Re-Thinking the Conceptual Understanding of Credit Risk Management and Portfolio Performance: A Holistic Conceptual Model

Uganda has over the years consistently faced portfolio quality challenges which have led to a series of financial turmoil. Extant empirical literature associate portfolio performance with credit risk management and suggest the need to improve credit risk management towards enhanced portfolio performance. It assumes a linear relationship between credit risk management and portfolio performance. Building on to the body of knowledge, this paper provides deeper insights into the credit risk management process. It identifies the possible interrelationships at the different stages of credit risk management. The paper draws from findings of interviews conducted on purposively selected staff in the credit risk management function, including credit risk staff, Relationship Managers and Credit Officers across eight (8) commercial banks in Uganda. In addition, views of the staff of Bank of Uganda; the regulator as well as the Uganda Bankers Association, an umbrella organization of all commercial banks in Uganda were solicited. The paper recommends commercial banks to strengthen their credit risk management process by adopting the holistic conceptual model for understanding interrelations in credit risk management and portfolio performance. To this end, credit risk assessment should go beyond considering the initially identified risks and be conducted thoroughly with a possibility of identifying any further risks and subsequently handling them. Covenants initially set at loan approval should be adjustable depending on how effective they turn out. Similarly, the credit risk management function need to emphasize adjustment of the initial treatment mechanisms through loan restructuring and customer relationship management before sell of collateral and litigation which sometimes are costly to banks