Loan Portfolio Quality of Microfinance Institutions in Uganda: A Qualitative Assessment

Abstract

The primary purpose of this study was to examine the loan portfolio quality of Uganda’s Microfinance institutions. Specifically, the study investigated respondents’ perception of capital structure, cost of capital, credit risk management, and quality of clientele base and their impact on loan portfolio quality. The study adopted an exploratory research design. The point of saturation was achieved after 16 managers (10 credit managers and 6 senior managers) were interviewed. Data were analyzed using content analysis techniques with the aid of NVivo version 12 software, and verbatism tests were used to explain the emergent themes. The findings indicate that capital structure was perceived as internal and external funding, cost of capital was perceived as pricing of funds, credit risk management was perceived as client/borrower engagement, quality of clientele base was perceived as social capital and loan portfolio quality was perceived as repayment. The findings suggested that funding, pricing of funds, client/borrower engagement, and social capital influence loan repayment. The study recommends that MFIs should source for affordable lines of credit, employ competent staff, ensure due diligence, further financial education, and ensure client sensitization. The study confirmed the relevance of the Modern Portfolio Theory in explaining loan portfolio quality. Future studies could investigate the loan portfolio quality of Microfinance Institutions in Sub Saharan Africa to find out whether the results would be similar.