Determining the Latent Correlation of Financial Disclosure and Non-Performing Loans of Commercial Banks in Western Uganda using Structural Equation Modelling

Abstract

Non-performing loans have been an issue that has hampered the functioning of commercial banks across the world. Using the liability management theory to evaluate the impact of financial transparency on non-performing loans of commercial banks in Western Uganda. A mixed-method approach was used. A sample of 232 respondents was obtained from a population of 550 persons using stratified, purposive, and simple random sampling methods. There were 195 responses from three commercial banks, yielding an 84.1% response rate. The hypotheses were examined, and the results demonstrated a substantial positive association between financial transparency and non-performing commercial bank loans. Six participants were carefully chosen from three commercial banks and interviewed utilizing interview guidelines. Using Nvivo software and Miles & Huberman (1994) approaches, interview data was managed and analyzed, which revealed that that commercial banks are not currently under investigation for accounting irregularities, they were also practicing segment reporting to show the performance of different segments, there was also transparency in disclosing transactions in banks, there was also timely reporting, and finally management discussion and analysis. The conclusion was that banks had internal controls for the management and prevention of NPLs, and board members had put in place mechanisms and controls to manage and prevent non-performing loans, but some of the internal controls instituted were not followed by management, causing commercial banks to continue to have non-performing loans. Based on the study's findings and conclusions, the study recommends that commercial banks implement strong internal control systems to enable them to deal with loopholes that result in non-performing loans, as it has been discovered that having good financial disclosures in place, such as internal controls, reduces loan performing loans and the reverse is true.

Key Words: Commercial Banks, Financial Disclosure, , Latent Correlation, Non-performing loans

DOI: 10.7176/RJFA/16-2-03

Publication date: February 28^th 2025