Author: Sara Eliufoo (University of Dar es Salaam, Tanzania), Prof. Henry Chalu, PhD (University of Dar es Salaam, Tanzania) and Judika Loti King’ori, PhD (University of Dar es Salaam, Tanzania)
Abstract: This study examined the relationship between banks loan management practices and bank stability. It focuses on 45 banks located in Tanzania, using the Agency Theory and Credit Risk Management Theory. The study used the cross-sectional research design, focusing on staff from all 45 banks licenced by the Bank of Tanzania. A representative sample of five officer from each bank yielded 220 respondents. The selection based on their specialized tasks and responsibilities within the specific banking institutions, including key positions such as Finance Officer, Human Resource Officer, Internal Auditor, Loan Management Officer, and Risk Officer. The study used a semi-structured closed-ended questionnaire as source of data. The study used the Partial Least Squares Structural Equation Modelling (PLS-SEM) in data analysis. Based on the findings, the study strongly supported the guiding hypotheses that stringent loan diversification, effective loan loss provisioning and minimized non-performing loans positively contribute to enhanced bank stability. The study recommended that banking institutions in Tanzania and similar developing economies should strengthen their loan management practices, particularly by enhancing loan diversification and implementing stringent loan loss provisioning measures. Regulatory bodies should continue to enforce and monitor these practices to ensure that banks effectively manage risks and maintain financial stability. Finally, policymakers and regulatory agencies should provide clear guidelines on loan diversification and ensure the adoption of robust credit evaluation mechanisms to minimize defaults.