Effectiveness of Credit Risk Management in Reducing Non-Performing Loans of Commercial Banks in Tanzania

This study examined how credit risk management strategies impact non-performing loans (NPLs) in Tanzanian commercial banks over the period from 2015 to 2024. Focusing on three core variables, credit referencing, underwriting standards, and loan recovery, while also considering bank size and liquidity as control factors, the study employed a random-effects regression model with Driscoll-Kraay standard errors to analyse annual panel data from eleven major banks. Theoretically, this study is grounded in Asymmetric Information Theory and Credit Risk Theory, explaining how information gaps and unmanaged default risk contribute to NPLs. The findings reveal that proactive and consistent use of credit referencing systems and stricter underwriting standards both play a significant role in reducing loan defaults. In contrast, loan recovery efforts were found to be largely reactive, as banks intensified these strategies only in response to rising NPLs rather than as a routine preventive measure. Notably, the analysis showed that bank size and liquidity did not have a meaningful impact on NPL levels, highlighting that operational discipline and risk management practices are more crucial than structural attributes. The study recommends that banks in Tanzania enhance their integration of credit reference checks in loan processing, maintain rigorous and disciplined loan approval criteria, and shift towards more systematic and preventive loan recovery frameworks. These recommendations are intended to support bank managers, regulators, and policymakers in making informed decisions that will foster greater financial stability and reduce credit risk across the Tanzanian banking sector.