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Credit risk management and loan recovery in micro finance institutions in

Ishaka Bushenyi municipality: a case study of Kyamuhunga Sacco

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DOI: 10.59298/INOSRAH/2025/5867

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 INOSR ARTS AND HUMANITIES 11(1):58-67, 2025 ISSN: 2705-1676
©INOSR PUBLICATIONS INOSRAH 5867
International Network Organization for Scientific Research
https://doi.org/10.59298/INOSRAH/2025/5867

Credit risk management and loan recovery in micro finance

institutions in Ishaka Bushenyi municipality: a case study of
Kyamuhunga Sacco
Ashemeza Amity and Labson Turyamushanga

Faculty of Business and Management, Kampala International University, Uganda

ABSTRACT
This study assessed the effect of credit management policies on loan recovery in microfinance institutions in Uganda,
with a case study of Kyamuhunga Sacco in Ishaka Bushenyi Municipality. The study targeted top management,
cashiers, loan officers, clients, and accountants. A combination of simple random and purposive sampling techniques
was used to identify the study’s sample size. Data collection methods included questionnaires, observations, and
interviews. The collected data was edited, coded, entered into a computer, and analyzed using Microsoft Excel. The
results were presented in tables for clarity. Based on the study's findings, 100% of respondents confirmed that
Kyamuhunga Sacco applies various credit management policies, including credit terms that address both the length
of the credit period and the discount rate, the loan amounts recommended by credit officers, and collateral security
requirements. The study further revealed that the rate of loan recovery in microfinance institutions in Uganda is
influenced by profitability ratios, efficiency ratios, outstanding loans, and the real annual average growth rate of
loans. In line with the third objective, the respondents indicated that there is a significant relationship between credit
management policies and loan recovery. Effective credit management policies provide the institution with reasonable
and adequate returns on loans, and borrowers are typically granted smaller loan amounts to reduce risk. The
researcher concluded that Kyamuhunga Sacco applies a variety of credit management policies, with the majority of
respondents agreeing that credit terms include both the duration of the credit period and applicable discount rates,
alongside a uniform interest rate. The study recommends that Kyamuhunga Sacco should consider redesigning its
credit policy to make credit management more effective, thereby reducing loan losses and write-offs.

INTRODUCTION
The development of microcredit, or microloans, as a which has been translated into numerous languages,
tool to alleviate poverty in impoverished nations, reaching a global audience [2]. In 1973, the need for
originated in Bangladesh during the 1970s [1]. financial services in low-income communities was
Professor Muhammad Yunus, the founder of further highlighted with the founding of ShoreBank,
Grameen Bank and recipient of the 2006 Nobel Peace a community development bank in Chicago.
Prize, is largely credited with pioneering this ShoreBank aimed to meet the financial needs of low-
movement [2]. Yunus envisioned a system where income neighbourhoods, particularly African-
individuals, regardless of their financial status, could American communities [3]. The bank's success in
access loans, seeing this as a fundamental human revitalizing Chicago’s poor neighbourhoods led to
right. His vision led to the establishment of Grameen international recognition and set a benchmark for
Bank, which focused on providing small loans, financial sector development. This success inspired
particularly to women, to promote self-employment. Bill Clinton, then Governor of Arkansas, to establish
Over the past two decades, Grameen Bank has loaned the Community Development Financial Institutions
more than 6.5 million dollars, empowering the Act in 1994 [4]. In the 1980s, Shore Bank
poorest populations, especially women. This initiative collaborated with Yunus to help establish Grameen
has significantly contributed to the global growth of Bank in Bangladesh, with a grant from the Ford
microcredit and financial inclusion. Yunus’s life and Foundation [5].
work are captured in his book Banker to the Poor,

58
Credit management policies (CMP) are key tools that resources [11]. However, poor credit management
financial institutions use to regulate credit sales and practices, such as inadequate information systems and
ensure profitability [6]. These policies help balance administrative shortcomings, often lead to bad debts
the risks and benefits of offering credit, especially in and financial losses [12]. Many microfinance
today’s competitive economy. A well-defined credit institutions, including Kyamuhunga Sacco, face
management policy establishes a framework for the challenges in loan recovery, with increasing levels of
entire credit process, outlining objectives, standards, nonperforming loans. Kyamuhunga Sacco’s 2021
and procedures that guide loan officers and managers annual report identifies these issues as a result of
in loan disbursement and recovery [7]. Credit inadequate credit management tools, which have
management policies also provide a basis for contributed to rising loan defaults. The study seeks
evaluating and improving the performance of credit to examine the effect of credit management policies
systems, especially in loan recovery [8]. Effective on loan recovery at Kyamuhunga Sacco in Ishaka
credit policies help mitigate risks by setting clear Bushenyi Municipality. By investigating the
procedures for evaluating loan applicants and challenges Kyamuhunga Sacco faces in loan recovery,
monitoring their creditworthiness [9] Loan recovery the research aims to provide insights into how credit
is vital for the financial health of lending institutions. management policies can be improved to enhance the
It enables institutions to clear their balance sheets, institution’s performance and ensure its long-term
improve collection efforts, and prepare accurate sustainability. The purpose of this study is to assess
financial reports [10]. Efficient loan recovery the impact of credit risk management policies on loan
minimizes default risks, reduces operational costs, recovery in microfinance institutions in Uganda, with
and ensures the effective recycling of financial Kyamuhunga Sacco serving as a case study.
METHODOLOGY
Research design Study sample and sampling technique
The study used a cross-sectional research design that The study consisted of 60 respondents representing
utilized both qualitative and quantitative data the entire population of Kyamuhunga Sacco. This
analysis [13]. The design allowed accessing included 9 members of the top management that were
respondents from various sections of the population. the managers, one accountant, 3 cashiers, 4 loans
Qualitative approach was used because it helps to officers and 44 clients. The researcher used purposive
view comprehensively and in detail the available data sampling to select the top management team that is
from the questionnaire. manager, an accountant, cashiers and loans officers
Area of the study while simple random sampling technique was used to
The study was carried out in Kyamuhunga Sacco in select clients. These methods were considered to be
Ishaka Bushenyi municipality Bushenyi district. simple and easy to use cost effective and convenient
Study population to the researcher. The sample size was selected from
The population of the study consisted of the top the whole population which is as follows 1 cashier, 2
management of the Kyamuhunga Sacco that is the loans officers, 41 clients, 5 members of top
manager, cashier, an accountant, loans officer, management and 1 accountant totalling to 50
shareholder management, employees. Therefore, this respondents.
constituted of 55 respondents as indicated by Krejcie
and Morgan [14].
Table 1: Population and Sample Size
Subject Population Sample

Top management 9 5

Cashiers 3 1

Loans officers 4 2

Clients 44 41

Accountant 1 1

Total 61 50

59
 Data sources Documentary
There are two types of data that were used by the The information presented by the researcher was got
researcher during the study. These included both from the internet, newspapers, magazines, from
primary and secondary sources of data collection. different scholars, books, and from the field.
Primary data Validity and Reliability of Instrument
It involved the researcher going into the field to get Validity of Instrument
information related to the study from different Validity of instruments refers to the extent to which
respondents, primary data provided firsthand an instrument is truly measuring what is intended to
information that was needed by the researchers and measure. Adequate measures was taken to ensure that
terms will carefully be defined so as to avoid the questionnaire fulfill content validity. To ensure
humanity possible misunderstandings. that the instrument collects data as per its intention,
Secondary Data the researcher distributed copies to experts including
This type of data was obtained from already collected the supervisor and colleagues with more experience
data from newspapers, reports, journals and to rate the valid items in the questionnaire.
magazines. This type of data was helpful in compiling Reliability of the Instrument
large amounts of data. However, its liable to Reliability refers to the degree to which an
exaggeration by many scholars. instrument consistently measures what it is supposed
Data collection instruments/ methods to measure. Therefore, before the instrument was
Data from the field was obtained by the use of used, a pilot study was conducted in a location
interview guide questionnaire and observation. different from the actual area of study. The results
Interview guide from the pre-test then were substituted with the final
Here the research set questionnaire from the findings using Pearson’s Correlation Coefficient
interview guide. The researcher was adopted this formula.
method because it gave more elaboration on answers Data processing
given and more information that was obtained from Data was collected by use of questionnaire and
respondents. Oral interview was also conducted to interview guide were processed through three stages.
collect more data to supplement data was obtained Editing
from the questionnaire and interview were mostly This was done by scrutinizing the data at an earlier
conducted to key respondent who were considered stage to detect errors omission and inconsistencies
are more knowledgeable about the problem under before data is tabulated and each individual schedule
study. This method was chosen because it procures was checked in detail to certain whether it had been
high resource rate. answered in full and accurately. Editing of data was
Questionnaire done by filling the missing information gaps which
The researcher set questions and answers of yes/no helped to correct any error for the purpose of
alternatives that was filled in by the respondents. The uniformity consistency completeness and accuracy.
questions were designed in an open and close format Coding
short and straight forward method. Questionnaires This involved assigning and categorizing that data
were taken physically by the researcher to reduce (answers) in codes to eliminate looping of facts.
costs and avoid non response. This method was Data analysis
preferred because it was more convenient to the After gathering all the information using the relevant
respondent, cover a large area and population in a research instruments data was arranged and put into
very short period of time. This meant the researcher different categories for easy interpretation. It was
increased the size of her population. The researcher tabulated and be analyzed using tables, graphics and
made the sample larger, hence stand a chance of charts. Percentages were calculated which was a basis
making and producing reliable results. for drawing meaningful conclusions. The researcher
Observation first classified the collected data before presenting it
This relied on the researchers seeing, testing and in its final form. Classification is the process of
smelling things and does not depend on getting relating the separate item within the mass of collected
information through someone else. The researcher to data. This was established the kind of relationship
some point used observation method in collecting between dependent and independent variables.
data. This was done through standing and watching The formula was used as it is below;
how transactions were made between the staff and r c Oij  Eij 2 
clients that are through banking and withdrawing of X   
2

money by the clients of the institution. This method
i 1 j 1 
helped the researcher to get firsthand information.  Eij 
X 2  chi square

60
i  Variation from 1 to r for academic purpose. The researcher speculated that
j  Variation from 1 to c some respondents are likely to refuse to give data
because of being stubborn and they thought that the
Oij  Observation frequency researcher was trying to spy on activities. However,
the researcher tried to give through explanation
Eij  Expected frequency about the purpose of carrying out the study. Lack of
Expected frequency (fe) was obtained using the information from respondents who might not give
formula; relevant information as needed. However, the
RowTotal  columnTotal researcher spent more time because of reluctance of
Eij  respondents in filling the questionnaire thus made the
GrandTotal data collection so slow and difficult. The researcher
This level of significance was determined between the created good communication skills to alert the
two studied variables or interest at the end of the respondents. The researcher faced financial problem.
calculation. The research process required a lot of funds to cater
Limitations of the study for various items and activities like transport,
False information from the respondents was an stationery. However, the researcher ensured that
expected limitation. However, the researcher tried to enough funds were mobilized early enough.
convince respondents that the information needed is
RESULTS
Gender composition of the respondents
Table 2: Showing gender composition of respondents
Gender Frequency Percentage (%)

Male 41 82

Female 09 18

Total 50 100

As illustrated in table 1, the study found out that the in the study was represented 41(82%) as compared to
majority of the respondents were male as compared less number 09(18%) of the female respondents.
to the female. The number of males who participated
Age composition of respondents
Table 3: Age composition of the respondents
Age range Frequency Percentage (%)
Below 30 02 04
30 -40 15 30
40 – 50 23 46
51 & above 10 20
Total 50 100

The table above 2 shows that most of the respondents important for the study as most of them were
were between the ages of 40-50 accounting for participating in the determining the impact of
23(46%). This implied that were likely to understand auditing and fraud prevention in Bushenyi district.
better the impact of audit and fraud prevention. The More, 10(20%) of the study respondents were in the
other category of the respondents were in the age category age of 51 & above while 02(04%) of the
range of 30-40 as reported by 15(30%) of the study respondent were below 30 years as these were of the
respondents and these respondents’ views were very least in number.

61
 Marital status of the respondents
Table 4: Showing marital status of the respondents
Marital status Frequency Percentage (%)
Married 29 58
Single 19 38
Separated/divorced 00 00
Widowed 02 04
Total 50 100

As seen in the table 3 above, majority of the study 02(04%) were widowed as none of the study
respondents constituting 29(58%) were married and respondents reported to fall under the category of
these were followed by respondents who were single Separated/divorced.
as reported by 19(38%) of the respondents finally
Level of education of respondents
Table 5: Showing level of education of the respondents
Level of education Frequency Percentage (%)
Certificate 05 10

Diploma 26 52
Degree 11 22
Masters 08 16

Total 50 100

The table 4 above shows that most of the respondents The credit management policies applied by
had diploma as their level of education with 26(52%), Kyamuhunga Sacco Ishaka Bushenyi municipality
followed by 11(22%) of the study respondents who The study objective one was set to find out the credit
had degree, then 8(16%) of the respondents had management policies applied by Kyamuhunga Sacco
masters, finally 05(10%) of the respondents who cited Ishaka Bushenyi municipality. According to the study
that had certificate. findings, all (100%) of the respondents were able to
understand the credit management policies were
applied d as none of the study respondents was able
to reveal of not understanding the same study
variable.
Table 6: Credit management policies applied by Kyamuhunga Sacco Ishaka Bushenyi municipality
Frequency Percentage
Credit management policies applied Yes No (%)
Credit terms involve both the length of credit
period and discount rate given 40(80%) 10(20%) 50 100
The loan amount recommended by credit and
repayment 23(46%) 27(54%) 50 100

Offering uniform interest rate for the credit 17(34%) 33(66%) 50 100
offer

21(42%) 29(58%) 50 100

Collateral security for covering rations
Borrowers remain excluded from formal bank
loan 50(100%) 00(00%) 50 100

As illustrated in table 5, the researcher sought to credit terms involve both the length of credit period
know the Credit management policies applied due to and discount rate given. This was answered by the

62
respondents views, as indicated in the table 4.6 above respondents’ views also indicated 27(54%) of the
as 40(80%) were in agreement as compared to the respondents disagreed with the statement and
least of number of the study respondents cited by 23(46%) responses of agreement of which male
10(20%) who were in a disagreement. Results from respondents indicated as the majority.

The rate of loan recovery in micro finance institutions

Table 7: Showing the rate of loan recovery in micro finance institutions
Rate of loan recovery in micro finance institutions Number of Respondents Percentage%

Profitability ratio 4 8

Efficiency ratios 2 4

Total balance of outstanding loans average 3 6

outstanding
Real annual average growth rate of loans 6 12

Productivity and efficiency ratios 2 4

Provision of conducive loans for productive consumption 3 6

and emergency
Aid from the government 30 60

Total 50 100

According to table 6 above, the rate of loan recovery that the outreach indicators include; number of
and this accounted for 4(8%) of the number of active borrowers, total balance of outstanding
respondents. Respondents are in agreement that loans average outstanding, real annual average
profitability ratio measures on micro finance growth rate of loans outstanding during the past
institutions net income in relation to the structure of years loan size, average minimum and maximum,
its balance sheet. Respondents further agreed that average disbursed loan size, average outstanding
this helps investors and managers determine raters, average loan term, nominal interest rates,
whether they are earning an adequate return on effective annual interest rates, value of loans per staff
funds invested in the microfinance institutions. Other member and number of loans per staff member
respondents who were interviewed by the researcher 2(4%) of the total respondents reported that
noted efficiency ratios also shows rate of loan productivity and efficiency ratios shows the rate of
recovery in micro finance institutions and this loan recovery. While 3(6%) of the total respondents
accounted for 2 (4%) of the total respondents. interviewed revealed that provision of conducive
Basing on the study findings, it was also revealed that loans for productive consumption and emergency acts
total balance of outstanding loans average as means to show the rate of loan recovery.
outstanding determines the rate of loan recovery and Respondents agree that outreach indicators include;
this was accounted by 3(6%) of the total respondents. number of active borrowers, total balance of
Respondents agreed that efficiency ratios measure the outstanding loans average outstanding, real annual
cost of providing loans to generate revenue; these are average growth rate of loans outstanding during the
referred to as operating costs and should include past years loan size, average minimum and maximum,
neither financing costs nor loan loss provisions. average disbursed loan size, average outstanding
6(12%) of the total respondents reported that real raters, average loan term, nominal interest rates,
annual average growth rate of loans also show the effective annual interest rates, value of loans per staff
rate of loan recovery in Saccos. Respondent agreed member and number of loans per staff member.

63
 Relationship between customers credit management policy and loan recovery
Table 8: Showing the relationship between credit management policy and loan recovery
Relationship between credit management policy and loan Frequency Percentage (%)
recovery
Good credit management provide the institution with a 10 28
reasonable and adequate return on loans

Credit standards are criteria for selecting customers for credit 10 24

Borrowers are given small amount of money it will not be 07 14
sufficient for business operations
Institution may have tight credit standards that it may extend 05 16
loan to the most reliance and financially strong customers
Credit manager should check on the amount the customer is 07 14
demanding
Collection efforts determine the actual collection period of the 02 04
loan
Credit standards are methods for selecting its customers for 4 08
loan
Organization extends credit to only the strongest customers 2 04
Credit managers and loan officers should check on the amount 3 6
demanded by the customers whether it is too much or little
Total 50 100

The findings in table 7 shows that of the respondents Other respondents mentioned that credit manager
covered by the study majority good credit should check on the amount the customer is
management provide the institution with a demanding. The finding further revealed that 2(04%)
reasonable and adequate return on loans as one of of the total respondents mentioned collection efforts
relationship between credit management policy and determine the actual collection period of the loan.
loan recover accounting to 10 (28%) of the study Respondents were in agreement Pandy (1992) Who
respondents. 12(24%) of the number of respondents revealed that collection efforts determine the actual
mentioned Credit standards are criteria for selecting collection period of the loan. He further reported that
customers for credit. Furthermore, 07(14%) of the MFIs get only normal interest rate to customers but
respondents revealed that borrowers are given small incurs like penalties on default, transports, time and
amount of money and not sufficient for business meetings. Respondents further agreed that
operations. The credit manager should check on the mandatory savings that may eventually fail the
amount the customer is demanding for, whether it is customer to pay at the end of the period given for the
too much or little. loan. Lastly, 2(4%) of the respondents revealed that
The study findings also showed 07(14%) of the study Credit managers and loan officers should check on the
respondents each who agreed that Fraud policies amount demanded by the customers whether it is too
should be reviewed. much or little is related to relationship between credit
The study findings also showed 7(14%) of the number management policy and loan recovery. Respondents
of respondents revealed that Credit manager should agreed that credit managers and loan officers should
check on the amount the customer is demanding. check on the amount demanded by the customers
Other 05 (16%) of the number of respondents revealed whether it is too much or little. The chartered
that Institution may have tight credit standards that institute of bankers, lending text advises lending
it may extend loan to the most reliance and organizations on the amount to be given to the
financially strong customers. borrower.
DISCUSSION
Basing on objective one; the study showed that the excluded from formal bank loan. These study findings
credit management policies applied by Kyamuhunga can be compared with the Abuka et al., [15] including
Sacco include; credit terms involve both the length of the amount to evidence the credit the terms of the
credit period and discount rate given, the loan amount credit refer to the decisions relating to loan size,
recommended by credit and repayment, offering security on loan, loan minimizing balance and cost of
uniform interest rate for the credit offer, collateral credit. The loan amount recommended by credit and
security for covering rations, borrowers remain

64
repayment in women’s scale enterprises must be not statement. The study on further findings established
be too little to satisfy the projects needs to borrowers. the Relationship between credit management policy
Basing on objective two, the study findings and loan recovery as good credit management
indicated that rate of loan recovery in micro finance provide the institution with a reasonable and
institutions. These include profitability ratio, adequate return on loans, credit standards are
efficiency ratios, total balance of outstanding loans, criteria for selecting customers for credit, borrowers
average outstanding, real annual average growth rate are given small amount of money it will not be
of loans, aid from the government, provision of sufficient for business operations, credit managers
conducive loans for productive consumption and and loan officers should check on the amount
emergency, productivity and efficiency ratios. This demanded by the customers whether it is too much or
was in agreement with respondents who explained little, credit manager should check on the amount the
that profitability ratio measures on micro finance customer is demanding, collection efforts determine
institutions net income in relation to the structure of the actual collection period of the loan, credit
its balance sheet. Respondents further agreed that standards are methods for selecting its customers for
this helps investors and managers determine loan, organization extends credit to only the
whether they are earning an adequate return on strongest customers, institution may have tight
funds invested in the microfinance institutions. credit standards that it may extend loan to the most
Productivity and efficiency ratios provide the reliance and financially strong customers. The
information about the rate at which micro finance findings were in agreement with agreement with
institutions generate revenue to cover their expenses. [17] who revealed that Good credit management
Productivity ratio focuses on the productivity officers provide the institution with a reasonable and
because they are primary generators of revenue [16] adequate return on loans and capital employed
Basing on objective three; The study findings primarily through improvement in operations
indicated that there is a relationship between credit efficiency this generates adequate internal resources
management policy and loan recovery as none of the to finance the institution‘s growth.
study respondents was able to disagree with the same
CONCLUSION
The findings concluded that credit management may have tight credit standards that it may extend
policies were applied by Kyamuhunga Sacco include; loan to the most reliance and financially strong
credit terms involve both the length of credit period customers.
and discount rate given, the loan amount Recommendations
recommended by credit and repayment, offering In line with the above study findings and conclusions,
uniform interest rate for the credit offer, collateral the following recommendations are made as under;
security for covering rations, borrowers remain Taking into consideration the study findings, the
excluded from formal bank loan. In addition, it is following recommendations were established to
concluded by showing the rate of loan recovery in improve on the level of loan recovery in Kyamuhunga
micro finance institutions. These include profitability Sacco Ishaka Bushenyi municipality:
ratio, efficiency ratios, total balance of outstanding It’s recommended that Lyamujungu Sacco should
loans average outstanding, real annual average redesign its credit policy so as to make credit
growth rate of loans, aid from the government, management more effective to reduce on loan losses
provision of conducive loans for productive and write offs.
consumption and emergency, productivity and In order to enhance loan recovery and reduce loan
efficiency ratios. Lastly, the study concludes default, Kyamuhunga Sacco municipality should
revealing the relationship between credit devise means of motivation and facilitation of the staff
management policy and loan recovery as good credit because the respondents cited uncommitted
management provide the institution with a management, unsequenced and unqualified staff as
reasonable and adequate return on loans, credit problems that can be linked with ineffective credit
standards are criteria for selecting customers for management and this consequently affects the level of
credit, borrowers are given small amount of loan recovery.
money it will not be sufficient for business To address the problem of loan default due to
operations, credit managers and loan officers should inadequate documentation of customers the bank
check on the amount demanded by the customers should ensure constant training of the staff and
whether it is too much or little, credit manager should ensuring that the lending procedures are properly
check on the amount the customer is demanding, documented and understood by every credit officer.
collection efforts determine the actual collection The researcher also recommends that Kyamuhunga
period of the loan, credit standards are methods for Sacco should give incentives to their customers like
selecting its customers for loan, organization extends cash discounts to customers who pay back the loan in
credit to only the strongest customers, institution

65
 time, this will encourage customers to pay back loans to change deteriorating loans into good and repayable
promptly and reduce loan default and bad debts. loans.
The institution should also consider regular To make clients appreciate the credit policies and
monitoring and supervision and analysis of financial recovery procedures. Kyamuhunga Sacco has to
statements of the clients. Follow ups should be made educate the clients and also listen to their grievances.
at least once a month to identify problem loans in time Education background was found out to have an
and offer necessary advise to borrowers on how best impact on the client’s understanding of policies and
recovery procedures.
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