The impact of group lending methodology on default case study: finca Uganda- Arua branch

Abstract

Microfinance has proved to be one of the most popular ways of making financial services available to the poor. Both formal and informal financial institutions have adopted delivery systems and loan conditions to meet the specific needs of their clients. Although much attention has been given to the contribution of microfinance in poverty alleviation, little discussion has taken place on loan default management in order for the financial institutions to remain financially viable and strong. The study aimed at investigating the impact of group lending methodology on loan default specifically examining the credit methodologies used in loan management, group guarantee system on loan default management and assess the factors that affect loan recovery. The study objectives were achieved through field survey using questionnaires and interviews by purposive sampling method and stratified sampling method that helped to elicit information from specific staff of FINCA as well as clients. The study was carried out in Arua municipality reason being that substantial number of FINCA group clients conduct business within the town. At total of 86 respondents were selected using purposive and stratified sampling method based on convenience. The data gathered from the field were analysed through use of SPSS and findings and recommendations were put forth as evidence of objectives being achieved to conclude the study. The study established that measures to discourage loan default such as group guarantee become ineffective with time. Similarly, continued access to follow-on loans was also established as incentive to repay the loans, insistence on savings in group lending methodology ensures that security of an individual borrower is built as members savings served as insurance against loan default.The study recommends that FINCA (U) Ltd management should regularly review credit risk technique used and expand loan monitoring framework among group members. Study further recommended that FINCA (U) Ltd portfolio management strategies should focus more on the internal cause of loan default which they have more control over by training the group members thoroughly before giving them loan.