Loan Defaults and Operation of Microfinance Institutions a Case Study of Pride Microfinance Institution Mbarara Branch

ABSTRACT The major objective of the study was to identify the factors responsible for loan default by clients of microfinance institutions, to examine the credit methodologies used in loan default management and to identify the relationship between loan default and MFI operations. Questionnaires were used collect data for the study. It was a combination of descriptive and analytical research of results from self administered questions, interviews and record inspection. The researcher analyzed the data and also constructed some tables to show comparisons. Responses were edited for completeness and accuracy; percentages were employed where respondents’ attitude were sought. Tables were also used for data analysis. From the study, the findings indicated that there is a negative relationship between the study variables meaning that an increase in Loan defaults reduces the performance of microfinance institutions. It was established that loan defaults are Marjory caused by poor sales from the clients and disappointments from the creditors .It was further revealed that institutional factors mostly cause loan defaults. The study critically recommended that, the institutions should educate people on how to invest money is it was revealed that loan defaults are caused by poor sales. Hence stakeholders should ensure that borrowers invest in activities that they consider productive and that Institutions should improve on their terms of loan collection and repayment as it was revealed that institutional factors greatly cause loan defaults. The most recommended area for further research were: loan default management in big formal institutions.

TABLE OF CONTENTS

DECLARATION

APPROVAL jj

DEDICATION

ACKNOWLEGEMENT iv

TABLE OF CONTENTS v

LIST OF TABLES

LISTS OF ABBREVIATIONS AND ACRONYMS ix

ABSTRACT

CHAPTER ONE 1

INTRODUCTION 1

1.1 Introduction 1

1.2 Background to the study 1

1.3 Statement of the problem 6

1.4 The purpose of the study 6

1.5 Objectives of the Study 6

1.6 Research Questions 6

1.7 Scope of the study 7

1.7.1 Geographical Scope 7

1.7.2 Content Scope 7

1.7.3 Theoretical Scope 7

1.7.4 Time Scope 7

1.7.5 Contextual Scope 8

1.8 Significance of the Study 8

1.9 Hypothesis 8

CHAPTER TWO ,,.. 9

LITERATURE REVIEW 9

2.1 Introduction 9

2.2 Opinions and definition of key terms 9

2.3 Conceptual frame work 10

2.3 The factors responsible for loan default by clients of microfinance institutions 10

2.3.1 General factor responsible of Loan losses default 10

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2.3.2 Institutional Factors .11

2.3.3 Client Related Factors 13

2.3.4 Geo-environmental Factors 13

2.3.5 Market Related Factors 14

2.4 Credit Methodologies used in Loan default management 14

2.5 Related Literature; 17

2.5.1 The relationship between loan default and operations of MFIs 17

CHAPTER THREE 20

RESEARCH METHODOLOGY 20

3.0 Introduction 20

3.1 Research Design 20

3.2 Study Population 20

3.3 Sample size 20

3.4 Sampling Techniques and Procedure 21

3.4.1 Sampling techniques 21

3.4.2 Sampling procedure 22

3.5 Sources of data 22

3.5.1 Primary data 22

3.6 Data collection instruments 22

3.7 Research procedure 23

3.9 Data analysis 23

3.10 Limitations to the study 23

CHAPTER FOUR 24

PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS 24

4.1 Introduction 24

4.2. Background characteristics of the respondents; 24

4.2.1 Findings on Gender of Respondents 24

4.2.2 Findings on Age of Respondents 25

4.2.3 Findings on duration of the service of the respondents 26

4.3 The factors responsible for loan default by clients of microfinance institutions 28

4.5 To examine the credit methodologies used in loan default management 32

4.6 Relationship between Loan Default and MFI Operations at Pride Microfinance 32

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CHAPTER FWE .36

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS .... 36

5.1 Introduction 36

5.2 Summary of Study Findings 36

5.2.1 To identify the factors responsible for loan default by clients of microfinance

institutions 36

5.2.2 To examine the credit methodologies used in loan default management 37

5.2.3To identify the relationship between loan default and MFI operations 38

5.3 Conclusion 38

5.4 Recommendations 39

5.5 Areas for Further Research 39

REFERENCES 40

APPENDIX I: QUESTIONNAIRE FOR STAFF OF PRIDE MICRO FINANCE

INSTITUTIONS 44

APPENDIX 2: Time and Budget Frame; 47

APENDIX 3 : Estimated budget; 48