Factors affecting the financial performance of microfinance institutions in Uganda

Abstract

The purpose of the study was to examine factors affecting the performance of microfinance institutions in Uganda. Pride Micro-Finance was used as a case study. The objectives of the study were; to assess the effect of risk management practices towards financial performance of Pride Micro-finance Ltd, to establish the influence of lending rates on the performance of Pride Micro-Finance Ltd and to establish the relationship between management efficiency and financial performance of Pride Micro-Finance Ltd. The study sample was 163 and the findings showed that that all these factors affect the financial performance of microfinance institutions in Uganda. As indicated from the correlation coefficient of credit risk management, lending rates and management efficiency on financial performance, which was 0.289, 0.233 and 0.29 all significant at a 5% confidence level respectively. The study recommends that senior management in the microfinance institutions should develop policies and procedures for identifying, measuring, monitoring, and controlling credit risk. The microfinance institutions should also establish overall credit limits both at individual borrowers’ and counterparties’ levels since this is critical in the credit appraisal process. Microfinance institutions should seek to adequately control their credit risk by keeping low their ratio of nonperforming loans, which is the major determinant of microfinance institutions financial performance. Lastly, micro finance institutions need to develop credit policies that will give them a competitive advantage over the other players in the market for them to adequately navigate and survive in this industry.