Determinants of loan defaults in financial institutions in Zambia: bank employees’ view

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Mumba, Charity
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The University of Zambia
The current study investigates bank employee’s perceptions of the importance of the determinants of non-performing loan (NPL) in Zambia’s banking sector. The espoused critical factors in the study were identified based on theories such as the Theory of Asymmetric Information, Deflation Theory and Patronizing and Die another Day Effects Theories .These theories identify various macroeconomic and bank specific factors that may explain and contribute to the problem of loan defaults. The purpose of the study was to explore the perceived importance/ranking of the various factors in each category and between the two categories in explaining the problem of loan default faced by Zambia's banking sector by bank employees. The study is based on the self-administered questionnaire data collected from bank employees that are involved in loan disbursement and recoveries. Using a multistage cluster sampling strategy, 11 banks were randomly or purposively selected from a population of 19 banks that are registered in the country in the first stage. In addition, two of the MFIs were also surveyed. In the second stage the second an average of seven employees working in the credit department of each bank were selected which yielded 78 respondents. The study identifies non-supervision of customers on their loan utilization, Poor Loan Appraisal, Lack of training for the clients before/after disbursement, Non-reminders of some customers concerning repayment obligation, weak penalties for defaulters, Late disbursement of loans by the bank, Lack of compliance to bank credit policy by staff, Lack of staff capacity building by banks, Incompetence by bank staff, Amount of repayment in each month too high, Unfavorable payment terms, High bank staff turnover and Inadequate loan sizes in relation to the client needs as key bank level loan default determinants. However, of these, non-supervision of customers on their loan utilization, Non-reminders of some customers concerning repayment obligation and Lack of training for the clients before/after disbursement as the most likely (highest) drivers of bank loan defaults. Of macro level factors, the study respondents viewed High Interest Rates, Unfavorable Exchange Rates and High Unemployment Levels as the most influential macroeconomic level factors of loan defaults in Zambia. Based on the results of the correlation analysis between the loan default factors and respondent perceptions of loan default rates in their banks, it is concluded that macro level factors have greater impact on loan defaults in Zambia's banking sector than bank specific factors. At the bank level, the study recommends improvements in bank credit risk management, credit department staff capacity, flexibility of loan conditions as well as legal measures for loan recovery. At the macro level, the study recommends that banks strengthen their capacities to evaluate the vulnerabilities of different classes of borrower to different macroeconomic factors. This should inform loan portfolio diversification strategies. Key words: Non-performing Loans; Banking Industry; Non-Banking Financial Institution; Employees Perspective
Banks and banking--Zambia , Bank loans--Zambia