Analysis of non-performing loans in micro finance institutions in Uganda: A case of Pride Microfinance Limited

Abstract

The purpose of the study was to analyse non-performing loans in Microfinance Institutions in Uganda with specific objectives to establish the trend of non- performing loans, to identify the causes of non-performing loans and to also identify mechanisms that can be employed to reduce the level of non-performing loans.

The background characteristics of the respondents reveal that majority of the respondents were Credit Officers (45.83%), and Credit Analysts (25%) whereas the least respondents were Managers (2.08%), Compliance Officers (2.08%) and Risk Officers (2.08%). Furthermore, most of the respondents had experience in the micro finance industry and with micro finance credit processes of 1- 5 year (39.58%) and 6- 10 years (33.33%) and those with the least experience being less than one year (12.50%) and over 10 years (14.58%).

According to the results of the study, there was an upward linear trend of non- performing loans from 2008 to 2017(10 years). Non-performing loans were majorly attributed to poor risk assessment and management, lenient/lax credit terms, poor loan monitoring and recovery mechanisms, harsh economic conditions like high interest rates, staging of businesses and collateral by customers to acquire loans, multiple borrowing by clients, overfunding of clients with little or no capacity to repay the loans and issuing of ghost loans by credit officers.

The major mechanisms that can be adopted to reduce the level of non- performing loans that were identified from the study include; Strong Know Your Customer(KYC), policies, good loan underwriting, increased monitoring, good risk assessment before loan disbursement, constant loan monitoring and follow up, charging fair interest rates, establishment of strong credit committees, holding area meetings by branch teams, utilisation of internal and external debt collectors, constant training of credit officers, financial literacy for clients, regulating the amounts lent out in relation to the source of income, constant appraisals of credit officers and management, constant reminders to clients with loans to make payments, Investment in debt collection, Putting strong credit controls in place, introducing performance analysis tools for those monitoring loan performance, enhanced group cohesion for group loans that ensure good performance and adherence to given procedures and employing aggressive loan recovery mechanisms

This study will contribute to the existing literature on non-performing loans in Microfinance Institutions in Uganda and other developing economies. The findings of the study will also be very useful in designing policies and procedures for credit departments in MFIs. The study will also provide credible and relevant information in the strategic management of credit operations of micro finance institutions in Uganda