Analysis of non-performing loans in micro finance deposit taking institutions (MDIs) in Uganda: a case study of Pride Microfinance Limited
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The purpose of the study was to analyze Non-performing Loans in Ugandan Micro Deposit-taking Institutions using Pride Microfinance Limited (PML) as a case study. The study focused on establishing the trend in Non-performing loans at PML for the period 2016 to 2020, the causes of non-performing loans at PML as well as recommending appropriate strategies to improve the loan performance at Pride Microfinance Ltd and other MDIs. The study adopted a descriptive survey research design and used both quantitative and qualitative approaches. The study population was the 250 staff who were working at the 10 branches in Kampala City by 31st December’2020. Further, the study targeted 25 staff from each of the 10 branches in Kampala City. Out of the 250 staff, 230 staff were sampled and 23 from each of the 10 branches. 20 respondents from each of the ten branches were reached out by the questionnaires while 3 respondents from each of the ten branches were interviewed directly. The study adopted purposive sampling to select both the key informants. The study used both primary and secondary data. The main sources of secondary data were Audited financial statements and published annual reports of Pride Microfinance Ltd for the period 2016-2020 which were mainly accessed from the Institution’s website while primary data was collected directly through questionnaires and face to face interviews with the help of an interview guide. Quantitative data was analyzed using SPSS version 22. The findings from the financial statements of Pride Micro finance Ltd (2016-2020) showed that NPLs reduced from the year 2016 to the year 2018 then rose until 2020. NPRL decreased drastically from 2016 to 2019 then suddenly rose in 2020. The Institution had the worst performance registered in 2020 at NPLR of 5.21 percent and huge NPLs of UGX. 9,551 million. In absolute figures, 2018 was the best year as the Institution registered the lowest NPLs of UGX. 3,504 million. However, in terms of NPLR, 2019 was the best year as the institution registered the lowest NPLR of 2.30. The results from both the questionnaires and interviews were consistent with the institution’s financial statements which indicated that the institution’s non-performing loans has been on a rise more so in the year 2020. The study also found out several causes of non-performing loans at Pride Microfinance Ltd which included; weak lending policies, lack of collateral security to back up the loan in case of default, inefficiency in monitoring and control mechanisms for loans sanctioned, failure to obtain proper information on customers concerning their loan repayment ability before sanctioning of loans, clients serving multiple loans, improper evaluation and analysis in the sanctioning and disbursement of the loans, high repayment rates, inadequate credit review, inadequate loan supervision, poor credit appraisal, disbursement of loans to agriculture sector, adverse effects of COVID’19 and stiff competition. The outstanding appropriate strategies to improve on the performance of loans included; proper monitoring and supervision of loan beneficiaries to avoid loan diversion, training of loan beneficiaries on how well to utilize the funds, thorough vetting of applicants before loan disbursement, frequent performance of due diligence during loan appraisal, Pride Microfinance Ltd making clear and effective credit policies and procedures and regularly review them, collateral and guarantees should be considered as credit risk reduction strategies as well as strengthening and monitoring monetary policies by BOU. The study concludes that Pride Microfinance Ltd should prioritize a risk management approach that is holistic, all-encompassing, and embedded across the business to ensure a resilient foundation that reduces rising levels of Non-performing loans in the long term. Basing on the findings, the study suggested more recommendations that can help in improving loan performance of Pride Microfinance Ltd and other MDIs and these included; regular monitoring of loan performance by clients, assessing which sectors/clients are most at risk of defaulting and re-examine loan loss provisions under different economic scenarios and performing rigorous credit loss assessments to assist in better risk assessment and pricing of their credit facilities.