EFFECT OF LOANS ON BUSINESS GROWTH

ABSTRACT

The topic of study was effect of loans on business growth, the objectives of the study were;

To examine the benefits of loans to business in Uganda.
To investigate the challenges of lending faced by Centenary Bank.

To examine the different techniques of ensuring the growth of business in Uganda.

The study used both qualitative and quantitative research designs, the study was carried out Centenary Bank Head quarters Mapera house located plot 44-46 Kampala road.

The study targeted Centenary Bank officials (administration), the procurement staffs of centenary bank, accounting officers of the bank, tellers of the Bank, and cashiers.

The sample comprised of 30 respondents that were selected in a way that 3 respondents were from the information technology department, 10 from administration, 10 from finance and 7 respondents who are from marketing. While carrying out research, purposive sampling was be applied to the above different categories of respondents.

The study shows that loans Enables acquisition of assets by Business people which helps the business to grow, the Provision of startup capital to the Business people is essential to enable the business grow and be in position to acquire more assets , micro finance institutions helps to reduce poverty , the findings in the study indicates that loans enables Business to acquire modern equipments to be able to expand their business to bigger levels and lastly the results in the study indicate that loans help a business to improve the livelihood of the business men.

The study made the following recommendations; Business organizations should be able to obtain loans to enable them acquire different assets that are crucial for the growth of their business, this will help in the development of them business to enable them grow to bigger levels, Financial institutions should determine the credit worthiness of the business owners and the ability of the business to pay back the loans this will help the business to prevent loan defaulters from acquiring loans that would affect the financial institutions. The study also recommends that financial institutions should be able to educate the Business owners to eliminate poor financial decisions that are prevalent with most business.

CHAPTER ONE

1.0 Introduction

This chapter presents the Background of the study, problem statement, purpose, general objectives, specific objectives, and research questions, Significance of the study, scope of the study and operational definitions of key concepts.

1.1 Background of the study

Globally it is recognized clearly that the growth of business contributes to economic development in many countries, this sector of economy creates employment opportunities to the citizens and leads to creation of goods and services as well as laying ground for skills acquisition and is an important source of innovation, and economic growth (Govori, 2013).

Business plays a major role in economic development in every country, including African countries, Uganda being among them (Rweyemamu, Kimaro and Urassa,2003). The potential of business growth in promoting economic growth and poverty alleviation in both developed and developing countries is widely accepted and documented by both scholars and policy makers. Studies indicate that in both advanced economies and developing countries, Small business contribute on average 60% of total formal employment in the manufacturing and service sectors (Ayyagari, Demirgüç-Kunt, and Maksimovic, 2007). Taking into account the contribution of the informal sector, Small business account for about three-quarters of total employment (Ayyagari et al., 2007).

In Uganda business sector is seen as a key to Uganda’s economic growth, alleviation of poverty and unemployment in the country. Available data shows that Small business contributes about 40% to the country’s Gross Domestic Product (GDP) (Tamara, 2006).

Small business are said to be 80% of registered business each employing between 5 and 99 people. Therefore, promotion of such enterprises in developing economies like Uganda is of paramount importance since it brings about a great distribution of income and wealth, economic self-dependence, entrepreneurial development employment and a host of other positive, economic uplifting factors (Aremu, 2004).

Commercial banks play a fundamental role in the economy by undertaking intermediation functions. Banking business involves receiving funds from the public by accepting demand, time and saving deposits or borrowing from the public or other banks, and using such funds in whole or in part for granting loans, advances and credit facilities and for investing funds by other means (Chirwa, 2001).

Over the past few years, interest rate spread of commercial banking system has caught researchers ‘attention throughout the world. As financial intermediaries, banks play a crucial role in the operation of most economies and the performance of most business. The efficiency of financial intermediation can affect economic growth. Crucially, loans affect the net return to savings and the gross return to investment (Demirguc-Kunt, & Huizinga, 1999).

According to Calcagnini et al. (2012) who studied the link between loans, interest rates, and guarantees found that loan size was negatively related with bank interest rate spread. Calcagnini et al. (2012) examined the impact of financial crisis on bank loans interest rates and guarantees and revealed that interest rate spread was negatively influenced by loan size. Moore & Craigwell (2013) examined the relationship between interest rates and loan sizes in Barbado and found that interest rate was positively related with size of bank loans.

Governments in developing countries offer funding to small firms either directly or by guaranteeing the payment of such loans as lack of funding appeared as one of the major challenges faced by small businesses. However, due to limited resources by governments; Satta (2006) was on the view that, not all small firms receive funding from the government; therefore, the other option would be to go for bank loans, and despite its increasing roles, access to credit by business remains one major constraint.

1.2 Statement of the Problem

According to Orebiyi, (2002), organizations need credit to be in position to expand their business and enjoy economies scale, he further asserts that lack of credit has hindered the growth of many business in the developing world a factor which has made them uncompetitive and less profitable, while Myers and Brealey (2003) point out that organizations need to learn to save avoid moving to lending institutions when the business are starting up since most financial institutions may have high lending rates which stifles profitability of a infant business.

Loan institutions are essential in the development of a country as they tend to provide credit to the poor to start up their business, however despite of the numerous benefits of lending institutions Uganda as a country has over 27 commercial banks which have been registered as lending institutions however the business in Uganda have not grown as expected , more to that Uganda is still one of the poorest economies in the world with the highest level of unemployment , (World Bank, 2015), this study therefore intends to investigate into the influence of loans on business growth, with specific reference to Centenary Bank, Mapeera house , Kampala (u).

1.3 Purpose of the Study

The study sought to examine the impact of loans on business growth, with specific reference to Centenary Bank Kampala, (u).

1.4 Objectives of the Study

To examine the benefits of loans to business in Uganda.
To investigate the challenges of lending faced by Centenary Bank.
To examine the different techniques of ensuring the growth of business in Uganda.

1.5 Research Questions

What are the benefits of loans to business in Uganda?
What are the challenges of lending faced by Centenary Bank?

What are the different techniques of ensuring the growth of business in Uganda?

1.6 Scope of the Study

1.6.1 Study Scope

The study specifically looked at the benefits of loans to business in Uganda, the challenges of lending faced by centenary bank and the different techniques of ensuring the growth of business in Uganda.

1.6.2 Geographical Scope

The study was carried out at Centenary bank Head quarters house located at plot 44-46 Kampala road, The reason for Choosing Centenary Rural Development Bank is due to the fact that it is the largest Micro Finance bank with a customer base of over 1,400,000 customers, apart from that the Bank also has 65 Branches and 167 ATMS country wide, (Centenary Bank annual report, 2015), making it an area of special interest in the study.

1.6.3 Time scope

The period of data to be considered in the organization was from 2012-2017 and period of body of knowledge in reviewing literature will be from 2000-2017, while the study was carried out from January to September 31^st 2017.

1.7 Justification of the study

The study specifically examined the benefits of giving out loans to business in Uganda, this is because the financial institutions in Uganda have many challenges and the government has liberalized.

The study also was in position to give more information on how to examine the different techniques of ensuring the growth of business in Uganda.

1.8 Significance of the Study

The study is expected to provide guidance to the Central Bank and other regulators in the credit risk management policy formulation.

The study will add to the already existing literature on factors that determine the growth of business in Uganda.

The study is expected to stimulate further research into the area of loan policy formulation and challenges of lending in Uganda.

The study is expected to enable commercial banks identify the credit management policies that are critical in ensuring the growth of business enterprises.

The study will help the government in formulation of policies regarding credit institutions in the country.

The study is precondition for the award of bachelor’s degree in micro finance so it will help the researcher to get the degree and complete his studies at campus.

1.9 Conceptual frame work

Independent variable Dependent variable

BUSINESS GROWTH

· Rapid expansion of business

· Increase in profitability

· Increase in share holders’ equity

· Inflation

· Government policy

· Increase in disposal income

Intervening variable

Source: Developed By the Researcher

This conceptual frame work shows the relationship between lending and business growth

It is conceptualized that the independent variables of lending have a direct influence on business growth mainly in terms of Rapid expansion of business, Increase in profitability and Increase in share holders’ equity and the intervening variables in the form of influence, Inflation, Government policy and Increase in disposal income have a negative effect on the relationship between the independent and dependent variables.

1.10 Conclusion of the study

The issue of loans has been of great impact to business in Uganda because most of the business especially small scale businesses complain of the limited access to loans and high restrictions needed for one to qualify for the loan.

1.11 Definition of key terms

Business growth; this is a process when the there is a constant increase in the revenue of the business and the profitability levels are also increasing.

Loans: A loan is the act of giving money, property or other material goods to another party in exchange for future repayment of the principal amount along with interest or other finance charges. A loan may be for a specific, one-time amount or can be available as an open-ended line of credit up to a specified limit or ceiling amount.

ATMS: Automatic Teller Machines

CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

This chapter discusses what various scholars have written about,

2.1 Benefits of loans to business

Loans enables the poor and excluded section of people in the society who do not have an access to formal banking to build assets, diversity livelihood options and increase income, and reduce their vulnerability to economic stress. In the past, it has been experienced that the provision for financial products and services to poor people by MFIs can be practicable and sustainable as banks can cover their full costs through adequate interest spreads and by operating efficiently and effectively. Microfinance is not a magic solution that will propel all of its clients out of poverty. But various impact studies have demonstrated that microfinance is really benefiting the poor households (Littlefield and Rosenberg, 2004).

There are broadly two sources of financial services. One of the sources is the formal banking sector while the other one is the informal sector. The formal banking sector serves less than 20% of the population in developing countries (Robinson, 2001). The rest of the population, typically low-income households, has historically not had access to formal financial services (Chiumya, 2006).

Lending institutions provide loans because most of the financial institutions like MFIs are not reaching the poorest in society and therefore most start up business fail because of lack of financial resources, despite some commentators’ skepticism of the impact of microfinance on poverty, studies have shown that lending to business has been successful in many situations. According to Littlefield, Murduch and Hashemi(2003) “various studies…document increases in income and assets, and decreases in vulnerability of lending institutions like microfinance clients”. They refer to projects in India, Indonesia, Zimbabwe, Bangladesh and Uganda which all shows very positive impacts of microfinance in reducing poverty. For instance, a report on a SHARE project in India showed that three-quarters of clients saw “significant improvements in their economic well-being and that half of the clients graduated out of poverty” (2003), Dichter (1999) states that lending is a tool for poverty reduction and while arguing that the record of MFIs in microfinance is “generally well below expectation” he does concede that some positive impacts do take place, From a study of a number of MFIs he states that findings show that consumption smoothing effects, signs of redistribution of wealth and influence within the household are the most common impact of MFI programmes .

Hulme and Mosley (1996) in a comprehensive study on the use of lending to combat poverty, argue that well-designed programmes can improve the incomes of the poor and can move them out of poverty. They state that “there is clear evidence that the impact of a loan on a borrower’s income is related to the level of income” as those with higher incomes have a greater range of investment opportunities and so credit schemes are more likely to benefit the “middle and upper poor” (1996).

Hulme and Mosley (1996) show that when loans are associated with an increase in assets, when borrowers are encouraged to invest in low-risk income generating activities and when the very poor are encouraged to save; the vulnerability of the very poor is reduced and their poverty situation improves. Johnson and Rogaly (1997, p.12) also refer to examples whereby savings and credit schemes were able to meet the needs of the very poor. They state that microfinance specialists are beginning to view improvements in economic security, rather than income promotion, as the first step in poverty reduction (ibid.) as this reduces beneficiaries’ overall vulnerability.

Franck and Huyghebaert (2008) examine whether having a lot of debt outstanding improves or hampers firm performance in the first few years after start-up. According to Modigliani and Miller (1958), financing decisions should not affect product market outcomes, as long as financial and product markets are perfect. So, Franck and Huyghebaert (2008) argue that leverage can affect firm performance only when some market imperfections pertain. When outside financiers according to Huyghebaert (2008), do not have the same information about firm quality as do firm insiders and when it is difficult for insiders to credibly transfer this information to outsiders, an important financial market imperfection arises.

Regarding product market imperfections, firms may recognize the impact of their decisions and behavior on one another when the number of competitors in a market is limited as postulated by Huyghebaert (2008). Rival firms may then engage in predation to drive entrants out of their market, provided that the benefits of doing so outweigh the costs Huyghebaert and Van de Gucht (2004). Franck and Huyghebaert

(2008) focus on the above two market imperfections and investigate how the incentives of an entrepreneur and her rival firms’ implications of financing decisions for firm performance, growth and survival affect the relation between leverage and post-entry performance in the context of business start -ups. Also, they examine how this relation changes over time, as the entrepreneurial venture grows older according to Huyghebaert (2008). For this purpose, they focus on two complementary measures of firm performance: current profitability and growth in earnings over time Huyghebaert (2008).

As a number of authors have already shown that profitability is an important determinant of firm growth, through the use of retained earnings Watson (2006), examining the link between leverage and internal cash generation in the context of business start-ups can make a further contribution to the literature. Other studies on small and medium enterprises have shown that small and medium -sized enterprises are financially constrained and face a financing gap.

Cash-flow investment sensitivities are typically large for small and medium enterprises and particularly for the smallest and unquoted among them. These studies thus stress once more the importance of internally generated earnings for firm growth and survival. From a start-up’s perspective according to Huyghebaert (2008) , firm survival is indeed a key consideration for entrepreneurs, as they usually hold a largely undiversified portfolio, have pledged personal assets to secure their firm’s bank debt, and enjoy sizeable private benefits of control. Entrepreneurs may take into account that according to Huyghebaert (2008), given asymmetric information, weak firm performance in one year could reduce their firm’s access to future financing from banks and could even lead to firm liquidation following default. The other debt again largely consists of trade credit

Studies on the effect of debt on returns have generated mixed results ranging from those supporting a positive relationship hypothesis to those opposing it according to Obert and Olawele (2010). Empirical studies such as Ruland and Zhou (2005) and Robb and Robinson (2009) agree with Miller and Modigliani (1963) that the gains from leverage are significant, and that the use of debt increases the market value of a firm. Financial leverage has a positive effect on the firm’s return on equity provided that the earning powers of the firm’s assets (the ratio of earnings before interest and taxes to total assets) exceeds the average interest cost of debt to the firm. Abor (2005) conducted a study on the effect of debt on firms in Ghana which indicated a significantly positive association between total debt and total assets and return on equity. The results therefore portrayed a positive leverage.

According to Berkivitch and Israel (1996), a firm’s debt level and its value is positively related especially when shareholders have absolute control over the business of the firm and it is negatively related when debt holders have the power to influence the course of the business. According to Berkivitch and Israel (1996), the impact of debt on value of firms therefore, depends on the balance of power within a firm. If shareholders have more power, a positive leverage will prevail and if debt holders have more power, a negative leverage would take place.

ROE refers to the return/monetary gain by shareholders in return for the capital they would have offered to firms. Debt is always desirable if a firm achieves relatively high profits as it results in higher returns to shareholders (positive leverage). If a firm incurs a major drop in income, employing more debt in the capital structure will be detrimental as the firm won’t be able to cover the cost of debt (negative leverage). Other studies such as Negash (2001) and Phillips and Sipahioglu (2004) conclude that the tax benefits of leverage are insignificant. Negash (2001), for instance finds that the use of debt has been found to have a negative impact on the profitability of the firms quoted on the Johannesburg Stock Exchange.

Negash (2001) further argues that, although the potential gains from leverage over an infinite period of time are significant and comparable to what is reported in studies from developed countries, in line with the theory of Modigliani and Miller of 1963.The actual gains, however, are not as implied by the 1963 theory since the effective tax rate for most firms in South Africa is lower than the statutory rate. This is because non-debt tax minimization efforts such as depreciation and amortization (investment and not debt related tax shields) reduce the significance of interest deductions and the tax advantages of debt. Empirical studies on the static theory discussed above have focused mainly on large firms.

Coleman and Cohn (2001) argue that some of the most interesting questions in SME finance relate to the extent to which the theories of corporate finance fit the SMEs. These researchers question whether these theories, which were developed within the context of large and publicly owned firms, actually work when they are applied to small firms. Rajan and Zingales (1995) indicate that although the study of the capital structures of listed and large firms may be of the greatest importance to the financial

Daniel et al. (2006) point out that in the case of small firms, the expected costs of bankruptcy is quite high and the expected costs of financial distress may out weigh any potential benefits from tax shield. Also, the advantage of the tax shield of debt is limited for small firms. Many small firms have limited revenues and the variability of their operating income can be quite volatile. Therefore, potential benefits of tax shields of interest payments remain doubtful. This is consistent with the results of a study by Sogorb (2002) which finds that the fiscal advantage of debt cannot be applied in the SME context because small firms are less likely to be profitable and therefore may not be able to use debt in order to get tax shields. Moreover, the main advantage of debt, the tax shield, can be especially complex to assess in new SMEs where business income is taxed as personal income.

According to Carney (1998) asserts that lending helped in the improvement of livelihood of the people in a given society, which helps in improving on their capabilities and assets (including both material and social resources) and activities required for a means of living.” Chambers (1997, p.10) states that livelihood security is “basic to well-being” and that security “refers to secure rights and reliable access to resources, food, income and basic services. It includes tangible and intangible assets to offset risk, ease shocks and meet contingencies.” Lindenberg (2002, p.304) defines livelihood security as “a family’s or community’s ability to maintain and improve its income, assets and social well-being from year to year.” Concern also state that livelihood security is more than just economic well-being as they define livelihood security as “the adequate and sustainable access to and control over resources, both material and social, to enable households to achieve their rights without undermining the natural resource base” (Concern, 2003). Livelihood security therefore, like poverty, is not just about income, but includes tangible and intangible assets, and social well being.

As with any financial institution, the biggest risk in business is lending money and not getting it back. Credit risk is a particular concern for lending institutions 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. Many banks do not extend credit to these kinds of people due to the high default risk for repayment of interest and in some cases the principle amount itself.

Matu (2008) carried out a study on sustainability and profitability of lending institutions and noted that efficiency and effectiveness were the main challenges facing Kenya on service delivery, Orua (2009) did a study on the relationship between capital structure and financial performance of financial institutions in Kenya.

Bankers face a situation of information asymmetry when assessing lending applications (Binks and Ennew, 1996, 1997). The information required to assess the competence and commitment of the entrepreneur, and the prospects of the business is either not available, uneconomic to obtain or difficult to interpret.

In Ghana, available data from the Registrar General Department indicates that 90% of companies registered are micro, small and medium enterprises (Mensah , 2004). This target group has been identified as the catalyst for economic growth of the country as they are a major source of income and employment to many Ghanaians. According to Mensah (2004) Small enterprises employ between 6 and 29 employees with fixed assets of $100 Thousand with Medium enterprises emplo ying between 30 and 99 employees with fixed assets of up to $1 Million, Hallberg (2001) put forward that SMEs account for majority of firms in an economy and a significant share of employment. Like other countries of the world, SMEs in Ghana have the tendency to serve as sources of livelihood to the poor, create employment opportunities, generate income and contribute immensely to economic growth. Small firms are the engines for economic development of several developed countries such as the US and Japan (Hallberg, 2001)

Developing countries such as Zimbabwe have also identified the potential of small firms to turn economies with negative growth into vibrant ones. For this reason, several governments in developing countries offer funding to small firms either directly or by guaranteeing the payment of such loans as lack of funding is cited as one of the major challenges faced by small businesses. Obert and Olawale (2010) argues that due to limited resources by governments, not all small firms receive funding from the government; therefore, the other option would be to go for bank loans Obert and Olawale (2010).

SMEs are often relatively new and lack a consistent track record of profitability that would demonstrate the capability to repay a loan. In addition, many SMEs lack assets that could be used as collateral. SMEs are also more prone to financial distress and failure. Commercial banks, because of these factors, consider lending to SMEs a high risk. Therefore, commercial banks often deny loans or offer loans to SMEs at higher rates of interest to accommodate the perceived high credit risk of SMEs according Coleman and Cohn (2001). The inaccessibility of debt finance to SMEs can further be attributed to information asymmetry. Rwelamila et al. (2004) indicates that this arises when one party to a transaction has better information than the other.

Acset al.(1999) also argues that Small and medium sized enterprises are more innovative than larger firms. Many small firms bring innovations to the market place, but the contribution of innovations to productivity often takes time, and larger firms may have more resources to adopt and implement them. D’Ambroise and Muldowney (1988), also point out that most writers use the term rather loosely. Researchers and other interested parties have used specific criteria to operationalise SME as a construct: value added, value of assets , annual sales and number of employees. D’Ambroise and Muldowney (1988), argue that annual sales and number of employees are most often used to delimit the category, For a growing number of researchers and reporting organizations, the SME is generally considered to employ no more than 250 persons and to have annual sales of less than £50million.

2.2 Challenges faced by financial institutions

Loan default

Liu and Zhu (2006) argued that credit is granted on faith and defined credit as “the ability of a business or individual to obtain economic value on faith, in return for an expected future payment”. Since trust is built on faith to commit and meet agreed financial obligations, trust, faith, respect and sometimes relationships are compromised if those obligations are not met. Not meeting the obligations is considered as default. Prior to 2004, when the Basel II accord was endorsed, financial institutions could adopt their own strategic definitions of default (Oke Adeyemo, Agbonlahor 2007). Client classifications such as good payers, poor payers and bad payers were commonly used and a payment in arrears for more than three months was considered to be a default in the retail context. The fact that every organisation could use any definition meant different scoring systems; risk measures and risk management practices could be used (Gestel and Baesens, 2009).

According to Chorafas (2007), Basel II defines default as “four different events or a combination of them; ninety days past due, write down, placement on internal non-accrual list and/or outright bankruptcy”. According to the Basel Committee 2006, “a default is considered to have occurred with regard to a particular obligor when either or both of the two following events take place: i) the bank considers that the obligor is unlikely to pay its credit obligations to the banking group in full, without recourse by the bank to actions such as realising security (if held) and; ii) the obligor is past due more than 90 days on any material obligation to the banking group” (Saita, 2007).

Interest rate in credit management

The pioneering work of Stiglitz and Weiss (1981 cited by Godquin, 2004) marked the beginning of attempts at explanations of credit rationing in credit markets. They asserted that “interest rates charged by a credit institution are seen as having a dual role of sorting potential borrowers (leading to adverse selection), and affecting the actions of borrowers (leading to the incentive effect)”. Weinberg (2006) advocated that interest charged and the amounts of debt are the two main factors affecting repayment obligations.

Indebtedness of owner/business in loan repayment

Akhavein (2001) indicated that the personal credit history or indebtedness of small business owners is highly predictive of the loan repayment prospects of their businesses. López (2007) asserted that both “hard” and “soft” information has an impact on the repayment patterns of the borrowers. Hard information such as borrowers‟ capacity, indebtedness and monthly installments need to be taken into consideration. In the small business environment, bankers actually deal with two customers: the members of such a business and the business itself. In actual fact, the indebtedness of the owner plays a pivotal role in loan repayment to such an extent that when a close corporation applies for finance and has to rely on the personal assets of the members to secure the finance, the two characteristics are seen as one (Afolabi, 2010).

Poor personal financial management, Burki and Perry, (2006) assert that the bank owners are directly or indirectly involved in the weakening of the loan assessment systems in that they often turn banks’ credits to ﬁnance their own activities which they in most cases did not pay in time and thus affecting bank operations, However they did not explain the procedure that can be undertaken to avoid such loopholes.

Difficulty in determining credit worthiness, ﬁnancial institutions have failed to determine credit worth borrowers simply because they have inadequate credit policies, failure of bank officers to comply with lending policies, inadequate customer relations, low staff morale, and bank officers’ exposure to fraud. Nguyen (2007) on the other hand believes that, the inefficient mechanisms used in assessing loans are attributed by the banks’ pessimism about the ability of technology to come up with decisions on who qualiﬁes and who doesn’t. He went ahead to suggest that the failures need to be closely examined because they reveal deep-rooted weaknesses and limitations about banks.

Presence of low income earners in an economy, low-income consumers are high-risk borrowers as this is attributed to inadequate income and lack of income security and hence making it difficult for them to make repayments on credit commitments. He further adds that this is compounded by the disproportionately higher cost of credit available to low income earners and lack of ﬂexibility available to consumers who may experience temporary difficulty in maintaining repayments. However, he did not explain the extent of the relationship between poor loan assessment and low-income consumers, (Hahn, 2002).

Competition among financial institutions, found that overwhelming banks competition in prices (interest rates) and moreover with imperfect knowledge of borrowers’ ability to repay their debts has accelerated poor loan assessments to potential borrowers (Bofondi et al, 2003). Considering Uganda’s banking sector, Interest rate spreads have been exceptionally high, reﬂecting high levels of perceived credit risk, low competition among banks, and inefficiency of the system. Interest rate spreads have ranged between 15 -20 percent since 1994, while real lending rates have varied from 10-25 percent since 1996. Non-interest expense is high at 5.8 percent of assets and is passed on to borrowers in the form of high spreads, suggesting inadequate competitive pressure in the market. However, there are signs of more competitive forces at play following the privatization of UCBL and its subsequent merger with Stanbic, International Monetary Fund, (2003).

High level of risks involved in holding and lending credit, lending embraces a wide range of risks. In an economy where survival almost depends on loans, loan officers have to be careful while assessing borrowers, where interest rate is considered as an important factor, a lending officer should not use a single rate of interest for all loans because it would lead to inappropriate investment decisions. Other things being constant, a loan should be required to earn a rate that is at least equal to the risk free rate plus a premium. The premium would compensate for the risk attached to the loan. Nguyen (2007) considers a model of repeated moral hazard, without learning and risk neutrality. In the optimal loan contract, the loan interest rate and collateral requirements decrease with the duration of the bank-borrower relationship, after the firm has demonstrated some project success. In a recent contribution, Freixas (2005) presents a model where relationships arise because there is an initial fixed cost of monitoring, that is, repeated lending from the same bank avoids duplication of monitoring costs

Government policies. According to Krugman, (2003), the reasons as to why there was no proper credit assessment inAsian bank, was partly due to government persuasiveness or order to lend heavily to particular industries and companies. In other wards they were “captive banks”. This allowed the companies concerned to become over leveraged (vulnerable to economic down town)and directed resources into unproﬁtable investments hence affecting the bank’s performance. Burki et al, (2003) on the other hand have a different view. They believe that, poor loan assessment in Asian Banks was as a result of lack of transparency in regional banking systems, which resulted into failure in disclosing the true scale of bad debt problems and henceforth weakening the market discipline on bank management. This reduced the need for them to face the problems and hence undermining public confidence in banking systems, which was largely attributed to lack of credible information from depositors.

Macroeconomics imbalance, Saudi Arabian monetary agency, (2003) [31] argues that the main causes of the problems faced by Saudi banks arises from the macroeconomics imbalances which are mainly created by lacked adequate credit assessment and monitoring procedures in relation to lack of required technical expertise and that all this therefore made banks so difficult to recover their cash from the borrowers. However no remedies were advanced to counteract the situation of poor credit assessment in banks.

Irregular deposits in banks, many deposits, According to the International Monetary Fund, (2003) a key feature of the Ugandan banking sector is the high degree of concentration on both the loan and deposit sides. When loans to the top ﬁve borrowers for each bank are aggregated, they represent about 40 percent of all loans with deposit concentration having a smaller percentage. Banking sector’s exposure to a small number of borrowers and depositors means that a cyclical downtown or terms of trade shock affecting these borrowers could translate quickly into asset quality problems for banks. I agree with IMF simply because a loan is a major asset of a ﬁnancial institution so if it is not properly managed, there are few chances of survival..

Limited collateral security among lenders, People living in poverty, like in Ethiopia, need a wide range of financial services for consumption smoothing, running their business and building assets. But due to collateral problems, poor people in most cases have no credit access from Banks. Microfinance offers financial services such as loans, savings and micro insurance to the poor people either in individual or in a group basis. Lending to the poor usually means that a lender will not be able to get any collateral to secure the loan (Njoroge, et al, 2009). Moreover, Kimentyi et al. (1998) argues that the most difficult aspects of lending to poor clients are borrower selection and repayment enforcement.

Limited number of customers especially in the developing world, The establishment of sustainable microfinance institutions that reach a large number of rural and urban poor, who are not served by the conventional financial institutions (such as the Commercial Banks) has been a prime component of the new development strategy of most African countries, Although the development of microfinance institutions in the developing world especially in African countries, started very recently, the industry has shown a remarkable growth in terms of outreach, particularly in number of clients (Amha, 2000).

High level of risk in lending, Dejene, (2003) argues in his study on the economic importance of the informal institutions in Ethiopia that the poor are often marginalized in the formal credit markets. This can be explained partly in terms of: 1) a lack of collateral, which makes lending to the poor a risky venture; 2) transaction cost of lending to and borrowing by the poor is often high; and 3) utility loss from repayment is higher for the poor as compared to the rich. So the poor don’t have access to the formal financial sources. Lack of access to institutional credit is one of the crucial factors impeding the poor from involving in operating small business and in particular and economic development in general.

Poor infrastructural development in most parts of the developing world has also hampered the work of most financial institutions , this has mainly been in terms of lack of proper ways of communication were financial institutions have faced a big setback in terms of delivering information to their debtors. Despite this financial institutions also faced challenges of, weak legal systems, banking sector and lack of technical capacity (CGAP, 2010).

The existence of nonperforming loans, some of the loans given out by the lending institutions unfortunately become non performing and eventually result in bad debts with adverse consequences for the overall financial performance of the institutions. The issue of loan default is becoming an increasing problem that threatens the sustainability of MFIs. The causes of the problem are multi-dimensional and non uniform among different literatures.

An informational constraint, the fundamental feature that creates imperfection in credit markets is informational constraints. Ray (2008) stated that informational gap occur at two basic levels. First, there is lack of information regarding the use to which a loan will be put. Second, there is lack of information regarding the repayment decision of borrowers, as well as limited knowledge of the defaulter’s subsequent needs and activities. All the important features of credit markets can be understood as responses to one or the other of these informational problems. In addition, Behrman and Srinivasan (2005) stated about the arising of agency problem in the functioning of credit market. This problem exists when there are different goals between creditors, shareholders and management. Financial intermediaries may reduce agency problem by monitoring borrowers and make wise investment choices

Limited trust, Sinapi Aba Trust is one of the leading microfinance institutions facing the challenge of a growing non- performing loan portfolio with its attendant harmful effect on the operations of the institution and the situation calls for remedial measures to curb it. The study therefore focuses on identifying the causes of nonperforming loans, the implications of NPLs on the operations of MFIs and the strategies to reduce the incidence of NPLs.

Speculation in the financial market is one of the principle challenges of loan, management as , another publication (kalyan-city.blogspot.com) identifies speculation: i.e. investing in high risk assets to earn high income and also fraudulent practices such advancing loans to ineligible persons or advances without security or reference as some of the causes of failures in loan management. It also cites internal reasons such as labor agitation/shortage and market failure as some of the causes of the incidence of NPLs. External factors such as recession in the economy and natural calamities/disasters were also cited by the same publication as some of the factors accounting for loan default. (Barth et al., 2004).

Principal repayment in future (Kay Associate Ltd), 2005). Because of this risk of default in loan repayment, lenders needs to project into the future and make sound judgment that will ensure that repayment is effected at the agreed date. Available literature places so much importance on the lender’s role in ensuring good decisions relating to the granting of loans in order to minimize credit risk. The lender must always aim at assessing the extent of the risk associated with the lending and try to reduce factors that can undermine repayment. The lender should therefore assemble all the relevant information that will assist him/her in arriving at a sound credit decision. In view of the possibility of nonpayment which leads to NPLs, MFIs have adopted a standard loan request procedures and requirements usually contained in credit policy manual to guide loan officers and customers. Some of the factors that the MFIs consider before granting loans include the following which are often referred to as the canons of good lending.

Storey (1994) notes that new businesses encounter a number of barriers to success throughout the start up period and during their first year of operation. These barriers can be both “internal” including government control and lack of skilled labour. Fielden et al.(2000) note that owner managers often perceive barriers of growth as being external in origin issues related to “money management” are often mainly cited as the main difficulty for business start-up.

Problems include a poor understanding of tax, national insurance and bookkeeping, as well as, difficulties in obtaining capital and the absence of a guaranteed income. Scott et al. (1996) point out that owners of the failed businesses often point to the shortage of the working capital as the prime cause of business failures. Fielden et al.(2000), documented that lack of adequate start up funds has a “knock on” effect restricting development and growth by reducing funds available for activities such as advertising, publicity, and acquiring suitable premises. Issues of finance are followed by concerns related to the level of demand for products and services as well as nature of market place competition, Storey (1994) notes that key constraints on growth are related to a combination of internal factors as unwillingness to delegate or bring in external skills and external factors including finance, employment and competition.

Economic perspective wise, Abor and Quartey (2010), argues that small and medium enterprises are not just suppliers, but also consumers; and this plays an important role if they are able to position themselves in a market with purchasing power: their demand for industrial or consumer goods will stimulate the activity of their suppliers, just as their own activity is stimulated by the demands of their clients. Demand in the form of investment plays a dual role according to Berry et al. (2002), both from ademand -side (with regard to the suppliers of industrial goods) and on the supply-side (through the potential for new production arising from upgraded equipment) thus demand is important to the income-generation potential of small and medium enterprises and their ability to stimulate the demand for both consumer and capital goods Abor and Quartey (2010).

Credit policies are periodically reviewed and revised by management to incorporate changes in strategic direction and risk tolerance or market (Elliot, 2009). Policies are revised to incorporate customer preferences so that they are served according to their expectations. Microfinance institutions review credit policies on average after three years (credit manual, 2009).

The reviews are used to evaluate the performance of the policy in terms of achieving desired objectives ranging from profitability to customer growth and outreach. Similarly Microfinance institutions use on time service delivery to serve customers by allowing customers to fill in loan documents at once before loans are disbursed (FINCA, 2010). The documents are a key to credit quality and they are needed to legally enforce loan agreements including the analysis of the borrower’s capacity. Common loan documents used include promissory notes, note guarantees, collateral agreements, and chattel, mortgage and loan application appraisal forms. These documents are kept safely since they act as evidence that the customer took the loan. In case one document is missing or improperly filled, the chances of losing a legal action when a customer defaults is high and becomes a loss to the company (Churchill, 2010).

The credit policy also addresses the procedures of recovering loan from customers which are due for payment but stuck in the portfolio (Zeller, 2010). Microfinance institutions therefore, carry out continuous education and training of customers on loan usage and importance’s of on time payments to influence customer compliance to the loan terms. They in addition use management information system (MIS) to track loan payments and arrears on a daily basis through activities like ringing clients’ mobile phones before the due date, sending text messages and physical visits to defaulting customers. On time loan payments therefore, encourages customer loyalty due to the Limited inconveniences received from credit staff leading to customer retention. Similarly the credit policy designates responsibilities to staff that are accountable for the accuracy of risk ratings (Bitner, 2010). In most cases Microfinance institutions use branch accounts to analyze the credit information contained in loan files before credit decisions are taken. This ensures that loans advanced are subjected to minimal transactional risk from the Branch which helps in portfolio quality control.

Green et al (2002) adds that Requirements such as identifying a product and a market, acquiring any necessary property rights or licenses, and keeping proper records are all in some sense more fundamental to running a small enterprise than is finance. (Sowa et al., 1992; Aryeetey et al., 1994; Parker et al., 1995; Kayanula and Quartey, 2000) all voiced on Other constraints small and medium enterprises face include: lack of access to appropriate technology; the existence of laws, regulations and rules that impede the development of the sector; weak institutional capacity and lack of management skills and training .

Abor and Quartey (2010) contributes to the fact that; potential providers of finance, whether formal or informal, are unlikely to commit funds to a business which they view as not being on a sound footing, irrespective of the exact nature of the unsoundness. Lack of funds may be the immediate reason for a business failing to start or to progress, even when the more fundamental reason lies elsewhere according to Abor and Quartey (2010). Finance is said to be the “glue” that holds together all the diverse aspects involved in small business start-up and development as indicate by Green et al (2002).

Idowu (2010) claim that a major barrier to rapid development of the small and medium enterprises sector is a shortage of both debt and equity financing. Accessing finance has been identified as a key element for small and medium enterprises to succeed in their drive to build productive capacity, to compete, to create jobs and to contribute to poverty alleviation in developing countries Idowu (2010). Small business especially in Africa can rarely meet the conditions set by financial institutions, which see small and medium enterprises as a risk because of poor guarantees and lack of information about their ability to repay loans Idowu (2010). Without finance, small and medium enterprises cannot acquire or absorb new technologies nor can they expand to compete in global markets or even strike business linkages with larger firms Idowu (2010).According to Cork and Nisxon (2000), poor management and accounting practices are hampering the ability of smaller enterprises to raise finance.

Michaelas et al. (1999) in addition, reveal that the minimization of the cost of capital and maximization of profitability through the use of debt finance might not hold for small firms. Small firms find it difficult to borrow from commercial banks for a variety of reasons such as risk. When they are able to borrow from banks, the costs of debt financing for small firms are usually higher than those of large enterprises due to their higher credit risk. The reliance on debt to finance investment purposes therefore negatively impacts on the profitability of small firms. In Zimbabwe, interest rates on lending are very high compared to the rates in developed countries. According to Madera (2010) the huge appetite for funding and low liquidity levels since the introduction of the multiple currencies trading system has resulted in punitive lending rates on the market.

Potential agency problems in SMEs are exacerbated by information asymmetries resulting from the lack of uniform, publicly available detailed accounting information. The primary concern for outside contributors of capital arises from moral hazard, or the possibility of the SME owner changing his behavior to the detriment of the capital provider after credit has been granted. This is because the firm owner has an incentive to alter his behavior ex post to favor projects with higher returns and greater risk. Debt providers seek to minimize agency costs arising from these relationships by employing a number of lending techniques. Baas and Schrooten (2006) proposed a classification of 4 lending techniques – transactions-based or ‘hard’ techniques include asset-based lending, financial statement lending, small business credit scoring lending and the ‘soft’ technique of relationship lending. Asset-based lending and relationship lending dominate the literature. In practice, lending to SMEs by banks is frequently collateral-based (Kon and Storey, 2003). The pervasiveness of the use of collateral is confirmed by a number of studies, for example; Black et al. (1996) find that the ratio of loan size to collateral exceeds unity for 85 percent of small business loans in the UK, Berger and Udell (1990) report that over 70 percent of all loans to SMEs are collateralized. Even for firms with positive cash flow financial institutions typically require collateral (Manove et al., 2001).

2.3 Different techniques of ensuring better performance of lending institutions

Over the years and as the need to build inclusive financial sectors became apparent, microfinance came to be accepted as a poverty alleviation tool. In addition, many countries started exerting efforts to ensure that financial services for the economically active poor are implemented on a large scale by multiple and competing financially self-sufficient institutions (Robinson, 2001).

Developing cheap ways of gathering information, Armendariz et al, (2010) stated that the information asymmetry problems could potentially be eliminated if lenders had cheap ways to gather and evaluate information on their clients and to enforce contracts. However, lenders typically face relatively high transactions costs when working in poor communities since handling many small transactions is far more expensive than servicing one large transaction for a richer borrower. Another potential solution would be available if borrowers had marketable assets to offer as collateral. In this sense, any problem on the loan was covered by the borrower’s asset. Thus, the lender could lend without risk. But the starting point for microfinance is that new ways of delivering loans are needed precisely because borrowers are too poor to have much in the way of marketable assets. However, Behrman and Srinivasan (1995) stated that one way for the government to improve enforcement conditions for credit markets is to improve the possibilities for usable sources of collateral like implementation of land registration.

Capacity Building, The growing competition, poaching of staff and lack of training and increasing demand for higher pay levels make human resources one of the most intractable problems in the sector. Capacity building in the form of a skilled and professional human capital base and adequate access to funding is essential for the building of a sustainable and efficient microfinance sector. Vento (2004).

Improvement of infrastructure, Inadequate and expensive Infrastructure base, Inadequate and expensive infrastructure such as communication, information technology, roads and electricity results in high operational cost within the microfinance sector. The current limited supply of these resources limits operations and drives up cost. In respect of infrastructure development, there is the need to establish a solid base and provide adequate logistics such as telecommunications and information technology to support the operations of microfinance institutions to make them more efficient Murray and Boros (2002)

Improving on the level of funding, The key challenges confronting the microfinance institutions in developing countries such as Ghana include Inadequate funding for capacity building, inadequate and expensive infrastructure base, Inadequate credit delivery and management, the inability to target the vulnerable and the marginalized, information gathering and dissemination, regulation and supervision, consumer protection and research, monitoring and evaluation. Norell, (2001).

A host of explanatory factors as indicated by Abor and Quartey (2010) for the growth of SMEs has been advanced, and a number of authors have made real attempts to conceptualise integrative models of firm growth rather than simply itemising factors or concentrating on one specific aspect of growth. So me of the writers; Davids on (1991) and Jennings and Beaver (1997) management perspective of performance

There is also a lack of empirical evidence and only Gibb and Scott (1985) and Jennings and Beaver (1997) attempt to address the full range of factors influencing a firm’s development. The remaining models, as pointed out by Perren (1999), concentrate on factors, which influence the entrepreneurial process and behaviours.

Improvement in credit management systems, Inadequate Credit delivery and management, the mechanism for credit delivery within the microfinance sector is inadequate and the microfinance institutions do not have the expertise to categorize their client into the various poverty categories so as to meet their specific needs. (NBE, 2010).

A regulation and Supervision Microfinance institution in the formal sector operates within a rigid regulatory and supervisory environment which presents some challenges for innovation, outreach and overall performance of the institutions. There is also an absence of specific BoG regulatory guidelines for the apex bodies in the semi-formal and informal sectors for the supervision of their members, (Najoragan, 2000).

Better information gathering and Dissemination, Lack of adequate and reliable information remains a challenge to the microfinance industry. These problems adversely affect the ability to properly target the right clients in order to meet the specific needs of such clients. There is also a paucity of information on microfinance institutions and their operations. (MFRC, 2002)

Creation of better ways of generation of information from lenders, Karlan and Zinman (2006) stated that better understandings of information asymmetries are critical for both lenders and policymakers. For instance, adverse selection problems should motivate policymakers and lenders to consider subsidies, loan guarantees, information coordination, and enhanced screening strategies. On the other hand, moral hazard problems should also motivate policymakers and lenders to consider legal reforms in the areas of liability and enhanced dynamic contracting schemes.

Even though according to them small and medium enterprises tend to attract motivated managers, they can hardly compete with larger firms. The scarcity of management talent, prevalent in most countries in the region, has a magnified impact on small and medium enterprises according to Abor and Quartey (2010). The lack of support services or their relatively higher unit cost can hamper small and medium enterprises efforts to improve their management, because consulting firms are often not equipped with appropriate cost-effective management solutions for small and medium enterprises according to Abor and Quartey (2010).

Moreover, per Kayanula and Quartey (2000) despite the numerous institutions providing training and advisory services, there is still a skills gap in the small and medium enterprises sector as a whole; this is because entrepreneurs cannot afford the high cost of training and advisory services while others do not see the need to upgrade their skills due to complacency. Likewise according to Aryeetey et al (1994), In terms of technology, small and medium enterprises often have difficulties in gaining access to appropriate technologies and information on available techniques.

The system of financial intermediation can affect economic performance and growth directly through the role it plays in savings mobilization. Pride microfinance has played this vital role of savings mobilization especially in the rural areas. It offers various savings accounts and it is a deposit taking institutions. It has facilitated the growth and empowerment of women who have been beneficiaries because it offers a wide range of appropriate instruments. According to Winiwiski, (1999) financial instruments play a vital role in facilitating savings because of appropriate instruments.

Savings play a crucial role in financial management strategies of the poor. Deposit facilities make it easier for poor clients to turn small amounts of money into ‘useful lump sums’, enabling them to smooth consumption and mitigate the effects of economic shocks,( Rutherford, 2001). Secure savings also can provide a measure of independence to socially and economically vulnerable individuals, notably women and children and unlike credit; the benefits of savings are not limited to the economically active. Although significant research has document the benefits of savings to the poor, the microfinance sector remains focused largely on credit delivery. Funders and government often don’t realize how vital asset- building policies and that savings mobilization can bring many benefits to the poor clients and microfinance providers (e.g. stable funding and protection from the foreign exchange risk.

Cassar and Holmes (2003) studied a number of Australian SMEs and determined a set of variables that effects a firms capital structure and pecking order; size, asset structure, profitability, risk and growth. In regard to size, they established that smaller firms find it relatively harder to access finance and more costly to resolve information asymmetries with lenders and financiers. Transaction costs are seen as a declining effect on financing where small scale financing bring larger trans action costs. In regard to asset structure, they established that asset structure is seen as an important determinant of the capital structure in a firm. Firms with a higher degree of tangible assets are associated with a higher liquidation value. Further, firms that have a large amount of fixed assets and a high liquidation value will have easier access to finance and lower cost of financing. In regard to profitability, they established that firms that have access to retained earnings will have a larger incentive, given the pecking order, to use these for financing rather than accessing external sources. In regard to risk, they asserted that a firm that has a high exposure towards agency and bankruptcy cost should be averse to having high levels of debt in their financing structure. Consequently, the more exposed a firm is to these risks; the lower their debt level will be in the capital structure. Finally, in terms of growth, they were of the view that firms with a higher growth place a greater demand on the internally generated funds. As a consequence, firms that are experiencing high growth will tend to look to a larger extent for external financing for further growth (Cassar and Holmes, 2003).

Bhaird and Lucey (2008) further established that the positive relationship between the use of retained profits and the age and size of the firm indicates that surviving firms are increasingly reliant on internal equity as accumulated profits are reinvested. This suggests a tendency to use capital which minimizes intrusion into the business, and is consistent with the POT. Another important source of internal equity noted in the study is the personal funds of the firm owner, and funds of friends and family which are most important in firms with low turnover. Furthermore, the results indicated that the firm owner contributes ‘quasi-equity’ in the form of the provision of personal assets as collateral for firm loans. These contributions emphasize the importance of the personal wealth of the firm owner in SME financing (Evans and Jovanovic, 1989), and indicate the significance of the risk taking propensity of the firm owner in the financing decision.

In their recent study, Bhaird and Lucey (2008) empirically tested hypotheses formulated from theories of capital structure by investigating the influence of a number of firm characteristic determinants on SME financing. Results from multivariate models tested on survey data supported a number of the propositions of agency and pecking order theories, confirming a number of findings of previous studies, albeit with a smaller sample. The results of the study emphasized that: the increased use of internal equity as the firm develops over time; the importance of the provision of collateral in alleviating information asymmetries and securing debt finance; and, the significant contribution of the firm owner through the contribution of

The use of debt finance is positively related with the provision of collateral. Potential agency problems are not constant over the life cycle of the firm. Firms at the start-up stage typically experience the greatest informational opacity problems, and may not have access to debt

financing. As a firm becomes established and develops a trading and credit history, reputation effects alleviate the problem of moral hazard, facilitating borrowing capacity (Diamond, 1991).

The “bank capital channel” is based on three hypotheses: 1) an imperfect market for bank equity (Myers and Majluf, 1984; Stein, 1998; Calomiris and Hubbard, 1995; Cornett and Tehranian, 1994); 2) a maturity mismatching between assets and liabilities that exposes banks to interest rate risk; 3) a “direct” influence of regulatory capital requirements on the supply of credit. The “bank capital channel” works in the following way. After an increase in market interest rates, a lower fraction of loans can be renegotiated with respect to deposits (loans are mainly long-term, while deposits are typically short-term): banks therefore bear a cost due to the maturity transformation performed that reduce profits and then capital. If equity is sufficiently low (and it is too costly to issue new shares), banks reduce lending because prudential regulations establish that capital has to be at least a minimum percentage of loans (Bolton and Freixas, 2001; Van den Heuvel, 2001).

Additionally, as the firm grows it will have accumulated assets as debt collateral in the form of inventory, accounts receivable and equipment (Berger and Udell, 1998). The firm may also have increased fixed assets in the form of land and buildings on which it may secure mortgage finance. Long term debt is typically secured on collateralizable fixed assets, and consequently its maturity matches the maturity of the pledged asset. Therefore, the use of long term debt is expected to increase initially, and decrease at a later stage as the long term debt is retired and the firm can rely increasingly on accumulated retained profits.

Fazzari, Hubbard, and Petersen (1988) found that firms with low or no dividend payout ratios were more likely to have investment that was sensitive to changes in free cash flow. The authors interpret their results as demonstrating that capital constraints likely affect companies that do not pay dividends as they forego investment when internal cash is not available. Costly external finance has been explored in multi-divisional firms and has been shown to play an important role as well. Lamont (1997) looks at companies that have oil related production and non-oil related businesses. He finds that investment in the non-oil related businesses are dramatically affected by swings in the world price of oil. This is true despite the fact that the firm’s non-oil businesses were largely uncorrelated with the prospects for their oil businesses. Similarly, Shin and Stulz (1998) show that the investment in minor divisions of multi-segment firms is affected by the operating performance of the larger divisions even if the investment

The financial life cycle model incorporates elements of trade-off, agency, and pecking order theories, and describes sources of finance typically advanced by funders at each stage of a firm’s development. At start-up, the commonly held view is that firms have difficulty accessing external finance due to information opacity (Huyghebaert and Van de Gucht, 2007). The most important and commonly-used sources of finance at this stage are personal savings of the firm owner, and finance from friends and family members (Ullah and Taylor, 2007). The contribution of the firm owner in nascent firms is not confined to equity, but commonly includes the provision of quasi-equity in the form of personal assets used as collateral to secure business debt

(Basu and Parker, 2001). Whilst a firm may obtain sufficient capital to initiate trading, a lack of planning may lead to problems of under-apitalization in the earliest stages. In extreme cases, particularly in the face of competition, the firm may not be able to continue in business (Cressy 2006).

2.4 Conclusion

According to the study the Businesses need loans to help improve on many of the business challenges that small scale business need for example the loans that can help the business in having capital to start, however there are many challenges that are associated with loans to business, some of them include loan default rate this hinders the growth of business.

This chapter summed the already existing information from the different scholars about the study topic under study and this was collected basing on the study objectives which provided the basis for the methodology presented in preceding chapter.

CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter presents the methodology which consists of the research design, area of study, study population, sample population and selection, sampling technique, data collection method, data quality control, data collection procedures and limitations of the study.

3.1 Research design

The study used both qualitative and quantitative research designs. Research design is defined as “a blueprint for conducting a study with maximum control over factors that may interfere with the validity of the findings”, (Burns and Grove (2003). The researcher used the above methods because many aspects will be covered in the study concerning the impact of loans on business growth. According to Holloway and Wheeler (2002) qualitative research is defined as “a form of social enquiry that focuses on the way people interpret and make sense of their experience and the world in which they live”. Researchers use the qualitative approach to explore the behavior, perspectives, experiences and feelings of people and emphasize the understanding of these elements, (Kothari, 2004).Quantitative research is a formal, objective, systematic process in which numerical data are used to obtain information about the world, (Burns & Grove 2005).Quantitative research method was used because it was easy to use in data analysis.

3.2 Area of the study

The study was carried out Centenary Bank Head quarters Mapera house located plot 44-46 Kampala road.

3.2Study population and sample size

Sekaran (2003) defines a population as the entire group of people, events or things that a researcher wishes to investigate. Mugenda and Mugenda (2003), argue that it is impossible to study the whole targeted population and therefore the researcher shall take a sample of the population. A sample is a subset of the population that comprises members selected from the population, The study targeted Centenary Bank officials (administration), the procurement staffs of centenary bank, accounting officers of the bank, tellers of the Bank, and cashiers.

3.3 Sampling techniques

According to (Amin, 2005) sampling involves selecting a sample of the population in such a way that samples of the same size have equal chances of being selected.

Table 1 below shows the summary of the sample size of the respondents and the sampling techniques that will be used in the study.

Table: Sample size of the respondents

Population Category	Total population	Sample size
Finance	15	10
Administration	15	10
Information technology	3	3
Marketing	10	7
Total	43	30

3.4 Data sources

Source of data will be from both primary and secondary sources.

Primary data

Primary data was obtained from the questionnaires administered on the target respondents to gain opinions and practices on impact of loans on business growth, Centenary Bank Head quarters Mapeera house, Kampala Uganda.

Secondary sources

Secondary data is data which has been collected by individuals or agencies for purposes other than those of a particular research study. It is data developed for some purpose other than for helping to solve the research problem at hand (Bell, 1997). This comprised of literature related to impact of loans on business growth in relation to the case study. Secondary data was sourced because it yields more accurate information than obtained through primary data, and it is also cheaper.

3.5 Data Collection Instruments

The major instruments for data collection were questionnaires and interview guide. Surveys were just one part of a complete data collection and evaluation strategy. The major method of data collection for the study was the survey, which was done using selected instruments like questionnaires. The questionnaire provided respondents with ample time to comprehend the questions raised and hence, they were able to answer factually.

3.5.1 Questionnaires

The Questionnaire is a research instrument consisting of a series of questions and other prompts for the purpose of gathering information from respondents, (Bush, et al, 2010). The researcher administered the questionnaires to respondents in different departments including, finance, information technology department, administration, which was designed basing on study objectives and questions. Respondents read and wrote the questionnaires themselves. The questionnaires were close ended and were considered convenient because they were administered to the literate and its anonymous nature fetched unhindered responses.

3.5.2 Interviews

An interview is a conversation where questions are asked and answers are given. In common parlance, the word interview refers to a one-on-one conversation with one person acting in the role of the interviewer and the other in the role of the interviewee, (Amin, 2003).The interview guide was structured. The interviews were held with administration and finance staffs, and took approximately thirty to sixty minutes. This was used since it’s the best tool for getting first-hand information /views, perceptions, feelings and attitudes of respondents. Both formal and informal interviews were used to get maximum information from the different respondents to participate in the research.

3.6 Data collection procedures

Upon receiving the University permission to carry out research, the area of study was visited for purposes of familiarization. The researcher sought permission from staff and once allowed to proceed with research, questionnaires were issued and interviews were carried out with the selected staff.

3.7 Quality control of data instruments

The instrument were taken to the supervisor to check its correctness there after pilot study was carried out to find out if it measures what it is meant to for.

3.8 Data processing and analysis

The raw data was coded, edited, and arranged ready for analyzing only completed raw data was analyzed using statistical tables and graphs.

3.9 Limitations of the study

The researcher faced the following challenges in the course of the study;

The researcher did not get enough time to interview all the respondents, but this was solved by budgeting for the time appropriately.
The researcher also face challenges in language as other respondents felt comfortable expressing themselves in local languages like luganda however the researcher emphasized the use of English to eliminate the challenge of language.
The researcher also faced a challenge of Bad weather; this was an obstacle to the efficiency of data collection which hampered with data quality.

3.10 Conclusions

This chapter has discussed in depth the methodology and the design to be used to collect data, the instruments used, the way of presentation, analysis and discussions form the basis on which chapter four is based.

CHAPTER FOUR

PRESENTATION, ANALYSIS, INTERPRETATION OF FINDINGS

4.0 Introduction

This chapter presents the results in reference to objectives in chapter one. Capacity in which one is serving Centenary Bank, Gender of respondents, Age of respondents, Education level of respondents, to examine the benefits of loans to business, to investigate the challenges of lending faced by Centenary Bank and to examine the different techniques of ensuring the growth of business in Uganda.

4.1 Findings on general information

4.1.2 Findings on the Gender of respondents

Depending on the sample of respondents that was taken, below is the table showing the gender distribution.

Table 1: findings on the gender of respondents

GENDER	FREQUENCY	PERCENTAGE	DEGREES
MALE	18	60	216
FEMALE	12	40	144
TOTAL	30	100	360

Source: primary data

Table 4.1.2 above shows that 60% of respondents were male and 40% were female. This means that the biggest percentage of respondents and employees in the organization that were sampled were male and apart from that it also shows that male gender dominate the work force of Centenary Bank which eased the work due to flexibility of men other than women.

4.1.3 Findings on the age of respondents.

The age groups of the respondents were represented as shown below;

Table 2: Findings on age category of respondents

AGE	FREQUENCY	PERCENTAGE
18-29	10	33.33
30-39	15	50
40 and above	5	16.667
TOTAL	30	100

Source: primary data

Figure 1: Piechart showing age category of respondents

Source: primary data

The table and pie-chart above shows that 33.33% of the respondents are in the age group of 18-29 while 50% of the respondents are in the ages of 30-39 while the remaining respondents of 16.6% are in the ages of above 40 years, This showed that respondents between the age 30-39 dominated all therefore are still in an active range therefore can give sound and clear responses in relation to the questions which gives accuracy in data collected.

4.1.4 Findings on the education level of respondents.

The education levels of the respondents were as shown in the table below;

Table 3: Showing educational level of respondents

RESPONDENTS	FREQUENCY	PERCENTAGE
Masters	05	16.67
Degree	20	66.67
Diploma	3	10
Others	2	6.67
TOTAL	30	100

From the findings above the table this implies that the degree holders are able to give reliable information about the topic since they have enough knowledge and qualifications.

4.1.5 Findings on the number of year’s respondents have worked at Centenary Bank

The number of years respondents have worked with Centenary Bank is as shown in the table below;

Table 4 showing the number of years respondents have worked at Centenary Bank

Table 5: Showing number of years respondents have worked

NUMBER OF YEARS	FREQUENCY	PERCENTAGE
3-5 years	8	27
6-10 years	15	50
10 and above	7	23
Total	30	100

Source: primary data

The table shows that majority of the respondents have worked for the time period of 6-10 years and therefore have much knowledge about the organization thus can give adequate information.

Figure 3: Bar graph showing number of years respondents have worked

The bar graph above shows that majority of the respondents have works between the range of 6-10 years this shows that the majority of the respondents have enough knowledge on the operations of Centenary Bank and therefore they were able to give detailed information regarding the topic.

Then the least of respondents have worked there for 10 years and above however those that have worked between 3-5 years are more than them.

4.2 Benefits of loans to business

Strongly agree, (SA), Agree(A), not sure (N), Disagree (D), Strongly disagree (SD).

Table 6: Benefits of loans to Business

Statements	Response
Statements	SA		A		N		D		SD
Enables acquisition of assets by Business people	Freq	%	Freq	%	Freq.	%	Freq.	%	Freq.	%
Provision of startup capital to the Business people	15	50	10	33	5	17	0	0	0	0
Helping to reduce poverty	18	60	12	40	0	0	0	0	0	0
loans enables Business to acquire modern equipments	22	73	5	16	1	3.3	3	10	0	0
Improvement of livelihood	25	83	5	17	0	0	0	0	0	0

Source: primary data.

From table 4.2.1 above, findings revealed that, 50% of respondents strongly agreed that loans Enables acquisition of assets by Business people which helps the business to grow, 33.3% agreed while 16.6% agreed this therefore shows that majority of respondents agree .

According to the table 60% of the respondents strongly agreed that Provision of startup capital to the Business people is essential to enable the business grow and be in position to aquire more assets, while the remaining 40% agreed this therefore shows that all the respondents agree with the fact that Business people are to get startup capital to enable their growth.

According to the table above, 73.3 % of the respondents strongly agreed that Helping to reduce poverty is one of the key while 16.7% agreed, 3.3% of the respondents were not sure while the remaining 10% disagreed.

From the table 83.3% of respondents strongly agreed that loans enables Business to acquire modern equipments while the remaining percentage of 16.6% of the respondents agreed this makes it clear that loans enables business to acquire equipments to enable it in executing of its business.

The table above indicates that 60% of respondents strongly agreed that loans helps a business to Improve the livelihood of the business men , 20% agreed while the remaining 20% were neutral over the issue.

4.3 Challenges faced by financial institutions

Strongly agree, (SA), Agree(A), not sure (N), Disagree (D), Strongly disagree (SD).

Table 7: Challenges faced by financial institutions

Statements	Response
Statements	SA		A		N		D		SD
	Freq	%	Freq	%	Freq	%	freq	%	Freq	%
loan defaulters affect financial institutions	18	60	12	40	0	0	0	0	0	0
Interest rate in credit management	22	73	8	26	0	0	0	0	0	0
Indebtedness of owner/business in loan repayment	15	50	15	50	0	0	0		0	0
Difficulty in determining credit worthiness	17	56	10	13	2	6	1		0	0
Presence of low income earners in an economy	15	50	10	33	0	0	0		0	0

Source: primary data

Table above reveals that loan defaulters affect financial institutions this is supported by the strong percentage of 47% strongly agreeing, while 33% agreed and 10% disagreed while the remaining percentage of respondents strongly disagreed, the above findings indicates that loan defaulters affect financial institutions.

According to table above, 47% of the respondents strongly agreed that Indebtedness of owner/business in loan repayment, while 33% of the respondents agreed while 20% of the respondents where neutral.

According to researchers’ findings, 50% of the respondents strongly agreed that Difficulty in determining credit worthiness of the borrowers. While the rest of respondents agreed this therefore shows that the financial institutions face a challenge in determining credit worthiness.

According to the table 67% of the respondents strongly agreed Presence of low income earners in an economy while 16% agreed and the remaining percentage disagreed, this finding further indicates that low income earners in an economy.

4.4 The Different techniques of ensuring better performance of lending institutions

Strongly agree, (SA), Agree(A), not sure (N), Disagree (D), Strongly disagree (SD).

Table 9: Different techniques of ensuring better performance of lending institutions

Statements	Response
Statements	SA		A		N		D		SD
	Freq	%	Freq	%	Freq	%	Freq	5	Freq	%
Developing cheap ways of gathering information	18	60	12	40	0	0	0	0	0	0
Capacity Building	22	73	8	27	0	0	0	0	0	0
Improvement of infrastructure	15	50	15	50	0	0	0	0	0	0
Improving on the level of funding	17	57	10	33	2	6	1	0	0	0
Improvement in credit management systems,	15	50	10	33	5	17	0	0	0	0
Better information gathering and Dissemination	18	60	10	33	0	0	0	0	0	0

Source: primary data

From table above, 60% of the respondents strongly agreed that Developing cheap ways of gathering information while the remaining 40% agreed; this therefore shows that the majority of the respondents agreed.

According to table above it indicates that, 73.3 % of the respondents strongly agreed that Capacity Building, while 26.7% agreed , while none of the respondents, was neutral, disagreed, and strongly disagreed.

Findings revealed in table above, shows that 50% of the respondents strongly agreed and the remaining percentage this therefore shows that 100% of the respondents agree with the fact that Improvement of infrastructure of a given country is essential , this is because when the infrastructure is essential to ensure profitability of a given business.

According to the table 56.7% of the respondents strongly agreed that Improving on the level of funding is essential in ensuring that there is profitability of the business to help them be in position to pay Back their loans to the financial institutions, while the remaining 33.3% of the respondents strongly agreed, while none of the respondents was neutral, disagreed or strongly disagreed.

From table above, majority of the respondents strongly agreed that Improvement in credit management systems is essential for the financial institution, while 23.3% agreed while none of the respondents were neutral, disagreed or strongly disagreed.

The table above shows that majority of the respondent assert that Better information gathering and Dissemination strongly agreed that 60% of the respondents strongly agreeing to the fact while 33.3% of the respondents agreed and the remaining percentage of the respondents were neutral.

4.6 Conclusions

This chapter has presented the demographic characteristics of the respondents and the data was also presented basing on study objectives.

CHAPTER FIVE

DISCUSSION, CONCLUSION, RECOMMENDATIONS

5.0 Introductions

This chapter covers the discussion of the study, conclusion, and recommendations of the study.

5.1 Discussion of the study

5.1.1 Benefits of loans to business

The findings in the study further indicates that majority of the respondents asserted that loans Enables acquisition of assets by Business people which helps the business to grow, this findings is also in line with Littlefield and Rosenberg, (2004) who states that Loans enables the poor and excluded section of people in the society who do not have an access to formal banking to build assets, diversity livelihood options and increase income, and reduce their vulnerability to economic stress. In the past, it has been experienced that the provision for financial products and services to poor people by MFIs can be practicable and sustainable as banks can cover their full costs through adequate interest spreads and by operating efficiently and effectively.

The results in the study indicates that Provision of startup capital to the Business people is essential to enable the business grow and be in position to acquire more assets this view is also shared this is also in line with (Robinson, 2001), who asserts that there are broadly two sources of financial services. One of the sources is the formal banking sector while the other one is the informal sector. The formal banking sector serves less than 20% of the population in developing countries; this is also further shared by Chiumya, (2006), who states that the rest of the population, typically low-income households, has historically not had access to formal financial services.

The findings in the study indicates that micro finance institutions helps to reduce poverty , this view is also shared by Littlefield, Murduch and Hashemi(2003) who states that Lending institutions provide loans because most of the financial institutions like MFIs are not reaching the poorest in society and therefore most start up business fail because of lack of financial resources, despite some commentators’ skepticism of the impact of microfinance on poverty, studies have shown that lending to business has been successful in many situations.

The findings in the study indicates that loans enables Business to acquire modern equipments to be able to expand their business to bigger levels

The results in the study indicates that loans helps a business to Improve the livelihood of the business men, this view is also shared by Carney (1998) who asserts that lending helped in the improvement of livelihood of the people in a given society, which helps in improving on their capabilities and assets (including both material and social resources) and activities required for a means of living.” Chambers (1997, p.10) states that livelihood security is “basic to well-being” and that security “refers to secure rights and reliable access to resources, food, income and basic services.

5.1.2 CHALLENGES FACED BY FINANCIAL INSTITUTIONS.

The study findings show that loan defaulters affect financial institutions, this view is also shared by Liu and Zhu (2006) argued that credit is granted on faith and defined credit as “the ability of a business or individual to obtain economic value on faith, in return for an expected future payment”. Since trust is built on faith to commit and meet agreed financial obligations, trust, faith, respect and sometimes relationships are compromised if those obligations are not met.

The table indicates that majority of the respondents strongly and agreed that determining Interest rate in credit management is abig challenges because the rates keeping on changing this is also in line with Stiglitz and Weiss (1981 cited by Godquin, 2004) who remarked that interest rates charged by a credit institution are seen as having a dual role of sorting potential borrowers (leading to adverse selection), and affecting the actions of borrowers (leading to the incentive effect)”. Weinberg (2006) advocated that interest charged and the amounts of debt are the two main factors affecting repayment obligations.

The findings in the study indicates that one of the big challenges faced by SMEs is Indebtedness of owner/business in loan repayment this view is also shared by Akhavein (2001) who indicated that the personal credit history or indebtedness of small business owners is highly predictive of the loan repayment prospects of their businesses while López (2007) further asserts that “hard” and “soft” information has an impact on the repayment patterns of the borrowers. Hard information such as borrowers‟ capacity, indebtedness and monthly installments need to be taken into consideration. In the small business environment, bankers

The findings in the study further indicates that there is difficulty in determining credit worthiness of the borrowers, this is also in line with Nguyen (2007) , who states that ﬁnancial institutions have failed to determine credit worth borrowers simply because they have inadequate credit policies, failure of bank officers to comply with lending policies, inadequate customer relations, low staff morale, and bank officers’ exposure to fraud.

Fin ally the findings in the study indicates that presence of low income earners in an economy this is also in line with (Hahn, 2002), who states that Presence of low income earners in an economy, low-income consumers are high-risk borrowers as this is attributed to inadequate income and lack of income security and hence making it difficult for them to make repayments on credit commitments. He further adds that this is compounded by the disproportionately higher cost of credit available to low income earners and lack of ﬂexibility available to consumers who may experience temporary difficulty in maintaining repayments.

5.1.3 Techniques of ensuring better performance of lending institutions

Findings from the study indicates that Developing cheap ways of gathering information is one of the best techniques of ensuring that there is better performance of lending institutions this is also in line with Armendariz et al, (2010) who stated that the information asymmetry problems could potentially be eliminated if lenders had cheap ways to gather and evaluate information on their clients and to enforce contracts. However, lenders typically face relatively high transactions costs when working in poor communities since handling many small transactions is far more expensive than servicing one large transaction for a richer borrower

The study further indicates that Capacity Building among financial institutions is necessary for an organization to improve on their performance, this findings is also in line with Vento (2004), who stated that The growing competition, poaching of staff and lack of training and increasing demand for higher pay levels make human resources one of the most intractable problems in the sector. Capacity building in the form of a skilled and professional human capital base and adequate access to funding is essential for the building of a sustainable and efficient microfinance sector.

The study further indicates that Improvement of infrastructure of a given country is essential, in ensuring that an financial institution is able to ensure that organization , this is also in line with Murray and Boros (2002), who states that Inadequate and expensive Infrastructure base, Inadequate and expensive infrastructure such as communication, information technology, roads and electricity results in high operational cost within the microfinance sector. The current limited supply of these resources limits operations and drives up cost.

The findings in the study indicates that Improving on the level of funding is essential in ensuring that there is profitability of the business to help them be in position to pay Back their loans to the financial institutions this is also in line with Norell, (2001), who states that The key challenges confronting the microfinance institutions in developing countries such as Uganda include Inadequate funding for capacity building, inadequate and expensive infrastructure base, Inadequate credit delivery and management, the inability to target the vulnerable and the marginalized, information gathering and dissemination, regulation and supervision, consumer protection and research, monitoring and evaluation.

The findings in the study indicates that Improvement in credit management systems is essential for the financial institution, this is also in line with NBE, (2010) who states that inadequate Credit delivery and management, the mechanism for credit delivery within the microfinance sector is inadequate and the microfinance institutions do not have the expertise to categorize their client into the various poverty categories so as to meet their specific needs..

The findings in the study indicates that Better information gathering and Dissemination is essential in ensuring better performance of financial institution, this view is also shared by MFRC,( 2002) who states that Lack of adequate and reliable information remains a challenge to the microfinance industry. These problems adversely affect the ability to properly target the right clients in order to meet the specific needs of such clients. There is also a paucity of information on microfinance institutions and their operations.

5.2 Conclusion

The study findings show that loan defaulters affect financial institutions, determining Interest rate in credit management is abig challenges because the rates keeping on changing, The findings in the study indicates that one of the big challenges faced by SMEs is Indebtedness of owner/business in loan repayment, The findings in the study further indicates that there is difficulty in determining credit worthiness of the borrowers, however the presence of low income earners in an economy is also a big challenge for financial institutions due to limited security.

The results in the study further indicates that developing cheap ways of gathering information is one of the best techniques of ensuring that there is better performance of lending institutions, Capacity Building among financial institutions is necessary for an organization to improve on their performance, The study further indicates that Improvement of infrastructure of a given country is essential, the Improving on the level of funding is essential in ensuring that there is profitability of the business to help them be in position to pay Back their loans to the financial institutions and The findings in the study indicates that Improvement in credit management systems is essential for the financial institution.

5.3 Recommendations

The study made the following recommendations;

Business organizations should be able to obtain loans to enable them acquire different assets that are crucial for the growth of their business, this will help in the development of them business to enable them grow to bigger levels

Financial institutions should determine the credit worthiness of the business owners and the ability of the business to pay back the loans this will help the business to prevent loan defaulters from acquiring loans that would affect the financial institutions.

The study also recommends that financial institutions should be able to educate the Business owners to eliminate poor financial decisions that are prevalent with most business.

REFERENCES

Littlefield, E., & Rosenberg, R. (2004). Microfinance and the poor. Finance and Development, 41(2), 38-40.

Brazma, A., Hingamp, P., Quackenbush, J., Sherlock, G., Spellman, P., Stoeckert, C., … & Gaasterland, T. (2001). Minimum information about a microarray experiment (MIAME)—toward standards for microarray data. Nature genetics, 29(4), 365-371.

Chiumya, C. (2006). The regulation of microfinance in Zambia. Essay on Regulation and Supervision, 18.

Littlefield, E., Morduch, J., & Hashemi, S. (2003). Is microfinance an effective strategy to reach the Millennium Development Goals?. Focus note, 24(2003), 1-11.

Dichter, C. (1999). U.S. Patent No. 5,896,443. Washington, DC: U.S. Patent and Trademark Office.

Hulme, D., & Mosley, P. (1996). Finance against poverty (Vol. 2). Psychology Press

Johnson, S., & Rogaly, B. (1997). Microfinance and poverty reduction. Oxfam.

Carney, D. (1998). Sustainable rural livelihoods: What contribution can we make?. Department for International Development.

Meyer-Lindenberg, A., Miletich, R. S., Kohn, P. D., Esposito, G., Carson, R. E., Quarantelli, M., … & Berman, K. F. (2002). Reduced prefrontal activity predicts exaggerated striatal dopaminergic function in schizophrenia. Nature neuroscience, 5(3), 267.

Bamberg, S. (2003). How does environmental concern influence specific environmentally related behaviors? A new answer to an old question. Journal of environmental psychology, 23(1), 21-32.

Orua, E. A. (2009). The relationship between capital structure and financial performance of Microfinance Institutions in Kenya (Doctoral dissertation, University of Nairobi).

Oke, J. T., Adeyemo, R., & Agbonlahor, M. U. (2007). An empirical analysis of microcredit repayment in southwestern Nigeria. Journal of Human Behavior in the Social Environment, 16(4), 37-55.

Van Gestel, T., & Baesens, B. (2009). Credit Risk Management: Basic concepts: Financial risk components, Rating analysis, models, economic and regulatory capital. Oxford University Press.

Chorafas, D. N. (2007). Risk accounting and risk management for accountants. Butterworth-Heinemann.

Godquin, M. (2004). Microfinance repayment performance in Bangladesh: How to improve the allocation of loans by MFIs. World Development, 32(11), 1909-1926.

Akhavein, J. D., Frame, W. S., & White, L. J. (2001). The diffusion of financial innovations: An examination of the adoption of small business credit scoring by large banking organizations.

Batley, R. (2006). The changing role of the state in development. Managing Change in Local Governance, 11.

Kabir Hassan, M. (2002). The microfinance revolution and the Grameen Bank experience in Bangladesh. Financial Markets, Institutions & Instruments, 11(3), 205-265.

Freixas, X. (2005). Deconstructing relationship banking. investigaciones económicas, 29(1).

Government policies. According to Freixas, X. (2005). Deconstructing relationship banking. investigaciones económicas, 29(1).

Dejene, A. (2003). Integrated natural resources management to enhance food security. The case for community-based approaches in Ethiopia. Environment and natural resources working paper, (16).

Conte, D., Foggia, P., Sansone, C., & Vento, M. (2004). Thirty years of graph matching in pattern recognition. International journal of pattern recognition and artificial intelligence, 18(03), 265-298.

Boros, R., Murray, U., & Sisto, I. (2002, March). A Guide to Gender-sensitive Microfinance. Prepared for the International Conference on “Women’s empowerment or feminisation of debt.

Armendáriz, B., & Morduch, J. (2010). The economics of microfinance. MIT press.

Ji, Q., Norell, M. A., Ke-Qin, G., Shu-An, J., & Ren, D. (2001). The distribution of integumentary structures in a feathered dinosaur. Nature, 410(6832), 1084.

Karlan, D., & Zinman, J. (2009). Observing unobservables: Identifying information asymmetries with a consumer credit field experiment. Econometrica, 77(6), 1993-2008.

Rutherford, A. (2001). Introducing ANOVA and ANCOVA: a GLM approach. Sage.

Norell, N. (2001). How to reduce arrears in microfinance institutions. Journal of Microfinance/ESR Review, 3(1), 8.

APPENDIX I: QUESTIONNAIRE

TOPIC: EFFECT OF LOANS ON BUSINESS GROWTH

A CASE STUDY: CENTENARY BANK

Dear respondent

I am JUMA IBRAHIM a student of UGANDA MARTYRS UNIVERSITY, am carrying out a study on the above stated topic. You are one of the respondents randomly selected to participate in the study. The information given shall be treated with at most confidentiality and shall only be used strictly for academic purpose.

SECTION A: GENERAL DATA

Sex: Male female

Age a) 18 -29 b) 30 – 39 c) 40 and above

Educational level

Certificate Diploma Degree Others

For how long have you been working with Centenary Bank?

Less than one year 2-3 years

1–2 years above 3 years

Please tick one appropriate.

SECTION B: BENEFITS OF LOANS TO BUSINESS IN UGANDA.

Key:SA=Strongly agree,A=agree,N=neutral,D=disagree,SD=strongly disagree

Benefits of loans to business in Uganda	Response
Benefits of loans to business in Uganda	SA	A	N	D	SD
Enables acquisition of assets by Business people
Provision of startup capital to the Business people
Helping to reduce poverty
loans enables Business to acquire modern equipments
Improvement of livelihood

Please tick one appropriate.

SECTION C: CHALLENGES FACED BY FINANCIAL INSTITUTIONS.

Key:SA=strongly agree,A=agree,N=neutral,D=disagree,SD=strongly disagree

Challenges faced by financial institutions	Response
Challenges faced by financial institutions	SA	A	N	D	SD
loan defaulters affect financial institutions
Interest rate in credit management
Indebtedness of owner/business in loan repayment
Difficulty in determining credit worthiness
Presence of low income earners in an economy

Please tick one appropriate.

SECTION D: 4.7. Techniques of ensuring better performance of lending institutions.

Key:SA=Strongly agree,A=agree,N=neutral,D=disagree,SD=strongly disagree

Techniques of ensuring better performance of lending institutions	Response
	SA	A	N	D	SD
Developing cheap ways of gathering information
Capacity Building
Improvement of infrastructure
Improving on the level of funding
Improvement in credit management systems
Better information gathering and Dissemination

THANKS FOR YOUR COOPERATION

ABSTRACT

CHAPTER ONE

1.0 Introduction

1.1 Background of the study

1.2 Statement of the Problem

1.3 Purpose of the Study

1.4 Objectives of the Study

1.5 Research Questions

1.6 Scope of the Study

1.6.1 Study Scope

1.6.2 Geographical Scope

1.6.3 Time scope

1.7 Justification of the study

1.8 Significance of the Study

1.9 Conceptual frame work

1.10 Conclusion of the study

1.11 Definition of key terms

CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

2.1 Benefits of loans to business

2.2 Challenges faced by financial institutions

2.3 Different techniques of ensuring better performance of lending institutions

2.4 Conclusion

CHAPTER THREE

METHODOLOGY

3.0 Introduction

3.1 Research design

3.2 Area of the study

3.2Study population and sample size

3.3 Sampling techniques

3.4 Data sources

3.5 Data Collection Instruments

3.5.1 Questionnaires

3.5.2 Interviews

3.6 Data collection procedures

3.7 Quality control of data instruments

3.8 Data processing and analysis

3.9 Limitations of the study

CHAPTER FOUR

PRESENTATION, ANALYSIS, INTERPRETATION OF FINDINGS

4.0 Introduction

4.1 Findings on general information

4.1.2 Findings on the Gender of respondents

4.1.3 Findings on the age of respondents.

4.1.4 Findings on the education level of respondents.

4.1.5 Findings on the number of year’s respondents have worked at Centenary Bank

4.2 Benefits of loans to business

4.3 Challenges faced by financial institutions

4.4 The Different techniques of ensuring better performance of lending institutions

CHAPTER FIVE

DISCUSSION, CONCLUSION, RECOMMENDATIONS

5.0 Introductions

5.1 Discussion of the study

5.1.1 Benefits of loans to business

5.1.2 CHALLENGES FACED BY FINANCIAL INSTITUTIONS.

5.1.3 Techniques of ensuring better performance of lending institutions

5.2 Conclusion

5.3 Recommendations

REFERENCES

APPENDIX I: QUESTIONNAIRE

Wilbroad Oketcho

Leave a Reply Cancel reply