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EFFECTS OF LENDING METHODOLOGIES AND OUTREACH MAXIMIZATION ON MFIs

ACASE STUDY OF CENTENARY BANK

CHAPTER ONE

1.0 Introduction

The introduction part provides the overview of the study. It includes the background, statement of the problem, research objectives and research questions, scope, significant of the study, justification of the study.

1.1 Background to the study

Today over 190 million clients around the world are served by over 3000 MFIs which come in the form of cooperatives (COOP), non-government organizations (NGOs), non-bank financial institutions (NBFIs), post office savings banks, and commercial banks. The word microfinance refers to services like small loans, savings accounts, insurance and other financial technology like mobile banking. There are different types of lending methodologies among MFIs: Village banking, individual banking and group lending are some examples. (CGAP, 2012a) Today, however, most MFIs offer mixed lending alternatives depending on the client’s situation (Gaul, 2012). Assuming that every household in the world has four to five family members, these actions of MFIs impact the lives of almost 1 billion people today. Nonetheless, there are still at least 2 billion adults in the world who are living in poverty. (Reed, 2011) The outreach to the poorest individuals still needs to become better while this is also the costliest group for MFIs to provide services for (Hulme and Mosley, 1996). Lately, MFIs have experienced a paradigm shift concerning the main goal of their operations. MFIs.

Socio-economic transformation efforts of low-income and poor community have been possible through accessing semi-formal and informal financial products/ services. The pivotal role of the microfinance has helped foster the growth and development of small and medium enterprise in the world by providing start-up and business expansion capital among other financial services. Microfinance institutions target the poor who are considered risky but the repayment rate turns to be positive as compared with the regular commercial banks (Zeller and Sharma, 1998).

Hanohan (2004) alludes that a well-functioning financial system is linked to faster and equitable growth. He argues that access to finance by the poor and small enterprises from formal and informal sources is a prerequisite for poverty reduction and social cohesion. Hence, access to finance has become an integral part of efforts to promote inclusive growth and empowerment of the vulnerable groups. Therefore, financial inclusion in any development sector leads to high levels of socio-economic development and ultimately reduces the poverty levels in an economy. Atiur (2009), however, states that financial inclusion is a tool for combating poverty and a key element of social inclusion making people to contribute to, and to benefit from the process of social and economic advancement. Through increased access to savings accounts and other financial services, the poor can build financial security, manage risks against adverse shocks and even invest in new business opportunities.

In addition, Microfinance gives people new opportunities by helping them to get and secure finances so as to equalize the chances and make them responsible for their own future. It broadens the horizons and thus plays both economic and social roles by improving the living conditions of the people (Mwaniki, 2006). These improvements are in a nutshell to alleviate poverty, boost production and according to this project, it will be seen from the point of the development of small and medium size enterprises (SMEs) and focusing mostly in the rural areas of Uganda. The UN millennium goal to alleviate poverty by the year 2015 is far-fetched despite the enormous works that microfinance institutions are doing to contribute in this domain (Hiderink and Kok, 2009). The main challenge facing the poor is to gain financial power to enable them boost their income generating activities (Yunus, 2003).

1.2 Statement of the Problem

Lending is important to different financial institutions across the globe as result organizations with good lending habits tend to perform better in the financial market and are also in a better position to meet their daily financial needs like paying suppliers in time, paying workers and also meeting their financial obligations in time, (Orebiyi, 2002).

Microfinance institutions are essential in the development of a country as they tend to provide credit to the poor to start up their business, despite numerous efforts to mobilize saving, microfinance institutions have failed to meet their targets this study therefore intends to investigate into the effects of lending methodologies and outreach maximization on MFIs, with specific reference to centenary bank, Mapeerahouse

Objectives of the study

1.3.1 General objectives

The study seeks to assess the effects of lending methodologies and outreach maximization on MFIs

1.3.2 Specific objectives

1. To examine influence of village banking on outreach maximization of MFs.
2. To assess the benefits of individual banking on outreach maximization of MFs.

• To examine the challenges of Group lending on outreach maximization on MFIs.

1.4       Research Questions

1. What is the influence of village banking on outreach maximization of MFs?
2. What are the benefits of individual banking on outreach maximization of MFs?

• What are the challenges of Group lending on outreach maximization on MFIs?

1.5 Conceptual frame work

Lending Methodologies                               Outreach maximization on MFIs

Intervening variables

1.6 Scope of the Study

1.6.1 Study Scope

The study will cover the, the  influence of village banking on outreach maximization of MFs, the benefits of individual banking on outreach maximization of MFs and the challenges of Group lending on outreach maximization on MFIs.

1.6.2 Geographical Scope

The study will be carried out at centenary bank Mapeera 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 Microfinance bank with a customer base of over 420,000 customers and borrowers numbering about 50,000 (centenary bank, 2004).

1.6.3 Time scope

The period of data to be considered in the organization will be from 2011-2018 and period of body of knowledge in reviewing literature will be from 2000-2018, while the study will be carried out from January to September 31^st 2018.

1.7 Significance of the Study

1. The study is expected to provide guidance to the Central Bank and other regulators in designing the saving and microfinance institutional development policies.
2. The study will add to the already existing literature on lending.

• The study is expected to stimulate further research into the area of lending and micro finance development.

1. The study is expected to enable commercial banks identify the saving policies that are critical in the development of micro finance policies.
2. The study will help the government in formulation of policies regarding microfinance institutions in the country.