The Effect of Lending Policy and Customer Retention in Centenary Bank-Kabalagala Branch

ABSTRACT 

This study was designed to find out the relationship between lending policy and customer retention in finance Institutions (Fls) in Uganda taking Kabalagala Branch as a case study. It describes how credit policy has an effect on customer retention in Fis. The study used both qualitative and quantitative methods through questionnaire and semi structured interviews. A simple random sampling design was used to select respondents from the clients and purposive sampling was used to select staff respondents. The study covered 20 respondents and data was collected with the help of questiom1aires and an interview guide. Data presentation was done using tables showing frequencies and percentages. Data analysis was done using a computer package of SPSS. fhe findings were that Centenary Bank has lending policies in place which it was using, that he level of client dropout was relatively high (moderate) and that credit policy and customer •etention had a negative relationship as evidenced from Pearson con-elation coefficient of r=- l.803. The results indicated that the increased client dropouts were as a result of high interest ates put in place as a credit policy forcing bon-owers to join other financial institutions. ['he study recommended that interest rates should be revised; clients should be given a grace ,eriod in case they fail to repay their loan in time, need for periodic review of credit policy nd training of staff Clients also recommended the encouragement of individual loans so as to prevent loyal clients from being penalized for those members of the group who fail to fulfil their loan obligations.

TABLE OF CONTENTS

DECLARATION ...................................................................................................................... i

APPROVAL ............................................................................................................................. ii

DEDICATION ....................................................................................................................... iii

ACKNOWLEDGEMENT ..................................................................................................... iv

LIST OF ABREVIATIONS AND ACRONYMS ................................................................. v

TABLE OF CONTENTS ....................................................................................................... vi

LIST OF TABLES .................................................................................................................. xi

LIST OF FIGURES ............................................................................................................... xii

ABSTRACT ......................................................................................................................... xiii

CHAPTER ONE: ..................................................................................................................... 1

NTRODUCTION ......................................................................................... : ......................... 1

1.0 Introduction ..................................................................................................................... 1

l. lBackground to the study ................ , .................................................................................. 1

1.2 Problem Statement .......................................................................................................... 4

1.3 Purpose of the study ........................................................................................................ 5

1.4 Objectives of the study .................................................................................................... 5

1.5 Research questions .......................................................................................................... 5

1.6 Scope of the study ............................................................................................................ 5

1.6.1 Geographical scope ....................................................................................................... 5

1.6.2 Time scope .................................................................................................................... 6

1.7 Significance of the study ................................................................................................. 6

CHAPTER TWO ..................................................................................................................... 7

LITERATURE REVIEW ....................................................................................................... 7

2.1 Introduction ..................................................................................................................... 7

2.2 Credit Policies used by Fis .............................................................................................. 7

2.3 Customer Retention ....................................................................................................... 15

2.3.1 Causes of withdraw of desertion ofmicrofinance clients ......................................... 19

2.3.1.1 In adapted products .................................................................................................. 19

2.3.1.2 Demand reasons ....................................................................................................... 21

2.3.1.3. Environmental reasons ........................................................................................... 24

2.3.2 How Customer retention can be enhanced ................................................................. 24

2.3.2.lListening to customers' complaints .......................................................................... 24

2.3.2.2 Creating a Complaint and Suggestion System ....................................................... 26

2.3.2.3 Employing a customer service representative ......................................................... 27

2.3.2.3 Implementing a Complaint Solicitation Strategy .................................................... 28

2.2.3.4 Instituting a Customer Advisory Board ................................................................... 28

2.3.2.5 Establishing a Customer Feedback Database .......................................................... 29

2.4 Relationship between credit facilities and customer retention ...................................... 30

2.4 Conclusion ..................................................................................................................... 33

CHAPTER THREE ............................................................................................................... 34

METHODOLOGY ................................................................................................................ 34

3.1 Introduction ................................................................................................................... 34

3.2 Research design ............................................................................................................. 34

3.3 Study area ...................................................................................................................... 34

3.4 Study population ............................................................................................................ 34

3.5.1 Sample size ................................................................................................................. 34

3.5.2 Sampling design ......................................................................................................... 35

3.6 Sources ofData .............................................................................................................. 35

3.6.1 Secondary data sources ............................................................................................... 35

3.6.2 Primary data sources ................................................................................................... 35

3.7 Data Collection Methods/ Instruments .......................................................................... 36

3.7.1 Questionnaire .............................................................................................................. 36

3.7.2 Interview guide ........................................................................................................... 36

3.7.3 Observation ................................................................................................................. 36

3.8 Data processing, analysis and presentation ................................................................... 36

3.8.1 Data processing ........................................................................................................... 36

3.8.2 Data analysis ............................................................................................................... 36

3.8.3 Data Presentation ........................................................................................................ 37

3.9 Limitations of the study ................................................................................................. 37

CHAPTER FOUR ................................................................................................................. 38

DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS ..... 38

4.1 Introduction ................................................................................................................... 38

4.2. Background characteristics of the respondents; ........................................................... 38

4.3 Credit policies used by Centenary Bank ....................................................................... .42

4.3.l Centenary Bank has a credit management committee that is responsible for

reviewing and monitoring risk management policies ......................................................... .42

4.3.2 Application forms are used by clients applying for credit ........................................ .43

4.3.3. Centenary Bank bases on the value of security to advance loans ............................ .44

4.3.5 The character of the clients is considered when processing a loan for a client ......... .46

4.3.6 Findings on capacity as a mode of assessing clients ................................................. .47

4.3.7 Centenary Bartle has an upper credit limit. ................................................................ .48

4.3.8 The terms of getting loans from Centenary Bank are favorable ................................. 49

4.3.9 The Nature of the business operated by the client is considered before extending the credit .......................................................... 50

4.3.10 Findings on whether the institution extends a satisfactory credit period to the clients.51

4.4 Level of Customer retention in Centenary Bartle .......................................................... 52

4.4.1 Centenary Bank keeps client's records ....................................................................... 52

4.4.2 Rate of desertion of the clients ................................................................................... 53

4.4.3 The clients of this institution have on average been getting services for the last three years ........................................ 54

4.5 The relationship between credit policy and customer retention in Centenary Bank .... 55

CHAPTER FIVE ................................................................................................................... 57

SUMMARY, CONCLUSION AND RECOMMENDATIONS ......................................... 57

5.1 Introduction ................................................................................................................... 57

5.2 Summary of major findings ........................................................................................... 57

5 :3 Conclusion ..................................................................................................................... 5 8

5.4 Recommendations and suggestions ............................................................................... 59

REFERENCES ...................................................................................................................... 61

APPENDICES ........................................................................................................................ 65

APPENDIX I: QUESTIONNAIRE .................................................................................... 65

APPENDIX II: INTERVIEW GUIDE ................................................................................ 71

APPENDIX III : BUDGET ................................................................................................. 72

APPENDIX IV: WORK SCHEDULE ................................................................................ 73