Factors Affecting the Performance of Microfinance Institutions in Uganda

TABLE OF CONTENTS

DECLARATION

APPROVAL

DEDICATION

ACKNOWLEDGEMENT

ABSTRACT

CHAPTER ONE INTRODUCTION
1.1 Introduction
1.2 Background to the study
1.2.1 Historical background
1.2.2Theoretical background
1.2.3 Conceptual background
1.2.4 Contextual background
1.3 Statement of the problem
1.4 Purpose of the study
1.5 Objectives of the study
1.6 Research Questions
1.7 Research hypotheses
1.8 Conceptual Framework
1.9 Scope of the study
1.10 Justification of the study
1.11 Significance of the study

CHAPTER TWO LITERATURE REVIEW
2.1 Introduction
2.2 Factors affecting performance of MFIs
2.2.1 The effect of governance mechanisms on MFI Performance
2.2.2 The effect of management information systems on MFI performance
2.2.3 The effect of funding on the performance of MFIs
2.3 Summary of the literature

CHAPTER THREE METHODOLOGY
3.1 Introduction
3.2 Research design
3.3 Study population
3.4 Sample size determination and selection
3.5 Data collection methods
3.6 Data collection instruments
3.6.1 Questionnaire
3.6.2 Interview guide
3.7 Validity and Reliability
3.8 Data Collection procedure
3.9 Data analysis
3.10 Measurement of variables

CHAPTER FOUR PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS
4.1 Introduction
4.2 Response rate
4.3 Background information of the respondents
4.3.1 Gender of the respondents
4.3.2 Age of the respondents
4.3.3 Educational background of the respondents
4.3.4 Marital status of the respondents
4.4 Performance of microfinance institutions
4.5 Results on the factors affecting the performance of MFIs in Uganda
4.5.1 The effect of governance mechanisms on the performance of Hofokam Limited
4.5.2 The effect of management information systems on the performance of Hofokam Limited
4.5.3The extent to which funding affects the performance of Hofokam Limited
4.6 Review of Hofokam financial performance

CHAPTER FIVE SUMMARY, DISCUSSION, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
5.2 Summary of findings
5.2.1 The effect of governance mechanisms on the performance of Hofokam Limited
5.2.2 The effect of management information systems on the performance of Hofokam Limited
5.2.3 The extent to which funding affects the performance of Hofokam Limited
5.3 Discussion of findings
5.3.1 The effect of governance mechanisms on the performance of Hofokam Limited
5.3.2 The effect of management information systems on the performance of Hofokam Limited
5.3.3 The extent to which funding affects the performance of Hofokam Limited
5.4 Conclusions
5.4.1 The effect of governance mechanisms on the performance of Hofokam Limited
5.4.2 The effect of management information system on the performance of Hofokam Limited.
5.4.3 The extent to which funding affects the performance of Hofokam Limited
5.5 Recommendations
5.5.1 The effect of governance mechanisms on the performance of Hofokam Limited
5.5.2 The effect of management information system on the performance of Hofokam Limited.
5.5.3 The extent to which funding affects the performance of Hofokam Limited
5.6 Limitations of the study
5.7 Contribution of the study
5.8 Areas for further research

REFERENCES

APPENDICES
APPENDIX 1: QUESTIONNAIRES
APPENDIX 2: INTERVIEW

DEDICATION

This research is dedicated to my family; my mother Ms Janet Kalibagwa Akiiki, my wife Harriet Karungi, my children; Ian Wamani Katusabe, Robina Katusabe and Walter Musinguzi, my brothers; Richard Mugisa and William Zakumumpa, UMI lecturers for their support in enabling me reach this far in my studies.

ACKNOWLEDGEMENT

In a special way, I thank the Almighty God for enabling me complete this work. My supervisor Mrs Pross Oluka Nagitta for being available for me and helping me shape my thinking in the field of research. I am so grateful. I would also like to appreciate the staff of Hofokam Limited that made my research possible. Special thanks go to out to my Mum for the support and encouragement offered to me during my period of study. Thank you for the inspiration Mummy. My thanks also go out to the staff of Uganda Management Institute and my course mates whose ideas made an enormous contribution towards the finishing of this study.

ABSTRACT

The purpose of the study was to examine factors affecting the performance of microfinance institutions in Uganda. Hofokam Limited was used as a case study. The objectives of the study were: to assess the effect of governance mechanisms on the performance of Hofokam Ltd, to establish the effect of management information systems on the performance of Hofokam ltd and to find out the extent to which finding affects the performance of Hofokam Ltd. The study sample was 48 and the findings showed that the selection criteria of the board members was not based on related experience and management remuneration was not competitive enough to attract and retain talent. The Management Information System didn’t support real time reporting for decision making and branches were not networked with head office with the MIS, the microfinance institution had struggled to access reasonable capital with affordable terms since the donor funding stopped. The study drew conclusions that governance mechanisms greatly affected the performance of microfinance as they determine the direction of the MFI, MIS in its state had a relatively low impact on the performance of Hofokam Limited and that funding was not a critical success factor for MFI performance as compared to other factors. The study recommends that the selection of the Board should be to a large extent based on ones’ professional experience, the MFI shouldn’t commit all efforts to be regulated as it has not proved a success factor for many other MFIs, the MIS in use should be upgraded to enable linkage across the branches and head office rather than invest in a totally new software, the MFI should look at increasing the level of operational efficiency especially for the staff in the credit department so that wastage is saved and also enhance in negotiation skills with funding partners so as to get the most affordable credit in the market.

CHAPTER ONE INTRODUCTION

1.1 Introduction

Over the last twenty years, microfinance has gained a lot of interest as an instrument of poverty alleviation and economic growth promotion especially in the developing world. The fascination with microfinance derives from the fact that the provision of financial services can contribute to poverty reduction and pass the test of sustainability at the same time (Carlton, Manndorff, Obara, Reiter & Rhyne, 2001). Microfinance development led to a number of strong institutions focusing on poor people’s finance and it begun to attract the interest of private investors. However, microfinance has sometimes disappointed its supporters. Only few of the hundreds of microfinance programs inaugurated have been able to achieve sustainability and meet expectations of client impact (Dokulilova, Janda & Zetek, 2009).

This study was premised around the factors affecting the organizational performance of microfinance institutions in Uganda guided by the need to have microfinance institutions achieve their intended objectives.

This chapter presents an insightful background to the study, statement of the problem, purpose of the study, objectives of the study, research questions, research hypotheses, scope of the study, justification of the study and the significance of the study.

1.2 Background to the study

1.2.1 Historical background

The microfinance concept was developed in Germany by Fredrich Willelin Raiffersein and his supporters in 1870 motivated by the concern to assist the rural population to break out of their dependence on money lenders and improve their welfare (CGAP, 2006).In the early 1900s, microfinance models began to appear in parts of the rural Latin America world with specific objectives of commercialization of the rural sector by mobilizing idle savings and increasing investment through credit and reducing oppressive feudal relation that were enforced through indebtness. However, over the years, these institutions became inefficient and at times abusive.

Compared to the well advanced microfinance countries like Bangladesh or Bolivia, the microfinance industry in Uganda is fairly new. In a bid to alleviate poverty through a social agenda, a number of Non-Government Organizations and other aid organizations started developing some form of micro credit as departments or functional areas in the 1980s and early 1990s owing to the real need for financial services by low income people. These microfinance programs and institutions grew fairly in number and size, helping to fill the void left behind by the economic turmoil and bank failures of early years. At about the same time, a few specialized MFIs also started operations, mainly delivering micro credit backed by compulsory savings used as collateral substitutes. Since then the microfinance industry has experienced a continuous growth. Compared to the total client estimation of about 100,000 in 1996 for instance the industry by 2008 was serving over three million people (Uganda Microfinance Industry Assessment, 2008). However, with a population of 29.6 Million people (New Vision November, 12, 2008), serving only three million was way below a small number given that the majority of

Ugandans were the rural and urban low income earners in dire need of microfinance services to lift their standards of living. Additionally, some MFIs have not lived long in the industry due to their inability to sustain their operations. Poor quality of the loan portfolio, lack of sufficient and affordable capital, high level of operating costs have been cited as reasons behind some MFI failures such as low levels of profitability and inability to cover all the demand for loans from potential clients.

1.2.2 Theoretical background

Microfinance performance theory states that for any microfinance institution to be seen as achieving its goals, its performance must be analyzed based on key indicators such as profit margin, client outreach, operational self-sufficiency, portfolio at risk, return on assets, return on equity, cost of funds ratio, operating expense ratio, quality of reporting. All of the above indicators are key outputs for the MFI to address the needs of the various stakeholders who hold both social and financial perspectives of performance (Consultative group to assist the poor, 2009).

Organizational Performance

Organizational performance as a concept suffers from the problem of conceptual clarity in a number of areas. The first of these is the area of definition. The term performance is often used indiscriminately to describe everything from efficiency to effectiveness (Stannack, 1996). Stoner, Freeman & Gilbert (1995) define organizational performance as the measure of how well the organization does its job. It is the extent to which the organization achieves its intended outcome (Pettigrew, 1992).

Research on organizational performance reveals definition ranging from social performance or contribution to charity (Coffey and Wang, 1998) to company profits (Hefferman and Flood, 2000) and organizational effectiveness (Zabra and Pearce, 1998).

The second of these problems lies in measurement. An adequate definition leads to the problem in measurement including input efficiency, output efficiency and in some cases, transactional efficiency (Hefferman and Flood, 2000).

Improving the performance of the organization is a central concern of researchers and speculation about the factors related to organizational effectiveness is abundant in the literature and elsewhere. Unfortunately, little effort has been made to look at those factors empirically. Stakeholders often disagree about which elements of performance are most important (Brewen, 1993).

According to Lafourcade, Isern, Mwangi & Brown (2005) performance in microfinance institutions is measured by profitability, outreach, sustainability and that MFIs need technological innovations, management capacity, and reduced financial expenses on debts.

1.2.3 Conceptual background

Microfinance overview

Microfinance has evolved as an economic development approach intended to benefit both low income men and women. Hartarska (2004) defines microfinance as the provision of loans and other financial services to the poor. Financial services include loans and savings; however some organizations also provide insurance and payment services. Thus, the broader definition of microfinance includes not only microcredits but also other financial services, which can be offered to the poor. Interested economists found soon that not only small credits but also other services connected with lending could improve economic lives of the poorest (Bauer, Chytilova, Morduch, 2008).

In addition to financial intermediation, many microfinance institutions provide social intermediation services such as group formation, development of self-confidence, training in financial literacy and management capabilities among members of a group. Thus the definition of microfinance often included both financial and social intermediation. Microfinance is not simply banking; it is a development tool (Legderwood, 1999).

The average microfinance client’s relationship with an MFI can be defined by a fairly standard set of obligations; Attendance of regular meetings of her group, training in loan utilization or participation in discussion of developmentally relevant issues such as social discrimination, gender awareness and education, contribution of fixed amounts of fixed amounts of savings, and repayment of fixed amounts as installments on any loan she obtains from the MFI or from her group. What she actually receives in return for fulfilling those obligations are; fixed amounts of loans for productive activities usually determined by the longevity of her relationship with the MFI rather than her financial needs, emergency loans for consumption subject to approval from her group (Srinivasan and Sriram, 2003).

Khachatryan (2010) notes that fundamental services provided by the MFIs are the same that conventional financial institutions offer to their customers. What creates the difference is the scale and method of service delivery.

Ledgerwood (1999) defines microfinance as the provision of loans and other financial services to the poor. The microfinance institution has evolved as a result of the efforts of committed individuals and assistance agencies to reduce poverty by promoting self-employment and entrepreneurship. The MFI faces unique challenges because it must achieve a double bottom line- provide financial services to the poor (outreach) and cover its costs i.e sustainability (Morduch, 1999). This study considers microfinance as a dimensional concept which aims at offering loans and small savings to the economically active poor.

However, without sound financial performance, the sustainability of microfinance institutions is not possible (Pankaj K. Agarwal & S.K Sinha, Delhi Business Review X Vol. 11, No. 2 2010). Increasingly questions are being raised over the cost of funds for these enterprises and their ability to earn margins sufficient to cover their operational costs and still leave some profit (Arsyad, 2005). It has been pointed out repeatedly that MFIs need to be economically viable and sustainable in the long run (Srinivasan et al., 2006). In fact studies have found strong linkage between the financial sustainability of microfinance institutions and achievement of their social objectives. Low income customers are more likely to borrow from institutions they see as financially viable (Zeller et al., 2003).

The factors affecting the microfinance institution’s performance are looked at as governance mechanisms, management information systems, and funding where; governance mechanisms are the systems through which the owners of the entity ensure that their business is run according to the intended purposes (Jensen & Meckling, 1976). Waterfield and Ramsing (1998) define management information system as a series of processes and actions in capturing raw data, processing the data into usable information and disseminating the information to users in the form needed. Funding refers to financial resources contributed by the owners and other stakeholders of a financial firm (Rose and Hudgins, 2010). Funding in microfinance covers areas of capital and its structure of a microfinance institution needed to facilitate growth, improve efficiency and financial stability (Bogan, 2008).

Organizational performance is the measure of how well the organization does its job (Stoner, Freeman &Gilbert, 1995). The study will consider outreach or market share, sustainability and profitability as indicators of organizational performance of microfinance institutions.

Governance Mechanisms, MIS, Funding in Microfinance Governance mechanisms

In microfinance, governance mechanisms refer to systems through which donors, equity investors, and other providers of funds ensure themselves that their funds will be used according to intended purposes (Hartarska, 2004). Jensen and Meckling, 1976 assert that such control mechanisms are necessary because managers and providers of funds may have diverging preferences and objectives. For example, MFI managers may work towards fulfilling the mission of the MFI but they may also have preferences for non-pecuniary rewards.

In the corporate governance literature, this problem is known as the agency problem. The literature refers the manager as an agent, who unlike the principal doesn’t own the resources of the firm. Costs associated with the agency problem are called agency costs and represent costs that residual claimants bear in order to benefit from professional services of managers. The goal of many governance mechanisms is to maximize the agency costs by aligning the objectives of the owners or principal with the objectives of the manager-agent (Jensen and Meckling, 1976). The key mechanisms of effective governance are board, managerial compensation and rewards, auditing and regulation (Kease, Thompson and Write, 1997).

Management Information Systems (MIS)

Waterfield and Ramsing (1998) define Management Information Systems as a series of processes and actions involved in capturing data, processing the data into usable information and disseminating the information to users in the form needed. They add that Management Information System is one of the most critical but least understood elements of a successful MFI and that more MFIs are starting to embrace the technology so as to improve their work.

At the most fundamental level, it is important to note the distinction between data and information. Relevant data is generated by the institution in many forms; checks made payable to employees, suppliers and customers; client loan repayment records and bank withdrawals, deposits and transfers. It is the task of the management information system to transform this raw data (or input) into meaningful information (or output) that can be used by the MFI at various levels (Ledgerwood, 1999).

Ledgerwood (1999) notes that microfinance management information system falls into three main areas; An accounting system,with the general ledger at its core, a credit and savings monitoring system which captures information and provided reports about the performance of each loan disbursed, often with a savings system that monitors all transactions related to client savings. Lastly, a system designed to gather data on client impact. She adds that not all microfinance institutions have a management information system that covers all the mentioned areas.

Funding

Grant (1995) defines funding as financial resources available to a company to enable it carry out its activities. The majority of MFs fund their activities with donor or government funding through grants or concessional loans. However, it is becoming evident that donor funding is limited. As MFIs expand and reach a critical stage of growth, they find they cannot sustain their growth with only donor support (Bogan, 2008).There are various ways that an MFI can access funds for capital, including; debts accessed through loans, equity, equity investment funds, securitization of the loan portfolio and deposit mobilization (Ledgerwood, 1999).

1.2.4 Contextual background

Microfinance as a concept has developed in Uganda and many institutions have come on board to deliver financial services to the non-banking population or the rural and urban poor. The more numbers of the target population that an MFI serves, the higher the rate of success it is deemed to have achieved. However, outreach success should be matched with profitability if the MFI is to become sustainable and a going concern which many have not managed to achieve.

The microfinance industry in Uganda has registered a notable growth over the years and is now offered on a commercial basis. With full commercialization of microfinance, the services are now largely offered as a business. Donors have stopped giving grants for loan funds.

Hofokam Limited is the selected representative of other microfinance institutions as the case study. Hofokam Limited is a rural based microfinance institution in Western Uganda. The institution was founded in 2003 by the Catholic Dioceses of Hoima, Fort Portal and Kasese with technical support from a donor agency, Catholic Relief Services. Hofokam’s vision is to raise the average household income and standard of living of poor families in Uganda in order to stimulate growth and contribute to national development while its mission is to provide quality financial services, information and technical training to the economically active poor so as to enable them realize their full potential (Hofokam Annual Report, June 2011).

In Hofokam Limited for instance, the pull out of Catholic Relief Services (CRS) as a main provider of loan funds through donated capital in September 2008 led to a notable liquidity shortfall as the institution faced a challenge of meeting the clientele demand for loans on time. Over this period, there was deterioration on organizational sales and market share (Management Report 2008).

Maes and Foore (2008) note that the microfinance industry has reached maturity levels in Uganda but still many microfinance institutions have inadequate supply of information management information system technology and governance capacity as the industry grows fairly faster than the development of appropriate personnel and skills.

Additionally, while capacity building of the supply side in terms of governance, organizational or financial know-how, technology or MIS and financial rating still remain valid topics. The need to bridge the gap to include rural and financially illiterate potential consumers remains yet to gain momentum as it involves an extremely large and heterogeneous target group because rural outreach still remains a challenge. Finscope, a detailed side study carried out in 2007, concluded that only 38% of Ugandans have access to financial services: 21% accessing formal and 17% informal financial services.

1.3 Statement of the problem

A microfinance institution’s pillar is based on serving the rural and urban poor generally known as the non-banking population given the founding ideology of the sector worldwide. From that view, outreach, sustainability and profitability have been accepted as the microfinance performance indicators (Lafourcade, Isern, Mwangi & Brown, 2005). Hofokam Ltd has opened additional client service points to expand market base, made operational processes re­engineering to increase efficiency and reduce costs and also moved from a manual information system to software to capture data for reporting and control purposes (Hofokam Management Report, 2009). However, just like most MFIs in Uganda, Hofokam is yet to adequately reach and serve the desired market. In the Hofokam annual report 2010, only 17,019 clients had credit facilities, a profit of UGX 199 million was made against an asset base of UGX 7.3 billion and despite a 49% increase in revenue compared to the previous financial year, there was a significant increment in costs by 39% as well. As Maes and Foore, 2008 noted, MIFs are facing challenges of limited products and high operational costs. Issues of governance, finances and technology have been identified as relevant topics for the supply side of microfinance if the institutions are to achieve their intended objectives (Ded & AMFIU, 2010) and if not addressed, the core microfinance objective of reaching the low income earners may take too long to be realized and also present an uncertain future for MFIs. The researcher intends to provide an insight into the factors affecting the performance of microfinance institutions. It is critical to address the issues limiting the performance of MFIs otherwise the MDGs of poverty eradication may never be achieved.

1.4 Purpose of the study

This study aimed at examining the factors affecting the performance of microfinance institutions in Uganda using Hofokam Limited as a case study.

1.5 Objectives of the study

i. To assess the effect of governance mechanisms on the performance of Hofokam Limited.
ii. To establish the effect of management information systems on the performance of Hofokam Limited.
iii. To find out the extent to which funding affects the performance of Hofokam Limited.

1.6 Research questions

i. What is the effect of governance mechanisms on the performance of Hofokam Limited?
ii. What is the effect of management information systems on the performance of Hofokam Limited?
iii. To what extent does funding affect the performance of Hofokam Limited?

1.7 Research hypotheses

In line with the research objectives, the hypotheses that were tested in the study are well divided into three as follows;

H1) Governance mechanisms affect the performance of MFIs.

H2) Management information systems have an effect on the performance of MFIs.

H3) Funding has an effect on the performance of MFIs.

1.8 Conceptual Framework

illustration not visible in this excerpt

Figure 1 Showing factors affecting the performance of microfinance institutions

Source: Appraisal for Microfinance Institutions (CGAP, March 2008).

The framework is built around factors affecting MFI performance. Dimensions for factors considered to affect performance are governance mechanisms, management information system and funding. Governance mechanisms affect the way the institution is controlled, managed and more importantly the strategic direction for instance a quality composed board is key for an MFI to focus strategically, a well remunerated management team is more likely to put all efforts towards the success of MFI as they feel part of the institution. MIS supports the day to day management of the MFI through availing the information to various stakeholders for decision making while funding affects the available capital for the MFI to on-lend to its customers and also meet other expenditures deemed critical to its operations. More so, the cost of capital affects the expenditure of the MFI in terms of financing costs which in turn affects the level of profitability of the MFI.

1.9 Scope of the study

Geographically, the study focused on MFIs in Uganda and more specifically, Hofokam Limited operations regarding its performance as a microfinance institution.

As far as the study content is concerned, factors affecting the MFI performance were considered to be; governance mechanisms, management information systems and funding. MFI performance was looked at in form of outreach, sustainability, profitability and client outreach.

The study focused on the period from 2009 to 2011 because in that period Hofokam was transitioning from the donor dependency into the main stream business model microfinance practices. In the same period, Hofokam transformed from a loss making MFI to a profit making venture.

1.10 Justification of the study

Overall , African microfinance institutions are important actors in the financial sector and they are well positioned to grow and reach the millions of potential clients who do not yet have access to mainstream financial services. However, they still face many challenges which affect the attainment of their intended objectives (Lafourcade, Isern, Mwangi, and Brown, 2005).

The researcher intended to look at those factors that pose a challenge to the effective performance of microfinance institutions. The need for a study of this kind is an important one in an environment like Uganda’s which is characteristic by the growing calls for an effective microfinance sector by government and donors to address poverty.

1.11 Significance of the study

The researcher hoped the study would benefit policy makers, academics, managers of microfinance institutions, research students and the researcher. To the policy makers, the findings of the study would be of help as they regulate microfinance activities. To the academics, the researcher hoped that they would be in position to know and appreciate the context of the microfinance sector.

For managers, the researcher hoped the study recommendations would help them address issues identified in the findings so as to improve the effectiveness and efficiency of the organization. The researcher also hoped that this study would enable him get to the frontier of knowledge and attain a Masters in Business Administration degree at Uganda Management Institute.

CHAPTER TWO LITERATURE REVIEW

2.1. Introduction

This chapter comprises of a critical review of the related literature and is presented according to the variables of the study. It entails the literature on the effect of governance mechanisms on MFI performance, the impact of management information systems on MFI performance and the effect of funding on the performance of MFIs. The chapter also includes the summary of the literature about the study.

2.2 Factors affecting performance of MFIs

2.2.1 The effect of governance mechanisms on MFI performance

Boards are important in microfinance because of the relatively limited role of external market forces. The board is a governance mechanism that helps to resolve the agency problems between owners and managers. The degree of alignment of the board and shareholder objectives is measured in the empirical corporate governance literature by the proportion of outside or independent directors on the board. The board of directors monitors and acts as advisors to management. Empirical studies have found a relationship between the proportion of the board and firm value (Hermalin and Weishball, 2003).

There is evidence that women directors spend more time on mentoring activities (Oster and O’Reagan, 2003). Corporate performance is affected by board diversity as corporations with high proportion of women and ethnic minorities perform better, according to a study of the largest fortune 1000 companies (Carter, Simmons and Simpsons, 2003).

The MFI board has unique characteristics. It is not unusual for several major stakeholders to be represented on the board. The major stakeholder in an MFI are donors, equity investors, insiders (employees and managers), and creditors (who often provide a significant amount of funding available for micro loans. Some MFIs have individual clients on their board (Campion, 1998). The relative power of these various stakeholders affects outreach and sustainability (Hartarska, 2004).

The incentives of top management have been cited as an important governance mechanism as it ensures the alignment of management with the shareholders interest (John & Qian, 2004). In other words, it serves as a mechanism of resolving the conflict of interests between the managers and shareholders. Brick et al., 2006 highlights that even director compensation could also affect performance. With regards to the banking institution, high powered incentives may encourage managers to take higher risks to achieve the objective of outreach at the expense of the depositors, who would suffer if the institution falls (John & John, 1993).

Regulation could affect the performance of the MFI because it may shift the emphasis away from both outreach and sustainability. This could happen because regulators promote less risky behavior by the manager in order to promote the safety of the MFI itself and more broadly, the safety of the financial system. Less risk taking however, is equivalent to lower returns and may interfere with the preference of and others who fund MFIs with the hope that these institutions would serve more risky clients (the poor) and still earn profits (Hartarska, 2004).

Audit is an effective mechanism for supervision. Internal audit helps to identify problem areas and to avoid major collapse by promoting independent, objective assessment of the appropriateness of the organization’s internal governance structure and operating effectiveness.

Reporting of all audit findings in an accurate and timely manner is essential for evaluation of the institution’s status and need for any change of strategy (Steinward, 2000).

Additionally, Hartsarka, 2004 observes that in the absence of developed equity and debt markets, donors and investors rely on independent evaluation of the MFIs performance. Microfinace rating reflects a rating agency’s opinion of the entity’s overall credit worthiness and capacity to satisfy its financial obligation. Unlike the typical rating agencies that rate the riskiness in issued debt, microfinance rating agencies rate the overall performance of the MFI in terms of outreach and sustainability.

2.2.2 The effect of management information systems on MFI performance

Information systems technology play a vital role in microfinance as it helps the MFI to track, analyze and report on their operations and various performance objectives such as outreach and profitability. Such reports are useful to management, donors and regulators (CGAP, 2005). Growth and expansion or advancement of microfinance institutions often poses various challenges of monitoring, financial management of incomes and expenses. Okeeffe and Fredrick, 2002 assert that a management information system facilitates the fundamental changes in the institution through information availability without interfering with the microfinance activities.

Orr (2000) observes that if there is a single key to survival of business in the 1990s and beyond, it is being able to analyze, plan and react to changing business conditions in a much more rapid fashion. To do this, top managers need information more than ever before. In the microfinance sector, an institution that develops as system capable of producing accurate, timely and comprehensive information on operations, especially the loan portfolio, will strengthen its financial performance and expand its clients reach (Waterfield and Ramsing, 1998).

Methodological issues, staff development, and even financing are frequently not proving to be the critical constraints to growth. Rather, an institution’s ability to track the status of its portfolio in a timely and accurate manner is in many cases the difference between success and failure of the lending and savings operations, and, therefore, of the institution (Ledgerwood, 1999).

Ferramd and Havers, 1999 explain that information is one of the central problems of microfinance and that its significance is made it complex as MFIs scale up with increasing layers of management, all depending on the appropriate flow of information to make decisions at their various levels.

Management Information Systems have enabled growth and transformation of operations of Microfinance Institutions (Water and Ramsing, 1998). As customer numbers grow to several thousands and beyond, microfinance managers lose their ability to maintain personal contact for information with what is happening at the field level which in turn affects their portfolio and financial performance (Omasaja, 2007).

Okeeffe and Fredrick (2002) explain that transformation places new demands on the microfinance institutions in terms of its ability to centralize information from different operating locations. Regulatory reporting requirements and liquidity management requires Head Office to be aware of the position and performance of their branches with greater frequency and reliability.

Waterfield and Ramsing (1998) emphasize that for a microfinance institution to perform efficiently and effectively, the better its information, the better it can manage its resources. This is supported by Ledgerwood (1999) who fronts that good management information systems can improve work of field staff, enabling them to better monitor their portfolios and provide better services to an increasing number of clients. It enables supervisors to better monitor their areas of responsibility, pinpointing priority areas that most require attention and also helps senior management to better orchestrate the work of the entire organization and make well informed operational and strategic decisions by regularly monitoring the health of the microfinance institutions considering a set of well-chosen reports and indicators.

According to Mainhart (1999), information lies at the very heart of microfinance. Management Information Systems maintain large amounts of crucial business data, from basic client information to detailed analysis of portfolio statistics. They act as a conduit through which raw data becomes useful and usable information which enables successful management of a microfinance Institution.

2.2.3 The effect of funding on performance of MFIs

Khachatyran (2010) notes that microfinance institutions have a need for financial sources in order to fulfill their commitment in the long term which makes the role of funding institutions to microfinance very important. The capital accounts play several roles in supporting the daily operations and ensuring the long run viability of financial firms. It provides a cushion against the risk of failure by absorbing financial and operating losses until management can address the institution’s problems and restore profitability (Rose and Hudgins, 2010).

Smith and Rupp (2002) explain that a firm may reach a sustainable competitive advantage through the financial resources it holds since they are rare. Rose and Hudgins, 2010 add that availability of funds enables the financial institution to develop new services and facilities. Most financial service providers eventually outgrow the facilities they start with. An infusion of additional capital or funds will permit a financial firm to expand into large quarters or build additional outreach offices in order to keep pace with its expanding market and follow its customers.

Ledgerwood (1999) observes that capital promotes public confidence and reassures creditors concerning an institution’s financial strength. Capital also checks the growth of the financial institution, helping ensure that growth is sustainable in the long run. Lenders whose funds fails to grow fast enough or declines far enough may find themselves losing market share in the competition for their bigger advancing customers (Rose and Hudgins, 2010).

The reserves established by a financial institution are created to absorb losses that have a high probability of occurring and that are separate from the general business risk incurred by the institution. For example, an increase in interest rates on monies borrowed by the institution without the ability to increase its loan rate by a commensurate amount will result -all things being equal—in a reduction in profits. A financial institution is not able to provision for movements in interest rates; this constitutes general business risk (The Accion Camel, 1998).

Despite the successes of many MFIs, millions of low-income individuals in developing countries still do not have access to financial services. High operating costs and capital constraints within the MFI industry have prevented MFIs from meeting the enormous demand (Bogan, 2008).

2.3 Summary of the literature

Performance of microfinance institutions based on the literature is affected by factors of governance mechanisms, management information system and funding. All of three factors have a role to play for a microfinance institution’s performance objectives of outreach, sustainability and profitability. What seems evident from the existing sources is that those factors are still posing challenges for the supply side of microfinance.

CHAPTER THREE METHODOLOGY

3.1. Introduction

The methodology presented shows how the general conduct of the study was handled and is presented in the a subsequent order of the research design, study population, sample size determination and selection strategies, data collection methods, data collection instruments, validity and reliability, data collection procedure, data analysis, and measurement of variables.

3.2. Research design

The researcher used a cross-sectional descriptive case study design which collected data at one MFI only. The study took the form of a survey, getting information about the factors affecting the performance of microfinance institutions with Hofokam Limited being the case study. The study adopted both quantitative and qualitative approaches.

Descriptive survey approach enabled the researcher to give a general over view of the study as far as microfinance is concerned. The correlation approach enabled the researcher to present each factor contributory role towards the performance of microfinance institutions. It enabled the measurement of how well MFI performance was considering the factors affecting it. The combination of the two enabled a deep understanding of the study and fact finding (Amin, 2005). Babie (2004) in agreement with Lawrence (2006) argues that usually the best study design uses more than one research method, taking advantage of their different strength. This prompted the researcher to use triangulation method.

3.3. Study population

The target for the study was the microfinance industry but more specifically in Uganda with Hofokam Limited being the case for the study. Out the eight branches that Hofokam has, the study focused mainly on the head office, and main business branches of Fort Portal, Kyenjojo, and Kasese to make the study population. 60 members of staff including both senior and junior levels, 7 board members comprised the target population.

3.4. Sample size determination and selection

Table 1 Showing the study population and sample size

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Source: Primary data

Stratified sampling was be used to identify subgroups of the population representative of the percentages of those same subgroups in the general population being studied, or to equal numbers of individuals within different subgroups for the purpose of comparing their responses to those of other subgroups. A sample of the staff members and the board was selected to represent each of those categories in the study. To determine the sample size, Yamane (1967) was used since for each objective and that each of the subgroups had a different level of significance.

Yamane (1967) sample size determination formula;

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N is the size of the study population and e is the level of precision

3.5. Data collection methods

To improve data reliability, the researcher used triangulation i.e. use of multiple data collection methods. Both primary and secondary data sources were accessed through questionnaires, interviews, and review of available documents about microfinance performance and factors affecting it.

Review of literature available on microfinance and its performance was done mainly through the existing literature. This involved reading journals, articles, books to compare and summarize findings in this area. Further document review on Hofokam as the case study was obtained to ascertain trends of performance of the specific indicators of the microfinance industry like profitability, portfolio size, outreach, sustainability.

Interviews about the state of affairs were also used to collect data from staff and the board member. Interviews were structured to enable response on the main issues in microfinance to be discussed with the respondents. The researcher used both face to face interviews to gain a more personal feeling with the respondents, pen paper questionnaires to save time given that all respondents had a reasonable level of literacy.

Observation on the state of affairs at the branches was also used to ascertain the market outreach of Hofokam in terms of the average number of clients served on a given day at the branches.

3.6. Data collection instruments

3.6.1. Questionnaire

Structured questionnaires were used for data collection from the staff and the board members because this was the most ideal instrument for the nature of the work at the MFI where staff are rarely free and a majority always in the field operations. The questionnaires used a 3 point liker scale ranging from 3 (Disagree) to 2 (undecided) and then to 1 (agree). This enabled the respondents to easily express their opinion on the state of affairs.

3.6.2. Interview Guide

Semi - structured interview guides were used to stimulate respondents into detailed discussions about the factors affecting MFI performance. The guides helped to standardize the interview situation and to obtain data required to meet specific objectives of the study.

3.7. Validity and Reliability

To ensure the consistency of measurement, the respondents were given the same questions at two different times in a space of one month before the conditions changed to see whether the responses given were still consistent. Questions which ascertain the same result were included in the questionnaire and the questions for the respondents were validated by two judges to ensure that the final piece was relevant and well structured.

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3.8. Data collection procedure

Interviews and questionnaires as data collection methods were administered to staff and the board member. This enabled easy comparison of the responses from each the respondents. Data clerks assisted the researcher in collecting data from respondents. A work plan on collection of data was shared with senior management to enable the researcher to easily interface with the respondents at the scheduled times. Relevant literature on microfinance performance was obtained from the library, internet and annual reports of Hofokam Ltd as a form of review of the existing literature.

3.9. Data analysis

Data collected was there after processed and analyzed. There was an establishment of categories, then the application of these categories to raw data through coding, tabulation and then drawing statistical inferences. The data was condensed into a few manageable groups and tables for further analysis. Data was coded; statistical package for social scientists (SPSS) helped to summarize the coded data and facilitated quick interpretation. Qualitative data was presented against study objectives and analyzed using explanations. Quantitative data was generated through data coding that yielded numbers. These numbers were analyzed using a computer package (SPSS) that yielded descriptive and inferential statistics to answer research questions and relationships of variables and analysis of variance. Descriptive statistics were used to summarize and describe data. Figures, bar graphs, percentages and frequency tables were used to present the results.

3.10. Measurement of variables

In microfinance, performance is measured in terms of outreach, profitability and sustainability. Sustainability was measured by accounting-based indicators. In general, accounting measures are considered more appropriate for long-term studies because managers may be able to manipulate financial statements for a year but their ability to manipulate statements for longer periods is limited (Bhagat and Jefferis, 2002) thus sustainability was measured by return on assets (ROA), and by operational self-sustainability (OSS). Operational self-sufficiency measures how well the MFI can cover its costs through operating revenues. It is a better measure in this context because ROA is self reported and does not necessarily include the value of donations, in-kind subsidies and inflation that MFIs should be incorporating in this ratio.

Outreach, in turn, was measured in one dimension of breadth. Breadth of outreach was measured by the logarithm of the number of active borrowers; that is, borrowers with active loans.

CHAPTER FOUR PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS

4.1. Introduction

The chapter contains presentation, analysis, and interpretation of data. It begins with the response rate and background information of the respondents. The next section presents the empirical results in relation of the objectives of the study.

4.2. Response rate

The response rate shows the participants that were involved in the study. To obtain data on the factors affecting the performance of MFIs, Hofokam Limited was used as a case study. Within Hofokam, respondents were stratified into two; members of staff and directors on the board. To obtain data from the staff and board members, the researcher reached the business premises of Hofokam Limited. The distance between the 3 branches of Fort Portal, Kyenjojo and Kasese made it easy for the researcher to interact with the respondents in real time. The respondents were cooperative and were all knowledgeable about the affairs of the MFI and other players in the Uganda microfinance industry as well. Out the sample size of 52 members of staff, 47 were actually seen and for the identified 3 board members, the researcher could only access only one as a respondent.

Table 2: Table showing number of respondents to the study

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Source: Primary data

From the above rate of response, 87.3% of the targeted sample responded. Staff categories including the Senior Management who act as heads of departments, branch managers, Loans Supervisors, Loan Officers and Finance Officers were interviewed and also given questionnaires to express their responses on the performance of the MFI in general. All issues were looked at in terms of the whole institution so as to make comparison of findings easy across the targeted branches which was made possible as most of the staff had worked in more than one or two branches during their careers with Hofokam Ltd so they had a great understanding of how the institution works across the board. This was critical as a good level of response rate strengthens the validity of the study. Bruce, 1999 stresses that response rate is one of the most critical factors used to determine study quality and adds that a response rate of 75% is appropriate.

4.3. Background information of the respondents

The researcher sought information on demographic features of the respondents such as the age, gender, level of education with the objective of confirming the suitability and idealness of those involved in the study.

4.3.1. Gender of the respondents

Graph 1: Graph showing Respondents by gender

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Source: Primary data

As seen in the graph above, it was found out that in general the 46% of the respondents were female while 54% of the respondents were male. The Board member seen as a respondent was female while 26 of the staff members were male and 21 were female. Both gender were well represented through those numbers of respondents as no gender completely dominated the other. It was also found out that Hofokam Ltd was undertaking a social objective of having gender balanced work force in which in some cases some positions were being specifically reserved for qualifying ladies.

4.3.2 Age of the respondents

The results indicated that most of the respondents belonged to the age group of 25-34 years with 33 of them belonging to the classification, 10 staff members belonged to the age group of 35-44 years, 4 were between 45-54 years and only 1 was 55 years and above. This implies that Hofokam Ltd employees are mostly youthful and presents an opportunity for a long term talent development and management which is so crucial in an industry where talent is hard to develop and even more importantly maintain. Given that most the staff are field based in the positions of Loans Officer, the MFI recruits only those below 30 years because it is perceived that the older one gets, the less efficient he/she is in the field operations.

In summary, the age groups of the respondents are displayed in the graph below;

Graph 2: Graph showing Respondents by age group

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4.3.3 Educational background of the respondents

Graph 3: Graph showing Respondents by education level

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Source: Primary data

It was found out that a majority of the staff at Hofokam were reasonably educated as per the ranging from the Certificate level to the post graduate level. Out of the 48 respondents, 2 had a certificate of education all of whom were office attendants, 10 had ordinary diplomas, 30 possessed Bachelor’s degrees with 5 having post graduate qualifications. The board member also had a post graduate qualification and was found to be very informed of the microfinance industry and the institutional affairs as well. The education level of each staff given the position held in the institution was found to be appropriate as majority of the junior officers had bachelor’s degrees while a few had ordinary diplomas, most of the managers had post graduate qualifications and were very knowledgeable of the financial industry and microfinance in particular in Uganda and beyond. This scenario presents Hofokam with a well-grounded and knowledgeable human resource necessary to move the MFI forward. Good human capital is the foundation of all other resources.

4.3.4. Marital status of the respondents

Graph 4: Graph showing respondents by marital status

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Source: Primary data

From the findings, a majority of the respondents were found to be married, 31 were married while 17 were not yet in marriage relationships. Out of the 47 staff, 30 were married and 17 were not yet married. The board member was married. Overall, the married category of the respondents represent 64.6% while the unmarried category represent 35.4% of those involved in the study. Hofokam Limited is a church based institution and all levels of governance encourage holy matrimony, a move that has been well embraced by all the staff and in the process increasing the number of the married. Married people are usually experienced in life matters especially social and economic ones thus the researcher fees a higher percentage of the respondents being married presents deep ground of having diverse ideas and feedback.

4.4. Performance of MFIs

The performance of Hofokam Limited as a microfinance institution

Each business has specific indicators of performance and microfinance is no exception. The ability of the MFI to survive into the future, its profitability and market share are all considered as broad dimensions of microfinance performance. Each stakeholder depends on them to make a situation analysis of the MFI as to whether it is on track or not. The table below shows the performance of Hofokam in the eyes of the respondents.

Table 3: Questionnaire results on the MFI performance.

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Source: Primary data

From the findings about the performance of Hofokam Limited, even though 60.4% of the respondents thought that the MFI had a future in microfinance, a majority of the respondents (58.3%) thought that the MFI deserved to post bigger profit margins, was not maximizing its outreach potential in terms of enrolling on more clients that were willing to access loans in the areas of its operations which was noted by 52.1% of the respondents. The respondents also stated that the clientele of the MFI was not huge enough given the potential available. 68.8% of the respondents found the clientele base of the MFI lacking given the potential in its areas of operation. On operational self-sufficiency, an overwhelming majority of 91.7% thought that the OSS of the MFI was still below the industrial standards; this was in line with the finding that the cost structure of the institution which 62.5% of the respondents found to be inefficient. The fact that the operations of the MFI were not efficient, the profitability of the MFI had to be affected negatively. Consequently, the trend of profitability was not healthy and encouraging, a statement supported by 52.0% of the respondents.

4.5. Results on the factors affecting the performance of MFIs in Uganda

This study established the factors affecting the performance of microfinance institutions in Uganda using Hofokam Limited as the case study. The study generated both qualitative and quantitative data. Qualitative data was obtained from interviews, questionnaires, documentary review on Hofokam Annual Reports, and observation of the state of affairs at the branches. Qualitative data were presented using simple descriptive frequencies and direct quotations followed by inferential statistics which helped to obtain statistics that were used in answering research questions like how does governance mechanisms, funding, and MIS affect the performance of the MFI? To answer the research questions correlation and regression analysis were used. This was preferred due to the fact that correlation coefficient gives an indication of the magnitude of the relationship between two variables (Mugenda & Mugenda, 1999). Findings are presented below according to the research objectives.

4.5.1 The effect of governance mechanisms on the performance of Hofokam Ltd

The sub section seeks to respond to the research question that: “What is the effect of governance mechanisms on the performance of Hofokam Limited?” The variable of governance mechanisms was operationalized to cover the board and its composition, auditing, regulation and management compensation. The findings of this investigation are presented in Table 4.

Table 4: Questionnaire results on effect of governance mechanisms on MFI performance

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Source: Primary data

From the findings above in Table 4, 79.2% of the respondents agreed that management was effective in moving the institution forward despite the fact that 70.8% of the respondents reckoned that the remuneration for management didn’t match their level of responsibility. Additionally, the board was seen as playing its key role to the MFI by 62.5% of the respondents. It was noted that most members of the board are not selected based on their competences but rather representatives of the three shareholding Catholic Dioceses of Hoima, Fort Portal and Kasese. 66.7% of the respondents dis-agreed that board members are selected based on their level of competences. However, the board was found to be supportive to the management team of the institution. It was also agreed that the auditing function of the MFI had more to do to effectively address the potential risks that the institution is exposed to. 62.5% of the respondents found the auditing function wanting if Hofokam is to effectively address the potential risks. A majority of the respondents of 83.3% found it necessary for Hofokam to get regulated in order to move forward.

The relationship between governance mechanisms and MFI performance Table 5

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Source: Field data

Results show that the correlation (r) between governance mechanisms and performance is 0.778(**), with a significance of 0.000, at a significance level of 0.01. This shows that there is a strong and highly significant positive relationship between governance mechanisms and MFI performance, since the P value is less than the significance level figure (p=0.000<0.01). Therefore, the result can be interpreted that the better the governance mechanisms used in MFIs, the better their performance and the reverse is also true. The high performance of a MFI as a consequence of effective governance mechanisms can be reflected in profitability, efficiency and portfolio quality of the MFI, holding other factors constant. A coefficient of determination (r2) was further computed in order to find out the effect of governance mechanisms on MFI performance. The results showed r2 of 60.5, implying that governance mechanisms would contribute 60.5% of MFI performance and the rest would be attributed to other factors, other than governance mechanisms.

Regression analysis for governance mechanisms and MFI performance

Table 6

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Source: Field data

The regression model result for governance mechanisms on MFI performance in Hofokam was positive and significant. The results of the R squared (R2) - which tells how a set of independent variables explains variations of a dependent variable yielded an adjusted R Square of =0.597 or 59.7%. This means that the independent variable dimension of governance mechanisms accounts for 59.7% of the variations in MFI performance. The model further shows a standardized coefficient of value of governance mechanisms as being positive (.778). This suggests that holding other factors constant, one unit of improvement in governance mechanisms would result into an improvement in MFI performance by a magnitude of 0.778 units. The regression finding was in agreement with the earlier correlation finding and therefore serves to further explain that the alternate hypothesis that ‘Governance mechanisms affect the performance of MFIs’ is confirmed and validated.

Interview results

Table 7: Interview results on the effect of governance mechanisms on MFI performance

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Source: Primary data

From the findings above, when issues of governance were asked, 18.8% of the respondents observed that the board clearly understands its oversight role. A small percentage on the Board was due to the fact that respondents found some of the board members lacking both in professional qualifications and experiences in related fields of banking and microfinance. One respondent noted that “whereas some board members are people of professional repute, others are wanting in terms of experience and which naturally affects the deliberations in the meetings as those seemingly incompetent do little in contributing towards issues of discussion and understanding of how the institutions is supposed to work”. 35.4% of the respondents observed that save for the few, generally the management situation at Hofokam was good comparatively in the industry as managers possessed appropriate mix of experience and academic qualification. Actually, respondents attributed the change of fortunes of the MFI from loss making to profit making to the management that was ushered in 2008 led by Mr. Charles Isingoma as the General Manager. Auditing assurance was according to respondents being affected by the inability of the function to do an enterprise wide auditing to cover all departments other than only focusing on credit department alone. A significant number of respondents were excited at the prospect of Hofokam venturing into deposit taking through acquiring a license from Bank of Uganda.

4.5.2 The effect of management information systems on the performance of Hofokam Ltd

Table 8: Questionnaire results on effect of management information system on MFI

performance.

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Source: Primary data

As an area that virtually affects all stakeholders involved with the institution, the management information system directly or indirectly influences how members of staff, management and the board do their work and above all make their decisions. Thus the results in the table above represent the responses from the internal users of the management information system that is the staff, management and the board members.

From the findings in table 7, respondents had mixed opinion on whether the MIS provides reliable and accurate information. It was a close call as only 54.2% agreed while a close 39.6% thought the MIS still had gaps in terms of reliability requirements. Additionally, it was found out that whereas the MIS was user friendly with 62.5% respondents being in agreement, a majority still found it lacking in terms of enabling timely reporting for decisions to be made at all levels of the institution, a finding represented by a whopping 70.8% of the respondents.

More weaknesses in the MIS were displayed as far as the availability of sufficient technical support from the vendor or the supplier of the software. 81.3% of the respondents noted the need for more involvement from the vendor of the MIS for its improved performance which supported a finding that the system needed more in built controls to protect data integrity (supported by 66.7% of the respondents).

Despite the need to have the system improved, a majority 56.3% of the respondents found the system sufficient to provide the necessary reports for all levels and also 70.8% thought it was financially viable software. The quality of the MIS is measured also in its ability to meet the demands of business as it grows. It was found out that the system cannot handle the growing business demands with 68.8% of the respondents supporting that position while 20.8% of the respondents were not sure.

The relationship between Management Information System and MFI performance

Table 9

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Source: Field data

Findings from table 9 show that there is a positive relationship between MIS and MFI performance r = 0.163. However, the relationship is not statistically significant, p=0.269> 0.05 at 95% confidence interval. This means that MIS does not significantly influence performance of MFIs and therefore, any efforts to enhance MIS would not significantly lead to an improvement in MFI performance. Basing on the correlation result, the hypothesis that; ‘MIS has an effect on the performance of MFIs’ was not validated and instead, the null hypothesis that; ‘MIS does not significantly affect performance of MFIs’ was adopted.

Regression analysis, showing the effect of MIS on performance of Hofokam limited. Table 10

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Source: Field data

The results in Table 10 further confirm the correlation results in Table 9, where it was found that MIS did not significantly predict performance of HOFOKAM limited, b=0.163, p=0.269>0.05. This therefore means that MIS do not significantly affect the variations in performance of Hofokam, but rather, their performance could be attributed to other factors, other than MIS.

performance

Table 11: Interview results on the effect of management information system on MFI

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Source: Primary data

“We like our software, it is easy to use and understandable”, some respondents noted as they felt that performance reports from the MIS are useful. To most respondents, the only reason they felt the MIS was lacking was mainly on the fact that it is not interconnected across the branches to head office thus the on time performance monitoring and system controls were not effective compared to other competitors. That’s why a majority 47.9% of the respondents appreciated the need for a software upgrade. It was found out from the respondents that the current software in use is Finance Solutions whose vendor had never visited the MFI for on-site support and getting system user feedback. This meant that some challenges with the system remained due to the inability to access the vendor physically. However, some respondents noted that though the current MIS software was not linked across the branches and head office, it was not the reason for the performance. They added that Hofokam had managed to grow over the years with the current system that is why 22.9% of the respondents found the MIS reports useful to the day today running of the MFI.

4.5.3 The extent to which funding affects the performance of Hofokam Ltd

The business of microfinance is a basically about selling of money for a margin or on lending the available cash that the MFI has at hand. This means that there is need to have a reasonable level of affordable capital so that the intended objectives of the MFI are met. The results below show the liquidity scenario at the MFI in its bid to remain serving its clients.

Table 12: Questionnaire results on to what extent funding affects MFI performance.

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Source: Primary data

From the findings, 100% of the respondents agreed that the MFI sometimes experiences liquidity short falls which was supported by a finding that sometimes the MFI fails to handle payment of approved loans especially during peak periods of the year. Those findings are partly explained by the 75% of the respondents who noted that access to capital was easy and that the lead time from the time of application for capital from wholesale money lenders to actual receipt of the funds was unnecessary long. Apart from the long lead times, 100% of the respondents noted that the cost of capital of the MFI was relatively higher compared to the other players in the industry and in the process a majority of the respondents (50%) were not sure of whether to term the relationship between the MFI and its creditors cordial or not. It was further found out that the MFI needs more funds to serve its intended market (100% of the respondents supported it) and that the MFI can do better with a right capital structure than the current one.

The relationship between funding and performance of Hofokam

Table 13

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Source: Field data

The findings in the table above indicated a very weak, negative and statistically insignificant relationship between funding and performance of Hofokam. This is evidenced from the value of the Pearson correlation (-0.045) - which is way below 1, and the significance value (0.762), which is far greater than 0.05, the level at which the relationship was tested. This implies that funding has a negative relationship with performance of MFIs, though not significant in regards to Hofokam. This further negates the stated hypothesis that; ‘funding has an effect on the performance of MFIs’.

Regression analysis for funding on performance of Hofokam

Table 14

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The findings in the table above indicate a standardised coefficient of -0.045, between funding and performance of Hofokam. The coefficient is negative, which means that improving funding would result into a decline in performance of Hofokam. The value of t-statistic for the coefficient equal to .762 which is insignificant (p-value, .762 is greater than 0.05). This means that performance of HOFOKAM is not statistically dependant on funding. The result therefore suggests that funding does not significantly affect the performance of Hofokam. According to the findings, R square (R2 tells how a set of independent variables explains variations of a dependent variable) value is 0.002, while the adjusted R Square is -.020 indicating that funding accounts for - 0.2% of performance in Hofokam, when all other variables are kept constant.

Table 15: Interview results on the effect of funding on the MFI performance

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Source: Primary data

From the table above, 45.8% of the interviewees noted that during the peak periods, loan disbursements are sometimes delayed. For fear of missing out on cash when they really need it, some customers borrowed money from the MFI two to three months earlier than the actual time of need to avoid disappointment. This was supported by the agreement by some respondents that the MFI needs more funding to meet the ever growing demand of its products and also increase its geographical coverage which at the moment is limited by resources. Interviewees noted that in most cases peak periods like October to December demand is so high that sometimes it exceeds the cash available for loan disbursement. One manager noted that such liquidity gaps in the past led the MFI into acquiring loan capital from a whole sale money lender which later proved too expensive because of the little time management had to scrutinize properly the terms and conditions of the facility and also lack of a contingency plan. The loan was to be repaid in US Dollars and also carried flexible interest rate terms. When the economic conditions were deemed not to be good in 2012, its rate shot from 15% to 29%. The above response from the manager explains why 16.7% of the interviewees realized that the financing expenses are ever growing. That said though, one respondent noted that even though the MFI had some short falls of funding, it could not well explain the performance of the MFI especially on critical indicators such as portfolio quality, operational self-sufficiency and even profitability. That the MFI was incurring high financing costs on external loans was due to poor bargaining skills on the side of the institution.

4.6 Review of Hofokam Limited’s financial performance

During the evaluation of the performance of Hofokam Limited, the acceptable standard areas for MFI performance were looked from 2009-2011. The results are indicated in the table below;

Table 16: review of the Hofokam key performance indicators

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Source: Hofokam Financial Years 2009, 2010, 2011 Annual Reports

The results above show a growing trend of the profit after tax over the three years. However, the growth in both profitability and loan portfolio is matched the increasing cost of funds seen by nearly 100% annual growth for the three years. As a result, the operating self-sufficiency shows a decline from 105.6% in 2009 to 105% due to the increasing costs implying that the sustainability of the MFI was greatly affected by the costs incurred in the year of 2010. Moreover, the operating self sufficiency of 105% is still way below the benchmark of 150% for the MFIs which have been in existence for more than five years. By implication, the cost structure fueled by high financing expenses has an effect on the sustainability of the MFI. Whereas the loan portfolio grew over the three financial periods, the clientele didn’t grow enough because being virtually the only major rural MFI in the Western region of Uganda; more people can be reached with the microfinance services.

CHAPTER FIVE SUMMARY, DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS

5.1. Introduction

This chapter presents the summary, discussion, conclusions and recommendations, which are based on the study findings. Summary and conclusions present the most imperative issues found out in the study while recommendations are suggested mainly for enhancing the performance of microfinance institutions in Uganda.

5.2. Summary of findings

The overall objective of the study was to examine the factors affecting the performance of microfinance institutions in Uganda and Hofokam Limited was used as the representative of the MFIs. The independent variables of the study were governance mechanisms, management information systems and funding while the dependent variable was the performance of the MFI. The study answered the following research questions that included: 1) What is the effect of governance mechanisms on the performance of Hofokam Limited? 2) What is the effect of management information systems on the performance of Hofokam Limited? 3) To what extent does funding affect the performance of Hofokam Limited?

The study was conducted at the three Hofokam stations of Fort Portal, Kasese and Kyenjojo. A total of 48 respondents participated in the study that included 47 staff and one board member. Most of the respondents were married and with reasonable levels of education good enough for the microfinance sector and banking in general. Additionally, all the respondents involved in the study were adults because the MFI only employs persons aged 23 years and above. The study adopted a case study design, where both qualitative and quantitative approaches were used. Data was collected using questionnaires, interviews, and documentary review.

The summary of the study is presented according to the study objectives;

5.2.1 The effect of governance mechanisms on the performance of Hofokam Limited

The results from the study revealed that the management of Hofokam was effective in their responsibilities but effective governance of the MFI was being hampered by the selection criteria of the directors on the board. The fact that the some members of the MFI board were selected despite their skills being unsuitable for microfinance management affected the efficiency of the boar in terms of the quality of the decisions made at the top level. Additionally, it was also found out that remuneration and compensation of management was not consummate with the responsibilities that they are charged with implying that special talent could not be attracted and if so retained. Finally, it was revealed that due to under staffing in the auditing department, the mechanism was not effective in addressing the risks the institution was exposed to such as fraud, which was realized as the biggest risk the MFI faces because of its nature of operations as a non­banking financial institution. Results showed that governance mechanisms were significant as far the performance of the microfinance institution was concerned. Generally, it was established that governance mechanisms strongly affect the performance of the MFI based on the correlation of 0.778(**).

5.2.2 The effect of management information systems on the performance of Hofokam Limited

The study found out that effective microfinance management was possible with a robust management information system as it would facilitate timely availability of information in such a manner that all levels of the MFI could make decisions at the relevant times for improved performance. Despite the fact that the MIS software was found to be user friendly, cost effective, it was also found wanting in a way that there was no technical support from the supplier of the MIS to address the challenges faced, the MIS lacked robust controls to mitigate loss of funds through fraud and required a lot of manual manipulations to sufficiently cover all areas of reporting. Though a positive relationship was found to exist between MIS and the MFI performance, it was not statistically significant to influence the performance of the MFI as some respondents observed that the MFI had managed to grow with the current MIS software which had no major negative effect on the current state of performance of the institution.

5.2.3. The extent to which funding affects the performance of Hofokam Limited

The results of the study indicate that Hofokam Limited just like many of the MFIs was initially donor funded by Catholic Relief Services. That meant availability of funds for on lending but even more importantly, at no cost in terms of financing costs. However, it was found out that when CRS pulled out of granting free capital to the MFI, a lot of financing gaps were realized by the MFI as it meant the need to look for other options was the only way forward. The capital from whole sale money lenders despite not being enough was very expensive. As a result liquidity short falls were realized which affected the MFIs ability to serve their intended market due to lack of funds to serve the new clients and also the existing clients with growing loan sizes. However, a negative correlation coefficient of -0.045 was found to exist between funding and the performance of Hofokam giving an indication that it was not materially significant as far as the MFI performance was concerned, when all other variables were kept constant.

5.3. Discussion of Findings

The findings are discussed in accordance to the research objectives.

5.3.1 The effect of governance mechanisms on the performance of Hofokam Limited

The dimensions used to measure governance mechanisms were board composition, auditing, regulation, management incentives. The findings of the study revealed that board members or directors of Hofokam Ltd were not selected based on their competences but rather on a social vision in that selection was geared at appointing loyal members of the Catholic church in the Dioceses of Hoima, Kasese, and Fort Portal. As a result, Hofokam has a representative board that aims to have all the three Diocesan owners have representatives. That model of board staffing faces challenges due to lack of an appropriate mix of skills of the board. A modern day financial institution board should have an appropriate skills mix and competence to address the ever changing dynamics in the industry. Hartarska (2005) states that boards are important in microfinance due to the relatively limited role of external forces and that the board of directors is an internal mechanism that helps resolve agency problems between owners and managers.

For auditing, respondents appreciated the competence of the department but due to under staffing of the function, majority of the respondents (62.5%) found to be wanting in terms of addressing the risks that the MFI is exposed to. It was found out that the MFI was gradually growing in size and also expanding its operational areas and to effectively realize the full purpose of the auditing function, its staffing had to match the size of institution. Having one auditor to cover all the 14 operational areas could only present increased risk exposure. This is supported by CGAP Appraisal Guide for Microfinance Institutions which states that the MFI internal audit should be able to sufficiently ensure effective use of resources and accurate financial reporting so that the institution’s objectives are lost through loss and misleading information.

From the questionnaire results, it was reported by 70.8% of the respondents that the remuneration and incentives given to management were not sufficient enough to attract and retain good staff in such high level positions. Compared to the other players in the industry, respondents argued that the incentives for management were not competitive. Such as scenario has an effect on motivation and willingness to sacrifice by members of management so as to have an improved level of performance. Therefore, it is safer to pay what competitive remuneration to management so as to have them own the objectives of the MFI and what it stands for since they are agents of the owners (Hartarska, 2005).

When respondents were asked whether it was necessary for Hofokam Ltd. to be regulated for the MFI to achieve its objectives, 83.3% of them found it necessary, just as a way of improving operational efficiency since it would now be able to mediate savings. It was revealed that because banks intermediate Hofokam clients’ transactions, some a deliberate delay was happening as a way for the banks to be able to make the customers realize that Hofokam was not good enough for them. Though regulation by the Central bank presents opportunities like improved public confidence in the MFI operations, it may not directly impact on the performance of the MFI say on growth of portfolio, quality of the loan portfolio. On the other hand, the regulation by the Central Bank may greatly change the original mission of the MFI with a lot of adjustments in how the MFI carries out its business and ownership. Additionally complying with the requirements for regulation is costly with a lot of significant expenditure required on infrastructure and additional personnel in the organizational structure.

Ndambu (2011) asserts that there is no sufficient evidence to suggest that regulatory status increases the sustainability of MFIs nor does the deposit intermediation.

5.3.2. The effect of management information systems on the performance of Hofokam Limited

Management information systems were dimensionally looked at in terms of reliability of data, reporting which was found to be key to any financial institution’s survival. From the study findings, it was revealed that the MIS was user friendly and cost effective but more importantly had no sufficient support from the vendor to continuously reengineer its capacity with innovations and relevant performance reporting was not possible with direct system generated reports which require manual manipulations to sufficiently cover all areas of performance. With manual manipulations, reports though with a possibility of being accurate can never be made in the time as and when needed for all stakeholders to make decisions. As a result, delayed reports affect time value of decisions by the various levels of the institution. Additionally, the potential of system fraud is a possibility as long as the MIS can easily be manipulated by the users leading to loss of funds and also the data integrity. Financial institutions that have more than one branch in terms of service points ought to have a well in built MIS that is interconnected for easy management of data integrity but also for timely consolidated reporting as and when it is required. A good management information system in the MFI facilitates easier cash-flow management and forecasting, timely information regarding portfolio risk, real time performance updates, more efficient accounting procedures, and simplified external reporting. In sum, a good MIS can increase an organization’s efficiency and decrease its operating costs (Consultative group to assist the poor, 2009).

Though 62.5% of the respondents agreed that the MIS was easy to use with an additional 70.8% finding it financially viable for the MFI, 66.7% noted that the MIS had insufficient inbuilt controls strong enough to preserve the integrity of the data. The fact the MFI was on a clear trend of growth in terms of clientele and geographical coverage, a majority 68.8% stated that under such a growth trend, the MIS was a strategic hindrance for the growing business of Hofokam. Statistically though, management information systems were not found to be very influential to the performance of the microfinance institution despite an existence of the positive correlation which was low. Some interviewees objected the thinking that the MIS software that was in use was negatively impacting on the performance of the MFI. To them as long as the MIS provided accurate reports that were sufficient to monitor the performance of the MFI, then it was not a critical success factor at the time since the MFI had managed to grow business with the current MIS software.

MIS will not do much for the sustainability of microfinance if institutions ignore good business practices such as focus on profitability, quality loans, provision for loan loss reserve and community accepted and appropriate accounting procedures. These good business practices should be in place before any MFI even thinks about MIS software. Without quality business practices, MIS will do little if anything to sustain these institutions. In fact, MIS can complicate the situation by creating a financial drain and propagating but allow you to do bad business more efficiently (Cann, 2011).

5.3.3 The extent to which funding affects the performance of Hofokam Limited

The study used the availability and cost of capital as the dimensions to measure the extent to which funding affects the performance of Hofokam Limited. From the study, it was found out that there was a challenge of managing the shift from receiving free capital grants from the major donor agency, CRS to looking for funds in the market at competitive interest rates for on lending to the clients. The effect of this change in the capital structure greatly had an impact on costs as the financing expenses went up but also due to the stringent market funds, the MFI could not get all the funds it needed from the whole sale lenders and commercial banks to meet the available demand on time. This caused delays in the customer service and in some cases client migration to other financial institutions.

Sandal (2011) observes that that donor funding can have positive effect on microfinance institutions in their startup phase allowing them access to capital they otherwise would be unable to obtain but can also a detrimental effect on microfinance institutions’ sustainability since it can create a dependency on subsidies. Since MFIs don’t intermediate voluntary savings as a way of raising capital for on lending, availability of cash resources is so paramount if any business in form of lending is to have a smooth happening.

From the questionnaire results, all respondents 100% agreed that the MFI experiences liquidity short falls with a high cost attached to the funds borrowed from external lenders which in turn affect the capacity of the MFI to reach its desired operational coverage. 75% of the respondents agreed that the turnaround time for funds applied to the whole sale money lenders takes longer than anticipated and in the process causing halt in the day today business transactions of the MFI in terms of paying out approved loans on time which partly explains the finding that 50% of the respondents were not decided as to whether the MFI had cordial relations with its capital funders. From the study, it was also established based on results of correlation that the performance of Hofokam Limited was not dependent on funding. The quantitative findings indicated that the performance of Hofokam Limited was not affected by funding as a factor; it was found out that other factors other than funding affected the MFI performance. As some interviewees put it, the MFI could still access the credit facilities at affordable rates with proper negotiating skills and analysis especially by the management of the institution. This is supported by the Microfinance Information Exchange (MIX) 2012 which states that there exist over 250 funders for the microfinance institutions in terms of debt financing that MFIs can partner with for on lending capital. The choice of whom to partner with entirely depends on the MFI putting into consideration its interests and affordability.

5.4 Conclusions

From the study findings, the following conclusions were reached in line with three objectives of the study.

5.4.1 The effect of governance mechanisms on the performance of Hofokam Limited

There is a positive significant relationship between governance mechanisms and the performance of MFIs. This is reflected in the fact that they enable the institution to achieve the original objectives for which the MFI was set out to do. The strategic leadership and guidance of management is carried out by the board meaning that the way the board is composed in terms of membership affects the direction the MFI will take. Additionally, the incentives given to management affect their commitment towards the cause of ensuring that the objectives of the MFI are achieved. Auditing mitigates or detects the risks that the MFI is exposed to thus in a way sustainability is safe guarded because of minimal loss of capital through fraud and other risks.

5.4.2 The effect of management information system on the performance of Hofokam Limited

Management information system is the lifeline of the MFI. The face of the MFI is embedded in its MIS. It’s from the MIS that the performance of the MFI can be known. The margin of the effect of the MIS on the performance of the MFI lies in its ability to be providing reliable data whenever needed by the various stakeholders like management and the board. If the MIS is able to provide timely reports that accurate, users will be able to make well informed decisions but more importantly on time. This is because delayed decision making in MFIs are so fatal that sometimes become meaningless due to being overtaken by events. Additionally, the quality of information from the MIS is based on the data in the MIS. The more accurate the data is, the better decisions it will facilitate because they will be made based on the actual reality on ground. The fact that the current MIS software is able to provide accurate and reliable information in form of reports means that though not sufficiently excellent, it is still able to steer the MFI business. That explains the relatively low correlation between the MIS and the performance of the Hofokam Limited. The fact that the MFI has managed to grow the business volumes with the MIS means it is not so significant in terms of impact as far as the performance of Hofokam Limited is concerned.

5.4.3 The extent to which funding affects the performance of Hofokam Limited

As far as Hofokam Limited is concerned, the microfinance institution is affected by other factors other than funding. Funding has no direct impact on the performance of the MFI. Even though a microfinance institution exits to primarily do money lending business to clients thus igniting the need for financial resources to be available, it is not a critical success factor for Hofokam Limited. The current capital structure is sufficient to move the MFI forward and more so, there are so many players in the funding market that can partner with the MFI.

5.5 Recommendations

The following recommendations are made in order to improve the performance of the microfinance institutions in Ugandan given the findings from the study. Recommendations are presented in line the objectives of the study.

5.5.1 The effect of governance mechanisms on the performance of Hofokam Limited

The selection criteria of board members should be bent towards choosing professionals with proven professionalism and relevant experience relevant to the microfinance industry so as to avoid a scenario of an underperforming board that has no insight of what is required of it.

As a control mechanism, internal auditing for the MFI should be beefed up with enough man power with the relevant risk assessment and fraud detection skills so as to be able to remain a useful assurance department to the institution and in the process mitigating possible scenarios of fraud across all functional areas of the MFI.

An industrial assessment into the incentives of management of other microfinance institutions should be carried out so as to ascertain where the MFI stands in its competitiveness of human resource remuneration and talent attraction.

Regulation by the Central Bank should not be looked at as the only way for the MFI to move forward. A financial institution’s main source of revenue is interest on loans which already is the focus of Hofokam at the moment. Regulation would give room for the MFI to intermediate savings but in a country like Uganda where the culture and ability to save is low, the investment to attract savings would not be worthwhile especially with competition with the traditional banks. Focus should be laid on reengineering internal processes to serve clients better and also improve efficiency to minimize the cost of operations.

5.5.2 The effect of management information system on the performance of Hofokam Limited

This study recommends that the MFI should not sacrifice a fortune for the sake of leaving the current MIS software. The fact that the software is able to provide accurate reports especially for the monitoring of the loan portfolio by the credit department staff means it has some substance. That said though, an evaluation on the current MIS should be done to explore how best it can be improved especially on the networking of branches with the Head office. With the availability of internet and VPN, inter linking branches with Head Office is possible. This would save the huge investment required to migrate to the other software options.

5.5.3 The extent to which funding affects the performance of Hofokam Limited

Having got the feedback of the staff on the liquidity position of the institution, even though it is critical for the operations of the MFI, as far as Hofokam is concerned the current funding structure is not a set back on its performance as a microfinance institution. The funding level should not be used as an excuse for failure to meet sustainability targets. The MFI should focus on improving the efficiency of doing business in terms of areas of operations, getting a reasonable staffing level that the resources can accommodate and even more importantly ensure that all members of staff in the credit department are well utilized for the purpose of having a quality loan portfolio which is productive.

The MFI management should establish wholesale money lenders on market both locally and internationally for competitive financing partnerships. The most feasible lenders should be brought on board after well calculated terms of the facility are considered so as to reduce the cost of capital but more importantly enable the MFI access credit when needed.

5.6 Limitations of the study

1) The study considered Hofokam Limited as its scope to represent other MFIs leaving out other players in Uganda like FINCA, Finance Trust and Pride Microfinance Limited. However, the limited scope was neutralized by the fact that acceptable parameters of portfolio and financial performance in the microfinance industry were used which apply across the entire industry.
2) Some respondents were proving hard to meet due to the fear that the information given would be held against them if it wasn’t positive. To address this, the researcher gave a written assurance that any information provided for the study was for academic purposes and even then confidential.

5.7 Contribution of the study

1. To the management of Hofokam Limited, the study may be used to strengthen the operations and sustainability of the MFI through improved performance by exploring the gaps identified.
2. To the general public, the study may increase information availability about the microfinance industry to enable rational decisions to be made by policy makers.
3. The identified gaps in the study can be a foundation for other future researchers.

5.8 Areas for further research

Microfinance is a global phenomenon with various stakeholders and practices. The biggest challenge for everyone involved in the industry has always been to see a perfect microfinance industry thus igniting a lot of debate on various aspects of the industry. However, the study focused on factors of governance mechanisms, management information systems and funding as affecting MFI performance. The researcher recommends future research on microfinance in the following areas.

1) The impact of staffing on the performance of microfinance institutions
2) An evaluation of sustainability of microfinance institutions in Uganda.

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APPENDICES

APPENDIX 1: QUESTIONNAIRES

Dear Respondent,

I am a student at Uganda Management Institute pursuing a Masters degree in Business Administration. This study is focused on factors affecting the performance of microfinance institutions in Uganda with Hofokam Limited as a representative case study. This in partial fulfillment of the requirements for the award of the Masters degree. Kindly spare some time to answer the questions in this questionnaire. For the record, all information provided will be confidential and is solely to be used for academic purposes.

To guarantee anonymity and confidentiality, please do not write your name or any other identifying marks on the questionnaire.

SECTION A: Background information

1. Position held in the institution
2. Length of stay in the institution
3. Level of education

a) Certificate b) Diploma c) Degree d) Post Graduate

4. How old are you?

25-34 years b) 35-44 years c) 35-39 d) 45-54 e) 55 and above

5. Marital Status

a) Married b) Not Married

SECTION B:

Effect of governance mechanisms on performance of Hofokam Limited

Please tick in the box with the appropriate answer using the following scales

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The effect of management information systems on the performance of Hofokam Limited

Please tick in the box with the appropriate answer using the following scales

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The extent to which funding affects the performance of Hofokam Limited

Please tick in the box with the appropriate answer using the following scales

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The performance of Hofokam Limited

Please tick in the box with the appropriate answer using the following scales

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THANK YOU

APPENDIX 2: INTERVIEW

PERFORMANCE

Interview questions on governance mechanisms

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Interview questions on management information systems

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Interview questions on the effect of funding on MFI performance

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