Effects of Credit Cycle Management on Financial Performance of Financial Institutions in Rwanda: A Case Study of Guaranty Trust Bank Rwanda PLC

Credit cycle management is an important activity within the microfinance industry that cannot be overlooked in any organization engaged in the business of lending money. A well-structured and sound credit cycle management is a prerequisite which is able to attain stability, continued profitability and long term sustainability. The objective of this study was to establish the Some Effects of credit cycle management on financial performance of Guaranty Trust Bank Rwanda Plc. The specific objectives of the study was to evaluate the effect of credit terms on financial performance of Guaranty Trust Bank Rwanda Plc, establish the effect of client appraisal on financial performance of Guaranty Trust Bank Rwanda Plc, to examine the effect of credit risk control measures on financial performance Guaranty Trust Bank Rwanda Plc and to determine the effect of credit collection policies on financial performance Guaranty Trust Bank Rwanda Plc. The study was anchored on liquidity risk theory, value at risk theory and portfolio theory. This study will adopt descriptive research design. The target population for this study included operations and credit departments and the management. The study used stratified and simple random Sampling techniques to obtain a Sample of 80 respondents. The main data collection tool was a structured questionnaire. A pilot study was conducted to establish the reliability and validity of the questionnaire. Data analysis was done by use of Statistical Package for the Social Sciences (SPSS) on the collected data so as to come up with descriptive and inferential statistics. Pearson correlation analysis and multiple linear regression analysis was used to test the relationship between variables in the study hypotheses. Analyzed data was presented descriptively using tables. The study concluded that there exists a significant positive relationship between credit term and financial performance of Guaranty Trust Bank. In addition, Guaranty Trust Bank did not charge very high interest rate on loans given or use short repayment period for the loans granted. Guaranty Trust Bank had a well-documented credit cycle management policy. However, the respondents were not sure whether Guaranty Trust Bank used rigid lending terms and whether credit committees were always involved in making decisions regarding loans are essential in reducing default/credit risk. There exists a significant positive relationship between client appraisal and financial performance of Guaranty Trust Bank. At loan appraisal and subsequent approvals were on the basis of borrower�s capacity, character, condition, credit history and collateral and Guaranty Trust Bank considered financial and physical characteristics in credit scoring models for individual loans. In addition, the credit reference bureau in choosing the right customers to lend to, conducted credit risk analysis on individuals and businesses before lending and had strategies for granting credits. There was a significant positive relationship between credit risk control employed by Guaranty Trust Bank and their financial performance. The study concluded that imposing loan size limits was a viable strategy in credit management, regular credit checks enhanced credit risk management and the use of customer credit application forms improved monitoring and credit risk management. The study concluded that there was a significant positive relationship between credit collection policies and financial performance of Guaranty Trust Bank. However, majority of the respondents Some Effects that improved follow up post migration to NPL improved collection and classification to good book, strict system related to credit performance monitoring led to enhanced loan performance. The study recommends that banks should use rigid lending terms and credit committees should always be involved in making decisions regarding loans are essential in reducing default/credit risk. Secondly, there should be Some Effects client appraisal before issuance of any loans in order to reduce NPLs since the study found out a significant positive relationship between client appraisal and financial performance of banks.