Credit risk management and loan performance of micro finance institutions in Uganda: a case study of seep Uganda ltd microfinance

Abstract

Credit risk is one of the greatest risks faced by micro finance institutions. With the increasing number of micro finance institutions making huge losses on bad loans, this study sought to determine the relationship between credit risk management and loan performance in micro finance institutions in Uganda. This study specifically looked at the relationship between credit risk identification and loan performance, the relationship between credit risk assessment and loan performance and the relationship between credit risk control and loan performance. To undertake the study, a mixed approach was used using both quantitative and qualitative approach. The study sought to use the 5Cs of credit to determine the relationship between credit risk management and loan performance. Furthermore, descriptive research design was conducted. Data was collected through the use of questionnaires and analyzed using descriptive statistics to determine the relationship between credit risk management variables and loan performance variables. The respondents were staff from SEEP (U) Ltd involved in credit who made up 20% of the respondents, as well as clients of SEEP (U) Ltd that receive loans from the organization who made up 80% of the respondents, making up a total of 110 respondents. Data was collected using questionnaires and analyzed using SPSS where descriptive and inferential statistics were used to determine the relationship between credit risk management variables and loan performance variables. The study also used financial reports to obtain qualitative data for analyzing loan performance which included information on outstanding loan balances, number of days past due, and loan loss provision. The findings revealed that the 5Cs of credit when adequately applied led to better performance of the loans, and when not adequately applied, led to poor performance of the loans. This further revealed that the role of senior management in applying procedures of identifying, assessing and controlling credit risk was an important factor in managing credit risk. The study found that there was a significantly positive relationship between credit risk management and loan performance. The study concluded that the credit risk identification, credit risk assessment, analysis and evaluation and credit risk control are good indicators of the model and therefore the three indicators used in credit risk management have shown a positive relationship with the loan performance of Micro Finance Institutions. The study also concluded that the approaches used by Micro Finance Institutions in screening and risk analysis before granting credit to customers are very effective.