Assessing the Effects of Credit Risk Management Controls on the Profitability of Commercial Banks: A Case of Stanbic Bank Zambia Plc

Abstract

This study investigated the effects of Credit Risk Management Controls (CRM) on profitability, measured by Return on Assets (ROA), at Stanbic Bank Zambia Plc, with particular emphasis on the moderating role of Loan Portfolio Quality (LPQ). Despite the increasing importance of credit risk management in maintaining financial stability and profitability within commercial banks, profitability outcomes continue to vary across institutions due to differences in the effectiveness of CRM practices and the quality of loan portfolios. Consequently, the study sought to determine the effect of CRM on ROA and examine whether LPQ influences the strength of this relationship. The study was anchored on Risk Management Theory and Modern Portfolio Theory, which posit that effective risk management and portfolio quality are essential determinants of financial performance. The study adopted a mixed methods case study design guided by a pragmatist research philosophy. Quantitative data consisted of monthly time-series observations covering the period 2018–2024 and were obtained from audited financial statements, internal reports, and institutional records of Stanbic Bank Zambia Plc. Qualitative data were collected through semi- structured interviews with key informants involved in credit risk management and related functions. Quantitative data were analysed using descriptive statistics, correlation analysis, moderation regression analysis, and diagnostic tests in EViews 13, while qualitative data were analysed using thematic analysis. The study model examined the direct effect of CRM on ROA and the moderating effect of LPQ through an interaction term between CRM and LPQ. The findings revealed that CRM had a positive and statistically significant effect on ROA (β = 0.024, p < 0.001), indicating that improvements in credit risk management practices enhanced profitability. The model demonstrated strong explanatory power (R² = 0.981), suggesting that CRM accounted for a substantial proportion of the variation in ROA. The moderation analysis further revealed that LPQ significantly moderated the relationship between CRM and ROA, as evidenced by a positive and statistically significant interaction effect (β = 0.001, p < 0.001). Although LPQ did not exert a statistically significant direct effect on ROA (β = 0.009, p = 0.203), it strengthened the positive impact of CRM on profitability. Diagnostic tests confirmed the robustness of the model, with no evidence of non-normality (Jarque–Bera p = 0.206), heteroscedasticity (Breusch–Pagan p = 0.123), serial correlation (Breusch–Godfrey p = 0.130), or model specification errors (Ramsey RESET p = 0.773). The qualitative findings complemented the quantitative results by revealing that borrower assessment, collateral management, and loan monitoring were perceived as critical drivers of profitability, while macroeconomic conditions and borrower-related challenges were identified as factors affecting CRM effectiveness. The study concludes that CRM significantly enhances profitability and that the effectiveness of CRM is strengthened by high levels of LPQ. It therefore recommends that Stanbic Bank Zambia Plc strengthen borrower assessment procedures, enhance portfolio monitoring systems, and prioritise strategies aimed at maintaining high-quality loan portfolios. The study contributes to knowledge by empirically demonstrating the moderating role of LPQ in the CRM–ROA relationship within the Zambian banking sector. Keywords: Credit Risk Management Controls, Loan Portfolio Quality, Profitability, Return on Assets, Commercial Banks, Zambia.