Management of credit default risk in commercial banks: the case of national microfinance bank (NMB)

The overall objective of this study was to examine the management of Credit default risks in commercial banks. To achieve the stated objective, the researcher conducted a survey of NMB clients and bank officers. Data were analyzed using Statistical Package for Social Sciences (SPSS). The study revealed that default risk at NMB is mainly caused by inability to repay the loan by most borrowers, unwillingness to repay the loan, poor business management skills (in case of SME loans), job termination (in case of salaried workers’ loans) and lack of proper follow up mechanisms by NMB. On the other hand, it was found that the default risk management function is challenged by, lack of enough expertise, fraud and unfaithful bank officers, ineffective supervision of its borrowers who are scattered across the country and lack of credit reference bureau where could be easier to trace borrowers’ history. At the end of the study various recommendations on default risk management are provided. Some of these recommendations include the need to continue lobbying to the Government to speed up the establishment of Credit Reference Bureau, the need for the bank (NMB) to diversify its lending activities geographically, and also the need for borrowers’ cultural changes especially on the aspect of the unwillingness to repay. Furthermore, there is a need for the bank to provide knowledge (awareness) to its borrowers on the importance of repaying the loans to the bank. The study also recommended that future research should be done on the role of the central bank in supervising and providing guidelines for risk management in commercial banks in Tanzania. This will help all commercial banks which have separate credit risk management plans but fall under the central bank regulations.