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Strengthened Shareholders' Rights, Increased Risk: The Paradox of Rising Non-Performing Loans in Ugandan Commercial Banks
Author: Muniru Sewanyina, David Nyambane, Michael Manyange, Sunday Arthur
Publisher: F1000 Research
Published: 2025
Section: Faculty of Business and Management
Abstract
The surge in non-performing loans (NPLs) critically threatens the stability of commercial banks, especially in developing economies. Corporate governance is widely seen as a key mitigating factor. However, the specific mechanisms and causal pathways through which governance attributes such as shareholders’ rights influence NPL levels remain inadequately understood, particularly within the unique institutional context of Sub-Saharan Africa. This investigation employed a cross-sectional, mixed-methods design focusing on commercial banks in Western Uganda. Quantitative data were collected from 195 bank employees and board members using structured questionnaires, with participants selected via stratified, purposive, and simple random sampling techniques. This data was analyzed with SPSS version 28, applying descriptive statistics, Pearson correlation, and simple linear regression. Concurrently, qualitative data were gathered through semi-structured interviews with six senior bank officials and analyzed thematically using NVivo software to provide contextual depth and nuance. The quantitative analysis revealed a statistically significant, strong positive relationship between board accountability and the reduction of NPLs (r = .779, p < .05). In contrast, a significant positive relationship was also found between shareholders’ rights and the perceived level of NPLs (β = .718, p < .05), suggesting a complex and potentially counterproductive role. Qualitative findings triangulated these results, identifying two key mechanisms: the reduction of improper board interference in loan approval processes and proactive board engagement in NPL resolution. The study concludes that robust shareholders’ right is a critical determinant for mitigating NPLs, whereas the effect of shareholders’ rights is ambiguous and potentially negative. A well-functioning, accountable board that aligns management actions with long-term bank stability is paramount. The findings underscore the necessity of implementing holistic governance reforms that balance empowered shareholders with strong ethical safeguards to ensure prudent credit risk management.Background
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