Credit policies and loan recovery in microfinance institutions

Abstract

The purpose of the study was to establish the relationship between credit policies and Loan Recovery in Letshego Uganda Limited. The objectives of the study were to establish the existing credit policies used by Letshego Uganda Limited in loan recovery. To establish the challenges of managing credit in Letshego Uganda Limited. To establish the relationship between credit policies and loan recovery in Letshego Uganda Limited. The study was a cross sectional survey where both qualitative and quantitative data were gathered in order to establish the relationship between the variables under study. Data was collected from employees of the credit and loans department and sample size comprised 44 respondents who were purposively selected and simple random sampling was jointly used to minimize biased results. Self-administered questionnaires were the main instrument of the study and data was analyzed using frequencies, percentages, regression model and SPSS was used to establish the relationship between credit policy and loan recovery. The results of this study indicated that Letshego Uganda Limited used credit standards, credit terms and collection procedures to manage its debts, costs and benefit implications were also experienced. The study revealed that credit policies exist in Letshego Uganda Limited but there was inadequacy in implementing them which negatively impacted on Letshegos loan recovery between the periods “2009-2011” where the default rate was steadily increasing. It is therefore this steady rise that necessitates the investigation of its probable cause. Besides this, there exists a strong positive relationship between credit policy and loan recovery that’s to say a correlation of 0.028 between credit standards and loan recovery, correlation of 0.199 between credit terms and loan recovery and a correlation of 0.105 between collection efforts and loan recovery (using correlation SPSS).This implies that the effectiveness of credit policy leads to higher loan recovery levels. The researcher recommends that Letshego makes flexible repayment plans for customers experiencing financial difficulty, and formulate hardship programs for borrowers that are late on repayment through extension or lowering of payments