EFFECTS OF HIGH INTEREST RATES ON THE GROWTH OF BUSINESSE IN KAMPALA

CASE STUDY:   ST BALIKUDEMBE MARKET

INTRODUCTION

This chapter covers the background of the study, Statement of the problem, purpose of the study, research questions, and scope of the study, significance of the study and definition of terms.

1.1       Background to the Study

The history of  interest  can be documented at least several thousand years back; forms of lending were evident in ancient Greek and Roman times, and monetary loans were even mentioned in the Christian bible, (Shafiel et al, 2010). According to Kithinji and Waweru (2007) interest can be thought of as “rent of money.” Interest rate as a price of money reflects market information regarding expected change in the purchasing power of money or future inflation (Ngugi, 2001). Sologoub (2006) highlights that high interest rate is indicative of inefficiency in the banking sectors of developing countries, as it is now widely acknowledged that interest rate spreads are an adequate measure of bank intermediation efficiency. The difference between lending and deposit interest rates, known as the interest rate spread (IRS), is an important determinant of the efficacy of the financial system in a country (Hassan and Khan, 2010). Alternatively, a high interest rate spread could mean unusually low deposit rates discouraging savings and limiting resources available to finance bank credit (Mustafa & Sayera, 2009).

Sologoub (2006) further indicates that efficient financial intermediation is an important factor in economic development process as it has implication for effective mobilization of investible resources. A wide deposit-lending rate margin is not only indicative of banking sector inefficiency; it also reflects the level of development of the financial sector (State Bank of Pakistan, 2006).

Proponents of financial market liberalization have argued that increased presence of foreign banks in developing countries would reduce  the cost of financial intermediation, increase the availability of credit and foster development of small business, (Crowley, 2007).

Interest rate can be decomposed into different components. Banks charge higher interest rates to riskier borrowers in anticipation of defaults, and so interest rate therefore account for loan loss provisions in the decomposition. Interest rate also account for overhead costs, taxes, and required reserves, all the above are factors that contribute to higher spreads (Hamid, 2011). The overhead costs are those attributable to loans, which we identify by calculating the share of loan interest revenue in total revenue. Profit margin is a residual after adjusting for loan loss provisions, the tax rate, reserve requirements, and overheads (Brock & Franken, 2003) .Credit is very essential for the business to grow and be able to pay workers and cater personal needs of for the entrepreneur. And for the business to grow it must have enough credit. St Balikudembe market is located Kampala capital city central district,it’s concentrated with many small and medium enterprises that deal in a variety of goods and services like restaurant, market venders, retail shops tailoring carpentry sell of secondhand clothes among others.Most of thesebusinesses receive credit from financial institutionsbut due to high interest charges, they normally fail to pay back and collapse withinless than five years from the date of their birth. Therefore, this study intends to investigate into the effects of interest charges on the growth of businesses in Kampala.

1.2       Statement of the Problem

Despite liberalizing the money markets in Uganda, interest rates spread continues being high. In year 2016, the interest rate spread was so high that the CBR reached 17%, while commercial banks was at more than 24% in most commercial banks in Uganda, (BOU, 2016). One of the expected benefits of financial liberalization and deepening of the financial sector is the narrowing of the interest rate spreads, the difference between the interest rate charged to borrowers and the interest rate paid to depositors.

Small business are one of the biggest employers in Uganda due to few multinational companies in the country, however despite their contribution is massive to the economy their survival continues to be affected by the high interest rates offered by the commercial banks in Uganda , this has therefore made most of the business in Uganda not to see their fifth birthday, this study therefore intends to investigate into effects of high interest rates on the growth of business in Kampala.

1.3       Purpose of the Study

The study seeks to investigate into effects of high interest rates on the growth of business in Kampala.

1.4       Objectives of the Study

1. To examine the determinants of interest rates in an economy.
2. To investigate the challenges in the growth of small business in St. Balikudembe market.

• To establish the relationship between interest rates and the growth of small business in St. Balikudembe Market.

1.5       Research Questions

1. What are the determinants of interest rates in an economy?
2. What are the challenges in the growth of small business in St. Balikudembe market?

• What is the relationship between interest rates and the growth of small business in St. Balikudembe Market?

1.6       Scope of the Study

1.6.1       Study Scope

The study will specifically look at the determinants of interest rates in an economy, the challenges in the growth of small business, the relationship between interest rates and the growth of small business.

1.6.2 Geographical Scope

The study will be carried out at St. Balikudembe Market.

1.6.3 Time scope

The period of data to be considered in the organization will be from 2012-2016 and period of body of knowledge in reviewing literature will be from 2000-2016.

1.7       Significance of the Study

The study will give future researchers information regarding the determinants of interest rates in an economy.

The study will provide information to scholars on the challenges in the growth of small business.

The study will help the policy makers have information on the relationship between interest rates and the growth of small business.

1.8 Definition of key terms

1.8.1 Interest Rates

Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR).

1.8.2 Small Business

Is an independently owned and operated company that is limited in size and in revenue depending on the industry.

CHAPTER TWO

LITERATURE REVIEW

2.1  INTRODUCTION

This chapter discusses what various scholars have written about, the determinants of interest rates in an economy, the challenges in the growth of small business and the relationship between interest rates and the growth of small business.

2.2 DETERMINANTS OF INTEREST RATES

Folawewo and Tennant (2008) studied the determinants of interest rate spread in 33 Sub-Saharan African (SSA) countries focusing on macroeconomic variables. Their results show that interest rate spread is influenced by the extent of the crowding out effect of government borrowing, public sector deficits, discount rate, inflation, level of money supply, reserve requirement, level of economic development and population size.

Beck, Thorsten and Hesse (2006) analyzed factors explaining interest rate spreads in Uganda compared with peer African countries for the period 1999 to 2005. They used a panel data set of 1,390 banks from 86 countries, and reported that the variation of spreads is high both across countries and within countries across banks. The average margins are around 10.9% while a mean spread of 18.1% was observed. To explain the high variation in interest rate margins across countries, they used bank size, exchange rate depreciation, real t-bill rate, liquidity ratio, concentration, inflation, GDP growth, institutional development, and overhead costs. They reported that most bank-specific as well as macroeconomic factors are relevant in explaining the high banking margins in Uganda. However, foreign banks and changes in market structure had no significant relationship with interest rate spreads. They concluded that size, high t-bill rates, and institutional deficiencies explain the large proportions of Ugandan interest margins.

Studies by (Demigurc-Kunt & Huizinga, 1999; Demigruc-Kunt, Laeven & Levine, 2003; Tennant, 2006) asserts that increase in reserve requirements are associated with a growth in interest rate spreads since banks pass on the cost of holding unloanable funds to consumers via an increase in lending rates or a reduction in deposit rates. However, reserve requirements relative to the size of the spread were small for the Organization for Economic Co-operation and Development (Randall, 1998) accounting for less than 10% of the average spread between the period 1991 to1996.

In the case of Belize, Martin (2010) estimated that 50% of the spread is attributable to reserve requirements, based on the zero-profit methodology. The level of country risk was a key factor that boosted spreads as severe sociopolitical instability in the Solomon Islands was a key factor behind commercial banks ‘high spreads (Zikmud, Babin & Griffin 2010). Further, a weak legal systemcontributed to the accumulation of non-performing loans in Kenya, which in turn pushedup lending rates and increased net interest margins (Ngugi, 2001).

Apart from these standard indicators other bank-specific characteristics could influence banks’ price-setting behavior (Weth, 2002).Ngugi (2001) extended the monthly time series data to December 1999. In addition, to the factors above, Ngugi (2001) incorporated excess liquidity and non-performing loans ratio as explanatory variables and finds that a rise in non-performing loans ratio leads to a rise in spreads while excess liquidity is negatively related with spreads. Both studies are undertaken at the macro level, mainly focusing on the macro industry level variables. Nonetheless, they both ignore macroeconomic indicators such as Gross Domestic Product(GDP) and inflation.

A major indicator of banking sector efficiency is interest rate spreads, which have been found to be higher in African countries like Kenya (Randall, 1998; Brock & Rojas-Suárez, 2000; Chirwa & Mlachila, 2004; Gelos, 2006; Crowley, 2007). Using accounting decompositions, as well as panel regressions, Ahokpossi (2013) studied the determinants of bank net interest rate margins in 10 SSA countries. He found that credit risk and operating inefficiencies (which signal market power) explain most of the variation in net interest margins across the region.

Hassan and Khan (2010) argued that as lending rates go up, banks on average attract a riskier pool of projects that require higher returns on investment. Higher interest rates, they argued also force many creditworthy borrowers to opt out of borrowing, explaining the fall in domestic credit to the private sector in Pakistan. The above analysis, Hassan and Khan’s (2010) was supported by Hamid (2011) on a study on effect of interest rate spread in developing countries which showed that the share of non-deposit-based funding is positively and significantly correlated to interest rate spreads.

People need to hold a certain amount of money to meet their normal everyday transactions such as entertainment, buying food and travel. This is a first choice since it is not affected by the interest and depends on the consumers’ income. Whether interest increases or decreases the demand for transactions motive for money will be perfectly inelastic. The demand for money for this purpose is related to income. People with higher income will tend to have larger transaction demand for money than those who have lower incomes(Moore& Craigwell, 2006).

Second is precautionary motive which refers to the desire of individual and business firms to hold cash balances to meet unforeseen contingencies like accidents and sickness. The money held for precautionary motive will differ with individuals and business according to their degree of financial confidence and access to credit facilities. It also depends on the income and level of business activity and also speculative motive. Keynes considered that there are three reasons why people demand for money rather than invest that money in bond (Crowley, 2007). Wong and Zhou(2008) argued that this is holding idle money balance due to uncertainties or emergency purposes. Money is kept to fulfill the function of store of value. He argues that if the consequences of all our actions were known with certainties the quantity theory would have been right to argue that money could only be held for transaction purposes.

These uncertainties (business risks) explain why banks charge a premium in order to compensate for risks of default from their customers. In reality the world is dominated by uncertainties. In consequence despite the opportunity cost of holding money, precautionary balance will be held in case there is a need for unplanned expenditure. The amount kept under this motive depends on the conditions under which one is living

Speculative demand for money, This is the demand for money to invest in business which will generate higher returns. Keynes argues that individuals could hold money depending on the return tied to that money. According to Keynes, the return inherent to an investment must surpass the risk of investment. If a bank is lending to a risky sector such as agricultural sector it tends to charge high interest rate in order to compensate for the likelihood of default hence business risks. When money is not required immediately as a means of payment it can be held as an asset for future consumption or it can be converted into another asset. He talks of bond as a major finance asset which can be acquired by an individual. A bond is a government stock or security whose terms (capital repayment at maturity and interest) are always honored. This means that there are no uncertainties hence no business risks. Individuals hold bond for two reasons: a) to earn interest and b) for capital gain.

The relationship between the price of bonds and its rate of interest is inverse relationship. This implies that when interest rates are high, prices of the bonds are low. This in effect means that people may be reluctant to hold bonds for fear that the rate of interest may go up and thus bond prices fall. On the other hand if an individual strongly expects a fall in interest rate, he will be anxious to hold bond in the expectation of making a capital gain when their price goes up. According to Fry (1995) applying this theory explains the premium offered in forward rates in comparison to expected future spot rates.

Folawewo and Tennant (2008) in a paper prepared for the 13th Annual African Econometrics Society Conference in Pretoria, Republic of South Africa analyzed the determinants of spreads between banks’ deposit and lending rates in Sub Saharan Africa countries (SSA). They found that macroeconomic policy variables such as inflation play significant role in explaining variations in interest rate spread in the region.

Khawaja and Din (2007) concluded that a rise in inflation increases the credit risk premium, and hence the spread that banks demand, as higher rates hamper the repayment capacity of borrowers. High and volatile inflation reduce rapidly and unpredictably the ability of the private sector to fulfill their planned financial obligations, including debt obligations.

• CHALLENGES IN THE GROWTH OF SMALL BUSINESS

According to Hawtrey and Liang (2008) who studied bank interest margins in 14 Organization for Economic Co-operation and Development countries for the period 1987 to 2001, there are two dangers associated with high interest spreads, one of them is that it may create general scarcity of money and as a result, restrict borrowing for consumer spending, construction, and business investment to cause, or worsen, a recession. Second problem is that certain groups or sectors within the economy may bear a disproportionate share of the impact of high interest rates and credit shortages due to high cost of funds. For small businesses, many of which fail for lack of funds, operate with small profit margins, increases in the cost of borrowing money can cut so heavily into profits that they can no longer afford to borrow money. This makes small investors reluctant to borrow and as a result making it difficult for small and medium investors to survive.

Crowley (2007),Sologoub (2006), Grenade (2007) have also shown that there is a pervasive view amongst some stakeholders that high interest rate spreads are caused by the internal characteristics of the banks themselves, such as their tendency to maximize profits in an oligopolistic market, while many others such as Hassan and Khan (2010) argued that the spreads are imposed by the macroeconomic, regulatory and institutional environment in which banks operate.

Poor personal financial management, Burki and Perry, (2006) [10] 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, loanofficers 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 banks, 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 intounprofitable investments hence affecting the bank’s performance. Burkiet 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.

Low level of 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.

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.

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).

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 set back 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 non performing 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 non performing loans, the implications of NPLs on the operations of MFIs and the strategies to reduce the incidence of NPLs.

Speculation inn 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:

• RELATIONSHIP BETWEEN INTEREST RATES AND THE GROWTH OF SMALL BUSINESS

Ahokpossi (2013) found that operating inefficiencies appeared to be the main determinants of high bank spreads in SSA economies. Brock and Rojas Suarez (2000) also showed that administrative and other operating costs contributed to the prevalence of high spreads in Latin American countries. On the other hand, Bourke (1989), and Moulyneux and Thornton (1992) in a study on concentration of markets found no relationship of concentration in banking sector on interest rate spread.

Maudos… et al (2004) analyzed interest margins in the principal European banking countries over the period 1993–2000 by considering banks as utility maximizers bearing operating costs. They found that factors that explain interest margins are the competitive condition of the market. Radha (2011) studied sources and impact of segmentation in the banking sector in Kenya and found that diversification gains are frequently offset by the costs of increased exposure to volatile activities. Similarly, Caprio., Klingebiel, Laeven and Noguera, (2005) have suggested that agency problems in financial conglomerates engaged in multiple activities and indicated that economies of scope are not sufficiently large to produce a diversification premium. It may also be the case that specialized banks exhibit higher unit costs on average, so that margins and efficiency will be lower, in the case of specialization for the European banking system(Maudos & Fernandez de Guevara, 2004).

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)

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.

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).

Regulation and Supervision Microfinance institutions 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)

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

Qualitative and quantitative research designs will be used. the researcher will use the above methods because many aspects will be covered in the study concerning investigate the effects of credit charges on the growth of businesses in Sentibalikudembe market in Kampala given the complex nature of the market, qualitative research method will be used because it collects information within a short time while quantitative will be through interview to cross check what has been given.

3.2       Area of the study

The study will be carried out at Sentibalikudembe

3.3       Study population and sample size

The study will target business men, market administrators, Market Venders.

3.4       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.

The sample will target36 respondents that will be selected in a way that 16respondents’will be business men, 5 will be key administrators, 15 respondents who are market vendors. While carrying out research, purposive sampling will be applied to the above different categories of respondents.

Using Krejcie and Morgan’s (1970) table for sample size determination approach, a sample size of 36 employees will be selected from the total population of 40 business men and women.

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

3.5 Data collection methods

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

• Primary data

Primary data will be obtained from the questionnaires administered on the target respondents to gain opinions and practices on the effects of credit charges on the growth of businesses in Sentibalikudembe market in Kampala.

• 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 will comprise of literature related to the effects of credit charges on the growth of businesses in relation to the case study. Secondary data will be sourced because it yields more accurate information than obtained through primary data, and it is also cheaper.

3.6 Data Collection Instruments

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

3.6.1 Questionnaires

The questionnaire will be used to collect quantitative data. The researcher will administer the questionnaires to respondents in different respondents including, administrators, business men, andmarket vendors which will be designed basing on study objectives and questions. Respondents will read and write the questionnaires themselves. The questionnaires will be close ended and will be considered convenient because they will be administered to the literate and its anonymous nature will fetch unhindered responses.

3.6.2 Interviews

Qualitative data will be collected from the informants using interviews. The interview guide will be structured. The interviews will be held with administrators and business men, and will take approximately thirty to sixty minutes. This will be used since it’s the best tool for getting first-hand information /views, perceptions, feelings and attitudes of respondents. Both formal and informal interviews will be used to get maximum information from the different respondents to participate in the research.

3.7Data collection procedures

Upon receiving the University permission to carry out research, the area of study will be visited for purposes of familiarization.  The researcher will seek permission from administrators and once allowed to proceed with research, questionnaires will be issued and interviews will be carried out with the selected respondents.

3.8Quality control of data instruments

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

3.9Data processing and analysis

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

3.10 Limitations of the study

Financial constraint, cash flow may not flow as   expected but this will not affect the study. Respondents may delay in filling the questionnaire and fear to give information, but they will be persuaded that the information will be kept secret.

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