INFORMATION AND COMMUNICATION TECHNOLOGY SYSTEMS AND PERFORMANCE OF MICROFINANCE INSTITUTIONS: A CASE OF PRIDE MICROFINANCE-HEAD OFFICE KAMPALA, UGANDA.

LIST OF ACRONYMS

MFIs : Microfinance Institutions

SMEs : Small and Medium-sized Enterprises

ICT : Information and Communications Technology

UNIVAC I : Universal Automatic Computer which was the world's first computer

IBM : International Business Machines

MDIs : Microfinance Deposit-taking Institutions

AMFIU : Association for Micro Financing Institutions of Uganda

GDP : Gross Domestic Product

PMUL : Pride Microfinance Uganda Limited

ATMs : Automated Teller Machines

DTB : Diamond Trust Bank

ATMs : Automating Telling Machines

PoS : Point of Sales Networks

CSS : Computer Systems Software.

ABSTRACT

This study investigated the impact of Information and Communication Technology (ICT) on the performance of Microfinance Institutions in Uganda, specifically focusing on Pride Microfinance Limited’s Head Office. The research was structured around three key objectives: to evaluate the effect of computer software on the performance of Pride Microfinance Limited, to assess the influence of information systems infrastructure on its performance, and to analyze the impact of user knowledge and skills on the institution’s performance. The theoretical framework for this study was grounded in the Diffusion of Innovation theory. A descriptive survey design was employed, which allowed for a comprehensive examination of the variables relevant to the research questions within a cross-sectional context. The study utilized a mixed-methods approach, integrating both qualitative and quantitative data. The target population comprised the staff of Pride Microfinance, totalling 178 individuals, from which a sample of 118 respondents was selected using simple random sampling and purposive sampling techniques. Data collection involved a self-administered questionnaire for quantitative data, alongside an interview guide for qualitative insights. The analysis was conducted using SPSS Version 21, focusing on descriptive statistics (mean and stan dard deviation) to gauge levels of agreement and inferential statistics (correlation and regression) to explore the relationships between independent and dependent variables. Key findings revealed that computer software, information systems infrastructure, and user knowledge and skills all positively and significantly influenced the performance of Pride Microfinance, with standardized beta coefficients of 0.528, 0.435, and 0.352, respectively. Consequently, the study concluded that each independent variable significantly contributed to the performance of Pride Microfinance. Based on these findings, it was recommended that the management of Pride Microfinance prioritize all factors identified in this research, particularly focusing on enhancing the information systems infrastructure, as it emerged as the strongest predictor of organizational performance.

CHAPTER ONE

INTRODUCTION

1.1 Introduction

The study aimed to establish the effect of Information and Communication Technology (ICT) systems on the performance of microfinance institutions in Uganda, using Pride Microfinance Head Office as a case study. In this research, ICT systems served as the independent variable, while performance of microfinance was the dependent variable. The key dimensions of ICT systems included computer software, information systems infrastructure, and user knowledge and skills. The performance of microfinance institutions was measured through indicators such as profitability, portfolio at risk, cost reduction, and customer satisfaction.

Microfinance institutions (MFIs) have been recognized as effective channels for delivering financial services to disadvantaged members of society and small and medium enterprises (SMEs), often outperforming well-established commercial banks (Parikh, 2006). However, MFIs face numerous challenges, particularly because many of their clients depend on agriculture, and a significant portion resides in rural areas characterized by sparse populations and limited financial transactions. Additionally, some clients live in urban areas with inadequate infrastructure. These challenges contribute to increased transaction costs for the services provided by MFIs.

To thrive in this environment, MFIs must leverage technological innovations to enhance their efficiency. Despite the significance of this issue, limited research exists on the effect of ICT on the performance of MFIs, particularly in relation to Pride Microfinance. This gap in knowledge motivated the researcher to undertake this study.

This chapter presents the background of the study, the problem statement, the purpose of the research, the study objectives, research hypotheses, scope, significance, justification, conceptual framework, and operational definitions of key terms and concepts.

1.2 Background of the study

This section provides a historical background, along with the theoretical, contextual, and conceptual frameworks pertinent to the study.

1.2.1 Historical Background

Worldwide, there has been significant recognition of the role of Information and Communication Technologies (ICTs) in facilitating business processes, enhancing efficiency, and improving productivity in service delivery. It was noted that, in the contemporary landscape, a business could not be sustainable or competitive without the integration of ICTs (Mulira, 2006). Microfinance Institutions (MFIs) initially lagged behind this trend, yet they were viewed in the developing world as vital tools for poverty alleviation.

The evolution of information and communication technology systems had a long history, traceable to the invention of Herman Hollerith’s census tabulator, which was developed to process the 1890 U.S. census. This invention marked the first significant step toward automation and the development of the information systems era. According to Sutduean et al. (2019), the UNIVAC I was the first computer installed at the U.S. Bureau of the Census in 1951, assisting with administrative duties. By 1954, General Electric had installed computers for commercial purposes, which eventually paved the way for the widespread adoption of personal computers globally in the 1970s.

As these technological advancements unfolded, they began to transform various sectors, including finance. MFIs gradually recognized the importance of incorporating ICTs into their operations to enhance service delivery and meet the evolving needs of their clients. This integration not only improved operational efficiency but also facilitated better financial inclusion for underserved populations.

Information and communication technology systems progressed from the personal computer era to the client-server era, and currently to enterprise internet, a transition that was largely spearheaded by the United States military since 1945. The main goal of this initiative was to eliminate communication barriers and enable improved performance. Many governments worldwide adopted this technological advancement to enhance their operational efficiency (Shahzad et al., 2020).

The adoption of computers in Africa can be traced back to 1960, when the first IBM 1401 data processing system was installed in Johannesburg, South Africa. This system, which was unveiled in October 1959, marked a significant milestone in the region’s technological landscape (Dwivedi et al., 2015). Following South Africa’s lead, other African countries began to adopt computers, particularly by the late 1990s. By 2017, Africa had more than 450 million internet users, with countries like Nigeria and Egypt contributing significantly—Nigeria alone had 98 million users, while Egypt had 49.23 million. These developments were driven by national efforts to enhance performance and service delivery (Ziemba, 2017).

Toots (2016) noted that various governments in East Africa, including Kenya, adopted information systems in key sectors such as education, health, revenue collection, and water resource management. This adoption aimed to improve the efficiency of governmental agencies and services (Maulani & Hamdani, 2019).

The adoption of information systems in Uganda can be traced back to the introduction of the first computer in the country in 1967, located in the Ministry of Finance. This computer was used to manage government payroll starting in 1968. A second mainframe was subsequently installed at Makerere University for research purposes. However, it was not until June 2006 that the Government of Uganda established a Ministry of ICT to promote the adoption of information systems across government agencies (Ramadani, 2017).

Pride Microfinance Limited (PML), which began operations in 1995 as a Microfinance Deposit-Taking Institution, made significant progress in enhancing service delivery through the adoption of information systems. This transformation included the introduction of electronic methods such as electronic customer registration, online payments, loan processing, and accounting for deposits, among other ICT-related activities. These initiatives aimed to provide services seamlessly, enabling electronic service delivery anytime and anywhere, while ensuring quick, high-quality services and greater transparency for customers.

Additionally, various electronic payment methods were introduced, including Mobile Money, Airtel Money, Ezee Pay, and Pay Way. The implementation of these ICT systems allowed PML to improve decision-making, reduce operational and related costs, enhance the quality of its financial products, bolster risk analysis and fraud protection, minimize human errors, extend outreach for loan officers, reduce paperwork, and standardize credit processes (Turaga, 2004).

1.2.2 Theoretical background

The Diffusion of Innovation theory guided the study in investigating the effect of information and communication technology systems on the performance of microfinance institutions. The theory was developed by Everett Rogers in 1962. The theory outlines four key elements that govern diffusion: the innovation itself, communication channels, time, and social systems (Kaminski, 2011). These elements explain the process of change as influenced by both employees and the organisation as a whole.

The theory assumes that the likelihood of adopting an innovation primarily depended on the availability of information. Furthermore, it suggested that, particularly at the local level, personal contacts played a more significant role in the dissemination of information than mass media (Deligiannaki & Ali, 2011). While the diffusion of innovations theory was simplified to focus solely on a product or innovation, it often overlooked the complex cultural, economic, technological, and other factors that impact organizational performance (Deligiannaki & Ali, 2011).

The Diffusion of Innovation theory was widely recognized and had several strengths that contributed to its popularity and usefulness in understanding the adoption and spread of innovations. Some of its key strengths included:

The Diffusion of Innovation theory provided a comprehensive framework that encompassed various factors and processes involved in the adoption and diffusion of innovations. It considered the interplay between individuals, social systems, communication channels, and the innovation itself. This framework effectively described and explained how and why innovations were adopted by individuals and groups.

The theory offered valuable insights into the diffusion process, including the stages of adoption, the characteristics of adopters, and the influence of interpersonal relationships and social networks. It enabled researchers and practitioners to predict the rate and pattern of adoption for particular innovations. Additionally, the Diffusion of Innovation theory had practical applications across various fields, including marketing, public health, technology adoption, organizational change, and policy development making it suitable for the study.

The theory provided a roadmap for designing effective communication strategies, targeting specific adopter groups, and facilitating successful adoption and implementation. It recognized the crucial role of communication channels and interpersonal influence in the diffusion process. Additionally, it highlighted the importance of opinion leaders, social networks, and communication strategies in shaping individuals’ attitudes and behaviours toward adopting innovations. These insights were successfully applied across various domains and cultural contexts.

While the diffusion process varied in different settings, the underlying principles and concepts of the theory could be adapted and applied to understand the dynamics of innovation adoption in diverse environments, including microfinance institutions (MFIs). MFIs use different technologies in executing their duties especially in recording keeping, transactions, credit payment, monitoring the business and many others. In addition, Pride microfinance is one of the institutions that has tried to innovate its processes, ensuring effective commutation as well as improving on its social network. All the above aspects that the institution puts under play makes the Diffusion of Innovation theory relevant and applicable to the study.

1.2.3 Conceptual Background

Information and Communication Technology (ICT) was defined as an electronic medium for creating, storing, manipulating, receiving, and sending information from one location to another. It facilitated faster, more convenient message delivery, making it easier to access, understand, and interpret information. ICT utilized various gadgets, including cell phones, the Internet, wireless networks, computers, radio, television, satellites, and base stations. These resources were employed to create, store, communicate, transmit, and manage information (Zonneveld et al., 2020).

Additionally, ICT could be defined as the study of complementary networks of hardware and software that individuals and organizations used to collect, filter, process, create, and distribute data. According to Jessup and Valacich (2008), ICT encompassed a variety of disciplines, including the analysis and design of systems, computer networking, information security, database management, and decision support systems.

Valacich and Schneider (2015) indicated that information and communication technology systems represented an organized combination of people, hardware, software, communication networks, and data resources, along with policies and procedures designed to facilitate activities that stored, retrieved, and transformed data resources into information. Information systems comprised interrelated components that worked together to collect, process, store, and disseminate information, supporting decision-making, coordination, control, analysis, and visualization within an organisation.

The ICT systems included several components:

Technology: This was understood as the application of scientific knowledge for practical purposes. From the invention of the wheel to the harnessing of electricity for artificial lighting, technology became an integral part of daily life, often taken for granted. The components of information systems, such as hardware, software, and data, all fell under this category.

Hardware: Information systems hardware involved the physical components of technology. Examples included computers, keyboards, disk drives, iPads, and flash drives.

Software: This comprised a set of instructions that informed the hardware what tasks to perform. The software was intangible and could not be physically touched. When programmers created software programs, they were essentially typing lists of instructions for the hardware. Software was categorized into two main types: operating-system software, which made hardware usable, and application software, which provided functional utility. Examples of operating systems included Microsoft Windows on personal computers and Google’s Android on mobile phones.

Takieddine and Sun (2015) noted that computer software, or simply software, consisted of a collection of data or instructions that dictated how a computer should operate, contrasting with the physical hardware from which the system was built. Computer software included programs, libraries, and related non-executable data, such as online documentation or digital media. Both computer hardware and software were interdependent, as neither could function effectively on its own.

Information System Infrastructure: This term referred to the foundation or framework that supported a system or organization. Gilmour et al. (2015) indicated that in computing, information technology infrastructure encompassed physical and virtual resources that facilitated the flow, storage, processing, and analysis of data. Infrastructure could be centralized within a data centre or decentralized across multiple data centers controlled either by the organization or by third parties, such as colocation facilities or cloud providers. According to Kroenke and Boyle (2015), data center hardware infrastructure typically included servers, storage subsystems, networking devices like switches and routers, and dedicated network appliances such as firewalls.

User Knowledge and Skills: Brabham and Guth (2017) defined user knowledge and skills as an individual’s ability to operate computer systems. In this study, user knowledge and skills referred specifically to the ability of organizational employees and clients to interact using computers, the internet, and various online services. This ability was measured in terms of computer literacy, user competence, and education level. Competencies were identified as motives, knowledge, skills, traits, and an individual’s self-image or self-concept. User competency in information systems was found to be lacking in many organizations, as numerous employees had not received adequate training in hardware, such as keyboard usage, and also lacked essential knowledge of software.

On the other hand, Al-Rahmi et al. (2020) defined performance as a measure of an organization’s achievements in alignment with its strategies and objectives. In this study, performance referred to the ability of microfinance institutions (MFIs) to achieve their set targets. As the dependent variable, performance was evaluated in terms of profitability, portfolio at risk, cost reduction, and customer satisfaction. Organizational performance was assessed through various dynamics, primarily by measuring the ability to achieve strategic goals and visions. Kaplan (2015) further stated that the Balanced Scorecard aimed to align business activities with the organization’s vision and strategy, improve internal and external communications, and monitor performance against strategic goals.

1.2.4 Contextual Background

This study investigated the effect of information and communication technology (ICT) on the performance of microfinance institutions in Uganda, specifically targeting the head office of Pride Microfinance Limited. Microfinance institutions (MFIs) often faced high operating costs when providing financial services to poor individuals and small and medium enterprises. ICTs were found to promote the two main objectives of microfinance: sustainability and outreach to underserved populations (Ssewanyana, 2009).

Ugandan microfinance institutions had long served the unbanked segments of the population, despite facing numerous obstacles in their quest to access this niche. It was estimated that micro-enterprises contributed about 18 percent of Uganda’s gross domestic product and 25 percent of non-agricultural GDP (Mwanza, 2018). As an industry, microfinance was relatively new in Uganda, with a few agencies starting over 20 years prior; however, the sector began to gain recognition as an industry only in the last 10 years.

MFIs in Uganda encountered several challenges, including high interest rates on loans, limited outreach, and the high costs associated with administering small transactions for savings accounts, money transfers, and loans to poor individuals, all of which yielded low profit margins (Amin, 2007; Hishigsuren, 2006; Mathison, 2005). Pride Microfinance was not an exception, as it operated within the same environment and faced the identified challenges. Particularly following the outbreak of the COVID-19 pandemic, Pride Microfinance Limited experienced increased operational costs related to borrower follow-ups, declining profits, from 12% in 2019, to 11% in 2020, to 7.3% in 2021, high loan default rates, and customer complaints about its services (Pride Microfinance Annual Report, 2019, 2020 & 2022).

Despite implementing ICT systems, PML had not yet achieved its intended targets regarding outreach and sustainability. This prompted the researcher to conduct the study to ascertain the extent to which ICT systems affected the performance of Pride Microfinance Limited.

1.3 Problem Statement

Microfinance institutions (MFIs) play a crucial role in financial inclusion, particularly for low-income individuals and small enterprises. The integration of Information and Communication Technology (ICT) is increasingly recognized as a critical factor influencing the performance of MFIs. However, despite the financial growth and operational efficiency seen in institutions like Pride Microfinance, challenges persist in leveraging ICT to its full potential. A review of Pride Microfinance’s financial performance, as outlined in the Statement of Cash Flows for the year ending December 31, 2023, reveals notable financial outcomes. While the institution achieved a profit of Ushs 7.69 billion in 2023, there were significant cash outflows in operating activities, amounting to Ushs 85.11 billion. This was primarily due to changes in loans, advances, and other operating assets. Additionally, investments in ICT-related assets, such as intangible assets and property, totalled to Ushs 7.37 billion, reflecting a strategic focus on digital transformation. Despite these investments, the benefits of ICT adoption remain under-optimised. Challenges such as high initial costs, integration complexities, and limited staff capacity to utilise ICT solutions effectively have hindered operational efficiency and financial sustainability. This is further evidenced by substantial borrowing costs (Ushs 3.21 billion in interest expense) and the need for external financing to maintain liquidity. This study aimed to investigate the effect of ICT on the performance of MFIs, with a specific focus on Pride Microfinance’s head office in Kampala. By exploring the extent to which ICT influences financial performance, operational efficiency, and customer satisfaction, the research will provide insights into optimizing ICT investments to enhance the sustainability and competitiveness of MFIs.

1.4 Objectives of the study

1.4.1 General Objective of the study

The study aimed to determine the effect of information and communication systems on the performance of microfinance institutions in Uganda.

1.4.2 Specific Objectives of the Study

To assess the effect of computer systems software on the performance of Pride Microfinance Limited.
To establish the effect of information systems infrastructure on the performance of Pride Microfinance Limited.

To examine the effect of user knowledge and skills on the performance of Pride Microfinance Limited.

1.5 Research Questions

What was the effect of computer systems software on the performance of Pride Microfinance Limited?
What was the effect of information systems infrastructure on the performance of Pride Microfinance Limited?

What was the effect of user knowledge and skills on the performance of Pride Microfinance Limited?

1.6 Hypotheses

H₁: Computer systems software positively and significantly affected the performance of Pride Microfinance Limited.

H₂: Information systems infrastructure positively and significantly affected the performance of Pride Microfinance Limited.

H₃: User knowledge and skills positively and significantly affected the performance of Pride Microfinance Limited.

1.7 Conceptual Framework

Information and communication technology systems became the centre of developments in any economy. Consequently, it became inevitable to embrace computer use in all work environments. The government of Uganda designed a strategy aimed at transforming the operational design and culture of the public sector to improve the performance of its agencies. The implementation of any information system required advanced technology infrastructure, such as dedicated servers for web-based applications and user-friendly web interfaces. Below is the conceptual framework illustrating how information and communication technology systems related to the performance of government agencies.

Figure 1.1: Conceptual framework illustrating the relationship between ICT and the Performance of MFIs.

Independent Variable Dependent Variable

Information and communication technology systems Microfinance Performance

Source: Adapted from Kaplan (2012), Wamema & Othieno (2017) as modified by the researcher

According to the figure illustrated above, information systems served as the independent variable influencing the performance of microfinance institutions. Information systems were examined in terms of systems software, the infrastructure used, and user knowledge and skills, which primarily related to the competence of employees in an organization aimed at improving performance.

Conversely, the dependent variable from the conceptual framework was the performance of MFIs, measured in terms of cost-cutting, profitability, customer satisfaction, outreach, and loan portfolio at risk. The framework illustrated the relationship between the independent and dependent variables. It was hypothesized that when MFIs adopted the necessary and effective ICT systems, their performance was likely to improve, particularly by reducing costs, enhancing the collection of borrowed funds, and promoting the sustainability of microfinance and outreach—core targets of Pride Microfinance (Wamema & Othieno, 2017).

1.8 Justification of the study

The study about the effect of information and communication technology systems on the performance of microfinance institutions (MFIs) in Uganda was justified due to the challenges that MFIs faced. These challenges included high interest rates on loans, limited outreach, and high costs of administering small transactions on savings accounts, money transfers, and loans to poor people and small and medium enterprises, which resulted in low profit margins (Hishigsuren, 2006; Mathison, 2005). Given these challenges, significant efforts were needed to enable MFIs to meet their dual objectives of outreach and sustainability. Therefore, this study represented one of the ways to address some of the problems affecting MFIs in financial service delivery in Uganda, using Pride Microfinance Limited as a case study. The findings could be shared with other MFIs in Uganda and beyond.

Additionally, despite PML’s efforts to adopt ICT, it continued to experience challenges related to low performance. There was limited research and literature on how the technology it adopted contributed to its performance, prompting the researcher to conduct this study to ascertain whether the usage of ICT systems at PML affected its performance.

Lastly, this study is unique in the way that most of the studies the researcher has read where mainly from outside Uganda and majorly focusing on application of ICT in commercial banks and less attention was paid to micro financial institutions, hence justifying the study.

1.9 Significance of the study

The findings from the study helped the management of Pride Microfinance to effectively utilize the technology available to improve the performance of the microfinance institution, particularly in relation to cutting operational costs, expediting the process of service delivery, and enhancing sustainability.

The study also provided additional literature for academics regarding the effect of systems infrastructure on the performance of government agencies in Uganda and other institutions. In this era, many government agencies and organizations adopted necessary technologies to remain competitive in providing effective and efficient services.

Furthermore, the study enabled policymakers to gather information on how to finance information systems to achieve better performance. The findings also informed policymakers about how to train employees to enhance the performance of government agencies.

1.10 Scope of the study

This section included the content, geographical and time scope.

1.10.1 Content scope

The study concentrated on two variables: Information and Communication Technology Systems, which served as the independent variable, and the performance of microfinance institutions, which acted as the dependent variable. It further expounded on the effects of systems software, systems infrastructure, and user knowledge and skills. Additionally, the performance of microfinance was conceptualized in terms of cost reduction, profitability, loan portfolio, outreach, and customer satisfaction.

1.10.2 Geographical scope

The study was conducted at the Pride Microfinance Limited head office, located in Kampala District, Uganda’s largest business center. It lay within the coordinates of 00°20′41″N 32°35′40″E, specifically on Plot 6-9, Ben Kiwanuka Street. The head office was chosen because it was where key strategic objectives and decisions were made and subsequently enforced throughout the Pride network across the country, utilizing the most advanced technology employed by the microfinance institution.

1.10.3 Time scope

The period of data considered from Pride Microfinance Limited spanned from 2014 to 2024. This timeframe was chosen because, during this period, Pride Microfinance adopted Information and Communication Technology systems to enhance performance in terms of reducing operational costs, increasing outreach, and improving profitability and customer satisfaction, among other objectives.

1.11 Operational definition of key terms

Information and Communication Technology Systems: This referred to the use of electronic systems, such as computers and mobile phones, to transfer information from one person to another to facilitate business transactions.

Performance: This referred to the level at which the organization effectively utilized the resources at its disposal.

Software: This was defined as a set of instructions that told the hardware what to do; software was intangible and could not be touched.

Information System Infrastructure: This constituted the foundation or framework that supported a system or organization.

User Knowledge and Skills: This was defined as the ability of an individual to possess the required knowledge to operate the computer system.

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