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IMPACT OF LOAN MANAGEMENT AND PERFORMANCE MICROFINANCE INSTITUTION PERFORMANCE

CHAPTER ONE

INTRODUCTION

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

1.1       Background to the Study

The history of loans can be documented at least several thousand years back; forms of lending were evident in ancient Greek and Roman times, and monetary loans were even mentioned in the Christian bible, (Shafiel et al, 2010). In the ancient (14 century), Italian moneylenders would set up benches in the local marketplace, with the word for bench being “banca”, from which we eventually derived the word “bank”. The moneylenders would charge interest on their loans at a rate that they set, and would sometimes be quite successful and become very wealthy, (Kovacevic, 2009). One of the early forms of lending that should be explored in the history of loans is the indentured loan (also known as indentured servitude.) Initially practiced in the Middle Ages and through the 19th century by land owners and the wealthy, indentured servitude allowed poor individuals to borrow the money needed for major expenses such as travel and real estate, then the borrowers would pay back with an interest, (Boca Raton, 2009). The modern history of loan management started much later than these ancient times, it is, however, important to realize that lending started much earlier than many people would imagine and has its origin in much older times.

Globally loan management is a global issue that is given much concern and most financial institution in the world maintain their liquidity through charging interest in the loans, (Guttentag , 2007). Loan management has been the biggest challenge for financial institutions globally the world leading financial institutions of Barclays bank, HSBC bank, CITI bank lose billions of dollars as a result of poor loan management, according to the world bank most leading financial institutions lose billions of dollars as a result of poor loan management, during the world recession of 2008 most leading financial institutions were blamed for the poor loan management  which led to the global recession of 2008, (world bank report, 2008). In finance, a loan is a debt provided by one entity (organization or individual) to another entity at an interest rate, and evidenced by a note which specifies, among other things, the principal amount, interest rate, and date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower, (Guttentag, 2007). Loan management  is a risky enterprise because repayment of loans can seldom be fully guaranteed, it involves implicit contracts between lenders and borrowers, thus, a well management loan can lead to better performance of microfinance institution, (Falk et al, 2004),  . Loan management is a system which is very essential for lending institutions to stay in business and as such an institution with poor loan management ability is at risk of collapse, (Fehr et al, 2005). A loan can be defined as an arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time. Usually, there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan (though modern capital markets have developed many ways of managing this risk, (Zehnder et al, 2005). They posit that in credit markets dominated by short-term interactions, borrowers may only be motivated to repay if they know that, due to credit reporting, their current behaviors observable by other lenders and most of all the impact of credit reporting on repayment behavior and credit market performance is highly dependent on the potential loan management, (Zehnderm et al, 2005). Microfinance refers to an array of financial services, including loans, savings and insurance, available to poor entrepreneurs and small business owners who have no collateral and wouldn’t otherwise qualify for a standard bank loan. Most often, microloans are given to those living in still-developing countries who are working in a variety of different trades, including carpentry, fishing and transportation (orebiyi 2002).Microloans typically are not more than several hundred dollars. Examples of uses include money for tools to start work in construction, or makeup and other supplies needed to become a cosmetologist. Because they are the ones that commonly use their profits to provide for their families with things like food, clothing, shelter and education, women currently comprise roughly two-thirds of all microfinance clients. The goal of micro financing is to provide individuals with money to invest in themselves or their business to help get them out of poverty. When providing loans, micro financing institutions do not require collateral, but do insist that the loan is repaid within six months to a year (enslow 2003).

With respect to Centenary Bank, the major problem facing the bank has been identified as failure to manage loan default (Centenary Bank Annual Reports, 2005, 2006, 2007). The management of the bank depends on incentives to repay on time; instant arrears information and delinquency tracking; immediate action to enforce repayment; and rigorous recovery in case of defaulting to achieve loan repayment (Annual Report, 2005). Out of the 28 operational branches of Centenary Bank micro lending performance indicates that the total portfolio for the headquarter branch is approximately UGX. 14.1 billion Of which UGX. 3.7 billion is in individual micro loans with a total arrears rate of 3.7% for the year 2007. For the years 2006 and 2005, the bank closed with arrear rates of 3.6% and 5.46% respectively. In addition, the bank’s micro lending performance for the last three years reveals that it has continued to record average arrear rates of 4.24% and Non-Performing Assets (NPA) rates of individual micro loans of 1.4% where the acceptable rate by Bank of Uganda is 1%. The above weaknesses may be responsible for the high default rate. It is upon this background that the study seeks to investigate the impact of loan management on microfinance institution performance, case study centenary bank, kireka branch.

1.2       Statement of the Problem

Loan management is beneficial to a financial institution as effective loan management helps a financial institution in increasing its liquidity, and also enables it to pay back debts, workers, and increase its capital base among many other benefits of loan management, (Orebiyi, 2002).

However despite of the adoption of loan management policies by centenary bank the bank is faced with numerous performance challenges including, poor levels of recovery rates of loans from borrowers, low profitability margins, poor performance as compared to its other similar  financial institutions, and above all increased complaints by bank top management about the low levels of the institutions performance (Centenary Bank Annual Reports, 2005, 2006) , this study therefore questions the impact of loan management on the performance of microfinance institutions, case study centenary bank, Mapeera branch, Kampala Uganda.

1.3       Purpose of the Study

The study seeks to examine the impact of loan management on microfinance institution performance at centenary bank Kireka Plot1653, Jinja road branch, kampala (u).

1.4       Objectives of the Study

1. To examine the risks of loan management in an organization
2. To examine the benefits of loan management to an organization

• To establish the relationship between loan management and microfinance institution performance.

1.5       Research Questions

1. What are the risks of loan management in an organization?
2. What are the benefits of loan management to an organization?

• What is the relationship between loan management and microfinance institution performance?

1.6       Scope of the Study

1.6.1        Study Scope

The study will specifically look at, the risks of loan management in an organization, the benefits of loan management to an organization, the relationship between loan management and microfinance institution performance.

1.6.2 Geographical Scope

The study will be carried out at centenary bank Kireka Plot1653, Jinja road branch, Kampala (u).

1.6.3 Time scope

The period of data to be considered in the organization will be from 2012-2014 and period of body of knowledge in reviewing literature will be from 2000-2014.

1.7       Significance of the Study

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

The study will add to the already existing literature on determinants of micro finance institution performance.

The study is expected to stimulate further research into the area of lending policy formulation and performance of loans.

The study is expected to enable commercial banks identify the loan management policies that are critical in the lending business.

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

1.8 Conceptual frame work

Loan management (I/V)                Micro institution performance (D/V)

Intervening variables

Figure 1 conceptual frame work for impacts of loan management on performance of microfinance institutions.

Adopted and modified from the systems theory of Bertalanffy, (1951), Rogers, (2003), theory of diffusion of innovation and the unified theory of acceptance and the use of technology, (Venkatesh, et al, 2003).

This study conceptualizes the relationship between loan management (the independent variable) and performance of microfinance institution, (dependent variable).

Loan management indices are various risks which include, financial risks, People risks and Techniques which are predictors of micro finance institution performance; Reliability, Efficiency, Timeliness, Flexibility. Profitability, (Moslehand Shannak, 2009), Pearlson and Saunders, (2006), however it is conceptualized that loan management at its various indices’, which are critical to the performance of an organization.

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter discusses what various scholars have written about the risks of loan management, ways of improving the performance of microfinance institution, solutions to microfinance challenges.

2.1.2 LOAN MANAGEMENT

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

Credit risk

Credit risk is incurred by lender when giving out liquidity. Although the creditworthiness of the borrower may be good – usually only the more creditworthy borrowers have access to the loan market – the inherent credit risk will tend to be higher where the tenor of the obligations is longer and the total size of the credit extended to the borrower is relatively large, This is particularly true in cases where the deal amount goes up simply because of over-subscription for the loan transaction.

Regardless of their extent of participation, lenders should not rely solely on the credit appraisal prepared by the arranger. Each member should perform its own independent analysis with respect to the credit quality of the borrower and the suitability of the deal in relation to its own risk, (Ray, 2008).

Market risk

The level of market risk in syndicated lending depends on the level of the big financial player’s involvement in a deal. AIs acting as underwriters are subject to market risk because, although they intend to sell all or part of their participations, they may end up with an unsold portion on their books for a period of time pending eventual sale, particularly if: due to unforeseen circumstances, the borrower’s financial condition deteriorates to such an extent as to affect an underwriter’s ability to distribute the unsold portion; or

Market interest rates move adversely. As the majority of syndicated loans are priced on a floating-rate basis, this would be relevant in respect of:  fixed-rate deals; or situations where market spreads widen after a syndicated transaction is concluded. This would render the deal unattractive to potential lenders.

It is usually the case that the period between underwriting and completion of syndication is relatively short and the extent of the risk is therefore limited. Nevertheless it is customary to cater for this risk by “material adverse change” or “force majeure” clauses in the documentation, covering market disruption or deteriorating credit circumstances, which would enable underwriters to restructure or cancel a deal.

AIs should have policies and procedures to cater for such situations, including documentation standards, hedging for interest rate and credit risks (e.g. by use of derivative instruments), if appropriate, and reporting to senior management on any significant unsold sticks, (Behman et al, 2005).

Interest rate risk

Depending on how a deal is priced and funded there may be different degrees of interest rate risk. It is incurred by lending institution which has provided lending commitments under legally binding documentation. Is should ensure that such risk arising from syndicated lending activities is properly managed at the product level or integrated into their overall interest rate risk management process. The handling of such risk is usually the responsibility of the Treasury Department.

In general, microfinance should limit the extent to which floating rate deals are funded from fixed-rate sources and vice versa in order to minimize their interest rate risk.

Even if microfinance use floating-rate money to fund their floating rate lending, they should still limit the extent to which they run any basis risk that may arise if their lending and funding are not priced using precisely the same indices.

AIs should not let competitive pressures tempt them to underwrite syndicated lending at spreads which leave them no safety margin to absorb interest rate and other associated risks.

Subject to negotiation with the borrower, AIs may make use of prepayment clauses as a safeguard against any loss incurred in the redeployment of funds. Standard documentation normally provides for prepayment to be made only on interest payment dates and subject to 30 or 60 days’ prior written notice which generally give AIs adequate time to redeploy funds. AIs may also incorporate a provision that allows them to claim for losses resulting from the prepayment of funds before the end of a given interest period, i.e. where the prepayment does not correspond to a rollover or repayment date.

Microfinance institutions may consider balancing cash flows and managing the interest rate risk through hedging, e.g. using swaps or other derivative instruments, (Amha, 2000)

Liquidity risk

As a matter of prudent management, financial institutions should manage their liquidity positions as a whole by limiting the amount of longer term syndicated lending and other types of long-term lending (e.g. residential mortgage loans) to a conservative percentage of their stable funds so as to avoid creating significant maturity mismatches.

Financial institutions can reduce their exposure under syndicated transactions and better manage their liquidity positions through subsequent loan sales in the secondary market. To facilitate this, financial institutions should ensure that the documentation contains transferability provisions enabling them to assign their rights by such sales. Financial institutions should avoid relying excessively on short-term deposits to fund long-term loans,(Dejene, 2003)

Operational risk

Operational risk in syndicated lending is incurred by the lenders but it also affects the agent as the latter is responsible for handling certain aspects of credit administration. Errors due to oversight or negligence, e.g. in giving timely advice to syndicate members, in arranging drawdown’s, in refixing interest rates or in effecting interest and principal payments to syndicate members, can be costly in terms of both monetary compensation and reputation.

AIs taking on the role of agent should ensure that their systems are adequate and their staffs are capable of carrying out their role efficiently. They may be required to compensate syndicate members if, for example, funds are disbursed late or to the wrong parties. They should also cater for counterparty risk on settlement of payments,(Norel, 2001).

Legal risk

Legal risk is incurred by underwriters, lenders and the once the documentation is signed.

Because of the scale, term and complexity of syndicated lending, with multiple parties involved, legal arrangements need to be as watertight as possible. Experienced staff of the arranger should work closely with legal counsel to ensure that the interests of lenders are adequately protected. This should be by negotiating with the borrower to ensure that appropriate and enforceable covenants are included in the information memorandum and that they are reflected in the syndicated loan agreement along with suitable protective clauses. All relevant documentation should be circulated to syndicate members for review and comment before such documentation is signed. It is up to prospective lenders to decide whether those covenants are adequate and in

If a high profile deal encounters problems, it is primarily the reputation of the arranger of the deal that suffers.

There may also, however, be some effect on the reputation of ordinary syndicate members. Syndicated lending tends to have a higher public profile and it is more difficult to control the information flow when there are multiple lenders. AIs, whatever their role or level of involvement in a deal, should have arrangements in place and experienced staff assigned to handle corporate communications in relation to syndicated lending. There will need to be a degree of coordination among various syndicate members so that media relations can be handled effectively As it is also in the borrower’s interest that media relations are handled effectively, financial institutions acting as arrangers should coordinate with the borrower to ensure that there is a mutually satisfactory approach for dealing with media inquiries, (Ray, 2008)

Strategic risk

Financial institutions should consider whether the projected extent of their

Involvement in syndicated lending is compatible with the overall strategic goals of the organization and whether they have the requisite resources to achieve targets set for this activity, (CGAP, 2010).

2.3 BENEFITS OF LOAN MANAGEMENT

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

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

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

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

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

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

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

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

2.4 Relationship between loan management and microfinance institution performance

Reduction Default on borrowed funds could be voluntary and involuntary. Involuntary default on borrowed funds could arise from unfavorable circumstances that may affect the ability of the borrower to repay. On the other hand, voluntary default, whereby a borrower does not repay even if he/she is able to do so (Stigliz and Weiss 1981). Therefore, the lender must understand the causes and the possible solutions of default. According to Norell, (2001) the most common reasons for the existence of defaults are the following: if the MFI is not serious on loan repayment, the borrowers are not willing to repay their loan; the MFI staffs are not responsible to shareholders to make a profit; clients’ lives are often full of unpredictable crises, such as illness or death in the family; if loans are too large for the cash needs of the business, extra funds may go toward personal use; and if loans are given without the proper evaluation of the business (Norell, 2001).

In order to achieve self-sufficiency, reducing default rate is very crucial for any MFIs. MFIs can take a number of actions to reduce default rate or the amount of arrears. Norell (2001) writes about some strategies for preventing or reducing default. Giving training to the clients prior to the transaction of each loan and financial incentives for the credit officers can be used to lower the default rates. Vento (2004) also defined the incentives from the promise to access to the subsequent loans is also helps to timely repayment and reducing default.

In addition, quick follow-up visits right after a missed payment and the formation of strong solidarity groups are also key to preventing high default rate. Limiting geographic scope reduces time and money wasted traveling from the office to clients’ businesses. If credit officers have a specific geographic region, they can visit clients more often and it helps to develop relationships in their neighborhoods. Loan should be given to the borrowers who have been in business at least twelve months. Businesses are most likely to fail within the first year of operation. If the business existed for at least one year on the Owner’s equity, the loan from MFI should be a lower risk than if the business is a start-up. Some MFIs use six months as a minimum, others three. The lower the number of months, the higher the risk for the MFI Norell (2001).

Norell agree on the four categories of client in the MFIs: (1) willing and able to repay, (2) willing but unable to repay, (3) unwilling but able to repay, and (4) unwilling and unable to repay. For very late loans (group loans over five weeks without payment, individual loans at sixty days without payment), credit officers should visit each late payer and the credit officer should classify the client into one of the above four categories of client. Based on the classification of borrowers, the loan officer shoud take corrective action. The approprate action taken by loan officer in each category are: (1) having the credit officer and the supervisor visit the client’s business, (2) rescheduling should be considered for clients with a very good excuse, (3) the institution can pursue legal action or inform the community and influential persons of clients’ unwillingness to repay. Because religious and community leaders can push them to pay. Moreover, their names can be publicly posted and (4) following up on such groups is apoor use of staff time. They are best referred to debt collectors or written off the loan (Norell, 2001).

CHAPTER THREE

METHODOLOGY

3.0       Introduction

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

3.1 Research design

The research will use cross sectional survey research design. The function of a qualitative and quantitative research design will ensure that the evidence obtained enables the researcher to answer the initial question as unambiguously as possible.

Qualitative approach: this approach gathers information based on an in depth understanding of human behavior and the resources that govern the behavior depending on the why and how of decisions making based on theoretical analysis and assumptions of the respondents.

This will be used because of theoretical analysis and assumption of the respondents.

This will be used because it deals with smaller population and it puts emphasis on uncovering more about people’s experiences.

This will be done by questioning and finding out about people’s views.

Quantitative approach: this is the approach that deals with numerical expression in figures in terms of quantity which involves measurement of quantity and amounts.

However quantitative approach will be used because of the following reasons; this approach eliminates behavioral biases were by the behavioral beliefs are done away with, the approach leads to accuracy were by results are not guessed, operational risks are reduced. This approach will be used in away of getting actual figures and taking on calculations then getting answers.

3.2       AREA OF THE STUDY

The study will be carried out at centenary bank Kireka branch plot 1653, Jinja road Kampala Uganda.

3.2       STUDY POPULATION AND SAMPLE SIZE

The study will target centenary bank administrators, the procurement staffs, cashiers, and secretaries.

3.3       SAMPLING TECHNIQUES

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

The respondents will be selected using purposive sampling techniques. Berg (2006) purposive sampling, the researcher chooses the sample based on where they think would be appropriate for the study. A Purposive sampling technique will be used because it’s cheap.

Using Krejcie and Morgan’s (1970) table for sample size determination approach, a sample size of 30 employees will be selected from the total population of 35employees.

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

Source: Primary data

3.4 DATA SOURCES

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

• Primary data

Primary data will be obtained from the questionnaires administered on the target respondents to gain opinions and practices on impacts of loan management on the performance of microfinance institutions.

• Secondary sources

Secondary data is data which has been collected by individuals or agencies for purposes other than those of a particular research study. It is data developed for some purpose other than for helping to solve the research problem at hand (Bell, 1997). This will comprise of literature related to impacts of loan management on the performance of microfinance institution in relation to the case study. Secondary data will be sourced because it yields more accurate information than obtained through primary data, and it is also cheaper

3.5 Data Collection methods and instruments

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

3.5.1 Questionnaires

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

3.5.2 Interviews

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

3.6 RELIABILITY AND VALIDITY OF RESEARCH INSTRUMENTS

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

3.7 DATA PROCESSING AND ANALYSIS

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

3.8 ANTICIPATED LIMITATIONS OF THE STUDY

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

CHAPTER FOUR

PRESENTATION, ANALYSIS, INTERPRETATION AND DISCUSSION OF FINDINGS

4.0       Introduction

This chapter presents the results in reference to objectives in chapter one. Gender of respondents, Age of respondents, education level of respondents, and different objectives.

4.1       FINDINGS ON GENERAL INFORMATION

Table 4.1: shows the findings on the gender of the respondents

Source: primary data

Table 4.1 above shows that 63.33% of respondents were male and 36.67% were female. That means that the biggest percentage of respondents and employees in centenary bank were male and apart from that it also shows that male gender dominate the work force of centenary bank.

PIE CHART SHOWING THE GENDER OF RESPONDENTS

The majority of the respondents are male while the minorities of the respondents are female.

4.2 FINDINGS ON THE AGE OF RESPONDENTS.

Table 4.2: Shows findings on age of the respondents

Source: primary data

The table above shows that majority of the respondents are at the age of 30-39 this is evidenced by a high percentage of 36.67% while 20% of the respondents are at the age of 40-49 years, minority of the respondents are at the age of 50 years and above and below 25 years, 16.67% of the respondents are at the age of 25-30 years.

BAR GRAPH SHOWING THE AGE OF RESPONDENTS

The bar graph above shows that majority of the respondents were in the ages of 30-39, this therefore shows that majority of the respondents are mature and therefore were able to give accurate information.

TABLE 4.3: SHOWS FINDINGS ON EDUCATION LEVEL OF RESPONDENTS

Source: primary data

Table above shows that the majority of staff is degree holders and their percentage is 50%, masters 13.33%, while 20% of the respondents are diploma holders and the rest of the respondents have other qualification this table therefore shows that majority of the respondents could read and write and therefore they were able to answer the questions that they were asked.

The line graph showing education level of respondents

The bar graph shows that majority of the respondents are degree holders and the second largest percentage of respondents are diploma holders it further shows that very few respondents are post graduate holders or hold other qualification.

FINDINGS NUMBER OF YEARS OF WORKING

Table 4.4 showing the number of years respondents have worked at centenary bank.

The table shows that majority of the respondents have worked for the time period of 6-10 years, and their percentage stands at 50% of, 20% of the respondents have worked for 3-5 years, while 16.67% of the respondents have worked for and respondents who have worked for above 10 years have percentage of 13.33%.

The above graph showing the number of years respondents have worked at centenary bank

The graph shows that majority of the respondents have worked for a period of 6-10 years at centenary bank this therefore shows that majority of the respondents have good understanding of the operations of the organization and  therefore gave right answers to the questions asked by the interviewer.

4.4 RISKS INVOLVED IN LOAN MANAGEMENT.

TABLE 4.7:  SHOWS THE RISKS INVOLVED IN LOAN MANAGEMENT.

Table above reveals that credit risks in very common in micro finance institutions in an organization; this is supported by the strong percentage of 46.67% strongly agreeing, while 33.33% agreed and 10% disagreed while the remaining percentage of respondents strongly disagreed. This therefore shows market risk is incurred by majority of the financial institutions.

The table indicates that majority of the respondents strongly and agreed that financial institutions incur market risks while non of the respondents was neutral, disagreed, and strongly disagreed this therefore shows that indeed financial institutions incur market risks.

According to table, 46.67% of the respondents strongly agreed micro finance institutions incur interest rate risks , while 33.33% of the respondents agreed while 20% of the respondents where neutral.

According to researchers’ findings, 50% of the respondents strongly agreed that a liquidity risk is incurred in micro finance institutions while the rest of the rest of the respondents agreed.

According to the table 66.7% of the respondents strongly agreed that operational risks affect organizations across the globe while 16.67 agreed and the remaining percentage disagreed.

4.2 VARIOUS BENEFITS OF MICRO FINANCE INSTITUTIONS.

TABLE 4.5: SHOWS VARIOUS BENEFITS OF MICRO FINANCE INSTITUTIONS:

From table 4.6 above, findings revealed that, 50% of respondents strongly agreed that capacity building is possible if an organization employs good practice in loan management, 33.33% agreed while 16.67% were Neutral this therefore shows that majority of respondents agree that capacity building is possible with good loan management systems in place.

According to the table 60% of the respondents strongly agreed that improvement in infrastructure is possible with good loan management system in place, while the remaining 40% agreed this therefore shows that all the respondents agree with the better loan management systems helps in improvement in infrastructure of an organization.

According to the table above, 73.33 % of the respondents strongly agreed that increase in the volume of credit in an organization is achieved if an organization is to have an efficient credit management system, while 16.7% agreed, 3.3% of the respondents were not sure while the remaining 10% disagreed.

From the table 83.33% of respondents strongly agreed that better information gathering is possible if a country is to have an efficient micro finance institution, while the remaining percentage of 16.67% of the respondents agreed.

4.3.      Relationship between loan management and microfinance institution performance.

TABLE 4.6: Shows relationship between loan management and microfinance institution performance

From table above, 60% of the respondents strongly agreed that reduction of default on borrowed funds is possible funds is possible if a micro finance institution manages its loan very well while the remaining 40% agreed.

According to table above it indicates that, 73.33 % of the respondents strongly agreed that proper loan management creates self sufficiency, while 26.67% agreed, while non of the respondents, was neutral, disagreed, and strongly disagreed.

Findings revealed in table above, shows that 50% of the respondents strongly agreed and the remaining percentage this therefore shows that 100% of the respondents agree with the fact that proper loan management enables an organization in formation of strong solidarity groups.

According to the table 56.67% of the respondents strongly agreed that proper management of loan enables a micro finance institution to be in position to create a client group., while the remaining 33.33% of the respondents strongly agreed, while non of the respondents was neutral, disagreed or strongly disagreed.

CHAPTER FIVE

DISCUSSION OF FINDINGS, SUMMARY OF FINDINGS, CONCLUSION, RECOMMENDATION AND AREAS OF FURTHER STUDY

5.0 Introduction

The study aimed at establishing the impact of loan management and performance microfinance institution performance. The study was guided by research objectives and the researcher summarized the findings in consistence to the research objectives.

5.1        DISCUSSION OF FINDINGS

5.2.1  RISKS INVOLVED IN LOAN MANAGEMENT.

Table above reveals that credit risks is very common in micro finance institutions in an organization; this is supported by the strong percentage of 46.67% strongly agreeing, while 33.33% agreed and 10% disagreed while the remaining percentage of respondents strongly disagreed. This therefore shows market risk is incurred by majority of the financial institutions.

The table indicates that majority of the respondents strongly and agreed that financial institutions incur market risks while none of the respondents was neutral, disagreed, and strongly disagreed this therefore shows that indeed financial institutions incur market risks.

From this findings its therefore evident that market risks is involved in a micro finance institution According to table, 46.67% of the respondents strongly agreed micro finance institutions incur interest rate risks, while 33.33% of the respondents agreed while 20% of the respondents where this also shows that Majority of the respondents hold the same view with Behman et al, (2005).

The researchers’ findings, 50% of the respondents strongly agreed that a liquidity risk is incurred in micro finance institutions while the rest of the respondents agreed these findings also show that liquidity risks greatly affects micro finance institutions ability to perform well.

The findings in the table 66.7% of the respondents strongly agreed that operational risks affect organizations across the globe while 16.67 agreed and the remaining percentage disagree this also in line with. CGAP, (2010), which asserts that Financial institutions should consider whether the projected extent of their, Involvement in syndicated lending is compatible with the overall strategic goals of the organization and whether they have the requisite resources to achieve targets set for this activity.

5.2.2  VARIOUS BENEFITS OF MICRO FINANCE INSTITUTIONS.

From table 4.6 above, findings revealed that, 50% of respondents strongly agreed that capacity building is possible if an organization employs good practice in loan management, 33.33% agreed while 16.67% were Neutral this therefore shows that majority of respondents agree that capacity building is possible with good loan management systems in place.

According to the table 60% of the respondents strongly agreed that improvement in infrastructure is possible with good loan management system in place, while the remaining 40% agreed this therefore shows that all the respondents agree with the better loan management systems helps in improvement in infrastructure of an organization, this is also in line with Vento (2004), who asserts that, The growing competition, poaching of staff and lack of training and increasing demand for higher pay levels make human resources one of the most intractable problems in the sector. Capacity building in the form of a skilled and professional human capital base and adequate access to funding is essential for the building of a sustainable and efficient microfinance sector.

The findings also reveal that, 73.33 % of the respondents strongly agreed that increase in the volume of credit in an organization is achieved if an organization is to have an efficient credit management system, while 16.7% agreed, 3.3% of the respondents were not sure while the remaining 10% disagreed, this is also in line with Murray and Boros (2002), who asserts that increase in volume of credit is achievable if there is an efficient credit management system in an organization.

The findings also reveal that 83.33% of respondents strongly agreed that better information gathering is possible if a country is to have an efficient micro finance institution, while the remaining percentage of 16.67% of the respondents agreed, this therefore shows that better information gathering is achievable if an organization is able to have an efficient loan management system.

5.2.3    Relationship between loan management and microfinance institution performance

The findings also show that, 60% of the respondents strongly agreed that reduction of default on borrowed funds is possible funds is possible if a micro finance institution manages its loan very well while the remaining 40% agreed, this could be due to the fact that reduction of default of borrowed funds is crucial in the success of borrowed funds, this is also in line with (Stigliz and Weiss 1981), who asserts that Reduction Default on borrowed funds could be voluntary and involuntary. Involuntary default on borrowed funds could arise from unfavorable circumstances that may affect the ability of the borrower to repay. On the other hand, voluntary default, whereby a borrower does not repay even if he/she is able to do so.

From the findings in the table it also shows that, 73.33 % of the respondents strongly agreed that proper loan management creates self sufficiency, while 26.67% agreed, while non of the respondents, was neutral, disagreed, and strongly disagreed, this therefore shows that its necessary for an organization to have proper loan management system this is also in line with Vento (2004), who asserts that In order to achieve self-sufficiency, reducing default rate is very crucial for any MFIs. MFIs can take a number of actions to reduce default rate or the amount of arrears. Norell (2001) writes about some strategies for preventing or reducing default. Giving training to the clients prior to the transaction of each loan and financial incentives for the credit officers can be used to lower the default rates.

The research findings also show that majority of the respondents at the percentage of  50% of the respondents strongly agreed and the remaining percentage this therefore shows that 100% of the respondents agree with the fact that proper loan management enables an organization in formation of strong solidarity groups.

According to the table 56.67% of the respondents strongly agreed that proper management of loan enables a micro finance institution to be in position to create a client group., while the remaining 33.33% of the respondents strongly agreed, while none of the respondents was neutral, disagreed or strongly disagreed.

5.3       CONCLUSION.

The study concludes that centenary bank should adopt better loan management techniques in order for it to grow into a multinational bank

5.4       RECOMMENDATIONS

The study recommends the administration of centenary bank to adopt better credit management systems in order to reduce on the risks in credit management.

5.5       AREAS FOR FURTHER RESEARCH

From the above analysis more studies need to be done in the following areas.

1. Roles of finance in efficient micro finance institution institutional performance.
2. Tools and techniques used to promote micro finance institutional performance.
3. Roles of human resource managers in financial stability of n organization.

TOPIC: IMPACT OF LOAN MANAGEMENT AND PERFORMANCE MICROFINANCE INSTITUTION PERFORMANCE

A CASE STUDY: CENTENARY BANK KIREKA BRANCH

Dear respondent

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

SECTION A:             GENERAL DATA

1. In what capacity are you serving the centenary bank?

Administration                                                cashiers

procurement department                               secretaries

• Sex: Male                    female

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

4. Educational level

Masters degree                        1^st degree                     diploma           others

5. For how long have you been working with centenary bank?

Less than two years                                   3-5 years

6-10 years                                                  10 above

6. Are you well conversant with loan management?

Yes                                                                      No

7. What is your responsibility as far as loan management is concerned?

…………………………………………………………………………………………………

SECTION B: RISKS IN LOAN MANAGEMENT.

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

SECTION C; BENEFITS OF LOAN MANAGEMENT

1. Does your organization enjoy some benefits as a result of good loan management?

                               Yes                                     No

2. If yes mention any benefit?

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

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

Please mention other benefits of loan management in your organization?

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….

Please tick one appropriate.

Please tick one appropriate.

SECTION D: Relationship between loan management and microfinance institution performance

• Does your organization work towards improving the efficiency of its organization?

Yes                                            No

• If yes what does it do to improve its efficiency?

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

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

Please mention other impacts of efficiency on loan management in your organization?

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

THANKS FOR YOUR COOPERATION