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THE IMPACT OF UPSCALING OF MICROFINANCE INSTITUTIONS ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS: A CASE STUDY OF FINCA UGANDA AND OPPORTUNITY BANK, KAMWOKYA BRANCH

LIST OF ABBREVIATIONS

MFIs Microfinance Institutions

FOSA Front Office Services Activities 

SASA SACCO Savings Account 

CAMEL Capital adequacy, Asset quality Management Earnings and Asset/Liability management

SACCO Saving and Credit Cooperative Organizations

ABSTRACT

The study was carried out at Finca Uganda Kamwokya branch and opportunity bank with the purpose investigating the impact of up scaling of microfinance institutions mortgages, loans and savings on financial performance of commercial banks. The specific objectives of the study were; to establish effects of loans on the profitability of commercial banks, the effects of savings decision on liquidity of commercial banks and to examine the effects of mortgages on the capital level of commercial banks.

The study adopted a cross-section research design where both qualitative and quantitative approaches of data collection were adopted. The researcher used questionnaire and interview method to collect data from 90 respondents using purposive sampling. 

The study concludes that the performance of microfinance institutions has improved as a result of upscaling since the credit follow up, credit analysis, favourable loans term have increased profits. The knowledge of formal credit history of clients increases profits. Also proper saving decisions, low interest rates, regular share accounts have improved the liquidity of the institution. Improved repayment schedules, terms and policies ensure no default in loan repayment and simplified terms increase the number of customers thus mortgages increase the capital levels of MFIs.

The study recommended that the organization should revise on the credit control policies and make some changes where necessary. Also, top management of organizations should be willing to extend overwhelming support to the loan department so as to ensure good financial performance.

CHAPTER ONE

INTRODUCTION

1.0 Introduction

This chapter focused on the background of the study, statement of the problem, purpose of the study, objectives of the study, research questions, scope of the study, significance of the study, and definition of terms.

1.1 Background of the study

1.1.1 This consist s of the historical, conceptual and contextual backgrounds.

Microfinance has long been considered a powerful tool for sustainable development. The idea of granting loans at fair conditions to alleviate financial constraints of the poor has gained widespread acceptance among academics, investors and the public sector alike. The market for microcredit has expanded over many years, with microfinance institutions (s) extending loans to more than 200 million clients by the end of 2010. Through various socio-economic ties of the borrowers and their families, microfinance has impacted upon the lives of around 1 billion people in emerging markets and developing countries (Henry, 2014).

Over the last ten years, development policy has focused on improving financial access for as many people as possible, for some time it seemed that development objectives and commercial profitability could be accomplished simultaneously and without friction. Sustainability of market growth was rarely questioned, as microfinance was transformed into a more and more financially efficient industry. The market experienced notable growth rates in terms of both the number of borrowers as well as asset volume while delivering a stable return on assets of 2-3%. Many institutions were able to achieve high growth rates by retaining profits and by attracting additional funds from commercial sources. Over time, an increasing share of institutions no longer depended on donations to expand their business, although many still benefit from them (Mwanje, 2014).

In recent years, in India have evolved into a vibrant segment of the financial sector, exhibiting a variety of business models. Non-adherence to rules and irresponsible actions of some s had brought a setback to the sector, albeit temporarily. But the section from 2012-13 onwards and is showing consistent growth. A spate of policy actions to strengthen the regulation of the microfinance sector, inclusion of loans to banks under the priority sector, benefited the sector considerably. Lending has exhibited robust growth with a compound annual growth rate of approximately 34% in loans disbursed (Sooka, 2015).

Currently, the regulated microfinance market in India has over 30 million clients, served by more than 70 regulated institutions, with a network of 10.553 branches and 80.097 employees across 32 states and union territories, activity is set to grow, especially because only 8% of adults have loans from formal financial institutions.

In autumn 2015, banking licenses to 11 payment banks and 10 small finance banks. This again put the spotlight on the microfinance sector as 8 of the 10 newly licensed small finance banks are s. The entry of s in the small finance bank segment is a revolutionary step since these entities are very familiar with the nuances of banking with poor borrowers. Thus far, s were not allowed to accept deposits and engaged in extending credit after sourcing money from commercial banks. Now, by getting access to banking, these entities can tap public deposits, which will significantly lower their cost of borrowing and enable them to bring down their rate of interest on loans from the current 24-26% to a level decided by the market competition—possibly lower double-digit figures. This is likely to increase the cost pressures on existing s and force them to tap new geographies and markets for growth and sustenance (Ben, 2016).

1.1.2 Conceptual Background to the study

Over 1.4 billion people in the world are considered poor (subsisting on less than one US dollar per day) and one of the United Nation’s concerns in the Millennium Development Goal is to get these people out of poverty (Littlefield, Morduch & Hashemi, 2003). In most instances, the poor are denied access to many essential services including financial, education and medical services, because they cannot afford them. Poverty has continued to be a concern and attracts attention both in the developed world and developing world. Unfortunately, in man) poor countries the gap between the poor and the rich is big and growing (Littlefield et al, 2003 ).

There has been a close association between economic development and financial access. Demirguc-Kunt (2006) argues that, although there is no consensus on the nature of the association between the two, some scholars are of the view that financial systems are a catalyst in alleviating market restrictions and hence influencing savings rates, investment decisions, technological innovations and therefore long-run growth rates. Demirguc-Kunt (2006) also points out that financial systems help mobilise and pool savings, provide payment services that facilitate the exchange of goods and services, produce and process information about investors and investment projects. These facilitate business transactions.

Since there is evidence that links the provision of financial services to economic growth as well as both increase and distribution of income, the concern has shifted to who has access to these services (Littlefield et al, 2003). Of interest is the extent to which the poor have access to financial services. Small enterprises and poor households face much greater obstacles in their ability to access finance all around the world hence isolating diem from development (Demirguc-Kunt, 2006: Honohan & Beck. 2007). Microfinance has been accepted as a viable approach to reaching the poor with financial services. It has also been linked with growth of micro and small businesses (Omino, 2005).

Microfinance as a business has proved to be profitable and sustainable (Gross & Silva. 2003: Wendt & Eichfeld. 2006). In some countries in Latin America. Asia and Africa some microfinance institutions have grown big and transformed into deposit-taking businesses specially regulated or within the conventional banking laws (Hishigsuren, 2006). In other cases commercial banks have expanded their services to serve the poor and small businesses. Analysis in the MIX market report of June 2009 shows that deposit-taking microfinance institutions performed better (Gonzalez & Meyer, 2009) and access to local savings helps such institutions scale up their operations (Wright & Kaplan, 2001). Access to local savings has been the main motivation for microfinance institutions to lobby for regulation.

1.1.3 Contextual Background to the study

The term “microfinance” (MF) refers to the provision of banking services to lower-income
people, especially the poor. These services include small loans for microenterprises and
individuals, savings, money transfer services, means of payment and insurance. Given their
nature, micro entrepreneurs tend to operate on the margins of the formal economy, often without permits and commercial documentation, and usually lacking fixed assets that could serve as collateral. Formal expense and income records are generally scarce. Income is often on the lower end of the scale, although operating margins for microenterprises in percentage terms can be significant. A Microfinance institution is an organization that provides financial services in terms of loans, funds at a given interest rates, for example the modern microfinance movement started in the 1970s when pilot programs in Bangladesh. Bolivia, and other countries  began  to  provide  small  loans  to  groups  of vulnerable  women  to invest in economic activities.

According to Ledgerwood (2010) the term microfinance refers to the provision of financial services to low income client including self-employed. Everyone needs a diverse range of financial instruments to run their business, build asset, stabilize consumption and shield themselves against risks. Financial services needed by the poor include working capital loans, consumer credit, savings pension insurance and money transfer services.

On the contrary, commercial banks are banks “that offer a broad range of deposit accounts, including checking, savings, and time deposits, and extend loans to individuals and businesses” and they are well suited to play a role in microfinance for the following reasons. First of all, they are regulated and supervised. Indeed, the sources of capital that are obtained reside in an entity independent. This is a very important factor that guarantees the How of funds to microfinance as it installs trust in donors. Indeed, one of the problems encountered by microfinance institutions is the lack of a systematic control of these organizations. There arc very few credit-rating agencies supervising these institutions leading, to difficulties in the procurement of capital.

Jamil (2012) asserts that the existence of microfinance institution continue to affect the operation of commercial because this industry charges low interest rates, accept voluntary savings from the poor which is not the case with commercial banks. He further explains that microfinance is the entire flexible structures and processes by which financial services are delivered to micro entrepreneurs as well as the poor and low income population on a sustainable basis. Africa remains one of the least developed, and the most under banked continent. A series of impact studies conducted in Uganda in the past years have demonstrated that the provision of microfinance services contributes to reduce client vulnerability to economic risks, results in strengthening linkages of clients and their households to the agricultural sector, and enables clients to acquire valued skills.

The demand for microfinance services has rarely been met by commercial banks, and this may be due to several reasons, including the following: failure lo perceive the poor households” demand for financial services, lack of collateral b\ the poor, poor saving culture among the poor, belief that microfinance cannot be profitable for banking institutions, existence of public, legal and regulatory policies that ignore MFI high operating costs, lack of specific experience in the provision of microfinance services, lack of adequate platforms for the provision of microloans. 

1.2 Statement of the Problem

Despite the fact that the government has made a significant initiative to support MFIs through legislation so as to achieve the millennium development goals and vision 2040 objectives of increasing financial inclusion. They still borrow expensively from commercial banks to bridge temporary illiquidity and this has evidently threatened financial stability of the institutions and hence safety of member deposits. In particular, this structural problem has negatively impacted on the pricing of credit facilities to members and these continue to substantially depend on expensive commercial banks loans, and inefficient contingent liquidity plans. This makes them prone to the liquidity shortage, and no matter how small this could be. It can cause great damage to MFIs (Monnie, 2009). It was against this background that a study should be carried out on effects of up scaling of mortgages, loans and savings on financial performance of commercial banks.

1.3 Purpose of the study

The purpose of the study was to investigate the impact of up scaling of microfinance institutions mortgages, loans and savings on financial performance of commercial banks.

1.4 Specific Objectives

The specific objectives were;

1. To establish effects of loans on the profitability of commercial banks?
2. The effects of savings decision on liquidity of commercial banks
3. To examine the effects of mortgages on the capital level of commercial banks

1.5 Research Questions

The research questions were:

1. What are the effects loans on the profitability of Commercial Banks?
2. What are the effects of saving decisions on the liquidity of commercial banks’? 
3. What are the effects of mortgages on capital levels of commercial banks’.’

1.6 Scope of the study

1.6.1 Content scope

The study was based on the effects of loans on the profitability of effects of saving decisions on the liquidity of commercial banks and the effects of mortgages on capital levels of commercial banks.

1.6.2 Geographical scope

Geographically, the study was carried in Kampala taking on Finca Uganda Kamwokya branch which is an MFI and Opportunity bank Kamwokya branch Kampala which is a commercial bank.

1.7 Significance of the study

This study might generate data and information on credit terms and how they affect performance of small Scale industries in Uganda.

They could use this to come up with acceptable terms to their clients.

The small industries could also use the findings of this study as ground to negotiate appropriate credit terms that will not constrain their performance.

The study would also add to the existing literature on the impact of upscaling of MFIs.

The research would be important to the academicians and other researchers who would use it as a spring board for other research studies.

1.8 Conceptual framework

Topic: The impact of upscaling of microfinance institutions on the financial performance of commercial banks

Independent Variable Dependent variable

Intervening variable

Intervening variable

Source: Doug, 2008

The figure shows independent variables which are upscaling of MFIs such as loans, savings and mortgages. Dependent variables of financial performance like profitability, liquidity and level of capital and intervening variables like government policies management practices and type of business.

There is a linkage between upscaling and financial performance and intervening variables. If the independent variables are effectively administered then financial performance is likely to improve however, if they are poorly administered, financial performance will decline.

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.0 Introduction

This chapter provided for the review of related literature extracted from various scholars, individual opinions and report findings. The chapter explores the concept of microfinance, availability of microfinance services, related information on the growth rate of small Scale industries, the effect of microfinance services on the growth of small scale industries, challenges faced associated with small Scale industries. The chapter also presents the research gap as sated below:

2.1 The effects of loans on the profitability of Microfinance institutions

Jared (2013), in his study observed that the rapid growth of the movement in Uganda can be pinned on the fact that they have for long periods specialized in offering cheap loans at an affordable” repayment history to their clients. This gesture has attracted an exodus of clients from the formal financial institutions such as banks seeking their services (ACCOSCA, 2012).

Some MFIs in Uganda have adopted Front Office Services Activities (FOSA) to offer the services they render to clients. FOSAs have proved to be one of the key profit centers for and members have appreciated the services offered by these FOSAs. Through the full utilization of the FOSA network, provides their members with the full range of basic financial services and consolidate these services to the full satisfaction of members. The introduction of FOSA has contributed positively to the performance of s through improved profitability which has led to the declaration of a high dividend rates lo the members (IFSB, 2005).

Mwaura (2005) insists that lack of credit follow up, credit analysis, and hostile lending of money are some of the factors that have contributed to financial gap and poor performance. In Uganda, following the liberalization of the financial sector in the 1990s (Omino, 2003). The back office model of operations was found to be inadequate and as a result, man} societies introduced the Front Office Services Activities (FOSA) alternatively known as the SACCO Savings Account (SASA). This was led by a number of factors including the need to solve the problem of non-remittance through the check-off savings system and was aimed at among other tilings, improving the SACCO societies” liquidity and the promotion of the owner-user principle.

By around 2003. SACCO societies in Uganda were ahead) taking deposits from persons not drawn from the common bond, that is, public deposits, (ICA, 2003). Max (2012).slates that regular share accounts (members” savings) constitute the largest part of a credit union’s funding. In 2004 for instance.,86.1 percent of American credit unions funding came from the members” savings (Federal Reserve Bulletin, 2004).

One way in which members remit their savings to a SACCO is through the regular share accounts. A regular share accounts is the savings accounts of members (Mishkin et al, 2007). They are types of payroll savings plans by which employees can automatically set aside a portion of their salary in a savings account (Rose, 2003).

Customers cannot write cheques against these accounts although they can withdraw funds without giving prior notice or incurring any penalties. (Kwame, 2010). However, in Uganda as many other countries, shares are not withdrawal and are used as security for loans lo members (Omino, 2003).

Additionally, customers do not receive any interest on these accounts. (SACCOL, 2011) but instead receive dividends that are not guaranteed in advance but are estimated (Rose, 2003). The share account is analogous to a passbook savings account and its return is referred to as a dividend, although it is treated as interest for individual income tax liability purposes.

A study by (Landi & Venturelli, 2002) analyzed the determinants and effects of diversification on efficiency and profitability amongst the European banks and found out that diversification positively affected efficiency in terms of profits, costs and revenue growth. In an earlier study by (DeYoung et al, 1999) on the effects of product mix (diversification) on earnings volatility of commercial banks, it was found that bank’s earnings grow more volatile as banks tilt their product mixes towards fee based activities and away from traditional intermediation services.

2.2 The Effects of savings Decisions on the liquidity of commercial bank

Jared (2013) asserts that as SACCO societies grow and become regulated, the need to build capital reserves becomes a requirement not only from the regulatory authorities but as the most cost-effective financing option for new products, services, marketing and branch network expansion (WOCCU) & FSD Uganda, 2008).

The NCUA”s CAMEL (Capital adequacy. Asset quality. Management. Earnings and Asset/Liability management) rating system. (NCUA, 1994). provides that capital reserves serve to support growth as a tree source of funds. Capital reserves represent not only as a cushion for uncertainties such as asset losses and adverse economic cycles, but it also provide resources for long-term investments and funding for provision of more services to members (WOCCU& FSD Uganda. 2008).

According to (Chowdi, 2008) in order to account for financial market developments as well as lessons learned from the turmoil, a study was undertaken to review some 2000 sound practices for managing liquidity in financial organizations. Guidance has been significantly expanded in a number of key areas. In particular, more detailed guidance was provided on: the importance of establishing a liquidity risk tolerance; the maintenance of an adequate level of liquidity, the necessity of allocating liquidity costs, benefits and risks to all significant business activities: flic identification and measurement of the full range of liquidity risk: the design and use of severe stress test scenarios: the need for a robust and operational contingency funding plan: the management of intraday liquidity risk and increased public disclosure in promoting market discipline.

Clement (2012), asserts that financial stewardship being the routine financial decision-making of commercial banks, should embrace sound business practices. This should also revoke around the commercial banks financial discipline with a profound influence on the success of all businesses conducted by the SACCOs (Mudibo, 2005).

More so, prudent funds allocation strategy is an important financial practice function in am commercial bank society. This aspect usually involves decisions to commit commercial bank funds to planned investment options. Commercial banks need to make decisions to invest their funds more efficiently in anticipation of expected flow of benefits in the long run. Such investment decisions generally include expansion, acquisition, modernization and replacement of long-term assets (Maina, 2007). Thus, commercial banks value is deemed to increase where the investments are profitable and add to the wealth in the long run. This situation is obtained where a commercial bank involves itself with investments that yield benefits greater than the opportunity cost of capital.

The mechanisms that explain why liquidity can suddenly evaporate operate through the interaction of funding illiquidity due to maturity mismatches and market illiquidity. As long as a financial institutions assets pa)’ off whenever its debt is due. it cannot suffer from funding liquidity problems even if it is highly levered. However, financial institutions typical) have an asset-liability maturity mismatch and hence are exposed to funding liquidity risk. A funding shortage arises when it is prohibitively expensive both to borrow more funds (low funding liquidity) and sell off its assets (low market liquidity).

In short, problems only arise if both funding liquidity dries up high margins/haircuts, restrained lending) and market liquidity evaporates tire safe discounts (Denis & Muganga. 201 0). As Jean-Laujent (2008), observed. Liquidity ratios may have a mixed impact on the capital structure decision. Companies with higher liquidity ratios might support a relatively higher debt ratio due to greater ability to meet short-term obligations.

On the other hand, firms with greater liquidities may use them to finance their investments. Therefore, the companies” liquidities should exert a negative impact on its leverage ratio (Ozkan, 2001). Moreover, the liquid assets can be used to show to which extent the.se assets can be manipulated by shareholders at the expense of bondholders (Prowse, 1991).

2.3 The effects of mortgages on the capital levels of commercial banks

Pandey (2004), describes cash management as the process of planning and controlling cash flows into and out of the business, cash flows within the business, and cash balances held by a business at a point in lime. Ross et al, (2008), as cited by Nyabwanga (2011) asserts that efficient cash management involves the determination of the optimal cash to hold by considering the trade-off between the opportunity cost of holding too much cash and the trading cost of holding too little. Atrill (2006), there is need for careful planning and monitoring of cash flows over time so as to determine the optimal cash to hold.

A study by (Kwame, 2007) established that the setting up of a cash balance policy ensures prudent cash budgeting and investment of surplus cash. This finding agrees with the findings by (Kotut, 2003) who established that cash budgeting is useful in planning for shortage and surplus of cash and has an effect on the financial performance of the firms. The assertion b\ (Ross, 2008) that reducing the time cash is tied up in the operating cycle improves a business’s profitability and market value furthers the significance of efficient cash management practices in improving business performance. Erkki (2004), defined cash management as a part of treason management, which is defined as a part of the main responsibilities of the central finance management team.

Huseyin (2011), highlighted specific task of a typical treasury function such as: cash management, risk management, hedging and insurance management, account receivable management, account payable management, bank relations and investor relations, (Huseyin, 2011) found that (Kytonen, 2004) definition is consistent with the (Srinvasan& Kim,1986) classification of cash management areas as cash balance management, cash gathering, cash mobilization and concentration, cash disbursement, and banking system design. Cash balance management includes management of cash position, short-term borrowing, short term investing, cash forecasting.

(Huseyin, 2011) opinion is that the classifications of cash management by (Srinvasan & Kim’s, 2011) are closely related concepts. (Huseyin, 2011) classilies cash management as operating transactions and financial transactions. The operating transactions include: accounting ledgers, invoicing, terms of sales – cash collection, cash control and processing as well as cash forecasting. The financial transactions include: optimization of cash, short-term investments, short term borrowing, interest rate risk management, exchange rate risk management, payment systems, information systems and banking investor relations (Kytonen, 2004).

The cooperative form is therefore regarded as having enormous potential for delivering pro-poor growth that is owned and controlled by poor people themselves (Jared, 2013). Nevertheless it is recognized that, lacking capital and business management capacity, cooperatives have had a disappointing history in developing countries (Birchall, 2004). There is an argument that it is the broader characteristics of cooperative organization such as social ownership, people-centered objectives and their community base, rather than their precise organizational form should be advocated.

According to (Mwaura, 2010) industry statistics in Kenya show that an estimated commercial banks are way below the required minimum capital levels and are expected to turn to the members for money needed to reach the threshold. Contributing money for the capital build-up will force members to take a portion of their monthly take-home or forego annual dividends in the next four years in support of the initiative. Nation staff commercial banks has for example, asked its members to increase their share capital to Kshs 6.000 from kshs 1. 000 beginning August 2010.

As observed by (Steve, 2010) Maisha Dora commercial banks withheld part and to some, whole dividends in the year 2009 and encouraged members to invest in beefing up the core capital in order to meet the SACCO liquidity demands. Haileselasie (2003) in his study about cooperatives in Saesi-Tsaeda-lmba found out that 78.7 percent of the members became member in cooperatives through mobilization and persuasion by the civil societies such as farmers. Youth and Women’s Associations. As a result, the members’ were not aware of their duties and rights within the cooperative societies.

According to Haileselasie’s (2003) findings, out of the total respondents members” participation in the annual meeting was 12.2 per cent and 68.8 per cent of the total respondents had bought only one share. The result of the study revealed that the overall participation of members in cooperatives was weak.

Darek (2012), states that the problem of access to capital has become even more challenging in emerging markets for a variety of reasons (Benedict & Venter. 2010). First, firms in emerging markets operate in an environment of imperfect legal infrastructure (Cunningham & Rowley. 2010). Capital providers must often agree to contractual terms dial are suboptimal for them. Second, financial disclosure in emerging markets continues to be relatively poor (Sami & Zhou. 2008; Zhou. 2007; Klonowski.2007). Darek (2012), observed that many countries report financial results under their own financial standards and regulations, which arc different from those seen in international accounting standards; consequently, auditing firms must often recast the financial statements of firms operating in such markets.

Third, asymmetry of information and moral hazards are more pronounced in emerging markets (Klonowski, 2007). Access to information is a greater challenge as sources of information on firms, the competitive posture of market players, and market size and growth rates are more difficult to find (Abor & Biekpe, 2006).

Fourth, firms operating within emerging markets have more problems related to corporate governance. The corporate governance concerns are more severe and more difficult to address than those experienced by firms in developed economies (Klonowski, 2007). Key issues may include: personal use of firm’s assets, unaccounted cash withdrawals and appointment of family members in the institutions. 

2.4 Conclusion

The environment within which and Commercial banks are operating have had a major drastic change, and Commercial banks have been relying on the member’s contribution and borrowing from the banks as the major source of cash so as to give loans to the members. Among the key issue is the liquidity requirements ratios and the provision for unrealizable loan. The attainment of full compliance with the capital adequacy ratios for individual MFIs remained a challenge, with institutional capital to total assets ratio being the most non-complied with (SASRA, 2014). While the issuance of loans increased over the year, their risk level as measured by level of non-performing loans deteriorated from 4.72 percent to 5.73 percent in 2014. I his indicates an elevated credit risk due to deterioration in performance of loans (SASRA, 2014). The regulator) framework defines non-performing loan portfolio as comprising the loans which arc classified as substandard, doubtful and loss categories. The non-performing loans ha\e increased from Ugx 9.3 billion in 2013 to Ugx 13 billion in 2014. This presents a worrying trend since the majority of loans advanced by MFIs are guarantee – backed, thereby reducing the risks of defaults. It also demonstrates the fact that notwithstanding the fact that the loans and credit advances by DTSs are guarantee-backed, they are still susceptible to default, and thus additional measures to address the risks ought to be put in place. (SASRA. 2014). While the withdraw-able savings deposits do not comprise significant portion of the balance sheet. MFIs are usually faced with liquidity mismatch when issuing loans based on multiplier of savings. However, there has been a shift from the multiplier factor to earnings especially with employer based MFIs, (SASRA. 2014).

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter discusses the research design and the methodology of the study; it highlights a full description of the research design, data type and sources, area and population of the study, simple size and selection, data collection tools/methods, data presentation and analysis, data collection procedure, validity and reliability of data and limitation of the study.

3.2 Research Design

The research was a descriptive research design. The research exploited both qualitative and quantitative approaches. Qualitative approach includes use of interviews, while quantitative approaches involves use of descriptive statistics that was generated inform of frequency tables, graphs, and Charts. Qualitative and quantitative approaches are adopted to enable the researcher get and analyze information concerning respondents’ opinions about study variables.

3.3 Data type and sources

3.3.1 Data type

The study collected both qualitative and quantitative data.

Qualitative data is data that can’t actually be measured. It included virtually any information that could be captured that was not numerical in nature.

Quantitative data was any kind of data could be measured numerically.

3.3.2 Data sources

Data was collected from both primary and secondary source.

Primary sources

This source provides data directly from the field by administering questionnaires and interview guide.

Secondary source

This source provides data from published journals, reports, text books, internet, and company records and from library.

3.4 Study Population

The target population of the study included management and staff from Finca Uganda and opportunity bank, Kamwokya branch.

3.5 Sample Size and Selection

The sample size was 90 respondents. 45 respondents were selected from Finca Uganda and 45 from opportunity bank. The study used purposive sampling method. This involves a deliberate selection of particular units of the population for constituting a representative sample. 

The sample size was determined using Krejcie and Morgan (1970) as shown in the table below:

Table 3.1: Sample Size and Composition

3.6 Sampling Technique

Using purposive sampling technique, the study chose the sample based on who was appropriate for the study. The study also used simple random method to reduce on the biasness of the purposive data and was mainly used on staff.

3.7 Data collection tools/methods

The study involved the following instruments;

3.7.1 Questionnaires

This research instrument used included structured questionnaires with pre-coded answers administered to the respondents. The instruments were pre-tested and discussed with the supervisors to ensure their reliability and validity.

3.7.2 Interview method

An interview is a conversation where questions are asked and answers are given. Interview refers to one-on-one conversation with one person acting in the role of the interviewer and the other in the role of the interviewee.

An interview guide is drafted with a set of questions that the researcher asks during an interview and this is structured (close ended) in nature. The method was used to collect data from clients of the company. Interview guide was used by the study since the method helped in the collection of more data as it allowed the interaction of both the researcher and the respondents.

3.7.3 Documentary review

The researcher identified and consulted related documents of centenary bank and studied them. Documents were studied by the researcher.

3.8 Data presentation and analysis

3.8.1 Data presentation

Presentation of data involves use of tables, pie-charts and graphs that were generated from the questions relevant to the study variables. Interpretation and discussion of the results was done as the researcher explained the strength of the study variables basing on the frequencies and percentages, charts and graphs.

3.8.2 Data Analysis

After collecting and cleaning the data it was entered in a computer using Ms-excel. The quantitative data was analyzed using descriptive statistics, which included frequencies and percentages. The qualitative data was analyzed in the content analysis and the analyzed data was presented using tables and figures in form a report.

3.9 Data collection procedure

Before data collection, the researcher ensured the approval of the research instruments especially the questionnaires; obtained the introductory letter from the university; introduced herself to the authorities, sought participants’ consent and made appointments when to meet them for data collection, and the data collected was analyzed.

3.10 Reliability and Validity

Validity refers to the degree to which a test measures what it was supposed to measure and consequently permitted appropriate interpretation of scores. As suggested by (Kathari, 2003), content and construct validity is determined by expert judgment. The researcher thus used help of the supervisor who examined and confirmed content validity by checking the items’ content coverage, relevance, clarify of questionnaire, persistency and ambiguity.

The reliability of research instruments was ensured by the researcher throughout the study, discussing them with the supervisor when seeking expert opinion, taking great care in the choice of section, order and proper structure of questions. The researcher developed instruments that are easy to understand.

CHAPTER FOUR

PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS

4.0 Introduction

This chapter provides for the study findings, the presentation, analysis and discussion of the findings. 

4.1 Characteristics of Respondents

This aspect of the analysis deals with the characteristics of the respondents of the questionnaires.  The results obtained are presented below;

Figure 4.1: Distribution of   Respondents by Gender

Source: Primary Data

From the table above, male respondents formed the highest percentage 29(64.44%) compared to the female with only 16(38.56%). This implies that men were more than women this shows their participation in management, however, the views of the women were vital too.

Figure 4.2: Age of Respondents

Source: Primary Data

From Figure 4.2 above, (2.22%) of the respondents were below 20years, (31.11%) were between 21-30years, (48.89%) of the respondents were between 31-40years and 11(17.78%) of them were over 40years. This implies that majority of the respondents were between 31-40years. This is because they are the most active age group hence they are actively involved in management; therefore they had rich experiences and could also appreciate the importance of the study. 

Table 4.1: Highest Level of Education

Source: Primary Data

Table 4.1 above shows that, (2.2%) of the respondents had attained certificate level, (24.4%) were of diploma level, (71.1%) of the respondents were degree holders, (2.2%) had reached master level. This implied that majority of the respondents were degree holders. This is because the organization recruits, retains and maintains qualified human resource to fill the positions in the institution who are capable of sustaining effective computerized procurement implying that the selected sample had the capacity and were qualified to avail the researcher with reliable and appropriate information on the topic under investigation.

Figure 4.3: Period of work

Source: Primary Data

From figure 4.3 above, 26.67% of the respondents revealed less than 1year, (71.11%) indicated 1-4years and (2.22%) of the respondents revealed 5years and above. This implies that majority of the study respondents had spent 1-4years in the organization. This is because the organization retains existing employees and also recruits more.

4.2 Effect of loans on the profitability of commercial banks

The study sought to examine the effect of loans on the profitability of commercial banks. Results were obtained and are presented in below;

Table 4.2: Effect of loans on the profitability of commercial banks

Source: Primary Data

Table 4.5 above shows that, (80%) of the respondents strongly agree with Credit follow up has improved profitability of MFIs, (20%) agree, while no respondents were not sure, disagree or strongly disagree. This implies that majority of the respondents agree. 

Results from the table also indicate that (66.7%) of the respondents strongly agree with Credit analysis has increased profits, 10(22.2%) agree, 2(4.4%) disagree, 3(6.7%) of the respondents strongly disagree and no respondents were not sure. This implies that majority of the respondents agreed. 

Findings as presented above indicate that, (53.3%) of the respondents strongly agree with Favourable loan terms have improved profits, 16(35.6%) agree, no respondents were not sure, 1(2.2%) of them disagree and 1(2.2%) strongly disagree. This implies majority of the respondents were positive. 

Results in table above indicate that 24(53.3%) of the respondents strongly agree with Knowledge of formal credit history has increased profits, 16(35.6%) agree, 2(4.4%) were not sure, 2(4.4%) disagree and 3(6.7%) strongly disagree. This implies that majority of the respondents were positive. 

4.3. Effect of saving decisions on the liquidity of commercial banks

The study also sought to assess the effect of saving decisions on the liquidity of commercial banks. Results were obtained and are presented below;

Table 4.3: Effect of saving decisions on the liquidity of commercial banks

Source: Primary Data

Results in table above show that majority of findings (53.3%) strongly agreed with Increased savings have increased liquidity while 35.6% of them agreed. 4.4% of the respondents were not sure, another 4.4% of them disagreed and 6.7% strongly disagreed. This implies that majority of the respondents were positive reflecting 88.9%. 

Table 4.3 above shows that 66.7% of the respondents strongly agreed with Regular share accounts have increased liquidity, 22.2% of them agreed. No respondents were not sure or disagreed and another 11.1% strongly disagreed. This implies that most respondents agreed with 88.9%. 

Results in the above indicated that 77.8% of the respondents strongly agreed with Low interests on saving accounts have increased liquidity, 17.8% of them agreed, no respondents were not sure or disagreed while 4.4% of the respondents strongly disagreed. This implies that most of the respondents were positive reflecting 95.6%.

The table above indicates that, 53.3% of the respondents strongly agree with Saving policies have increased liquidity, 35.6% agree, 4.4% of the respondents were not sure, another 4.4% of them disagree and 6.7% of the respondents strongly disagree. This implies that majority of the respondents were positive indicating 88.9%.. 

4.3 Effect of mortgages on capital levels of commercial banks

The study sought to examine the effect of mortgages on capital levels of commercial banks. Results were obtained and are presented below;

Table 4.4: Effect of mortgages on capital levels of commercial banks

Source: Primary Data

Table 4.4 above indicates that, 20% of the respondents strongly agree with Mortgage policies have increased capital levels, 80% agree however no respondents were not sure, disagreed or strongly disagreed. This implies that majority of the respondents were positive reflecting 100%.

Results above indicate that, 88.9% of the respondents strongly agree with Investing in mortgages have increased capital, 6.7% agree, 4.4% of the respondents disagreed while no respondents were not sure or strongly disagreed. This implies that majority of the respondents were positive reflecting 95.6%.

Also results in the table indicate that, 88.9% of the respondents strongly agreed with Mortgages increase repayment schedules s, 4.4% of them indicated agreed, no respondents were not sure or disagree and 6.7% strongly disagree. This implies that most respondents were positive with 93.3%. 

Results in table above show that, 42.2% of the respondents strongly agree with Mortgage terms and policies ensure no default in loan repayment, 55.6% agree, no respondents were not sure or disagree and 2.2% strongly disagree. This implies that majority of the respondents were positive with 97.8%.

Finally, 11.1% of the respondents strongly agree with u Simplified terms increase the number of customers, 77.8% of the respondents agree while no respondents were not sure, 2.2% of the respondents disagree and 8.9% strongly disagree. This implies that majority of the respondents were positive.

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS 

5.0 Introduction

The data was analyzed using description and percentages. This chapter therefore presents the summary of findings, conclusion and recommendations. 

5.1 Summary of Findings

The study found out that loans increase profitability of microfinance institutions since Credit follow up has improved profitability, credit analysis has increased profits, favourable loan terms have improved profits, knowledge of formal credit history has increased profits and knowledge of work history has increased profits.

Also, proper saving decisions improve the liquidity for example increased savings have increased liquidity, regular share accounts have increased liquidity, low interests on saving accounts have increased liquidity and saving policies have increased liquidity.

The study found out that mortgages increase the capital levels of MFIs as mortgage policies have increased capital levels, improved repayment schedules, terms and policies ensure no default in loan repayment and simplified terms increase the number of customers. Therefore up scaling of MFIs has improved the financial performance of commercial banks.

5.2 Conclusion

The study concludes that the performance of microfinance institutions has improved as a result of upscaling since the credit follow up, credit analysis, favourable loans term have increased profits. The knowledge of formal credit history of clients increases profits. Also proper saving decisions, low interest rates, regular share accounts have improved the liquidity of the institution. Improved repayment schedules, terms and policies ensure no default in loan repayment and simplified terms increase the number of customers thus mortgages increase the capital levels of MFIs.

5.3 Recommendations

The management of organization should reduce on the interest rate on loan charged on every client and even to extend the loan repayment period so as to give ample time for their clients to raise that required amount.

Organization institution should revise on the credit control policies and make some changes where necessary.

The top management of organizations should be willing to extend overwhelming support loan department so as to ensure good financial performance.

The organization should improve on the services offered to their clients so as to maintain good image in the eyes of clients

5.4 Areas for Further research.

The researcher suggests that more research should be conducted on:

• The challenges of implementing credit control policies in microfinance institutions.
• The impact of loan terms and conditions on clients.

5.5 Limitations and delimitation of the study

The study was faced with the problem of not finding all respondents in the study area especially the employees who went to the field as a group. The researcher however arranged with them to fix for her an appropriate time in order to collect reliability and valid information from them for the study.

The study was also expensive in terms of stationary. However the researcher mobilized funds from her friends and family members for the study to be completed successfully in time with the help of the supervisor.

The researcher further was faced with a problem of some respondents not providing information for the study as information relating to the study variables, however to this, researcher was explained to them that the information was only for the academic purpose while making them to understand the study variables.

REFERENCES

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APPENDICES

APPENDIX I: QUESTIONNAIRES FOR MANAGEMENT

Dear respondent, 

My name is Ntezi Maria and as partial requirement of the award of Bachelor degree of Microfinance. As a part of the requirement for the completion of my course, I am carrying out a study on “Effect of upscaling of Microfinance institutions on the financial performance of commercial banks.  You have been selected to provide vital information that will facilitate the study. Your response will be treated with utmost confidentiality. Thank you very much for your valuable time. 

Section A: Background information about the respondent 

(Tick the most appropriate)

Section B: Effect of loans on the profitability of commercial banks

5. What is the effect of loans on the profitability of commercial banks? In this section, tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D), Strongly Disagree (SD). 

Section C: Effect of saving decisions on the liquidity of commercial banks

6. What is the effect of saving decisions on the liquidity of commercial banks? In this section, tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D), Strongly Disagree (SD). 

Section D: Effect of mortgages on capital levels of commercial banks

7. What is the effect of mortgages on capital levels of commercial banks? In this section, tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D), Strongly Disagree (SD). 

Thank you for your cooperation