Credit Risk Management and Loan Performance on Microfinance Institutions; A Case Study of Pride Microfinance Kabalagala Branch

ABSTRACT

The concept ofMicrofinance in Uganda is one of the most developed in the Sub-Saharan Africa. However, given the importance of credit risk in microjInance functioning, the efficiency of Microfinance Risk Management which includes techniques, methods, processes, procedures,

activities and incentives is expected to sign~Icantly influence its loan performance. This study therefore sought to determine the relationshz~ between credit risk management and loan performance in inicrofinance institutions (MFIs,) in Uganda; a case of Pride Microjinance, Kabalagala Branch. A descriptive research design was adopted. The target population comprised

twelve MFIs and a sample size of 30 respondents obtained by purposively sampling the respondents from staff members ofpride microjmnance, Kabalagala branch. Data collection was clone using questionnaires and analyzed using SPSS where descriptive and inferential statistics were conducted. The study found a positive and statistically sign~flcant relationshz~ between credit

risk environment, credit appraisal process, credit administration, measurement and monitoring, internal control over credit risk and loan performai~ce in the microfinance bank’s the senior management in the MFIs should develop policies andprocedures, establish overall credit limits, have a system for monitoring the condition of individual credits and an independent internal control system for conducting ongoing assessment of the microjinance ‘s credit risk management process,

TABLE OF CONTENTS

DECLARATION.

APPROVAL ii

DEDICATION iii

ACKNOWLEDGEMENT iv

TABLE OF CONTENTS v

LIST OF TABLES viii

LIST OF ACRONYMS ix

ABSTRACT x

CHAPTER ONE 1

INTRODUCTION 1

1.0 Introduction

1.1 Background to the Study 1

1 .1 1-listorical Perspective 1

1 .1 .2 Theoretical Perspective 2

1 .1 .3 Conceptual Perspective 2

1 .1 .4 Contextual Perspective 3

1.2 Statement of the Problem 4

1.3 Purpose of the Study 6

1 .4 Specific objectives 6

1.5 Research questions 6

1.6 Scope of the Study 6

1 .6.1 Content scope 6

1.6.2 Geographical Scope 6

1.6.3 Time scope 7

1.7 Significance of the study 7

1.8 Operational definition of key terms 7

CHAPTERTWO 8

LITERATURE REVIEW 8

2.0 Introduction 8

2.1 Theoretical Review 8

V

2.2 Conceptual Framework .1 1

2.2 Review of Related Literature 20

2.3 Relationship between credit risk management and bank Profitability 24

2.4 Empirical Review 25

2.5 Research Gap 26

CHARPTER THREE 28

METHODOLOGY 28

3.0 Introduction 28

3.1 Research design 28

3.2 Area of the study 28

3.3 Population of the study 28

3.4 Sample size 29

3.5 Data collection sources 29

3.6 Research instruments 29

3.7 Data collection methods 29

3.8 Data analysis 29

3.9 Validity and Reliability of instruments 30

3.9.1 Validity of instruments 30

3.9.2 Reliability of Instruments 30

3.10 Ethical Considerations 31

3.11 Limitations of the study 31

CHAPTER FOUR 32

DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS 32

4.0 Introduction 32

4.1 Response Rate 32

4.2 Demographic characteristics of the respondents 33

4.2.1 Gender of Respondents 33

4.2.3 Level of Education of the Respondents 34

4.2.4 Period of service in the Bank 35

4.3 Factor Analysis 36

4.4 Relationship between Variables .40

4.4.1 Relationship between Loan Appraisal and Loan Performance 40

4.4.2 Relationship between Financial Viability and Loan Performance 40

4.4.3 Relationship between Technical Feasibility and Loan Performance 41

4.4.4 Relationship between Credit Rating and Loan Performance 41

4.5 Relationship between Other Risk Management Techniques and Loan Performance 41

4.5.1 Relationship between Risk Transfers with Loan Performance 41

4.5.2 Relationship between Risk Diversification and Loan Performance 41

4.5.3 Relationship between Risk Retention and Loan Performance 41

CHAPTER FIVE 42

SUMMARY OF THE FINDINGS, CONCLUSION AND RECOMMENDATIONS 42

5.0 Introduction 42

5.1 Interpretation and Discussion of Results 42

5.2.1 Examining the Relationship between Loan Appraisal and Loan Performance 42

5.2.2 Examining the Relationship between Financial Viability, Financial Analysis and Loan

Performance 42

5.2.3 Examining the Relationship between Technical Feasibility and Loan Performance 43

5.2.4 Examining the Relationship between Credit Rating and Loan Performance 43

5.3 Examining the Relationship between other Risk Management Techniques and Loan

Performance 44

5.3.1 Examining the Relationship between Risk Transfer and Loan Performance 44

5.3.2 Examining the Relationship between Risk Diversification and Loan Performance 44

5.3.3 Examining the Relationship between Risk Retention and Loan Performance 44

5.4 Conclusions 45

5.5. Recommendations 45

5.6 Areas for Further Research 47

REFERENCES 48

APPENDICES .55