ABSTRACT
The study aimed at assessing the effects of credit policy on the performance of microfinance institutions in Equity Bank of Uganda talcing the case study to be Wandegeya branch. The study mainly looked at credit risk policy and the performance of Equity bank and to find out whether this policy was effective to the bank. For effectiveness of the research, the researcher used a research design and data collection and analysis were used to arrange the information in such away that enabled the researcher to come up with the reliable recommendations and conclusions. Different methodologies were employed which were research design, study population, sample design, research instruments and analysis of data where the researcher used pie charts and presentations done in bar graphs. It was realized that the performance of any microfinance institution depends on its existing credit policy at any given time period thus Equity bank use credit policy to evaluate credit worth ness of its customers hence this has enabled the bank to run smoothly and effectively. It was also found out that Equity bank uses credit rating policy which helps them to rate the credit worth ness of its customers. Credit rating also helps the bank to reduce the defaulters of the bank. It was also revealed that the bank uses credit evaluation where this looks at the in-depth analysis in a client's application. It is the duration it takes a client to access the funds from the time an application on credit facility is tendered in to the time the bank disburses the loan. It is true that majority of the clients take a month for their loan to be approved from Equity bank thus is seen when the customer has met all the requirements needed by the bank. X
TABLE OF CONTENTS
Declaration ....................................................................................... .i
Approval. ........................................................................................ .ii
Dedications ..................................................................................... .iii
Acknowledgement ............................................................................. .iv
Table of contents .................................................................................. v
List of tables ..................................................................................... viii
List of figures ................................................................................... .ix
Abstract ........................................................................................... x
CHAPTER ONE INTRODUCTION ...•.... '°................................ 1
1.0 Introduction ............................................................................ 1
1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Statement of the problem ................................................................ 2
1.3 Purpose of the study ............................................................... 2
1.4 Objectives of the study ............................................................... 2
1.5 Research questions ...... ., ................................................................ 3
1.6 Significance of the study ............................................................... 3
1.7 Scope ,., ··································································:)
1.8 Conceptual framework ..................................................................... 4
LITERATURE REVIEW
CHAPTER TWO ········································································ 6
2.0 Overview of credit policy in microfinance institution ................................. 6
2.1 Related literature ....................................................................... 6
2.2 Credit risk 111odel .................................................................... ,.. 7
2.3 Consu111er bank credit ...................................................................... 8
2.4 Importance of credit ...................................................................... 9
2.5 Credit policy ....................................................................... 10
2.5.1 Credit standards and analysis .......................................................... 10
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2.5.2 Credit terms .................................................................. 11
2.5.3 Determinants of credit terms in commercial banks ................................. 11
2.5.4 Collection policy ...................................................................... .11
2.6 Effects of credit on performance of commercial banks ............................ .12
2. 7 Functions of credit management policy in the economy ............................. 13
2. 7 .1 Reducing the rate of defaulters ........................................................ 13
2. 7 .2 Maintains stability ...................................................................... .14
2.7.3 Maintains a favorable spread ........................................................... 14
CHAPTER THREE RESEARCH METHODOLOGY .......................... 14
3.0 Introduction ............................................................................ .14
3 .1 Research design ......................................................................... .14
3.2 Research Population ................................................................... .14
3.3 Sampling design ........................................................................ .14
3.3.1 Sample size ............................................................................. .15
3.4 Data source, collection methods ....................................................... 15
3.4.1 Data source ............................................................................... 15
3.4.2 data collection procedures ............................................................... 15
3.4.2.1 Questionnaires method ................................................................ .15
3.4.3 Data Processing and Analysis ............................................................ 16
3.5 limitations of the study ....................................................................... 16
CHAPTER FOUR
PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS ............... 17
4.0 Introduction ................................................................................ 17
4.1 Bio data ........................................................................................ 17
4.1.1 Respondents designations ................................................................. 17
4.1.2 Respondents by age, sex and education level. .......................................... 18
4.1.3 Length of service ........................................................................... 22
4.2 Credit policy in Equity Bank ................................................................. 23
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4.2.1 Credit policy review ......................................................................... 27
4.2.2 Credit evaluation in Equity Bank ........................................................ .29
4.3 Credit rating ................................................................................... 30
4.3 .1 Response on factors on assessment of credit facility .................................. .32
4.3.2 Response on credit recovery approach .................................................. .35
4.4 Response on duration given to borrowers ............................................... .36
4.5 Effects of credit policy on the banks performance ....................................... .39
CHAPTER FIVE
DISCISSION OF FINDINGS, CONCLUSION AND RECOMMENDATIONS .... 41
5.0 Introduction ..................................................................................... 41
5 .1 Discussion of findings ........................................................................ 41
5.1.1 Bio data ....................................................................................... 41
5.1.2 Credit rating .................................................................................. 41
5.1.3 Credit policy ................................................................................. 42.
5.1.4 Credit terms .................................................................................. 43
5 .1.5 Credit evaluation ............................................................................ 44
5.1.6 Credit recovery approach ................................................................. .45
5.1.7 Duration given to borrowers .............................................................. .46
5.2 Conclusion ...................................................................................... 47
5.3 Recommendations .............................................................................. 48
APENDICES ....................................................................................... 49
APPENDIX I-REFERENCES .......................................................................... 49
APPENDIX II-INSTRUMENTS .......................................................................... 50 I
QUESTIONNAIRES TO THE CLIENTS ............................................................. 56
INETERVIEV GUIDE ................................................................................... 59
AP END IX HI-TIME SCHEDULE ............................................................ 60
APENDIX IV-ESTIMATED BUDGET ..................................................................... 61
