The effect of credit management policy on loan portfolio performance in microfinance institutions; case study: Pride Microfinance in Kampala business district

Abstract

This study was purposely undertaken to determine the relationship between credit management policy and loan portfolio performance of Pride Microfinance. Credit management policy was the independent variable and loan portfolio performance was the dependent variable. This study was guided by the following objectives: to assess the effect between credit risk transfer, credit risk diversification and credit risk monitoring towards loan portfolio performance of Pride Microfinance. The study was supported by portfolio theory and expectancy disconfirmation theory. The study was conducted using a cross-sectional design. Quantitative research approach was used alongside a qualitative approach. A sample size of 94 respondents was selected. Both simple random and purposive sampling were used in selecting respondents. A questionnaire, interview guide and documentary review checklist were preferred for data collection. It was further analyzed using both descriptive statistics and inferential statistics. Findings revealed that the two dimensions of credit management policy, i.e., credit risk diversification and credit risk monitoring were positively and significantly related to loan portfolio performance of pride micro finance (P-value= 0.856 and 0.797) respectively, whereas, credit risk transfer was negatively and significantly related to loan portfolio performance of pride micro finance (P-value= -0.528). It was concluded that credit management policy had a positive and significant relationship with loan portfolio performance of Pride Microfinance. It was Pride Microfinance need to increase the use of insurance firms so as to transfer potential risks in case of defaulting clients; put in place credit risk strategy which can continuously be followed and monitored; microfinance institutions to consider reinforcing a system of regular independent credit and compliance, and also make a detailed assessment of loan viability before financing/ advancing a loan facility to a given company