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Alternative recovery techniques to foreclosures (workouts) are recently gaining
popularity in the banking sector in Tanzania. This study aims to assess workouts by
commercial banks in Tanzania on recovery of stressed secured loans. The study also
determines challenges and limitations of these workouts used by commercial banks
in Tanzania.
The study combined three theories namely; Theory of Information Asymmetry,
Adverse selection theory as well as Moral hazard theory which together explained
the theoretical point of view for this study.
Ten (10) banks were selected for the study. Data collection was done through banks
internal reports. Ten questionnaires were given to ten credit managers one from each
bank; all were dully filled and completed by the respondents. Data was analysed
through descriptive statistics to provide thorough understanding of the workouts and
the challenges there with. The study found out the workouts applied included loan
restructuring, loan refinancing, and transfer of loan to a new borrower, forbearance
and short Sale of the Property. However, these recovery techniques there are
challenges and limitations in encountered. These are related to court injunction, fund
deviation, incompetency and dishonesty in financial reporting as well as the Case of
Junior Liens. The study concluded that banks prefer loan restructuring to recover
their stressed loans and in cases where such workout is not allowed by the first lender
then loan refinancing is another commonly used workout. Forbearance is the least
workout used due to moral hazard risks associated with it. This study recommend
that banks should increase efficiency in loan underwriting processes, strategize on
increasing financial literacy to borrowers, and make efforts on applying other
alternative techniques of recovery rather than restructuring method. |
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