Thesis:

Influence of credit management practices on loan performance of Islamic banks in Mogadishu, Somalia

In light of the substantial losses faced by financial institutions in Somali, effective credit management is imperative to ensure the success of Islamic banks in loan advancements. This research analysed the influence of credit management practices on the loan performance of Islamic banks in Mogadishu, Somalia. The study evaluated the effects of credit policy, credit appraisal, and collection policy on the loan performance of three prominent Islamic commercial banks: Amal Bank, Salam Bank, and Dahabshil Bank. The theoretical framework that guided this research includes the moral hazard theory, the theory of self-efficacy, and the information sharing theory. A descriptive research design was adopted, with a census study involving 72 employees from the credit departments of the three chosen Islamic banks. Data for the study were collected through questionnaires and analyzed using descriptive statistics. Multiple regression analysis was applied, and the findings were presented through graphs and tables. The study findings revealed significant and positive associations between credit policy and loan performance, credit appraisal and loan performance, as well as collection policy and loan performance of Islamic banks in Mogadishu, Somalia. The research concludes that a well-defined credit policy is foundational for shaping the performance of Islamic banks. Ensuring accessibility to the credit policy by all staff members is crucial, contributing to optimal bank performance. Additionally, obtaining borrowers' credit history from other financial institutions is a pivotal strategy for assessing creditworthiness before loan extensions. The capacity of borrowers to repay from their own sources is identified as a key factor enhancing the extension of loans by Islamic banks. Islamic banks prioritize borrowers' ability to repay from their own sources, aligning with Islamic finance principles. This approach reduces loan default and non-performance, ensuring financial sustainability. Collateral demand in loan appraisals is a risk mitigation strategy, minimizing financial risk and fostering responsible borrowing behavior. Islamic banks' rigorous debt collection approach ensures timely repayment, while penalties on loan defaults deter delinquency and promote a healthier credit environment. Auctioning customers' properties in case of default demonstrates a structured debt recovery process. Legal recourse is used to recover debts, enhancing credibility and deterring potential defaulters. To enhance credit management practices, Islamic banks are encouraged to prioritize transparency and accessibility in their credit policies. Regular reviews of the credit policy, aligning it with emerging market trends, regulatory shifts, and evolving economic conditions, are paramount. Moreover, incorporating ethical and Sharia-compliant components into the credit policy is recommended to strengthen the overall performance of Islamic banks in Mogadishu, Somalia. Islamic banks should also consider incorporating ethical and Sharia-compliant components into the credit policy. This includes a comprehensive assessment of a borrower's financial net worth, adherence to Islamic principles, and the economic viability of proposed ventures. This alignment with Sharia principles not only enhances the bank's reputation but also ensures a consistent commitment to ethical banking practices. Islamic banks should explore avenues to enhance customer education and communication regarding the credit policy.