THE IMPACT OF CREDIT POLICY ON LOAN RECOVERY IN MICROFINANCE INSTITUTIONS. A CASE STUDY OF EFC UGANDA NDEEBA

BRANCH, KAMPALA

ABSTRACT

The study was carried out at EFC Uganda Limited with the purpose of investigating the impact of credit policy on loans recovery. The research objectives included; to establish the existing credit policies, to examine the contribution of loan recovery policies and to establish the relationship between credit policy and loans recovery.

The study used a descriptive research design where both qualitative and quantitative approaches of data collection were adopted using questionnaires and interview guides. Sample size of 63 respondents was selected using purposive sampling techniques.

The study found out that the existing credit policies in EFC Uganda included; identify client’s collateral, customer’s financial status, client’s credit history, client’s work history, loan size and period of loan. While the contribution of loan recovery policies included analyses credit requests, credit policies save time, provides framework for the entire management practices, guides bank officers who grant loans, evaluate clients credit worthiness and a stringent policy minimizes the cost of collection. As a result of credit policies, full recovery has been ensured, credit policies ensure that borrowers take amounts they are able to finance, credit policies reduce risk involved in unsecured lending, training of clients improves on the loan recovery, policies ensure low delinquency rate, simplified terms increase the number of loans and credit terms and policies ensure no default in loan repayment.

The study recommended that credit control policies should favor the organization clients especially the permanent clients. The management of organization also should reduce on the interest rate on loan charged on every client and even to extend the loan repayment period so as to give ample time for their clients to raise that required amount. Organization institution should revise on the credit control policies and make some changes where necessary. The top management of the organization should be willing to extend overwhelming support to loan department so as to ensure good financial performance.

CHAPTER ONE

INTRODUCTION

1.0 Introduction

This chapter covers the background of the study, statement of the problem, objectives of the study, research questions, scope of the study, significance, limitations and delimitations.

1.1 Background of the Study

According to Kakuru (2000) credit policy is a set of policy actions designed to minimize costs associated with credit while maximizing the benefit from it. Edminster (2010) defined credit policy as an institutions’ method of analyzing credit request and its decision criteria for accepting or rejecting applications. The objective of this policy is to have optimal recovery from debtors as a firm may follow a lenient or stringent credit policy.

On the contrary, Loan recovery (operational definition) refers to process and the rate at which the clients pay back the principal plus interest amount extended to them in form of loans, it is determined by repayment rate, portfolio quality ratios, profitability ratios, productivity and efficiency ratios and scale of depth of outreach.

Ideally, Microfinance institutions belong to a wider group of financial institutions regarded as semi formal financial institutions. These are institutions which are registered as non-government organizations performing financial functions of lending and taking deposits (Microfinance Act, 2003).

Besides, According to Ssewagudde (2000) credit policy provides parameters, defines procedures and directives that have been carefully formulated, administered from top and well understood at all institution’s levels. EFC Uganda undergoes a set of three procedures of evaluating credit applicants to establish whether or not loans should be granted, these are credit information, credit investigation and analysis in a bid to maintain proper credit standards, avoid excess risk and evaluate business opportunity. According to Michael Malan the managing director of campus can credit reference bureau (CRB), loan recovery is important in enabling lending institutions to clear their balance sheets in order to increase collection efforts to ease preparation of financial reports (The New Vision 15th September,  2010).

EFC Uganda was established in 2008. The company is a local microfinance institution (MFI) and a subsidiary of international organization blue financial services limited (Blue or The Group). It’s a lending MFI in 14 African countries. The group offers ethical and innovative financial services to formally employed hut under-banked and underserved employees with a range of products like personal loans, short term loans, education loans, home loans to mention but few.

Consequently, EFC Uganda employees a combination of three decision variable measures as were also defined by Pandey (1995) credit standards, credit terms and collection efforts. Credit standards (accessibility measures) are criteria to decide the types of customers for purpose of extending credit such as capital adequacy and asset quality. Credit terms are stipulations under which credit is granted, they specify the duration of credit and terms of payments by customers such as loan period and loan size. Collection efforts determine the actual collection period that is procedures that the institution follows to recover payments of past dues. Like phone calls and individual visits.

According to Mugisa (1995) bad quality loans (assets) not only erode the institution’s ability to recycle its financial resources but also threaten their survival and deprive the economy of a continuous flow of capital.

It is against this background that the researcher is prompted to carry out an investigation on the appropriateness and effectiveness of credit policy management put in place and also investigates the cause of the steady rise in default risk.

1.2 Statement of Problem

Like any other financial institution, EFC Uganda has credit policies as a way of administering loans. The policies have objectives of maximizing profits to the benefit of the shareholders as well. Since 2008, the institution faces hardships in loan recovery, portfolio at risk shifted from 0.38% to 0.51% in 2010 despite all the efforts of attaching assets to secure loans, building up equality loan portfolios and keeping the rate of deficit under control. The branch manager cited that EFC Uganda problem is as a result of inadequate application of the tools of credit policy management (EFC annual report 2010 by Gloria Kizanye) locking it into a large and increasing proportion of nonperforming loans. According to Mugisa (1995) bad quality assets (loans) not only erode the institution’s ability to recycle its financial resources but also threaten their survival and deprive the economy of a continuous flow of capital.

1.3 Objective of the study

The study was guided by both the general objective and specific objectives;

1.3.1 General objective to Study

To investigate the impact of credit policy on loans recovery in EFC Uganda Limited

1.3.2 Specific objectives

1. To establish the existing credit policies in EFC Uganda Limited.
2. To examine the contribution of loan recovery policies in EFC Uganda.

• To establish the relationship between credit policy and loans recovery of EFC Uganda

1.5 Research Questions

1. What are the existing credit policies in EFC Uganda?
2. What are the contributions of loan recovery policies in EFC Uganda?

• What is the relationship between credit policy and loans recovery of EFC Uganda?

1.6 Scope of the Study

The scope of the study covered the content scope, geographical and time scope as explained below;

1.6.1 Content scope

The study covered the impact of credit policy on loan recovery in microfinance institutions using EFC Uganda Limited Ndeeba branch, Kampala as a case study.

1.6.2 Geographical scope.

The study was carried out at EFC Uganda Limited which is in located in Ndeeba and it is just 2 Kilometers away from the city centre Kampala.

1.6.3 Time Scope

The study  covered a period of six years from 2010 and 2016. This period was chosen so as to provide recent and relevant data in relation to the study.

1.7 Significance of the Study

The government will also be informed on how to make policies, rules and regulations regarding credit policies in microfinance institutions that will help protect investors so as to encourage investments and spur economic growth.

To policy makers; the study findings will be of great benefit in formulation and implementation of policies related to credit policy.

This study will be of great relevance to the organization under study as well as other financial institutions. The non-financial business firms, whether manufacturing or service oriented shall also benefit from the research findings. This is because the result of the study shall enable the users especially banks to appraise its credit policies and to review its operations critically for more result oriented approach in the dealing with its credit facilities.

This study will be useful to all business enterprises involved in granting commercial credit and other users of the study by identifying the best credit policies.

The outcome of this study is expected to benefit many parties. The microfinance sector may benefit from the study because it may highlight the problems microfinance face due to non-performing loans.

The results of the study may also help other researchers who may be interested in doing further research in the same area of study. The findings of the study may also benefit students pursuing financial management courses. The study also adds to the body of knowledge in the finance discipline by bridging gaps in credit management practices.

This study may make several contributions to both knowledge building and practice improvement in credit management practices and loan performance.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter presents a review of the related literature which was analyzed following specific objectives that include credit policies, loan recovery, contribution of loan recovery policies and relationship between credit policy and loan recovery.

2.1. Theoretical Framework

Social Exchange Theory: This theory has been applied to social participation studies by various scholars. These include Blau (1964), Ekeh (1974) and Homans (1965). The basic assumption behind this theory is that behaviour is not random but purposive and goal directed, it is also held that behaviour is directed to achieving rewards and avoiding punishments. Blau (1964) further argues that behaviour is highly determined by fulfilling role expectations both in objectives desired and acceptable rules to obtain those objectives. In essence the main focus of the theory is to explain what transpires when two or more persons meet or associate.

It was stated by Homans (1965) that interaction occurs when individuals expect compensation equivalent to resources invested although not in the same form, on the other hand, Ekah (1974, p. 46) asserts that human assigns meaning to what they give out and increase or decrease their interaction with others on the basis of these interpretations. The impression we get from the above is that the theory of social exchange centres on behavior and interdependence among people.

In fact Homans (1965, p. 21) sees social behaviour as an exchange of activity tangible or intangible or more or less rewarding or costly between at least two persons. Homans argues that it is that exchange nature of social behaviour that has brought about the concept of social exchange. Social behaviour to a large extent therefore means social exchange. One can therefore argue that social exchange theory seeks to provide linkage between the study of everyday social life and the other theories of society. It is important in analysis of political dynamics or group dynamics. It improves the understanding of existing. That implies that it focuses on the processes of social life.

2.2. Conceptual Framework

Conceptual framework is a figure that indicates the independent variables , dependent variables and intervening variables. The study ought to invitigate the impact of credit policy on loan recovery in microfinance institutions using a case study of EFC Uganda Ndeeba branch Kampala.

Independent variables                                                                      Dependent variables

Intervening Variables

Source: Doug (2008)

The conceptual framework has the  independent variables, dependent variables and the intervening variables. The independent variables of credit policy on loan recovery include  credit policies such as credit standards, credit terms, collection efforts. Dependent variables of loan recovery like performing asset ratio and the  intervening variables such as  policies and procedures.

There is a linkage between credit policy and loan recovery and intervening variables. If the independent variables are effectively administered then loan recovery is likely to improve however, if they are poorly administered, loan recovery decline.

2.3 Existing Credit policies

A credit policy is an institutional method for analyzing credit requests and its decision criteria for accepting or rejecting applications (Girma 1996). Credit policy is important in the management of accounts receivables.

A firm has time flexibility of shaping credit policy within the confines of its practices. It is therefore a means of reducing high default risk implying that the firm should be discretionary in granting loans (Pandey, 1995). Policies save time by ensuring that the same issue is not discussed over and over again each time a decision is to be made. This ensures that decisions are consistent and fair and that people in the same circumstance get treated in the same manner (Khandkar and Khan, 2010)

According to Mc Naughton (1996), credit policy provides a frame work for the entire management practices. Written credit policies are the cornerstone of sound credit management, they set objectives, standards and parameters to guide micro finance officers who grant loans and manage loan portfolio. The main reach for policy is to ensure operation’s consistency and adherence to uniform sound practices. Policies should be the same for all and is the general rule designed to guide each decision, simplifying and listening to each decision making process. A good credit involves effective initiation analysis, credit monitoring and evaluation.

2.3.1 Credit Standards

This is a criteria used to decide the type of client to whom loans should be extended. Kakuru (2010) noted that it’s important that credit standards be basing on the individual credit application by considering character assessment, capacity condition collateral and security capital. Character it refers to the willingness of a customer to settle his obligations (Kakuru, 2000) it mainly involves assessment of the moral factors.

Social collateral group members can guarantee the loan members known the character of each client; if they doubt the character then the client is likely to default. Saving habit involves analyzing how consistent the client is in realizing own funds, saving promotes loan sustainability of the enterprise once the loan is paid.

Other sources of income. Other source should be identified so as to enable him serve the loan in time. This helps micro finance institutions not to only limit loans to short term projects such qualities have an impact on the repayment commitment of the borrowers it should be noted that there should be a firm evidence of this information that point to the borrowers character (Katcnde, 2010).

Capacity, this is subjective judgment of a customer’s ability to pay. It may be assessed using a customer’s ability to pay. It may be assessed using the customer’s past records, which may be supplemented by physical or observation. Condition, this is the impact of the present economic trends on the business conditions which affects the firm’s ability to recover its money. It includes the assessment of prevailing economic and other factors which may affect the client ability to pay (Kakuru, 2000) Collateral security, This is what customers offer as saving so that failure to honor his obligation the creditor can sell it to recover the loan. It is also a form of security which the client offers as form of guarantee to acquire loans and surrender in case of failure to pay; if borrowers do not fulfill their obligations the creditor may seize their asset (Girma, 1996).

According to Chan and Thakor (1987), security should be safe and easily marketable securities apart from land building keep on losing value as to globalization where new technology keeps on developing therefore lender should put more emphasis on it. In relation to the above, EFC has opted to use personal guarantors, saving port-folios, group lending schemes among others in order to ensure improved loan recovery.

2.3.2 Credit Terms

Ringtho (2010) observes that credit terms are normally looked at as the credit period terms of discount and the amount of credit and choice of instrument used to evidence credit. Credit terms may include; Length of time to approve loans, this is the time taken from applicants to the loan disbursement or receipt. It is evaluated by the position of the client as indicated by the ratio analysis, trends in cash flow and looking at capital position. Maturity of a loan, this is the time period it takes loan to mature with the interest there on. Cost of loan. This is interest charged on loans, different micro finance institutions charge differently basing on what their competitors are charging. The chartered institute of bankers and lending text (1993) advises lending institutions to consider amount given to borrowers. Robinson M.S (1994) pointed out that the maximum loan amount per cycle are determined basing on the purpose of the loan and the ability of the client to repay (including guarantee).

However, EFC has adopted the use of rendering professional advice on the use of credit, proper loan scheduling & rescheduling as well as adopting other strategies to avoid risks. EFC also has ensured that loan amounts match with cash patterns of clients.

2.3.3 Collection Efforts

Mc Naughton (1996) defines a collection effort as the procedure an institution follows to collect past due account. Collection policy refers to the procedures micro finance institutions use to collect due accounts. The collection process can be rather expensive in terms of both product expenditure and lost good will (Brighan, 1997).

Effort may include attaching mandatory savings forcing guarantors to pay, attaching collateral assets, courts litigation (Myers, 2010). Micro finance institutions may send a letter to such individuals (borrowers) when say ten days elapse or phone calls and if payment is not received with in thirty days, it may turn over the account to a collection agency (Myers, 2010).

Collection procedure is required because some clients do not pay the loan in time some are slower while others never pay. Thus collection efforts aim at accelerating collections from slower payers to avoid bad debts. Prompt payments are aimed at increasing turn over while keeping low and bad debts within limits (Pandey, 1995). However, caution should be taken against stringent steps especially on permanent clients because harsh measures may cause them to shift to competitors (Van Horn 1995).

In relation to collection efforts, EFC has adopted several strategies to ensure timely loan repayment for example clients are put on pressure to pay installments so as to meet the amount in time, also EFC has been charging personal guarantors in case of delayed loan repayments. EFC also has ensured that the collateral assets attached to the loan amount are at least twice the amount asked. EFC has also adopted a strategy of sending messages/notices to clients a day before payment is to be made. This has ensured that clients pay in time as a result of pressure.

2.4 The contribution of loan recovery policies in Microfinance institutions

Loan recovery policies analyze credit requests and its decision criteria for accepting or rejecting applications (Girn, 1996). Loan recovery policies are important in the management of accounts receivables. A firm has time flexibility of shaping credit policy within the confines of its practices. It is therefore a means of reducing high default risk implying that the firm should be discretionary in granting loans (Pandey, 1995).

Policies save time by ensuring that the same issue is not discussed over and over again each time a decision is to be made. This ensures that decisions are consistent and fair and that people in the same circumstance get treated in the same manner (Khandkar and Khan, 1998).

According to McNaughton (1996), loan recovery policy provides a frame work for the entire management practices. Most financial institutions have written loan recovery policies which are the cornerstone of sound credit management, they set objectives, standards and parameters to guide micro finance officers who grant loans and manage loan portfolio. The main importance of policies is to ensure operation’s consistency and adherence to uniform sound practices. Policies should always be the same for all and is the general rule designed to guide each decision, simplifying and listening to each decision making process. A good loan recovery policy involves effective initiation analysis, credit monitoring and evaluation.

Loan recovery policies are set of objectives, standards and parameters to guide bank officers who grant loans and manage the loan portfolio. Thus, they are procedures, guidelines and rules designed to minimize costs associated with credit while maximizing the benefit from it (Ahimbishwe, 2002).

The main objective of loan recovery policy is to have an optimal investment in debtors that minimizes costs while maximizing benefits hence ensuring profitability and sustainability of microfinance institutions as commercial institutions. The loan recovery policy of an organization may be stringent or lenient depending on the manager’s regulation of variables. There are three main variables namely credit terms, credit standards and credit procedures (Hulmes, 1992).

Managers use these variables to evaluate clients credit worthiness, repayment period and interest on loan collection methods and procedures to take in case of loan default. A stringent credit policy gives credit to customers on a highly selective basis. Only customers who have proven creditworthiness and strong financial base are given loans, the main target of a stringent credit policy is to minimize the cost of collection, bad debts and unnecessary legal costs (Pandey, 2001)

2.5 Relationships between credit policy and loan recovery

The loan recovery policy of an organization may be stringent or lenient depending on the manager’s regulation of variables. This area will enlighten the relationship between credit policy and loan recovery.

2.5.1 Credit standards and loan recovery

Good credit management provide the institution with a reasonable and adequate return on loans and capital employed primarily through improvement in operations efficiency this generates adequate internal resources to finance the institution’s growth (Pandey, 2000).

The institution may have tight credit standards that it may extend loan to the most reliance and financially strong customers such standards will result in no bad debt losses and less cost of credit administration (Pandey, 2000).

Pandey (1995) stressed that credit standards are criteria for selecting customers for credit; the fund may have higher credit standards that is extending loans to selected customers with good reputation or record. On the other hand customers have to be evaluated to see if they meet the standards set by the management before loans are extended to them. However, (Van Home, 1995) states that when an institution extends loan to only strongest customers, it will never have bad losses and will incur fewer administration expenses.

2.5.2 Credit terms and loan recovery

When borrowers are given small amount of money it will not be sufficient for business operations yet given too much money it is spent on non productive activities causing high non -loan repayment. The credit manager should check on the amount the customer is demanding for, whether it is too much or little. The chartered of bankers and lending text (2002) advises lending institutions on the amount to give a borrower. In relation to EFC, they use simplified terms increase the number of loans, matching loan amounts with cash patterns of clients have ensured that borrowers take amounts. They are able to finance hence loan recovery.

 2.5.3 Collection efforts and loan recovery

Collection efforts determine the actual collection period of the loan (Pandey, 2000) it is the supervision of the credit loans. The policy refers to procedure an institution or firm follows to obtain payment of past due. It may involve sending a letter to such clients when they are for instance, ten days past due data or phone calls, if payment is not received with thirty days court action may be taken. Collection procedures are needed because some clients do not pay their dues in time if firms carry out this policy, it will quicken recovery portfolio and hence reduce bad debts. However, it may not guarantee full recovery because some clients are slower in repayment while others never pay (Pandey, 1992). Credit policy decisions are based solely on borrower’s will and ability to recover loans, the amount of loan is therefore based on the client’s needs and assessed loan recovery ability of the enterprises.

Within EFC, management promotes financial education of borrowers so as to ensure that loans disbursed are purposely financed in economic income generating activity. The use of DMARK, issuing of notices, messages, phone calls and use of sustainable personal guarantors has promoted positive loan recovery.

CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter covers the research design, data type and sources, sampling size and sampling procedures, data collection methods and procedures, data processing and analysis, limitations and delimitations faced while conducting the study. It highlighted the means by which the study was conducted.

3.1 Research Design

Research design is a set of advance decisions that make up the master plan specifying the methods and procedures for collecting and analyzing the needed information (Opuko, 2000). A descriptive research design was used to explain the variables, a research methodology based on an in-depth investigation and it provided for a systematic way of looking at events, collecting data, analyzing information, and reporting the results. Both quantitative and qualitative data was used in this research design. According to Baron (2011), qualitative research design helps to capture qualitative data, based on qualitative aspects that may not be quantified. It aids in discovering the motives and desires or what people think and how they feel about a given subject or situation. This method involves an unstructured approach to inquiry and allows flexibility in all aspects of the research process. It is more appropriate to explore the nature of a problem, issue or phenomenon without quantifying it. While quantitative research is the systematic empirical investigation of observable phenomena via statistical, mathematical or computational techniques (Mugenda & Mugenda, 2003). According to Silverrman (2001), quantification gives greater confidence in the accuracy of conclusions derived from qualitative data; and it gives the reader a chance to think through the data on their own to cap on the researcher’s findings.

3.2 Data Type and Sources

This section consisted of data types and these included qualitative and quantitative data. Data sources include both primary and secondary as explained below;

3.2.1 Data Type

Both quantitative and qualitative data was collected for the study. Qualitative data considers the qualities of a certain phenomenon and is descriptive in nature while quantitative data refers to numerical information or statics of a particular phenomenon and is definitive in nature. In addition, this adopted mainly two sources of data that is primary and secondary data sources.

3.2.2 Data Sources

Data was collected from both primary and secondary source.

Primary source

Primary sources provide data that was collected by use of questionnaires and interview guide from the field. This was designed using likert scale and they was distributed to staff and clients in order to get their views about the impact of credit policy on loan recovery in microfinance institutions using EFC Uganda Ndeeba branch, Kampala as the case study.

Secondary Source

This source involved a review of textbooks, journals, Newspaper articles, internet and earlier researches on the problem.

3.3 Sample Size and Sampling Procedure

Sampling is a definite plan determined before data collection for obtaining a sample from a given population (Opuko 2000). It involves three decisions: who to be sampled, how many people to sample, and how to obtain the sample.

3.3.1 Sample Size

The researcher used a sample size of 63 respondents and these was categorized in the following manner, 5 from the senior management level, 8 from the human resource department, 10 customer care attendants, 15 banking officers, 15 credit officers and 10 research and development officers. This number was determined using the following derived from the following formula according to Kish (1965). The results are tabulated below;

Table 3:1 showing the Sample Size of respondents

Source: Primary Data 2017

Table above shows, population (63) of the study from which the researcher selected the sample size of 40. 15(23.8%) of the respondents was selected from Credit officers, another 15(23.8%) of the respondents was selected from Banking officers, 10(15.9%) of the respondents was selected from Research and development, also 10(15.9%) of the respondents was selected from Customer care attendants while 8(12.7%) of the respondents was selected from Human resource officers and only 5(7.9%) of the respondents was selected from the Senior management. This implies that majority of the respondents was selected from banking and credit officers. Therefore most of the information was got from respondents who had knowledge about the study under investigation.

3.3.2 Sampling Procedure

The researcher used a purposive sampling technique where managers, credit officers who have long experience in credit policy and loan recovery of microfinance institutions in order to get reliable and consistent information in a broad perspective and group using a simple random technique.

3.4 Data collection methods and procedures

3.4.1 Data collection methods

This included instruments that the researcher used to collect data for the study. It also highlighted specific methods to be used. The study involved questionnaires and interview method.

3.4.1.1. Questionnaire

Questionnaires were chosen because of their ability to reduce any bias and the collection of authentic data important for data analysis. The researcher used both closed ended and open-ended questionnaires aimed at examining the impact of credit policy on loan recovery in micro finance institutions using EFC Uganda Ndeeba Branch, Kampala as the case study. However one of the limitations to this study was that since the study is self-administered, the researcher noted inconsistencies in answering and returning the questionnaires. The researcher further noted (during the editing process) that most respondents expressed high levels of bias according to their departments.

3.4.1.2 Interview Guide

Structured questions and open ended statements was used by the researcher in trying to interview senior managers, employees from the loans department, employees from accounts chapter, Credit department under EFC Uganda.

3.4.2 Data Collection Procedures

A letter of introduction was obtained from the research coordinator, Economics and Statistics, Kyambogo University seeking permission to conduct the study. It was presented to the officials of EFC Uganda seeking permission to carrying out the study in the division. After being granted the permission, the researcher proceeded to make appointments with the selected respondents. Thereafter, the researcher administered questionnaires and the required data was collected. The researcher personally administered questionnaires to the respondents in order to avoid delay, to avoid collecting wrong data, ensure completeness and accuracy and confidentiality of the data collected was strictly adhered to.

3.5 Data processing and analysis

Completed questionnaire was edited for completeness and consistency. The questionnaire was coded to allow for statistical analysis. According to Mugenda (2010), data must be cleaned, coded and properly analyzed in order to obtain a meaningful report.  The percentage frequencies were posted to excel worksheets to generate graphical summaries that also used to indicate the direction of respondents. Tables and charts were used to summarize responses for further analysis and facilitate comparison.

 3.6 Limitations and delimitations of the study

Cost. The researcher experienced a problem of limited finances during the study which included transport, printing and photocopying of relevant materials. However, the researcher borrowed some money from relatives, friends and used it sparingly so as to overcome the cost constraint.

Time. The researcher experienced time constraint in data collection, analyzing of data and in final presentation of the report. However, the researcher overcame this problem by putting the time element into consideration while fulfilling all appointments with respondents and fully meeting them.

Non and late responses. The researcher also experienced a problem of late responses or no responses at all from some respondents who was given the questionnaires to fill. However, the researcher assured the respondents that any information given was treated with maximum confidentiality

CHAPTER FOUR

PRESENTATION, ANALYSIS, INTERPRETATION AND DISCUSSION OF RESEARCH FINDINGS

4.0 Introduction

This chapter presents field data, gives presentation, interpretation and discussion of findings made as an attempt to establish the impact of credit policy on loan recovery. The results obtained from the study are presented in form of figures, tables, frequencies and percentages in line with the stated objectives and research questions. The findings were as results of questionnaires which were given to respondents to fill and interview guide.

4.1 Bio-data of Respondents

The study sought to identify the characteristics of respondents in terms of their gender, age and education level. Results were obtained and are presented below;

Figure 4.1: The Gender of respondents

Source: Primary data

The study results in Figure 4.1 above reveal that 36.51% of the respondents were females and then 63.49% of the target respondents were males. The study findings presented above show that the respondents who largely participated were males.

Table 4.1: The age of respondents participated in the study.

Source: Primary data

The study findings revealed that many research participants were in the age bracket between 31-40years and these respondents were represented by 23(36.5%) whereas respondents aged 26-30years were represented by 18(28.6%) and another 18(28.6%) was for people aged between 40 years – above while 4(6.3%) of the respondents were between 20-25years This indicates that all the people in the different age brackets were included in the study which ensured the validity and reliability of the study results.

Table 4.2: Education level of the respondents

Source: Primary source

The study results show that respondents who had certificates were represented by 3.1%, where as those with degree were represented by 66.7% and then 30.2% was for respondents who had diploma. Basing on the study found out that all the respondents who participated in the study had at least attained certain level of education which this ensured the reliability and validity of the collected information.

4.2 Existing credit policies in EFC Uganda Limited

The study sought to identify the existing credit policies adopted by EFC Uganda Limited. Results were obtained and are presented below;

Table 4.3: Existing credit policies in EFC Uganda Limited

Source: Primary Data

Results in table above indicate that 48(76.2%) of the respondents strongly agree with client’s collateral, 15(23.8) agree, no respondents were not sure, disagree or strongly disagree. This implies that majority of the respondents were positive meaning that before loans are issued out, collaterals are identified.

The table 4.3 above also shows that 56(88.9%) of the respondents strongly agree with customer’s financial status, 7(11.1%) agree, no respondents were not sure, disagree or strongly disagree. This implies that majority of the respondents were positive thus, identifying customer’s financial status is one of the credit policies used in EFC Uganda ltd.

Results indicate that 41(65.1%) of the respondents strongly agree with client’s credit history, 19(30.2%) agree, no respondents were not sure, 2(3.2%) of the respondents disagree and 1(1.6%) strongly disagree. This implies that majority of the respondents were positive thus, the organization always analyses the credit history of client’s before loans are issued out.

Also 57(90.5%) of the respondents strongly agree with client’s work history, 6(9.5%) agree, no respondents were not sure, disagree or strongly disagree. This implies that most of the respondents were positive thus, it is evidently agreed that EFC Uganda ltd always analyses the work history of clients before loans are issued out.

24(38.1%) of the respondents strongly agree with loan size, 35(55.6%) agree, 1(1.5) of the respondents were not sure, 2(3.2%) disagree and 1(1.5%) strongly disagree. This implies that most respondents were positive thus, the organization always considers the loan size before loans are issued out.

Finally findings, 24(38.1%) of the respondents strongly agree with period of the loan, 13(20.6%) agree, 11(17.5%) were not sure, 7(11.1%) disagree and 8(12.7%) of the study respondents strongly disagree. This implies that most respondents were positive hence the organization always considers the period of the loan to be given out.

4.3 Contribution of loan recovery policies in EFC Uganda

The study also sought to examine the contributions of loan recovery policies in EFC Uganda. Different responses were obtained and are presented below;

Table 4.4:  Contribution of loan recovery policies in EFC Uganda

Source: Primary Data

Table 4.5 above shows that 43(68.3%) of the strongly agree with analyses credit requests, 20(31.7%) agree, no respondents were not sure, disagree or strongly disagree. This implies that majority of the respondents were positive therefore, loan recovery policies have helped in analyzing credit requests in the organization.

Results also indicate that 51(81%) strongly agree with credit policies save time, 12(19%) agree, no respondents were not sure, disagree or strongly disagree. This implies that most respondents agreed thus, as a result of loan recovery policies in the organization, time has been saved and applied to deal with other activities.

Table 4.4 above indicated that 36(57.1%) of the respondents strongly agree provides framework for the entire management practices, 24(38.1%) of the respondents agree, no respondents were not sure, 2(3.2%) disagree and 1(1.6%) of the respondents. This implies that most respondents agreed therefore, as a result of several loan recovery policies in the organization, framework for the entire management practices has been provided and this has improved on the organizational performance.

Also, 53(84.1%) of the respondent’s strongly agree with guides bank officers who grant loans, 10(15.9%) of the respondents agree, no respondents were not sure, disagree or strongly disagree. This implies that majority of the respondents agreed thus, loan recovery policies have improved performance of the entire organization.

Regarding evaluate clients credit worthiness, 19(30.2%) of the respondents strongly agree, 40(63.5%) of them agree, 1(1.6%) were not sure, 2(3.2%) disagree and 1(1.6%) of the respondents strongly disagree. From the analysis, majority were positive therefore these policies have guided the organization on how to evaluate the creditworthiness of clients.

Finally, 29(46%) of the respondents strongly agree with a stringent policy minimizes the cost of collection, 8(12.5%) agree, 11(17.5%) were not sure, 7(11.1%) disagree, 8(12.7%) strongly disagree. From the above analysis, most respondents were positive implying that loan recovery policies have been instrumental in the cost efficiency of the organization.

4.4 Relationship between credit policy and loans recovery of EFC Uganda

The study also sought to establish the relationship between credit policy and loan recovery policies in EFC Uganda. Different responses were obtained and are presented below;

Table 4.5:  Relationship between credit policy and loans recovery of EFC Uganda

Source: Primary Data

From the above table, 33(52.4%) of the respondents strongly agree with Credit policies ensure full recovery, 12(19%) agree, no respondents were not sure, 11(17.5%) disagree and 7(11.1%) strongly disagree. This implies most respondents were positive therefore as a result of credit policies – loan recovery has been improved in the organization.

Also 41(65.1%) of the respondents strongly agree with Credit policies ensure that borrowers take amounts they are able to finance, 10(15.9%) agree, 4(6.3%) were not sure, 5(7.9%) of them disagree and 3(4.8%) of the respondents strongly disagree. This implies most respondents agreed therefore, credit policies in the organization have improved credit performance.

Furthermore, 20(31.7%) of the respondents strongly agree with Credit policies reduce risk involved in unsecured lending, 21(33.3%) of them agree, 2(3.2%) were not sure, 5(7.9%) disagree and 15(23.8%) of the respondents strongly disagree. This implies that majority of the respondents were positive implying that credit performance has been improved.

CHAPTER FIVE

SUMMARY, CONCLUSIONS AND POLICY RECOMMENDATIONS

5.0 Introduction

This chapter shows the detailed summary of major findings, summary of the findings in relation to the objectives, conclusion drawn, recommendations and suggestions on areas of future research

5.1 Summary of the finding

The study found out that the existing credit policies in EFC Uganda included; identify client’s collateral, customer’s financial status, client’s credit history, client’s work history, loan size and period of loan.

While the contribution of loan recovery policies included analyses credit requests, credit policies save time, provides framework for the entire management practices, guides bank officers who grant loans, evaluate clients credit worthiness and a stringent policy minimizes the cost of collection.

As a result of credit policies, full recovery has been ensured, credit policies ensure that borrowers take amounts they are able to finance, credit policies reduce risk involved in unsecured lending, training of clients improves on the loan recovery, policies ensure low delinquency rate, simplified terms increase the number of loans and credit terms and policies ensure no default in loan repayment.

5.2 Conclusion

The study found out that limiting age group and geographical area while lending, Zero tolerance to loan default and delinquency penalties, Compulsory client financial education, Limiting handling cash by staff members, Weekly group meetings and compulsory savings, Segregation of duties in loan process, Using credit committees in approving large loan amounts, Setting cost recovery interest rate, Compulsory loan guarantorship and insurance and Lending to both men and women were Credit Control Policies used by Organization Limited.  The study found out that Referral of new clients by the old customers to Organization due to transparency in loan process, the repeat borrowing by the pride customers due to compulsory client financial education aiming to teach their clients how to use the borrowed money, Limited complaints from the pride customers due to fairness and limited discrimination by Organization loan department when giving out loan, Good institution reputation which comes as a result of good financial services offered to the pride customers establishes, Proper handling of Organization customers which is one of the credit policies leads to customer satisfaction thus establishing the relationship between credit control policies and borrowing

5.3 Recommendations

The credit control policies should favor the organization clients especially the permanent clients

The management of organization should reduce on the interest rate on loan charged on every client and even to extend the loan repayment period so as to give ample time for their clients to raise that required amount.

Organization institution should revise on the credit control policies and make some changes where necessary.

The Top management of organizations should be willing to extend overwhelming support loan department so as to ensure good financial performance.

The organization should improve on the services offered to their clients so as to maintain good image in the eyes of clients

5.4 Areas for Further research.

The researcher appreciates the fact that this research study covered adequate details of findings in order to draw conclusions. However, it was based on literature review and findings of the study. On that note, the researcher suggests that more research should be conducted on:

The challenges of implementing credit control policies in microfinance institutions.

The methods used to assess the credit control policies in institution.

The impact of loan terms and conditions on clients.

REFERENCES

Byabashija, Warren (1997), Makerere University Business School, journal faculty of commerce

CMCM Report (2000): Baseline study on lending methodologies of MFIs in Uganda. Uganda printing and publishing.

Girma, D. (1996) Economics page 210 by Times Mirror Mosby Collage publishing

Kakuru j. (2003), The Management of loan portfolios and the performance of indigenous commercial banks in Uganda: A case study of Uganda Commercial Bank and Centenary Rural Development Bank, MBA.Thesis, Makerere University, Kampala.

Kakuru, Julius (1998),Basic Financial Management, Makerere University Business school publication.

Kasibante M. (2001) Regulations of Micro Finance Institutions, Micro Finance Bankers Vol.1 issue No.5, Uganda Institute of Bankers, Kampala p.26

Katende, H. (2010), Economics 2nd Edition, page 329 by Irwin publishers.

Krestlow, Wamiam Basel committee publications (1999), sound practices for credit disclosure.vol.53

Mugisha, A, (1995), The New Vision Newspaper “Commercial Micro Finance Limited; Credit Institutions from Micro Finance Tier II,”The New Vision Printing and publishing corporation, Kampala p.32.

Musoke, A (1999).Reaching the poor through Micro credit institutions. Bank of Uganda.

Nshekanabo.A. (2002), the New Vision Newspaper.”Credit information Benefit MFI‟s” .The New Vision Printing and Publisher Corporation, Kampala p.34.

Pandy, M.S. (2000): Understanding MFIs. Pentice Hall publisher, London.

Robinson, I. (1994) the theory of value distribution and welfare economics, page 396, Vikas publishers.

Ssewagadde Eva (2000), The management of loan portfolios and the performance of indigenous commercial Banks in Uganda: A case study of Uganda Commercial Bank and Centenary RURAL Development Bank, MBA .Thesis, Makerere University, Kampala.

Ssewagudde, J. (2000): Financial systems and small enterprises development.MCC records.

APPENDICES

APPENDIX I: QUESTIONNAIRE FOR MANAGEMENT

Dear respondents,

I am Aber Particia Onen, a third year student pursuing Bachelor degree of Microfinance at Kyambogo University. This questionnaire is designed to investigate the impact of credit policy on loan recovery in MFIs, a case study of EFC Uganda Ndeeba Branch, Kampala. The information that you will give will be used for academic purpose only. I therefore kindly request you to give your honest opinion.

Instruction: Tick appropriate option and fill in where required

CHAPTER A: Background Information                                 

Please write or tick accordingly

1. What is your sex?

Male                          Female

2. Which one is your age bracket?

(20-25)                                    (26-30)                        (31-40)             (40 and above)

3. What is your highest level of education?

Certificate                                    Diploma                     Degree                          Masters

Others specify…………………………

Chapter B: Credit policies in EFC Uganda

4. What credit policies exist in this organization? Please tick (√) the appropriate alternative where SA-strongly agree, A- agree, NS- Not Sure, SD-strongly disagree D-disagree

Chapter C: Contributions of loan recovery policies in EFC Uganda

5. What are the contributions of loan recovery in this organization? Please tick (√) the appropriate alternative where SA-strongly agree, A- agree, NS- Not Sure, SD-strongly disagree D-disagree

Chapter D: Relationship between credit policies and loan recovery

5. What is the relationship between credit policies and loan recovery? Please tick (√) the appropriate alternative where SA-strongly agree, A- agree, NS- Not Sure, SD-strongly disagree D-disagree

Thank you for your time

APPENDIX II: QUESTIONNAIRE FOR OTHER STAFF

Dear respondents,

I am Aber Particia Onen, a third year student pursuing Bachelor degree of Microfinance at Kyambogo University. This questionnaire is designed to investigate the impact of credit policy on loan recovery in MFIs, a case study of EFC Uganda Ndeeba Branch, Kampala. The information that you will give will be used for academic purpose only. I therefore kindly request you to give your honest opinion.

Instruction: Tick appropriate option and fill in where required

CHAPTER A: Background Information                                 

Please write or tick accordingly

1. What is your sex?

Male                          Female

2. Which one is your age bracket?

(20-25)                                    (26-30)                        (31-40)             (40 and above)

3. What is your highest level of education?

Certificate                                    Diploma                     Degree                          Masters

Others specify…………………………

Chapter B: Credit policies in EFC Uganda

4. What credit policies exist in this organization? Please tick (√) the appropriate alternative where SA-strongly agree, A- agree, NS- Not Sure, SD-strongly disagree D-disagree

Chapter C: Contributions of loan recovery policies in EFC Uganda

5. What are the contributions of loan recovery in this organization? Please tick (√) the appropriate alternative where SA-strongly agree, A- agree, NS- Not Sure, SD-strongly disagree D-disagree

Chapter D: Relationship between credit policies and loan recovery

5. What is the relationship between credit policies and loan recovery? Please tick (√) the appropriate alternative where SA-strongly agree, A- agree, NS- Not Sure, SD-strongly disagree D-disagree

Thank you for your time