ABSTRACT The study investigated and sought to establish the relationship between credit policy and loan portfolio performahce: A case study of opportunity bank in Kamwokya on’ Kira Road just 3 kilometers from the city center Kampala. The research objectives included; to evaluate the effects of credit policy in Microfinance Institutions (MFI5), to determine the level of loan portfolio performance and to establish the impact of credit policy on loan portfolio performance in opportunity bank. The study employed a cross sectional research design where both quantitative and qualitative approaches of data collection were employed to collect data from 50 respondents. The participants were selected using two sampling techniques; purposive and simple random sampling. The data was collected using questionnaires and interview guides which was then analyzed descriptively. Most of the MFI5 lack the efficient risk management mechanism that will help eradicate or sieve out serial defaulters. To effectively lock out these serial defaulters, MFIs requires referencing solution that will enable them submit and share data whilst processing their customers’ credit application. The study revealed that all the institutions that participated in the study have a loan risk management policy that is in operation. The stakeholders who are involved in credit policy formulation to a great extent are the members of these organizations and the regulator while the employees and the directors are involved in the credit formulation process only to a moderate extent. The study confirmed that the existing credit policy of the organization forms the basis for developing a new credit policy that is used by the organization. The institution has set up well funded risk management functions, with enhanced risk awareness among lenders, risk strategies are fol~bwed in disbursement of credit, the institution conducts thorough risk assessment on the potentials clients and it has also set up fund to cater for the risks that the institution may incur in its transactions.

TABLE OF CONTENTS

DECLARATION

APPROVAL ii

DEDICATION iii

ACKNOWLEDGEMENT iv

LIST OF TABLES viii

LIST OF FIGURES ix

ABSTRACT X

CHAPTERONE ----------------------------------1

1.0 Introduction 1

~ /

1.1 Background of the Study 1

1.2 Statement of the problem 5

1.3 Purpose of the Study 6

1.4 Objectives of the Study 6

1.5 Research Questions 6

1.6ScopeoftheStudy 6

1.6.1 Content Scope 6

1.6.2 Geographical scope 6

1.6.3 Time scope 7

1.7 Significance I justification of the study 7

1.8 Conceptual Framework 8

CHAPTER TWO 9

LITERATURE REVIEW 9

2.0 Introduction 9

2.1 Credit Policy 9

2.2 Performance of loan portfolio. 9

2.3 Theoretical literature review 10

2.3.1 Contingency Theory 11

2.3.2 Modern portfolio theory (MPT). 11

2.4 Related studies. 12

V

CHAPTER THREE -16

RESEARCH METHODOLOGY 16

3.1 Introduction 16

3.2 Research Design 16

3.3 Data type and sources 16.

3.4 Study Population 16

3.5 Sample Size and Composition 16

3.6 Sampling Technique 17

3.7 Data Collection Tools and Methods 17

3.7.1 Questionnaire 17

3.7.2 Interview Guide 17

3.8 Data Collection Procedure 18

3.9 Data Processing and Analysis 18

3.10 Reliability and Validity of Research Instruments 18

CHAPTER FOUR 20

PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS 20

4.0 Introduction 20

4.1 Overview of the Study 20

4.1.1 Response Rate 20

4.2 Demographic Characteristics of the Respondents 20

4.3 Effect of Credit Standards on Loan Recovery. 22

4.4 Effects of credit term on loan recovery 24

4.5 Effects of credit rationing on loan recovery 27

4.6 Effects of collection efforts on loan recovery. 29

4.7 Effects of the management style. 30

4.8 Effe~ts of the government policies. 32

4.9 Eff~cts~of the non-performing assets. 34

4.10 Effects of the performing assets. 36

vi

CHAPTER FIVE ------------------~------------------------------------------------39

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION 39

5.1. Introduction 39

5.2 Summary of Findings 39

5.2.1 Effect of Credit Standards on Loan Recovery. 39

5.2.2 Effects of credit terms on loan recovery 39

5.2.3 Effects of credit rationing on loan recovery 39

5.2.4. Effects of collection efforts on portfolio performance. 40

5.2.5 Effects of the management team on portfolio performance. 40

5.2.6 Ef,fects of the government policy on portfolio performance. 40

5.2.7 Effects of the non-performing on portfolio performance. 40

5.2.8 Effects of the performing assets on portfolio performance. 41

5.2.9 Effects of the loan recovery on portfolio performance. 41

5.3 Conclusion 41

5.4 Recommendations 41

5.5 Suggestions for Further Research 42

5.6 Limitation and delimitations of the study 42

REFERENCES 44

APPENDICES 47

APPENDIX I: QUESTIONNARE FOR MANAGEMENT 47