The study was to examine the effect of credit management on performance of micro finance institutions in Uganda, the objectives of the study were; to examine the effect of client appraisal techniques on financial performance of micro finance support Centre ltd. Mbale Branch, to examine the effect of credit risk control tools on financial performance in micro finance support Centre ltd. Mbale Branch and to examine effect collection policies on financial performance in micro finance support Centre ltd. Mbale Branch

The study used a case study design to in collecting data from the field. The research used a questionnaire and an interview guide in collecting data.

Findings of the study indicated that; client appraisal techniques significantly contribute to financial performance. The correlation between them is r= 0.323, with p=0.003, there is a positive significant relationship between credit risk control tools and financial performance based on the obtained correlation coefficient of .326 (**) with a significance value of .003., there is a positive significant relationship between collection policy and financial performance in MSC, based on the obtained correlation coefficient of .298 (**) with a significance value of .002.

The study recommendations were; the study recommends that MSC should redesign their client appraisal techniques so as to improve their financial performance. Through client appraisal techniques, MSC will be able to know the credit worthiness of clients and thus reduce non-performing loans. MSC should reduce on their interest rates as these affect performance of loans. This will help to bring in more borrowers. The risk aspect should be given more attention because when not handled properly, the organization may end up losing. The study also recommends that MSC should continue to strengthen its credit policies as this has been very effective in improving the organization’s financial performance

CHAPTER ONE

GENERAL INTRODUCTION

1.0 Introduction

This chapter highlights the background information of the subject matter, statement of problem, and objectives of the study, research questions, scope of the study, of the significance of the study, conceptual frame work and the definitions of the key terms.

1.1Background of the study:

Globally, the modern use of the expression ‘’micro financing’’ has roots in the 1970s when organizations such as Grameen Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were starting and shaping the modern industry of micro financing- Which initially had a limited focus based on the provision of microloans to the poor entrepreneurs and small businesses lacking access to banking and relate services, and majorly two main mechanisms for deliverance of financial services to such clients i.e. relationship- based banking for individual entrepreneurs and small businesses; and group-based models, where several entrepreneurs come together and apply for loans and other services as a group. However, over time, Microfinance has emerged as a larger movement whose object is a world in which as everyone, especially the poor and socially marginalized people and households have access to wide range of affordable, high quality financial products and services, including not just credit but also savings, insurance, payment services, and fund transfers. According Horne and Wachowicz (1998), many of those who promote microfinance generally believe that such access was help poor people out of poverty, including participants in the Microcredit Summit campaign(1998) For many, Microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses; For others it is a way for poor to manage their finances more effectively and take advantage of economic opportunities while managing risks.

Currently, Microfinance deals with the supply of loans (credit), savings and other basic financial services to the poor, because these financial services usually involve provision of small amounts of money- small loans, small savings etc. In contrast however, for most of the microfinance institutions credit is one of the services offered to customers because it is one of the factors a firm use to influence the demand for its products. According to Myers and Berkley (2003), defined credit as a process where the possession of goods or services is allowed without spot payment upon a contractual agreement for later payment.

The idea of credit started since 1540s.with ‘’belief, faith, ’from Middle French credit (15C) ‘’Belief, trust, ’from Italian creditor, from Latin creditum’ a loan’’, thing entrusted to another, ’neuter past participle of cerdere’’ to trust, entrust, and believe. ‘’The commercial sense of confidence in the ability and intention of a purchaser or borrower to make payment at some future time’’ was in English 1570s (creditor) is mid-15c); ‘’hence sum place at a person’s disposal’ ’by Bank etc.

Therefore, the biggest risk in Microfinance is lending money and not getting if back.

Credit risk is a particular concern for Microfinance institutions because lending is unsecured i.e., traditional collateral is not often used to secure microloans, Churchill and Coster (2001). Because the people covered are those who cannot afford credit from Banks and such other financial institutions due to lack of ability to provide guarantee or security against money borrowed. Many microfinance institutions do not extend to these kinds of people due to high default risk for repayment of interest and in some cases the principle amount if self. Therefore, these institutions are required to design sound credit management. Credit management is therefore a process of granting credit, the terms it’s granted on and recovering this credit when it is due. This is a function within a bank or company to control credit policies that was improve revenues and reduce financial risks that entail the identification of existing and potential risks inherent in lending activities. Hence for effective credit management the following variables should be put in place by MFIs and these include client appraisal techniques, Credit terms, collection policy, and credit risk control tools among others. Sound credit management is a prerequisite for microfinance institution’s stability and continuing profitability, while deteriorating credit quality is the most frequent cause of poor financial performance and condition. According to Gitman (1997), the probability of bad debts as credit standards are relaxed. Firms must therefore ensure that the management of receivables is efficient and effective. Such delays on collecting cash from debtors as they fall due has serious financial problems, increased bad debts affect customer relations, if payment is made late, then profitability is eroded and if payment is not made at all, then a total loss is incurred. On that basis, it is simply good business to put credit management at the ‘’front end’’ by managing it strategically.

In Uganda, institutionalization of Microfinance was slowly implemented. Traditionally, the private sector in Uganda has struggled with infrastructural failings such as weak commercial justice system, corruption, inadequate tax and regulation management, as well as lack of financial services (Audit report.2002; Wong 1999). Over the 1990s the closure of Banks and the raise of inflexible banking practices by Uganda commercial Bank, segregated small business and low income households from access to financial services (Carlton, et al, 2016). Furthermore, traditional Banks during this time diminished Uganda’s social capital and credit culture by mishandling credit schemes, having a profound impact on the civil population’s trust of traditional financial institutions (Carlton et al.2001), However, more traditional forms of informal financial activities have encompassed many forms and had been used for decades( Carlton at al.2001). However the first microfinance institution introduced by the government is seen in FINCA and Uganda’s Women Finance Trust (UWFT)in the 1990s, Due to governmental failings in effective poverty and development policies during this time, there was a strong reliance on NGO’s community based organizations and local ‘Resistance Councils’.

Following the introduction of the above MFIs IN Uganda, the results indicate that Microfinance is important for the society but there are some challenges such as inadequate donor funding, insufficient support from governments, improper regulations, inefficiency in credit management tools and techniques, also challenges include lack of standardized reporting and performance monitoring system for Microfinance institutions. However, the although the government of Uganda through the introduction of The microfinance support Centre to intervene and solve the above challenges of Microfinance institutions but much effort has been on poverty alleviation and less effort has been placed on credit management. Thus according to the financial reports of MSC 2016-2018 out of 80% billion loan money disbursed only 40% billion was recovered on time and 20% was defaulted. Hence this shows a big challenge in credit management among the Microfinance intuitions thus the need for further studies.

1.2 Problem statement.

Sound credit management is a prerequisite for a micro finance institution’s stability and continuing profitability, while deteriorating credit quality is the most frequent cause of poor financial performance and condition. According to Gitman (1997), the probability of bad debts increases as credit standards are relaxed. Firms must therefore ensure that the management of receivables is efficient and effective .Such delays on collecting cash from debtors as they fall due has serious financial problems, increased bad debts and affects customer relations. If payment is made late, then profitability is eroded and if payment is not made at all, then a total loss is incurred. On that basis, it is simply good business to put credit management at the ‘front end’ by managing it strategically. MSC has established proper credit management mechanism which are aimed at ensuring that it achieves proper management of all the loans disbursed to its clients and improve its financial performance for example, there are proper policies concerning disbursement of funds, well trained credit officer and risk assessment officers. (MSC Annual Report, 2016). However, despite the above efforts, financial position of MSC has kept on deteriorating as a result of a high default rate. Thus according to the financial reports of MSC 2016-2018 out of 80% billion loan money disbursed only 40% billion was recovered on time and 20% was defaulted. As with any financial institution, the biggest risk in microfinance is lending money and not getting it back. Credit risk is a particular concern for MFIs because most micro lending is unsecured (i.e., traditional collateral is not often used to secure microloans Craig Churchill and Dan Coster (2001). The people covered are those who cannot avail credit from banks and such other financial institutions due to the lack of the ability to provide guarantee or security against the money borrowed. This forms the background against which the researcher is to carry out a research to examine the effect of credit management on financial performance with a specific focus on Micro finance Support Centre Mbale branch.

1.3 Research Objective

1.3.1. General objectives

Examine the effects of credit management on performance of micro finance institutions in Uganda.

1.3.2. Specific objectives

To examine the effect of client appraisal techniques on financial performance of micro finance support Centre ltd. Mbale Branch
To examine the effect of credit risk control tools on financial performance in micro finance support Centre ltd. Mbale Branch

To examine effect collection policies on financial performance in micro finance support Centre ltd. Mbale Branch

1.4. Research questions.

What is the effect of client appraisal techniques on financial performance of micro finance support Centre Mbale branch?
What is the effect of credit risk control tools on financial performance in micro finance support Centre Mbale?

How effective are the collection policies on financial performance in micro finance bank Mbale?

1.5. Research hypothesis

Thereis a strong positive and significant effect of client appraisal techniques on financial performance.
There is a positive and significant relationship between credit risk control tools and financial performance.

There is a positive and significant effect of collection policies on financial performance.

1.6. Scope of the study

This was divided into content scope, geographical scope and time scope as explained below;

1.6.1. Content scope

The study concentrated on credit management as an independent variable with dimensions of; client appraisal techniques, credit risk control tools and collection policies. On the other hand the dependent variable is financial performance in micro finance Support Centre

measured by profitability, cash flow and liquidity position.

1.6.2. Time scope.

The study will be carried out for a period of 5 months, however the literature to be considered in the study will be for at least 10 years and the information from the microfinance support Centre to be considered will be in for four years.

1.6.3. Geographical scope:

The study was carried out at Micro finance support Centre, Mbale Branch is located in eastern region of Uganda, Mbale municipality. Plot 2, Bumasifwa lane along Pallisa Road in Mbale.

Mbale Microfinance support Centre has been chosen because it is one of the biggest branches of microfinance support centers in the country and it is also one of the well-funded. Therefore the Microfinance support Centre Mbale has been chosen because of challenges that faces the microfinance institutions in the area.

1.7. Significance of the Study

The result of this study may be valuable to researchers and scholars, as it would form a basis for further research. Scholars can use this study as a basis for discussions on credit management and financial performance of MFIs. It may provide the scholars with empirical studies that they may use in their studies. The study shall also add to the body of knowledge in the finance discipline by bridging gaps in credit management research in general.

This study may make several contributions to both knowledge building and practice improvement in credit management and financial performance. From a theoretical standpoint, the study proposes a comprehensive framework of studying changes in credit management and financial performance. It also expected that it was aid policy makers in their effort to revamp the sector.

It shall be of great relevance to the organizations 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 finance trust bank Mbale to appraise its credit policies and to review its operations critically for more result oriented approach in the dealing with its credit facilities.

1.8. Justification of the study

A number of research studies on credit management have been carried around the globe and Uganda in particular however, only a few were taken by the research basing on their relativeness to the study and they were Robert (2011), and Lydia (2012).

Robert (2011) carried out study on credit management and profitability of commercial banks with FINCA Uganda and focused on the roles of credit management profitability in commercial banks with the objectives to examine the credit policy and profitability in FINCA Uganda, to assess the causes of low profitability in FINCA Uganda and to establish the relationship between credit management policy and profitability in FINCA Uganda .however ,as much as the Robert did his best the following gaps exist in the finding that need to be addressed .the researcher focused on the profitability of commercial banks only thus leaving other MFIs out and this prompted another researched on the roles of credit management.

Lydia (2012) carried out study on credit control and loan performance in financial institutions, case study centenary bank Mbale with the following objectives to assess the level of usage of credit control systems in centenary bank, to establish the effects of credit control systems on the deposit rates in centenary bank and recommended further study on the credit risk management and efficiency of management of financial institutions.

from the study above its clear though that the researcher did her best based on the researchers objective which were on the usage of credit control system, the effect of credit control system on loan default but did not study the challenges of credit management system and there was need to study the challenges faced in the usage of credit management and roles of credit management system on financial performance.

1.9. Definition of key terms

Financial performance

According to the business dictionary financial performance involves measuring the results of firm’s policies and operations in monetary terms. These results are reflected in the firms return on investment, return on assets and value added.

Stoner (2003), defines financial performance as the ability to operate efficiently, profitably, survive, grow and react to the environmental opportunities and threats. In agreement with this, sollenerg and Anderson (1995) assert that, performance is measured by how efficient the enterprise is in use of resources in achieving its objectives. Hitt,et al(1996) believes that many firm’s low performance is the result of poorly performing assets.

Client Appraisal

The first step in limiting credit risk involves screening clients to ensure that they have the willingness and ability to repay a loan. MSC uses the 5Cs model of credit to evaluate a customer as a potential borrower (Abedi, 2000).

Credit management

Myers and Brealey (2003) describes credit management as a methods and strategies adopted by the firm to ensure that they maintain an optimal level of credit and effective management

It is an aspect of financial management involving credit analysis, credit rating, credit classification and credit reporting .Nelson (2002) views credit management as simply the means by which an entity manages its credit sales. It is a pre requisite for any entity dealing with credit transactions since it is impossible to have zero credit or default risk.

Credit Risk Control tools.

Key credit controls included loan product design, credit committees and delinquency management. (Church hill Coster, 2001).

Collection policies.

There are various policies that an organization should put in place to ensure that credit management is done effectively; one of these policies is a collection policy which is needed because all customers do not pay the firms bills in time. Some customers are slow payers while others are non-payers. The collection effort should therefore aim at accelerating collections from slow payer and reducing bad debt losses (Kariuki, 2010).

1.10The Conceptual Frame Work

INDEPENDENT VARIABLE DEPENDENT VARIABLE

Financial performance

· Profitability,

· cash flow

· Liquidity position.

Credit management

· Client appraisal techniques

· Credit risk control tools

· Collection policy

INTERVENING VARIABLE

Organization policies and values

· Level of supervision

· Level of education

· Support documents

· Organizational policy

Source: Developed by the researcher as guided by Jabareen, Y. (2009)

The figure 1:1 presents the conceptual frame work containing independent variables (credit management), the intervening variables (organization policies and values) and dependent variables (financial performance)

Credit management involves the use of credit term collection policy, credit risk control tools and client appraisal techniques geared towards the financial performance to achieve the objectives there is interplay with the intervening variable which includes the level of supervision, training clients, support documentation and government policy. The outcome is manifested in form of sales, cash flows; net profit and debtor turn over.

credit terms involve setting clear lines to be followed while selling on credit and this calls for a careful supervision at all levels In order to improve on sales and better debtors turn over on financial performance of the organization

Client appraisal techniques help in ascertaining the credit worthiness’ of the client but this needs support services and documentation in order to improve on the debtor turn over and profitability.

credit risk control tools helps in aiding and selling the product to good clients as it provides tools to be used in order to avoid event that can lead to bad sales, credit risk control, therefore calls for the training the clients on the importance of keeping the record. Documentation for themselves and close supervision by the credit management team within the organization for timely repayments in order to ascertain sales.

collection policy aim at accelerating collection form slow payers and reducing bad losses but this requires good government policies and proper documentation in order to improve on timely repayments and decrease in fault and profit for the organization.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter consisted of literature of credit management and financial performance and the review of literature relating to the objectives of the study. During the study, the researcher primarily looked towards the concept of credit management variables i.e. Client appraisal techniques, Credit control tools and Collection policies, financial performance variables included Revenue, profitability, cash flows and liquidity position. And the chapter ended with the summary conclusion of the literature review.

2.1 Theoretical Review

Previous literature has shown that there exists information asymmetry in assessing bank lending applications (Binks and Ennew, 1997). Information asymmetry describes the condition in which relevant information is not known to all parties involved in an undertaking (Ekumah and Essel, 2003). Studies on transaction costs have shown that transaction costs occur “when a good or a service is transferred across a technologically separable interface”. Therefore transaction costs arise every time a product or service is being transferred from one stage to another, where new sets of technological capabilities are needed to make the product or service. Therefore, it may be very well more economies to maintain the activity in-house, so that the company was not use resources on example contacts with suppliers, meetings and supervision. Managers must therefore weigh the internal transaction costs against the external transaction costs, before the company decides whether or not to keep some activity in-house. Wasiamson (1981).This chapter was review the asymmetric information theory and Transaction cost theory in credit management

2.1.1 Asymmetric Information Theory

Information asymmetry refers to a situation where business owners or manager know more about the prospects for, and risks facing their business, than do lenders (PWHC, 2002) cited in Eppy.I (2005). It describes a condition in which all parties involved in an undertaking do not know relevant information. In a debt market, information asymmetry arises when a borrower who takes a loan usually has better information about the potential risks and returns associated with investment projects for which the funds are earmarked. The lender on the other hand does not have sufficient information concerning the borrower (Edwards and Turnbull, 1994).

Binks et al (1992) point out that perceived information asymmetry may pose two problems for the banks, moral hazard (monitoring entrepreneurial behavior) and adverse selection (making errors in lending decisions). Banks may find it difficult to overcome these problems because it is not economical to devote resources to appraisal and monitoring where lending is for relatively small amounts. This is because data needed to screen credit applications and to monitor borrowers are not freely available to banks.

2.1.2Transactions Costs Theory

First developed by Schwartz (1974), this theory conjectures that suppliers may have an advantage over traditional lenders in checking the real financial situation or the credit worthiness of their clients. Suppliers also have a better ability to monitor and force repayment of the credit. All these superiorities may give suppliers a cost advantage when compared with financial institutions.

Three sources of cost advantage were classified by Petersen and Rajan (1997) as follows: information acquisition, controlling the buyer and salvaging value from existing assets. The first source of cost advantage can be explained by the fact that sellers can get information about buyers faster and at lower cost because it is obtained in the normal course of business.

That is, the frequency and the amount of the buyer’s orders give suppliers an idea of the client’s situation; the buyer’s rejection of discounts for early payment may serve to alert the supplier of a weakening in the credit-worthiness of the buyer, and sellers usually visit customers more often than financial institutions do.

2.2. Conceptual Review

2.2.1. Credit Management

Credit management is one of the most important activities in any company and cannot be overlooked by any economic enterprise engaged in credit irrespective of its business nature. It is the process to ensure that customers will pay for the products delivered or the services rendered. Myers and Brealey (2003) describe credit management as methods and strategies adopted by a firm to ensure that they maintain an optimal level of credit and its effective management. It is an aspect of financial management involving credit analysis, credit rating, credit classification and credit reporting. Nelson (2002) views credit management as simply the means by which an entity manages its credit sales. It is a prerequisite for any entity dealing with credit transactions since it is impossible to have a zero credit or default risk.

The higher the amount of accounts receivables and their age, the higher the finance costs incurred to maintain them. If these receivables are not collectible on time and urgent cash needs arise, a firm may result to borrowing and the opportunity cost is the interest expense paid. Nzotta (2004) opined that credit management greatly influences the success or failure of commercial banks and other financial institutions. This is because the failure of deposit banks is influenced to a large extent by the quality of credit decisions and thus the quality of the risky assets. He further notes that, credit management provides a leading indicator of the quality of deposit banks credit portfolio.

A key requirement for effective credit management is the ability to intelligently and efficiently manage customer credit lines. In order to minimize exposure to bad debt, over reserving and bankruptcies, companies must have greater insight into customer financial strength, credit score history and changing payment patterns. Credit management starts with the sale and does not stop until the full and final payment has been received. It is as important as part of the deal as closing the sale. In fact, a sale is technically not a sale until the money has been collected. It follows that principles of goods lending shall be concerned with ensuring, so far as possible that the borrower will be able to make scheduled payments with interest in full and within the required time period otherwise, the profit from an interest earned is reduced or even wiped out by the bad debt when the customer eventually defaults. Credit management is concerned primarily with managing debtors and financing debts. The objectives of credit management can be stated as safe guarding the companies‟ investments in debtors and optimizing operational cash flows. Policies and procedures must be applied for granting credit to customers, collecting payment and limiting the risk of non-payments.

2.2.2. Financial performance:

According to the business dictionary financial performance involves measuring the results of a firm’s policies and operations in monetary terms. These results are reflected in the firms return on investment, return on assets and value added. Stoner (2003) as cited in Turyahebya (2013), defines financial performance as the ability to operate efficiently, profitably, survive, grow and react to the environmental opportunities and threats. In agreement with this, Sollenberg and Anderson (1995) assert that, performance is measured by how efficient the enterprise is in use of resources in achieving its objectives. Hitt et al., (1996) believes that many firms’ low performance is the result of poorly performing assets.

The firm financial performance can be measured in terms profitability, Revenue, cash flows among others. Van Horne (1989) said that a firm should evaluate its credit policy in terms of return (profits) and costs and are of three types which include; selling and production costs, Administration costs and bad debts losses. Management needs to establish a system on its trade debtors by critically addressing factors like cash discounts offered for prompt payment, credit period offered, evaluating customers credit worthiness and stating clearly the steps regarding late payment in its credit policy and thus credit standards which is the strength and credit worthiness of customer must be exhibited in order for potential client to quality of credit.

2.2.3 Profitability.

Profitability is measured by the incomes and expenses. Income is the money generated from the activities of the business for example the sale proceeds. Expenses are the costs of resources used up or consumed by the business. These costs include the opportunity costs for tying up funds in debts, cost of running the credit operations, cost of time to chase debts, cost of bad debts and the cost of dept. recovery (Leong, 2009). Profitability can be defined as either accounting or economic profits. Accounting profits is excess of the income over the expenses. However, a single non-profit financial year may not really harm the business of the firm, but when the firm incurs losses in the consecutive years it may jeopardize the viability of that business (DONs, 2009).

The accounting profits are measured to ascertain the success of the business. To see the business chances of survival; and to ascertain its ability to reward the owners for their investment into the business and this is the main goal to management.

The measurement of accounting profit is done by several instruments some of them include income statement which accounts for the financial, the income statement that measures project profitability of the business for the coming accounting year.

Economic profits is computed by deducting the opportunity cost from the net income (Graham, 2000). The opportunity cost includes money, labor and the management ability directed towards credit allocation. Economic profits are computed to provide the business with long-term perspective to oversee its continued operation. The firm’s profitability is influenced by the structure of the revenue generating assets like credit in Microfinance institutions which generate revenue in terms of interest incomes. Also profitability is dependent on the firm’s ability to eliminate risks in the asset operation to ensure correspondence between the assets and liabilities. (Bobakova, 2003).

2.2.4. Cash flows and liquidity position.

Cash discount is the percentage reduction on the amount of debts to be paid by the creditors. This acts as an incentive to induce the customer to repay the credit obligation within or lesser than the credit period. Cash discount act as a tool to accelerate credit collections from customers and this helps the firm to reduce the level of receivables and their associated costs Reigner and Hill (1997), Mosic (1982), Pandey (1995). Defines cash management as away concerned with management of cash flows into or out of the organization / firm’s cash flows within the firm and cash balances held by the firm at appoint of time.

Pandey (1995), Cash management is concerned with managing of cash flows of the firm and cash balances held by the firm at appoint of time by financing deficit or investigating surplus. Cash sale generate cash which has to be disbursed out, the surplus cash has to be invested while the deficit has to be borrowed .Cash management needs to be accomplished at minimum cost.

Bodil (1999), a business cannot survive without enough cash to pay bills and finance growth. On the other hand, having too much cash is inefficiency cost of capital. Therefore firms should endeavor to their money at work to maximize value and when they invest excess cash they must strive a balance between risks and expected returns.

Business analysts report that poor cash management is the main reason for business failure. Poor cash flow handling is said t be the most crucial stumbling block for entrepreneurs. Therefore managers who don’t consider the effectiveness of the cash flows hinder the management of cash is the life blood of the business.

2.3. Empirical literature review.

2.3.1Effect of Client Appraisal on financial performance

The first step in limiting credit risk involves screening clients to ensure that they have the willingness and ability to repay a loan. Microfinance support Centre uses use the 5Cs model of credit to evaluate a customer as a potential borrower (Abedi, 2000). The 5Cs may help to increase loan performance, as they get to know their customers better. These 5Cs are character, capacity, collateral, capital and condition.

Character – refers to the trustworthiness and integrity of the business owners .it’s an indication of the applicant’s willingness to repay and ability to run the enterprise. Capacity assesses whether the cash flow of the business (or household) can service loan repayments. Capital – Assets and liabilities of the business and/or household. Collateral -Access to an asset that the applicant is willing to cede in case of non-payment, or a guarantee by a respected person to repay a loan in default. Conditions-A business plan that considers the level of competition and the market for the product or service, and the legal and economic environment

The 5Cs need to be included in the credit-scoring model. The credit scoring model is a classification procedure in which data collected from application forms for new or extended credit line are used to assign credit applicants to „good‟ or „bad‟ credit risk classes (Constantinescu et al., 2010).Inkumbi (2009) notes that capital (equity contributions) and collateral (the security required by lenders) as major stumbling blocks for entrepreneurs trying to access capital. This is especially true for young entrepreneurs or entrepreneurs with no money to invest as equity; or with no assets, they can offer as security for a loan.

Any effort to improve access to finance has to address the challenges related to access to capital and collateral. One way to guarantee the recovery of loaned money is to take some sort of collateral on a loan. This is a straightforward way of dealing with the aspect of securing depositors‟ funds. However although the company uses the 5Cs model of credit to evaluate a customer as a potential borrower according to (Abedi, 2000), Does not fully g defaulted according to end of year financial report of the company hence the researcher intends to carry out a further study to address the gap.

Sheilah (2011) commented that, the ability of financial institutions to promote growth and financial performance depends on the extent to which financial transactions are carried out with trust, confidence and least risk. This requires sound and safe loan appraisal to assess and unearth the financial character of the loan applicant before any step is undertaken. This will dictate on the conditions to be applied on the loan covenant to help curb bank–customer relationship that may have positive influence on financial performance of the commercial banksin Uganda. Sheilah is of the view that proper and adequate loan appraisal is the key to controlling or managing the level of income interests hence return on assets as well as return on equity therefore positively influencing on financial performance. The study established that loan appraisal did not adequately assess the value of assets to be invested on customers apart from return on equity to guide the execution of appropriate credit decision.

In a study by Nagarajan (2011) it was observed that the time taken to appraise the bank’s clients is very important in order to identify the return on deposits. This influences the bank’s financial performance. This reflects the bank management’s ability to utilize the customer’s deposits in order to generate profits. Moreover, Dhankal (2011) added by saying that the challenge with this policy is attractiveness of the banks to customers so as to frequently make deposits and to offer incentives on delayed deposits so as to make use of these deposits to generate more revenues towards improved financial performance of these banks. However, the study identified a gap in that this does not just involve only collection procedure details provided by the bank but also the procedure on how the lawful collection should take place.

2.3.2. Effect of Credit Risk Control on financial performance

Key Credit controls include loan product design, credit committees, and delinquency management.

(Churchill and Coster, 2001). Although most of microfinance institutions have tried to apply these tools, there is still a challenge among the credit committees in determining the institution’s credit policy and spotting potential risks of various transactions assumed by the institution. Therefore, the researcher intends to carry out further study to evaluate the effectiveness of the above credit risk control tools in relation to credit management and financial performance.

Mwangi (2010) investigated on factors that affect MFIs credit risk management practices in Kenya. The study’s specific objectives included how portfolio quality, market infrastructure and market concentration affected the credit risks of MFIs. According to the study results the three factors did affected credit risk of MFIs. Nyakeri (2012) carried out a research on how practices relating to management of credit affects financial performance in SACCOS in Nairobi .The research specific objectives included the effect of credit approval process, loan portfolio, credit score and the Risk analysis on the profitability of the MFIs. According to the findings the credit risk analysis improved the firm’s profitability, loan portfolio and returns of the MFIs.

Nagarajan (2011) assessed the risk management for MFIs in Mozambique concluded that the process of managing risks is ever changing and could be developed and tested when risk occurred. The processes need to consider the commitment of all the firm stakeholders for it to be planned and executed properly. An encouraging finding was that minimizing losses was possible by managing cash flow properly management of cash flows and portfolios, by coming up with robust institutional infrastructure, use of skilled employees and insisting of client discipline and effectively coordinating the stakeholders.

Moti (2012) studied the effectiveness of credit management system on loan performance: empirical evidence from microfinance sector in Kenya. The goal of the research was to determine how effective credit management was on the performance of loan in MFIs. The specific goals was to determine the effect of control measures, credit terms, credit risk, credit collection policies and credit appraisal on the performance of loans. The study used a descriptive research method. The respondents who provided the data were officers who worked at MFIs in Meru. The findings showed that the collection policy highly affected the repayment of loans with =12.74, P=0.000 at 5% significance level.

2.3.3 Effect of Collection Policy on financial performance.

There are various policies that an organization should put in place to ensure that credit management is done effectively; one of these policies is a collection policy, which is needed because not all customers pay the firms bills in time. Some customers are slow payers while some are non-payers. The collection effort should, therefore aim at accelerating collections from slow payers and reducing bad debt losses (Kariuki, 2010). Although the application of these policies to ensure timely payment of its accounts receivables the microfinance institutions still face challenge of bad debts hence the researcher needs to carry out a further study to assess the effectiveness of the collection policies to financial performance of microfinance institutions.

Owino (2012) in his study on effects of lending policies on loan defaults on commercial banks says that the purpose of loan appraisal is to assess the likelihood that the loan asset to be offered to customers has higher interest margin that drives increased return on assets hence financial performance of the commercial banks. It includes assessing the borrower’s needs and financial conditions that identifies the borrower’s character, capacity, collateral, capital etc. Interested lenders will expect the loan applicant to have contributed from their own assets and to have undertaken personal financial risk to establish the business before advancing any credit. The study identified that the hindrance of loan appraisal is information asymmetry that spells doom on the success of fully assessing the loan applicant due to hidden information and history

According to Nyorekwa (2014) on the study of effectiveness of lending policies on financial performance of the banking sector in Tanzania observed that before lending out money, a bank has to assess all important factors that have a bearing on the financial soundness of the customer as well as the returns expected to be generated from the loan assets prime focus being the purpose and need of the credit and ability of the borrower to repay the credit advanced as per the terms of the loans. The borrower’s character, experience and competence to manage the business and to utilize the funds for the purpose for which they are lent are normally taken into account. The project or activity proposed for financing should be capable of generating sufficient income so that the loan is serviced and repaid to have targeted return on assets invested by the banks. There was a gap with how the loan appraisal could be conducted to establish if the bank’s lending could be too little or too much in relation to the need so as to cause problems

2.12 Summary of Literature Review

Following all the reports made by a above researchers,

The chapter begun by providing a brief discussion on key theoretical approaches and findings reported in earlier related studies credit management and financial performance. Key theoretical approaches discussed are Asymmetric Information Theory and Transactions costs theory. The chapter also concentrated on empirical facets of credit management and financial performance.

A credit policy forms part of a larger credit management systems. Most scalars have analyzed credit policy but little has been done on analyzing the relationship between credit management and financial performance of Microfinance institutions. Since most companies want to create a sustainable business with profitable growth both now and in future. The literature review has indicated that credit managers need to be critical when setting their credit policy and carrying out assessment of their customers before advancing any credit.

The theory stated the use of 5s, but did not critically state the ingredient to be looked at and to what extent it’s considered good for decision making.

Local studies that have been done on microfinance sector do not focus on the effect of credit management on the financial performance of Micro finance institutions; there is therefore a gap in the empirical evidence available hence the researcher seeks to study to bridge that gap.

CHAPTER THREE

RESEARCH METHODOLOGY

3.0. Introduction

This chapter presents information on research design, area of study, study population, sampling Design sampling size, Data collection methods and instruments, Quality control methods, Data management and processing, Data analysis, Ethical considerations and finally limitations of the study.

3.1 Research Design

This section focused on the research techniques which were adopted and used for the study with the aim of achieving the research objectives. A research design is defined as an overall plan for research undertaking and it provides the glue that holds the research project together.

The study used a case study design to investigate the effect of credit management on financial performance in Microfinance Support Centre, Mbale branch. The case study design was used in that its findings were based on the data collected from a geographic area of MSC which was used as a case study. The research employed both qualitative and quantitative methods. The qualitative approach was used in comprehending views obtained from respondents through questionnaire and interviews. The quantitative approach on the other hand was used in computing data that involved figures hence this enabled the use of percentages in data analysis.

3.2 Area of the study

The area of the study was at Microfinance Support Centre, Mbale branch. Because it strategically located and the researcher had easy access to the respondents. The area of the study refers to the anthropological or sociological research which is intended to gather and relate data on various aspects of a geographical region and its inhabitants, as natural resources, history, language, institutions, economic characteristics and Primary investigation into human ecology.

3.3 Study Population

The study population consisted of 60 respondents from the different departments which included finance (2), Human Resource Administration (5), loans officers (15), Information communication technology (02), Marketing and corporate Affairs (13), legal officer (10), customers (10) and internal audit (05). Therefore, the study population was60 out of which the sample size selection for the study was made.

3.4 Sampling procedures.

3.4.1 Sample size and Selection.

Sekaran, (2003) identified that, sampling is the process of choosing the research units of the target population, which are to be included in the study. A sample size of 52 respondents was selected out the population of the study population of 60 which comprised of finance (5), Human Resource Administration (2), loans officers (15), Information communication technology (02), Marketing and corporate Affairs (13), legal officer (10), customers (10) and internal audit (05). The sample size was determined using Morgan and Krejcie table as given by Amin, (2005) (Appendix III)

Table 3.1: Showing category, population, sample size and sampling technique.

Category	Study Population	Sample Size	Sampling technique
Finance	05	4	Purpose sampling
Human Resource Administration	02	1	Purpose sampling
Loan officers	15	13	Simple Random Sampling
Information communication technology	02	1	Purposive sampling
Marketing and corporate Affairs	13	11	Simple Random Sampling
Legal Officers	10	9	Simple Random Sampling
Customers	10	9	Simple Random Sampling
Internal Audit	5	4	Purposive sampling
Total	60	52

Source: Primary data (2021)

3.4.2 Sampling techniques.

The study used both probabilistic and non-probabilistic techniques. These included simple random and purposive sampling techniques.

A simple random sample is a subset of a statistical population in which each member of the subset has an equal probability of being chosen. A simple random sample is meant to be an unbiased representation of a group. Simple random sampling was used for the study because it was considered a fair way of selecting a sample from a given population since every member is given equal opportunities of being selected.

Purposive sampling was used for selecting heads of Human Resource Administration, finance and respondents from ICT departments. This was preferred by the researcher because ;it excluded people who were unsuitable for the study and remained with the most suitable candidates , it is less time consuming, reduces the costs for carrying out the sampling project, the results of purposeful sampling are usually expected to be more accurate than those achieved with an alternative form of sampling.

3.5 Sources of data.

Two basic sources of data considered were both primary and secondary.

The study used both primary and secondary data sources. The instruments were preferred for their greater convenience in the context of time, stability, uniformity and consistency.

The primary data refers to the data collected by the researcher herself. In order to achieve her objectives data was collected mainly using the structured questionnaires and interview guides from the respondents.

Secondary data refers to already available data set, this was obtained from documents, journals, online data sets in order to supplement on the primary data collected by the questionnaires and the interview guides.

3.6 Data Collection Methods and Instruments

To collect a large quantity of data, the following data collection methods were used: questionnaire, face-face interviews, and documentary review.

3.6.1 Data Collection Methods

Questionnaires:

A structured questionnaire was used to collect data and in this study, questionnaires were used to collect data from members and staff of MSC on issues surrounding credit management and financial performance. Questionnaires were used because apart from being easier to administer, they more reliable and also easier to analyze (Amin, 2003). Questionnaires are often used to collect data from large samples because they are cheap to administer, free from bias of the researcher, provide adequate time for respondents to fill them (Kothari, 2006). Using an introductory letter from the university, the researcher delivered the blank questionnaire to the selected respondents in Micro finance Support Centre and provided an appropriate time for them to complete them and then she collected them.

Interviews

Face to face interviews were held to collect data from the staff at MSC in order to collect in-depth data on credit management and financial performance. The researcher arranged to meet the respondents in these three categories and held face to face interviews with them. During the process, a set of questions were asked and their responses were written down by the researcher. At the end of the interview process, the researcher went over what had been captured and ensured that no useful information was be left out.

3.6.2 Data Collection Instruments

Questionnaire.

As an instrument, a 5 point-Likert scale questionnaire was used. It comprised of both open ended and close ended questions. This served to the respondents majorly on appointment who were then required to tick against the provided questions or fill in where necessary. This instrument is good because it has limited choice for respondents there by limiting assumptions and falsifications by respondents.

Interview Guide

As an instrument, an interview schedule was used to collect data from the top SMT, the top management team of the organization. This is because these respondents were ever busy that they were unable to take off time to answer a questionnaire. The interview schedule contained a set of questions that were followed while interviewing the respondents to avoid going off topic. This instrument is good because it minimized differences between interview responses since the guiding questions were pre-determined and interviewees were subjected to the same environments (Canals, 2017).

3.7Quality Control Methods

The instruments of data collection in this study were assessed in terms of validity and reliability to ensure dependability of the results of the study.

3.7.1 Validity

Validity of the instrument was determined by computing the Content Validity Index after rating of the items by the supervisor. The researcher requested the supervisor to rate the items in the data collection instruments as Very Relevant (VR), Relevant (R), Somewhat Relevant (SWR) or Not Relevant (NR). From the rating, the researcher used the formula below to compute the Content Validity Index (CVI), which was an indicator of the level of validity of the instrument.

Formula used: CVI = VR + R

K; Where VR is for Very Relevant, R for Relevant and K is for total number of items in the instrument.

From the supervisor’s rating, 10 items were rated very relevant; 13 were rated relevant, 5 were rated somewhat relevant and 3 as not relevant. This was out of the 37 items in the instrument. By substitution in the formula above;

CVI = 10 + 13 = 23 = 0.793

29 29

The value of Content Validity Index (CVI) obtained was interpreted using the George and Mallery (2003) scale. Since the value of CVI obtained was 0.793, which is above 0.7, it indicated good reliability (George and Mallery, 2003).

3.7.2 Reliability

Reliability refers to consistency in delivering results. To ascertain reliability, the researcher pre-tested the research instrument on a reasonable number of staffs within MSC, who were not used in the final data collection process. After pre-testing, the Chronbach’s Alpha formula was used to compute the reliability coefficient which is an indicator of the level of reliability of the instrument (George and Mallery, 2003). A reliability coefficient value of 0.7 was obtained indicating acceptable reliability (George and Mallery, 2003).

3.8 Measurement of variables

The dependent variable of the study; financial performance was measured by Profitability, cash flow and liquidity position. The independent variables of the study credit management were measured by client appraisal techniques, credit risk control tools and collection policies. A questionnaire with 5 point rating scale as per Likert scale ranging from strongly agree (1) to strongly disagree (5) of Munene, (2000) local measure was used to measure respondent’s evaluation by asking them the degree of agreement with statements. The measurement scale of 1 up to five on every statement simply measures the strength of the respondents’ opinion on the particular statement. If the respondent ticked 1 it implied that one strongly agrees with the statement, 2 = agrees, 3 = not sure in other words one does not take any side on the statement, 4 = disagrees and 5 = strongly disagrees with the statement under discussion.

3.9 Analysis of Data

Data collected was first cleaned and scrutinized for any missing values before actual analysis was done.

3.9.1 Quantitative Data

Quantitative data collected was centered into the Statistical Package for Social Scientists (SPSS) computer software. The software was commanded to generate descriptive statistics such as frequencies and percentages. Then a correlation analysis was ran using the SPSS software to establish the effect of the Credit Management on financial performance in Microfinance Support Centre, Mbale branch.

3.9.2 Qualitative Data

The qualitative data was analyzed for content and language used by thorough transcribing of recorded interviews looking out for similarities and differences to identify themes and develop categories according to the objectives. Data cleaning, editing and coding of the items in the questionnaire was employed to cross check and interpret qualitative data and generate theoretical relations for making conclusions. The interplay between the findings solicited by both quantitative and qualitative data enabled the researcher to draw conclusions and subsequently make recommendations.

3.10 Ethical Considerations

The researcher respect anonymity of the respondents by ensuring confidentiality of the respondents and the data provided. This was done through assurance that the information they provided was to be purely for academic purposes and that their identity would not be disclosed to anyone. This was highlighted in the introductory part of the questionnaire and before the interview sessions. Lastly but not least, objectivity was considered during report writing to avoid personal bias.

3.11 Limitations of the Study

Organizations are critical about security and disbursement of information pertaining to their operations. The main limitation was in terms of accessing information that was considered classified by Organization authorities. The respondents, especially the top managers tried to refuse to disclose information about their departments. However, through the use of the introduction letter from the university and having an honest discussion on the significance of the study with the branch manager, a harmonious environment was created and permission to access such classified information was granted. The other factor that limited was the response rate (due to loss of some questionnaires) which could affect the reliability of the study. However, in this case, more questionnaires were distributed to ensure that the appropriate sample was attained.

3.12 Conclusion

This chapter clarified on the research design including the approaches adopted. The methodology enabled the researcher to design a plan for the study which acted as guidance for data collection during which ethical issues were seriously observed. A challenge was encountered during the study but was on the other hand be an opportunity to learn from them during the study.

CHAPTER FOUR

PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS

4.0 Introduction.

This chapter presents the findings and interpretation of research study in accordance with study questions and objectives.

The objectives under study were: To examine the effect of client appraisal techniques on financial performance of micro finance support Centre ltd. Mbale Branch,

To examine the effect of credit risk control tools on financial performance in micro finance support Centre ltd. Mbale Branch and to examine effect collection policies on financial performance in micro finance support Centre ltd. Mbale Branch.

The study used both descriptive and regression analysis approaches and these findings were got from both primary and secondary sources and the questionnaires, interviews and document review were used to reinforce the existing knowledge in the literature reviews.

To test the hypothesis relating to this objective, a number of approaches to data analysis were used. These included descriptive statistics, Pearson product moment of correlation, Regression analysis and analysis of Variance (ANOVA).

4.1 Response Rate

The study presented the response rate to indicate whether the returned questionnaire was sufficient enough for analysis.

Table 4.1. Showing response rate.

The result in Table 4.1 shows the response rate of the questionnaires.

	Questionnaires administered	Questionnaires filled and returned	Percentage
Respondents	52	52	100%

Source: Primary Data 2021.

Fifty-two questionnaires were issued and all the questionnaires were filled and returned. The fifty-two therefore represent 100% response rate. The response rate is considered adequate given the recommendations by Arora and Arora (2003) who consent that a response rate of 75% is adequate and Mugenda and Mugenda (2003) who advise on response rates exceeding 50%.

4.2 Background Information of the respondents.

The study analyzed background information of the respondents relying on a number of variables including; gender, age category, working period, marital status of the respondents with and highest level of education of the respondents. The findings gathered are presented as follows:

4.2.1 Gender of the Respondents

This subsection presents findings of the gender of respondents in terms of male and female. Data on this variable was collected, analyzed and is presented in table 4.2 below;

Table 4.2. Showing gender of the respondents.

The results in Table 4.2 show the responses distributed according to gender of employees.

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Male	25	51.9	48.1	48.1
	Female	27	48.1	51.9	100.0
	Total	52	100.0	100.0

Source: Primary data 2021

From the table 4.2, 51.9% of the respondents were female and 48.1% were female. This clearly shows that majority of the respondents were male with up to 27 of them compared to the 25 males who were involved in the study. This is a clear indication that majority of the employees at MSC are male. This implies that perhaps since MSC work involves a lot of Primary work to check on clients, more males are employed than female counter parts. However, the difference is not very big to question gender balance. This also may imply that the data was obtained from different sex therefore balanced views that may properly advice on how to improve on the financial performance.

4.3. Age of the respondents

This subsection considered the age of the respondents in terms of age brackets. Data on this variable was collected, analyzed and is presented in table 4.3 below;

Table 4.3. Showing Age of the respondents.

The results in Table 4.2 show the responses distributed according to age of employees.

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	18-25 Years	9	17.3	17.3	17.3
	25-30 Years	28	53.8	53.8	71.1
	30-40 Years	14	26.9	26.9	98
	40-50 Years	1	1.9	1.9	100.0
	Total	52	100.0	100.0

Source: Primary data 2021

From the table 4.3, it shows that 28(53.8%) of the respondents were between 25-30 years, 14(26.9%) were aged between 30-40 years, 9(17.3%) were between 18-25 years and 1(1.9%) were aged between 18-25 year. The analysis shows that majority of the respondents are between ages 25-30 years, this implies that this age group produce quality work and this age group are considered to be mature enough in handling clients and handling organization resources responsibly. The finding also indicates that respondents who are majorly MSC members are young, and enthusiastic about improving the financial abilities of the organization.

4.4 Marital status of the respondents

This section took into consideration the marital status of the respondents and the data collected was presented and analyzed in the table below.

Table 4.4. Showing marital status of the respondents.

The results in Table 4.4 show the responses distributed according to marital status of employee

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Married	19	36.5	36.5	36.5
	Single	17	32.6	32.6	68.1
	Divorced	7	13.5	13.5	81.6
	Engaged	9	17.3	17.3	100.0
	Total	52	100.0	100.0

Source: Primary data 2021

Findings from table 4.4 reveals that majority of the responds 36.5% were married, 34.6% were single, and 17.3% of the respondents were engaged and 13.5% of the respondents were divorced. The findings imply that majority of the respondents were married and hence it means that information was got from responsible people who do work with faith.

4.5. Level of Education

This subsection considered level of education of the of respondents in terms of secondary, certificate, Diploma, Bachelor’s Degree, Master’s Degree and others. Data on this variable was collected, analyzed and is presented in table 4.5 below;

Table 4.5. Showing level of education of the respondents.

The results in Table 4.5 show the responses distributed according to education levels of employees.

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Secondary	5	9.6	9.6	9.6
	Certificate	12	23.1	23.1	32.7
	Diploma	7	13.5	13.5	36.2
	Bachelor’s Degree	19	36.5	36.5	82.7
	Master’s Degree	9	17.3	17.3	100.0
	Total	52	100.0	100.0

Source: Primary data 2021

From the analysis 36.5% are Degree holders, 23.1% certificate, 13.5% Diploma level, 17.3% were Master’s Degree holders, 13.5% and 9.6% are of secondary school certificates. Majority 36.5% were degree holders and this shows that the employee’s education level can be used in planning and making decisions and hence produce quality work for improvement of financial performance. Hence quality information obtained from the right people.

4.6. Work experience of the respondents

This subsection considered working period of the respondents with MSC, Mbale branch. Data on this variable was collected, analyzed and is presented in table 4.6 below;

Table 4.6. Showing Experience of the respondents.

The results in Table 4.6 show the responses distributed according to the working experience of employees.

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Less than 1 year	10	19.2	19.2	19.2
	1-5 years	23	44.2	44.2	63.4
	6-10 years	17	32.7	32.7	96.1
	More than 10 years	2	3.8	3.8	100.0
	Total	52	100.0	100.0

Source: Primary data 2021

From the findings a majority of 44.2% of the respondents have worked with MSC for a period between 1 to 5 years, 32.7% have worked with MSC for a period between 6-10 years, 19.2% of the respondents had worked in MSC for a period less than 1 year and 3.8% of the respondents had worked there for more than 10 years.

Therefore, based on the findings above, majority of respondents have worked for a period of 1-5 years. This means that they had acquired enough experience and a great understanding of the organization’s policies, procedures and experience with the kind of work at hand and thus able to achieve targets comfortably and without challenges. It can also imply that the responses were of great value and reality since they were given by experienced members with enough knowledge about the credit management and financial performance.

4.3 Descriptive statistics on credit management and financial performance.

The study determined the frequencies, percentages, mean and standard deviation of the responses on client appraisal techniques, credit risk control tools, and collection.

4.3. Client appraisal techniques and financial performance in MSC

The first objective of the study was to examine the effect of client appraisal techniques on the financial performance of MSC. The data was analyzed as below;

Table 4.7: There are client appraisal techniques in this organization

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	42	80.8	80.8	80.8
	Agree	6	11.5	11.5	92.3
	Not sure	2	3.8	3.8	96.1
	Disagree	2	3.8	3.8	100.0
	Total	52	100.0	100.0

Source: Primary data 2021

On finding out whether there are appraisal techniques in MSC, majority of the respondents 42(80.8%) strongly agreed, 6(11.5%) of the responds agree with the statement ‘there are appraisal techniques,’ 2(3.8%) of the respondents were not sure about the statement and 2(3.8%) of the respondents disagreed with the statement. The findings show that majority of the responds agree that there are appraisal techniques in MSC, Mbale branch. This implies that when appraisal techniques are emphasized, they help the organization to weigh their clients, this is very important in ensuring that the loans are recovered back in time which affects the financial performance of the organization. Sheilah (2011) is of the view that proper and adequate loan appraisal is the key to controlling or managing the level of income interests hence return on assets as well as return on equity therefore positively influencing on financial performance.

Table 4.8: There is a competent staff for carrying out client appraisal.

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	10	19.2	19.2	19.2
	Agree	34	65.4	65.4	84.6
	Not sure	3	5.8	5.8	90.4
	Disagree	2	3.8	3.8	94.2
	Strongly disagree	3	5.8	5.8	100.0
	Total	52	100.0	100.0

Source: Primary data 2021

On finding out whether there is a competent staff to carry out client appraisal, 34(65.4%)) agree and 10(19.2%) also strongly agree that there are competent staff to carry out client appraisal, 3(5.8%) were not sure, 3(5.8%) of the respondents strongly disagree and 2(3.8%) of the respondents disagreed. This means that majority of the respondents agree that there are competent staff to carry out client appraisal in MSC. This therefore, implies that having a competent staff in place plays a great role in improving financial performance in an organization because such staff will ensure that all collections are got in time and can be in position to correctly evaluate the clients and issue correct repayment schedules which is important in addressing the issue of deteriorating financial performance in the organization. One of the respondents had to say, ‘all our staff are highly qualified and understand what they do.

Table 4.9: This organization offer credit to customers

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	10	19.2	19.2	19.2
	Agree	24	46.2	46.2	65.2
	Not sure	8	15.4	15.4	80.8
	Disagree	10	19.2	19.2	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

With reference to the table above findings indicate that majority of the respondents 34(65.4%) of the respondents strongly agree and agree with the statement ‘Does your organization offer credit to customers,’ 10(19.2%) of the respondents disagree and 8(15.4%) were not sure about the statement. The means that majority of the respondents were in agreement with the statement that this organization offers credit to customers. This forms the basis for the survival of the organization and it is its life-blood as this helps in generating the necessary income which boosts its financial performance.

Documentary findings show that most clients at MSC had received loans. Indeed, an interview respondent said

“It takes two to three days to process and receive a loan depending on how often the loans committee sits and number of loan requests/application, availability of funds and the signatories”.

This shows that the MSC offers loans to its clients.

Table 4.10: Client appraisal take note of collateral.

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	12	23.1	23.1	23.1
	Agree	21	40.4	40.4	63.5
	Not sure	6	11.5	11.5	75
	Disagree	12	23.1	23.1	98.1
	Strongly disagree	1	1.9	1.9	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

Results from the table reveal that 21(40.4%) and 12(23.1%) of the respondents strongly agree and agree with the statement ‘Client appraisal takes note of collateral,’12(23.1%) and 1(1.9%) of the respondents disagree and strongly disagree with the statement respectively, while 6(11.5%) of the respondents were not sure about the statement. The means that majority of the respondents were in total agreement with the statement ‘Client appraisal take note of collateral.’ This is the most important item in credit management, in case of failure to pay, the collateral is used to cover up the default monies and so this helps the organization to maintain its inflow of cash and boosts its financial performance. This is in line with Inkumbi (2009) who notes that capital (equity contributions) and collateral (the security required by lenders) as major stumbling blocks for entrepreneurs trying to access capital is more important before credit is granted. This is especially true for young entrepreneurs or entrepreneurs with no money to invest as equity; or with no assets, they can offer as security for a loan.

Table 4.11: Failure to assess customer’s capacity to repay results in loan defaults

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	10	19.2	19.2	19.2
	Agree	23	44.2	44.2	63.4
	Not sure	9	17.3	17.3	80.7
	Disagree	9	17.3	17.3	98
	Strongly disagree	1	1.9	1.9	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

On finding out whether failure to assess customer’s capacity to repay results in loan defaults, 23(44.2%) of the respondents agree with the statement, 10(19.2%) of the respondents strongly disagree, 9(17.3%) and 1(1.9%) of the respondents both disagree and strongly disagree with the while 9(17.3%) of the respondents were not sure. This means that majority of the respondents were in agreement with the statement that failure to assess customer’s capacity to repay results in loan defaults. This failure to assess customers’ capacity to pay possess a big threat as in most cases such customers disappear with the money and this leaves the organization with a gap in its finances and hence the financial performance is negatively affected.

In line with the findings, one of the interviewees asserted that ‘it is true whenever we do not assess our customers’ capacity to, it has always resulted into many of our clients to pay back the loans we give to them, this is also because some of our clients lie to us about what they own.’

Table 4.12: All clients are appraised before credit is granted to them

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	13	25.0	25.0	25.0
	Agree	18	34.6	34.6	59.6
	Not sure	13	25.0	25.0	84.6
	Disagree	7	13.5	13.5	98.1
	Strongly disagree	1	1.9	1.9	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

Results from the table above reveal that majority of the respondents 18(34.6%) agree with the statement that all clients are appraised before credit is granted to them, 13(25.0%) strongly agree, 7(13.5%) disagree and 1(1.9%) of the respondents strongly disagree with the statement while 13(25.0%) were not sure. The findings imply that majority of the respondents were in agreement with the statement all clients are appraised before credit is granted to them. Proper appraisal helps to minimize the default rate among the customers and hence boosts the financial performance of the organization. This is in line with Nagarajan (2011) who asserts that the time taken to appraise the bank’s clients is very important in order to identify the return on deposits. This influences the bank’s financial performance. This reflects the bank management’s ability to utilize the customer’s deposits in order to generate profits.

One of the interviewees said ‘ In fact it is our usual routine here that all our clients are first appraises before we grant them credit and this has helped us to identify those who have the capacity to repay back the loans from those who are not capable.’

Table 4.13: Client appraisal techniques improve the quality of customers in this organization

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	8	15.4	15.4	15.4
	Agree	23	44.2	44.2	59.6
	Not sure	1	1.9	1.9	61.5
	Disagree	13	25.0	25.0	86.5
	Strongly disagree	7	13.7	13.7	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

Results from the table reveal that majority of the respondents 23(44.2%) agree with the statement that client appraisal techniques improve the quality of customers in this organization, 8(15.4%) of the respondents strongly agree, 13(25.0%) disagree and 7(13.5%) strongly disagree with the statement while 1(1.9%) were not sure. The findings indicate that majority of the respondents were in agreement with the statement that client appraisal techniques improve the quality of customers in this organization. These techniques help the organization to get to know the clients who have enough collateral security to pledge against the loan they are to take and in fact the chances of the organization losing money are further minimized.

Table 4.14. Correlations between client appraisal techniques and financial performance
		Client appraisal techniques	Financial performance
Client appraisal techniques	Pearson Correlation	3	.323^**
	Sig. (2-tailed)		.003
	N	52	52
Financial Performance	Pearson Correlation	.323^**	3
	Sig. (2-tailed)	.003
	N	52	52
**. Correlation is significant at the 0.03 level (2-tailed).

Source: Primary data (2021)

The results show that client appraisal techniques significantly contribute to financial performance. The correlation between them is r= 0.323, with p=0.003. Therefore, if the organization gives more consideration to client appraisal techniques in line with the objectives of the organization, then financial performance will be improved.

Table 4.15: Effect of Client appraisal and financial performance

Model Summary
Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.855^a	.730	.727	.55905
a. Predictors: (Constant), Client appraisal techniques

Source: Primary Data (2021)

The model summary in table 4.15 above using predictor client appraisal techniques reveals that adjusted R Square value is 0.727. This implies that 72.7% (0.727 *100) variations financial performance is explained by Client appraisal techniques while the remaining 27.3% is explained by other factors.

Hypothesis I

There is a strong positive and significant effect of client appraisal techniques on financial performance.’

Table 4.16: Variation in Client appraisal and financial performance

ANOVA^a
Model		Sum of Squares	Df	Mean Square	F	Sig.
1	Regression	64.303	1	64.303	205.744	.000^b
	Residual	23.753	50	.313
	Total	88.055	51
a. Dependent Variable: Financial performance
b. Predictors: (Constant), Client appraisal techniques

Source: Primary Data (2021)

The study used ANOVA statistical technique to analyze data. The study had the level of significance at α=0.000. It can be deduced from the regression that Client appraisal techniques are of significance to financial performance at, F=205.744 (0.000^b). Since significance calculated 0.000^bis less than 0.05, the study therefore accepts the first hypothesis which stated that ‘There is a strong positive and significant effect of client appraisal techniques on financial performance.’

4.4: Effect of Credit Risk Control and financial performance in MSC.

Table 4.17: Imposing loan size limits is a viable strategy in credit management
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	26	50.0	50.0	50.0
	Agree	6	11.5	11.5	61.5
	Not sure	10	19.2	19.2	80.8
	Disagree	9	17.3	17.3	98.1
	Strongly disagree	1	1.9	1.9	100.0
	Total	52	100.0	100.0

Source: Primary data 2021

Results from the table above reveal that majority of the respondents 32(61.5%) strongly agree and agree with the statement ‘imposing loan size limits is a viable strategy in credit management,’ 10(19.2%) of the respondents strongly disagree and disagree with the statement while 10(19.2%) of the respondents were not sure. This means that majority of the respondents were in agreement with the statement ‘imposing loan size limits is a viable strategy in credit management. The loan size limits help in determining the loan amount which a customer can be offered, this helps in reducing on the risk of default as this may result into a decline in financial performance and therefore, loan limits help in improving on financial performance by offering clients the loans that they can be in position to repay back.

Indeed one of the interviewees said ‘these limits help our clients to take the loans that they are in position to pay and also leave for them room to make a profit in their businesses and as an organization we also benefit because we shall be receiving our monies in time which has help to beef up our financial performance.’

Table 4.18: The use of credit checks on regular basis enhances credit management
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	4	7.7	7.7	7.7
	Agree	32	61.5	61.5	69.2
	Not sure	11	21.2	21.2	90.4
	Disagree	4	7.7	7.7	98.1
	Strongly disagree	1	1.9	1.9	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

On finding out whether the use of credit checks on regular basis enhances credit management, 4(7.7%) and 32(61.5%) majority of the respondents strongly agree and agree with the statement. 4(.7%) and 1(1.9%) of the respondents disagree and strongly disagree respectively while 11(21.2%) were not sure. This means that majority of the respondents were in agreement with the statement ‘the use of credit checks on regular basis enhances credit management.’ Such credit checks help to track the performance of the loans issued out to the clients and through this, the organization can easily track those clients who are not performing well via repayment of their loans as this can adversely affect the financial performance of the organization as it cuts on the inflow of incomes.

One of the interviewee had to say ‘ we talk track of all our clients in the system on a daily basis and this helps us to those loans that are performing well and those that are not performing well to avoid bring losses in the organization.’

Table 4.19: Flexible repayment period improve loan repayment
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	10	19.2	19.2	19.2
	Agree	14	26.9	26.9	46.2
	Not sure	20	38.5	38.5	84.6
	Disagree	5	9.6	9.6	94.2
	Strongly disagree	3	5.8	5.8	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

Findings from the table reveal that 20(38.5%) of the respondents strongly agree with the statement ‘flexible repayment period improve loan repayment,’ 14(26.9%) of the respondents agree with the statement, 5(9.6%) and 3(5.8%) of the respondents disagree and strongly disagree respectively while 10(19.2%) were not sure. The findings indicate that majority of the respondents were in agreement with the statement that flexible repayment period improve loan repayment. When customers are given a flexible repayment period to pay back their loan, this allows them to properly plan and they will be in position to pay back the organization its money and as a result, the organization will not lose their money and this will help to improve on recoveries and hence their financial performance will be boosted as compared to when the customers are given strict deadlines.

‘We allow our customers to repay back the loans in flexible terms and this has improved on the performance of our loans and also boosted and brought in new clients in our organization’

Table 4.20: Penalty for late payment enhances customer’s commitment to loan repayment
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	10	19.2	19.2	19.2
	Agree	17	32.7	32.7	51.9
	Not sure	16	30.8	30.8	82.7
	Disagree	9	17.3	17.3	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

On finding out whether penalty for late payment enhances customers commitment to loan repayment, 17(32.7%) majority of the respondents agree and 10(19.2%) strongly agree with the statement, 9(17.3%) and 0(0.0%) of the respondents both disagree and strongly disagree while 16(30.8%) of the respondents were not sure. The findings imply that majority of the respondents concur with the statement that penalty for late payment enhances customers commitment to loan repayment. The late repayment penalty sets the pace and hard work among the clients and because of the fear and need to avoid the penalty, they remit their installments in time and this leaves the organisation with enough money to carry on its planned activities and thereby boosting its financial performance.

One of the interviewees had to say that ‘the late penalty has indeed worked for us because most of our clients fear to pay it and so they pay back in time and this has increased our performance financially.’

Table 4.21: The use of customer credit application forms improves monitoring and credit management
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	10	19.2	19.2	19.2
	Agree	14	26.9	26.9	46.2
	Not sure	12	23.1	23.1	69.2
	Disagree	13	25.0	25.0	94.2
	Strongly disagree	3	5.8	5.8	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

Findings from the table show that majority of the respondents 14(26.9%) and 10(19.2%) both agree and strongly agree with the statement ‘the use of customer credit application forms improves monitoring and credit management as well,’ 13(25.0%) and 3(5.8%) of the respondents disagree and strongly disagree with the statement respectively while 12(23.1%) were not sure about the statement. This means that majority of the respondents were in agreement with the statement ‘the use of customer credit application forms improves monitoring and credit management as well,’

One of the interviewees said. ‘In this organization all our clients fill application forms before they access credit and these forms help us to get their consent in regard to our terms and conditions and these have helped us to keep track of our clients’

Table 4.22: Credit committee’s involvement in making decisions regarding loans are essential in reducing default.
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	12	23.1	23.1	23.1
	Agree	18	34.6	34.6	57.7
	Not sure	7	13.5	13.5	71.2
	Disagree	10	19.2	19.2	90.4
	Strongly disagree	5	9.6	9.6	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

Findings from the table above reveal that majority of the responds 18(34.6%) agree with the statement ‘Credit committee’s involvement in making decisions regarding loans are essential in reducing default/credit risk,’12(23.1%) of the respondents strongly disagree, 10(19.2%) disagree and 5(9.6%) strongly disagree with the statement while 7(13.5%) were not sure. The findings indicate that majority of the respondents were in agreement with the statement ‘credit committee’s involvement in making decisions regarding loans are essential in reducing default/credit risk.’ Such Credit committees are essential in assessing risks and finding ways of reducing them and by doing so, the rate of default is also minimized to greater levels and this benefits the organization positively.

Table 4.23: Interest rates charged affect performance of loans
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	6	11.5	11.5	11.5
	Agree	21	40.4	40.4	51.9
	Not sure	16	30.8	30.8	82.7
	Disagree	8	15.4	15.4	98.1
	Strongly disagree	1	1.9	1.9	100.0
	Total	52	100.0	100.0

Source: Primary data 2021

On finding out whether interest rates charged affect performance of loans, 21(40.4%) majority of the respondents agree, 6(11.5%) strongly agree with the statement, 8(15.4%) of the respondents disagree with the statement and 1(1.9%) of the respondents strongly disagree while 16(30.8%) were not sure about the statement. This implies that majority of the respondents were in agreement with the statement ‘interest rates charged affect performance of loans.’ The interest rates charged on loans tend to discourage clients from borrowing and as a result, the organization end up having redundant funds which may affect the financial performance negatively.

Table 4.24. Correlations between credit risk control tools and financial performance in MSC.
		Credit risk	Financial performance
Credit risk control tools	Pearson Correlation	3	.326^**
	Sig. (2-tailed)		.003
	N	52	52
Financial performance	Pearson Correlation	.326^**	3
	Sig. (2-tailed)	.003
	N	52	52
**. Correlation is significant at the 0.03 level (2-tailed).

Source: Primary data 2021

Results from table above revealed that there is a positive significant relationship between credit risk control tools and financial performance. This is based on the obtained correlation coefficient of .326 (**) with a significance value of .003. This explains that in a situation where the credit risk control tools are properly assessed, then financial performance will be effectively achieved.

Table 4.25 Effect of credit risk control tools on financial performance

Model Summary
Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.887^a	.787	.784	.49710
a. Predictors: (Constant), Credit risk control tools

Source: Primary Data (2021)

The model summary in table 4.25 above using predictor credit risk control reveals that adjusted R Square value is 0.784. This implies that 78.4% (0.784 *100) variations in financial performance is explained by credit risk while the remaining 21.6% is explained by other factors.

Hypothesis II

There is a positive significant relationship between credit risk control tools and financial performance

Table 4.26: Variation in credit control tools on financial performance

ANOVA^a
Model		Sum of Squares	Df	Mean Square	F	Sig.
1	Regression	69.275	1	69.275	280.345	.000^b
	Residual	18.780	50	.247
	Total	88.055	51
a. Dependent Variable: Financial performance
b. Predictors: (Constant), Credit risk control tools

Source: Primary Data (2021)

The study used ANOVA statistical technique to analyze data. The study had the level of significance at α=0.000. It can be deduced from the regression that credit risk control tools are of significance to financial performance at, F=280.345 (0.000^b). Since significance calculated 0.000^bis less than 0.05, the study therefore the study accepts the second hypothesis which stated that “There is a positive and significant relationship between credit risk control tools and financial performance.”

4.5. Collection policy and financial performance in MSC

Table 4.27: Available collection policies have assisted towards effective credit management.

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	22	42.3	42.3	42.3
	Agree	21	40.4	40.4	82.7
	Not sure	2	3.8	3.8	86.5
	Disagree	7	13.5	13.5	100.0
	Total	52	100.0	100.0

Source: Primary data 2021

On finding out whether available collection policies have assisted towards effective credit management, 43(82.7.3%) majority of the respondents strongly agree and agree with the statement, 7(13.5%) of the respondents disagree with the statement and 2(3.8%) of the respondents were not sure. The findings imply that majority of the respondents were in agreement with the statement ‘available collection policies have assisted towards effective credit management,’ This implies that such policies help in giving direction on how loans are to be disbursed and so this calls for care to be taken.

Our policies at the moment are indeed working for us because they have enabled us to make all our collections from our clients timely and this has improved the profitability of this organization because at least we have enough money to lend out to all our clients.

Table 4.28: Formulation of collection policies have been a challenge in credit management
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	12	23.1	23.1	23.1
	Agree	26	50.0	50.0	73.1
	Not sure	3	5.8	5.8	78.8
	Disagree	8	15.4	15.4	94.2
	Strongly disagree	3	5.8	5.8	100.0
	Total	52	100.0	100.0

Source: Primary data 2021

Results from the table above reveal that majority of the respondents 26(50.0%) and 12(23.1%) both agree and strongly agree with the statement ‘Formulation of collection policies have been a challenge in credit management,’ 8(15.4%) and 3(5.8%) of the respondents both disagree and strongly disagree with the statement, 3(5.8%) of the respondents were not sure about the statement. The findings indicate that majority of the respondents were in agreement with the statement Formulation of collection policies have been a challenge in credit management.’ This possess a big threat to the financial performance of the organization because when the policies are insufficient, it will create reluctance in the organization and the financial performance will be affected.

Table 4.29: Enforcement of guarantee policies provides chances for loan recovery in case of loan defaults.
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	18	34.6	34.6	34.6
	Agree	14	26.9	26.9	61.5
	Not sure	11	21.2	21.2	82.7
	Disagree	8	15.4	15.4	98.1
	Strongly disagree	1	1.9	1.9	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

Findings from the table above show that 18(34.6%) majority of the respondents strongly agree with the statement ‘Enforcement of guarantee policies provides chances for loan recovery in case of loan defaults,’14(26.9%) of the respondents agree with the statement, 11(21.2%) of the respondents were not sure about the statement, 8(15.4%) disagree with the statement and 1(1.9%) strongly disagree with the statement. The findings imply that majority of the respondents were in agreement with the statement that enforcement of guarantee policies provides chances for loan recovery in case of loan defaults,’

Table 4.30: The credit collection policy has improved the debtor’s turnover
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	13	25.0	25.0	25.0
	Agree	17	32.7	32.7	57.7
	Not sure	7	13.5	13.5	71.2
	Disagree	10	19.2	19.2	90.4
	Strongly disagree	5	9.6	9.6	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

Findings from the table above reveal that majority of the respondents 17(32.7%) agree with the statement ‘the credit collection policy has improved the debtor’s turnover,’ 13(25.0%) of the respondents strongly agree with the statement, 10(19.2%) and 5(9.6%) of the respondents disagree and strongly disagree with the statement respectively, 7(13.5%) of the respondents were not sure about the statement. The findings indicate that majority of the respondents were in agreement with the statement ‘the credit collection policy has improved the debtor’s turnover.’

One of the interviewees said, ‘our credit collection policy has indeed improved our debtor’s turnover and we are actually doing extremely well in this very area

Table 4.31: Regular reviews have been done on collection policies to improve sate of credit management
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	11	21.2	21.2	21.2
	Agree	17	32.7	32.7	53.8
	Not sure	10	19.2	19.2	73.1
	Disagree	8	15.4	15.4	88.5
	Strongly disagree	6	11.5	11.5	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

On finding out whether regular reviews have been done on collection policies to improve sate of credit management, majority of the respondents 17(32.7%) and 11(21.2%) both agree and strongly agree with the statement. 8(15.4%) and 6(11.5%) of the respondents both disagree and strongly disagree with the statement and 10(19.2%) of the respondents were not sure about the statement. The findings imply that majority of the respondents were in agreement with the statement ‘regular reviews have been done on collection policies to improve sate of credit management,’ regular review of policies help to review those which are inadequate and bring in those that can help the organization do better, by doing so, the organization will help the organization to improve on its financial performance.

One of the interviewees had to say, ‘we review our policies whenever we feel those in existence are not working for the organization and help it achieve its objectives, this has help this organization to improve on its financial performance.’

Table 4.32: A stringent policy is more effective in debt recovery than a lenient policy
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly agree	8	15.4	15.4	15.4
	Agree	11	21.2	21.2	36.5
	Not sure	14	26.9	26.9	63.5
	Disagree	11	21.2	21.2	84.6
	Strongly disagree	8	15.4	15.4	100.0
	Total	52	100.0	100.0

Source: Primary data (2021)

Results from the table reveal that majority of the respondents 15(28.8%) strongly agree with the statement that a stringent policy is more effective in debt recovery than a lenient policy, 12(23.1%) agree with the statement, 10(19.2%) of the respondents disagree with the statement, 8(15.4%) of the respondents strongly agree with the statement and 7(13.5%) of the respondents were not sure about the statement. The findings imply that majority of the respondents were in agreement with the statement ‘a stringent policy is more effective in debt recovery than a lenient policy.’ This is important as a stringent policy will increase on the collection of monies which are out inform of loans to be collected back in time and this affects the organization’s liquidity position positively.

In an interview with one of the respondents, ‘here at MSC we have very stringent debt recovery policy and in fact it has worked for us and most of our clients are comfort with it and they indeed remit all the money they owe us on time.’

Table 4.33. Correlations between credit policy and financial performance
		Credit policy	Financial performance
Collection policy	Pearson Correlation	3	.298^**
	Sig. (2-tailed)		.002
	N	52	52
Financial performance	Pearson Correlation	.298^**	3
	Sig. (2-tailed)	.002
	N	52	52
**. Correlation is significant at the 0.02 level (2-tailed).

Source: Primary data (2021)

Findings in the table above revealed that there is a positive significant relationship between collection policy and financial performance in MSC. This is based on the obtained correlation coefficient of .298 (**) with a significance value of .002. This explains that in a situation where credit policies are effectively followed, then financial performance will effectively take place.

Table 4.34: Effect of collection policy on financial performance

Model Summary
Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.877^a	.769	.766	.51777
a. Predictors: (Constant), Collection policy

Source: Primary Data (2021)

The model summary in table 4.16 above using predictor Collection policy reveals that adjusted R Square value is 0.766. This implies that 76.6% (0.766 *100) variations in financial performance at MSC is explained by Collection policy while the remaining 23.4% is explained by other factors.

Hypothesis III

Therefore, accepts the third hypothesis which stated that there is a positive and significant effect of collection policy on financial performance.

Table 4.35: Variation in collection policy on financial performance

ANOVA^a
Model		Sum of Squares	Df	Mean Square	F	Sig.
1	Regression	67.680	1	67.680	252.454	.000^b
	Residual	20.375	50	.268
	Total	88.055	51
a. Dependent Variable: financial performance
b. Predictors: (Constant), Collection policy

Source: Primary Data (2021)

The study used ANOVA statistical technique to analyze data. The study had the level of significance at α=0.000. It can be deduced from the regression that Collection policy isof significance to financial performance at, F=252.454 (0.000^b). Since significance calculated 0.000^bis less than 0.05, the study therefore accepts the third hypothesis which stated that there is a positive and significant effect of collection policy on financial performance.

Table 4.36: Effect of credit management on financial performance

Model Summary
Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.904^a	.816	.809	.46737
a. Predictors: (Constant), Appraisal techniques, risk control tools, credit policy

Source: Primary Data (2021)

The model summary in table 4.36 above using predictor appraisal techniques, risk control tools and collection policy reveals that adjusted R Square value is 0.809. This implies that 80.9% (0.809 *100) variations in financial performance is explained by appraisal techniques, risk control tools and credit policy while the remaining 19.1% is explained by other factors

Coefficients
Model		Unstandardized Coefficients		Standardized Coefficients	t	Sig.
Model		B	Std. Error	Beta	t	Sig.
1	(Constant)	.464	.163		2.845	.006
	Appraisal techniques	.497	.123	.497	4.026	.000
	Risk control tools	.326	.170	.319	1.915	.059
	Collection policy	.109	.148	.112	.739	.462
a. Dependent Variable: Financial performance Source: Primary Data (2021)

The study used coefficients (beta values) and statistical technique to analyze data. This helped to determine the extent and direction of the effect of appraisal techniques, risk control tools and credit policy on financial performance and how they impact on it. The study showed that appraisal techniques, risk control tools and collection policy have beta values of 0.497, 0.329 and 0.112. It can be deduced from the regression that at 1% increase in appraisal techniques, risk control tools and credit policy, financial performance is increased by 0.497, 0.329 and 0.112 respectively and at 100% increase in appraisal techniques, risk control tools and credit policy; financial performance is likely also to increase by 49.7%, 32.9% and 11.2%. Therefore, the management of MSC should emphasize appraisal techniques, risk control tools and credit policy to improve financial performance.

Conclusion

This study determined the effect of credit management and financial performance. This research used a sample of 52 respondents. These were sampled using both purposive and simple random sampling methods. The mode of data collection was drop and later pick mode after prior appointment with the respondent, interview guide was also used.

CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introduction

This chapter presents the summary of the findings, conclusions and recommendation to the study. This was presented according to study objectives which were; to examine the effect of client appraisal techniques on financial performance of micro finance support Centre ltd. Mbale Branch, examine the effect of credit risk control tools on financial performance in micro finance support Centre ltd. Mbale Branch and to examine effect collection policies on financial performance in micro finance support Centre ltd. Mbale Branch.

5.1 Summary of the findings

5.1.1 Background information

Most of the respondents were in the age bracket of 25-30 years with a percentage of 53.8%, 51.9% of the respondents were female who were more compared to the male, most of the respondents were married with 36.5%, majority of the respondents were Degree holders with 36.5%, most of staff members of MSC had spent a time period of 1-5 years with 44.2%.

5.1.1 The effect of client appraisal techniques on financial performance of micro finance institutions.

In this study, finding on this objective reveal the model summary using predictor loan reveals that adjusted R Square value is 0.727. This implies that 72.7% (0.727 *100) variations in financial performance is explained by client appraisal techniques while the remaining 27.3% is explained by other factors. It can be deduced from the regression that loan is significance to welfare of teachers at, F=205.744 (0.000^b). Since significance calculated 0.000^bis less than 0.05, the study therefore accepts the hypothesis which stated that “There is a strong positive and significant effect of client appraisal techniques on financial performance”.

5.1.2. Effect of credit risk control tools on financial performance in micro finance support Centre ltd. Mbale Branch.

Results on this objective showed that the model summary in table 4.18 above using predictor saving reveals that adjusted R Square value is 0.784. This implies that 78.4% (0.784 *100) variations in financial performance is explained by credit risk control tools while the remaining 21.6% is explained by other factors. It can be deduced from the regression that saving is significance to financial performance at, F=280.345 (0.000^b). Since significance calculated 0.000^bis less than 0.05, the study therefore reveals that “There is a strong positive and significant relationship credit risk control tools and financial performance.”

5.1.3. Effect collection policies on financial performance in micro finance support Centre ltd. Mbale Branch.

Findings on this objective reveal that the model summary using predictor collection policies reveals that adjusted R Square value is 0.766. This implies that 76.6% (0.766 *100) variations in financial performance is explained by collection policies while the remaining 23.4% is explained by other factors. It can be deduced from the regression that collection policies are of significance to financial performance at, F=252.454 (0.000^b). Since significance calculated 0.000^bis less than 0.05, the study therefore reveals that “There is a strong positive and significant relationship collection policies and financial performance.”

5.2 Conclusion

From the foregoing discussions, the following conclusions are drawn from the findings of the study.

5.2.1 The effect of client appraisal on financial performance.

5.2.2 The effect of credit risk control tools on financial performance

Results revealed that there is a positive significant relationship between credit risk control tools and financial performance. This is based on the obtained correlation coefficient of .326 (**) with a significance value of .003. This explains that in a situation where the credit risk control tools are properly assessed, then financial be effectively achieved.

5.2.3 The effect of collection policies on financial performance.

5.3Recommendations

5.3.1 The effect of client appraisal on financial performance.

The study recommends that there is need for MSC to enhance their client appraisal techniques so as to improve their financial performance. Through client appraisal techniques, MSC will be able to know the credit worthiness of clients and thus reduce non-performing loans.

5.3.2 The effect credit risk control tools on financial performance in micro finance support Centre ltd. Mbale Branch

Furthermore, MSC should reduce on their interest rates as these affect performance of loans. This will help to bring in more borrowers. The risk aspect should be given more attention because when not handled properly, the organization may end up losing.

5.3.3 The effect of microfinance asset financing services on the growth of SMEs.

The study also recommends that MSC should continue to strengthen its credit policies as this has been very effective in improving the organization’s financial performance.

5.4 Suggestions for further research.

The researcher recommends further research to establish the effect of credit management on profitability of micro finance institutions in Uganda.

REFERENCES

Books

ABEDI, S. (2000): Highway to Success, Credit Management Journal, and http:// leathers inters.

. New Jersey: Prentice Hall. Balduino,

W.F. (2000). Risk Is In. [On-line]. Available http://www.dnb.com(22/10/07).Com

ARNOLD, G. (2003). Corporate Financial Management

BINKS, M.R. AND ENNEW, C.T. (1992).Information asymmetries and the provision of finance to small firms: International Small Business Journal

BINKS, M., AND ENNEW, T. (1996). Financing small firms, small business and entrepreneur, 2^nd edition.

BINKS, M., ANDENNEW, T. (1997). Small business and relationship banking: the impact of participative behavior, entrepreneurship: Theory and practice vol. 21, No.4 pp 83-92.Ed Macmillan.

BRIGHAM, E.F., GAPENSKI, L.C. AND DAVE’S, P.R. (1999). Intermediate Financial Management. Florida: The Dryden press.

CGAP (2009) [Online]. Measuring results of micro finance Institutions Available http://www.gap.org

CHRISTEN, P., E. RHYNE, R. C. VOGEL, AND C. MCKEAN (1995), “Maximizing the Outreach of Microenterprise Finance: An analysis of Successful Micro finance programs “,

EDWARD. B (1993) Credit Management (6^thEd.) http://www.gowerpublishing.com

EDWARDS, P. &TURNBULL (1994). Finance for small and medium sized enterprises.

KREJCIE and MORGAN, 1970. Determining Sample Size for Research Activities.

https://home.kku.ac.th/sompong/guest_speaker/KrejcieandMorgan_article

MYERS, C. & BREALEY, R. (2003). Principles of Corporate Finance. New York: McGraw- Hill.

HITT, E. HOSKISSON, A. JOHNSON, D. (1996). The Market for Corporate Control and Firm Innovation

Journals

DEAKINS, D., HUSSEIN, G. (1999).Risk assessment with asymmetric Information: International Journal of Bank Marketing.

NELSON, L. (2002). Solving Credit Problem. Retrieved on 21 July 2015 from http://www.cfo.com

Reports

EPPY, I. (2005) Perceived Information Asymmetry, Bank lending Approaches and Bank Credit Accessibility by SMES in Uganda Makerere University.

TURYAHEBWA, A (2013) Financial Performance in the Selected Microfinance Institutions In Uganda (unpublished master’s thesis) Kampala International University,West campus,

SHEILAH, A.L. (2011) Lending Methodologies and Loan losses and Default in a Microfinance Deposit Taking Institutions in Uganda; a research report presented to the Makerere University Uganda.

OWINO, M. (2012) Effect of the Lending Policies on the Levels of Non-performing Loans (NPLs) on Commercial Banks of Kenya.

DALLAMI, K. & GUIGALE, M. (2009) Reflection to Credit policy in developing Countries Policy.

DHAKAL, S. (2011), „Risk management in SACCO‟s, Econometric Analysis‟. Second Edition Macmillan. London.

NAGARAJAN, M. (2011), “Credit risk management practices for microfinance institutions in Mozambique”. Unpublished MBA project-University of Maputo.

APPENDICES:

APPENDIX A: QUESTIONNAIRE

QUESTIONNAIRE ON THE EFFECT OF CREDIT MANAGEMENT ON THE FINANCIAL PERFORMANCE OF MICROFINANCE INSTITUTIONS IN UGANDA. CASE STUDY: THE MICROFINANCE SUPPORT CENTER LIMITED: MBALE BRANCH.

Questionnaire for Microfinance support Centre limited.

Dear respondent

RE: APPLIED QUESTIONNAIRE

I am a student at MTAC undertaking a Diploma in accounting and finance; I am currently undertaking an undergraduate research project on; the Effect of credit management on the financial performance of Microfinance institutions in Uganda, A case study at Microfinance support Centre limited as partial fulfillment of my degree requirements.

Attached herewith is a questionnaire that I am requesting to be completed. All the information you will provide shall remain strictly confidential.

Your cooperation shall be highly appreciated.

Sincerely,

………………………

NAKUMIZA ALIMA

SECTION 1- INTRODUCTION

Instructions: (Please tick or fill in the blank space where appropriate)

SECTION A: General Personal Data

Gender

Male Female

Age group?
a) 18-25 b) 25-30 c) 30-40 d) 40-50
Marital status?
a) Married b) Single
c) Divorced d) Engaged
Highest level of Education?

Secondary	certificate	Diploma	Bachelors	Masters.

Others specify……………………………………..

Duration spent working in Microfinance support Centre limited.

Less than 1yr	1-5 years	6-10years	More than 10 years

Department of work

Banking

Marketing

Audit

Loan

Information

SECTION.B

Part B: Credit Risk Management Practices

CLIENT APPRAISAL TECHINIQUES;

In the following questions answer as follows;

NB SA. Stands for-Strongly Agree A-Agree NS-Not Sure D-Disagree SD-Strongly Disagree

What is your level of agreement on the following statements relating to client appraisal in Microfinance support center limited?

	Statement	SA	A	NS	D	SD
7.	Are there Client appraisal Techniques in your organization.
8.	Do you have a competent staff for carrying out client appraisal?
9.	Does your organization offer credit to customers
10.	Does client appraisal take note of collateral?
11.	Does failure to assess customer’s capacity to repay results in loan defaults.
12.	Are all clients appraised before credit granted to them.
13.	Does client appraisal Techniques improve the quality of customers in this organization

CREDIT RISK CONTROL TOOLS.

		Statement	SA	A	NS	D	SD

14.		Imposing loan size limits is a viable strategy in credit management
15.		The use of credit checks on regular basis enhances credit management
16.		Does flexible repayment period improve loan repayment?
17.		Does Penalty for late payment enhances customers commitment to loan repayment
18.		The use of customer credit application forms improves monitoring and credit management as well.
19.		Credit committee’s involvement in making decisions regarding loans are essential in reducing default/credit risk.
20.	Interest rates charged affect performance of loans in the Micro finance support Centre Ltd.

COLLECTION POLICY

	Statement	SA	A	NS	D	SD

21	Available collection policies have assisted towards effective credit management.
22	Formulation of collection policies have been a challenge in credit management
23	Enforcement of guarantee policies provides chances for loan recovery in case of loan defaults.
24	The credit collection policy has improved the debtor’s turnover.
25	Regular reviews have been done on collection policies to improve sate of credit management.
26	A stringent policy is more effective in debt recovery than a lenient policy

APPENDIX B: INTERVIEW GUIDE

Date of interview………………………………………………………………………………………..

No.	Interview Questions	Response	Interviewer’s comments
1.	Please what do you understand by the term credit management?
2.	Can you please comment the use of credit management in this organization?
3.	How does this organization apply the collection policy to recover debts from defaulters?
4.	Are there Client appraisal Techniques in your organization?
5.	Does client appraisal Techniques improve the quality of customers in this organization?
6.	Can you please explain if credit terms have improved debtor turnover in this organization
7.	Please explain why Imposing loan size limits is a viable strategy in credit management
8.	Does flexible repayment period improve loan repayment
9	Does this organization have a checklist of client appraisal in granting credit? Briefly explain.
10	How would you rate the effect of credit management systems in the financial performance of this organization?
11	Explain how Regular reviews can be done on collection policies to improve state of credit management
12.	Is there any other information on credit management systems you need to add? If yes, please add.

APPENDIX C: Table for determining sample size from a given population

N	S	N	S	N	S	N	S	N	S
10	10	100	80	280	162	800	260	2800	338
15	14	110	86	290	165	850	265	3000	341
20	19	120	92	300	169	900	269	3500	246
25	24	130	97	320	175	950	274	4000	351
30	28	140	103	340	181	1000	278	4500	351
35	32	150	108	360	186	1100	285	5000	357
40	36	160	113	380	181	1200	291	6000	361
45	40	180	118	400	196	1300	297	7000	364
50	44	190	123	420	201	1400	302	8000	367
55	48	200	127	440	205	1500	306	9000	368
60	52	210	132	460	210	1600	310	10000	373
65	56	220	136	480	214	1700	313	15000	375
70	59	230	140	500	217	1800	317	20000	377
75	63	240	144	550	225	1900	320	30000	379
80	66	250	148	600	234	2000	322	40000	380
85	70	260	152	650	242	2200	327	50000	381
90	73	270	155	700	248	2400	331	75000	382
95	76	270	159	750	256	2600	335	100000	384

Note: “N” is population size

“S” is sample size.

Krejcie, Robert V., Morgan, Daryle W., “Determining Sample Size for Research Activities”, Educational and Psychological Measurement, 1970.

APPENDIX D: LIST OF FREQUENCE TABLES.

Table 3.2: Showing category, population, sample size and sampling technique.

Category	Study Population	Sample Size	Sampling technique
Finance	05	4	Purpose sampling
Human Resource Administration	02	1	Purpose sampling
Loan officers	15	13	Simple Random Sampling
Information communication technology	02	1	Purposive sampling
Marketing and corporate Affairs	13	11	Simple Random Sampling
Legal Officers	10	9	Simple Random Sampling
Customers	10	9	Simple Random Sampling
Internal Audit	5	4	Purposive sampling
Total	60	52

Table 4.1 shows the response rate of the questionnaires.

APPENDIX E: WORK PLAN.

No	Activity	Duration	Deliverable
1	Topic identification	1 Week	Approved Topic
2	Concept development	2 Weeks	Approved concept paper
3	Proposal Writing	2 Months	Rough copy 1 Rough copy 2 Rough copy 3 Fair Copy.
4	Developing data collection tools	1 Week	Data collection tools
5	presenting of the tools	2 Weeks	Tools were approved
6	Data collection and writing the report	1 month	Data collected

APPENDIX F: BUDGET.

NO	ITEM	UNIT	QUANTY	COST
1	Storage device	35000	2	70000
2	Files	5000	4	30000
3	Printing papers	20000	3 Reams	30000
4	Type setting			30000
5	Data collection			50000
6	Data analysis			20000
7	Report writing			20000
8	Spiral binding	5000	2	10000
10	Travelling			20000
11	Airtime			20000
	Total			300000