The effects of loan terms on loan repayment in Uganda: A case study of Pride Micro-finance Mbarara District

Abstract

The study was conducted to establish the effects of loan terms on loan repayment in Mbarara District. The researcher was motivated to find out why MFIs continued to register default yet with loan terms in place. The effectiveness of collateral security, interest rate and loan period in mitigating default were evaluated during the study to provide a basis upon which more credit interventions would be based. Pride Microfinance was taken as a case study. The study was guided by the Grameen theory of Lending and the Basely and Coate Repayment model. Case study design was adopted to allow for intensive investigation of specific details. Both qualitative and quantitative approaches were employed during data collection and analysis. Validity and reliability of findings were adequately guaranteed using experts in the field of Microfinance and via pilot tests. Questionnaires, interviews and documentary review methods were used during data collection while analysis was done both qualitatively and quantitatively to obtain greater insight of the problem. A sample of 96 respondents was considered adequate to meet the study objectives. A response rate of 92.7% was good enough to provide dependable results. Descriptive statistics such as mean and standard deviation were obtained. Findings revealed existence of a high need for PML management to realign their interest rates to meet the market standards but more so the need to sensitize borrowers to enable them appreciate the rates charged. Besides, Loan periods at PML were found not to be in respect of borrowers’ income sources, business cycles, cash flows and requests leading to repayment constraints. In addition, it was revealed that collateral security was largely for formality as loss rated and written off loans had not been recovered yet collateral pledged was still in existence. To enhance borrowers’ self accountability, the researcher concluded that PML ought to invest heavily in sensitizing its customers about the loan terms prior to loan disbursement.