The impact of risk management on credit processes of microfinance institutions in Uganda

Abstract

This study examines the impact of risk management in the credit processes of financial institutions in Uganda. In the world of volatile cash movements and increasing global lending and borrowing of funds, financial institutions are continually affected by borrower’s late and nonpayment of loan obligations. This result from the institution's inability to collect anticipated interest earnings as well as loss of principal resulting from loan defaults. Financial institutions carry out credit risk management as a measure of administering credit to borrowers. With well-developed credit processes and procedures, credit appraisal, training of staff and setting credit standards and terms to offset the possibility for loss and improve on financial performance. Financial Institutions thus develop strategies to either eliminate or reduce this credit risk. In the management of this risk, financial institutions are concerned about their financial performance The previous scholars have addressed the key issues in relation to Credit Risk and portfolio management, profitability, performance of loans and the strategies and controls to manage incidences of default and made appropriate recommendations. While there have been much research on Credit, few researchers have taken into consideration the gaps in credit processes, failure points, breaches and its impact to financial institutions with its resultant loss. In the study, descriptive cross-sectional survey design was used because this method is effective when gathering data of a sample population at a particular point in time. The study will employed purposive and convenient sampling techniques with primary and the secondary data, using a self-administered questionnaire (put to reliability and validity tests). Questionnaires respondents were sampled out of the financial and banking industry. However, despite the efforts made to address the poor credit risk management, financial institutions still have difficulties resulting from the credit risk management processes undertaken and changes in customer base leading to decreasing financial performance. To most financial institutions, their credit risk management goal is to arrange the institution’s financial affairs in such a way that however much borrowers fail to pay back the loan in the future.