Effects of Credit Policy on Financial Performance of Savings and Credit Cooperative Societies at Premier Credit Organisation in Kampala Uganda

ABSTRACT 

The purpose of this study was to investigate effects of credit policy on financial performance of savings and credit cooperative societies at premier credit Organisation in Kampala Uganda. The specific objectives were to establish the effects of credit policy on the financial performance of SACCOs , examine the influence of credit policy on the financial performance of SACCOs and find out the financial performance of savings and credit cooperative societies at premier credit Organisation in Kampala Uganda. Efficient credit policy influences sharing of information among financial institutions about borrowers, stabilizes interest rates, reduces nonperforming loans, increases deposits and increases credit extended to borrowers. In Uganda, credit management became widely adopted by regulated SACCOs to mitigate loan defaults and improve financial performance. This study sought to fill the existing knowledge gap by answering the question what is the effect of credit policy on financial performance of SASRA regulated SACCOs in Kampala. The study adopted correlation research design that consisted a population of all 40 SASRA Regulated SACCOs registered under the Societies Act in Kampala, Uganda. The study employed purposive sampling technique in identifying the SACCOs and the respondents from the sampled SACCOs. A multivariate regression model of financial performance versus credit policies was applied to examine the relationship between the variables. The study revealed that regulated SACCOs had adopted credit standards as a credit policy and credit tenn policy loan ratio in determination of how much a client would borrow. The study revealed that regulated SACCOs were also applying collection policy, considering non-performing loans and total loans, loan—loss provision coverage ratio and application of credit policy which increased Return on Assets (ROA) for the regulated SACCOs to a great extent. From the regression results, use of collection policy (Default Rate) led to significant increase in ROA of regulated SACCOs indicating that lowering nonperforming loans to total loans would significantly lead to increase in profitability Data was also analyzed and presented with the aid of statistical package for social sciences (SPSS). The findings indicated that credit policy significantly affect financial performance. In order to recover cash lost the management should take key issues on customer assessment and evaluation. The SACCO management should develop credit procedures, policies and analytical capabilities. VIII

TABLE OF CONTENTS

DECLARATION

APROVAL H

DEDICATION

ACKNOWLEDGEMENT iv

ABBREVIATIONS AND ACRONYMS v

ABSTRACT viii

CHAPTER ONE 1

INTRODUCTION 1

1.lBackground to the Study 1

1.2 Statement ofthe problem 3

1.3 Purpose ofthe study 4

1.4 Research Objectives 4

1.5 Scope ofthe Study

1.6 Significance ofthe Study 5

CHAPTER TWO 6

LITERATURE REVIEW 6

2.0 Introduction 6

2.1 Theoretical Review 6

2.1.1 Asymmetric Information Theory 6

2.1.2 Transactions Costs Theory 7

2.1.2 The SC’s Model of Client Appraisal 7

2.2 Conceptual Framework 8

2. 3 Determinants of Financial Performance in Deposit Taking SACCOs 8

2.3.1 Credit Standards .8

2.3.2 Credit Terms 9

2.3.3 Collection Policy 9

2.3.4 Capital Adequacy 10

2.3.5 Loan-loss Provision Policy 10

2.4 Empirical Review 11

2.5 Summary and Conclusion 13

CHAPTER THREE 14

METHODOLOGY 14

3.0 Introduction 14

3,1 Research design 14

3.2 Target Population 14

3.3 Data collection 15

3.4 Data Analysis 15

3.5.1 Operationalization of Variables 17

3.5.2. Test of Significant 17

CHAPTER FOUR 18

DATA ANALYSIS AND PRESENTATATION OF FINDINGS 18

4.0 Introduction 18

4.1 Descriptive Statistics 18

4.2 Diagnostic Statistics 20

4,3 Credit Policy and Financial Performance 21

4.4 Demographic Characteristics 22

4.4.1 Duration the SACCO has been in Operation 22

4,4.2 Level of Employment 23

4.4.3 Duration Worked in the Organization 23

4.4.4 Tier ofthe SACCO .24

4.5 Sample Characteristics 25

CHAPTER FiVE 29

SUMMARY, CONCLUSION AND RECOMMENDATION 29

5.0 Introduction 29

5.1 Summary of Findings 29

5.2 Conclusions 30

5.3 Recommendations 31

REFERENCES 32

APPENDIX 36

SURVEY QUESTIONNAIRE 36