Higher management intervention in the decision making of loans approval in banks and financial institutions

Afuni, Manir. (2002). Higher management intervention in the decision making of loans approval in banks and financial institutions PhD Thesis, Graduate School of Management, The University of Queensland.

       
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Author Afuni, Manir.
Thesis Title Higher management intervention in the decision making of loans approval in banks and financial institutions
School, Centre or Institute Graduate School of Management
Institution The University of Queensland
Publication date 2002
Thesis type PhD Thesis
Supervisor Dr Arthur D Shuhnan
Total pages 342
Collection year 2002
Language eng
Subjects L
350101 Financial Accounting
720403 Management
Formatted abstract
Australian banks and financial institutions, like those all over the world, are suffering from poor decisions to loan to companies that collapsed (Boyd, 1992). Though the losses were most acute in 1990 and 1991, increases in competition have led to higher tolerance to non-performing loans, and the emergence of new banks and financial institutions led to lower standards by the banks and their acceptance of higher level of credit risk (McGoldrick and Greenland, 1992).

While most previous research (Altman, 1980; Eisenreich, 1981; and Weaver, 1987) has concentrated on the formulas or sets of rules that loan officers should follow, this research examines the unwarranted interference in the loan approval decision making process by the banking institution's higher management. It examined the nature of and the causes of this interference, and its overall effect on the institution's performance in the long run.

Before a model of management intervention could be developed, a pilot study was used to establish that the phenomenon exists; that is managers do intervene in the loan approval process. The pilot study confirmed that intervention does occur, and provided some insights into what some of the contributing factors might be.

Altman's (1980) commercial lending process model is considered in this research as the base model after modification to allow for the intervention dimension. Altman's model is based on four steps: application for a loan; credit evaluation; loan review; and, repayment performance. The model was modified to allow for the intervention dimension before the decision is made, during the decision, and after the decision is made.

The studies conducted for this thesis attempt to throw some light on the factors leading to intervention in the decision making of loan approvals across cultures, and at different levels within the organization. The study examined the question of existence of intervention in general at two different stages of decision making, that is before the decision had been made and after the decision had been made. The study also examined intervention for loans within participants' authority level, and intervention for loans outside participants' authority level.

More specifically, the study examined the perceived causes of intervention expressed by officers and managers, across Australian and Kuwait cultures. Differences across participants' position within the organization were also considered to be important in providing an understanding for the causes of intervention. The predicted differences were initially based on cultural differences. It was expected that because the power distance is greater in Kuwait than Australia, and because of "wasta", Kuwaiti participants, relative to the Australian participants, would rate superiors' personal interest in the loan/applicant and applicants' high public profile as important factors for intervention. This was indeed the case, and provided some evidence on the influence of cultural norms on the decision making process.

In addition to those cultural differences the study examined the link between decisions and variances on the accessibility, availability and packaging of information. The link between decision making of loans approvals and the amount of information available to both superior and subordinate, and, the link between decision making of loans approval and the difference in packaging of information between superiors and subordinates. Generally the results did not support the link between decision making of loan approvals and access to different information between the superior and the subordinate. However, the results provided some evidence of the influence of amount of information on decision making, and the influence of different packaging on decision making. Superiors were seen as more likely to intervene in the loan decision when they have more information than subordinates about the loan or about the applicant. Superiors also reported that they are more likely to intervene in the loan decision when information was packaged differently to them than to subordinates. This patterns held for loans within participants' authority level and outside participants' authority level, before the decision had been made and after the decision had been made.

The study also examined the link between decision-making and rewards. More specifically the study examined the link between decision making of loan approvals rewards being attached to the number or amount of loans approved, rewards being attached to the number of performing loans, and, rewards being attached to turning down loan applications. Results provided support only for the hypothesis that superiors are seen as more likely to intervene in the loan decision when there are employee performance rewards attached to the number or amount of loans approved, and superiors are more likely to intervene in the loan decision when there are employee performance rewards attached to the number of performing loans. This pattern was particularly strong when the subordinate had made an initial decision and for those loans within superiors' authority level.

The link between decision-making and rewards was further examined through the study. It examined the link between decision making and rewards being attached to the decision, the link between decision making and superiors' personal interest in the loan or applicant, and the link between decision making and superiors' fiduciary interest in the loan or applicant. Results generally provided support for the hypothesis that superiors are more likely to intervene in the loan decision when there are rewards attached to the decision and superior is after those rewards. Results also supported the hypotheses that superiors are more likely to intervene in the loan decision when they have personal interest in the loan or applicant, and that superiors are more likely to intervene when they have fiduciary interest in the loan or applicant.

The last set of questions in the study examined the link between decision making and internal processes within the organization. Internal processes are defined as those practices within the bank that governs the loan decision process and its outcome after the decision is made. More specifically, the study examined the link between intervention in the loan decision and the existence of a pre-set process of loan assessment, the link between the loan decision and subordinates being informed about the loans outcome in the long run, and the link between intervention in the loan decision and subordinates' follow-up of the progress of the loan through its life, for both loans within participants' authority level and outside participants' authority level. Results were inconsistent: there was support for the hypothesis that superiors are more likely to intervene in the loan decision when subordinates follow the progress of the loan through its life, but there was no support for the other hypothesis which generally rules out the link between intervention in the loan decision and internal processes within the organization.

The findings of this research have major implications at both theoretical and practical levels. First, with respect to the development of a commercial lending model, this research added key dimensions to the existing model by embodying new model components, and expounding theoretical relationships between those components. Second, loan decision process can be more efficient by implementing a few changes regarding standardization and automation of information, and by setting performance targets.

Keyword Loans
Banks and banking

Document type: Thesis
Collection: UQ Theses (RHD) - UQ staff and students only
 
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Created: Fri, 24 Aug 2007, 17:54:55 EST