Impact of the quality of credit risk management practices on financial performance of commercial banks in Tanzania

Commercial banks’ roles in economic development make it paramount for their sustainable financial performance, hence a need for effective credit risk management as credits are the main source of revenue creation, yet are the main threat to the bank’s asset quality and, if not effectively managed, will jeopardize performance. The study investigated the influence of the quality of credit risk management practices on the financial performance of commercial banks in Tanzania. Balanced panel data of fifteen commercial banks with 255 observations from 2003 to 2019 have been used for the analysis. Results revealed that risk assessment and approval, the quality of credit processes and controls, adequacy of the recovery process, and risk supervision & monitoring positively influence banks’ performance through their capital adequacy, efficient use of equity and asset quality, respectively. Further, banks’ earning ability and liquidity are negatively affected by risk assessment and approval as well as risk supervision and monitoring. The study recommends that credit risk management practices be central to bank operations due to their positive effect on financial performance. However, caution should be taken and strike a balance on mix and concertation in the facilitation of all studied variables, as credit risk assessment & approval and credit risk monitoring and supervision negatively affect banks’ liquidity.