CREDIT MANAGEMENT AND FINANCIAL PERFORMANCE IN MICROFINANCE INSTITUTIONS IN UGANDA A CASE STUDY OF MICROFINANCE SUPPORT CENTRE, MBALE BRANCH
ABSTRACT
The study examined the effect of credit management on the financial performance of microfinance institutions in Uganda, using Microfinance Support Centre (MSC), Mbale Branch as a case study. The specific objectives were: to examine the effect of client appraisal techniques on financial performance; to examine the effect of credit risk control tools on financial performance; and to examine the effect of collection policies on financial performance of MSC Mbale Branch.
The study adopted a case study research design. Data was collected using self-administered questionnaires and interview guides.
The findings revealed a positive and statistically significant relationship between credit management practices and financial performance. Specifically, client appraisal techniques had a correlation of r = 0.323 (p = 0.003), credit risk control tools had r = 0.326 (p = 0.003), and collection policies had r = 0.298 (p = 0.002) with financial performance.
The study recommends that MSC should strengthen its client appraisal techniques to better assess the creditworthiness of borrowers and reduce non-performing loans. Management should also review interest rates to make them more competitive, enhance risk management practices, and continue strengthening collection policies, as these have proven effective in improving financial performance.
CHAPTER ONE GENERAL INTRODUCTION
1.0 Introduction This chapter presents the background to the study, statement of the problem, research objectives, research questions, research hypotheses, scope of the study, significance of the study, justification of the study, and definition of key terms.
1.1 Background of the Study The concept of microfinance has its modern origins in the 1970s, pioneered by institutions such as the Grameen Bank in Bangladesh under Professor Muhammad Yunus. Initially, microfinance focused on providing small loans to poor entrepreneurs and small businesses excluded from formal banking services. Over time, it has evolved into a broader movement aimed at providing affordable financial services — including credit, savings, insurance, and payment services — to low-income individuals and households (Horne & Wachowicz, 1998).
Microfinance is now widely recognized as an important tool for poverty reduction, economic empowerment, and financial inclusion. However, the biggest risk facing microfinance institutions (MFIs) remains credit risk — the possibility that borrowers will default on their loans. Effective credit management is therefore critical for the sustainability and profitability of MFIs.
In Uganda, microfinance institutions emerged in the 1990s with the establishment of organizations such as FINCA and Uganda Women’s Finance Trust (UWFT). The sector grew rapidly due to the limitations of traditional banks in serving the poor. The government later established the Microfinance Support Centre (MSC) to provide wholesale funding and capacity building to MFIs across the country.
Despite these efforts, many MFIs in Uganda continue to face challenges related to credit management, resulting in high levels of non-performing loans and reduced financial performance. This study therefore seeks to examine the effect of credit management on the financial performance of microfinance institutions, with specific reference to Microfinance Support Centre, Mbale Branch.
1.2 Statement of the Problem Sound credit management is essential for the stability and profitability of any financial institution. Poor credit quality remains one of the leading causes of financial distress in microfinance institutions. When credit standards are relaxed without proper controls, the probability of bad debts increases significantly (Gitman, 1997).
Although the Microfinance Support Centre has put in place various credit management mechanisms — including client appraisal, risk control tools, and collection policies — the institution continues to experience a high rate of loan defaults. According to MSC financial reports (2016–2018), out of UGX 80 billion disbursed in loans, only 40% was recovered on time, while 20% went into default.
This poor loan recovery performance negatively affects the institution’s liquidity, profitability, and overall financial sustainability. Despite the existence of credit management systems, the desired improvement in financial performance has not been achieved. This situation raises critical questions about the effectiveness of current credit management practices at MSC Mbale Branch.
It is against this background that this study seeks to examine the effect of credit management on the financial performance of Microfinance Support Centre, Mbale Branch.
1.3 Research Objectives
1.3.1 General Objective To examine the effect of credit management on the financial performance of microfinance institutions in Uganda, a case study of Microfinance Support Centre, Mbale Branch.
1.3.2 Specific Objectives i. To examine the effect of client appraisal techniques on the financial performance of Microfinance Support Centre, Mbale Branch. ii. To examine the effect of credit risk control tools on the financial performance of Microfinance Support Centre, Mbale Branch. iii. To examine the effect of collection policies on the financial performance of Microfinance Support Centre, Mbale Branch.
1.4 Research Questions i. What is the effect of client appraisal techniques on the financial performance of Microfinance Support Centre, Mbale Branch? ii. What is the effect of credit risk control tools on the financial performance of Microfinance Support Centre, Mbale Branch? iii. What is the effect of collection policies on the financial performance of Microfinance Support Centre, Mbale Branch?
1.5 Research Hypotheses i. There is a significant positive relationship between client appraisal techniques and financial performance of Microfinance Support Centre, Mbale Branch. ii. There is a significant positive relationship between credit risk control tools and financial performance of Microfinance Support Centre, Mbale Branch. iii. There is a significant positive relationship between collection policies and financial performance of Microfinance Support Centre, Mbale Branch.
1.6 Scope of the Study
1.6.1 Content Scope The study focused on credit management (independent variable) with emphasis on client appraisal techniques, credit risk control tools, and collection policies. The dependent variable was financial performance, measured using profitability, cash flow, and liquidity position.
1.6.2 Geographical Scope The study was conducted at Microfinance Support Centre, Mbale Branch, located in Mbale Municipality, Eastern Uganda.
1.6.3 Time Scope The study covered a period of five months for data collection. However, literature reviewed spanned the last ten years, while secondary data from MSC Mbale Branch covered the period 2016 to 2022.
1.7 Significance of the Study This study is expected to benefit several stakeholders. To researchers and scholars, it will provide empirical evidence on credit management and financial performance of microfinance institutions, serving as a foundation for future studies.
