THE IMPACT OF CREDIT ON THE PERFORMANCE OF AN ORGANIZATION
A CASE STUDY OF SSEBAGALA & SONS ELECTRO CENTRE LTD
1.0 INTRODUCTION
This chapter presents the background of the study, highlighting the historical and contextual development of the research problem. It further presents the statement of the problem, the general and specific objectives of the study, research questions, scope of the study, and significance of the study.
1.1 Background of the Study
Credit is an important component of business financing, although it involves considerable risk because repayment cannot always be fully guaranteed. It involves an implicit agreement between lenders and borrowers regarding the provision and repayment of funds. When properly managed, credit can contribute to improved performance and growth of small and medium-sized enterprises (SMEs) (Falk et al., 2004). Credit management is therefore an essential component of financial management, particularly for lending institutions, since poor credit management can expose financial institutions to significant losses and threaten their sustainability (Fehr et al., 2005).
Credit provided by banks and other financial institutions, with repayment expected at a future date, plays an important role in economic development because of its potential multiplier effects. Nnanna (2001) observes that bank credit is important for the establishment, growth, and efficient performance of enterprises. Businesses commonly finance their assets using a combination of debt and equity, which constitutes their capital structure. Capital structure decisions are among the most important financial decisions made by firms because they can significantly influence financial performance (Ahmad et al., 2012).
There has been increasing recognition of the important role played by business organizations, both small and large, in economic development. Businesses contribute to the economy through employment creation, income generation, payment of taxes, provision of goods and services, and promotion of investment (Ebaid, 2009). Access to appropriate sources of finance is therefore important for businesses to establish, expand, and sustain their operations.
According to Shubita and Alsawalhah (2012), determining an optimal financial structure for a firm is challenging because it requires consideration of several factors, particularly risk and profitability. This decision becomes even more difficult when the economic, social, technological, and political environments in which a firm operates are characterized by a high degree of instability. Chiang, Chan, and Hui (2002) argue that financial performance, particularly profitability, and capital structure are closely related. They further indicate that the choice of an appropriate proportion of debt and equity can influence the value and financial performance of a company.
The inability of firms to access long-term financing may force them to rely on short-term debt to finance long-term projects. Such a situation can create a mismatch between assets and liabilities and may consequently reduce the firm’s working capital. A decline in working capital can negatively affect business operations and the ability of a firm to meet its short-term obligations. Salazar, Soto, and Mosqueda (2012) emphasize that the primary source of loan repayment should ideally be the cash flows generated by the financed project.
Maritala (2012) examined the optimal level of capital structure that enables firms to improve their financial performance. The study found a negative relationship between the debt ratio and financial performance, as measured by return on assets and return on equity. Similarly, Fosu (2013) investigated the relationship between capital structure and corporate performance in South Africa, with particular emphasis on the role of competition.
Root (2009) defines debt management as the process of controlling debt and ensuring that associated financial obligations are appropriately managed and repaid. Debt management can therefore be understood as a deliberate effort by a debtor or an appointed agent to reduce the debt burden and establish manageable repayment arrangements. Cecchetti et al. (2011) observe that a reasonable level of debt can contribute to welfare and economic growth, whereas excessive debt may constrain growth and negatively affect the performance of an organization.
Therefore, while credit can provide organizations with the financial resources necessary to expand operations, acquire assets, increase working capital, and improve performance, excessive borrowing and poor credit management can expose organizations to financial difficulties. It is against this background that the study seeks to examine the impact of credit on the performance of Ssebagala & Sons Electro Centre Ltd.
1.2 Statement of the Problem
There has been a considerable increase in the number and size of small and medium-sized enterprises in Uganda. However, many of these businesses continue to face financial challenges arising from dependence on credit obtained from banks and microfinance institutions (Kasekende, 2003). Most firms lack sufficient internal capital to acquire the equipment, machinery, and other assets necessary for growth and expansion. Consequently, they seek alternative sources of financing, including bank loans and other forms of credit, to increase their capital and acquire machinery and equipment required for business expansion and establishment (Mutebile, 2010).
Although credit is expected to facilitate business growth and improve organizational performance, many enterprises have not achieved sustained positive growth despite accessing borrowed funds. Excessive debt obligations, high repayment costs, poor credit management, and inadequate utilization of borrowed funds may negatively affect business operations and profitability. This raises concerns regarding whether credit contributes positively to organizational performance or whether the associated financial obligations create challenges for business sustainability.
Ssebagala & Sons Electro Centre Ltd, like many SMEs, may rely on credit to finance its operations, acquire stock and equipment, and support business expansion. However, limited empirical information is available regarding the extent to which credit has influenced the organization’s performance. It is therefore important to examine the benefits and challenges associated with credit and identify other factors affecting the performance of the organization. It is against this background that this study seeks to investigate the impact of credit on the performance of Ssebagala & Sons Electro Centre Ltd.
1.3 General Objective of the Study
To investigate the impact of credit on the performance of Ssebagala & Sons Electro Centre Ltd.
1.4 Specific Objectives of the Study
i. To establish the benefits of credit on the performance of Ssebagala & Sons Electro Centre Ltd.
ii. To establish the challenges of credit to the performance of Ssebagala & Sons Electro Centre Ltd.
iii. To establish the factors affecting the performance of Ssebagala & Sons Electro Centre Ltd.
1.5 Research Questions
i. What are the benefits of credit on the performance of Ssebagala & Sons Electro Centre Ltd?
ii. What are the challenges of credit to the performance of Ssebagala & Sons Electro Centre Ltd?
iii. What factors affect the performance of Ssebagala & Sons Electro Centre Ltd?
1.6 Scope of the Study
The scope of the study will cover the content, geographical, and time dimensions of the research.
1.6.1 Content Scope
The study will focus on the benefits of credit, challenges associated with credit, and factors affecting the performance of Ssebagala & Sons Electro Centre Ltd. The study will specifically examine how access to and utilization of credit influence the organization’s operations, growth, profitability, and overall performance.
1.6.2 Geographical Scope
The study will be conducted at Ssebagala & Sons Electro Centre Ltd, located at Nakasero, Plot 9, Market Street, Tourist Hotel Building, Kampala, Uganda. The organization was selected as the case study because it was reported to have been among the well-performing small and medium-sized enterprises in Uganda during the period under consideration.
1.6.3 Time Scope
The study will focus on the period from 2013 to 2018. This period was selected because it represents a period during which Ssebagala & Sons Electro Centre Ltd was reported to have been among the top-performing SMEs in Uganda. The period will therefore provide an appropriate basis for examining the relationship between credit and organizational performance.
1.7 Significance of the Study
The study will be significant to various stakeholders, including financial institutions, policymakers, researchers, and students.
Financial Institutions: The study will provide financial institutions with information regarding the benefits and challenges associated with providing credit to businesses. This information may assist financial institutions in improving their credit assessment, lending, monitoring, and recovery practices.
Government and Policymakers: The findings may provide useful information to the government and other policymakers in developing and improving policies relating to business financing, credit accessibility, and SME development in Uganda.
Future Researchers: The study will provide literature and empirical information that may be useful to future researchers undertaking studies related to credit, business financing, and organizational performance.
The Student/Researcher: The study will enable the researcher to acquire practical research skills, including data collection, analysis, interpretation, and report writing. These skills will be useful in future academic and professional activities.
