Credit risk management practices and performance of loans in microfinance deposit taking institutions in Northern Uganda

Abstract

The purpose of the study was establishing the relationship between credit risk management practices and the performance of loans in Microfinance Deposit Taking Institutions in Northern Uganda, The objectives of the study were to find the effect of the Credit scoring, Client appraisals, Credit terms and Collection procedures on loan performance determined by the portfolio at risk, bad loan provisions and write offs. The study used exploratory design with quantitative approach and qualitative approach assisted in explaining the results. Cross sectional research design was used since the study was at one point in time and longitudinal research design was used to analyze the loan performance parameters from the MDIs over the last 5 years and purposive sampling technique was used to select the respondents from the 9 MDI branches. The use of descriptive and inferential statistics. was deemed the best design to fulfill the objective of the study. The findings regards to the credit scoring on loan performance indicated that positive significant relationship exists( r= . .:52). the relationship between client appraisal and loan performance was significantly positively related (r=.491 ), the relationship of credit terms and loan performance had weak positive positively related (r=.071) and the relationship between collection procedures and loan performance was positively related (r=.410). This implies that loan performance is greatly influenced by credit scoring appraisal. In regards there is need to find out the other predictors of loan performance credit risk management practices predicts 34.4 percent of the variance in loan performance. Use credit scoring, clients appraisal and collection procedures were significant predictors of performance. Thus, this requires management of MDIs to stream line the process of credit scoring have trained and competent cred it teams that properly appraise clients and concrete collection procedures as this will have the capacity to predict more of the variance in loan performance