THE IMPACT OF CREDIT MANAGEMENT ON LOAN FACILITY DEFAULT IN

FINANCIAL BANKS: A CASE STUDY OF UGAFODE BANK, KAMPALA BRANCH

By

NAMULEMA ANGEL

REG NO: DBA/M/041/MAY/2021

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF BUSINESS IN

PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF A DIPLOMA
IN BUSINESS ADMINISTRATION OF YMCA COMPREHENSIVE INSTITUTE

NOVEMBER, 2022
 DECLARATION
I declare that the content of this Proposal titled “the impact of credit management on loan
facility default in financial banks: A case study of UGAFODE Bank, Kampala Branch” is my
original work and has never been submitted or presented to any institution for any award.

Signature ……………………… Date ……………………………………

NAMULEMA ANGEL

REG NO: DBA/M/041/MAY/2021

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 APPROVAL
This research NAMULEMA ANGEL entitled “the impact of credit management on loan facility
default in financial banks: A case study of UGAFODE Bank, Kampala Branch” has been
produced under my supervision and is now ready for submission with my approval.

Signature ………………………. Date ……………………………….

SUPERVISOR:
MR. PRINCE MUTEBI

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 DEDICATION
I dedicate this work with honor to my dearest father and mother Mr. Musisi Vincent and Mrs.
Nakalembe Catherine for all the support they rendered, my dear brothers, and dear sisters, friends
for having made my education successful through their financial, spiritual, moral and every kind of
support they rendered towards my education.

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 ACKNOWLEDGEMENT
I acknowledge YMCA Comprehensive Institute and in particular department of business for making
me what I am today. My special thanks go to all the for their wise and articulate counsel ever
since I joined this institute. I am also grateful to my research supervisor Mr. Prince Mutebi for
his valuable time and guidance with this research proposal. God be with you. Finally all my
friends, relatives brothers and sisters, colleagues, your support has been immensely appreciated,
you are friends indeed.

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 TABLE OF CONTENTS
DECLARATION..............................................................................................................................i
APPROVAL....................................................................................................................................ii
DEDICATION...............................................................................................................................iii
ACKNOWLEDGEMENT..............................................................................................................iv
CHAPTER ONE: INTRODUCTION..............................................................................................1
1.0 Introduction............................................................................................................................1
1.1 Background to the study........................................................................................................1
1.2 UGAFODE Uganda...............................................................................................................2
1.3 Statement of the problem.......................................................................................................3
1.3 Objectives of the Study..........................................................................................................3
1.3.1 General Objective...............................................................................................................3
1.3.2 Specific objectives..............................................................................................................3
1.4 Research Questions................................................................................................................3
1.5 Scope of the Study.................................................................................................................4
1.5.1 Geographical Scope............................................................................................................4
1.5.2 Study scope.........................................................................................................................4
1.5.3 Time scope..........................................................................................................................4
1.6 Significance of the study........................................................................................................4
1.7 Limitations of the study.........................................................................................................4
CHAPTER TWO: LITERATURE REVIEW..................................................................................6
2.0 Introduction............................................................................................................................6
2.1 An overview of credit management.......................................................................................6
2.2 Forms of credit management used by banks..........................................................................6
2.3 Effects of various credit management forms on loan facility default...................................10
2.4 Other factors affecting loan facility defaults........................................................................13
CHAPTER THREE : METHODOLOGY.....................................................................................16
3.0 Introduction..........................................................................................................................16
3.1 Research design....................................................................................................................16
3.2 Area of the study..................................................................................................................16
3.3 Study Population..................................................................................................................16

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 3.4 Sample Size..........................................................................................................................16
3.4 Sample size and selection procedure...................................................................................17
3.5 Research procedures............................................................................................................17
3.6 Data collection instruments..................................................................................................17
3.6.1 Questionnaires...................................................................................................................17
3.6.2 Interviews..........................................................................................................................17
3.7 Data type and sources..........................................................................................................18
3.7.1 Primary data......................................................................................................................18
3.7.2 Secondary data..................................................................................................................18
3.8 Data quality control..............................................................................................................18
3.9 Research ethical considerations...........................................................................................18
3.10 Data processing and analysis.............................................................................................18
3.11 Anticipated problems and solutions.......................................................................................19
References......................................................................................................................................20
APPENDICES...............................................................................................................................23
APPENDIX I: BURGET SUMMARY.........................................................................................23
APPENDIX II: BUDGET ESTIMATES.......................................................................................24

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 CHAPTER ONE: INTRODUCTION

1.0 Introduction
This chapter will cover the background of the study, purpose of the study, research questions,
and scope of the study, significance of the study and definition of terms.

1.1 Background to the study

Financial markets and institutions are central to the process of economic development and
growth. In a perfect world characterized by an Arrow-Debreu economy, there is no role for the
financial services sector and intermediation, in general. In this perfect world there is a complete
of state contingent claims, and transaction costs are absent, making the role of financial
intermediation irrelevant. Menyah, K., (2014). argument further underpins the perfect economy
world where financing decisions of firms, in this type of world, is irrelevant to the value of the In
this case the financial intermediation process does exist but as to how it is utilized it is irrelevant
for value of the firm. In reality though, the economy is imperfect and exhibits transaction and
information acquisition costs.

According to Burani, A. (2012) Prior to Uganda's independence in 1962, Government-owned

institutions dominated most banking in Uganda and in 1966 the Bank of Uganda, which
controlled the issue of currency and managed foreign exchange reserves, became the Central
Bank. Uganda Commercial Bank, which had fifty branches throughout the country, dominated
commercial banking and was wholly led by the government. The Uganda Development Bank
was a state-owned development financial institution, which channeled loans from international
sources into Ugandan enterprises administered most of the development loans made to Uganda.
Makhanu. A. (2015) states that the East African Development Bank, established in 1967 was
jointly owned by Uganda, Kenya, and Tanzania. It was also concerned with development
finance. It survived the breakup of the African Community in 1977 and received a new charter in
1980. In the 1960s, other commercial banks included local operations of Bank of Baroda,
Barclays Bank, Bank of India, Grindlays Bank, Standard Chartered Bank and Uganda
Cooperative Bank, lag the 1970s and early 1980s, the number of commercial bank branches and
services acted significantly. Whereas Uganda had 290 commercial bank branches in 1970, by

1
1987 were only 84, of which 58 branches were operated by government-owned banks. This
number began to increase slowly the following year, and in 1989 the gradual increase in banking
activity signaled growing confidence in Uganda's economic recovery Mukokoma, M. N. (2012).

The issue of loan default among banks and Microfinance Institutions has been discussed in many
public lectures and fora as one of the reasons why commercial banks have not shown much
interest in financing Micro, Small and Medium Enterprises (MSMEs). According to Kothari, S.
P., & Lester, R. (2012), loan default can be defined as the inability of a borrower to fulfil his or
her loan obligation when due. High default rates in MSMEs lending should be of major concern
to policy makers in developing countries, because of its unintended negative impacts on MSMEs
financing. Microfinance institutions all over the world including Ghana are faced with the
challenge of loan default/delinquency.

The chance that a microfinance institution (MFI) may not receive its money back from borrowers
(plus interest) is the most common and often the most serious vulnerability in a microfinance
institution (Warue, 2012). According to her since most microloans are unsecured,
delinquency/default can quickly spread from a handful of loans to a significant portion of the
portfolio. This contagious effect is worsened by the fact that microfinance portfolios often have a
high concentration in certain business sectors. Consequently, many clients may be exposed to the
same external threats such as lack of demand for clients products, livestock disease outbreak, bad
weather and many others. These factors create volatility in microloan portfolio quality,
heightening importance of controlling credit risk. In this regard, MFIs need a monitoring system
that highlights repayment problems clearly and quickly, so that loan officers and their
supervisors can focus on delinquency (repayment rate) before it gets out of hand. In lending
services, a default is the failure to pay back a loan.

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1.2 UGAFODE Uganda
UGAFODE, is a microfinance deposit-accepting institution (MDI) in Uganda. It is licensed and
supervised by the Bank of Uganda, the central bank and national banking regulator. It is the
fourth MDI in Uganda which applied to the Bank of Uganda for the issuance of an MDI banking
license In October 2011, As of March 2019, the institution's total assets were about US$10.07
million (UGX:25.34 billion), with shareholders' equity of about US$2.25 million (UGX:5.66
billion) (Kalu,2018).

1.3 Statement of the problem

The sustainability of microfinance institutions depends largely on their ability to collect their
loans as efficiently and effectively as possible. In other words to be financially viable or
sustainable, microfinance institutions must ensure high portfolio quality based on 100%
repayment .or at worst low delinquency/default, cost recovery and efficient lending.

However of late, there have been complains by UGAFODE and other microfinance institutions
in Uganda regarding high rate of default/delinquency by their clients that most microfinance
institutions are not achieving the internationally accepted standard portfolio at risk of 3%, which
is a cause for concern because of its consequences on businesses, individuals, and the economy
of Uganda at large. It is generally accepted that credit, which is put to productive use, results in
good returns. But credit provision is such a risky business that, in addition to other reasons of
varied nature, it may involve fraudulent and opportunistic behavior. This results into high rates
of loan default which prompted the student to investigate the impact of credit management on
loan default at UGAFODE.

1.3 Objectives of the Study

1.3.1 General Objective

The General objective of the study is to establish the impact of credit management on loan
facility default in in financial banks. -

1.3.2 Specific objectives

i. To establish the various credit management procedures used by UGAFODE bank.
ii. To establish the effects of the various credit management forms on loan facility default in

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 UGAFODE bank, Kampala branch.
iii. To establish the other determinants of loan facility default in financial banks?

1.4 Research Questions

i. What forms of credit management used by UGAFODE bank, Kampala branch?
ii. Do the various forms of credit management affect loan facility default in UGAFODE
bank, Kampala branch?
iii. What other factors affect loan facility default UGAFODE bank, in Kampala branch?

1.5 Scope of the Study

1.5.1 Geographical Scope

The study will be carried out in UGAFODE bank, Kampala branch. The bank is situated along
Bombo Road, Kampala

1.5.2 Study scope

The study will put a lot of emphasis on the loan application and disbursement procedures in the
bank with specific reference on the collateral, cash flows and the credit history forms of loan
assessment. The study will also establish which of the forms lead to more defaults in this bank.

1.5.3 Time scope

The study will be carried out for a period of three (3) months from September - November to
enable the researcher collect all the relevant primary data. Secondary data will be reviewed from
bank records, reports and journals for a period of five (5) years between 2015 and 2020. ,.

1.6 Significance of the study

To the bank and other financial institutions, the study findings will show the credit management
yields less defaults and this is the credit management form that the bank can start using to reduce
the loan facility default and thus ratios of non-performing loans

To the future academicians, the study will form a basis for the literature review, an addition to
knowledge base and a basis for future reference.

To the government, the study findings will help to influence credit management policies
especially on the side of interest rate

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To the researcher, the study will the researcher obtain a Diploma in Business Administration of
YMCA Comprehensive Institute.

1.7 Limitations of the study

Some respondents may be reluctant to give full information for fear of disclosing sensitive
information about the organization. In order to avert this problem the researcher will decide to
administer the questionnaire to the various respondents and sensitize them about their fears
thereby instilling the confidence in them which will make them to release the data required

There may be limited funds to carter for transport and secretarial services. The researcher will
seek for financial support from relatives’ to support her during the research process.

Being the first research, the researcher may lack enough experience and skills during the process
research writing.

The study may involve a lot of financial expenditure as the researcher will move from one place
to another, but with the help of friends and parents, the researcher will accomplish the study.

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 CHAPTER TWO: LITERATURE REVIEW

2.0 Introduction
This chapter presents a review of related literature. It involves identification, careful selection
and extensive study of existing information from sources like reports, dissertations, journals,
theses, and others related to the study topic to clarify and contextualize the study. The literature
is reviewed as per the research study objectives. Therefore, the literature specifically explores the
various credit management procedures, effects of the various credit management forms on loan
default and other determinants of loan default.

2.1 An overview of credit management

According to Brender" A et al (2015), the cost, volatility and maturity of incoming funds
provided by surplus budget units also has a significant impact upon loans and securities acquired
by a financial institution. Commercial banks derive a substantial proportion of their funds from
checking accounts and will tend to concentrate on short and medium term lending in order to
avoid an embarrassing and expensive shortage of cash. One of the factors that reduce
performance of financial institutions is the increase in non-performing loans which is caused by
lending to clients that may not be credit worthy Demirgu'g-Kunt, A.et al (2013). This section
thus reviews the effects of credit management practices with a view of reducing non-performing
loans in order to increase the returns on assets and equity.

2.2 Forms of credit management used by banks

According to Van Home, J. et al (2008), credit management is a term used to identify accounting
functions usually conducted under the umbrella of accounts receivables. It is about how to select
credit proposals and monitor the credit worthiness of the, at first approval and subsequent follow
up initiatives. He further states that the main problem with credit management according to is
connected to limited access to information, especially for the case of SMEs. The work of credit
management is intended to maximize the bank's lending to firms or individuals that fulfill the
obligations to repay the loan (Nbrden, L 2010). Several studies have developed various models,
either qualitative or quantitative, in order to identify the probability of success or failure of
lending. The models consist of three factors of credit rating.

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Credit history

Angelini, E. (2007) states that the first qualifying report a bank reviews is the applicant's credit
report, if there exists, one and provides the history of current and past obligations from an
objective view. In his view, opines that, unlike large firms, the information of SMEs has
historically been limited and hence difficult to access and further notes that the most important
factor in credit management is the character of the applicant Three distinguishing aspects of
character are always observed during the credit assessment and they include personality, skills
and business motive.

Golin, J. (2013), asserts that credit history also involves a series of meetings between the lending
institution and the borrower. They further assert that, a good and healthy credit history and a
strong relationship with the lender are to be considered as charactaristics of a trustworthy
character, However, human character changes in a second and this renders credit history a very
unreliable method of assessing the credit worthiness of a borrower as it may cause several
financial problems to the institution.

There have been several sets of studies to investigate the effects of credit history on bank lending
and therefore performance such as, Jham et al., (2008), who carried out a study to investigate the
factors affecting bank profitability using a sample of 16 cooperative banks in Greece. They
found out that credit history was necessary but not a sufficient mode of credit assessment
because human character changes by the clock. Their findings were correlated to those provided
by Swan, G. S. (2012) although, the latter's results show the extent to which credit history affects
bank performance

Capacity/cash flow

Toporowski, J. (2005), opines that, a banker's analysis often consists of the most ordinary key
figures such as liquidity, uncertainty analysis, solidity and the business' cash flow. Some bankers
believe that a zero result budget as well as one optimistic and one pessimistic analysis would be
useful in the credit worthiness assessment. Despite the importance of financial ratios, the figures
should not be exaggerated and as such the management of failing companies might perform
manipulative accounting procedures in an attempt to hide poor conditions, this is very common

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with SMEs.

Altman, E. (2007), is of the view that, the cash flow model cannot be used in cases of individual
lending or for small and medium enterprises and can be used on the large companies and it's
appropriate that, lending institutions use this form of credit assessment simply because of the fact
that large firms usually store their performance in form of financial statements, which is very
useful in establishing the effectiveness of lending.

Nissanke, M, (2008), suggest that, less than 2 percent of lending by financial institutions to
borrowers in sub Saharan African countries is guided by the use of cash flow assessments and
this could literally mean that the use of this model of credit management is limited due to the
existence of a very big informal sector where business documentation and records are limited.
This cash flow assessment model can only be applied in the developed world, where businesses
periodically update and review and publish their financial statements in order to ascertain the
organisational financial standing which-is the most suitable form of credit management for
business borrowers.

Collaterals

Savery, B. J. (2013), collaterals are sequentially analysed in the credit assessment after the three
factors above have been accepted. The major problem with collaterals is to establish the value,
which can be anything from mortgage deeds to personal bailment. This problem has been
rectified by the fact that many financial institutions now desire to have durable and appreciating
items such as land and houses. Because of different values of collaterals, lending institutions
have developed acceptable loan value ratios for assets pledged towards loans and the loan must
match the useful life of the pledged asset. The most efficient form of credit management for a
microfinance institution is collateral especially given the fact that collaterals in form of land or
houses, appreciate on a daily basis.

Customer’s character

Financial institutions consider customer’s character in making a decision on the level of credit
worthiness of a borrower. Most financial institutions value the borrower’s reputation, honesty
and integrity and account history as a sign of willingness to repay the borrowed funds. The

8
financial institution might also consider knowledge and experience in your area of business, your
grasp of financial principles and the soundness of your plans for the future of your business
(Powell & Mylenko, 2004).

Collection Efforts
Mc Naughton (2003) defines a collection effort as the procedure an institution follows to collect
past due account. Collection policy refers to the procedures micro finance institutions use to
collect due accounts. The collection process can be rather expensive in terms of both product
expenditure and lost good will (Brighan, 2013).

Effort may include attaching mandatory savings forcing guarantors to pay, attaching collateral
assets, courts litigation (Myers, 2004). Micro finance institutions may send a letter to such
individuals (borrowers) when say ten days elapse or phone calls and if payment is not received
with in thirty days, it may turn over the account to a collection agency (Myers, 2004).

Collection procedure is required because some clients do not pay the loan in time some are
slower while others never pay. Thus collection efforts aim at accelerating collections from
slower payers to avoid bad debts. Prompt payments are aimed at increasing turn over while
keeping low and bad debts within limits (Pandey, 2013). However, caution should be taken
against stringent steps especially on permanent clients because harsh measures may cause them
to shift to competitors (Van Horn, 2012).

Credit Terms
Ringtho (2004) observes that credit terms are normally looked at as the credit period terms of
discount and the amount of credit and choice of instrument used to evidence credit. Credit terms
may include;

Length of time to approve loans, this is the time taken from applicants to the loan disbursement
or receipt. It is evaluated by the position of the client as indicated by the ratio analysis, trends in
cash flow and looking at capital position.

Maturity of a loan, this is the time period it takes loan to mature with the interest there on.

Cost of loan. This is interest charged on loans, different micro finance institutions charge

9
differently basing on what their competitors are charging.

Robinson M.S (1994) pointed out that the maximum loan amount per cycle are determined
basing on the purpose of the loan and the ability of the client to repay (including guarantee).

2.3 Effects of various credit management forms on loan facility default

Credit Policy

Credit policy refers to a combination of three decision variables namely; collection efforts, credit
standards and credit terms. They include, credit standards, credit terms and collection efforts on
which the financial manager has influence. Credit standards in advancing loans, credit standard
must be emphasized such that the credit supplier gains an acceptable level of confidence to attain
the maximum amount of credit at the lowest as possible cost. Credit standards can be tight or
loose (Anderson, Williams and Sweeney, 2009)

Credit Standards

Tight credit standards make a firm lose a big number of customers and when credit are loose the
firm gets an increased number of clients but at a risk of loss through bad debts. A loose credit
policy may not necessarily mean an increase in profitability because the increased number of
customers may lead to increased costs in terms of loan administration and bad debts recovery.

Character refers to the willingness of a customer to settle his obligations this mainly involves
assessment of the moral factors. Social collateral group members can guarantee the loan
members known the character of each client; if they doubt the character then the client is likely
to default. Saving habit involves analyzing how consistent the client is in realizing own funds,
saving promotes loan sustainability of the enterprise once the loan is paid. Other source should
be identified so as to enable him serve the loan in time. This helps micro finance institutions not
to only limit loans to short term projects such qualities have an impact on the repayment
commitment of the borrowers it should be noted that there should be a firm evidence of this
information that point to the borrowers character (Vercammen,1995).

The evaluation of an individual should involve gathering of relevant information on the

10
applicant, analyzing the information to determine credit worthiness and making the decision to
extend credit and to what tune. They suggested the use of the 5Cs of lending.

5C’s of Lending

The 5Cs of lending are Capacity, Character, Collateral, Condition and Capital. Capacity refers to
the customer’s ability to fulfill his financial obligations. Capacity, this is subjective judgment of
a customer’s ability to pay. It may be assessed using a customer’s ability to pay. It may be
assessed using the customer’s past records, which may be supplemented by physical or
observation. Collateral is the property, fixed assets, chattels, pledged as security by clients
(Riach, 2010).

Collateral Security

Collateral security is what customers offer as saving so that failure to honor his obligation the
creditor can sell it to recover the loan. It is also a form of security which the client offers as form
of guarantee to acquire loans and surrender in case of failure to pay; if borrowers do not fulfill
their obligations the creditor may seize their asset. Capital portends the financial strength, more
so in respect of net worth and working capital, evaluation of capital may be by way of analyzing
the balance sheet using the financial ratios (San Jose & Riestra, 2002).Condition relates to the
general economic climate and its influence on the client’s ability to pay. Condition, this is the
impact of the present economic trends on the business conditions which affects the firm’s ability
to recover its money. It includes the assessment of prevailing economic and other factors which
may affect the client ability to pay (Rajedom, 2010).

Credit Term

A Credit term is a contractual stipulation under which a firm grants credit to customers
furthermore these terms give the credit period and the credit limit. The firm should make terms
more attractive to act as an incentive to clients without incurring unnecessary high levels of bad
debts and increasing organizations risk. Credit terms normally stipulate the credit period, interest
rate, method of calculating interest and frequency of loan installments. Discounts are offered to
induce clients to pay up within the stipulated period or before the end of the credit period.This
discount is normally expressed as a percentage of the loan. Discounts are meant to accelerate

11
timely collection to cut back on the amount of doubtful debts and associated costs (Stiglitz &
Weiss, 1981).

Riach (2010), observes that credit terms are normally looked at as the credit period terms of
discount and the amount of credit and choice of instrument used to evidence credit. Credit terms
may include; Length of time to approve loans, this is the time taken from applicants to the loan
disbursement or receipt. It is evaluated by the position of the client as indicated by the ratio
analysis, trends in cash flow and looking at capital position. Maturity of a loan, this is the time
period it takes loan to mature with the interest there on. Cost of loan. This is interest charged on
loans, different micro finance institutions charge differently basing on what their competitors are
charging (Padilla & Pagano, 2000).

Collection Effort

Rajedom (2010), defines a collection effort as the procedure an institution follows to collect past
due account. Collection policy refers to the procedures micro finance institutions use to collect
due accounts. The collection process can be rather expensive in terms of both product
expenditure and lost good will. Methods used by Micro finance institutions could include letters,
demand letters, telephone calls, visits by the firm’s officials for face to face reminders to pay and
legal enforcements (Anderson, Williams & Sweeney, 2009).

Rajan (1995), asserts that collection policy is a guide that ensures prompt payment and regular
collections. The rationale is that not all clients meet their obligations, some just take it for
granted, others simply forget while others just don’t have a culture of paying until persuaded to
do so. Many micro finance institutions may send a letter to such individuals (borrowers) when
say ten days elapse or phone calls and if payment is not received with in thirty days, it may turn
over the account to a collection agency. Collection procedure is required because some clients do
not pay the loan in time some are slower while others never pay (Stiglitz & Weiss, 1981).

Thus collection efforts aim at accelerating collections from slower payers to avoid bad debts.
Prompt payments are aimed at increasing turn over while keeping low and bad debts within
limits. However, caution should be taken against stringent steps especially on permanent clients
because harsh measures may cause them to shift to competitors. States that collection effort are

12
directed at accelerating recovery from slow payers and decreases bad debts losses (Padilla &
Pagano, 2000).

2.4 Other factors affecting loan facility defaults

Berger and De Young (1997) identified poor management as one of the major causes of loan
default. They argue that managers in most banks with non-performing loans do not practice
adequate loan underwriting, monitoring and control. Rouse (1989) identified that lack of good
skills and judgment on the part of the lender is a possible cause of loan defaults. Bloem and
Gorter (2001) point out that deficient bank management, poor supervision, over optimistic
assessments of creditworthiness during economic booms, and moral hazard that result from
generous government guarantees are some of the factors that lead to loan defaults.

Ahmad, (1997), mentioned some important factors that cause loan defaults which include; lack
of willingness to pay loans coupled with diversion of funds by borrowers, willful negligence and
improper appraisal by Credit Officers. In addition, Hurt and Fesolvalyi (1998), cited by
Kwakwa, (2009) found that, corporate loan default increases as real gross domestic product
decline, and that the exchange rate depreciation directly affects the repayment ability of
borrowers. Balogun and Alimi (1988) also identified the major causes of loan default as loan
shortages, delay in time of loan delivery, small farm size, high interest rate, age of farmers, poor
supervision, non-profitability of farm enterprises and undue government intervention with the
operations of government sponsored credit programmes.

Thomas (2000) emphasizes that education enhances the borrowers’ ability to repay. The better
educated borrowers are deemed to have more stable and higher income employment and thus a
lower default rate. Borrowers with high level of education are more likely to repay their loan
since they occupy higher positions and with high income levels.

Boyle et al. (1992) confirm that older borrowers are more risk adverse, and therefore the less
likely to default. Thus banks are more hesitant to lend to younger borrowers who are more risk
averse. Arminger et al (1997) noted that gender in addition to age is one of the most used socio-
demographical variables to differentiate the predictive power between men and women. There is
clear evidence that women default less frequently on loans possibly because they are more risk
adverse. According to Coval and Shumway (2000) gender is a fair discriminatory base on the

13
statistical default rates of men versus women. There are ample evidences that women default less
frequently on loans because women are more risk adverse. According to Dinh and Kleimeir
(2007), marital status affects the borrower’s level of responsibility, reliability, or maturity. The
probability of default is higher for married than single borrowers. They discover that the marital
status is typically related to number of dependents which in turn reflects financial pressure on the
borrower and borrower’s ability to repay a loan.

Research studies have shown that the effect of bad loans on the bank in terms of net financial
performance (i.e. return on investment/net profit) and lending potential (i.e. annual loan size) is
practical and realistic. These studies would be identified from the perspectives of foreign
countries and Ghana. The studies of Karim et al. (2010), Obamuyi, (2007), Nguta & Huka,
(2013), Nawaz et al., (2012), Fidrmuc & Hainz (2009), Chelagat (2012) and Aballey (2009)
provide such evidence in a foreign country context. Apart from the report in Ghana Banking
Survey (2013), a few other studies (Appiah, 2011; Awunyo-Vitor, 2012) have shown that bad
loans negatively influence banks in terms of financial performance and lending potential in
Ghana.

When a bank fails to put in place a good credit risk management system, it will find itself faced
with a lot of problems and negative consequences. There may be many interrelated problems but
the most basic ones which are so obvious and interrelated revolve around trying to be profitable,
solvent and liquid. Profitability is the proof of an effective and well managed business. The
banks are into business like any other firm with the purpose of making a profit. For this to be
attained, losses have to be minimized. Advising on losses suffered by banks is that the same
basic causes tend to occur time and again so, it therefore makes sense that before reviewing
office procedures, the causes of the different losses which have been incurred both within the
bank and by competitors conducting similar business should be looked into (Richard and Simon,
2001). The bank has to be sure about the capability of repayment of the borrower before granting
any loans.

Credit risk leads to capital inadequacy (insolvency). Capital adequacy means the financial
capability of the bank to meet up with its financial obligations or uncertainties that may arise and
thus will reduce the risk that it may face to some extent. An acceptable capital adequacy position

14
is equivalent to saying that a bank is not over exposed to risks (Garderner, 2007). This is because
its primary role or main function is to absorb unexpected and exceptional losses that it might
experience especially in situations of uncertainty. The more capital a bank has, the more are its
creditors or the government insurance agency protected, and the greater is the capital loss that
can be sustained without resulting in bankruptcy (Shah, 1996).

Credit risk also bring liquidity problem. A more liquid bank will be more able to meet up with
financial demands from its customers and thus create more value. Bank liquidity creation is
positively correlated with bank value (Berger and Bouwman, 2009). Banks have as main service,
the creation of liquidity, but, this good can be destroyed by the behavior of individual financial
institutions (Gaffney, 2009). This being because when the monetization of the various types of
collateral (such as land or capital) turns over slowly, the bank’s liquidity is lost. A loss in
liquidity shows that they cannot meet up with demand if customers turn up and thus crisis can
develop (Gaffney, 2009).

15
 CHAPTER THREE : METHODOLOGY

3.0 Introduction

This chapter presents the methodology that will be used, which captures the research design,
study area and population, sample size, sampling procedures, data types and sources, data
collection tools, research ethics, data analysis methods and presentation, and the anticipated
delimitations of the study.

3.1 Research design

The study will adopt across sectional study survey design because it is efficient in collecting
large amount of information within a short time and does not permit manipulation of the
variables. Quantitative methods will be used to collect data on measurable variables and analyses
data generated to show relationship between the key study variables. Qualitative methods will be
used to obtain data on variables that cannot be quantified from relevant authorities with facts
about the topic under study and show the relationship between the key study variables in a more
descriptive manner.

3.2 Area of the study

The study will be carried out in UGAFODE, Kampala branch which is located along Bombo
Road, Kampala. The bank is specifically chosen because the researcher is conversant with the
area and the area is easily accessible.

3.3 Study Population

The population of the study will include credit officers who disburse loans to borrowers because
they have relevant knowledge on credit management activities and records of loan borrowers and
top management who have adequate knowledge on credit management procedures.

3.4 Sample Size

A sample is a part of population which the student will study in order to make inference about
the whole population (Kothari, 2000). He further defines population as a total of items from
which information is designed. In this study, the researcher will take a sample of 36 respondents

16
so as to derive the required information.

3.4 Sample size and selection procedure

The sample size will purposively be selected and will include reviewing and following
documents of borrowers for a specific month together with reviewing information as regards the
loan assessment procedures with the three forms of credit management in mind. The number N
of all borrowers for the month of specific period (N=68) is provided by the bank. Therefore,
using the Yamane formula, the sample n of the respondents to interview will be

n= N where n is the sample size, N is the population of interest and

1 + Ne2 e is the significance level e = 0.05. This implies that the sample size, n = 36
respondents

3.5 Research procedures

The steps that will be followed by the student before collecting primary data include; approval of
the research instruments to be used in data collection; obtaining the Introductory Letter to be
presented in the area of study; and distribution of questionnaires and data collection.

3.6 Data collection instruments

3.6.1 Questionnaires

Self-administered questionnaires, with open-ended and closed-ended questions will be

administered to the credit officers in charge of recommending loans and follow up of payments,
to collect their views. They will be required to read each question, interpret and answer
accordingly. The questionnaires will be collected after an appropriate time.

3.6.2 Interviews

An interview guide will be designed to collect the views from credit officers and top
management who will be too busy to fill the questionnaires. The student will make appointments
with these respondents to conduct oral interviews, and the data generated will be used to
supplement the data yielded by the questionnaires. This method will be used due to its flexibility

17
and ability to provide new ideas on the study-theme.

3.7 Data type and sources

3.7.1 Primary data

This data will be gathered first hand by the student by use of the data collection instruments -
questionnaires and interview guides. The respondents for primary research will include, credit
officers and top management of UGAFODE bank, Kampala branch.

3.7.2 Secondary data

This is data gathered by other persons for a different purpose yet still useful for this study. The
secondary data for this study will be got from reports and records of UGAFODE bank,
Wandegeya branch as regards credit management from the past to present.

3.8 Data quality control

The researcher will construct research tools questionnaires and submit to the supervisor to
examine and approve them for the purposes of validity. Then, the researcher will proceed to
carry out a pilot-test and later collect data from the field. For reliability, questions formulated for
respondents will be pilot tested in the study area to determine if they are consistent with required
data.

3.9 Research ethical considerations

The following steps will be taken to observe research ethics: the consent of respondents will be
sought and after revealing type of information needed and the purpose to avoid potential
concealment of vital information; confidentiality of respondents' information will be observed;
and the true findings of the study will be reported without exaggeration.

3.10 Data processing and analysis

Data will be obtained and manually analysed for every research objective under which they fall.
On receiving data, it will be manually edited and coded. The items describing similar objectives
will be categorized together and put in frequency tables. Tables will be constructed showing the

18
frequency distribution of answers for each question and then converted into percentages. Data
analysis and interpretation will then be made using the information provided from the tables in
from of percentages.

3.11 Anticipated problems and solutions

i. The study is expected to involve costs such as transport to and fro the field, communication,
stationery and printing of the research work. This will be resolved by seeking funding from
friends and relatives and adhering to the study budget.

ii. The time factor will also constrain the study since it requires apportioning time to the study
alongside other academic commitments like internship. A work schedule will be drawn to
balance between the study and other tasks.

iv. Obtaining accurate, objective and more especially information considered sensitive from
the target respondents is expected to be problematic. The study shall overcome this by
providing adequate assurance to them that data is required purely for academic purposes.

19
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 APPENDICES
APPENDIX I: BURGET SUMMARY

YEAR 2022 2023

ACTIVITY SEPT OCT NOV DEC JAN FEB MAR APR MAY
Selecting topic
Writing proposal
Submission of proposal
Data collection
Data processing &
analysis
Printing, binding and
Proposal submission

23
APPENDIX II: BUDGET ESTIMATES

S/N ITEMS Units Unit Cost (Shs.) Cost (Shs.)

A Personal Savings 30,000/=
Contribution from friend. 30,000/=
Contribution from family members 40,000/=
B Expenditure
Transport and Airtime 40,000/=
Printing, Photocopying and all secretarial work 60,000/=
TOTAL EXPENDITURE 100,000

24
APPENDIX III: QUESTIONNAIRE
TOPIC: THE IMPACT OF CREDIT MANAGEMENT ON LOAN FACILITY DEFAULT IN
FINANCIAL BANKS: A CASE STUDY OF UGAFODE BANK, KAMPALA BRANCH

Dear respondent,

I am called Namulema Angel a student of YMCA Comprehensive Institute carrying out a study
on the above mentioned topic. You are one of the respondents selected to participate in the
study. The information give shall be treated with at most confidentiality and shall only be used
strictly for academic purposes.

SECTION A: BIO DATA

Please indicate a tick 
( a) against your choice
Sex of the respondent
Male Female
which position do you hold in the company
Credit Officer Accountant
Branch manager
what is your age bracket?
18 – 29 41 – 50
30 – 40 51 - 60

4. Highest level of Education

Certificate Diploma Degree
Others

5. How long have you worked with UGAFODE?

Under 1 year 1-3 years 4-5 Years
Above 5 Years
6. Do you have any knowledge about loan default?
Yes No
7. Have you heard of some cases of loan default?

25
Yes No

SECTION B: VARIOUS CREDIT MANAGEMENT PROCEDURES USED BY

UGAFODE BANK
Please tick one appropriate by indicating your level of agreement or disagreement
SA=strongly disagree, A=agree, N=Not sure, D=disagree, SD=strongly disagree

Various credit management Response

procedures used by UGAFODE bank.
A N D SD
SA
The bank assesses the client's credit
history before issuing him or her a loan

Assessing the cash flow statement of a

client is used as a credit management too
at UGAFODE.
The bank uses collateral as a loan
management procedure

SECTION D: EFFECTS OF VARIOUS CREDIT MANAGEMENT FORMS ON LOAN

FACILITY DEFAULT

Please tick one appropriate by indicating your level of agreement or disagreement

SA=strongly disagree, A=agree, N=Not sure, D=disagree, SD=strongly disagree
effects of various credit management forms on loan facility Response
default
SA A N D SD

Collateral gives lenders an essential threat to ensure that the

borrowers will not behave in a fraudulent way

26
Producing balance sheets by clients as security against a loan
has been adopted in UGAFODE as a credit management
measure.

Checking the client's Credit History has been adopted By

UGAFODE as a credit management measure to reduce non-
performing loans.

SECTION D: OTHER FACTORS AFFECTING LOAN FACILITY DEFAULTS

Please tick one appropriate by indicating your level of agreement or disagreement
SA=strongly disagree, A=agree, N=Not sure, D=disagree, SD=strongly disagree
Response

Other factors affecting loan facility defaults SA A N D SD

High interest rates affect loan default.

Excessive lending is another factor that affects loan default

Depressed regional economic conditions like loss rates of

commercial banks also affect loan default

27