Uganda Is Realizing a Positive Growth in Its Financial Sector

MAKERERE UNIVERSITY

CREDIT MANAGEMENT AND FINANCIAL PERFOMANCE A CASE STUDY OF KYEBANDO SACCO

BY NALUMU SARAH 07/ U/12502/EXT 207015333

A RESEARCH REPORT SUBMITTED TO THE SCHOOL OF EDUCATION AND DISTANCE LEARNING IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF BACHELOR OF COMMERCE OF MAKERERE UNIVERSITY

2011

Declaration

I, Nalumu Sarah, do hereby declare that this work is original and has never been submitted to any other institution for a ward of any Degree or Diploma. Where the work of others has been used, reference has been made there of.

Signed: ……………………………… Date: ……………………………… Nalumu Sarah Reg No: 07/U/12502/EXT

(Student)

Approval

This report Titled “ Credit Management and Financial Performance: A case study of Kyebando SACCO has been submitted by Nalumu Sarah for examination with my approval as the University Supervisor, and it’s now ready for presentation for the award of a Bachelor of Commerce Degree of Makerere University.

Signed: ……………………………….. Date: ……………………………….. Mr. Nyende Festo (Supervisor)

Dedication

I dedicate this piece of work to my dear parents, who against all odds have labored much, in thick and thin to invest in my education for a prosperous and bright future. I also dedicate this piece of work to my supervisor for the support rendered to me in processing and producing this report. May God Bless you all

iii

Acknowledgement

I, unreservedly, extend a vote of thanks to a myriad of people who in one way or the other contributed towards the accomplishment of this research work. I also would like to acknowledge the assistance and role played by the following personalities contributed to the successful completion of this study. To the almighty God who has kept me alive for all the years.

I cannot say exactly how grateful I am to my supervisor; his guidance in this study was beyond measure. Your guidance is invaluable. Thank you also for providing me with professional advice, encouragement and your time that has spurred me to success.

In the same way, would like to thank the management of Kyebando Sacco for the time they gave me most especially in evenings after the long day’s work. They honestly filled the questionnaires, surely, without their input; this study would not have come to fruition.

I extend an invaluable heap of thanks to my parents and friends for their moral, material and emotional support that made me encounter and overcome challenging situations with a lot of zeal and stamina. Thanks a lot. Finally, my friends, Kenneth, Eric, Innocent, Humphrey, Lydia, Francis, Suzan, Maria and the others deserve maximum respect because their constructive criticism and encouragement plus their moral and emotional comfort made me sail through the entire course with minimum difficulty.

Table of Contents

Declaration ...... i

Approval ...... ii

Dedication ...... ii

Acknowledgement ...... iii

Table of Contents ...... v

List of Tables ...... viii

List of Figures ...... ix

Abstract ...... x

CHAPTER ONE ...... 1

Introduction ...... 1

1.1 Background 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 ...... 4

1.6 Scope of study ...... 4

1.6.1 Geographical scope;...... 4

1.6.2 Content scope ...... 4

1.7 Significance of the study ...... 5

CHAPTER TWO ...... 6

LITERATURE REVIEW ...... 6

2.1 Introduction ...... 6

2.2 Credit policies ...... 7

2.3 Credit and credit analysis ...... 8

2.4 Credit risk measurement ...... 8

2.5 Credit procedure ...... 9

2.6 Effective credit management...... 11

2.7 Credit management tools ...... 13

2.8 Financial performance of financial institutions ...... 15

2.9 Relationship between credit management and financial performance ...... 19

2.10 Conclusion ...... 19

CHAPTER THREE ...... 20

RESEARCH METHODOLOGY ...... 20

3.1 Introduction ...... 20

3.2 Research Design ...... 20

3.3 Study population...... 20

3.4 Sampling Methods and Techniques...... 21

3.4.1 Sampling design ...... 21

3.4.2 Sample size...... 21

3.5 Sampling procedure ...... 21

3.6 Sources of data ...... 21

3.6.1 Primary source of data ...... 21

3.6.2 Secondary source of data ...... 21

3.7 Data collection and instruments ...... 22

3.7.1 Questionnaires ...... 22

3.7.2 Interview ...... 22

3.8 Data processing, Analysis and Interpretation of findings ...... 22

3.9 Limitations of the study ...... 22

CHAPTER FOUR ...... 24

PRESENTATION AND ANALYSIS ...... 24

4.1 Introduction ...... 24

4.2. Background characteristics of the respondents; ...... 24

4.3 Credit management policies used by Kyebando SACCO ...... 27

4.4 Financial Performance of Kyebando SACCO ...... 33

4.5 Relationship between credit management and financial performance ...... 35

4.6 Regression Analysis ...... 36

CHAPTER FIVE ...... 37

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ...... 37

5.1 Introduction ...... 37

5.2 Summary of the findings ...... 37

5.2.2 Summary on Financial performance of Kyebando SACCO ...... 37

5.2.3 Summary on the relationship between credit management and financial performance ...... 38

5.3 Conclusion...... 38

5.4 Recommendations ...... 38

5.5 Areas for further research ...... 39

References ...... 40

vii

List of Tables

Table 1 : Description of respondents by Gender...... 24 Table 2: Description of respondents by working experience ...... 25 Table 3: Showing the views of the respondents on credit management policies used by Kyebando SACCO ...... 28 Table 4: Views of the respondents on the financial performance of Kyebando SACCO . 33

viii

List of Figures

Figure 1: Description of respondents by age...... 25 Figure 2: Description of respondents by level of education ...... 26 Figure 3: Description of respondents by designation ...... 27

Abstract

The study was set to establish the extent to which credit management affect the financial performance of Kyebando Savings &Credit Cooperative limited. The study was guided by a set of objectives which enabled the effective research to be carried out.

A combination of descriptive research design was used. Respondents who participated in the study were selected using stratified random sampling. In all, the study involved 20 respondents. Data was collected with the use of questionnaire and interviews. Data was analyzed using descriptive frequencies, pie charts and graphs and the relationship between the variables credit management and financial performance was tested using Pearson correlation coefficient using SPSS (statistical package for social sciences).

The findings indicated a slight improvement in the Sacco’s performance which was attributed to improved credit management procedures used during the lending activities. However the researcher recommended that the Sacco should emphasize more on staff training.

CHAPTER ONE

Introduction

1.1 Background of the study

Uganda is realizing a positive growth in its financial sector. The growth of the financial sector can be noticed in the increasing number of financial institutions. Financial institutions include commercial banks, microfinance institutions (MFIS), micro deposit taking institutions (MDIS) and many others. The increase in the number of commercial banks has enhanced increase in bank deposits despite the fact that there is a global financial crisis (Bank of Uganda).

Jaffe & Dwight (2005) Credit is the commitment to provide funds or substitutes for funds to a borrower and it can be inform of loans, overdrafts, advances, lease bills discounted, guarantees and any other asset contingencies connected with credit risk. Credit risk is the probability that a borrower will default on a commitment to repay debt or bank loans and the default occur when the borrower cannot fulfill key financial obligations (Edwards & Steven, 2008).

Credit risk affects any party making or receiving a loan or a debt payment and these include bond issuers, bond investors, and commercial banks and other financial institutions. (Neal & Roberts, 1996).

Bartels & Roberts (1964) in selling of credit, sellers provide a service which must be regarded like any other service they perform because it is offered for the satisfaction of the market and this comprises credit management

When advancing such credit services, commercial banks and other financial institutions have to establish effective credit management policies to handle credit risks and monitor the credit issued. (Paul & Salima, 2006; Wilson& Nick, 2006)

Jaffee & Dwight ; Russell & Thomas (1984) Credit management involves collection, compilation, storage, analysis and any retrieval of information about credit and some of the credit management tools can include; adequate underwriting, direct contact with borrowers, frequent client visits.

Credit management is a focused customer investigation function of finance, indirect support lending charged with the management of customer risk. The main objective of this credit management is to maximize profits and liquidity (Hal Pen et al, 1993)

Harden & Williams; Trebby & James (2009) financial performance is the measuring of results of a firm’s policies and operations in monetary terms. These results are reflected in the firm’s return, on investment, return on assets, value added and so on

Financial performance is the subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm's overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation. (Stevenson & Paul, 2005;Mascha &Maureen & Francis,2009)

Ever since the recent credit crunch, financial institutions globally are facing adverse effects due to the crunch and since that incidence there are low levels of granting credit to individuals and t o other organizations. (Smith & Paul 2009)

Commercial banks are experiencing loan recovery problems. These problems are usually due to ineffective monitoring of clients, failure to recover the expected amount from the collateral security left by clients who fail to pay back and risk loans such as agricultural loans where the yield may be lower than the expected. In such situations banks fail to generate the anticipated financial proceeds (New vision February 21, 2010) Credit issued to customers is the most prominent source of income to financial performance. Therefore, when credit is issued to a customer, an ethical and proper credit

2 management policy is required if a bank is to attain a sound financial performance (Paul & Salima; Wilson & Nick, 2006)

Kyebando savings and credit cooperative society limited was started in 2000 as Financial Services Association (FSA). It’s supervised by the office of the commissioner of cooperatives under the cooperative department in the ministry of trade, tourism and industry. It’s also supervised by the Uganda cooperative savings and credit union (UCSCU).It currently has 6000 members. Every member must have a minimum of at least two shares. (FSA Reports)

1.2 Statement of the problem

Kyebando saving and credit cooperative limited is extending credit to its clients and has put in place essential credit management tools like adequate documentation made to accept legal responsibility for a loan policy and direct contact with borrowers. Despite the existence of all that, the company is experiencing difficulties in its financial performance and this is all blamed on the weaknesses in the credit management. (Kyebando Sacco reports,2008-2010)

1.3 Purpose of the study

The purpose of the study was to establish the relationship between credit management and the financial performance of Kyebando Savings and Credit Cooperative

1.4 Objectives of the study

To find out the credit management tools used by Kyebando Savings and Credit Cooperative. To establish the financial performance of Kyebando Savings and Credit Cooperative

To establish the relationship between credit management and financial performance.

1.5 Research questions

What are the credit management tools and the challenges faced by Kyebando Savings and Credit Cooperatives? How is financial performance measured? What is the relationship between credit management and financial performance?

1.6 Scope of study

1.6.1 Geographical scope;

The research took place in Kyebando, Kampala.

1.6.2 Content scope

The research looked at credit management and financial performance in Kyebando savings and credit cooperative limited.

1.6.3 Time scope The study looked at the profitability performance of Kyebando savings and credit cooperative limited between 2006-2010.

1.7 Significance of the study

The findings of the study will help managers and policy makers in identifying their non performing credits and be able to undertake adequate collection efforts thus reducing on the possibility of credit risk outcomes.

The findings will also be useful to government in initiating credit management regulations that will strengthen confidence of shareholders and other stakeholders in the financial system.

The generation of the study findings will help other financial institution facing similar problems in relation to the study variables to improve their financial performance. The research will help other scholars for future reference who would wish to research in the same field.

CHAPTER TWO

LITERATURE REVIEW

The review covers what other scholars and policy makers have written in respect of credit management and financial performance in that it defines the credit management giving features that exist in credit management as well as defining financial performance. It also gives the relationship that exists between credit management and financial performance in financial institutions.

2.1 Introduction

Credit risk is the probability that a borrower will default on a commitment to repay debt or bank loans and the default occur when the borrower cannot fulfill key financial obligations (Edwards & Steven2008).

Jones & Chris, (2004) Credit is borrowed money that one can use to purchase things they need when they need them and then pay the funds at an agreed time with an agreed interest rate. Wilbroad, (2005) Credit can also be referred to as an offer of a firm's products and services to customers who cannot make immediate payments .Banks mainly issue credit to their customers with the hope that money will be returned with a profit which is in form of interest. Common types of credit include mortgages or home loans, personal loans or lines of credit, salary loans, business loans, investment loans and agricultural loans.

Credit management is a customer focused investigation function of finance, indirect support lending, charged with the management of customer risk (Hal Pen et al, 1993).

Jaffee & Dwight (1984); Credit management emphasizes collection, compilation, storage, analysis and retrieval of information regarding credit.. It involves qualifying the extension of credit to a customer, monitors the reception and logging of payments on outstanding invoices, the initiation of collection procedures, and the resolution of disputes or queries regarding charges on customer invoice. When functioning efficiently, credit management serves as an excellent way for the business to remain financially stable

According to Russell & Thomas (1984), the process of credit management begins with accurately assessing the credit-worthiness of the customer base. This is particularly important if the company chooses to extend some type of credit line or revolving credit to certain customers. Proper credit management calls for setting specific criteria that a customer must meet before receiving this type of credit arrangement.

2.2 Credit policies

Wiedenbrugge & Marcel, (2010) credit management policy should have enough flexibility to adapt to changing market conditions because customers and organizations change overtime thus the financial institutions need to go more into detail on what the integrated approach means in terms of people, culture systems, management and the organization.

Rao & Dismas (1972) the ultimate objective of selective credit policies is to influence the composition of real investment, and not merely to influence financial markets. Although various forms of selective credit policies have been in use in the U.S.A. for many decades, there has been relatively little systematic investigation of the extent to which this ultimate objective can be realized. There’s an attempt to examine the theoretical and empirical justification for using selective credit policies; specify the structural conditions under which such policies might be expected to achieve their real objective; and look at the empirical evidence to determine whether or not these conditions are satisfied.

Stokes & David,(2010)There are policies for effective management of credit risk. An effective credit policy has to support the goals and objectives of the strategic plan and provide the framework needed to achieve those targets. It highlights the guide questions that will answer critical vision outlined in the strategic plan including the mission, department goals and the terms of sale

2.3 Credit and credit analysis

Credit analysis is concerned with analyzing the applicant and the surrounding environment in order to determine whether to extend a loan to him or her (Bartels & Robert, 1964)

2.4 Credit risk measurement

Measure of risk

Neal & Robert (1996) more quantitative measure of credit risk is the credit risk premium. The credit risk premium is the difference between the interest rate a firm pays when it borrows and the interest rate on a default-free security, such as a U.S. Treasury bond. The premium is the extra compensation the bond market or commercial bank requires for lending to a company that might default. This increase is necessary to offset the higher expected losses on the bond or loan due to the increased probability that the loan will not be repaid

According to Pandey (2005) the 5C's in terms of measurement parameters which financial institutions use on whether to issue credit or not. These measurement parameters are; character, capacity, capital, collateral and condition. Character This relates to the willingness of the customer to settle his obligations. The character of the borrower can be looked at and judged using two techniques; i) His past record, where the history of the institution is looked at in terms of payment and a certain degree of loyalty is considered

ii) Personal interview which involves the person meeting with the loan officer

Capacity This is the customer's ability to pay the amount plus interest and the loan officer must ensure that source of repayment must be clear and details proven in any case. Capital This is the contribution or interest of the customer in his business so considering capital, loan officers can determine the stake of the client in his business. It is undesirable to grant credit to a client who has got little stake in his business. Chances are high that it may not be recovered

Collateral This is the security against which failure to repay, the collateral should be in a good condition and easily marketable. The security should always be fully pledged. If the financial institution takes security for an advance, it must ensure that the security has been completed before advance is made to borrow. The customer/borrower should understand the implication of depositing a security and also appreciate that the security formalities must be completed before borrowing takes place.

Conditions This involves the assessment of prevailing economic, political and social factors that may affect the client's ability to pay. Politically: less or no credit should be granted to customers in insecure areas where the risk of total loss is high. A high rate of interest should be charged on more risky loans compared to those that are of less risk. Economically: under inflationary conditions, it is unsuitable to grant credit due to low returns expected.

2.5 Credit procedure

The credit procedure is derived from a strategic plan of the and involves relating the lending transaction to the overall mission of the financial institution. (Stevenson & Paul, 2005)

Srinvasan & Venkat,1987;Kim & Yong (1987)The credit granting process involves a tradeoff between the perceived default risk of the credit applicant and potential returns from granting requested credit. The main objective in credit granting is to determine the optimal amount of credit to grant to customers.

At present, the loan assessment system of Kyebando SACCO stores client account opening particulars, can produce a summary report of the computed financials by credit officers but has no capacity to compute them. It is just a store of client loan information. It has no capacity to generate a decision.

The decision is generated by the loans committee which comprises of the manager, loans officer and supervisor. The decisions generated may be incorrect due to the bias which is inherent in human beings and this has resulted into over financing or under financing of businesses thereafter resulting into bad debts.

This is witnessed by lack of full information given by people about their incomes, multiple-borrowing, forged securities as some of the indicators. The current system provides reports such as repayment schedules, collateral list agreement and contract forms. It also has the capacity to monitor payment and charge default in case of late payment.

In case of continuous customers, the SACCO looks at their repayment history. If t he client has ever defaulted the SACCO cannot risk granting that individual a loan but if he or she has been servicing the loan well, then they give the loan. For the case of new customers, it is those ones with performing businesses, good accounts and good reputation that act as guarantors (Kyebando Sacco reports)

2.6 Effective credit management

Effective credit management is the process followed by financial institutions in granting credit to their clients as well as monitoring and evaluating the dangerous sign for failure to reduce the possibility of loss arising from the fact that interest, principal or both loans will not be paid as due(Korteweg,2000) Financial institutions have to ensure that there are effective credit management policies to handle their institutions where borrowers may default on their repayments or else they may face cash flow problems, which eventually affects their liquidity position. Ultimately, this negatively impacts on the profitability thus the financial performance (Stokes & David 2010).

Effective credit management is therefore needed to encourage collection efforts, identify problem loans and thus help in reducing possibility of loss which is a result of bad loans. To ensure effective credit management every institution regardless of the size or sophistication must have basic tools to monitor trends, concentrations, exceptions and projections. (New Vision July 20, 2010)

According to the Association of Executives in Finance, Credit and International Business (FCIB), there are five keys to effective credit management.

Effective credit and collection policy Effective credit management is about developing consistency in your credit and collection processes. This, in turn, will ensure efficiency in your entire revenue cycle. The secret to consistency is a thoughtfully designed and actively implemented credit and collection policy. Such a policy has power to breed new life into the entire credit-to-cash process. Even if you already have a credit and collection policy, it’s important to review it on a regular basis to assess its effectiveness, efficiency and make sure you are following it.

Due diligence With current customers, don’t assume they’re okay now because they were okay last year. There is need for innovation in the services offered to the existing customers. It is important to review the creditworthiness of all your important customers. Today’s business climate is erratic. Companies that appeared secure six months ago may now be on the verge of collapse. Set up regular reviews to monitor each customer’s creditworthiness to keep a step ahead of bad debt write-offs. In particular, credit applications, financials and participation in industry credit groups can help you develop the information necessary to making a reasonable decision about extending credit to both new and existing customers.

Protect your sale wherever and however possible There are a number of ways to protect your sale when selling domestically or internationally. The place to start is at the beginning. By appropriately structuring your sales contract (and/or credit application), you can build future protection in case you need to litigate. A well-written contract can make the litigation process easier and faster, and the likelihood of success much higher. The Bernstein Law Firm outlines three things you can do to Improve your chances of collecting from a risky (any) customer: (1) get written personal guaranties of payment from your customer’s principals; (2) retain a security interest in various assets; and (3) include a confession of judgment clause as part of your sales agreement or credit application.

Focus on Cash Flow Businesses today cannot afford excessive write-offs. Few business owners will dispute the fact that cash is king. Poor cash flow management continues to result in the collapse of business enterprises, large and small, worldwide. One of the most common cash traps is uncollected sales which are known as accounts receivable or debtors.

Know when to call in outside assistance No one can do it alone. Many credit professionals struggle under the weight of increased scrutiny, expanded responsibilities, and static resources. Bogged down with daily operations and growing responsibilities, the institution can resort to out-sourcing from third parties

2.7 Credit management tools

As a banker's loan portfolio grows, its lines of business and types of lending become more diverse and risky and its geographical lending area becomes wider as more advanced credit management tools become critical. Credit management tools may include but are not limited to the following; i) Monitoring and supervision Credit management can only be effective if it’s receiving feedback about what is happening on a project through the conduct of monitoring and critical point control. The letter of sanction which spells out the terms of the loan contract is crucial to the process of monitoring and supervision (Uganda Banker Vol3, 1995) ii) Staffing and training An important tool in the strategy of credit management is a competent and honest staff. All the staff in the credit analysis section must be fully trained and must be of integrity. Financial institutions need to ensure that loans are appraised and classified properly therefore with a fully trained staff, the Saccos corporate plan with due regard to the growth, profit maximization, liquidity creation and risk mitigation can be met.(Mckinsey,1995) iii) Classification of unsatisfactory loans Banks review their loans portfolios and classify those loans that are unsatisfactory in quality. Under the banking act of Uganda, financial institutions have to establish three adverse loan classifications namely, substandard loans, doubtful and loss loans.

Then the banks should reserve equal to say 20% of substandard loans, 50% of doubtful loans and 100% of loan losses. Under this legal obligation, banks are able to meet non- performing loans. iv) Regular visits and interview Regular visits and interviews are usually done by appointment with the customer visits are an excellent opportunity to re-assess a customer. A visit is usually more informative than discussions in bank premises (Thornton, 2000) v) Acquisition of collateral Uganda Banker Vol3 (1995) Financial institutions should ensure that any lending proposition stands up with necessary and viable security. The collateral should be easily marketable have minimum administrative costs and the bank should obtain the first claim on the asset and its value should be greater than the face value of the loan it secures. vi) Establishing loan covenants Loan covenants are agreements that banks make with loan seekers such agreements can include agreements on actions to be taken in case of failure to pay. Loan covenants should be in place to avoid loss. One of the problems of bank failures is the unexpected loan losses. Therefore a loan covenant is an essential credit management tool that can be used to overcome the risk of loan (Yohe, 1995) vii) Adequate underwriting Credit policy creates a framework for lending. Therefore banks have to carry out adequate underwriting before offering credit to their clients. Adequate underwriting is done by following the lending standards for varied loan products. By carrying out adequate underwriting, the customers will be able to repay the loans. (Devine & Steve 2005; Solomon & Alex, 2005) Explores the effectiveness of creditor insurance as a means of managing creditor risk. Summary of the European mortgage market; Risks facing mortgage borrowers across Europe; Examination of the European and British creditor insurance market. Carr & Matthew,(2009)There is need to focus on the use of technological solutions for credit institutions. The innovative ideas such as credit scoring programs alleviate

14 problems of credit professionals on credit decisions, prompting for productivity in the businesses. Wimley & Jones(2009)Implementation of a strategic and automated approach to cash collections will enhance compliance and customer service. It then notes that efficient collections ensure ongoing cash flow streams which fulfill company's objectives. Credit scoring is one of the most powerful tools for risk management.

Managing Credit,Receivables & Collection,(2006)The article features the CreditRiskMonitor (CRMZ), a financial information service designed to save corporate credit professionals' time. This tool enables one to create Internet-based business reports and services as a business credit or training tool. It can also collect financial and finance analysis details of several companies around the world. It has features that help one create and monitor a portfolio on a timely basis. Several service options are also embedded in this tool.

2.8 Financial performance of financial institutions

Financial performance can be defined as the company’s ability to generate new resources from day to day operations over a given period of time. Financial performance in most situations is judged by net income and cash flow operation. The financial soundness of a financial institution may be strong or unsatisfactory varying from one institution to another. (Bank of Uganda, 2007).Financial performance is defined to include; profitability, liquidity, capital structure, market relations etc. The management team should establish financial performance goals including profitability goals. Unless minimum financial performance levels are achieved, it is impossible for a business enterprise to survive overtime.

Financial performance for a particular business entity can be indicated by a number of ways and by management. Managers prepare their own departments. There are number of tools to be considered in financial analysis by the manager. Such tools can be used to measure how a financial institution is performing.

These tools include Use of financial ratios Pae & Jinhan (2001): Thornton & Daniel (2001) Ratio analysis is one of the tools used by financial analysts for making decisions regarding credit and investments. This method utilizes the data found in financial statements to determine a company’s standing. Analysts will compare the company’s ratios to its past performance, as well as to industry statistics to determine risks, trends, and to identify opportunities. This analytical tool facilitates inter-company comparisons and self assessment of the financial institution. These ratios of financial performance can be divided into three main groups; profitability (operating) ratios, which gauge a company’s operating success over a given period of time; liquidity ratios, which measure the short-term ability of a company to pay its debts and to meet unexpected cash needs; and solvency ratios which indicate a company’s ability to meet long-term commitments on a continuing basis. Liquidity ratios These ratios are important in measuring the ability of a company to meet both its short term and long term obligations. They measure the institution’s ability to meet unforeseen expenses. Financial institutions prefer to maintain a high liquidity ratio because it foresees high demand for loans. Financial institutions with high liquidity are usually associated with a sound financial performance. The liquidity ratios are used to determine the liquidity of the institution and can be indicated as; Current Ratio: This ratio is obtained by dividing the 'Total Current Assets' of a company by its 'Total Current Liabilities'. The ratio is regarded as a test of liquidity for a company. It expresses the 'working capital' relationship of current assets available to meet the company's current obligations. The formula: Current Ratio = Total Current Assets/ Total Current Liabilities

Quick Ratio: This ratio is obtained by dividing the 'Total Quick Assets' of a company by its 'Total Current Liabilities'. Sometimes a company could be carrying heavy inventory as part of its current assets, which might be obsolete or slow moving. Thus eliminating inventory from current assets and then doing the liquidity test is measured by this ratio.

The ratio is regarded as an acid test of liquidity for a company. It expresses the true 'working capital' relationship of its cash, accounts receivables, prepayments and notes receivables available to meet the company's current obligations. The formula: Quick Ratio = Total Quick Assets/ Total Current Liabilities Quick Assets = Total Current Assets- Inventory

Debt to Equity Ratio: This ratio is obtained by dividing the 'Total Liability or Debt ' of a company by its 'Owners Equity also known as the Net Worth'. The ratio measures how the company is leveraging its debt against the capital employed by its owners. If the liabilities exceed the net worth then in that case the creditors have more stake than the shareowners. The formula: Debt to Equity Ratio = Total Liabilities / Owners Equity or Net Worth Profitability ratios Profit is defined as the excess of revenue over expenditure. Profits are the biggest indicators of performance of a firm. Financial institutions that make profits are said to be good performers while those that make losses are said to be poor performers. The return on Equity Ratio is the financial ratio often used to determine profitability. The formula: Return on Equity = Net Profit / equity The Leverage Ratios Leverage refers to the employment of debt in operations in anticipation of magnifying returns at high levels of operation. The leverage of the institution is measured by the debt equity ratio and is indicated as; D.E.R= Long Term debt / Total Equity The debt equity ratio is of particular interest to lenders because it shows how much of a safety cushion (in form of equity) there is in an institution to absorb losses.

Solvency Ratios These measure the ability of the firm to meet long term obligations as they fall due. Solvency Ratio= own Capital / total assets

Net Interest Margin This measures how well a bank manages its assets and liabilities. One of the primary intermediation functions of financial institutions is to issue liabilities in terms of credit and use the proceeds to purchase income earning assets. If the bank manager has done a good job of asset and liability management such that the bank earns substantial income on its assets and has low costs on its liabilities, the profits would be high. Net Interest Margin = (Interest income-Interest expenses) / Assets Wherever appropriate and possible, these ratios should be linked to strategic objectives and reporting requirements.

Index analysis Financial managers also use the index analysis to further understand the underlying trends in performance of an organization. Here the different components of the income statement and balance sheet are related to a similar component in a given base year.

By using ratios and index analysis, the management of a firm can be able to establish and predict financial performance well in advance using financial records available. Repayment capacity measures the ability to repay debt from both farm and non-farm income. It evaluates the capacity of the business to service additional debt or to invest in additional capital after meeting all other cash commitments. Measures of repayment capacity are developed around an accrual net income figure (Zwick & Burton,1979) Trebby & James(2009)Performance measures are needed for decisions regarding management compensation packages and resource allocation To properly evaluate a firm’s operations, it is imperative to consider; 1) The firm’s value 2) Amount of invested capital 3) Return on investment

2.9 Relationship between credit management and financial performance

The main objective of credit management is to maximize profits and liquidity which are key aspects of financial performance .Credit issued to customers and the institution’s investments are the prominent sources of income to the financial institutions. Therefore, credit is not a matter of choice but a matter of survival. The firm’s performance depends on the debtors’ ability to meet their obligations. Therefore, when credit is issued to a customer, an ethical and proper credit management policy is required if a bank is to attain a sound financial performance. (Porter, 2000) In order for an entity to financially perform, its managers must have power and skills to manage the credit issued. Power and skills together with appropriate accountability will steer the entity to prosperity, growth, survival and expansion which will enhance the entity’s financial power. It is therefore an obligation for credit managers to ensure maintenance of a proper credit management policy.(Tor Jansson,1993)

Credit should be ethical enough if a financial institution is to sustain a sound financial performance. Pandey, (1995) a good credit management policy means decreased bad debts, low losses, and low borrowing costs. This reduces the operating cost and enhances performance.

2.10 Conclusion

Financial performance depends on Credit management. Therefore all financial institutions like any other form of business organization, in today’s dynamic financial landscape should focus on proper credit management not only to boost and enhance their financial performances but as way of ensuring survival.

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter details the methods that were used to conduct the study. It presents the research design, study population, sampling methods and techniques, sources of data, data collection, presentation and interpretation of the findings, budget of the study and limitations of the study.

3.2 Research Design

The study was descriptive and analytical types of designs to establish the relationship between credit management and financial performance of Kyebando savings and credit co-operative limited. The longitudinal design was used due to the period of time used. The cross-sectional design was also used. The information was collected on both qualitative and quantitative data from both primary and secondary sources. The researcher mostly based on the views of the respondents to derive conclusions and recommendations

3.3 Study population

The study comprised of 80 employees of Kyebando savings and credit cooperative limited in Kyebando, Kampala. Category Total Population Sample Size Board 5 5 Heads of Departments 10 10 Tellers 3 3 Casual workers 2 2 Total 20 20

3.4 Sampling Methods and Techniques

3.4.1 Sampling design

Stratified simple random sampling was used to identify the different strata in the study population based on their functional departments then from each stratum a representative will answer the questionnaires and respondents to the interview questions.

3.4.2 Sample size

A sample of 20 respondents comprising of 20 employees of Kyebando savings and credit cooperative limited

3.5 Sampling procedure

I used convenience sampling in the collection of data because it enabled me to easily identify and locate the elements that I wanted. The procedure helped me to interview formally the elements I wanted on a convenient basis and this was because the technique saved time. The technique involved interviewing a sample size until the required was obtained. Here I choose those people that are friendly and those who don’t appear to be difficult to interview.

3.6 Sources of data

Both primary and secondary sources of data were used though emphasis was put on primary sources.

3.6.1 Primary source of data

The main source of data was the questionnaires which were distributed to respondents. Interviews were used too.

3.6.2 Secondary source of data

The secondary source of data comprised the information that was obtained from the records of Kyebando savings and credit cooperative limited.

3.7 Data collection and instruments

Different methods and instruments were used by the researcher to collect data and these included;

3.7.1 Questionnaires

These were the main data collection instruments that were used and these required the respondents to attempt the questions at their own free will and in the format which the researcher was easily understood.

3.7.2 Interview

The researcher conducted face-to-face interviews with respondents and managed to gather adequate data that was used in writing the report

3.8 Data processing, Analysis and Interpretation of findings

After data collection, the researcher arranged and edited data. It was analyzed and interpreted using SPSS frequencies and percentages. The findings were then presented in a report writing using frequency tables.

3.9 Limitations of the study

The researcher was restricted to a few records because of fear of loss of information to their members.

Poor cooperation from the targeted audience due to the fact that people were busy with their responsibilities at work and failed to understand the importance of the research however much the researcher tried to make it clear to them.

With this the researcher tried to meet the respondents basically during weekends when they seemed to have minimal work in order to minimize the problem of poor cooperation.

The time given for the study was limited for the researcher to exhaust the study variables. However the study was largely successful as the methods used to collect adequate data derived valid conclusions.

Lack of experience as this is the first time to carry out such an activity but will try to follow the instructions of the supervisor.

CHAPTER FOUR

PRESENTATION AND ANALYSIS

4.1 Introduction

In this chapter, the researcher presents analyses and interprets the findings of the study. The findings are based on the data collected using questionnaires that were administered to all the respondents. For purposes of easier understanding, interpretation and analysis, the finding are presented, analyzed and interpreted in the gist of three objectives that the study was set to answer. These were; i) To establish the credit management policies used by Kyebando SACCO ii) To establish the level of financial performance of Kyebando SACCO iii) To establish the relationship between credit management policies and financial performance of Kyebando SACCO Descriptive means of data analysis are mainly used backed by simple tables and percentages. The results of the study are presented, analyzed and interpreted according to the themes of the study, notably, credit management policies, the level of financial performance of Kyebando SACCO, the relationship between credit management policies and financial of Kyebando SACCO

4.2. Background characteristics of the respondents;

Table 1 : Description of respondents by Gender

Cumulative Frequency Percent Valid Percent Percent Valid Male 16 80.0 80.0 80.0 Female 4 20.0 20.0 100.0 Total 20 100.0 100.0

Table 1 above shows that majority of the respondents, 16(80.0 %) were male as compared to females, 4(20.0%). This finding indicates that males continue to dominate positions of responsibility in financial institutions as well as business enterprises as compared of women. Figure 1: Description of respondents by age.

Figure 1 above indicates that 10 % of the respondents were aged 25 years and below, 55.0% were aged between 26 and 36, 20.0% were aged between 37 and 47, 32% were aged between 48 and 58 while 32% were above 48 years of age. By implication, majority of the respondents being mature meant that they were informed and knowledgeable about the variables. Table 2: Description of respondents by working experience

Cumulative Frequency Percent Valid Percent Percent Valid Below 3 year 6 30.0 30.0 30.0 3-5 years 4 20.0 20.0 50.0 6 -8years 10 50.0 50.0 100.0 9 years and above 0 0 0 100.0 Total 20 100.0 100.0

Table 2 shows that 30% of the respondents indicated that they have been engaged with their respective departments for a period less than 1 year, 20.0% indicated that they have been engaged with their departments for the period between 1-2 years while 50.0% indicated that they have been engaged for more than 3 years. In all, majority, 50.0% indicated that they have been engage with the institution for the last three years. This creates an impression that the respondents had a vast experience on the dynamics of the institutions and therefore more knowledgeable and informative as regards the operations of Kyebando SACCO and other SACCOs in Kampala District.

Figure 2: Description of respondents by level of education

Figure 4 shows that 2(10.0%) of the respondents were diploma holders, 13(65%) were degree holders, 3(15.0%) had completed masters degree while 2(10.0%) had professional accreditations such as Diploma in Banking and ACCA. Majority respondents (75%) were degree holders( Bachelors and Masters) implying that Kyebando SACCO considers graduate employees to be very creative, knowledgeable and possessing expertise in varied areas of banking as compared to employees from other cadres.

Figure 3: Description of respondents by designation

Figure 2 shows that 9(45.0%) of the respondents were credit officers, 4(20.0%) were loans officers 6(30.0%) were finance officers while 1(5.0%) was a Public Relations Officer. The representation of he key respondents from the most crucial departments regarding information on interest rates and loan portfolio investment implies that the responses given were cross cutting the departments in the bank and therefore were reliable.

4.3 Credit management policies used by Kyebando SACCO

Table 3: Showing the views of the respondents on credit management policies used by Kyebando SACCO

Items SDA DA NS A SA 1. There is a credit 1(5.0%) 1(5.0%) 1(5.0%) 11(55.0%) 6(30.0%) management committee 2. People apply for credit 5(25.0%) 3(15.0%) 2(10.0%) 6(30.0%) 4(20.0%) using application forms 3. People apply for credit 3(15.0%) 2(10.0%) 1(5.0%) 9(45.0%) 5(25.0%) using project proposals. 4. Credit is granted through 2(10.0%) 1(5.0%) 0(0%) 6(30.0%) 11(55.0%) verbal interaction with customers. 5. Kyebando SACCO bases 0(0.0%) 2(10.0%) 2(10.0%) 6(30.0%) 10(50.0%) on the value of security.

6. The SACCO also 1(5.0%) 2(10.0%) 1(5.0%) 5(25.0%) 11(55.0%) considers the nature of business 7. Kyebando SACCO 1(5.0%) 1(5.0%) 1(5.0%) 11(55.0%) 6(30.0%) considers adequacy of information 8. Legal action is taken upon 5(25.0%) 3(15.0%) 2(10.0%) 6(30.0%) 4(20.0%) loan defaulters

9. Pledged assets are 3(15.0%) 2(10.0%) 1(5.0%) 9(45.0%) 5(25.0%) normally taken over in case of default. 10. Visits are made to 2(10.0%) 1(5.0%) 0(0%) 6(30.0%) 11(55.0%) beneficiaries 11. Inadequate staff makes 0(0.0%) 2(10.0%) 2(10.0%) 6(30.0%) 10(50.0%) loan monitoring problematic. 12. The inaccessibility of 1(5.0%) 2(10.0%) 1(5.0%) 5(25.0%) 11(55.0%) clients also makes loan monitoring hard.

Item 1 from table 3 shows that 1(5.0%) of the respondents strongly disagreed there is a credit management committee that is responsible for reviewing and monitoring risk

28 management policies in Kyebando SACCO 1(5.0%) disagreed, 1(5.0% were not sure, 11(55.0%) agreed while 6(30%) strongly agreed. In all, majority respondents 85% agreed that there is a credit management committee that is responsible for reviewing and monitoring risk management policies in Kyebando SACCO. This implies that reviews are made and monitoring carried out before credit is advanced. By doing such, its provides assurance that the right customers access credit. The findings of the study are in line with observations made by Russell &Thomas (1984) that the process of credit management begins with accurately assessing the credit-worthiness of the customer base. This is particularly important if the company chooses to extend some type of credit line or revolving credit to certain customers

Item 2 from table 3 shows that 5(25.0%) of the respondents strongly disagreed that people apply for credit using application forms, 3(15.0%) disagreed, 2(10.0%) were not sure, 6(30.0%) agreed while 4(20.0%) strongly agreed. Majority respondents ( 50.0%) agreed that clients of Kyebando SACCO apply for credit using application forms. This is a better credit management practice because it enables management to keep track of the records pertaining to the funds that have been borrowed by the clients. Availability of such information solves the problems of information asymmetry that would provide a possibility of fraud and default. The findings of the study are supported by Jaffee & Dwight (1984) that credit management emphasizes collection, compilation, storage, analysis and retrieval of information regarding credit and involves qualifying the extension of credit to a customer, monitors the reception and logging of payments on outstanding invoices, the initiation of collection procedures, and the resolution of disputes or queries regarding charges on customer invoice.

Item 3 table 3 shows that 3(15.0%) strongly disagreed that clients apply for credit using project proposals, 3(10%) disagreed, 1(5.0%) were not sure, 9(45.0%) agreed while 5 (25.0%) strongly agreed. In all, majority respondents indicated that sometimes, people use project proposal to apply for credit from Kyebando SACCO. This implies that Kyebando SACCO uses varied approaches in selecting the beneficiaries to credit other

29 that the usual methods of considering clients with accounts. This is in agreement with the findings of Wiedenbrugge & Marcel,(2010) that credit management policy should have enough flexibility to adapt to changing market conditions because customers and organizations change overtime thus the financial institutions need to go more into detail on what the integrated approach means in terms of people, culture systems, management and the organization

Items 4 from table 3 shows that 2(10.0%) of the respondents strongly disagreed that credit is granted through verbal interaction with customers 1(5.0%) disagreed, none indicated they were not sure, 6(30.0%) agreed while 11(55.0%) strongly agreed. In all majority respondents (85%) agreed that credit is granted through verbal interaction with the customers. Verbal interactions enable the management of Kyebando SACCO to collect detailed information from the respondents.

Item 5 from table 3 shows that none of the respondents strongly disagreed that Kyebando SACCO bases on the value of security, 2(10%) disagreed, 2(10%) were not sure, 6(30. %) agreed while 10(50.0%) strongly agreed. In all 80% of the respondents agreed that the value of the property mortgaged is considered greatly. By implication, this enables the staff of the SACCO to easily convert the property into money to recover the funds given to the clients. The findings are in line with those of Pandey (2005) that security against which failure to repay, the collateral should be in a good condition and easily marketable. The security should always be fully pledged. If the financial institution takes security for an advance, it must ensure that the security has been completed before advance is made to borrow. The customer/borrower should understand the implication of depositing a security and also appreciate that the security formalities must be completed before borrowing takes place.

Item 6 from table 3 shows that 1(5.0%) strongly disagreed that the SACCO also considers the nature of business, 2(10.0%) disagreed, (5.0%) were not sure, 5(25.0%)

30 agreed while 11(55.0%) strongly agreed. Such ensures that credit is accessed by people with high propensity of paying back.

Item 7 from table 4 shows that 1(5.0%) of the respondents strongly disagreed that Kyebando SACCO considers adequacy of information, 1(5.0%) disagreed, 1(5.0%) were not sure, 11(55.0%) agreed while 6(30.0%) strongly agreed. Majority respondents (85.0%) agreed that clients of Kyebando SACCO considers adequacy of information. This narrows down the chances of default that may arise due to deficiency information provided.

Item 8 table 3 shows that 5(25.0%) strongly disagreed that legal action is taken upon loan defaulters, 3(15.0%) disagreed, 2(10.0%) were not sure, 6(30.0%) agreed while 4(20.0%) strongly agreed. The use of legal action enables management to recover the funds borrowed and may as well prevent other clients form defaulting after they have become aware of the legal penalties

Items 9 from table 3 shows that 3(15.0%) of the respondents strongly disagreed that pledged assets are normally taken over in case of default 2(10.0%) disagreed, 1(5.0%) indicated they were not sure, 9 (45.0%) agreed while 5(25.0%) strongly agreed. This implies that confiscation of property of the clients provides an easy method of converting the collateral security to money to compensate for what the client borrowed.

Item 10 from table 3 shows that 2(10.0%) of the respondents strongly disagreed that visits are made to beneficiaries, 1(5.0%) disagreed, none indicated that they were not sure, 6(30.%) agreed while 11(55.0%) strongly agreed. In all 85% of the respondents agreed that management of Kyebando SACCO organized visits to the clients

Item 11 from table 3 shows that none of the respondents strongly disagreed that inadequate staff makes loan monitoring problematic, 2(10.0%) disagreed, 2(10.0%) indicated that they were not sure, 6(30.0%) agreed while 10(50.0%) strongly agreed. In

31 all 80% of the respondents agreed that when there is inadequate staff, loan monitoring becomes problematic and can increase on the rate of defaulting. Item 12 from table 3 shows that 1(5.0%) of the respondents strongly disagreed that inaccessibility of clients also makes loan monitoring hard, 2(10.0%) disagreed, 1(5.0%) indicated that they were not sure, 5(25.0%) agreed while 11(55.0%) strongly agreed. In all 80% of the respondents agreed that when the clients are inaccessible, it makes loan monitoring hard.

4.4 Financial Performance of Kyebando SACCO

Table 4: Views of the respondents on the financial performance of Kyebando SACCO

Items SDA DA NS A SA 1. Financial statements show a 1(5.0%) 1(5.0%) 1(5.0%) 11(55.0%) 6(30.0%) decrease in profit in the recent years. 2. The SACCO loans 5(25.0%) 3(15.0%) 2(10.0%) 6(30.0%) 4(20.0%) contribute largely to the profits 3. Land titles contribute to the 3(15.0%) 2(10.0%) 1(5.0%) 9(45.0%) 5(25.0%) losses in Kyebando SACCO.

4. Improvements can be done 2(10.0%) 1(5.0%) 0(0%) 6(30.0%) 11(55.0%) to improve the loan department in Kyebando SACCO. 5. Different tools are used to 0(0.0%) 2(10.0%) 2(10.0%) 6(30.0%) 10(50.0%) analyze its performance.

6. Performance measures are 1(5.0%) 2(10.0%) 1(5.0%) 5(25.0%) 11(55.0%) used to make decisions 7. Financial performance is the 1(5.0%) 1(5.0%) 1(5.0%) 11(55.0%) 6(30.0%) main indicator of the SACCO’S survival. 8. The financial performance is 5(25.0%) 3(15.0%) 2(10.0%) 6(30.0%) 4(20.0%) obtained from the financial statements of the SACCO. 9. Financial performance 3(15.0%) 2(10.0%) 1(5.0%) 9(45.0%) 5(25.0%) reports are drawn periodically 10. Financial reports are used 2(10.0%) 1(5.0%) 0(0%) 6(30.0%) 11(55.0%) only internally by the SACCO.

Item 1 from table 4 shows that 1(5.0%) of the respondents strongly disagreed that financial statements show a decrease in profit in the recent years, 1(5.0%) disagreed, 1(5.0% were not sure, 11(55.0%) agreed while 6(30%) strongly agreed in all, majority

33 respondents 85% agreed that financial statements show a decrease in profits in the recent years. This could imply that the rate of defaulting was high as well as the costs of recovery hence affecting the levels of profitability.

Item 2 from table 4 shows that 5(2.5.0%) of the respondents strongly disagreed that the SACCO loans contribute largely to the profits 38(15.0%) disagreed, 2(10.0%) were not sure,, 6(30%) agreed, while 4(20.0%) strongly agreed. .

Items 3 from table 4 shows that 3(15.%) of the respondents strongly disagreed that land titles contribute to the losses in Kyebando SACCO 2(10.%) disagreed, 1(5.0%) were not sure, 9(45.0%) agreed while 5(25.0%) strongly agreed. In all majority respondents (70%) agreed that land tittles contribute to losses in the SACCO. This occurs when some clients use forged land titles that management fails to verify with the land boards.

Item 4 table 4 shows that 2(10.0%) strongly disagreed that improvements can be done to improve the loan department in Kyebando SACCO, 1(5.0%) disagreed, none were not sure, 6(30%) agreed while 11(55.0%) strongly agreed.

Item 5 from table 4 shows that none of the respondents strongly disagreed that different tools are used to analyze its performance, 2(10%) disagreed, 2(10%) were not sure, 6(30.%) agreed while 10(50.0%) strongly agreed. Errors that would create loopholes in the assessing the financial performance of the institution using one tool can easily be rectified using the other tools.

Item 6 from table 4 shows that 1(5.0%) strongly disagreed that performance measures are used to make decisions, 2(10.0%) disagreed, 1(5.0%) were not sure, 5(25.0%) agreed while 11(55.0%) strongly agreed.

Item 7 from Table 4 indicates that 1(5.0%) of the respondents strongly disagreed, disagreed, and were not sure respectively that financial performance is the main indicator of the SACCO’s survival,11(55.0%) agreed while 6(30.0%) strongly agreed. All

34 financial institutions including Kyebando SACCO use financial performance as an indicator of their levels of competitiveness in service delivery.

Item 8 from Table 4 shows that 5(25.0%) of the respondents strongly disagreed that financial performance is obtained from the financial statements of the institutions, 3(15.0%) disagreed, 2(10.0%) were not sure 6(30.0%) agreed while 4(20.0%) strongly agreed. Though other tools can provide a basis of gauging financial performance, financial statements serve better.

4.5 Relationship between credit management and financial performance

Financial Credit management performance Credit Management Pearson Correlation 1 .703** Sig. (2-tailed) .000 N 20 20 Financial Pearson Correlation .703** 1 performance Sig. (2-tailed) .000 N 20 20 ** Correlation is significant at the 0.01 level (2-tailed).

The relationship between credit management and financial performance was statistically tested using Pearson’s correlation matrix. This was used because both credit management and financial performance were numerical. A strong positive relationship (r=.803*, p<0.01) was established because .803 is close to 1, with a p-value of 0.000 which is less than 0.01 implying that a positive relationship that was significant at 0.01 level existed between credit management and financial performance. To further establish the significance of the contribution of credit management to financial performance, the coefficient of determination (r2) was computed. Since r=0.803, r2=0.644. This implies that effective credit management contributed 64% on the levels of

35 financial performance of Kyebando SACCO while 36% was contributed by other factors. The implication of the above relationship is that effective credit management procedures positively influence financial performance and therefore reminds the management of Kyebando SACCO of the need to effectively streamline credit management procedures and strategies if they are to achieve higher levels of financial performance.

The findings of the study are supported by Porter (2000) that the firm’s financial performance depends on the debtor’s ability to meet their obligations. Porter further recommended that if an entity is to effectively perform financially, the managers must have power and skills to manage the credit issued.

4.6 Regression Analysis

Predictors Adjusted R Df Mean Square F Sig. Square 0.596 1 417.216 86.212 0.000a Standardized t Sig. coefficients Adjusted R Std error Beta (B) square Constant 0.180 3.409 0.006 Credit 0.596 0.071 0.613 9.265 0.000 management Predictor: (constant) Credit management Dependent: financial performance Source: Primary data.

The regression model shows adjusted R2 value of 0.078 between credit management and financial performance suggesting that credit management predicted 45.5% of the variance in financial performance. The R2 = 0.454, beta 0.678, t = 9.2654 and significance of 0.000 suggested that credit management attributes were a strong significant predictor of financial performance.

CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter presents the summary of findings, conclusions and recommendations.

5.2 Summary of the findings

The summary of the findings of the study are presented according to the themes that were developed from the objectives of the study 5.2.1 Summary on Credit management policies used by Kyebando SACCO The study established that Kyebando SACCO used a number of credit management strategies to ensure that that management mitigates loan default. The strategies used included assessment of the clients before credit is given, assessing the worth of the security pledged, making visits to the clients, taking legal action against the defaulters and confiscation of the property that has been pledged by the clients. Such methods used are meant to reduce the vulnerability of the institution to the shocks that would result from defaulting by the client. Financial institutions have to ensure that there are effective credit management policies to handle their institutions where borrowers may default on their repayments or else they face cash flow problems which eventually affects their liquidity position.

5.2.2 Summary on Financial performance of Kyebando SACCO

The study assessed the financial performance of Kyebando SACCO and it was established that the financial performance of the institution was declining. This was deduced from the responses of the respondents that in the recent years, the profit levels of the institution have been indicating a decline.

5.2.3 Summary on the relationship between credit management and financial performance

The study established a high positive relationship(r=.703, p<0.01) between credit management and financial performance of the institution. This implies that the more effective the credit management policies that are in place, the higher will the level of financial performance. This is largely so because better client assessment techniques, continuous monitoring and provision of adequate information about the use of the funds accessed reduces on the misuse of credit accessed by clients in non productive business activities, reduces on the costs of recovery of the money in case of default and guarantees pay back by clients since the most capable clients are screened out.

5.3 Conclusion.

The study concluded that when there are effective credit management policies in place, default rates are low; costs of recovering and monitoring the clients are also low. This brings about high levels of profitability and financial performance.

5.4 Recommendations

The researcher made the following recommendations. There is need for management of Kyebando SACCO opening up a ‘ business clinic’ from where the clients accessing the credit can be sensitized from such that they can invest the funds accessed in more productive ventures that could enable them to easily pay back at the same time realizing profits.

There is need for organizing refresher training courses for the staff as this will equip them with the efficient and cost effective methods of recovering funds from the clients.

Kyebando SACCO should encourage group lending method. With this, the rate of default is low since the members stand surerity and as well, it reduces on the costs that would be incurred by management of the SACCO in monitoring individual clients since the heads of the groups do it themselves.

Since the study established that Kyebando SACCO has made losses from land titles that are presented by clients that are sometimes fake, there is need for management putting in place a land title verification committee which could work with land management boards at district level and the LCs. This would enable the institutions to extend credit to clients with genuine titles.

There is need for deploying more staff in the loans department such that monitoring and assessment exercises can be made more effective

5.5 Areas for further research

This study has been carried out on a small scale using one case study of Kyebando SACCO. However, the different SACCOs now spread all over Uganda have different operational procedures, This makes the findings of the study inconclusive hence implying the need for a comparative analysis of credit management policies used by SACCOS and their financial performance levels at a regional scale.

A study can further be carried out on the effect of the interest rate differentials on the financial performance of SAACOs in Central region or any other part of Uganda.

References

Bank of Uganda October 20,2010

Campello, Murillo, Giambona, Erasmo, Graham, John R, Harvey& Campbell (2010)

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Edwards & Steven, (2008) Journal of Finance.

Jaffe & Dwight (2005) Review of Financial Studies.

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New vision February 20,2010

Pae, Jinhan, Thornton, Daniel (2001) Atlantic Economic Journal

Roberts & Salima (2006); Wilson &Nick (2006) Special Edition on credit monitoring.

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Appendices Appendix 1: Questionnaire for Staff

Dear respondent, The researcher is undertaken a study to determine credit management and financial performance taking a case study of Kyebando Savings and Credit Cooperatives Limited in Kampala. The information you give is strictly of academic purposes and will be treated confidentiality.

Your willingness to help in the research effort is highly appreciated. SECTION A: BACKGROUND INFORMATION 1. Name of respondents (Optional)………………………………….. 2. Age of respondent Under 25 25-35 36-45 Above 46 3. Gender Male Female 4. Education level Masters level Bachelor level Diploma Certificate Others (Specify)……………………………………………………. 5. For how long have you been employed in Kyebando Saving and Credit Cooperative. 0-3 years 4-5 years

6-8 years 9 years and above 6. Position held in the SACCO……………………………………

SECTION B: CREDIT MANAGEMENT (TICK IN THE APPROPRIATE BOX) 1. SA - Strongly Agree 3. NS – Not sure 4. SDA – Strongly Disagree 2. A – Agree 4. DA – Disagree SN. QUESTIONS SA A NS DA SDA 1. There is a credit management committee that is responsible for reviewing and monitoring risk management policies in Kyebando SACCO. 2. People apply for credit using application forms 3. People apply for credit using project proposals. 4. Credit is granted through verbal interaction with customers. 5. Kyebando SACCO bases on the value of security when selecting customers for credit extensions. 6. The SACCO also considers the nature of business while selecting customers for credit extensions 7. Inadequate information given by customer is a hindrance in credit management. 8. Legal action is taken upon loan defaulters 9. The pledged assets are normally taken over by the SACCO in case of default. 10. The SACCO visits beneficiaries to access loan performance 11. The SACCO has limited staff so loan monitoring becomes problematic. 12. The inaccessibility of clients also makes loan monitoring hard.

FINANCIAL PERFORMANCE SN. QUESTIONS SA A NS DA SDA 1. Financial statements show a decrease in profit in the recent years. 2. The SACCO loans contribute largely to the profits 3. Land titles contribute to the losses in Kyebando SACCO. 4. Improvements can be done to improve the loan department in Kyebando SACCO. 5. Kyebando SACCO uses different tools to analyze its performance. 6. There are performance measures used to make decisions 7. Financial performance is the main indicator of the SACCO’S survival. 8. The financial performance is obtained from the financial statements of the SACCO. 9. Reports about the financial performance are drawn periodically 10. The financial reports are used only internally by the SACCO.