Vol 1 No 1 (2017)
Articles

Credit Risk Management and Financial Performance of Microfinance Institutions in Kampala, Uganda

Bashabe Shieler
Department of Finance and Accounting, Kampala International University Kampala
Kalu O. Emenike
Department of Accounting and Finance Kampala International University Kampala
Christian U. Amu
Department of Financial Management Technology Federal University of Technology Owerri, Imo State
Published May 13, 2017
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327 Views | 2151 Downloads
Keywords
  • Credit risk management,
  • Credit risk identification,
  • Credit risk appraisal,
  • Credit risk monitoring,
  • Credit risk mitigation,
  • Financial performance,
  • Microfinance institution,
  • Uganda.
  • ...More
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Abstract

The objective of this study was to evaluate whether relationship exist between credit risk management techniques and financial performance of microfinance institutions in Kampala, Uganda. Specifically, the study examined whether there is a relationship between credit risk identification, credit risk appraisal, credit risk monitoring, credit risk mitigation and financial performance of microfinance institutions in Kampala using sample of 60 members of staff in finance and credit departments of three licensed microfinance institutions in Kampala, Uganda namely Finca Uganda Ltd, Pride Microfinance Ltd, UGAFODE Microfinance Ltd. Primary data was collected using questionnaires and it comprised of closed ended questions. Secondary data was collected from the microfinance institutions (MDI’s) annual reports (2011 - 2015).  Frequencies and descriptive statistics were used to analyse the population. Pearson linear correlation coefficient was adopted to examine relationship between credit risk management techniques and financial performance.  The findings indicate that credit risk identification and credit risk appraisal has a strong positive relationship on financial performance of MDIs, while credit risk monitoring and credit risk mitigation have moderate significant positive relationship on financial performance of MDIs. The study recommends, among others, that the credit risk appraisal process should identify and analyse all loss exposures, and measure such loss exposures. This should guide in selection of technique or combination of techniques to handle each exposure.  The study concludes that MDIs should continually emphasise effective credit risk identification, credit risk appraisal, credit risk monitoring, and credit risk mitigation techniques to enhance maximum financial performance.

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