Credit policy and loan portfolio performance

Abstract

The study focuses on examining the relationship between credit policies and loan portfolio performance in microfinance institutions in Uganda. The study objectives included; assessing the effects of credit terms, examining the effect of credit analysis and standards and determining the relationship between credit collection efforts. The study used a case study design and adopted both qualitative and quantitative research approaches. The qualitative approach was used to collect informative data that was got in form of statements and narratives. The quantitative approach was used to collect descriptive data this was used to develop tables. The study involved a sample of 59 respondents drawn from a study population of 70 people. SPSS version 16 was used to analyze the quantitative data to develop tables. The time frame of the study was cross section. The findings of the study indicated that Microfinance institutions mainly provide group guaranteed loans where a fellow member acts as social security. They also provides individual loans where borrowers provide collateral security. It provides a variety of loan products such as school fees loans, business loans and salary loans. The results revealed that a significant correlation existed between credit policy and loan portfolio performance with positive (r = .260* and P < 0.05) meaning that credit policy relates to loan portfolio performance. The conclusions of the study revealed that Microfinance institutions lend out a maximum of 100 million ushs. There is a lot of local market competition by other non regulated financial institutions due to high interest rates charged on borrowing. There is need for management to supervise efficiently and effectively the loans lent. Recommendations of the study included; MFIs should use information technology, implement lenient credit policies, train employees on how to use 5cs that is collateral, conditions, capital, conditions and capacity and use third party agents