The topic of the study was to credit management and financial performance in microfinance institutions in Uganda. The study will be guided by the following; to examine the effect of client appraisal techniques on financial performance of micro finance support Centre ltd, to examine the effect of credit risk control tools on financial performance in micro finance support Centre ltd and to examine effect collection policies on financial performance in micro finance support Centre ltd. Mbale Branch.

The study population will consist of 60 respondents from the different departments which included finance (2), Human Resource Administration (5), loans officers (15), Information communication technology (02), Marketing and corporate Affairs (13), legal officer (10), customers (10) and internal audit (05).

The study will use the questionnaire and interview to collect data; A structured questionnaire will be used to collect data and in this study, questionnaires will be used to collect data from members and staff of MSC on issues surrounding credit management and financial performance and Face to face interviews will be held to collect data from the staff at MSC in order to collect in-depth data on credit management and financial performance. The researcher will arrange to meet the respondents in these three categories and hold face to face interviews with them.

CHAPTER ONE

GENERAL INTRODUCTION

1.0 Introduction

This chapter highlights the background information of the subject matter, statement of problem, and objectives of the study, research questions, scope of the study, of the significance of the study, conceptual frame work and the definitions of the key terms.

1.1 Background of the study:

Globally, the modern use of the expression ‘’micro financing’’ has roots in the 1970s when organizations such as Grameen Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were starting and shaping the modern industry of micro financing- Which initially had a limited focus based on the provision of microloans to the poor entrepreneurs and small businesses lacking access to banking and relate services, and majorly two main mechanisms for deliverance of financial services to such clients i.e. relationship- based banking for individual entrepreneurs and small businesses; and group-based models, where several entrepreneurs come together and apply for loans and other services as a group. However, over time, Microfinance has emerged as a larger movement whose object is a world in which as everyone, especially the poor and socially marginalized people and households have access to wide range of affordable, high quality financial products and services, including not just credit but also savings, insurance, payment services, and fund transfers. According Horne and Wachowicz (1998), many of those who promote microfinance generally believe that such access was help poor people out of poverty, including participants in the Microcredit Summit campaign(1998) For many, Microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses; For others it is a way for poor to manage their finances more effectively and take advantage of economic opportunities while managing risks.

Currently, Microfinance deals with the supply of loans (credit), savings and other basic financial services to the poor, because these financial services usually involve provision of small amounts of money- small loans, small savings etc. In contrast however, for most of the microfinance institutions credit is one of the services offered to customers because it is one of the factors a firm use to influence the demand for its products. According to Myers and Berkley (2003), defined credit as a process where the possession of goods or services is allowed without spot payment upon a contractual agreement for later payment.

The idea of credit started since 1540s.with ‘’belief, faith, ’from Middle French credit (15C) ‘’Belief, trust, ’from Italian creditor, from Latin creditum’ a loan’’, thing entrusted to another, ’neuter past participle of cerdere’’ to trust, entrust, and believe. ‘’The commercial sense of confidence in the ability and intention of a purchaser or borrower to make payment at some future time’’ was in English 1570s (creditor) is mid-15c); ‘’hence sum place at a person’s disposal’ ’by Bank etc.

Therefore, the biggest risk in Microfinance is lending money and not getting if back.

Credit risk is a particular concern for Microfinance institutions because lending is unsecured i.e., traditional collateral is not often used to secure microloans, Churchill and Coster (2001). Because the people covered are those who cannot afford credit from Banks and such other financial institutions due to lack of ability to provide guarantee or security against money borrowed. Many microfinance institutions do not extend to these kinds of people due to high default risk for repayment of interest and in some cases the principle amount if self. Therefore, these institutions are required to design sound credit management. Credit management is therefore a process of granting credit, the terms it’s granted on and recovering this credit when it is due. This is a function within a bank or company to control credit policies that was improve revenues and reduce financial risks that entail the identification of existing and potential risks inherent in lending activities. Hence for effective credit management the following variables should be put in place by MFIs and these include client appraisal techniques, Credit terms, collection policy, and credit risk control tools among others. Sound credit management is a prerequisite for microfinance institution’s stability and continuing profitability, while deteriorating credit quality is the most frequent cause of poor financial performance and condition. According to Gitman (1997), the probability of bad debts as credit standards are relaxed. Firms must therefore ensure that the management of receivables is efficient and effective. Such delays on collecting cash from debtors as they fall due has serious financial problems, increased bad debts affect customer relations, if payment is made late, then profitability is eroded and if payment is not made at all, then a total loss is incurred. On that basis, it is simply good business to put credit management at the ‘’front end’’ by managing it strategically.

In Uganda, institutionalization of Microfinance was slowly implemented. Traditionally, the private sector in Uganda has struggled with infrastructural failings such as weak commercial justice system, corruption, inadequate tax and regulation management, as well as lack of financial services (Audit report.2002; Wong 1999). Over the 1990s the closure of Banks and the raise of inflexible banking practices by Uganda commercial Bank, segregated small business and low income households from access to financial services (Carlton, et al, 2016). Furthermore, traditional Banks during this time diminished Uganda’s social capital and credit culture by mishandling credit schemes, having a profound impact on the civil population’s trust of traditional financial institutions (Carlton et al.2001), However, more traditional forms of informal financial activities have encompassed many forms and had been used for decades( Carlton at al.2001). However the first microfinance institution introduced by the government is seen in FINCA and Uganda’s Women Finance Trust (UWFT)in the 1990s, Due to governmental failings in effective poverty and development policies during this time, there was a strong reliance on NGO’s community based organizations and local ‘Resistance Councils’.

Following the introduction of the above MFIs IN Uganda, the results indicate that Microfinance is important for the society but there are some challenges such as inadequate donor funding, insufficient support from governments, improper regulations, inefficiency in credit management tools and techniques, also challenges include lack of standardized reporting and performance monitoring system for Microfinance institutions. However, the although the government of Uganda through the introduction of The microfinance support Centre to intervene and solve the above challenges of Microfinance institutions but much effort has been on poverty alleviation and less effort has been placed on credit management. Thus according to the financial reports of MSC 2016-2018 out of 80% billion loan money disbursed only 40% billion was recovered on time and 20% was defaulted. Hence this shows a big challenge in credit management among the Microfinance intuitions thus the need for further studies.

1.2 Problem statement.

Sound credit management is a prerequisite for a micro finance institution’s stability and continuing profitability, while deteriorating credit quality is the most frequent cause of poor financial performance and condition. According to Gitman (1997), the probability of bad debts increases as credit standards are relaxed. Firms must therefore ensure that the management of receivables is efficient and effective .Such delays on collecting cash from debtors as they fall due has serious financial problems, increased bad debts and affects customer relations. If payment is made late, then profitability is eroded and if payment is not made at all, then a total loss is incurred. On that basis, it is simply good business to put credit management at the ‘front end’ by managing it strategically. MSC has established proper credit management mechanism which are aimed at ensuring that it achieves proper management of all the loans disbursed to its clients and improve its financial performance for example, there are proper policies concerning disbursement of funds, well trained credit officer and risk assessment officers. (MSC Annual Report, 2016). However, despite the above efforts, financial position of MSC has kept on deteriorating as a result of a high default rate. Thus according to the financial reports of MSC 2016-2018 out of 80% billion loan money disbursed only 40% billion was recovered on time and 20% was defaulted. As with any financial institution, the biggest risk in microfinance is lending money and not getting it back. Credit risk is a particular concern for MFIs because most micro lending is unsecured (i.e., traditional collateral is not often used to secure microloans Craig Churchill and Dan Coster (2001). The people covered are those who cannot avail credit from banks and such other financial institutions due to the lack of the ability to provide guarantee or security against the money borrowed. This forms the background against which the researcher is to carry out a research to examine the effect of credit management on financial performance with a specific focus on Micro finance Support Centre Mbale branch.

1.3 Research Objective

1.3.1. General objectives

Examine the effects of credit management on performance of micro finance institutions in Uganda.

1.3.2. Specific objectives

To examine the effect of client appraisal techniques on financial performance of micro finance support Centre ltd. Mbale Branch
To examine the effect of credit risk control tools on financial performance in micro finance support Centre ltd. Mbale Branch

To examine effect collection policies on financial performance in micro finance support Centre ltd. Mbale Branch

1.4. Research questions.

What is the effect of client appraisal techniques on financial performance of micro finance support Centre Mbale branch?
What is the effect of credit risk control tools on financial performance in micro finance support Centre Mbale?

How effective are the collection policies on financial performance in micro finance bank Mbale?

1.5. Research hypothesis

There is a strong positive and significant effect of client appraisal techniques on financial performance.
There is a positive and significant relationship between credit risk control tools and financial performance.

There is a positive and significant effect of collection policies on financial performance.

1.6. Scope of the study

This will be divided into content scope, geographical scope and time scope as explained below;

1.6.1. Content scope

The study will concentrate on credit management as an independent variable with dimensions of; client appraisal techniques, credit risk control tools and collection policies. On the other hand the dependent variable is financial performance in micro finance Support Centre measured by profitability, cash flow and liquidity position.

1.6.2. Time scope.

The study will consider information of 10 years this is because during this period Microfinance support Centre made expansion in several areas in Uganda and the time period of 10 years is sufficient enough to predict the future of an organization.

1.6.3. Geographical scope:

The study will be carried out at Micro finance support Centre, Mbale Branch is located in eastern region of Uganda, Mbale municipality. Plot 2, Bumasifwa lane along Pallisa Road in Mbale. Municipality is located in eastern region in Uganda, bordered by Sironko district to the North, Bududa district to the Northeast, Manafwa district to the Southeast, Tororo district to the South, Butaleja district to the Southwest and Budaka district to the West. Pallisa and Kumi district lie to the Northwest of Mbale district.

Mbale district has been chosen because it has one of the largest microfinance support centres in the country.

1.7. Significance of the Study

The result of this study will be valuable to researchers and scholars, as it would form a basis for further research. Scholars can use this study as a basis for discussions on credit management and financial performance of MFIs. It will provide the scholars with empirical studies that they will use in their studies. The study shall also add to the body of knowledge in the finance discipline by bridging gaps in credit management research in general.

This study will make several contributions to both knowledge building and practice improvement in credit management and financial performance. From a theoretical standpoint, the study proposes a comprehensive framework of studying changes in credit management and financial performance. It also expects that it will aid policy makers in their effort to revamp the sector.

It shall be of great relevance to the organizations under study as well as other financial institutions. The non-financial business firms, whether manufacturing or service oriented shall also benefit from the research findings. This is because the result of the study shall enable the users especially finance trust bank Mbale to appraise its credit policies and to review its operations critically for more result oriented approach in the dealing with its credit facilities.

1.8. Justification of the study

A number of research studies on credit management have been carried around the globe and Uganda in particular however, only a few were taken by the research basing on their relativeness to the study and they were Robert (2011), and Lydia (2012).

Robert (2011) carried out study on credit management and profitability of commercial banks with FINCA Uganda and focused on the roles of credit management profitability in commercial banks with the objectives to examine the credit policy and profitability in FINCA Uganda, to assess the causes of low profitability in FINCA Uganda and to establish the relationship between credit management policy and profitability in FINCA Uganda .however ,as much as the Robert did his best the following gaps exist in the finding that need to be addressed .the researcher focused on the profitability of commercial banks only thus leaving other MFIs out and this prompted another researched on the roles of credit management.

Lydia (2012) carried out study on credit control and loan performance in financial institutions, case study centenary bank Mbale with the following objectives to assess the level of usage of credit control systems in centenary bank, to establish the effects of credit control systems on the deposit rates in centenary bank and recommended further study on the credit risk management and efficiency of management of financial institutions.

from the study above its clear though that the researcher did her best based on the researchers objective which were on the usage of credit control system, the effect of credit control system on loan default but did not study the challenges of credit management system and there was need to study the challenges faced in the usage of credit management and roles of credit management system on financial performance.

1.9. Definition of key terms

Financial performance

According to the business dictionary financial performance involves measuring the results of firm’s policies and operations in monetary terms. These results are reflected in the firms return on investment, return on assets and value added.

Stoner (2003), defines financial performance as the ability to operate efficiently, profitably, survive, grow and react to the environmental opportunities and threats. In agreement with this, sollenerg and Anderson (1995) assert that, performance is measured by how efficient the enterprise is in use of resources in achieving its objectives. Hitt,et al(1996) believes that many firm’s low performance is the result of poorly performing assets.

Client Appraisal

The first step in limiting credit risk involves screening clients to ensure that they have the willingness and ability to repay a loan. MSC uses the 5Cs model of credit to evaluate a customer as a potential borrower (Abedi, 2000).

Credit management

Myers and Brealey (2003) describes credit management as a methods and strategies adopted by the firm to ensure that they maintain an optimal level of credit and effective management

It is an aspect of financial management involving credit analysis, credit rating, credit classification and credit reporting .Nelson (2002) views credit management as simply the means by which an entity manages its credit sales. It is a pre requisite for any entity dealing with credit transactions since it is impossible to have zero credit or default risk.

Credit Risk Control tools.

Key credit controls included loan product design, credit committees and delinquency management. (Church hill Coster, 2001).

Collection policies.

There are various policies that an organization should put in place to ensure that credit management is done effectively; one of these policies is a collection policy which is needed because all customers do not pay the firms bills in time. Some customers are slow payers while others are non-payers. The collection effort should therefore aim at accelerating collections from slow payer and reducing bad debt losses (Kariuki, 2010).

1.10 The Conceptual Frame Work

INDEPENDENT VARIABLE DEPENDENT VARIABLE

Financial performance

· Profitability,

· cash flow

· Liquidity position.

Credit management

· Client appraisal techniques

· Credit risk control tools

· Collection policy

INTERVENING VARIABLE

Organization policies and values

· Level of supervision

· Level of education

· Support documents

· Organizational policy

Source: Developed by the researcher as guided by Jabareen, Y. (2009)

The figure 1:1 presents the conceptual frame work containing independent variables (credit management), the intervening variables (organization policies and values) and dependent variables (financial performance)

Credit management involves the use of credit term collection policy, credit risk control tools and client appraisal techniques geared towards the financial performance to achieve the objectives there is interplay with the intervening variable which includes the level of supervision, training clients, support documentation and government policy. The outcome is manifested in form of sales, cash flows; net profit and debtor turn over.

credit terms involve setting clear lines to be followed while selling on credit and this calls for a careful supervision at all levels In order to improve on sales and better debtors turn over on financial performance of the organization

Client appraisal techniques help in ascertaining the credit worthiness’ of the client but this needs support services and documentation in order to improve on the debtor turn over and profitability.

credit risk control tools helps in aiding and selling the product to good clients as it provides tools to be used in order to avoid event that can lead to bad sales, credit risk control, therefore calls for the training the clients on the importance of keeping the record. Documentation for themselves and close supervision by the credit management team within the organization for timely repayments in order to ascertain sales.

collection policy aim at accelerating collection form slow payers and reducing bad losses but this requires good government policies and proper documentation in order to improve on timely repayments and decrease in fault and profit for the organization.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter consisted of literature of credit management and financial performance and the review of literature relating to the objectives of the study. During the study, the researcher primarily looked towards the concept of credit management variables i.e. Client appraisal techniques, Credit control tools and Collection policies, financial performance variables included Revenue, profitability, cash flows and liquidity position. And the chapter ended with the summary conclusion of the literature review.

2.1 Theoretical Review

Previous literature has shown that there exists information asymmetry in assessing bank lending applications (Binks and Ennew, 1997). Information asymmetry describes the condition in which relevant information is not known to all parties involved in an undertaking (Ekumah and Essel, 2003). Studies on transaction costs have shown that transaction costs occur “when a good or a service is transferred across a technologically separable interface”. Therefore transaction costs arise every time a product or service is being transferred from one stage to another, where new sets of technological capabilities are needed to make the product or service. Therefore, it may be very well more economies to maintain the activity in-house, so that the company was not use resources on example contacts with suppliers, meetings and supervision. Managers must therefore weigh the internal transaction costs against the external transaction costs, before the company decides whether or not to keep some activity in-house. Wasiamson (1981).This chapter was review the asymmetric information theory and Transaction cost theory in credit management

2.1.1 Asymmetric Information Theory

Information asymmetry refers to a situation where business owners or manager know more about the prospects for, and risks facing their business, than do lenders (PWHC, 2002) cited in Eppy.I (2005). It describes a condition in which all parties involved in an undertaking do not know relevant information. In a debt market, information asymmetry arises when a borrower who takes a loan usually has better information about the potential risks and returns associated with investment projects for which the funds are earmarked. The lender on the other hand does not have sufficient information concerning the borrower (Edwards and Turnbull, 1994).

Binks et al (1992) point out that perceived information asymmetry may pose two problems for the banks, moral hazard (monitoring entrepreneurial behavior) and adverse selection (making errors in lending decisions). Banks may find it difficult to overcome these problems because it is not economical to devote resources to appraisal and monitoring where lending is for relatively small amounts. This is because data needed to screen credit applications and to monitor borrowers are not freely available to banks.

2.1.2Transactions Costs Theory

First developed by Schwartz (1974), this theory conjectures that suppliers may have an advantage over traditional lenders in checking the real financial situation or the credit worthiness of their clients. Suppliers also have a better ability to monitor and force repayment of the credit. All these superiorities may give suppliers a cost advantage when compared with financial institutions.

Three sources of cost advantage were classified by Petersen and Rajan (1997) as follows: information acquisition, controlling the buyer and salvaging value from existing assets. The first source of cost advantage can be explained by the fact that sellers can get information about buyers faster and at lower cost because it is obtained in the normal course of business.

That is, the frequency and the amount of the buyer’s orders give suppliers an idea of the client’s situation; the buyer’s rejection of discounts for early payment may serve to alert the supplier of a weakening in the credit-worthiness of the buyer, and sellers usually visit customers more often than financial institutions do.

2.2. Conceptual Review

2.2.1. Credit Management

Credit management is one of the most important activities in any company and cannot be overlooked by any economic enterprise engaged in credit irrespective of its business nature. It is the process to ensure that customers will pay for the products delivered or the services rendered. Myers and Brealey (2003) describe credit management as methods and strategies adopted by a firm to ensure that they maintain an optimal level of credit and its effective management. It is an aspect of financial management involving credit analysis, credit rating, credit classification and credit reporting. Nelson (2002) views credit management as simply the means by which an entity manages its credit sales. It is a prerequisite for any entity dealing with credit transactions since it is impossible to have a zero credit or default risk.

The higher the amount of accounts receivables and their age, the higher the finance costs incurred to maintain them. If these receivables are not collectible on time and urgent cash needs arise, a firm may result to borrowing and the opportunity cost is the interest expense paid. Nzotta (2004) opined that credit management greatly influences the success or failure of commercial banks and other financial institutions. This is because the failure of deposit banks is influenced to a large extent by the quality of credit decisions and thus the quality of the risky assets. He further notes that, credit management provides a leading indicator of the quality of deposit banks credit portfolio.

A key requirement for effective credit management is the ability to intelligently and efficiently manage customer credit lines. In order to minimize exposure to bad debt, over reserving and bankruptcies, companies must have greater insight into customer financial strength, credit score history and changing payment patterns. Credit management starts with the sale and does not stop until the full and final payment has been received. It is as important as part of the deal as closing the sale. In fact, a sale is technically not a sale until the money has been collected. It follows that principles of goods lending shall be concerned with ensuring, so far as possible that the borrower will be able to make scheduled payments with interest in full and within the required time period otherwise, the profit from an interest earned is reduced or even wiped out by the bad debt when the customer eventually defaults. Credit management is concerned primarily with managing debtors and financing debts. The objectives of credit management can be stated as safe guarding the companies‟ investments in debtors and optimizing operational cash flows. Policies and procedures must be applied for granting credit to customers, collecting payment and limiting the risk of non-payments.

2.2.2. Financial performance:

According to the business dictionary financial performance involves measuring the results of a firm’s policies and operations in monetary terms. These results are reflected in the firms return on investment, return on assets and value added. Stoner (2003) as cited in Turyahebya (2013), defines financial performance as the ability to operate efficiently, profitably, survive, grow and react to the environmental opportunities and threats. In agreement with this, Sollenberg and Anderson (1995) assert that, performance is measured by how efficient the enterprise is in use of resources in achieving its objectives. Hitt et al., (1996) believes that many firms’ low performance is the result of poorly performing assets.

The firm financial performance can be measured in terms profitability, Revenue, cash flows among others. Van Horne (1989) said that a firm should evaluate its credit policy in terms of return (profits) and costs and are of three types which include; selling and production costs, Administration costs and bad debts losses. Management needs to establish a system on its trade debtors by critically addressing factors like cash discounts offered for prompt payment, credit period offered, evaluating customers credit worthiness and stating clearly the steps regarding late payment in its credit policy and thus credit standards which is the strength and credit worthiness of customer must be exhibited in order for potential client to quality of credit.

2.2.3 Profitability.

Profitability is measured by the incomes and expenses. Income is the money generated from the activities of the business for example the sale proceeds. Expenses are the costs of resources used up or consumed by the business. These costs include the opportunity costs for tying up funds in debts, cost of running the credit operations, cost of time to chase debts, cost of bad debts and the cost of dept. recovery (Leong, 2009). Profitability can be defined as either accounting or economic profits. Accounting profits is excess of the income over the expenses. However, a single non-profit financial year may not really harm the business of the firm, but when the firm incurs losses in the consecutive years it may jeopardize the viability of that business (DONs, 2009).

The accounting profits are measured to ascertain the success of the business. To see the business chances of survival; and to ascertain its ability to reward the owners for their investment into the business and this is the main goal to management.

The measurement of accounting profit is done by several instruments some of them include income statement which accounts for the financial, the income statement that measures project profitability of the business for the coming accounting year.

Economic profits is computed by deducting the opportunity cost from the net income (Graham, 2000). The opportunity cost includes money, labor and the management ability directed towards credit allocation. Economic profits are computed to provide the business with long-term perspective to oversee its continued operation. The firm’s profitability is influenced by the structure of the revenue generating assets like credit in Microfinance institutions which generate revenue in terms of interest incomes. Also profitability is dependent on the firm’s ability to eliminate risks in the asset operation to ensure correspondence between the assets and liabilities. (Bobakova, 2003).

2.2.4. Cash flows and liquidity position.

Cash discount is the percentage reduction on the amount of debts to be paid by the creditors. This acts as an incentive to induce the customer to repay the credit obligation within or lesser than the credit period. Cash discount act as a tool to accelerate credit collections from customers and this helps the firm to reduce the level of receivables and their associated costs Reigner and Hill (1997), Mosic (1982), Pandey (1995). Defines cash management as away concerned with management of cash flows into or out of the organization / firm’s cash flows within the firm and cash balances held by the firm at appoint of time.

Pandey (1995), Cash management is concerned with managing of cash flows of the firm and cash balances held by the firm at appoint of time by financing deficit or investigating surplus. Cash sale generate cash which has to be disbursed out, the surplus cash has to be invested while the deficit has to be borrowed .Cash management needs to be accomplished at minimum cost.

Bodil (1999), a business cannot survive without enough cash to pay bills and finance growth. On the other hand, having too much cash is inefficiency cost of capital. Therefore firms should endeavor to their money at work to maximize value and when they invest excess cash they must strive a balance between risks and expected returns.

Business analysts report that poor cash management is the main reason for business failure. Poor cash flow handling is said t be the most crucial stumbling block for entrepreneurs. Therefore managers who don’t consider the effectiveness of the cash flows hinder the management of cash is the life blood of the business.

2.3. Empirical literature review.

2.3.1Effect of Client Appraisal on financial performance

The first step in limiting credit risk involves screening clients to ensure that they have the willingness and ability to repay a loan. Microfinance support Centre uses use the 5Cs model of credit to evaluate a customer as a potential borrower (Abedi, 2000). The 5Cs may help to increase loan performance, as they get to know their customers better. These 5Cs are character, capacity, collateral, capital and condition.

Character – refers to the trustworthiness and integrity of the business owners .it’s an indication of the applicant’s willingness to repay and ability to run the enterprise. Capacity assesses whether the cash flow of the business (or household) can service loan repayments. Capital – Assets and liabilities of the business and/or household. Collateral -Access to an asset that the applicant is willing to cede in case of non-payment, or a guarantee by a respected person to repay a loan in default. Conditions-A business plan that considers the level of competition and the market for the product or service, and the legal and economic environment

The 5Cs need to be included in the credit-scoring model. The credit scoring model is a classification procedure in which data collected from application forms for new or extended credit line are used to assign credit applicants to „good‟ or „bad‟ credit risk classes (Constantinescu et al., 2010).Inkumbi (2009) notes that capital (equity contributions) and collateral (the security required by lenders) as major stumbling blocks for entrepreneurs trying to access capital. This is especially true for young entrepreneurs or entrepreneurs with no money to invest as equity; or with no assets, they can offer as security for a loan.

Any effort to improve access to finance has to address the challenges related to access to capital and collateral. One way to guarantee the recovery of loaned money is to take some sort of collateral on a loan. This is a straightforward way of dealing with the aspect of securing depositors‟ funds. However although the company uses the 5Cs model of credit to evaluate a customer as a potential borrower according to (Abedi, 2000), Does not fully g defaulted according to end of year financial report of the company hence the researcher intends to carry out a further study to address the gap.

Sheilah (2011) commented that, the ability of financial institutions to promote growth and financial performance depends on the extent to which financial transactions are carried out with trust, confidence and least risk. This requires sound and safe loan appraisal to assess and unearth the financial character of the loan applicant before any step is undertaken. This will dictate on the conditions to be applied on the loan covenant to help curb bank–customer relationship that may have positive influence on financial performance of the commercial banksin Uganda. Sheilah is of the view that proper and adequate loan appraisal is the key to controlling or managing the level of income interests hence return on assets as well as return on equity therefore positively influencing on financial performance. The study established that loan appraisal did not adequately assess the value of assets to be invested on customers apart from return on equity to guide the execution of appropriate credit decision.

In a study by Nagarajan (2011) it was observed that the time taken to appraise the bank’s clients is very important in order to identify the return on deposits. This influences the bank’s financial performance. This reflects the bank management’s ability to utilize the customer’s deposits in order to generate profits. Moreover, Dhankal (2011) added by saying that the challenge with this policy is attractiveness of the banks to customers so as to frequently make deposits and to offer incentives on delayed deposits so as to make use of these deposits to generate more revenues towards improved financial performance of these banks. However, the study identified a gap in that this does not just involve only collection procedure details provided by the bank but also the procedure on how the lawful collection should take place.

2.3.2. Effect of Credit Risk Control on financial performance

Key Credit controls include loan product design, credit committees, and delinquency management.

(Churchill and Coster, 2001). Although most of microfinance institutions have tried to apply these tools, there is still a challenge among the credit committees in determining the institution’s credit policy and spotting potential risks of various transactions assumed by the institution. Therefore, the researcher intends to carry out further study to evaluate the effectiveness of the above credit risk control tools in relation to credit management and financial performance.

Mwangi (2010) investigated on factors that affect MFIs credit risk management practices in Kenya. The study’s specific objectives included how portfolio quality, market infrastructure and market concentration affected the credit risks of MFIs. According to the study results the three factors did affected credit risk of MFIs. Nyakeri (2012) carried out a research on how practices relating to management of credit affects financial performance in SACCOS in Nairobi .The research specific objectives included the effect of credit approval process, loan portfolio, credit score and the Risk analysis on the profitability of the MFIs. According to the findings the credit risk analysis improved the firm’s profitability, loan portfolio and returns of the MFIs.

Nagarajan (2011) assessed the risk management for MFIs in Mozambique concluded that the process of managing risks is ever changing and could be developed and tested when risk occurred. The processes need to consider the commitment of all the firm stakeholders for it to be planned and executed properly. An encouraging finding was that minimizing losses was possible by managing cash flow properly management of cash flows and portfolios, by coming up with robust institutional infrastructure, use of skilled employees and insisting of client discipline and effectively coordinating the stakeholders.

Moti (2012) studied the effectiveness of credit management system on loan performance: empirical evidence from microfinance sector in Kenya. The goal of the research was to determine how effective credit management was on the performance of loan in MFIs. The specific goals was to determine the effect of control measures, credit terms, credit risk, credit collection policies and credit appraisal on the performance of loans. The study used a descriptive research method. The respondents who provided the data were officers who worked at MFIs in Meru. The findings showed that the collection policy highly affected the repayment of loans with =12.74, P=0.000 at 5% significance level.

2.3.3 Effect of Collection Policy on financial performance.

There are various policies that an organization should put in place to ensure that credit management is done effectively; one of these policies is a collection policy, which is needed because not all customers pay the firms bills in time. Some customers are slow payers while some are non-payers. The collection effort should, therefore aim at accelerating collections from slow payers and reducing bad debt losses (Kariuki, 2010). Although the application of these policiesto ensure timely payment of its accounts receivables the microfinance institutions still face challenge of bad debts hence the researcher needs to carry out a further study to assess the effectiveness of the collection policies to financial performance of microfinance institutions.

Owino (2012) in his study on effects of lending policies on loan defaults on commercial banks says that the purpose of loan appraisal is to assess the likelihood that the loan asset to be offered to customers has higher interest margin that drives increased return on assets hence financial performance of the commercial banks. It includes assessing the borrower’s needs and financial conditions that identifies the borrower’s character, capacity, collateral, capital etc. Interested lenders will expect the loan applicant to have contributed from their own assets and to have undertaken personal financial risk to establish the business before advancing any credit. The study identified that the hindrance of loan appraisal is information asymmetry that spells doom on the success of fully assessing the loan applicant due to hidden information and history

According to Nyorekwa (2014) on the study of effectiveness of lending policies on financial performance of the banking sector in Tanzania observed that before lending out money, a bank has to assess all important factors that have a bearing on the financial soundness of the customer as well as the returns expected to be generated from the loan assets prime focus being the purpose and need of the credit and ability of the borrower to repay the credit advanced as per the terms of the loans. The borrower’s character, experience and competence to manage the business and to utilize the funds for the purpose for which they are lent are normally taken into account. The project or activity proposed for financing should be capable of generating sufficient income so that the loan is serviced and repaid to have targeted return on assets invested by the banks. There was a gap with how the loan appraisal could be conducted to establish if the bank’s lending could be too little or too much in relation to the need so as to cause problems

2.12 Summary of Literature Review

Following all the reports made by a above researchers,

The chapter begun by providing a brief discussion on key theoretical approaches and findings reported in earlier related studies credit management and financial performance. Key theoretical approaches discussed are Asymmetric Information Theory and Transactions costs theory. The chapter also concentrated on empirical facets of credit management and financial performance.

A credit policy forms part of a larger credit management systems. Most scalars have analyzed credit policy but little has been done on analyzing the relationship between credit management and financial performance of Microfinance institutions. Since most companies want to create a sustainable business with profitable growth both now and in future. The literature review has indicated that credit managers need to be critical when setting their credit policy and carrying out assessment of their customers before advancing any credit.

The theory stated the use of 5s, but did not critically state the ingredient to be looked at and to what extent it’s considered good for decision making.

Local studies that have been done on microfinance sector do not focus on the effect of credit management on the financial performance of Micro finance institutions; there is therefore a gap in the empirical evidence available hence the researcher seeks to study to bridge that gap

CHAPTER THR EE

RESEARCH METHODOLOGY

3.0. Introduction

This chapter presents information on research design, area of study, study population, sampling Design sampling size, Data collection methods and instruments, Quality control methods, Data management and processing, Data analysis, Ethical considerations and finally limitations of the study.

3.1 Research Design

This section will focus on the research techniques which were adopted and used for the study with the aim of achieving the research objectives. A research design is defined as an overall plan for research undertaking and it provides the glue that holds the research project together.

The study used a case study design to investigate the effect of credit management on financial performance in Microfinance Support Centre, Mbale branch. The case study design will be used in that its findings will be based on the data collected from a geographic area of MSC which was used as a case study. The research will employed both qualitative and quantitative methods. The qualitative approach will be used in comprehending views obtained from respondents through questionnaire and interviews. The quantitative approach on the other hand will be used in computing data that will involve figures hence this will enable the use of percentages in data analysis.

3.2 Area of the study

The area of the study will be at Microfinance Support Centre, Mbale branch. Because it is strategically located and the researcher has easy access to the respondents. The area of the study refers to the anthropological or sociological research which is intended to gather and relate data on various aspects of a geographical region and its inhabitants, as natural resources, history, language, institutions, economic characteristics and Primary investigation into human ecology.

3.3 Study Population

3.4 Sampling procedures.

3.4.1 Sample size and Selection.

Sekaran, (2003) identified that, sampling is the process of choosing the research units of the target population, which are to be included in the study. A sample size of 52 respondents will be selected out the population of the study population of 60 who will comprise of finance (5), Human Resource Administration (2), loans officers (15), Information communication technology (02), Marketing and corporate Affairs (13), legal officer (10), customers (10) and internal audit (05). The sample size will be determined using Morgan and Krejcie table as given by Amin, (2005) (Appendix III)

Table 1: Showing category, population, sample size and sampling technique.

Category	Study Population	Sample Size	Sampling technique
Finance	05	4	Purpose sampling
Human Resource Administration	02	1	Purpose sampling
Loan officers	15	13	Simple Random Sampling
Information communication technology	02	1	Purposive sampling
Marketing and corporate Affairs	13	11	Simple Random Sampling
Legal Officers	10	9	Simple Random Sampling
Customers	10	9	Simple Random Sampling
Internal Audit	5	4	Purposive sampling
Total	60	52

Source: Primary data (2021)

3.4.2 Sampling techniques.

The study will use both probabilistic and non-probabilistic techniques. This will include simple random and purposive sampling techniques.

A simple random sample is a subset of a statistical population in which each member of the subset has an equal probability of being chosen. A simple random sample is meant to be an unbiased representation of a group. Simple random sampling will be used for the study because it will consider a fair way of selecting a sample from a given population since every member is given equal opportunities of being selected.

Purposive sampling will be used for selecting heads of Human Resource Administration, finance and respondents from ICT departments. This is preferred by the researcher because ;it excludes people who are unsuitable for the study and remain with the most suitable candidates , it is less time consuming, reduces the costs for carrying out the sampling project, the results of purposeful sampling are usually expected to be more accurate than those achieved with an alternative form of sampling.

3.5 Sources of data.

Two basic sources of data will be considered; both primary and secondary.

The study will use both primary and secondary data sources. The instruments are preferred for their greater convenience in the context of time, stability, uniformity and consistency.

The primary data refers to the data collected by the researcher herself. In order to achieve her objectives data as collected mainly using the structured questionnaires and interview guides from the respondents.

Secondary data refers to already available data set, this will be obtained from documents, journals, online data sets in order to supplement on the primary data collected by the questionnaires and the interview guides.

3.6 Data Collection Methods and Instruments

To collect a large quantity of data, the following data collection methods will be used: questionnaire, face-face interviews, and documentary review.

3.6.1 Data Collection Methods

Questionnaires:

A structured questionnaire will be used to collect data and in this study, questionnaires will be used to collect data from members and staff of MSC on issues surrounding credit management and financial performance. Questionnaires will be used because apart from being easier to administer, they more reliable and also easier to analyze (Amin, 2003). Questionnaires are often used to collect data from large samples because they are cheap to administer, free from bias of the researcher, provide adequate time for respondents to fill them (Kothari, 2006). Using an introductory letter from the MTAC, the researcher will deliver the blank questionnaire to the selected respondents in Micro finance Support Centre and provide an appropriate time for them to complete them and then she collected them.

Interviews

Face to face interviews will be held to collect data from the staff at MSC in order to collect in-depth data on credit management and financial performance. The researcher will arrang to meet the respondents in these three categories and hold face to face interviews with them. During the process, a set of questions will be asked and their responses will be written down by the researcher. At the end of the interview process, the researcher will go over what had been captured and ensured that no useful information is left out.

3.6.2 Data Collection Instruments

Questionnaire.

As an instrument, a 5 point-Likert scale questionnaire will be used. It will comprise of both open ended and close ended questions. This serves to the respondents majorly on appointment who will then be required to tick against the provided questions or fill in where necessary. This instrument is good because it has limited choice for respondents there by limiting assumptions and falsifications by respondents.

Interview Guide

As an instrument, an interview schedule will be used to collect data from the top SMT, the top management team of the organization. This is because these respondents are ever busy that they are unable to take off time to answer a questionnaire. The interview schedule will contain a set of questions that will be followed while interviewing the respondents to avoid going off topic. This instrument is good because it minimizes differences between interview responses since the guiding questions are pre-determined and interviewees are subjected to the same environments (Canals, 2017).

3.7 Quality Control Methods

The instruments of data collection in this study will be assessed in terms of validity and reliability to ensure dependability of the results of the study.

3.7.1 Validity

Validity of the instrument will be determined by computing the Content Validity Index after rating of the items by the supervisor. The researcher will request the supervisor to rate the items in the data collection instruments as Very Relevant (VR), Relevant (R), Somewhat Relevant (SWR) or Not Relevant (NR). From the rating, the researcher will use the formula below to compute the Content Validity Index (CVI), which will be an indicator of the level of validity of the instrument.

Formula used: CVI = VR + R

K; Where VR is for Very Relevant, R for Relevant and K is for total number of items in the instrument.

From the supervisor’s rating, 10 items are rated very relevant; 13 are rated relevant, 5 will be rated somewhat relevant and 3 as not relevant. This will be out of the 37 items in the instrument. By substitution in the formula above;

CVI = 10 + 13 = 23 = 0.793

29 29

The value of Content Validity Index (CVI) obtained will be interpreted using the George and Mallery (2003) scale. Since the value of CVI obtained was 0.793, which is above 0.7, it indicated good reliability (George and Mallery, 2003).

3.7.2 Reliability

Reliability refers to consistency in delivering results. To ascertain reliability, the researcher will pre-test the research instrument on a reasonable number of staffs within MSC, which may not be used in the final data collection process. After pre-testing, the Chronbach’s Alpha formula will be used to compute the reliability coefficient which is an indicator of the level of reliability of the instrument (George and Mallery, 2003). A reliability coefficient value of 0.7 will be obtained indicating acceptable reliability (George and Mallery, 2003).

3.8 Measurement of variables

The dependent variable of the study; financial performance will be measured by Profitability, cash flow and liquidity position. The independent variables of the study credit management will be measured by client appraisal techniques, credit risk control tools and collection policies. A questionnaire with 5 point rating scale as per Likert scale ranging from strongly agree (1) to strongly disagree (5) of Munene, (2000) local measure will be used to measure respondent’s evaluation by asking them the degree of agreement with statements. The measurement scale of 1 up to five on every statement simply measures the strength of the respondents’ opinion on the particular statement. If the respondent ticks it implied that one strongly agrees with the statement, 2 = agrees, 3 = not sure in other words one does not take any side on the statement, 4 = disagrees and 5 = strongly disagrees with the statement under discussion.

3.9 Analysis of Data

Data collected was first cleaned and scrutinized for any missing values before actual analysis was done.

3.9.1 Quantitative Data

Quantitative data collected was centered into the Statistical Package for Social Scientists (SPSS) computer software. The software Will commanded to generate descriptive statistics such as frequencies and percentages. Then a correlation analysis will ran using the SPSS software to establish the effect of the Credit Management on financial performance in Microfinance Support Centre, Mbale branch.

3.9.2 Qualitative Data

The qualitative data will be analyzed for content and language used by thorough transcribing of recorded interviews looking out for similarities and differences to identify themes and develop categories according to the objectives. Data cleaning, editing and coding of the items in the questionnaire will be employed to cross check and interpret qualitative data and generate theoretical relations for making conclusions. The interplay between the findings solicited by both quantitative and qualitative data will enable the researcher to draw conclusions and subsequently make recommendations.

3.10 Ethical Considerations

The researcher will respect anonymity of the respondents by ensuring confidentiality of the respondents and the data provided. This will be done through assurance that the information they provided will be purely for academic purposes and that their identity would not be disclosed to anyone. This will be highlighted in the introductory part of the questionnaire and before the interview sessions. Lastly but not least, objectivity will be considered during report writing to avoid personal bias.

REFERENCES

Books

ABEDI, S. (2000): Highway to Success, Credit Management Journal, and http:// leathers inters.

. New Jersey: Prentice Hall. Balduino,

W.F. (2000). Risk Is In. [On-line]. Available http://www.dnb.com(22/10/07).Com

ARNOLD, G. (2003). Corporate Financial Management

BINKS, M.R. AND ENNEW, C.T. (1992).Information asymmetries and the provision of finance to small firms: International Small Business Journal

BINKS, M., AND ENNEW, T. (1996). Financing small firms, small business and entrepreneur, 2^nd edition.

BINKS, M., ANDENNEW, T. (1997). Small business and relationship banking: the impact of participative behavior, entrepreneurship: Theory and practice vol. 21, No.4 pp 83-92.Ed Macmillan.

BRIGHAM, E.F., GAPENSKI, L.C. AND DAVE’S, P.R. (1999). Intermediate Financial Management. Florida: The Dryden press.

CGAP (2009) [Online]. Measuring results of micro finance Institutions Available http://www.gap.org

CHRISTEN, P., E. RHYNE, R. C. VOGEL, AND C. MCKEAN (1995), “Maximizing the Outreach of Microenterprise Finance: An analysis of Successful Micro finance programs “,

EDWARD. B (1993) Credit Management (6^thEd.) http://www.gowerpublishing.com

EDWARDS, P. &TURNBULL (1994). Finance for small and medium sized enterprises.

KREJCIE and MORGAN, 1970. Determining Sample Size for Research Activities.

https://home.kku.ac.th/sompong/guest_speaker/KrejcieandMorgan_article

MYERS, C. & BREALEY, R. (2003). Principles of Corporate Finance. New York: McGraw- Hill.

HITT, E. HOSKISSON, A. JOHNSON, D. (1996). The Market for Corporate Control and Firm Innovation

Journals

DEAKINS, D., HUSSEIN, G. (1999).Risk assessment with asymmetric Information: International Journal of Bank Marketing.

NELSON, L. (2002). Solving Credit Problem. Retrieved on 21 July 2015 from http://www.cfo.com

Reports

EPPY, I. (2005) Perceived Information Asymmetry, Bank lending Approaches and Bank Credit Accessibility by SMES in Uganda Makerere University.

TURYAHEBWA, A (2013) Financial Performance in the Selected Microfinance Institutions In Uganda (unpublished master’s thesis) Kampala International University,West campus,

SHEILAH, A.L. (2011) Lending Methodologies and Loan losses and Default in a Microfinance Deposit Taking Institutions in Uganda; a research report presented to the Makerere University Uganda.

OWINO, M. (2012) Effect of the Lending Policies on the Levels of Non-performing Loans (NPLs) on Commercial Banks of Kenya.

DALLAMI, K. & GUIGALE, M. (2009) Reflection to Credit policy in developing Countries Policy.

DHAKAL, S. (2011), „Risk management in SACCO‟s, Econometric Analysis‟. Second Edition Macmillan. London.

NAGARAJAN, M. (2011), “Credit risk management practices for microfinance institutions in Mozambique”. Unpublished MBA project-University of Maputo.

APPENDICES:

APPENDIX A: QUESTIONNAIRE

QUESTIONNAIRE ON THE EFFECT OF CREDIT MANAGEMENT ON THE FINANCIAL PERFORMANCE OF MICROFINANCE INSTITUTIONS IN UGANDA. CASE STUDY: THE MICROFINANCE SUPPORT CENTER LIMITED: MBALE BRANCH.

Questionnaire for Microfinance support Centre limited.

Dear respondent

RE: APPLIED QUESTIONNAIRE

I am a student at the MTAC undertaking a Diploma in Accounting and finance; I am currently undertaking an undergraduate research project on; the Effect of credit management on the financial performance of Microfinance institutions in Uganda, A case study at Microfinance support Centre limited as partial fulfillment of my degree requirements.

Attached herewith is a questionnaire that I am requesting to be completed. All the information you will provide shall remain strictly confidential.

Your cooperation shall be highly appreciated.

Sincerely,

………………………

NAKUMIZA ALIMA

SECTION 1- INTRODUCTION

Instructions: (Please tick or fill in the blank space where appropriate)

SECTION A: General Personal Data

Gender

Male Female

Age group?
a) 18-25 b) 25-30 c) 30-40 d) 40-50
Marital status?
a) Married b) Single
c) Divorced d) Engaged
Highest level of Education?

Secondary	certificate	Diploma	Bachelors	Masters.

Others specify……………………………………..

Duration spent working in Microfinance support Centre limited.

Less than 1yr	1-5 years	6-10years	More than 10 years

Department of work

Banking

Marketing

Audit

Loan

Information

SECTION.B

Part B: Credit Risk Management Practices

CLIENT APPRAISAL TECHINIQUES;

In the following questions answer as follows;

NB SA. Stands for-Strongly Agree A-Agree NS-Not Sure D-Disagree SD-Strongly Disagree

What is your level of agreement on the following statements relating to client appraisal in Microfinance support center limited?

	Statement	SA	A	NS	D	SD
7.	Are there Client appraisal Techniques in your organization.
8.	Do you have a competent staff for carrying out client appraisal?
9.	Does your organization offer credit to customers
10.	Does client appraisal take note of collateral?
11.	Does failure to assess customer’s capacity to repay results in loan defaults.
12.	Are all clients appraised before credit granted to them.
13.	Does client appraisal Techniques improve the quality of customers in this organization

CREDIT RISK CONTROL TOOLS.

		Statement	SA	A	NS	D	SD

14.		Imposing loan size limits is a viable strategy in credit management
15.		The use of credit checks on regular basis enhances credit management
16.		Does flexible repayment period improve loan repayment?
17.		Does Penalty for late payment enhances customers commitment to loan repayment
18.		The use of customer credit application forms improves monitoring and credit management as well.
19.		Credit committee’s involvement in making decisions regarding loans are essential in reducing default/credit risk.
20.	Interest rates charged affect performance of loans in the Micro finance support Centre Ltd.

COLLECTION POLICY

	Statement	SA	A	NS	D	SD

21	Available collection policies have assisted towards effective credit management.
22	Formulation of collection policies have been a challenge in credit management
23	Enforcement of guarantee policies provides chances for loan recovery in case of loan defaults.
24	The credit collection policy has improved the debtor’s turnover.
25	Regular reviews have been done on collection policies to improve sate of credit management.
26	A stringent policy is more effective in debt recovery than a lenient policy

APPENDIX B: INTERVIEW GUIDE

Date of interview………………………………………………………………………………………..

No.	Interview Questions	Response	Interviewer’s comments
1.	Please what do you understand by the term credit management?
2.	Can you please comment the use of credit management in this organization?
3.	How does this organization apply the collection policy to recover debts from defaulters?
4.	Are there Client appraisal Techniques in your organization?
5.	Does client appraisal Techniques improve the quality of customers in this organization?
6.	Can you please explain if credit terms have improved debtor turnover in this organization
7.	Please explain why Imposing loan size limits is a viable strategy in credit management
8.	Does flexible repayment period improve loan repayment
9	Does this organization have a checklist of client appraisal in granting credit? Briefly explain.
10	How would you rate the effect of credit management systems in the financial performance of this organization?
11	Explain how Regular reviews can be done on collection policies to improve state of credit management
12.	Is there any other information on credit management systems you need to add? If yes, please add.

APPENDIX C: Table for determining sample size from a given population

N	S	N	S	N	S	N	S	N	S
10	10	100	80	280	162	800	260	2800	338
15	14	110	86	290	165	850	265	3000	341
20	19	120	92	300	169	900	269	3500	246
25	24	130	97	320	175	950	274	4000	351
30	28	140	103	340	181	1000	278	4500	351
35	32	150	108	360	186	1100	285	5000	357
40	36	160	113	380	181	1200	291	6000	361
45	40	180	118	400	196	1300	297	7000	364
50	44	190	123	420	201	1400	302	8000	367
55	48	200	127	440	205	1500	306	9000	368
60	52	210	132	460	210	1600	310	10000	373
65	56	220	136	480	214	1700	313	15000	375
70	59	230	140	500	217	1800	317	20000	377
75	63	240	144	550	225	1900	320	30000	379
80	66	250	148	600	234	2000	322	40000	380
85	70	260	152	650	242	2200	327	50000	381
90	73	270	155	700	248	2400	331	75000	382
95	76	270	159	750	256	2600	335	100000	384

Note: “N” is population size

“S” is sample size.

Krejcie, Robert V., Morgan, Daryle W., “Determining Sample Size for Research Activities”, Educational and Psychological Measurement, 1970.