FINANCIAL RISK MANAGEMENT AND FINANCIAL PERFORMANCE OF

COMMERCIAL BANKS; A CASE OF CENTENERY BANK MBALE

BY

BABIRABIRA ELIZABETH
S18/MUC/BBA/331

A DISSERTATION SUBMITTED TO THE DEPARTMENT OF BUSINESS

AND ADMINISTRATION IN PARTIAL FULLFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF THE BACHELORS’
DEGREE IN BUSINESS ADMINISTRATION OF
UGANDA CHRISTIAN UNIVERSITY

JANUARY, 2022

i
 DECLARATION
I Babirabira Elizabeth do declare that this research work presented to the Department of
Business and Administration of Uganda Christian University is my original work and has never
been submitted to any institution for any award.

Signature……………………………… Date……………………………

BABIRABIRA ELIZABETH
S18/MUC/BBA/331

3
 APPROVAL
This research thesis entitled “financial risk management and financial performance of
commercial banks in Uganda” has been done under my full supervision as a University
Supervisor and it is submitted to the Department of Business and Administration for examination
with my approval.

Signature ………………………… Date…………………………

Dr. Mwima Eric
University supervisor

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 DEDICATION
I dedicate this work to my parents and family members for their moral and financial support and
the encouragement that they gave me during the study.

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 ACKNOWLEDGEMENTS
I wish to give my deepest gratitude to Dr Mwima Eric my Supervisor, for his great
support, constructive feedback and thorough understanding to keep me diligent and speed up
my progress on the work.

Once again, I am very grateful to my family and friends for their mental encouragement,
practical suggestions and prayers during the research process that has brought me this far. Thank
you for believing in me and appreciating the demand of the course in term of time and resources.

I thank the entire respondents to my research questionnaires and interview. I acknowledge the
support accorded to me in term of valuable information provided that contribute to successful
completion of this management research project. I also wish to extend my sincere gratitude to the
Department of Business and administration lecturers for facilitating this research and the general
advices provided towards the enrichment of this thesis. Thanks all of you for making this thesis a
reality.

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 TABLE OF CONTENTS

DECLARATION .............................................................................................................................
i APPROVAL ...................................................................................................................................
ii DEDICATION ...............................................................................................................................
iii ACKNOWLEDGEMENTS
........................................................................................................... iv LIST OF
ABBREVIATIONS AND ACRONYMS ....................................................................... x
ABSTRACT................................................................................................................................... xi

CHAPTER ONE ........................................................................................................................... 1

INTRODUCTION......................................................................................................................... 1
1.0 introduction ...............................................................................................................................
1
1.1 Background to the study ........................................................................................................... 1
1.1.1 Historical perspective............................................................................................................. 1
1.1.2 Theoretical perspective ..........................................................................................................
4
1.1.4 Contextual perspective........................................................................................................... 7
1.2 Statement of the problem ..........................................................................................................
8
1.4 Objectives of the study.............................................................................................................. 9
1.5 Research questions ....................................................................................................................
9
1.6 Research hypotheses ...............................................................................................................
10
1.7 Scope of the study ...................................................................................................................
10
1.7.1 Geographically scope ...........................................................................................................
10
1.7.2 Theoretically scope ..............................................................................................................
10
1.7.3 Time scope ...........................................................................................................................
11
1.7.4 Content scope....................................................................................................................... 11
1.8 Significance of the study......................................................................................................... 11
1.9 unit of analysis and unit of inquiry .........................................................................................
11
7
1.10 Operational definition of key terms ......................................................................................
12

8
CHAPTER TWO ........................................................................................................................ 14
REVIEW OF RELATED LITTERATURE ............................................................................. 14
2.0 Introduction ............................................................................................................................. 14
2.1 Theoretical review .................................................................................................................. 14
2.1.1 Stakeholder theory ............................................................................................................... 14
2.1.2 Agency theory ...................................................................................................................... 15
2.1.3 The Financial Economic Theory.......................................................................................... 15
2.2 Conceptual framework ............................................................................................................ 16
2.3 Conceptual Review ................................................................................................................. 16
2.3.1 Financial risk management: ................................................................................................. 16
2.3.1.1 Credit risk.......................................................................................................................... 16
2.3.1.2 Interest rate risk................................................................................................................. 18
2.3.1.3 Exchange rate risk ............................................................................................................. 20
2.3.2 Financial performance ......................................................................................................... 21
2.3.2.1 Profitability ....................................................................................................................... 21
2.3.2.2 Liquidity............................................................................................................................ 23
2.3.2.3 Solvency............................................................................................................................ 23
2.4 Empirical review ..................................................................................................................... 24
2.5 Research gap ........................................................................................................................... 28

CHAPTER THREE:................................................................................................................... 29
METHODOLOGY ..................................................................................................................... 29
3.0 Introduction ............................................................................................................................. 29
3.1 Research design ...................................................................................................................... 29
3.2 Population of the study ........................................................................................................... 29
3.3.2 Sample Technique................................................................................................................ 31
3.4 Data sources ............................................................................................................................ 31
3.5 Data collection instrument ...................................................................................................... 31
3.5.1 Questionnaire ....................................................................................................................... 31
3.5.2 Interview Guide ................................................................................................................... 32
3.6. Validity and reliability ........................................................................................................... 32

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3.6.1 Validity ................................................................................................................................ 32
3.6.2. Reliability............................................................................................................................ 33
3.7 Data Gathering Procedures ..................................................................................................... 33
3.8. Data Analysis ......................................................................................................................... 34
3.8.1 Qualitative data .................................................................................................................... 34
3.8.2 The quantitative data............................................................................................................ 34
3.8.3 Analytical model .................................................................................................................. 35
3.8.4 Decision rule ........................................................................................................................ 35
3.9 Ethical consideration............................................................................................................... 35
3.10 Limitations of the study ........................................................................................................ 36

CHAPTER FOUR....................................................................................................................... 37
PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS ........................ 37
4.0 Introduction ............................................................................................................................. 37
4.1 Respondent Rate. .................................................................................................................... 37
4.2 Demographic characteristics of respondents .......................................................................... 38
4.3 Descriptive characteristic financial risk management ............................................................ 40
4.4 Regression analysis of credit risk management and financial performance of Centenary bank
Uganda...................................................................................................... 45

CHAPTER FIVE ........................................................................................................................ 51

DISCUSSIONS, CONCLUSION AND RECOMMENDATION ........................................... 51
5.0 Introduction ............................................................................................................................. 51
5.1 Discussion ............................................................................................................................... 51
5.1.3 Objective three the effect of exchange rate risk on financial performance of Centenary bank
Uganda...................................................................................................... 53
5.2 Conclusions............................................................................................................................. 54
5.3. Recommendations .................................................................................................................. 55
5.4 Contribution to knowledge ..................................................................................................... 57
5.5 Area for further study.............................................................................................................. 57

vii
REFERENCES ............................................................................................................................. 58
APPENDIX................................................................................................................................... 64

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88
 LIST OF TABLES

Table 1.Showing sample size and sampling techniques ............................................................... 30

Table 2.Showing sample size technique for qualitative data. ....................................................... 31
Table 3:Response Rate of the Questionnaire ................................................................................ 37
Table 4.showing the age characteristic of respondents................................................................. 38
Table 5. Showing the area of study characteristics ....................................................................... 38
Table 6. Showing the Gender characteristic of respondents ......................................................... 39
Table 7. Showing the year of experience of respondents ............................................................. 39
Table 8. Showing the education level of respondent .................................................................... 40
Table 9. Showing the mean and standard deviation showing credit risk management in
Centenary bank in Uganda.................................................................................................. 41
Table 10.showing the mean and standard deviation showing interest rate risk management in
Centenary bank Uganda......................................................................................... 42
Table 11.showing the mean and standard deviation showing exchange rate risk management
in Centenary bank Uganda......................................................................................... 44
Table 12.Showing the Mean and standard deviation showing financial performance in
Centenary bankUganda....................................................................................................... 45
Table 13. Showing the regression analysis of credit risk on financial performance in commercial
banks Uganda.......................................................................................................................... 46
Table 14. Showing the regression analysis of interest rate risk and financial performance ......... 47
Table 15. Showing the regression analysis of exchange rate risk management and financial
performance .................................................................................................................................. 48
Table 16. Showing the Multiple regression analysis of financial risk management and financial
performance of Centenary bank in Uganda ........................................................... 49

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 LIST OF ABBREVIATIONS AND ACRONYMS

BOU: Bank of Uganda

USD: United States Dollar

ROE: Return on Equity

ROA: Return on ASSET

NPL: Non-Performing Loans

GDP: Gross Domestic Product

CRM: Credit Risk Management

IRRM: Interest Rate Risk Management

CRM: Credit Risk Management

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 ABSTRACT
The financial performance commercial bank has been averagely low in the past years. This was
due to improper risk management strategies on different kind of financial risks that faced
commercial banks in Uganda. This causes the liquidation of some commercial banks (Crane
bank). This main study sought to find the effect of financial risk management on the financial
performance of commercial banks in Uganda. The specific objectives were to assess the effect of
credit risk, interest rate risk, and exchange rate risk on financial performance of the banks. The
target population of the study was 40 and the sample size 36 respondents using the Slovene’s
formula composed by managers and executives. The study used a case study research design. The
simple linear regression and multiple regression analysis were used to analyze data. The main
instrument was questionnaire and key informant interview. Thus the regression analysis showed
that financial risk management affects financial performance of commercial banks in Uganda.
Specifically credit risk was regressed with financial performance, the result of the linear
regression showed F-statistic 274.652 at P<.05 ;interest rate risk was regressed with financial
performance, the result of the linear regression showed F-statistic 315.259 at P<.05; exchange
rate risk was regressed with financial performance, the result of the linear regression showed
F-statistic 250.823 at P<.05; this means that both credit, interest rate and exchange rate risk have
significant effect on financial performance. The results of multiple regression analysis performed
simultaneously on the variables showed that financial risk management has a positive strong
effect on financial performance, this means that effective financial risk management will lead to a
healthy financial performance of Centenary bank in Uganda. The study concluded that credit
risk, interest rate risk and exchange rate risk had statistically significant effect on banks
financial performance in Uganda for the period under study and this explains 88.3 percent on
the financial performance. The study recommended that given the current supervisory and
regulatory policy frameworks for banks, risk managers should be more concerned with
managing risk coming from financial operations and that future studies in this area be carried out
for longer study periods and more independent variables, in order to bring out the true picture of
the effect of financial risk management on financial performance. This study advanced
knowledge by linking the escalating financial performance of commercial banks in Uganda to
disregard of stakeholder theory.
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 CHAPTER ONE
INTRODUCTION
1.0 Introduction
This chapter covers the background to the study; historical perspective, theoretical
perspective, conceptual perspective, contextual, statement of the problem, research objectives,
specific objectives, scope of the study, significance of the study, conceptual framework and the
operational definitions of key terms.

1.1 Background to the study

1.1.1 Historical perspective

Globally, we cannot talk about financial risk management without mentioning the financial crisis
called the subprime crisis, which continues to plague all over the world. In fact, the starting point
for this crisis is the granting of subprime credits that are of variable interest rate and high-level
credits. These are real estate loans granted by banks to households which the majority of them
are of low incomes. From that point on, there is a mismanagement of the risk made by these
banks (Alli, 2009).

It is well established in the literature that banks play a pivotal role in the development process.
In the course of financial activity, the savings of the economy are increased and rendered highly
mobile, and the risk facing savers are reduced through diversification. Also, banks contribute to
economic growth by enhancing the volume and productivity of investment activities (Wood,
2013).In performing these important roles, risks are inherent in the operations of banks. These
risks are the basis of the banks’ profitability (Gup, 2005) and may impact the banks’ financial
performance in an adverse or positive manner (Schroeck, 2002).

The study of risk management began after the Second World War. Risk management has long
been associated with the use of market insurance to protect individuals and businesses from
various losses associated with accidents. Forms of pure risk management, alternatives to market
insurance, took shape in the 1950s when market insurance was perceived as very costly and
incomplete. The use of derivatives as financial risk management instruments began in the 1970s
and developed very rapidly during the 1980s. It was also during the 1980s that companies
accelerated the financial management of financial instruments. International risk regulation
began in the 1990s and financial firms developed internal risk management models and capital
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formulas to protect against unanticipated risks and reduce regulatory capital. It was also during
these years that the governance of risk management became essential, that integrated risk
management was introduced and that the first risk manager positions were created. But all these
regulations, governance rules and risk management methods were not enough to prevent the
2007 financial crisis (Dionne, 2013).

In Africa the concept of risk management was largely appreciated in 1950’s when most of banks
started opening the credit sections department to give loans to white settles (Wood, 2013)
According to International Monetary Fund (2016), Uganda is one of the undeveloped countries
in Africa that has currently begun to promote banks activities. The emergence of risks
management in Uganda is closely linked to the development of financial system. This can be
traced back 1960 after the independence of the country. The Uganda’s economy has
suffered many crises because of conflicts and wars that have affected the country since the
Independence Day. Significant political and economic progress has since helped the economic
reconstruction process, and GDP per capita has risen to USD160 in 2009, but significant
post-conflict challenges remain. The country’s infrastructure, destroyed during the war, is
underdeveloped and plagued with bottlenecks. The economy heavily relies on informal activities
and agriculture, which accounts for the lion’s share of GDP and employs the greatest part of the
labor force, and features limited exports or value-adding activities.

Since 2001, the government has undertaken an economic, financial and structural reform
program aimed at stabilizing the macroeconomic situation and establishing a climate favorable to
private sector-led development. As a result, the Uganda achieved solid growth rates,
averaging more than 6.3 percent a year between 2003 and 2008. The global economic and
financial crisis has, however, had a substantial impact on the economy. Real GDP growth slowed
from 6.2 percent in 2008 to 2.8 percent in 2009. Inflation also spiked from 16.7 percent in 2007
and 18.0 percent in 2008 to 46.2 percent in 2009. The economy is however expected to recover,
in part, to the gradual recovery of the mining sector and increasing public and private
investment. Real GDP growth increased to 7.2 percent in 2010, 6.5 percent in 2011, 6 percent in
2012, 6.3 percent 2013, 4 percent 2014; 4.5 percent 2015, 4 percent 2016 end 3.5 percent in
2017, while inflation eased to 23.5 percent in 2010 and further decrease to 12 percent in 2011, 11
percent in 2012, 10 percent 2013, 8 percent in 2014, 8 percent 2015, 8 percent in 2016 and 7.6
percent in 2017(Fund, 2016).
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For many years, risk has been one of the major causes of volatility in the results of companies
and financial institutions. Like any company, a credit institution is exposed to a multitude of
risks that can lead to its failure and bankruptcy. Credit is the main function of banks. It is an
operation whereby a credit institution makes or promises to make available to a customer, a sum
of money for interest and expenses, for a fixed or indefinite period. It is therefore a resource job
that a bank makes in the hope of being reimbursed and that added interest constituting the price
of the risk it takes and other ancillary costs. Therefore, even if the banker hopes to have a gain in
this transaction, he simultaneously exposes himself to an uncertainty of non-payment of the
borrower. In fact, when a credit is granted, the lender is not always sure to recover its funds.
Thus it is frequently exposed to the credit risk. It may be due to an economic recession, thus
putting the borrowers in the impossibility of meeting their commitments, but it is all the more
crucial for the banker to find effective ways to protect themselves, if not to master this risk of
non-payment of the customer, synonymous with loss or profit. It is utopian for a company to
have the goal of losing profit. Like all companies, the bank is a commercial company, which also
seeks to maximize its profitability. It therefore has to be profitable in its business as a whole.
Risk management is the systematic use of organization-wide processes of identify, assess,
manage, and monitor risks such that aggregated information can be used to protect, release, and
create value (Alli, 2009).

The financial performance of a bank implies a good management of risks by effective techniques
implemented. Performance is a very important aspect of every business activity. The objective of
measuring performance does not only cover how business is performing but also give an insight
on how business can perform better. It helps to improve the overall performance of an
organization so that to ensure stakeholders achieve their various objectives. Hofmann (2001)
notes that non-financial performance measures are mostly used for performance evaluation. He
added that these performance measures serve as an indicator of the firm’s long term performance
and may therefore be included in incentive contracts. Financial performance is a company’s
ability to create new resources; from day to day operation over a given period of time and it is
gauged by net income and cash from operation.

This thesis will allow grasping the impact that the financial risks management generates. Indeed,
this financial risk management will allow the banks to be more efficient, therefore these

14
customers will be able to benefit more and more loans. However, if the risk can cause the banks
to fail and fail, it will not also save companies from filing their balance sheets. Similarly, it is all
the more important for banks to update their risk management methods, in the face of
competition in their sector, at the birth of new parameters that influence risk as well as the risk of
Market. In the same vein, if effective risk management is at the center of Banks ' profitability, the
downside of bankruptcies is the negative consequences of its mismanagement (Stoner, 2003).
Thus, this work will constitute, on the one hand, a precaution tool for the new banks in their
management of risks, and on the other hand, for credit institutions that have close to the balance
sheets, this study can serve as a support instrument for a considerable expansion, if not a
continuation of their main fundraising activities. Moreover, this research will undoubtedly be a
real opportunity for any researcher to understand more the complexity of the task that is
entrusted to these credit institutions which occupy a place of choice in the management of their
source funds the principal of the loans granted.

1.1.2 Theoretical perspective

The stakeholder theory (Freeman, 1984)focuses clearly on the symmetry of stakeholders’
interests as the foremost determinant of the corporate policy. The most important contribution
towards the financial risk management is an addition of implicit contracts theory from
employment to other contracts (Cornell and Shapiro & Klimczak, 2012). In certain businesses,
mainly services and high-tech industries, customer confidence on firms is very important to carry
on offering their services in the future and can considerably contribute to firms’ values. On the
other hand, the value of such implied claims is extremely sensitive to estimated costs of
bankruptcy and financial distress. Since the financial risk management practices in a company
induce to a reduction in these estimated costs, its value increases (Klimczak, risk management
theory: a comprehensive empirical assessment, 2012)
Hence, the above discussion implies that the risk management can be seen in banking
institutions: to fulfill the regularity requirements; to align the interests of managers with their

15
shareholders interest; to reduce expected tax payments of the bank; to lower the probability of
financial distress, business failures or bankruptcy; to safeguard specific investments of the
organization; to help the banking business organization in developing financial plans and
investment activities; and to maximize the shareholders’ value of the bank. In addition, it is also
obvious from the above mentioned propositions that financial risk management is also useful
within a bank to control different kinds of risks and to mitigate the possible negative effects of
these exposures. However (Hamid, drivers to implementation of risk management practices,
2014) suggest that the adoption of a single theory is not sufficient to explain the rational of
financial risk management. Therefore, this study also takes two theoretical considerations such as
the financial economic theory and agency theory to describe the implementation of financial risk
management practices in Ugandan banks.

Besides the theoretical considerations for the implementation financial risk management
mentioned above, a lot of efforts have been undertaken at international level to improve the
financial risk management mechanism of banks (Committee, 2013) although a number of
theories have been reviewed and used to explain performance of commercial banks. Stakeholder
theory explained and helped to understand that financial risk management can be seen in banking
institutions: to fulfill the regularity requirements (which benefit to the all financial system); to
align the interests of managers with their shareholders interest; to reduce risks which can cause
the poor performance of banks.

1.1.3 Conceptual perspective

Risk is defined as something happening that may have an impact on the achievement of
objectives, and it includes risk as an opportunity as well as a threat (Audit Office, 2016)The
nature of banking business contains an environment of high risk. So risky in the sense that it is
the only business where proportion of borrowed funds is far higher than the owners’ equity
(Owojori et Al., 2011).The banking business in comparison to other types of human endeavor is
entirely exposed to risks. Banks no longer simply receive deposits and make loans; they also
operate in a rapidly innovative sector with a lot of pressure mount for profit which urges them
for continuous product or service development to cross-sell and up sell to satisfy customers.

16
Risks are complex and since one single activity can involve several risks, (Luy, 2010) asserts
that risks contain risks. Banking risks are classified into credit risk, market risk, and operational
risk (Basel Committee on Bank supervision). However, (Santomero, determinant of bank
efficiency during unstable macroeconomic environment, 1997) identify six types of risks -
systematic or market risk, operational risk, and legal risk. (Crouhy G. a., 2006)also made another
classification of bank risk to include market risk, credit risk, liquidity risk, operational risk, legal
risk, business risk, strategic risk, and reputation risk. Thus, the researchers’ main focus is the
effect of financial risk management on financial performance of Ugandan banks conceptualized
by interest rate, credit and exchange rate on their financial performance. This is in line with
(Santomero 1997) who maintains that the banking industry has long viewed the problem of risk
management as the need to control four of the above risks which make up most, if not all, of
their risk exposure viz credit, interest rate, foreign exchange and liquidity risk. He maintains that
while the banks recognize counterparty and legal risks, they view them as less central to their
customers, and where counterparty risk is significant, it is evaluated using standard credit risk
procedures, and often within the credit department itself.

Therefore for the purposes of this study, financial risk management may be regarded as the
application of policies, laws, guidelines, procedures and regulations to ensure safety of assets and
efficiency and effectiveness of financial performance of commercial banks.

Stoner (2003) as cited in (Turyahebwa, 2013) defines financial performance as the ability to
operate efficiently, profitably, survive, grow and react to the environmental opportunities and
threats. In agreement with this, (Anderson, 1995)assert that, financial performance is measured
by how efficient the enterprise is in use of resources in achieving its objectives.(Hitt,
1996) believes that many firms' low performance is the result of poorly performing assets.
Profitability measure is important to the investors. This measure of profitability is the most
important for stockholders of a bank since it reflects what the bank is earning on their
investments (Rasiah, journal of performance management vol 23, 2010)The profitability
performance can be measured using ROA. The higher the ROA ratio, the better bank profits
(Rasiah, 2010). As stated by (Humphrey, 1997) studies of frontier efficiency rely on accounting
measures of costs, outputs, inputs, revenues, profits, etc. to impute efficiency relative to the best
practice within the available sample. According to (Tennant, 2003) profitability can be measured
17
in a number of ways including return on assets (ROA), return on equity (ROE) or profit margins.
Other than that, getting on top of the financial measures of the bank performance is an important
part of running a growing business, especially in the current economic climate. For the purpose
of this study the term financial performance can be regarded as increasing shareholder return.

1.1.4 Contextual perspective

The Ugandan financial system saw the establishment of the first banks in 1920 the general credit
of the Congo opens its doors as a company portfolio. In 1929, Uganda’s general credit activities
were transferred to the Bank of England, which was to manage them as pure commercial bank.
Thus, after 1960s, the financial system saw the emergence of several commercial banks.
According to Nzoimbengene (2016) The Ugandan banking sector is at a crossroads:
consolidation of achievements, stability and resilience of actors are the key words. This study
presents the analysis of performance of the financial sector in Uganda

In Uganda, the political instability and economic difficulties were obstacles to the emergence of
stable and robust financial structures, at the national and sub-regional levels and the cause of
poor performance of banks. Consolidation of the efforts made for more than a decade (by the
regulator, the banks and all patterns in the province’s financial ecosystem) and the maintenance
of the stability and performance of the entire sector are challenges that the central bank of Congo
faces. In addition, the sector’s regulatory and supervisory authority has announced a series of
measures to contribute to these objectives. These measures include: increasing the minimum
capital of banks, changing prudential and governance standards. The collapses of the Uganda
Commercial Bank (UCB) and Crane Bank have certainly contributed to this surge of pride in the
authority of the sector. Notwithstanding these pitfalls, the sector sees the rise of pan-African
banks, even if local banks remain largely market leaders (Nzoimbengene, 2016). According to
BOU (2017) International banks have managed to consolidate their presence since early 2000,
although their after-tax results are still unsatisfactory. The main findings of this study are the
following: a lower rate of banks access is still around 6%. For this information, the average
od sub-Saharan Africa is 25%, a 23% growth in deposits attributable, like many balance sheet
items, to the depreciation of the national currency against the US dollar, since 82% of the
deposits are in foreign currency, to highlight the dollarization of the economy, an increase in the
cost income ratio of the sector from 77% to 79%, a net result for the sector in full retreat: 87%
decrease in 2016 compared to 2015, whereas it had increase by 20% between 2015 and 2014, a
18
still high tax pressure : 52% in 2016 against 40% in 2015. An ‘apparent’ boom in the volume of
loan granted in 2016: a growth of 38% compared to 13% recorded in 2015 and explained in large
part by the depreciation of the national currency. Disbursement credits are dominated and
among these, short-term credits and bank overdrafts that finance private companies and
households. Like deposits, most loans are denominated in US dollars, with financial
profitability of the sector positive but very low (1%). The Uganda banking sector currently has
several commercial banks, it is noted that a bank and several microfinances are in financial
distress and are on supervision of the central bank (BOU, 2017).

1.2 Statement of the problem

According to the (BOU, 2017) Uganda’s banking industry was described as extremely weak,
with poor risk management strategies and some bank were on verge of collapse. From the years
of economic mismanagement, political interference and poor practice of risk management,
Uganda’s banking system posted huge losses in the early 2010. It is further noted that most of
the banks failures were caused by poor risk management strategies and political interference.
Many of the debts were attributable to imprudent easy (lending) strategies, insider lending and
lending at high interest rates to borrowers to cover the politics risk which was in the country.
This caused declining of profitability and huge losses in 2016 among banks. Mukela, (2015)
asserts that bank profitability and profits are fragile and deteriorate, reflecting high operation in
foreign currency which causes high foreign exchange costs. Bank charges are a major source of
revenue for banks. It is very expensive to operate in US dollars, especially for some banks,
because foreign currency payments are made through correspondents.
From the above facts it is obvious that the incident of poor performance of commercial banks has
been on the increase from the post-colonial days to present days without success in managing it.
According to Reuters (2016) for a couple of years now, the need to strengthen financial system
in Uganda and reduce poor performance of banks by setting guidelines to contain risk has
become a priority in Uganda. It is from the above background that this study sought to examine
the effect of financial risk management on financial performance of Centenary bank in Uganda.

1.3 Purpose of the study

The purpose of the study is to assess how financial risk management affects financial
performance of Centenary banks in Uganda.

19
1.4 Objectives of the study
1. To establish how credit risk affects financial performance of Centenary bank in Uganda
2. To assess how interest rate risk affects financial performance of commercial banks in
Uganda
3. To assess how exchange rate risk affects financial performance of Centenary bank.

1.5 Research questions

1. Does credit risk affects financial performance of Centenary bank Uganda?
2. Does interest rate risk affects financial performance of Centenary bank Uganda?
3. Does exchange rate risk affects financial performance of Centenary bank Uganda?

1.6 Research hypotheses

The study will test the following hypotheses:
H01: Credit risk has no significant effect on financial performance of Centenary bank in Uganda.
H02: Interest rate risk has no significant effect on financial performance of Centenary bank in
Uganda.
HO3: Exchange rate risk has no significant effect on financial performance of Centenary
bank Uganda

1.7 Scope of the study

1.7.1 Geographically scope

The study was carried out with Centenary bank in Uganda Mbale branch

1.7.2 Time scope

Due to time and resource constraints, the study was considered information for a period of 3
years from 2018 - 2021
1.7.3 Content scope
The study focused on the financial risk management (which is our independent variable) and
how it affects financial performance of Centenary bank (which is our dependent variable), this
conducted us to identify the effect of financial risk (credit risk, interest rate risk, exchange rate
risk) on financial performance (profitability, liquidity and solvency).

20
1.8 Significance of the study
This study enabled commercial banks management to appreciate the effects of financial risk
management and financial performance and thus help them address the areas that need
improvement; also this study enabled branch managers of banks to understand how an effective
financial risk management can impact on the performance of the institutions and even the whole
state.

This study also enabled shareholders to have an idea of how interest rate risk, credit risk,
exchange rate risk can impact on their assets and wealth and influence the growth of financial
institutions and the whole financial system of the country.

It is useful to other researchers as it adds to the existing literature body of knowledge especially
on proper risk management and how it affects the Banks’ financial performance.
1.9 Conceptual Framework
A conceptual framework is a graphical or diagrammatic representation of the relationship
between the independent variable and the dependent variable and their outcomes. It illustrates the
effect of financial risk management on financial performance of selected banks in Uganda.
Banks manage financial risks for two main purposes: to enhance interest income (profitability)
and to reduce losses (bad debts, operation costs) which results from credit default
(Tenguh,
2008). Therefore, it is expected that banks with better financial risk management strategies have
lower losses.
Figure1: conceptual framework relating financial risk management and financial
performance.
INDEPENDENT VARIABLE DEPENDENT VARIABLE

Financial Risk Management

 Credit risk Financial Performance
 Interest rate risk  Liquidity
 Exchange rate risk  Profitability
 Solvency

Source: Al-amimi and Miniaoui, 2017 as modified by Researcher

21
1.10 Operational definition of key terms
Risk management: The identification, analysis, assessment, control, and avoidance,
minimization, or elimination of unacceptable risks. An organization may use risk assumption,
risk avoidance, risk retention, risk transfer, or any other strategy (or combination of strategies) in
proper management of future events.
Financial Risk is defined as the added variability of net returns to owner equity that results
from the financial obligation associated with debt (or capital lease) financing (Jean & Mark,
2000)
Exchange rate risk: also called currency risk, is the risk that changes in the relative value of
certain currencies will reduce the value of investment denominated in a foreign currency.
Interest rate risk: Interest rate risk is the exposure of a bank’s financial condition to adverse
movements in interest rate. Changes in interest rates affect a bank’s earnings by changing its net
interest income and the level of other interest sensitive income and operating expenses.
Credit risk: Credit risk refers to the probability of loss due to a borrower’s failure to make
payments on any type of debt. Credit risk management is the practice of mitigating losses by
understanding the adequacy of a bank’s capital and loan loss reserves at any given time a process
that has long been a challenge for financial institutions.
Management: refers to organization and coordination of the activities of an enterprise in
accordance with certain policies and in achievement of defined objectives.
A commercial bank: A commercial bank is a financial institution which performs the functions
of accepting deposits from the general public and giving loans for investment with the aim of
earning profit.
Financial performance: financial performance in this research project will be taken in the
perspective of solvability which is the ability of a bank to pay back his liabilities by his assets in
case of liquidation; liquidity which is the ability of a bank to pay back his current obligation and
profitability which is the ability of a business to make profit.
Credit: actions taken by a business to grant, monitor and collect the cash for outstanding
accounts receivable. This is a policy that stipulates clear guidelines and procedures that firms use
for grating credits to applicants or already existing customer while monitoring their credit
performance for timely collection of receivable.

22
23
 CHAPTER TWO

REVIEW OF RELATED LITTERATURE

2.0 Introduction
This chapter provides a critical review of the issues that was been explored and studied both
theoretically and empirically in the existing literature on financial risk management as the
independent variable and financial performance as the dependent variable.

2.1 Theoretical Review

2.1.1 Stakeholder Theory
When analyzing the literature review in this research, the researcher found it better to take the
stakeholder theory as one of the pillars on which we would base our study because it seems to
better reflect the reasons why stakeholders within an organization put effort together, clean and
control the environment to prevent and avoid different kind of risks which cause poor
performance of commercial banks or other financial institutions.
The theory was first described by Doctor Edward Freeman 1984, a professor at the university of
Virginia, in his landmark book, “strategic management: A stakeholder approach’ “it suggested
that shareholder are one of many stakeholder in a company. If you get all stakeholders to swim
or row in the same direction, you have got a company with momentum real power, says
Freeman. Saying that profit is the only important thing in a company is like saying that red blood
cell is life, you need red blood cell to have life but you need so much more. Stakeholder theory is
even more important in the new global economy. An organization need to be mindful not only to
those who hold a stock in a company but to those who work in its stores, those who lives in it
environment, those who do business with it and even competitors, as the company may shape the
landscape in its industry. According to Klimczak (2012), the stakeholder theory focuses
explicitly on equilibrium of stakeholder interests as the main determinant of corporate policy and
that it‘s most promising contribution to risk management is the extension of implicit contracts
theory from employment to other contracts. In certain businesses, mainly services and high-tech
industries, customer confidence on firms is very important to carry on offering their services in
the future and can considerably contribute to firms’ values. On the other hand, the value of such
implied claims is extremely sensitive to estimated costs of bankruptcy and financial distress.

24
Since the risk management practices in a company induce to a reduction in these estimated costs,
its value increases (Klimczak, 2012).
Hence, the above discussion implies that the risk management can be seen in banking
institutions: to fulfill the regularity requirements; to align the interests of managers with their
shareholders interest; to reduce expected tax payments of the bank; to lower the probability of
financial distress, business failures or bankruptcy; to safeguard specific investments of the
organization; to help the banking business organization in developing financial plans and
investment activities; and to maximize the shareholders’ value of the bank. In addition, it is also
obvious from the above mentioned propositions that risk management is also useful within a
bank to control different kinds of risks and to mitigate the possible negative effects of these
exposures. However, Hamid (2014) suggest that the adoption of a single theory is not sufficient
to explain the rational of risk management. Therefore, this study also takes two theoretical
considerations such as Agency theory and financial economic approach to describe the
implementation of risk management practices in Ugandan banks.

2.2. Empirical Review

2.2.1 Credit Risk and Financial performance
Credit risk refers to the probability of loss due to a borrower’s failure to make payments on any
type of debt, it is acknowledged as the most important risk facing commercial banks. This occurs
due to customers’ failure to service bank borrowed fund as well as interest charged on the loan.
When customers are unable to settle their debts, these defaults result in losses that can ultimately
eat into the bank’s capital. Whenever a bank provides credit facility it is susceptible to credit risk
(Sanusi, 2010) other types of risks include operating risk, interest rate risks, exchange rate risks,
crime risk, etc.

Credit risk arises whenever a lender is exposed to loss from a borrower, counterparty, or an
obligatory who fails to honor their debt obligation as they have contracted According to Colquitt
(2007), this loss may derive from deterioration in the counterparty’s credit quality, which
consequently leads to a loss to the value of the debt, or according to Crouhy (2006) the borrower
defaults when he is willingly to fulfill the obligations. Credit failure in banks is not new or a rare
occurrence, they affect their liquidity position as well as cash flows and profits. Hence,
Bratanovic (2009) maintain that it is a biggest threat to any bank performance and the principal
cause of bank failures. According to O w o jo ri (2011), available statistics from liquidated banks
25
clearly showed that inability to collect loans and advances extended to customers and creditors or
companies related to directors or managers was a major contributor to the distress of liquidated
banks in Nigeria. When this occurred, a number of banking licenses were revoked by the Central
Bank of Nigeria (CBN). As Nigerian Deposit Insurance Corporation (NDIC) reports of various
years indicate, many banks had their ratios of performing credits that were less than 10% of loan
portfolios.

This risk is one of the most premier and the most important types of banking risk (Colquitt,
2007). Credit risk refers to the likelihood in which a contractual counterparty does not meet its
obligations due to decline in repay ability or unwillingness to comply with the contract
(Ammann, 2001; Bessis, 2002; Schroeck, 2002; Colquitt, 2007). Therefore, credit risk emerges
when a bank is failed to recover the lending money from a borrower, counterparty, or an
obligatory. According to Simonson (1999), credit risk is a threat that the bank may not be able to
collect the principal or interest on loans and securities as promised. Generally, loans and
advances are the biggest and the most obvious cause of credit risk in the majority of banks
Dhakan (2006), Banks eliminate the credit risk through effective risk management that contains a
comprehensive credit risk analysis based on scanning and monitoring of the most trustworthy
loan applications, the degree of collateral, diversification of the loan portfolio, accurate loan
pricing depending upon the borrowers’ repay ability and intentions (Akotey, 2013)

Patient (2016) has examined empirically the credit risk management of commercial bank in D.R.
Congo, his findings state that the risk of credit can be seen as a non-performance when the latter
is not mastered by the banks because it constitutes more than 80% of the balance sheet. Then a
credit risk management is all the more important than the other main activities of a bank such as
the transformation of assets and the production of information. The management of credit risk as
we have seen previously corresponds to all the techniques aimed at improving the profitability-
risk couple and allowing the bank to master its portfolio of credit, as well as to reduce the risk
Bank bankruptcy. The bank must have an effective risk management system.

Claudine (2008) examined the association between the performance of banks and credit risk
management. As part of their findings, they observed that return on equity and return on assets
both measuring profitability were inversely related to the ratio of non-performing loan to total
loan of financial institutions thereby leading to a decline in profitability.

26
Hosna (2009) in their study opined that credit risk has a significant positive effect on the
profitability of commercial banks in Sweden. Correspondingly, Kithinji (2010) examined the
effects of credit risk management on commercial banks profitability in Kenya. They observed
that the level of credit was high in the early years of the implementation of Basle II but decreased
significantly in 2007 and 2008, probably when the Basle II was implemented by commercial
banks. The findings revealed that the bulk of the profits of commercial banks are not influenced
by the amount of credit and non-performing loans suggesting that other variables other than
credit and non-performing loans impact on profits.

Ogilo (2012) investigated the impact of credit risk management on financial performance of
commercial banks in Kenya. The objective of the study were to analyze the impact of credit risk
management on financial performance and to establish whether there is a relationship between
the two variables, the credit risk management determinant was CAMEL indicators, the CAMEL
indicator investigated included; capital adequacy, asset quality, earnings, liquidity were the
determinant of credit risk management. Pearson correlation revealed that capital adequacy has a
low correlation coefficient of -0.25 at p0.035 with financial performance. Using data set of five
past years. The researcher find out the correlation between asset quality and financial
performance r=0.324 at p=0.041. Management quality also had correlation with financial
performance given r=-0.512 at p=0.001. A correlation was also established between earning
quality and ROE at 95% level of confidence with r=0.89 at p=0.001: the study concluded credit
risk management has a weak relationship with financial performance of banks in Kenya.
Earnings have a strong relationship with financial performance.

Funso (2012) investigated the quantitative effect of credit risk on the performance of commercial
banks in Nigeria for the period 2000-2010. Findings from their study showed that the effect of
credit risk on bank performance measured by the return on assets of banks is cross sectional in
variant in Nigeria; Kargi (2011) examined the impact of credit risk on the profitability of
Nigerian banks. Findings from the study revealed that credit risk management has a significant
impact on the profitability of Nigerian banks. Hence, they opined that banks’ profitability is
inversely influenced by the levels of loans and advances, non-performing loans and deposits
thereby exposing them to great risk of illiquidity and distress.

Prior studies suggest that good credit risk architecture, policies and structure of credit risk
management, credit rating system, monitoring and control contributes to the success of credit
27
risk management system (Bagchi, 2003) Similarly, (Nirmala, 2004) in a related study opined that
the success of credit risk management requires maintenance of proper credit risk environment,
credit strategy and policies. Thus the ultimate aim should be to protect and improve the loan
quality. In the same vein, findings from Salas and Saurina (2002) revealed that growth in GDP,
rapid credit expansion, bank size and capital ratio had a significant impact on the non-performing
loans.

2.2.2 Interest Rate Risk and Financial performance

Due to the competition among the banks, interest rate remains in a comparable range. For
tracking and managing the significant development interest rate is to be addressed a significant
economic problem (Boulier, 2009) On the other hand, in the profit and loss statement interest
rate also engage in managing the interest component entirely (Buiter & Panigirtzoglou, 2003). In
addition, the interest rate also summarizes the way of whole business debt summary, including
the receipt of debt, excellence of the debt, expectations of visions participation proportions and
fixed floating mixture of the debt (Brigo & Mercurio Einav, 2008). Interest rates are applied in
various shapes like there are different interest rates for saving account and for taking loan.
Central bank sets the interest rate to control the interest rate that transforms the interest rates to
control the lively of financial system. But the results of the variation in the interest rate are not
constantly the projected results .Central bank plays many important roles in the economy but the
major task of it is to regulate the interest rates which affect the financial system. For instance,
this can be completed by regulating the interbank loan rate. The rates that commercial banks
present for saving and lending are influenced by interbank interest rates and banks as result
present their rates which are below or above from the interbank rate in certain percentage. In this
way commercial banks earn their profit. An interest rate risk is considered as one of the most
significant risks of a bank (Schawel, 2011).

According to Bair (2011), - The chairman of the US Federal Deposit Insurance Corporation said
that “I do worry that credit quality needs to be fixed, but the next issue is likely to be interest rate
risk”. The article of Schawel (2011) also indicated banks fail in employing short-term deposit to
invest long-term fixed rate asset, or even short-term asset, for instance. As can be seen, IRR is
considered as important as credit risk. Hence, IRR needs to be defined clearly according to
Oxford Dictionary of Economics; interest rate is defined as “The charge made for the loan of
financial capital expressed as a proportion of the loan”. In other words, interest rate is the fee that
28
is paid to the lender of the money by a borrower for using that loan. In contrast, customers can
also gain profit by deposit money to a bank. Therefore, IRR can be basically understood as
unfavorable fluctuation of interest rate or changes of other factors related to interest rate such as
inflation rate, default-risk premium, etc. which cause unexpected changes in interest received by
lender (Martin, 2013).

In contrast, customers can also gain profit by deposit money to a bank. Therefore, IRR can be
basically understood as unfavorable fluctuation of interest rate or changes of other factors related
to interest rate such as inflation rate, default-risk premium, etc. which cause unexpected changes
in interest received by lender. (Martin, 2013)
More formally, Basel Committee on Banking Supervision (2004. Ref 11) indicated that “Interest
rate risk is the exposure of a bank’s financial condition to adverse movements in interest rate.
[…] Changes in interest rates affect a bank’s earnings by changing its net interest income and
the level of other interest sensitive income and operating expenses. Changes in interest rates also
affect the underlying value of the bank’s assets, liabilities and off-balance sheet instruments
because the present value of future cash flows (and in some cases, the cash flows themselves)
changes when interest rates change”.

In other way, Williamson(2014), described that interest rate risk arises when there are
mismatches between maturity of bank’s assets and liabilities. In a bank where long-term
liabilities are used to fund short term assets, interest rate risk exposes itself as a reinvested risk
due to assets mature before liabilities. If the interest rate falls, the reinvestment of those assets
will be at a lower rate than the existing rate payments on liabilities. Obviously, the bank will earn
profit from the risk as the interest rate increases. In other case, short-term liabilities are a source
for long-term assets, which requires rollover of liabilities until the mature of the assets to repay
the liabilities. Thus, the interest rate risk will occur as a rise of the interest rate because the rate
of the rollover of liabilities is greater than the rate earned on assets. Obviously, in case of
decrease of interest rate, the bank will obtain profits from the risk. (Williamson, 2014)
The above case of bank’s assets and liabilities can profoundly be explained by an example that
banks usually apply different kinds of yields during the process of borrowing and lending fund.
In the case, a bank mobilizes the capital (liabilities) from the publics with a fixed interest rate,
then lending and investing (assets) with a floating interest rate. As the interest rate goes down,
the bank has to suffer from the risk of interest rate due to the interest income is lower than
29
interest expense. On the contrary, as the bank mobilizes the capital from the public with a
floating interest rate and then lends and invests with a fixed interest rate. The risk will occur in
the increase of the interest rate. Consequently, the bank will get losses as the interest expense is
bigger than the interest income.

In banking activities, interest rate risk is normally accepted because of the nature of risk that
brings both opportunity and threat. It may be considered as the important source of profitability
for banks and their shareholder’s value. In addition, if the risk is uncontrollable, there will be a
significant threat to the bank’s value.

The study of (Paul, 2006) showed that when interest rate increases it actually effect to borrowers
but it doesn’t affect the bank’s performance. The borrower will tolerate the impact of high
interest rate while the performance of bank would not be affected by high interest rates. Because
when interest rates go upward then the bank charges more to borrower than the return it pays to
depositors. Therefore, both the borrower and depositor will tolerate the cost.

According to the study of Khawaja (2007) Increase in the interest rate depresses the borrowers
and depositors, like investment and saving. Banks by charging high interest rate gain high returns
from borrowers and discouraging the depositors by giving low return to them which results in
inclusive spreads. In Pakistan spreads are higher. Finally, interest rate increases when spreads are
taken into account that results into high returns to banks on investments and lending. And beside
this, depositors have no other option to save their money except on prevailing rates offered by
the banks.

2.2.3 Exchange Rate Risk and financial performance

The value of a currency against a unit of a foreign currency is termed as the exchange rate. The
exchange rate is not fixed as it tends to vary based on the particular currencies and also the
particular time or period. Certain currencies will have a high value than others, but when the
value decreases it is termed as to depreciate. There are many factors that results in changes in
exchange rate and it include main the balance demand and supply in the foreign market. These
changes occur spontaneously and always seem difficult to predict. The changes result in the
organizations performance to be change as well. This is however limited largely to those
organization undertaking mainly in international transactions or currencies as the locally based
ones will be impacted minimally (Langat, 2016) As such high exchange rates will make most
30
foreign investor shun from making any transactions at that particular time. The bank will be
affected in the similar way as depreciation in the local currency will mean reduce transactions
such as savings and borrowing resulting in reduces return.

Foreign exchange risk refers to the likelihood that unexpected change in exchange rates will alter
the home currency value if foreign currency cash payment and receipts are expected from a
foreign source. Currency risk management aims to reduce the negative impact of currency
fluctuations and is commonly associated with financial hedging of exchange rate exposure.
Hedging is a kind of investment activity that seeks to protect against future price risks. It reduces
the risk of unfavorable exchange rate movements by taking an offsetting position (Hodrick,
2009). Generally, companies are exposed to Transaction exposure, Economic exposure and
Translation exposure (El-Masry & al, 2007).Transaction risk occurs where the value of the
existing obligations are worsened by volatility in the forex rates. Transactional exposure arises
from future cash flows and where the value of existing obligations is affected by changes in
forex rates. Economic risk relates to adverse impact on entity income for both domestic and
foreign operations because of sharp, unexpected change in exchange rate. Translation exposure
occurs through currency mismatch and it is related to assets or income derived from offshore
enterprise (Madura, 2003).

Addae (2015) examined the effect of exchange rate fluctuation on Ghanaian banks. The study
investigated the sensitivity to exchange rate in the commercial banks found in the Ghana. The
finding shows that the banks have varied risk management strategies. This thus showed that risk
management was an integral part of these organizations. The study was mainly concentrated in
Ghana and thus may not be applicable in the D.R. Congo.

Adetayo (2013) examined how the commercial banks manage the risks that are posed by the
foreign exchanges rate in Nigeria. The study sought to determine how the risk involve in foreign
exchange can be effectively managed. The study exploited both the primary and secondary
sources of data. The study determined that spot transactions techniques were effective in
minimizing foreign exchange risk. The study however was not able to determine the relationship
that exists between the two variables.

31
2.3 Summary of literature
A thorough study of previous research relating to financial risk management and financial
performance of Centenary bank has made us aware of the lacking conclusion of effects of
financial risk management on financial performance of commercial banks in Uganda. Most of
researchers have focused on one of several countries and showed different results. However, no
research has put the research in commercial Banks’s Uganda; Therefore, I founded the existence
of research gap and devote my effort to conduct a research on it. Luy (2010) risk management
and performance of banks in Kenya. Nairobi: university of Nairobi.

Up to the best knowledge of the researcher in Uganda, context it is difficult to get a study which
employed credit risk, interest rate risk, exchange rate risk to test the effect of financial risk
management on financial performance of Centenary bank Uganda therefore there is a
temporal gap and conceptual gap as well. (Mark, 2012)also made another study of financial risk
management on performance of banks and broke the independent variable market risk, credit
risk, liquidity risk, and reputation risk.

The current study therefore aims at contributing to the literature gap on the subject matter by
expanding on the independent variables and analyzing the effect of those variables on Centenary
bank in Uganda.

32
 CHAPTER THREE:
METHODOLOGY

3.0 Introduction
This chapter presents the research design, the research population, and the sample size, sampling
procedures, research instruments, validity and reliability of instruments, data gathering
procedures, data analysis, ethical considerations and limitations of the study.

3.1 Research Design

This study employed descriptive whereby quantitative research approaches were used to gain
insight about the effect of financial risk management on financial performance; it is descriptive
in that it described the characteristics of respondents. Qualitative approach includes the use of
interviews. The regression designs were used to determine if there is significant effect of
financial risk management on financial performance of commercial banks.
Regression Analysis were used because the researcher chose to indicate the impact of a unit of
change in the known variable(X: independent variable) on the estimated variable(Y: dependent
variable).

3.2 Population of the Study

Mugenda (2003) defined population as a set of people, services, elements, and events, group of
things or households that are being investigated. This definition ensures that population of
interest is homogeneous. The population was 40 respondents and comprised of (1) branch
manager, (1) Accountant, (1) Human resource officer and (4) customer care officers and (10)
bank teller officers and (23) credit officers. The respective populations of the banks are
presented in table 1 below.

3.3
Sample
Size
A sample is the subset of a population that was used to represent the entire group as a whole.
The sample size for the study was calculated using Krejcie & Morgan (1970) Table (see
Appendices) as cited in Amin (2015:454) and a population of 40 a sample size of 36
respondents.

33
Table 1: Accessible population, sample size and sampling technique

Category of respondents Population Sample size Sampling Technique

Branch manager 1 1 Purposive

Accountant 1 1 Purposive
Human resource officer 1 1 Purposive
Customer care officers 4 4 Purposive
Bank teller officers 10 8 Simple random
Credit officers 23 11 Simple random
Total 40 36

Source: field data (Centenary Human Resource Department, 2022).

3.4 Sampling techniques and procedures

3.4.1 Purposive sampling technique

A purposive sample was used to select respondents who possessed similar characteristics to
form a sample. The technique allowed the selection of certain units or cases based on a
specific purpose rather than randomly (Tashakkori & Teddlie, 2013). Purposive sampling
was used to identify respondents who were used to provide non-numeric information through
interviews. The technique was used to select Branch manager, Accountant, human resource
officer and customer care officers.
3.4.2 Simple random technique
Simple random sampling is a technique that is used to select respondents where each respondent
was equally chanced to be selected to form a sample. The technique is unbiased and allows the
generalizations of findings. This technique was used to select the Bank teller officers and credit
officers.

34
 3.4 Data Sources
The researcher gathered information through the primary sources. This enables the researcher
to attain information from the field. Data collection in this case was done through the use of
questionnaire. Data was collected from people’s opinions, ideas through questioning and
interviewing the study respondents.

3.5 Data Collection Instrument

3.5.1 Questionnaire
A questionnaire was the major instrument which was used for data collection. The
questionnaire is preferred for this study because it enabled the researcher reach a larger number
of respondents within a short time, thus made it easier to collect relevant information. The first
section in the questionnaire was the face sheet, to collect data on profile of respondents. The
second section in the questionnaire was on variable of financial risk management (credit risk,
interest rate risk, exchange rate risk); the third section of the questionnaire had questions of
financial performance of the selected banks. All the questions was Likert Scaled on four
points ranging from 1= strongly disagree, 2 = disagree, 3 = agree, and 4 = strongly agree. The
questionnaire contained close-ended questions to collect quantifiable data relevant for precise
and effective correlation of research variables. They was also preferred to save time, enabled
respondents to easily fill out the questionnaires and keep them on the subject and relatively
objective.

3.5.2 Interview
Guide
The interview was used to collect information about the study from the selected managers and
executives of the Centenary bank The respondents were asked questions including opinions on
the subject matter. Interview helped the researcher to enforce the answers getting from the
questionnaire.

3.6. Validity and Reliability

3.6.1 Validity
The researcher ensured the validity of the instrument by face validity analysis using research
supervisors who went on checking if all the items which was constructed, helped achieve the

35
 aim of the study. This was done by giving copies of questionnaire to two lecturers (experts) to
judge the validity of the questions according to objectives. A content validity index (CVI) was
computed.
Table 3: Validity
Variable Expert1 Expert2 Average
Credit risk 0.8 1 0.9
Interest rate risk 0.85 0.875 0.86
Exchange rate risk 0.78 0.75 0.765
Average 0.81 0.875 0.84

Source: survey data 2022

From the table CVI=0.84 which is greater than 0.70 the research instrument is considered valid
as supported by Amin (2015).
3.6.2. Reliability
The reliability of the research instruments was established using Cronbach Alpha coefficient test.
Specifically, this test over the research items systematically arranged in the questionnaire
according to the research questions. The entire variable reflected in this grouped research items
of the questionnaire particularly tested using the Cronbach Alpha Coefficient. As the result the
SPSS reliability test yielded 0.792 output that reveals the instrument reliability as
recommended by Amin (2015).
Variables Cronbach’s alpha Number of items

Credit risk 0.73 5

Interest rate risk 0.81 5

Exchange rate risk 0.78 5

Financial performance 0.85 11
Total 0.792 26

3.7 Data collection Procedures

36
Before the administration of the questionnaires the researcher took an introductory letter from
the Department of Business and Administration, the researcher had to first seek authorization
from the proposed respondents to conduct research and reviewed the questions to avoid errors
and ensure that only qualified respondents was approached. The respondents requested to sign
and answer the questionnaires. The researcher emphasized retrieval of the questionnaires within
three days from the date of distribution. And lastly, all returned questionnaires were checked if
all was answered. The data gathered was collected, coded into the computer and statistically
treated using the Statistical Package for Social Sciences (SPSS).

3.8. Data Analysis

3.8.1 Qualitative Data
After collecting data, it was processed and analyzed. The qualitative data was analyzed by
sorting out major themes, concepts and ideas that relate to the variables of the study so as to
make meaning and draw conclusions. All the relevant information was put in place to ensure that
the necessary information was available before data analyzed designs.

3.8.2 The quantitative Data

The data collected was entered into statistical package for social scientists coded and all the
errors were removed, and the results attained on mean and standard deviations. The data on mean
attained a numerical scale that is designed based on highest value minus lowest and divided by
highest value in the Likert scale.
The regression analysis was used to determine the effect of financial risk management on
financial performance of commercial banks. The decision rule for the data analysis was based on
multiple regressions to determine the effects of financial risk management on financial
performance of Centenary bank; the decision rule was based on 0.05 level of significance.

3.9 Ethical Consideration

Seeking permission from area authorities to conduct research. Maintaining the privacy and
confidentiality of the respondents that is to say keep their personal issues private and non-
disclosure of response from particular respondents to maintain integrity and also protect them
from potential victimization. Maintaining honesty and avoiding exceptional and
deceptive behavior such as creating false impression in the minds of participants through
withholding information, establishing false intimacy or telling lies as this can potentially harm
37
research participants. Reported what was actually found and not manufacturing and publish
dream up data and also giving due recognition to any one whose work may have been used in
this research and not try to pass it as the researchers’ original work

3.10 Limitations of the Study

1. Long distance from the institution to the area of the study was one of the limitations the
researcher faced. However, the researcher tried as much as possible to move to the area to collect
the data in phases to ease on transport charges

2. Non-response to certain questions and providing of false information was another limitation to
the study. This was due to the fear by some respondents that the researcher could expose their
identities. However, the researcher used logical questions so that the respondents were able to
release such information needed by the researcher.

3. Implementation of data collection method: There are chances that the nature of
implementation of data collection methods and interpretation may content flawed beyond the
researcher ability to discover. The researcher had problems in making interview (instrument of
data collection) because some bankers’ manager said that they don’t have time for interview that
they were busy, and research analyzing the qualitative data basing on the little who accepted.

4. Sample size was used to generalize the study outcome, the researcher is aware that the
greater the sample size the accurate the results especially in quantitative research like the current
study.

5. Scope of discussions: The researcher don’t have many years of experience of conducing
researches and producing academic papers of such a large scope therefore the depth of
discussions in this study is compromised.

38
 CHAPTER FOUR

PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS

4.0 Introduction
This chapter presents, analyzes, and interprets the results of data collected from the field survey.
The Data analysis and interpretation was based on the research objectives. Below are the data
presentations and analysis of research findings.
4.1 Respondent Rate.
The researcher administered a total of 36 copies questionnaires administered and they were
returned fully completed constituting a response rate of 100% however, interviews were held.
The score therefore suggest an overall response rate of 100% which according to Amin (2015) is
a good representation of a survey population in a given study as it’s above a response rate
of 70%.

4.2 Demographic Characteristics of Respondents

The demographic profiles of the respondents surveyed were based on Age, gender, level of
education, area of study and years of working experience. Table 4 presents the findings of the
respondents’ profile:

Table 4.showing the Age Characteristic of Respondents

Age of the respondents Frequency Percent Cumulative Percent

18– 25 years 6 16.6 16.6
26 – 35 years 8 22.2 38.8
36 – 45 years 13 36.1 74.9
Above 45 years 9 25.0 100.0
Total 36 100.0

39
 Source: field data, 2022

The results in table 4 show that 13 respondents which is the 36.1% of the total respondent are
aged between36 - 45 years; 9 respondents which representing 25.0% of the total respondent are
aged above 45 years; 8 respondents which representing 22.2% of the total respondent are aged
between 26-35 years while minority 6 respondents which representing 16.6% of the total
respondent are aged between 18 -25. This shows us that the major part of the respondent are in
the maturity age which implies that they are people with purpose and vision, they are youth and at
the flower of the age.
4.2.2 Gender of the respondents

On the issue of providing their responses on gender, respondents were requested to indicate their
gender. The findings are presented in the Table 5 below.
Table 5. Showing the Gender characteristic of respondents
Gender of the respondents Frequency Percent Cumulative Percent
Male 26 72.2 72.2
Female 10 27.7 100.0
Total 36 100.0

Source: field data 2022

The result in table 5shows us that 26 respondents which represent 72.2% of the total respondents
are male and 10 respondents which represent 27.7% of the total respondents are female. This
shows that the majority gender in the banking sector in Uganda are male.

Table 6. Showing the year of experience of respondents

40
Age of the respondents Frequency Percent Cumulative Percent
0–5 years 9 25.0 25.0
5 – 10 years 13 36.1 61.1
10 – 20 years 8 22.2 83.3
Above 20 years 6 16.6 100.0
Total 36 100.0

Source: field data, 2022

The result in table 6 shows that 16.6% of respondents have above 20 years of experience,
22.2% have between 10 -20 years while majority 36.1% and 25.0% of respondent are in the
interval of 5 -10 years and 0 -5 years of experience respectively, this means that they are still
learning, they have the burning desire of success and they are obsess by doing well.

Table 7. Showing the education level of respondent

Education level Frequency Percent Cumulative Percent
Diploma 9 25.0 25.0
Degree 18 50.0 75.0
Master 8 22.2 97.2
PhD 1 2.7 100.0
Total 36 100.0

41
 Source: field data, 2022
The result in table 7 shows us that 9 respondents which represent 25.0% of the total respondent
had only a diploma; 18 respondents which represent 50.0% of the total respondent had a
degree; 8 respondents which represent 22.2% of the total respondent had a master and 1
respondent which represent 2.7% of the total respondent had a PHD. This implies that the
banking sector employs educated people.

4.3 Descriptive characteristic financial risk

management
The independent variable of the study was financial risk management and it is broken into three
components, with the total of fifteen questions, based on four point linker scale. The
respondents were asked to indicate the extent to which they agree or disagree with each
question, and their responses were analyzes using SPSS. The rating scales were as follows: 1 =
strongly disagree; 2 = disagree; 3 = agree; 4 = strongly agree. The responses were summarized
using means and standard deviations, as indicated in table 4.3. The cohesiveness behind
descriptive statistics is to summarize and present the raw data collected from the field in a clear
and understandable manner (Hanneman, Kposowa & Riddle, 2013)

Table 8. Showing the mean and standard deviation showing credit risk management in
Centenary bank in Uganda
Statements SD D A SA Mean Std
1 2 3 4 Dev
42
The credit risk strategy set by the board of Directors13.8% 2.7% 33.3% 50.0% 3.52 0.69
are effectively transformed and communicated within (5) (1) (12) (18)
the bank in the shape of policies and procedures by
the top management
The bank has an effective risk management 27.7% 2.7% 50.0% 22.2% 3.47 0.67
framework (infrastructure, process and policies) in (10) (2) (18) (8)
place for managing credit risk
The bank has a credit risk rating framework across 16.6% 5.5% 25.0% 52.7% 3.54 0.81
all type of credit activities (6) (2) (9) (19)
The bank monitors quality of the credit portfolio on 50.0% 16.6% 27.7% 2.7% 3.63 0.66
day-to-day basis and takes remedial measures as (18) (6) (10) (2)
and when any deterioration occurs
The bank regularly prepares periodic report of credit 38.8% 2.7% 44.4% 13.8% 3.26 0.725
risk (14) (1) (16) (5)
Average 3.57 0.68
Source: field data 2022

Statistical findings presented in the Table 8 above that the credit risk strategy set by
the board of Directors are effectively transformed and communicated within the bank in
the shape of policies and procedures by the top management with 83.3% agreement
score, mean = 3.52, and 16.5% disagreed. This shows that the bank is managing
credit risk very carefully by setting policies, guidelines and also by segmenting the
portfolio, it the reason why it performs financially.

Relative to the above scores, 72.2% agreed that the bank has an effective risk management
framework (infrastructure, process and policies) in place for managing credit risk. This
can further be supported by a mean score of 3.47 and standard deviation score of 0.67
that were computed however, up to a tune 30.4% disagreed. The findings highlight risk
management strategies for instance customer evaluation collaterals among others as
important techniques. In one of the related interviews held, an interviewee observed that:
“The bank portfolio is well diversified because we have segmented our client in to
three segments which are private banking, corporate banking and individual banking, apart
for diversifying we have establish policies to access, analyze and monitor risks that can
arise the granting of loans”

Statistics representing 77.7% (mean=3.54) suggest that the bank has a credit risk rating
framework across all type of credit activities, while 22.1% respondents disagreed
respectively. In addition, 30.4% respondents agreed that the bank monitors quality of the
43
 credit portfolio on day-to-day basis and takes remedial measures as and when any
deterioration occurs. However, majority 66.6% disagreed which suggests that bank
monitors quality of the credit portfolio on day-to-day basis. To complement on the above
findings, one respondent who voiced out that: “the bank performs well financially in general
but talking about credit rating and monitoring of quality of portfolio we are struggling a
bit.”

Lastly, 58.2% wit mean score of 3.26 respondents agreed that the bank regularly prepares
periodic report of credit risk, 31.5% disagreed. The findings reveal how centenary bank
considers financial risk management and therefore the need to improve its strategies and
techniques. In one of the related interviews held, an interviewee observed that: ““The bank
hedges against credit risk to avoid losses in the sense that we grant credit to our client
according to the nature of their income.”

The result in table 8 shows that the construct credit risk has an overall average mean of 3.57
and the standard deviation of 0.68 which was rate very healthy; this implies that the credit
risk is generally healthy managed. Muele (2006) Effective credit risk management is a
tool that provides framework for the entire credit risk management process. However some
bankers are lazy and ignore the process which increases the risk of the all institution.

Table 9.Showing the mean and standard deviation showing interest risk management
in Centenary bank Uganda.
Statements SD D A SA Mean Std
1 2 3 4 Dev
There is a proper set of rules and guidelines, 27.7% 2.7% 50.0% 22.2% 3.65 0.58
for managing interest rate risk, available in the bank (10) (2) (18) (8)

44
 The interest rate risk strategy set by the Board 13.8% 2.7% 33.3% 50.0% 3.61 0.65
of Directors are effectively transformed and (5) (1) (12) (18)
communicated within the bank in the shape of
policies and procedures by the top management
The bank has an effective risk management 16.6% 5.5% 25.0% 52.7% 3.44 0.75
framework (infrastructure, process and policies) (6) (2) (9) (19)
in place for managing interest rate risk
The bank regularly prepares periodic report of 13.8% 2.7% 33.3% 50.0% 3.40 0.83
interest rate risk (5) (1) (12) (18)
Applications of interest rate risk 38.8% 2.7% 44.4% 13.8% 3.63 0.72
management techniques reduce costs or expected (14) (1) (16) (5)
losses
Average 3.54 0.70

Source: field data, 2022

Statistical findings presented in the Table 9 above that There is a proper set of rules and
guidelines, for managing interest rate risk, available in the bank with72.2 % agreement score,
mean = 3.65, and 30.4 % disagreed. This shows that the bank is managing credit risk very
carefully by setting policies, guidelines and also by segmenting the portfolio, it the reason why it

performs financially. According to interviewed on 5th January 2022, responses of the interview
were:” we are the leading commercial bank in Uganda this can respond to your question, we have
healthy ratios of solvability, liquidity and profitability, our bank is very healthy”.

Relative to the above scores, 83.3% agreed that The interest rate risk strategy set by the
Board of Directors are effectively transformed and communicated within the bank in the shape
of policies and procedures by the top management. This can further be supported by a mean
score of 3.61and standard deviation score of 0.65 that were computed however, up to a tune
16.5% disagreed. In one of the related interviews held, an interviewee observed that: “The bank
do hedge for interest rate risk in the sense that it calculates how much it might pay on deposit of
clients and how much it might earn on loans granted, therefore our bank is committed itself on
variable interest rate, this expose it to interest rate risk. If the commitment was on a lower
interest rate and in the meanwhile the interest rate rises, to avoid all those risk the bank usually
control it lending and borrowing rate”.

Statistics representing 77.7% (mean=3.44) suggest that the bank has an effective risk
management framework (infrastructure, process and policies) in place for managing
interest rate risk, while 22.1% respondents disagreed respectively. In addition, 83.3% majority

45
respondents agreed that the bank regularly prepares periodic report of interest rate risk.
However, minority 16.5% disagreed which suggests that bank monitors quality of the credit
portfolio on day-to-day basis. To complement on the above findings, one respondent who
voiced out that: “The loan portfolio is well diversify, the market is well segmented (private
banking, individual banking and corporate banking), this segmentation of market help to avoid
some risks because as it said don’t put all eggs in the same basket”

Lastly, 58.2% wit mean score of 3.63 respondents agreed applications of interest rate
risk management techniques reduce costs or expected losses, 31.5% disagreed. The findings
reveal how centenary bank considers financial risk management and therefore the need to
improve its strategies and techniques. In one of the related interviews held, an interviewee
observed that: ““The bank is managing its interest rate risk by applying the archaic method
only which consist of control of the borrowing and the lending interest rate.”

The result in table 9 shows that the construct interest rate risk has an overall average mean of
3.54 and a standard deviation of 0.70. This implies to that interest rate risk is averagely very
healthy managed in Centenary bank.

46
 Table 10. Showing the mean and standard deviation showing exchange rate risk
management in Centenary bank Uganda.
Statements SD D A SA Mean Std
1 2 3 4 Dev
There is a proper set of rules and guidelines, for 38.8% 2.7% 44.4% 13.8% 3.65 0.58
managing exchange rate. (14) (1) (16) (5)
The exchange rate strategy set by the Board of 13.8% 2.7% 33.3% 50.0% 3.63 0.69
Directors are effectively transformed and (5) (1) (12) (18)
communicated within the bank in the shape of
policies and procedures by the top management
The bank has an effective risk management 16.6% 5.5% 25.0% 52.7% 3.66 0.64
framework (infrastructure, process and policies) in (6) (2) (9) (19)
place for managing exchange rate risk
The bank’s overall exchange risk exposure is 13.8% 2.7% 33.3% 50.0% 3.57 0.78
maintained at prudent levels and consistent with the (5) (1) (12) (18)
available capital
The bank regularly prepares periodic report of 27.7% 2.7% 50.0% 22.2% 3.51 0.0.71
exchange rate Risk (10) (2) (18) (8)
Average 3.60 0.68
Source: field, data 2022

Statistical findings presented in the Table 10 above that there is a proper set of rules and
guidelines, for managing exchange rate. With 58.2 % agreement score, mean = 3.65 and 41.5%
disagreed. This shows that the bank is managing credit risk very carefully by setting
policies, guidelines and also by segmenting the portfolio, it the reason why it performs financially.

Relative to the above scores, 83.3% agreed that the exchange rate strategy set by the Board of
Directors are effectively transformed and communicated within the bank in the shape of policies
and procedures by the top management. This can further be supported by a mean score of
3.63and standard deviation score of 0.69 that were computed however, up to a tune 16.5%
disagreed.

Statistics representing 77.7% (mean=3.44) suggest that the bank has an effective risk
management framework (infrastructure, process and policies) in place for managing exchange
rate risk, while 22.1% respondents disagreed respectively. In addition, 83.3% majority
respondents agreed that the bank’s overall exchange risk exposure is maintained at prudent
levels and consistent with the available capital. However, minority 16.5% disagreed which
suggests that bank monitors quality of the credit portfolio on day-to-day basis. To complement
on the above findings, one respondent who voiced out that: “The loan portfolio is well diversify,
47
 the market is well segmented (private banking, individual banking and corporate banking), this
segmentation of market help to avoid some risks because as it said don’t put all eggs in the
same basket”

Lastly, 58.2% wit mean score of 3.51 respondents the bank regularly prepares periodic report
of exchange rate Risk, 31.5% disagreed. The findings reveal how centenary bank considers
financial risk management and therefore the need to improve its strategies and techniques.

Interviews with respondents: one respondent said “our bank has healthy ratio of solvency,
profitability and liquidity, it is performing by now but earlier 2013 the bank was in difficult
position with liquidity ratios but I think it was all banks in Uganda which was affected by that
situation” Another respondent also had to say;“ The bank does use many hedging method apart
from the method using by other which consist of granted credit in dollar if your income is in
dollar , our bank can give credit in dollar and your income is in franc by this it use other
different methods such us futures and dealing with correspondent banks to cover it position”.
Another respondent said;“ Our bank has majority of loan in foreign currency, as you know the
Ugandan currency are floating and people had lost confidence in francs , this has caused that
majority of people uses and asks for loans in foreign currency USD ”.
Table 10 shows that the construct exchange rate risk management has an average mean of 3.60
and standard deviation of 0.680 which is interpreted as very healthy. This implies that the
exchange rate risk is very healthy managed in the Centenary bank Uganda.
4.4 Regression analysis of credit risk management and financial performance of Centenary
bank Uganda
In this stage we have tried to analyze the effects of financial risk management on financial
performance of Centenary bank in Uganda; the Independent variable was broken in to three
components credit risk, interest rate risk, exchange rate risk and each was computed with the
dependent variable (financial performance). Bellow the table 4.4.1 shows the outcome of the
regression analysis.
Table 13. Showing the regression analysis of credit risk on financial performance in
commercial banks Uganda

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .83 a
.701 .69 .43334

48
Table 14: Regression coefficients

Model Unstandardized Standardized T Sig.

Coefficients Coefficients
B Std. Error Beta
(Constant) .473 181 2.621 .001
1 Credit risk .829 .050 .837 16.573 .000

a. Dependent Variable: Financial performance

Source: field, data 2022
The outcome of the first null hypothesis H01 confirms that credit risk affects positively the
financial performance of commercial banks. This null hypothesis was tested using the result
of coefficients in the simple linear regression and thus credit risk was regressed with
financial performance. The result of linear regression showed that t - test =16.573 and
significant at P < 0.000. By this result the null is rejected because the sig value is below the
threshold of its acceptance level (0.05).
Table 15. Showing the regression analysis of interest rate risk and financial
performance

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .854a .725 .725 .43334

Table 16: Regression coefficients

Model Unstandardized Standardized T Sig.

Coefficients Coefficients
B Std. Error Beta
(Constant) .484 .168 2.880 .005
1 Interest rate risk .833 .047 .854 17.756 .000

a. Dependent Variable: Financial performance

Source: field, data 2022

The table above shows the testing of the second null hypothesis which was Interest rate risk as
(independent variable) and financial performance (dependent variable); this null hypothesis
was tested using the result of coefficients in the simple linear regression and thus Interest risk
was regressed with financial performance. The result of linear regression showed that t - test

49
= 17.756 and significant at P < 0.005. By this result the null is rejected because the sig value is
below the threshold of its acceptance level (0.05).
Table 17. Showing the regression analysis of exchange rate risk management and
financial performance

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .684. .682 .679 .43334

Table 18: Regression coefficients

Model Unstandardized Standardized T Sig.

Coefficients Coefficients
B Std. Error Beta
(Constant) .460 .190 2.424 .017
1 Exchange rate risk .826 .052 .826 15.837 .000

a. Dependent Variable: Financial performance

Source: field, data 2022
The table below shows the testing of the third null hypothesis which was exchange rate
risk (independent variable) and financial performance(dependent variable); This null
hypothesis was tested using the result of coefficients in the simple linear regression and thus
exchange rate risk was regressed with financial performance. The result of linear
regression showed that t - test = 15.837 and significant at P <0.000. By this result the null is
rejected because the sig value is below the threshold of its acceptance level (0.05).
Table 18. Showing the Multiple regression analysis of financial risk management and
financial performance of Centenary bank in Uganda

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .883 .779 .773 .43334

50
Table 4.22: Regression coefficients

Model Unstandardized Standardized T Sig.

Coefficients Coefficients
B Std. Error Beta
(Constant) .172 .165 1.041 .001
1 Credit risk .173 .113 .175 1.526 .000

Interest rate risk .417 .105 .428 3.965 .000

Exchange rate risk .324 .086 .324 3.779 .000
a. Dependent Variable: Financial performance
Source: field, data 2022

The result in table 16 shows that financial risk management is positively related to financial
performance since the combine Regression results gives the coefficient of .172 with a P-
Value of 0.001 thus still significantly related therefore the hypothesis still rejected.
With the R of .883, R-Square of .779 and the adjusted R-Square of .773 means that the
variables: credit risk, interest rate risk and exchange rate risk explains at least 88% of the
behavior of financial performance of commercial banks in Uganda.
The constant of 0.172 showed that if credit risk, interest rate risk and exchange rate risk
management provided by commercial banks were rated as zero, the financial performance of
commercial banks in Uganda would be 0.172. The coefficient 0.173 on credit risk, showed
that one unit change in credit risk management results in 0.173 units increase in
financial performance of Centenary bank. Also, the result of multiple regression of 0.417
showed that one unit change in interest rate risk management results in 0.417 units increase in
financial performance of Centenary bank. Lastly, 0.324 showed that one unit change in
exchange rate risk management provided by commercial banks results in 0.324 units in
financial performance of Centenary bank in Uganda.

51
 CHAPTER FIVE

DISCUSSIONS, CONCLUSION AND RECOMMENDATION

5.0 Introduction
In this chapter, the researcher discusses the findings presented in chapter four based on the
research objectives; thus it presents Discussion, conclusions, recommendations are presented
and areas for further study.
5.1 Discussion of findings
In this section the study’s findings was discussed in light of the research objectives and findings
of previous researches. The headings of the discussion are structured according to the research
objectives. The purpose of this study was to establish whether there is an effect of financial risk
management which is independent variable and financial performance which is our
dependent variable on Centenary bank in Uganda. Independent variable was broken in to three
components which are credit risk, interest rate risk and exchange rate risk and each of them was
regressed to financial performance of the banks cited below.

5.1.1 Effect of credit risk on financial performance of Centenary bank Uganda.

The research question that guided this objective was ‘Does credit risk affects financial
performance of Centenary bank in Uganda’ and in attempt to get answer for the question, a null
hypothesis was formulated thus: “H01credit risk has no significant effect on financial
performance of Centenary bank in Uganda”. The findings for this objective were that credit risk
affects significantly and positively financial performance of commercial banks. In the first
instance the descriptive statistics shows that credit risk management is very healthy. The
linear regression findings of this study indicated that credit risk had very healthy and positive
significant effect on financial performance in Uganda. Similarly the results of multiple
regressions also showed that credit risk has a significant and positive effect on the financial
performance of commercial banks in Uganda. The result of this research support the theory of
stakeholder theory (Klimczak, risk management theory, 2012). In fact, the more individuals are
motivated and involved to complete something while having a perfect knowledge of the
objectives to reach them whereby they achieve them, the more individuals will complete great
performance. The finding was in line with the findings of Adeusi and Oladunjoye (2014) who

52
studied and found that credit risk has a positive effect on financial Performance of Banks in
Nigeria.

5.1.2 Interest rate risk on financial performance of Centenary bank Uganda.

The research question that guided this objective was does interest rate risk affect financial
performance of commercial banks in Uganda? And in attempt to get answer for the question a
null hypothesis was formulated thus: ‘Ho2 Interest rate risk has no significant effect on
financial performance of commercial banks in Uganda’. The effect was found significant though
the findings revealed that interest rate risk management provided a high contribution to financial
performance of commercial banks in Uganda. In the first instance the descriptive statistics shows
that interest rate risk is very healthy. The Regression linear findings of this study indicated that
interest rate risk had a very strong significant effect on financial performance of commercial
banks as well. Similarly the results of the multiple regressions also showed that interest rate risk
is significantly and positively affects on financial performance on commercial banks in Uganda.
The finding was in line with the findings of (Soyemi, 2014) Soyemi and Who maintained that
interest rate risk has a significant positive effect on financial performance of commercial banks
in Uganda? The results of this research support in some way the financial economic theory
(Klimczak, 2012) by the fact that this theory expresses that hedging leads to lower volatility of
cash flow and therefore lower volatility of firm value. The theory argues that the ultimate result
of hedging, if it indeed is beneficial to the firm, should be higher value a hedging premium. The
commercial banks make use of the strategies to hedge in order to be able to both record profits
and to produce a financial performance while reducing risks. The result was consistent with other
previous empirical studies namely (Tafri, 2009) Tafri and Hamid who found that interest rate
risk management positively impacts on the financial performance of the Nigeria money deposit
banks. This results support the study of (Zagonov, 2009) determining how banks regulate the
interest rate risk, the findings were performance was negatively related to interest rate risk this
was explained by the fact that management failed to hedge the risk similar results by (Matthias,
2012) on impact of loan growth and business model on bank risk in 15 EU countries found
higher level of interest rates risk reduce bank’s exposure to leverage risk.

5.1.3 Effect of exchange rate risk on financial performance of Centenary bank Uganda.

53
The researcher derived in this objective the question “Does exchange rate risk affects financial
performance of Centenary bank in Uganda?” And the null hypothesis tested was: exchange rate
risk has no significant effect on financial performance of Centenary bank in Uganda. The
descriptive analysis shows exchange rate risk has a positive and strong effect on financial
performance. The regression analysis shows that there is a positive effect of exchange rate risk
on financial performance of Centenary bank in Uganda with (r=.826 , sig=0.000). These results
do not support the findings of Gino Lucio and Ilias (2014) on foreign exchange risk and
performance of firms, the results found a negative relationship between risk and realized
returns. Other authors who had a similar findings posited that foreign loans to total assets as
proxy for foreign exchange risk was negative to earnings for US large commercial firms (Ling,
2014)similar with the study of Noor and, Abdalla (2017) on the Impact of Financial Risks on
the Firms’ Performance of firms in Kenya, the objectives of the study were to find out how
credit risk affect firms’ performance , To find out how liquidity risk affect firm’s performance,
Determine the effects of market risk to firm’s performance To analyze the how foreign exchange
rate risk affect firm’s performance. The findings were there was a significant relationship
between the variables of risk and financial performance. The research concluded that Financial
Risks had greater impact on performance of Firms. Thus the research found that Credit Risk
affected lending and borrowing by Financial Firms, Foreign exchange risks makes firms realize
unpredictable losses this affect performance.

The multiple regression result shows that credit risk, interest rate risk and exchange rate risk
affect financial performance of Centenary bank in Uganda with a r=0.883 and a P value of 0.001,
it shows that credit risk and interest rate risk and exchange rate risk have both a positive effect
on financial performance , this result also implies that 1% increase of the level of credit risk
management will lead to 83.7% increase in financial performance on commercial banks, 1%
increase of the level of interest rate risk management lead to 85.4% increase in financial
performance ,1% increase in the level exchange rate risk management lead to 82.6 increase in
financial performance .
The R of .883, R-Square of .779 and the adjusted R-Square of .773 means that the variables:
credit risk, interest rate risk and exchange rate risk explain at least 88.3% of the behavior of
Financial performance of Centenary bank in Uganda.

54
 5.2 Conclusions
The purpose of this study was to analyze the effect risk management on financial performance of
Centenary bank in Uganda. The result supports the key theory of the study which is stakeholder
theory. The study shows how effective risk management is a key factor of financial
performance with regard to profitability, solvency and liquidity.

Effect of credit risk management on financial performance in Centenary bank in Uganda.

After testing the first hypothesis the result shows that there is an effect of credit risk on financial
performance, which implies that effective credit risk management lead to high performance of
commercial banks in Uganda. By this implication it means that bankers invest resources
(financial and human) to manage risks which can arise in the process of granting credit.

Effect of interest rate risk on financial performance of commercial banks in Uganda.

There is a positive effect of interest rate risk management on financial performance of
commercial banks in Uganda, which implies that the healthy is the interest rate risk the healthier
is the financial performance of Centenary bank in Uganda. By this implication it means that
bankers have understood the importance of managing interest rate and how it affects on financial
performance and they make this their main job.
Effect of exchange rate risk on financial performance of commercial banks in Uganda.
The result of the regression analysis shows that there is a positive effect of exchange rate risk on
financial performance of Centenary bank in Uganda. This implies that exchange rate risk affects
positively on financial performance of Uganda banks, by this implication it means that banks
should manager efficiently exchange rate risk by setting clear guidelines and process .

5.3. Recommendations
The study suggests made the following recommendations based on the findings of the tested
hypothesis:
Effect of credit risk on financial performance of commercial banks in Uganda
The lending policies should outline the allocation and scope of credit facilities by establishing the
limits which could be based on group authority that allow committees to approve large loans.
Also the frequency of committees meetings and reporting procedures should be specified,
Managers require understanding how credit risk management affects the banks performance to be
able to ensure proper utilization of banks deposits as improper management of credit risk will
55
increase the non-performing of the institutions this may result in to financial distress. The
management should establish a credit risk management department so that this department can
assess, analyze and monitor risks related to credits and thus prevent the outcomes that can arise
by those risks instead of react when the banks are already beaten by those risks. The researcher
recommends that commercial banks must not only make the analysis of the client and his
business before a credit approval but also making an effective economic analysis of the
running of the entire economy so that they can appraise risks such as exchange rate risk,
interest rate risk and this will help them to prevent and to cover their positions.
Effect of interest rate risk on financial performance of commercial banks in Uganda
The recommendation for interest rate is that commercial banks in Uganda could focus on
hedging and forecasting the macroeconomic factors that determine interest rates rather than the
focusing on interest rates themselves this will enable them to project profitable business. The
managers should install latest advances in their system processes to monitor interest rate risk and
adequately have transparency and enhance operational efficiency. In order to ensure sustainable
financial performance, Commercial Banks need to develop policies and resources tended to
manage asset and liability duration mismatches effectively. Basic risk may not have
manifested its influence in Banks’ financial performance because of the markets insensitivity
to interest rate changes on both interest earning assets and liabilities, which gives Banks ability
to hedge and neutralize its effects on Net Interest Margins. However, as the market’s sensitivity to
interest rate develops, this risk needs to be properly attended to. Variation of Net interest Margins
which has an effect to Banks’ financial performance should be effectively monitored by
Commercial Banks to manage earnings volatility, so as to achieve profitability goals and increase
value of the organization
Effect of exchange rate risk on financial performance of commercial banks in Uganda
To the management at the banks, the study further recommends that the issues related to
exchange rate risk should be always taken into account in effort to improve banks foreign
exchange risk management and financial performance. This is because exchange rate risk has an
effect in bank performance. Additionally the study recommends that banks should come up with
mechanism that will enable them to be ready to respond to any changes in the macro-economic
environment. Through this any uncertainties created will be anticipated and easily addresses.
Commercial banks should privileged the national currency (Ugandan francs) instead of proposing
their services and products in foreign currency(us dollars) and each transaction made in foreign
56
currency must be covered , this will allow banks to not put much money in exchange rate risk
management. The researcher recommends that manager should focus more in managing credit
risk , interest rate risk and exchange rate risk because it affect the financial performance of banks
in Uganda therefore if poorly managed it can cause the bankruptcy of the institutions and for the
whole financial system.

5.4 Area for further study

There was a limitation on the number of independent variables used in this study as only three
were considered. Future research in the area would focus on more independent variables to the
regression model in order to develop more literature in this study area. The study was also
limited on the number of years under study due to unavailable of data for a longer period. Future
research should consider longer study periods for generalizing the results. The researcher
suggests the following areas for further research as they are closely related to the outcome of the
current study:
1. Operational risk management and financial performance of commercial banks in
Uganda
2. Impact of economic instability on commercial banks in Uganda
3. Risks management and performance of banks in Uganda

57
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 APPENDICES
APPENDIX I: QUESTIONNAIRE
UANDA CRISTIAN UNIVERSITY
Dear Respondent,

I am a Master candidate in Business administration undertaking a thesis on financial risk

management and financial performance of Centenary bank in Uganda, In view of this, I
request you to participate in this study. Kindly answer this questionnaire without living any
question unanswered. Please be assured that the information you give will be treated with
utmost confidentiality and will be used for academic purpose only.

I request that you fill this questionnaire so that I get it back in a maximum of one week.
Before answering this questionnaire, kindly read and sign the” informed consent”
below, where ‘I’ refers to you the respondent.

Thank you very much in

advance. You faithfully,

A. Personal data.

1. Your sex; 1.Male 2. Female

2. Level of education; 1. Diploma 2. Degree 3.Master 4. PhD

4. Year of experience; 1.0-5years 2.5-10 years 4.10-20years 4. <20yrs

5. Age; 1.18-25 years 2.25-35years 3.35-45years 4. <45yrs.

Date received by respondent…………….

Initials……………………...

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 B. Financial risk management questionnaire.
Please respond to the option and kindly be guided with the scoring system below. Write
your rating in the space provided.
Credit risk questionnaire

How would do rate your bank on the following aspect?

Answer key: 1. Strongly disagree 2.Disagree 3. Agree 4.Strongly agree

No Questions 1 2 3 4
1. The credit risk strategy set by the board of Directors are
effectively transformed and communicated within the bank in
the shape of policies and procedures by the top management
2. The bank has an effective risk management framework
(infrastructure, process and policies) in place for managing
credit risk
3. The bank has a credit risk rating framework across all type of
credit activities
4. The bank monitors quality of the credit portfolio on day-to-
day basis and takes remedial measures as and when any
deterioration occurs
5. The bank regularly prepares periodic report of credit risk

Interest rate risk

1. Strongly disagree 2.Disagree 3. Agree 4.Strongly agree
No Questions 1 2 3 4
1. There is a proper set of rules and guidelines, for managing
interest rate risk, available in the bank
2. The interest rate risk strategy set by the Board of Directors are
effectively transformed and communicated within the bank in
the shape of policies and procedures by the top management
3. The bank has an effective risk management framework
(infrastructure, process and policies) in place for managing
interest rate risk
4. The bank regularly prepares periodic report of interest rate
risk
5. Applications of interest rate risk management techniques
reduce costs or expected losses

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Exchange rate risk questionnaire

How would do rate your bank on the following aspect?

Answer key: 1. Strongly disagree 2.Disagree 3. Agree 4.Strongly agree

No Questions 1 2 3 4

1. There is a proper set of rules and guidelines, for managing

exchange rate.
2. The exchange rate strategy set by the Board of Directors are
effectively transformed and communicated within the bank in
the shape of policies and procedures by the top management
3. The bank has an effective risk management framework
(infrastructure, process and policies) in place for managing
exchange rate risk
4. The bank’s overall exchange risk exposure is maintained at
prudent levels and consistent with the available capital
5. The bank regularly prepares periodic report of exchange rate
risk

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 C. Questionnaire on performance

How would do rate your bank on the following aspect?

Answer key: 1. Strongly Disagree 2.Disagree 3. Agree 4.Strongly agree

No Questions 1 2 3 4
Profitability
1. Your bank perform in term of profit
2. Your loan portfolio perform in the last three years
3. Debt default rate is declining among borrowers over the past three
years.
4. Your bank perform in term of timeless, quality, accuracy of
financial reporting
Liquidity
5. Your bank performs in term of liquidity.
6. Your bank liquidity ratios have been healthy over the past three
years.

7. Your bank current ratio is following accounting norms.

8. Your bank quick ratio is following accounting norms.
Solvency
9. Your bank perform in term of solvability
10. Your bank’s liabilities are depreciating over the past three years
11. Your bank assets can cover your liabilities in case of liquidation

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INTERVIEW GUIDE

Q1. Does your bank perform well financially (profitability, liquidity, and solvency)?

Q2.Is your bank loan portfolio well diversified?

Q3. How your bank does manage exchange rate risk?

Q4. How your bank does manage interest rate risk?

Q5. What is the proportion of loans which is enumerated in foreign currency?

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