt recovery increases customer satisfaction of
KCB has mean of 1.78 and standard deviation of 0.832. And debt recovery increases
flexibility and innovative of KCB has mean of 1.70 and standard deviation of 0.687.
Based on these findings and considering the Likert scale rating, values of mean and standard
deviation confirmed that many respondents had a dispersive tendency to strongly agree for
the relationship between debt recovery and financial performance of commercial banks. The
findings of this study are in agreement with literature review as cited by Mwega (2009), who
stated that there is relationship between debt recovery and financial performance of
commercial banks.
51
4.3. Coefficients of linear regression Analysis
R2 which is coefficient of determination was used to explain the extent to the performance of
KCB as the commercial banks was determined by debt recovery. This led the researcher to
discover the goodness of fit in the description of variables. The information from the
questionnaire responses were later analysed and hereby presented using table 4.10 which
shows the Coefficients of Linear Regression Analysis with regard to debt recovery and
financial performance of KCB.
Table 4.10: Coefficients of Linear Regression Analysis
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
B Std. Error Beta
(Constant) ,678 ,264 2,569 ,015
Debt recovery
increases return on
equity of the KCB
,027 ,159 ,025 ,168 ,868
Debt recovery
increases return on
Asset of KCB
-,334 ,154 -,343 -2,171 ,037
Debt recovery
increases return on
investment of KCB
,512 ,159 ,506 3,221 ,003
Debt recovery
increases customer
satisfaction of KCB
-,011 ,179 -,014 -,062 ,951
Debt recovery
increases flexibility
and innovative of
KCB
,471 ,215 ,476 2,185 ,036
Source: Primary data
According to table 4.10 the researcher got intercept a = 0.678 and slope b = 0.15 Thus the
linear equation was Y = 0.678 + 0.15X, Where X was Debt recovery and Y was the financial
52
performance. From this Equation, the researcher established a relationship between debt
recovery and financial performance of KCB as commercial banks. This implied that there
was a strong positive relationship between debt recovery and financial performance.
These results meant that the debt recovery and the financial performance of KCB as
commercial banks had the ability to stimulate success of the KCB. Hence the third research
question was positively answered that there is a significant relationship between debt
recovery and financial performance of KCB.
53
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND
RECOMMENDATIONS
5.0. Introduction
In this chapter, the findings from chapter four are discussed in a logical summary form,
conclusions drawn and recommendations made in line with the research variables and the
objectives of the study. The chapter also provides suggestions for further research. The
purpose of the study was to analyse the contribution of debt recovery and financial
performance of commercial bank.
5.1 Summary of Findings
In an effort to try to summarize the major findings, we need to be reminded that, the study
determine the relationship which exists between debt recovery and financial performance of
commercial bank. The study was based on the profile of respondents in terms of gender, age
bracket, and educational level in KCB. The study was also based on the determinants used by
KCB in debt recovery, and strategies used by KCB in debt recovery.
The main findings have been presented in accordance with the chronological order of the
research objectives of this as presented in chapter one of this research thesis and these
objectives include; to assess determinants used by KCB in debt recovery, to analyze
strategies used by KCB in debt recovery and to assess the relationship that exists between
debt recovery and financial performance of commercial banks.
With regard to the respondents’ identification, the finding present the demographic
characteristics of the respondents in terms of age, gender, and level of Education of
respondents. As far as gender is concerned, majority of the respondents were males with the
54
percentage of 62.5% males, while their counterparts the female respondents took a slightly
smaller portion of 37.5% respondents. These respective gender percentages were significant
because it called for the views and inferences that respected gender equalities a key factor in
the contemporary gender sensitive Rwandan Society. Therefore, views and inferences were
represented by both male and female respondents. This may further imply that the problem
laid in other issues but not in gender inequality.
Regarding the age group of the respondents, most of them ranged between the age of 20-25,
26-30, 31-35, 36-40 and 40 years and above. The age bracket of 26-30 year was the majority
with the frequency of 42.9%. This was followed by the age bracket of 20-25 with the
frequency of 1.8%. The employees between the ages of 31-35 were 35.7%, and 36-40 with
14.3% yet only 5.4% of the employees were between the age of 40 years and above. This
meant that most employees of KCB were in the active age of employment, which implied
that the respondents were actively engaged in the project planning process and therefore able
to provide reliable information for analysis by the researcher.
For the level of Education, the findings show that, majority of the respondents of KCB had
bachelor’s Degrees with the frequency of 48.2% which is an appropriate level of
qualification for professional staff in any organizations especially in the public sector.
Holders of masters had the percentage of 25%. The respondents with Diploma had the
frequency of 26.8%. Such people had professional knowledge and skills about debt recovery
especially because they were highly educated people with a wide range of knowledge and
skills.
Before presenting the answers to questions the researcher gives a brief reflection of the
research questions that have guided this study as discussed in the chapter four of this research
55
thesis. The research questions are; a) what are the determinants used by KCB in debt
recovery? b) What are the strategies used by KCB in debt recovery? And c) is there any
relationship between debt recovery and financial performance of commercial banks?
5.1.1. Research Question one: what are the determinants used by KCB in debt
recovery?
Based on these findings and considering the Likert scale rating, values of mean and standard
deviation confirmed that many respondents had a dispersive tendency to strongly agree for
the determinants of debt recover policy in KCB. The findings of this study are in agreement
with literature review as cited by Zwich (2006), who stated that determinants of debt
recovery policy in KCB play important in debt recovery and financial performance.
5.1.2. Research Question Two: What are strategies used by KCB in debt recovery?
Based on these findings and considering the Likert scale rating, values of mean and standard
deviation confirmed that many respondents had a dispersive tendency to strongly agree for
the strategies used by KCB in debt recovery. The findings of this study are in agreement with
literature review as cited by Flower (2009), who stated that strategies used by KCB in debt
recovery are important to the financial performance.
5.1.3. Research Question Three: Is there any relationship between debt recovery and
financial performance of commercial bank?
According to table 4.10 the researcher got intercept a = 0.678 and slope b = 0.15 Thus the
linear equation was Y = 0.678 + 0.15X, Where X was Debt recovery and Y was the financial
performance. From this Equation, the researcher established a relationship between debt
56
recovery and financial performance of KCB as commercial banks. This implied that there
was a strong positive relationship between debt recovery and financial performance.
These results meant that the debt recovery and the financial performance of KCB as
commercial banks had the ability to stimulate success of the KCB. Hence the third research
question was positively answered that there is a significant correlation between debt recovery
and financial performance of KCB.
5.2. Conclusion
With regard to objective one of this study, the majority of the respondents with a percentage
strongly agreed with the statement of determinants of debt recovery policy in KCB.
With regard to objective two of this study, the majority of the respondents with a percentage
strongly agreed with the statement of strategies used by KCB in debt recovery.
With regard to objective three of this study, the majority of the respondents with a percentage
strongly agreed with the statement of determinants of relationship between debt recovery and
financial performance of commercial banks.
The conclusion of the study revealed that the relationship of debt recovery and financial
performance is positively associated with project performance. As debt recovery is enriched,
financial performance effect turned positive. The strength of this relationship depends upon
debt recovery.
57
5.3. Recommendations
This study has shed more light on adoption and application of debt recovery and the financial
performance of commercial banks in Rwanda. Based on the findings and the main emerging
issues from the study, the following recommendations were suggested by the researcher.
Banks managers should hire external experts to facilitate to set system of recovering. For
make sure that all debt are recovered.
Banks managers ought to select appropriate strategies of debt recovery in order to assess all
documents of clients (Borrowers)
There should be a prior determination of a comfortable level of involvement by identifying
the right personnel with regard to the job fit factor and the needs and resources which will be
used to complete debt recovery required.
5.4. Areas for further research
Being a project research, this study is most likely to provoke some other studies as a follow
up in a bid to establish the likely contribution of debt recovery and financial performance of
commercial banks in Rwanda and beyond. To enhance the prospect of generalizing the
findings of the current study, it is necessary to expand the scope in terms of the sample size
and the selection strategy.
It is therefore suggested that the study be replicated by using a much larger sample selected
more broadly from public and or private banks that carry out projects in order to study such a
relationship more thoroughly.
58
Future studies should include variables more than two because this research was just limited
to two variables only which include; debt recovery (independent variable) plus financial
performance of commercial banks (dependent variable).
Finally, future research should extend the study in different sector frameworks like
education, health, energy and satiation in order to increase its applicability to a much
extensive scope because this research was collected data from several areas.
59
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APPENDICES
65
APPENDIX ONE: QUESTIONNAIRE
Mount Kenya University, School of Business and Public Management
Dear Respondent,
My name is Sakindi Vincent and I’ am studying for a Masters Degree Program (MBA) at
Mount Kenya University, School of Business and Public Management. I’m currently
carrying out research entitled “Debt recovery on financial performance of commercial banks in
Rwanda. A case study of Kenya Commercial Bank.’’ Your completion of the following
questionnaire will be of great help to this study. Your support will be greatly appreciated and
your opinions will be highly valued. It will take approximately 10-15 minutes. I expect your
kind cooperation in this respect. All information provided in this study will be treated as
confidential and your anonymity is assured
Thank you for your cooperation.
Yours sincerely,
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Section A: Demographic information
1. Gender: a. Male [ ] b. Female [ ]
2. Age: a. 20-25 [ ], b. 26-30 [ ], c. 31-35 [ ], d. 36-40 [ ], e. Above [ ]
3. Education level: a. Secondary [ ] b. Diploma [ ], c. Bachelor [ ], d. Masters [ ],
e. PhD [ ]
Section B: Questions related to the research topic
Objective One: To assess the determinants of debt recovery policy in KCB
1. To what extent does the KCB use client appraisal in debt recovery
i. Very great extent [ ]; ii. Great extent [ ], iii. Moderate extent [ ]; iv. Low
extent [ ]; v. Not at all [ ]
2. To what extent does the KCB use credit risk control in debt recovery
i. Very great extent [ ]; ii. Great extent [ ]; iii. Moderate extent [ ]; iv. Low
extent [ ]; v. Not at all [ ]
3. To what extent does the KCB use collection policy in debt recovery
i. Very great extent [ ]; ii. Great extent [ ]; iii. Moderate extent [ ]; iv. Low
extent [ ]; v. Not at all [ ]
4. Determinants of debt recovery policy in KCB
Strong
agree
Agree Neutral Disagree Strong
Disagree
(1) (2) (3) (4) (5)
Imposing loan size limits is a viable
strategy in debt recovery;
The use of credit checks on regular basis
enhance debt recovery
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Flexible repayment periods improve loan
repayment
Penalty for late payment enhances clients
commitment to loan repayment
The use of clients credit application forms
improve Monitoring and credit
management as well
Credit committees involvement in making
decisions regarding loans are essential in
reducing default / credit risk.
Objective Two: To analyze strategies used by KCB in debt recovery
5. Strategies used by KCB indebt recovery
Strong
agree
Agree Neutral Disagree Strong
disagree
(1) (2) (3) (4) (5)
Doing effective client appraisal in the
process of providing a loan
Competent personnel for carrying out
client appraisal in the process of
providing a loan
Checking value of collateral before
providing a loan to clients
Assessing clients capacity to repay
results in loan defaults
Checking a very document of loan
requirements to clients before proving
a loan.
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Objective Three: To establish the relationship between debt recovery and financial
performance of KCB
6. Is there the relationship between debt recovery and financial performance of
commercial banks
Strong
agree
Agree Neutral Disagree Strong
Disagree
(1) (2) (3) (4) (5)
Debt recovery increases return on equity of
the KCB
Debt recovery increases return on Asset of
the KCB
Debt recovery increases return on investment
of KCB
Debt recovery increases customer
satisfaction of KCB
Debt recovery increases flexibility and
innovative of KCB.
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APPENDIX TWO: AUTHORIZATION LETTER OF MKU
70
APPENDIX THREE: ACCEPTANCE LETTER
