EVALUATION OF CREDIT POLICY MANAGEMENT AND
PERFORMANCE OF MICRO-FINANCE INSTITUTIONS IN
UGANDA
A CASE STUDY OF PRIDE MICROFINANCE
BY
Tumusiime Clare
BBA/6067/ 41/DU
SUPERVISED BY: Mr. Naleela Kizito
RESEARCH REPORT SUBMITTED IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE AWARD OF A BACHELOR
DEGREE IN BUSINESS ADMINISTRATION AND
MANAGEMENT
OF KAMP AlA INTERNATIONAL UNIVERSITY
• August, 2006 DECLARATION I Tumusiime Clare hereby declare that the following research report under the title "Evaluation of Credit Policy Management and Performance of Micro finance Institutions" has never been submitted to any college or university for any award. It is my original work.
Signed: ~ ------Tumusiime Clare
BBA/ 6067/ 41/DU Date~. ~r.!.~.h .~_gl.U.J] .... ~ .Qh/' APPROVAL This research report on "evaluation of credit policy and performance of Micro- finance Institutions" in Uganda has been carried out by Tumusiime Clare under my supervision and is now ready for submission to Kampala
International University.
Signed:---~ ------·· Mr. Naleela Kizito
S~rvisor Date: ..... ~3 .. l.~ .. r.~.fe......
11 DEDICATION I dedicate this project to my mum and Dad, Father Bonny, my sisters and brothers. May the Lord God reward them more abundantly.
l1l ACKNOWLEDGEMENT With deep pleasure I wish to extend my sincere appreciation to Almighty God for giving me life and blessing my studies.
My esteem love goes to my brothers; Francis, Justus, Julius, and my sisters; Rita and Sharon who had to endure a long period of struggles to support me as their sister.
My sincere thanks also go to the entire staff of Kampala International University for their love and services rendered. More especially to Professor John Peter Opio I and Mr. Naleela Kizito, my supervisor who worked tirelessly, showed patience in I guiding me in the research. l I Further more, I would like to recognize the cooperation of Kampala Interantional ( f University Students especially Adupa Richard, Turyahebwa Abanis, Mambo Ali, I ! and Bosa John during the difficult time of my studies. If t (
lft Finally, I appreciate the acceptance and sincerity respondents who responded to my inquiries for the study. Sincerely, a piece of work of this nature would have not come out without the effort of Mr. Owayezu Justus, I acknowledge the neat typing.
lV ABSTRACT The study aimed at finding the relationship between credit policy management and performance of Micro-finance Institutions in Uganda. It mainly looked at Pride Uganda in Kampala city.
The study was intended to evaluate the credit policy management elements in
Uganda.
The researcher utilized both quantitative and qualitative methods for data analysis. Respondents included credit officers and MFI clients, both male and female.
The outcome of the research revealed that there are specific yardsticks for measuring credit performance; business profitability, groups' ability to repay the loan, Frequency of loan taking, level of savings, credit management and long term survival of an individual business.
The study concludes that great efforts are being put by MFis to ensure their performance and the efforts of their regulatory body (MFRC), which makes their operations easier. Though there are still some difficulties especially on the side of the credit takers, who at times fail to reimburse credits taken by them.
This is also associated with ignorance however; MFis are trying with greater efforts to ensure good use of funds/loan taken by their customers. Such efforts are all enhancing MFis performance.
V TABLE OF CONTENTS Content Page DECLARATION ...... i APPROVAL ...... ii DEDICATION ...... iii ACKNOWLEDGEMENT ...... iv ABSTRACT ...... v TABLE OF CONTENTS ...... vi APPENDICES ...... vii LIST OF TABLES ...... viii LIST OF FIGURES ...... viii LIST OF ABBREVIATIONS ...... ix 1.0 Introduction ...... 1 1.1 Back ground of the study ...... 1 1.2 Statement of the problem ...... 3 1.3 Purpose of the study ...... 3 1.4 Objectives of the study...... 3 1.5 Research questions ...... 3 1.6 The scope of the study ...... 3 1.7 Significance of the study ...... 4 LITERATURE REVIEW ...... 6 2.0 Introduction ...... 6 2.1 The Microfinance Industry in Uganda ...... 6 2.2 Performance ofMFis in Uganda ...... 8 2.3 The Regulatory Body of MFis ...... 9 2-4 Credit Policy and its elements ...... 10 2.5 Objectives of the MFis ...... 11 2.6 How credit management is related to performance ...... 12 2.7 Problems Faced by MFis in Uganda ...... 14 2.8 Breaking Barriers to Growth and Innovation ...... 14 METHODOLOGY ...... 15 3.0 Introduction ...... 15 3.1 Research Design ...... 15 3.2 Scope of the Study ...... 16 3.3 Sources of Data ...... 16 3.4 Data Collection ...... 16 3.5 Data Processing ...... 16 3.6 Data Presentation ...... 16 3.7 Data Analysis ...... 17 3.8 Limitations of the study...... 17 3.9 Conclusion ...... 17 DATA PRESENTATION ANALYSIS AND INTERPRETATION OF FINDINGS .. 18 4.0 Introduction ...... 18 4.1 Table I Categorisation of Respondents ...... 18
Vl 4.2 Review of Credit Performance of Pride Uganda ...... 20 4.3 The role of MFis on poverty eradication in Uganda (Pride Uganda) ..... 21 4.4 Review of credit terms on loans offered by Pride Uganda ...... 22 4.5 The extent to which Pride Uganda has promoted growth among women 24 4.6 Challenges faced by Pride Uganda in their effort to eradicate poverty .. 25 4.7 Possible solutions to the challenges faced by Pride Uganda...... 26 5.0 Introduction ...... 29 5.1 Summary...... 29 5.2 Conclusion ...... 30 5.3 Recommendations ...... 30
APPENDICES Introductory letter ...... (I)
Questionnaire ...... (II)
Map of Uganda ...... (III)
Vll LIST OF ABBREVIATIONS MFis Micro-Finance Institutions
KIU Kampala International University
MFRC Micro Finance Regulatory Council
NGO Non-Governmental Organization
MDI Micro-Finance Deposit-Taking Institution
SHPs Small Help Projects
ADC Australian Development Corporation
EDF European Development Fund
USAID United States Agency for International Development
No. Number
Co. Company
v l A ·------·--
CHAPTER ONE
1.0 Introduction The study vvas intended to find out the relationship bet,,·een credit policy management and performance of Micro-finance Institutions in Uganda.
The researcher was intending to find out the extent to \\·hich MFis have contributed to the prO\•ision of credit management in Uganda. Most MFis aim at extending credit to low income earners so as to improve on their financial capability and po\·erty eradication. The researcher was therefore, trying to anah·ze their performance tmvards such great mission of poverty eradication and creation of self-reliance. I I The government of Uganda has permitted other organizations to work alongside
NGOs to\';ards the development of her nati,·es. Such projects that ha\·e been created by the government put much emphasis on poverty eradication and sl'lf-reliance. This I gives the researcher a much greater interest on the anal~·sis of their performance and commitment tmvards attaining their goals and objecti,·es, though -.,·ith much focus on MFis.
1.1 Back ground of the study Micro finance institutions (MFis) are non governmental organizations \\·ith specific objectives including among others to increase access and participation of the economically active poor people in the rural and semi-urban areas. Before MFI's lend out money, they first analyze the credit w01thiness of the customers. Clients are required to form groups which are one of credit policies employed in system for reducing risk of failure by the customers. Financial service sector has historically been less developed in Africa than in other regions of the developing world for various reasons including poH·rty among the population.
It has been noted that, most of the commercial banks haw been reluctant to offer credit facilities to small businesses mainly because of the high rate default besides the increasing cost of administration. Similarly, efforts by high Fls have been frustrated by high default rate.
Micro finance projects have been subjected to high default rate which lead to their distress sooner than later Vision 25th March 2004).
Firms sel1 on credit as a marketing tool for expanding sales/marketing. It can be used to maintain the market share in reducing market and can also be used to expand the market share in the gro\\ing market, Pandey (1998).
Pandey (1998) further states that a firm may follm,· a lenient , which giws credit to customers or in liberal terms or stringent credit pol' \\·hereby credit senices, are offered on highly selective basis \\ith a lot of rest•n·ation. But MFls provide credit facilities to customers on liberal terms and stand ,ts compared to commercial banks, Walugembe (2000).
It's from above experience that the researcher vvas compelled to un< lertake research on credit policy management and performance of MFI's in Uganda.
2 1.2 Statement of the proble1n Micro-finance Institutions in Uganda have been putting much vffort to make credit policy management its user friendly to their customers. However. there are several constraints which limit their performance. Therefore, MFls haw to take on appropriate credit policy management tu enhance performance, \Valugernbe (2000).
1.3 Purpose of the study The purpose of the study was to examine the relationship betvveen credit management aspects and performance of MFis in Uganda.
1.4 Objectives of the study 1. To identify performance of MFis in Uganda.
11. To identify the credit management elements in Uganda. m. To examine the relationship between credit management and performance of
MFis.
1.5 Research questions !;,f 1. What has been the performance of MFis in Uganda? I 11. What are the credit management elements in Uganda? m. What is the relationship between credit policy management and performance I of MFis? I
.,... 1.6 The scope of the study
Subject scope:
The study was intended to assess credit policy management and performance of
MFis. The research was conducted within Kampala city. It was easy to access the
division since it is where the researcher resides and therefore more familiar to the
researcher. It has also been easy to access MFis in this area especially Pride
Microfinance.
Geographical scope:
The study focuses on MFis in Uganda only; with a case study of Pride Microfinance.
Time scope:
The data used covered the periods of 2001 to 2006.
1.7 Significance of the study The study came on a vecy crucial time when MFis are not achieving the set objectives of which causes have been partly attributed to credit management policy. This includes interests rate charged, repayment period among others. The results of the study would be useful in helping to understand the relationship between credit policy management and performance of MFis in Uganda.
4 111 The study was to identify the performance of MFis in Uganda. This would help
to understand particular problems at hand on credit policy management and
performance of micro-finance institutions. This would help credit management
practitioners come up with the way forward to overcome them.
111 The study was to identify and examine the relationship between credit
management and performance of MFis in Uganda. This would therefore, be
useful in guiding management of MFis in Uganda on adjustment of policies
where possible so as to fulfill the major objectives of poverty eradication in
Uganda.
111 The study was a prerequisite for the award of a Bachelor degree in Business
Administration.
111 Academicians interested in evaluating the performance of MFis in Uganda
may learn from and expand upon the research.
111 It's important to KIU because it adds on research materials.
5 CHAPTER TWO LITERATURE REVIEW
2.0 Introduction In this chapter the researcher examined credit policies used under the programmes and the relationship between credit policy management and performance of MFis in
Uganda. The available limited literature was largely obtained from text books, journals, New Vision newspaper and the internet websites. Nevertheless, the available literature provided a clear picture of the relationships between credit policy and performance of MFis in Uganda. The issues have been reviewed under the following headings;
2.1 The Microfinance Industry in Uganda
While Uganda boasts of a long history of informal finance, semi-formalized microfinance began emerging as an industry in the early 199o's. The microfinance industry is therefore still young, but the growth and development of its institutions has been dramatic over the past decade. From a few social welfare- oriented organisations, microfinance has grown into a dynamic private sector industry serving Uganda's economically active poor. This growth has been mirrored by changes in philosophy and increasing coherence based on 'good practices'. The four key principles guiding the industry today are;
Outreach: The need to expand financial services to an increasing number of Uganda's low-income entrepreneurs, particular in rural areas. MFis have adopted innovative ways of delivering financial services, especially credit, to target group originally considered "unbankable" by the conventional banking sector. Use of group lending and village banking models with peculiar variations has allowed MFis to reach a large number of clients who previously had no access to financial services.
6 Sustainability: To carry the business in a financially sustainable way - to ensure through increased efficiency, that MFis are able to meet the needs of their clients in the longer term. Full-cost pricing and strategic alliance of MFis with insurance companies are emerging as elements of microfinance best practices.
Commercial Viability: Increasingly, the heightened need for capital along with pursuit of strategies of commercial sustainability is opening up the once sheltered microfinance industry to the more competitive and formal financial market place. Competition in the general financial sector has seen commercial banks entering the microfinance market.
Legal framework: Realizing the need for a regulatory framework, parliament passed the first ever microfinance law in Uganda in October 2003. The regulatory frameworks allow eligible institutions to intermediate savings from the public under central bank supervision, thus enhancing their viability while safeguarding people's deposits.
The cornerstone of the building the MFI industry in Uganda along the four principles is the question of capacity building which cuts across. It is now widely accepted that capacity building will form the basis for the future of the microfinance industry in Uganda.
In terms of size and structure of the microfinance industry, both formal and informal microfinance institutions exist in Uganda. The informal sector is wide and is doing a significant job in the microfinance sector. According to the study undertaken by the Ministry of Finance Planning and Economic Development in 2002, most of the MFis surveyed (63.7%) were found to be small groups (category F) and small institutions including multipurpose NGOs, cooperatives and informal organisations (category D). These MFis are limited by liquidity hence unable to provide their clients with bigger sums of credit for a longer period, a fact that affects the ability of the non farm activities to expand.
Alongside the informal microfinance, the industry consist a formal Microfinance sector that has demonstrated remarkable growth in terms of outreach, recognition
7 and specialization since 1994. The Microfinance sector operates across urban, peri urban and rural areas and concentrates on the lower income levels of society (the economically active poor), which comprise the overwhelming majority of the population. More than 70% of clients of MFis are women.
Enhanced coordination through the microfinance forum still remains the biggest strengths of microfinance industry in Uganda. Donor coordination is equally strong through the private sector donor subgroup and capacity building initiatives. The formation of the rural microfinance committees at the district level through the Government supported outreach plan is expected to further strengthen microfinance coordination in rural areas in 2003.
A performance monitoring system for MFis has been developed and accepted by the practitioners and donors in the industry. Though reporting by MFis to the system is not mandatory, the system sets a foundation upon which regulation could be built.
Challenges are still in the areas of building the capacity of MFis and increasing outreach, in terms of under-served areas (esp. the North and North-East of Uganda) and under-served sectors (esp. agriculture). The development of appropriate financial services beyond credit ( e.g. savings and insurance products, with specific attention to the active poor especially women) also remains a challenge. The recently enacted MDI law brings a few MFis under the purview of the Central Bank. Many MFis therefore continue to operate without any statutory or mandatory regulations and supervision. There is need for a law to regulate the operation of tier 4 financial institutions.
These challenges are expected to be minimized with the implementation of the I various Government, NGO and donor microfinance initiatives in place. I I
2.2 Performance of MFis in Uganda Performance of MFis in the whole world has never been the best. Grameen's being the largest Micro-lending programs, 55% of its clients cannot afford basic needs,
8 have failed to mature into commercial bank. And worst still, loans to women have remained at 5% of amounts lent in Bangladesh, Kenan (1999).
In the summit attended by Pride Uganda, it was noted that MFis are contributing greatly towards eradicating poverty, observers noted that MFis are placing their own interest above of the poor in search for "rapid expansion" (Development and
Cooperation, January/February 2003).
MFis with policies which could not effectively eradicate poverty, policies such as high interest rate, giving short-term payment periods are not in line with good performance of Micro-business, Besisira (2003).
2 .. 3 The Regulatory Body of MFis "The primary aim of the regulatory council is to promote sustainable growth of the micro-lending industry, to serve unserved credit needs, while ensuring that consumer rights are protected."
The Micro-Finance Regulatory Council (MFRC) has been established in accordance with the Usury Act Exemption Notice of 1 June 1999. The MFRC is a company incorporated under Section 21 of the Companies Act, and has been recognized as the official and single regulator of all money lending transactions falling within the scope of the Usury Act Exemption Notice.
Any money lender, who wishes to avail themselves of the benefits of the Usury Act
9 Exemption, will be required to register with the MFRC and thereafter comply with the rules of the MFRC and the Exemption Notice.
In 2003, the Parliament of Uganda passed the Micro Finance Deposit-Taking Institutions Act. The Act established a new type of financial institution to be regulated by the Bank of Uganda, namely the Micro Finance Deposit-Taking Institution (MDI). Unlike unregulated microfinance institutions, MD Is are permitted to collect savings from the public and use them to make loans (intermediation). In this sense, they perform one of the core functions of a traditional regulated commercial bank. However, the activities in which MDis may engage are limited by the Act. For example, they may not offer cheques, nor may they conduct business in foreign currencies.
Five largest MFis in Uganda have taken the decision to become licensed MDis. These are:
PRIDE Microfinance Limited, Uganda Microfinance Union Limited, Uganda Finance Trust Limited, FINCA Uganda Limited, and Faulu Uganda Limited. (Lloyd Stevens Transformation & Consolidation Consultant [email protected] and Paul Rippey Manager, [email protected])
2 .. 4 Credit Policy and its elements Policies are directives formulated to guide the thinking, decisions and actions of managers and their subordinates in pursuing the organization's goals. They improve the guideline for establishing and controlling the on-going operating process of a firm's consistent with firm's strategic objectives. They are referred to as standards operating procedures and serve managerial effectiveness by standardizing many routine decisions and limit the decision of the managers and subordinates in the implementing operation strategies to meet the established objectives, Katanzi
(2001). The term credit policy is used to mean amalgamation of three decision
10
------~~------making variables which include; credit standards, credit terms and collection efforts.
On which the firm has to influence. Credit terms which include credit periods and
discounts. Refer to conditions under which a firm gives credit to its customers,
Pandey (1998).
After the MFis has gathered enough information about each customer, it goes ahead
to determine how much money should be extended, for how long and under which
interest rate to charge depend on the past experience. Credit standards are the
acceptable criteria to be followed when determining the type of a customer to whom
credit facilities should be given. The firm's credit policy will be optimum at a point
where incremental rate of return equals to the cost of funds. Collection efforts refers
to the proper monitoring and management of credit or loans which involves constant
visits to customers, preparation of reports, investigating the state of project
administration, checking receipts and verification. All this are done to accelerate
collection from slow paying customers and reduce bad debts losses.
2.5 Objectives of the MFis It is important to note that different MFis may have different objectives. However, the major objectives are that of poverty eradication and often focus on in poorest segment of population, Dichter (1999).
Poverty eradication can be measured in terms of the improved of people's standards of living with access of credit facilities from MFis. It can also be measured by increase in level of business activities in areas where MFis are concentrated, Yakuru
(2000).
11 However MFis have not yet proved themselves to be the sole winners in poverty eradication scheme and other aids to poverty alleviation have been forced to emerge,
Walugembe (2000).
At national level the objective of MFis is to increase the National Saving Mobilization
Level, reduce rural-urban transfers of finance resource through reinvestment in local communities, Chen (1999).
MFis have been able to serve the needs of the poor in a way which commercial banks cannot do by addressing key issues of collateral and bringing nearer credit services to the rural poor people, Tumuhimbise (1997).
2.6 How credit management is related to performance Credit management involves combined efforts to make sure that money lent out to the clients is paid in full amount and within the stated period. However, though collection procedures have been put in place, they have not been implemented fully.
This is because of high rate of failure of some clients resulting into poor performance. In such a case if MFis are to perform perfectly, they should advocate for training.
Training should largely focus on imparting marketing techniques and management skills. It is believed that through training that small entrepreneurs could learn marketing and market identification, management and pricing, Kasirye (1996).
12 MFis should train their clients on how to use petty cash they give. In this case
borrowers have accused MFis of being a tool of politics to show that they are working
by attaching loans with stringent conditions that trap borrowers into poverty and
indebtedness, Lomongin (2000).
The greatest problem is that MFis are at grass root facilities, where more people who
borrow from MFis are illiterate, the more educated deal with banks that give out
millions of loans. The inability of people by virtue of their illiteracy has created a
chance of defaulting as a result of reduced performance, Lule (1999).
In general, policies should be designed to meet client's needs, based on the belief
that MFis can provide access to financial services and act in responsible manner by
treating customers as clients rather than beneficiaries.
When credit services have been given to MFis' clientele, it is necessary for MFis to
have a constant supervision from the time of sanctioning the loan to disbursement
(Newvision October 8, 2002).
Credit policy has an important implication on firm's performance. An optimal credit policy should be selected although it may take a lot of time as the credit committee selects appropriate credit variables. A lenient credit policy is likely to increase on the firm's sales revenue but has a cost related to it. Likewise, a liberal credit policy may not affect the sales revenue too. Therefore, a credit policy decision has a high positive implication on the performance because it affects the cash flows of an organization, Pandey (1995).
13 2 .. 7 Problems Faced byMFis in Uganda
Today, micro-finance in Uganda is approaching a historic "tipping point" that could lead to massive poverty reduction in the next five to ten years. Pride's existing portfolio of high growth partners want to collectively add more than two million clients over the next five years, while at the same time pushing the frontiers of innovation, new product development and impact. Pride is in a position to become high growth MFis over the next two to three years.
2.8 Breaking Barriers to Growth and Innovation
Base on their operations in the last few years, MFis have identified five key constraints that, if not systematically addressed, will prevent their existing and potential high growth partners from achieving their business plan goals. They are:
• Capital Constraints • Technology Constraints • Regulatory Constraints • Management Constraints • Relational Constraints
Pride Uganda and other, are well positioned to break through these barriers with our partners, and the wider microfinance sector in India. In order to do this, we will:
• Ensure optimal capital allocation based on MFI performance • Maximize leverage through matching MFI business plans with commercial and philanthropic investors • Track, verify and report progress to key stakeholders in Uganda • Conduct and review audits to ensure accountability • Engage policy-makers to remove regulatory constraints • Ensure cross-fertilization and forums/processes that promote collegiality to promote learning and adoption of best/sound practices, and provide (mostly volunteer) consultants and mentors to MFI senior staff as needed.
14 CHAPTER THREE
METHODOLOGY 3.0 Introduction This chapter includes the methods that were employed in the analysis of the relationship between credit management aspects and performance of MFis in
Uganda. It gives a brief focus of the study, the methods of sampling, description of the instruments that were used in the study, the methods of data collection, study population and procedures as well as data analysis and the problems/limitations experienced during the research process.
3.1 Research Design Given the nature of the topic the researcher used both qualitative and qualitative methods for data analysis for this study. This involved looking to the psychosocial life of credit users and the services offered including the attitude of the workers of the MFis towards, the users of their credits (borrowers).
In the qualitative study, the researcher intended to find out the numerical points like the number of borrowers of the institution (Pride Microfinance), the potential customers and the defaulters of credits. The observation of subjects was done qualitatively, with sampling and I documentation, the researcher used the survey techniques using cross sectioned I survey that is interviewing different people at the same time and their trend survey where the researcher interviewed individuals which included in-depth interviews
15 with the credit providers, credit users and some few government officials since they are the regulators of these credit providers.
3.2 Scope of the Study The study focused on the examination of the relationship between credit management aspects and performance of MFis in Uganda, taking a case study of
Pride Microfinance and considering the services they offer to ensure their performance.
3 .. 3 Sources of Data Sources of data were both primary and secondary data which was obtained from publications, journals, text books, research proposals and Newspapers.
3.4 Data Collection The data was collected through reading various publications relevant to the study and text books as well as the information obtained from self-administered questionnaires.
3.5 Data Processing The data collected was processed through use of computer for example the data was edited by the help of Microsoft word, and the data was coded and recorded to check the accuracy and completeness.
16 3 .. 6 Data Presentation Data collected was presented by use of tables, graphs and pie-charts
3 .. 7 Data Analysis Appropriate computer packages/software such as SPSS and Microsoft excel were used in analysis of the data.
3.8 Limitations of the study • The research was expensive to the researcher in terms of searching for data,
photocopying, and Internet surfing among others.
• The targeted population was so busy throughout the day and by the time they
leave work, many of them were exhausted. This posed a threat since some of
the respondents failed to get time to respond to the questionnaires. Thus the
study was delayed.
• The researcher faced the limitation of time since the time allocated for the
research was so short to enable the researcher obtain the relevant data ester.
• The researcher faced the problem of limited research materials, this was
because of the number of students being many, research materials were very
difficult to find in the library more especially journals.
3 .. 9 Conclusion MFis have to set up several collection procedures if they are to reduce the level of defaulters.
They have to adapt to frequent visits by credit officers, group pressures, centre meeting at
17 which clients will make subsequent payment of amount owed. If this close relationship is adopted, then MFis and clients will be okay and their performance will improve.
18 CHAPTER FOUR
DATA PRESENTATION ANALYSIS AND INTERPRETATION OF FINDINGS
4.0 Introduction This chapter contains the presentation, analysis and discussion of the findings made by the researcher. The researcher followed the objectives of the study to help in making a thorough analysis. The researcher used tables, pie charts and bar graphs to present and analyze the findings.
4.1 Tablel Categorization of respondents. Details No. of questionnaires Numberof Percentage issued respondents (%) Credit officers 10 8 80 Clients 45 38 84.4 Male 15 12 31.6 Female 30 26 68.4 Source: Primary data
From the table above, the findings of the study revealed that, 80% of the credit officers responded, of the total clients that responded, 68-4% were women and 31.6% were men. Of all the respondents, the credit officers revealed that MFI' s have achieved a high performance and this can be evidenced through reduced poverty among the clients of Pride Uganda. The clients of Pride further revealed that Pride has done a great job in reducing poverty among the poor Ugandans.
19 Figure 1 Showing the clientele in Pride micro finance Uganda
Composition of clientele in Pride uganda
□ Male
■ Female
Source: primary data
From figure 1 above, the findings of the study revealed that, the majority of clients in
Pride Uganda are women. This was because the women take a large composition that is 68.4% and male take a percentage of 31.6%. Thus objective of Pride Uganda being improving the economic power women was achieved.
4.2 Review of credit performance of pride Uganda The findings of the study revealed that the performance of pride Uganda in regard to poverty eradication has been so encouraging. This was revealed by the clients that have benefited from the funds extended to them from Pride Uganda. The findings of the study revealed that the loans obtained by clients from Pride have helped to establish small businesses which have enabled them to earn a living. For example it was found that most women who are clients of Pride have set up retail shops among other projects which have improved their standards ofliving.
However, the researcher found out that the loans offered by Pride Uganda are only extended to clients with clear loan repayment records. The researcher also found out
20 that the most clients repay their loans in time. This has helped Pride Uganda to increase its base in as far as extending loans is concerned
Table II The businesses set up by women clients of Pride Uganda
Business activities Number of respondents Percentages Retail shops 10 40.0% Saloons 6 24% Clinics 4 16% Farming 5 20.0% Total 25 100% Source: primary data
Figure 2 Showing businesses set up by women clients of Pride Uganda
□ Retail shops
■ Saloons D Clinics o Farming
Source: Primary data
From the above table and figure, the findings of the study revealed that women clients of Pride have engaged themselves mostly in starting up retail shops in different suburbs of Kampala. Women who own retail shops take 40% and they are followed by women who have started salons totaling to 24%. This explains the positive impact of Pride Uganda on the development of women in as far as business is concerned.
4.3 The role of MFis on poverty eradication in Uganda (Pride Uganda) The researcher found out the extent to what Pride Uganda has helped in eradicating poverty. The researcher found out that through the credit facilities offered by Pride
21 Uganda, most groups of people have obtained loans and these loans have helped them in establishing small businesses in and around Kampala. This has helped in improving the standards of living of the clients of Pride Uganda
However, the researcher found out that the loans offered by Pride Uganda are only extended to clients with clear loan repayment records. The researcher also found out that the most clients repay their loans in time. This has helped Pride Uganda to increase its base in as far as extending loans is concerned. The researcher found out that the largest group of beneficiaries from the services of Pride Uganda is women.
This was because most of the loans are extended mostly to women than men. The reason obtained for the above was to improve on the standard of living of women and to encourage more women to join business and start their own projects that can make them earn a living rather than depending on their husbands.
4.,4 Review of credit terms on loans offered by Pride Uganda The researcher found out that there are terms that have to be met before a credit facility is extended to the client. The researcher found out that some of the terms of credit were so much demanding from the clients which acted as a barrier to some clients accessing the loan facility of Pride Uganda.
Table III Response on Credit Terms
Response on Clients Credit officers credit terms Number of Percentage Number of Percentage respondents respondents Strongly agree 5 16.7% - - .Agree 4 13.3% - - Disagree 18 60.0% 8 100% Not sure 3 10.0% - - Total 30 100% - 100% Source: Primary data
22 From the above table, the researcher found out that clients themselves disagreed that their loan from Pride Uganda is not easily accessible. This is because 60% of the clients said that the loan is easily accessible and the terms of the credit are simple and understandable.
Similarly, the researcher found out that the credit officers affirmed that the loans at
Pride Uganda are easily accessible. This is because 100% of the credit officers accepted that their loans at Pride Uganda are easily accessible if the client meets the following conditions;
• An on-going business in which money is earned weekly,
• No currently borrowing from any other organization,
• Be guaranteed by your village bank,
• Be at least 18years old
• Attend meetings and save money weekly
Thus the researcher found out the above mentioned terms that have to be met before a credit facility is extended to the client. The credit officers claimed that they are simple as well as the largest percentage of clients. However, some clients said that the terms are harsh, for example, they restrict them from acquiring other forms of finance from other banks and yet at Pride Uganda they are given little money which cannot fully finance their businesses.
Therefore, Pride Uganda needs to revisit their terms so as to come up with terms that will be favorable to their clients so as Pride Uganda can achieve its objectives.
23 The researcher found out that other than loans, Pride Uganda offers other services to the clients. For example, Pride Uganda provides training to people most especially to women on how to start up businesses, it provides advice to people; this advice is in form of business advice on how well the clients can manage their businesses so as to obtain high profitability. Pride Uganda provides education to people on how to mobilize savings out of their remains. The researcher found out that Pride Uganda has provided employment to different categories of people.
The researcher found out that there are specific yardsticks for measuring credit performance;
• Business profitability
• Groups easier to repay the loan
• Frequency of credit application
• Level of savings
• Credit management
• Long term survival of an individual business
4.5 The extent to which Pride Uganda has promoted growth among women The researcher found out that Pride Uganda has promoted growth mostly among women. This is because of the clients of Pride Uganda most are women and they have come up with small help projects (SHPs) of all, most are funded by Pride
Uganda. These small businesses include retail shops, clinics, farming and salons.
24 Table IV Response from credit officers on whether Uganda has promoted growth among women
Response Number of respondents Percenta2e Strongly agree 6 75% Disagree 2 25% Total 8 100% Source: Primary data
From the above table, the researcher found out that Pride Uganda has to a large extent promoted growth among women. This is because 75% agreed unanimously that women have benefited much from Pride Uganda credit facilities and they have been able to start up their own projects in terms of educating the kids as well as human wellbeing. I However, the researcher found out that 25% disagreed that growth among women has not been promoted. This is because some of the women's businesses are II collapsing. Thus this group of people need not be underestimated; possible solutions I to their problems should be devised so as to promote general growth among women. f l
I' .t 4 .. 6 Challenges faced by Pride Uganda in their effort to I eradicate poverty I The study revealed that Pride Uganda has faced challenges in its pursuit of eradicating poverty. Among the challenges faced that the researcher was able to I identify include; failure of customers to pay the loan in time and the customers of I
Pride Uganda misuse the funds and they end up collapsing. This in the end has affected Pride Uganda since it loses a lot of money through such acts.
25 Among other challenges that the study revealed were; little funds, that is Pride
Uganda does not have enough funds that can help in satisfying all its customers,
Pride Uganda has also faced the challenge of high transaction costs in the country.
The researcher was able to identify that the challenge that is mostly affecting Pride
Uganda's operation is poor education among people on how to utilize the given loans to invest them in productive activities.
The study revealed most complaints raised by the clients of Pride Uganda. For example, high interest rate which leaves the clients with little or no savings, short loan period which makes it difficult for customers to pay the loan in time. Thus if all the above challenges are left unchecked, then the objective of Pride Uganda of eradicating poverty will not be met.
4.7 Possible solutions to the challenges faced by Pride Uganda The study revealed the challenges that Pride Uganda has been facing in its mission of eradicating poverty and self-reliance. The following are the possible solutions that the researcher managed to put forward as the answers for Pride Uganda problems;
MFI's should diversify their loans and make them both cash and material, for example, loan sheets, cement and agricultural tools. This helps in reducing expenses among clients who are in need of constructing their houses.
Since the funds are not adequate, loans should not be given to all individuals at the same time because different clients participate in different businesses. This enables the selected few to acquire sufficient funds. This is because a loan with sufficient funds enables the client to start on a business of large capital base and thus the returns from such an investment vvill be much.
26 To ensure timely loan repayment, more strong measures should be emphasized for
example taking court action to whoever fails to pay. Similarly, the weekly deposits
made by clients should be pushed to monthly deposits. This will be a relief to the
clients and can save on their weekly expenditures.
Besides the above, Pride Uganda may also use the following to overcome its
Problems:
Commercial viability: Evidence of institutional (governance, culture, legal) and financial (profits, commercial funding) viability, with the potential to become a demonstration model of successful commercial microfinance.
Management: Strong management team, and systems, with successful track record in the management of financial services institutions and/ or microfinance institutions in Africa. I Financial Performance: Track record of consistent profitability, based on t I expense management, sufficient financial margins, and portfolio quality. i
Governance and Vision: Clear definition of roles and responsibilities at all levels If of the organization, including the critical relationship between the Board and I ! Management, and a clear institutional vision, communicated to staff and the market. l
Market/ Products: Focus on microfinance market segment with broad branch I ( network and extensive service/product offering.
Institutional Culture: Well-developed corporate profile and organizational strengths, which reinforce capacity to build locally-managed and community-based identity, which motivate staff, and which build loyal client base.
Asset Growth: Critical mass of client base with potential for growth of productive assets with acceptable quality.
27 Regulated/Legal Status: Fund's objective is to make equity investments, therefore MFI must be able to issue equity or quasi equity instruments, and should also be able to access commercial loans.
28 FIVE 5.0 Introduction This chapter gives the summary of the main findings of the study, conclusion
and the recommendations made by the researcher.
5.1 Summary The study was conducted to examine the relationship between credit management aspects and performance of MFis in Uganda. The findings from the study revealed that MFis have played a considerable role in poverty eradication. However, the rates of poverty are still high which call for more efforts to be put in by MFis so as to achieve their major objective of poverty eradication. This may also calls for the efforts of other institutions especially the regulatory body of MFis in Uganda (the government body).
The study revealed that Pride Uganda has done a lot in promoting women, since it has helped most of them to come up with small businesses that have assisted these women to earn a living.
The study revealed that though Pride Uganda has promoted women's growth in business, more needs to be done since some of the women are still poor. The findings of the study revealed that MFis are faced with more challenges and this affected them in their operation. Among the challenges found out include failure to repay the loan by customers, insufficient funding, and misuse of funds by the clients.
29 The study revealed that the major source of income for Pride Uganda is through
donations. These donors include USAID, A .D .Caswell as E .D .F. These are United
States Agency for International Department (USAID), Australian Development
Corporation (ADC) and European Development Fund (EDF). Though Pride Uganda has the above donors, the collected money is not enough for the number of clients that Pride Uganda has. Thus limiting its operations in its attempt to eradicate poverty.
5.2 Conclusion The findings of the study indicated that MFis have played a considerable role on eradicating poverty among the poor Ugandans especially women. It revealed that more have participated in day to day business activities as a result of the support offered by MFis. However, the general population of Uganda is still poor. Therefore, a lot has to be done by MFis so as to reduce the poverty rates that are on the mcrease. Thus MFis may be forced to change their strategies towards fighting poverty.
5.3 Recommendations From the findings of the study, it was revealed that MFis are being faced with a lot of challenges. The following are the recommendations put forward by the researcher;
• MFis should make their pre-loan requirements and conditions flexible. For
example, they should ease the process so as for the clients to easily access the
loans. For example, the condition of having on-going business for one to be
30 allowed a loan should be dropped since majority of clients more especially
women do not have startup capital.
• The condition of not to borrow from any other institution is not realistic since
it limits the clients and loan they obtain from them is not enough to meet all
the needs from the client. Thus such a condition should be revised and indeed
be dropped.
• Since most MFis' mission is to enhance women growth and eradicate poverty, I
then interest rates should be allowed to a reasonable rate that will enable clients afford in repaying the principal as well as the interest in time. I • MFI's should carry out performance appraisal, for example, the initial loan
should be in position of being raised to who ever pays the loan in time so as to I
motivate the clients to repay their loans in time.
It !• ¾ l t Areas suggested for further research. t
Evaluation of credit policy management and performance of micro-finance IJ institutions in Uganda I
li I I
31 REFERENCES 1. Anthony Saunders (2001), Financial Markets and Institutions, third edition
MCGraw Hill (New York).
2. Account journal, (August 2001) published by BP London.
3. European commission (1998), Micro finance and poverty reduction
4. Frank J. Fabozzi (1994, 1998) Foundations of Financial Markets and
Institutions, second edition, Schuster Co.
5. Gary Smith, Money, Banking and Financial Institutions, fourth edition, DC
Health and Co. 1991 in Canada.
6. Katanzi Patrick (2001) Analysis of Micro fiance in Uganda journal from micro
fiance banker volume 2 issue 2.
7. Lule Okumu (2002) Optimizing the role of MF in Uganda's development
"journal of Uganda's institute of Bankers volume 2.
8. Pandey I.M (1998) Financial Management 'J1h Edition, Vikas Publishing
House PVT Ltd, New Delhi
9. Rao SB (1994) Financial Management 2nd Edition, Vikas Publishing House PVT
Ltd, New Delhi.
10. Rose Kolari & Fraser (1980, 1985), Financial Institutions (Understanding and
managing financial services), fourth edition, United States.
11. The Newvision report April 22, 2004 page 26, October 2000 page 6 and 17th April
2003 volume 27-28.
12. Tumuhimbise M (1997) Credit Management in Public Enterprises, publishers.
13. Van Horne JC (1994) Financial Management and Policy. 9th Edition, Prentice
Hall, New Delhi.
32 14. Yakuru.J (2001) Financial Decisions and the Business, 2 nd Edition, the Business
Publishing Group, Kampala.
15.Anthony Saunders (2001) Financial market and institutions, third edition Mc
Graw-Hill (New York)
16.Frank J Fabozzi (1994,1998) Foundation of Financial markets and institution, second edition publisher Schuster co.
33 Dear Respondent,
RE: Questionnaire for Data Collection
Dear respondent, I am a student of Kampala International University, School of Business and Management, offering Bachelor of Business Administration and Management with Accounting Option.
This is to kindly request you to spare some time, respond and contribute to the ongoing study entitled "Evaluation of Credit Policy Management and Performance of Micro-finance Institutions in Uganda" a case study of Pride Microfinance.
Your unreserved participation will be of great academic value and thus a major determinant to the success of this study.
All participants' response will be treated with strictest confidentiality.
Thank you.
Yours faithfully,
Ms. Tumusiime Clare.
34 SECTION A
QUESTIONNAIRE FOR THE MFI CLIENTS
PERSONAL DATA
Please tick in the appropriate box
1. Age Between 18 and 25 years Between 25 and 35 years D 35 years and above D
2. Sex Male Female D
3. How did you join Pride Uganda? Please tick appropriate box below. Through;
A friend
Pride Uganda agent Newspaper Advert D Television
Other, please specify:
4. What kind of business are you operating? Retail shop D Salon D Clinic D Farming D 5. For how long have you operated this business?
35 Less than a year D Between one to five years D Between five to ten years D 6. Do you think joining Pride has helped you manage your business?
Yes D No D If yes, how has it helped you? l ...... t 7. What is the proportion of Pride' loan to your capital? Less than 30% D \ Between 30%and 50% D More than 50% D I li 9. Is this proportion significant to your business? I Yes D l" No D t f
~l; 10. What loan amount is given to the new client? I I Between 100,oooUshs and 200,oooUshs D l Between 200,oooUshs and 500,oooUshs D l Above 500,oooUshs D I 11. Please tiC k. m t h e appropnate b ox b eow1 Details Strongly Agree Disagree Not sure i auee J Joining Pride has enhanced my I i business t Pride's credit terms are friendly I and easily accessible l I always pay my loan in time I
I! f 36 Do you always obtain all your needs from the loans? Always D Sometimes D Not always D
12. What are some of the challenges that are faced by Pride in its efforts to eradicate poverty in Uganda?
THANKYOU
37 SECTIONB
QUESTIONNAIRE FOR THE CREDIT OFFICERS
PERSONAL DATA Please tick in the appropriate box 1. Sex D Male
Female D
2. Qualifications D Certificate
Diploma D Degree D Others please specify:
3. What is the mission of Pride?
4. Do you follow a specific criterion in selecting customers for the purpose of credit extension? Yes D No D Not sure D 5. Are there any other services that FINCA provides to the people other than loans? Yes D No D Not sure D
38 6. If yes what are those services?
7. How long is your credit period? One month D Three months D Six months D One year D 8. How many people have FINCA reached so far?
500 D
1000 D
5000 D Above5000 D 9. What is the composition of the clientele? Women D Men D Mostly Women D 10. Are there specific yardsticks for measuring credit performance? Yes D No D Not sure D
11. Please, tic. k. Ill the appropnate bblox eow Details Strongly Agree Disagree Not sure a2ree Loans are given to whoever applies forthem FINCA (U) has promoted growth among the women in Uganda FINCA (U) has benefited the poor Credit officer choose business activities for the clients
39 12. Do clients pay their loans on the scheduled time? Always D Sometimes D Not always D 13. Do you always have enough funds for all the clients?
Always D
Sometimes D Not always D 14. Where does FINCA obtain funds from? Relatives D Government D Internal donors D International donors D 15. What are the challenges faced by Pride Uganda in its effort to meet its set objectives?
16. What are the attempts/strategies put in place to overcome the above problems in above?
17. What are the contributions of your institution to the following people? • Customers • Government • Employees • Others, specify: ...... 18. What are the contributions of the following group of people to your institution? • Government
40 • Employees/marketers • Customers • Banks • Others, specify and give their contributions: ...... 19. Are the strategies in (16) above meeting your target of solving those problems? 20.What are the management policies/controls (contributions) to the institution to help meet its credit goal and objectives? 21. How does the institution help/facilitate the credit officers in managing credit? • Give Allowances • Give commission • Others, please specify: ...... 1. Do employees participate in planning for credit management? 2. What are the employees/ credit officers' contributions to the success of your institution in achieving its goals and objectives?
THANKYOU
41 UGANOA . 01$TRIB11f10H OF- FINANCIAL Fl.t::lllnU, UL ltRS
J ••• O I ,... t •'
42