Credit Risk Identification and Loan Portfolio Quality in Uganda’s Commercial Banking Sector: The Moderating Effect of Adverse Selection
The study examines the moderating effect of credit risk identification and profiling on loan portfolio quality in Uganda’s Commercial Banking Sector by focusing on a survey of selected banks. Guided by a pragmatic philosophy blending both qualitative and quantitative approaches, the study adopted a cross-sectional survey design on a sample of 207 participants drawn from a population of 427 across 12 departments within 7 commercial banks. Quantitative data were sought using a self–administered questionnaire from 204 participants, while qualitative data were collected using an interview guide from 3 key informants. Quantitative data were processed using SPSS (Version 25) and exported to JASP version 0.19.30 software to perform factor analysis and run Structural Equation Models (SEM). Data analysis was done using SEM regression for the direct relations, while Hierarchical Moderated Multiple Regression analysis was employed to examine the moderating effect of adverse selection on credit risk identification and loan portfolio quality. Study findings indicate that Credit risk identification significantly predicted loan portfolio quality before and after moderation with adverse selection. In particular, CRI showed a prediction power of β = 0.271, p<0.05 before moderation with adverse selection. Upon moderation, results indicate that adverse selection significantly moderated the effect of Credit risk identification and profiling on loan portfolio quality in commercial banks with interaction terms of CRI×ADS = -0.353, p<0.01. The study concludes that Credit risk identification and profiling significantly predicted loan portfolio quality and that adverse selection significantly moderates the effect of credit risk identification on loan portfolio quality. The study recommends that commercial banks should intensify efforts and tactics employed in underwriting loans, especially at the inception of the loan process.