Examining causes of non-performing loans in microfinance institutions in Uganda: a case study of Real People Financial Services Uganda

Abstract

Non-performing loans (NPLs) are turning out to be a worldwide pandemic in the financial sector that affects financial markets' stability in general and the viability of the financial institutions in particular. The performance of any Microfinance institution (MFI) is premised on the type of clientele it recruits and the methods deployed by the same institution to manage the clients should the risk of default begin to manifest. Bank of Uganda (BOU) supervision reports and Uganda microfinance regulatory authority (UMRA) reports for the past decades have indicated rising volumes of NPLs among microfinance institutions leading to negative incomes and performance. In the past decade, Uganda witnessed rising numbers of winding up of not only MFIs but commercial banks as well because of the mismanagement of loan assets that later degenerate into NPLs and write-off loans. The study thus examined the causes of non-performing loans and identified strategies to improve loan performance in Real people financial services Uganda (RPFSU). The purpose of this study was to establish internal factors specifically affecting loan Performance in Real People financial service Uganda. The research study adopted a descriptive survey approach on the factors that determine non-performing loans of microfinance institutions in Uganda. This study targeted real people financial services Uganda (RPFSU). The study used primary data which was collected by way of structured and semi-structured questionnaires with both open and closed-ended questions. This was administered to the managers, collection managers, approval officers, relationship officers, collection officers, customer service officers, and the accounts department. The data were analyzed by use of summary statistics, including percentages, means, and standard deviation. The SPSS was used to analyze the collected data. The study established that lack of aggressive loan collection methods, unrealistic client projects, and diversion of loan funds were key in causing loan default. The study recommended that a strong collection process, customize loans to clients as well as put emphasis on proper proactive loan monitoring and follow up and institute clear recovery strategies for bad loan assets.