THE EFFECT OF DEBT FINANCING ON THE FINANCIAL PERFORMANCE OF

MICROFINANCE INSTITUTIONS;

A CASE STUDY OF MUKONO-KAYUNGA TEACHERS’ SACCO-MUKONO

DISTRICT

BY

KAAHWA RITAH

15/U/8977/MFE/PE

A RESEARCH REPORT SUBMITTED TO THE DEPARTMENT OF ECONOMICS

AND STATISTICS IN PARTIAL FULFILMENT OF THE REQUIREMENTS
FOR THE AWARD OF A BACHELORS DEGREE IN MICROFINANCE
OF KYAMBOGO UNIVERSITY

OCTOBER, 2018
 DECLARATION

I, KAAHWA RITAH, declare to the best of my knowledge that this research report is my original
work and that it has never been submitted to any institution of higher learning by any other person
before.

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

i
 APPROVAL

This is to approve that this research report about “The effect of debt financing on the financial
performance of microfinance institutions” has been done under my close supervision and it is now
ready for submission.

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

Name: MR BALYESIIMA DANISTAN FRANK

(SUPERVISOR)

ii
 DEDICATION

This piece of work is whole heartedly dedicated to my parents, Mr. Kibuuka Charles and Mrs
Nyakaana Mary Gorret for their financial support that inspired me to complete my studies. May
the Almighty God grant them the best in life.

iii
 ACKNOWLEDGEMENT

To the Almighty God, I do humbly appreciate the protection, guidance, provision and good health
granted unto me and my benefactors that rendered the research study a great success.

I do appreciate Research Supervisor, MR BALYESIIMA DANISTAN FRANK for the timely,

adequate, and positively influential style of supervision that I was subjected to from the starting
point up to this level. Thank you for making the exercise a great success.

I am greatly indebted to my sisters Akunguzibwe Jane and Alinda Mary for their selfless support
and contribution financially and in all ways towards the development of my educational career up
to this level.

Sincere thanks goes to my friends Okema Steven and Nasasira Ritah for their tireless effort that
has enabled me compile this report. May God reward them abundantly.

iv
 TABLE OF CONTENTS
DECLARATION ............................................................................................................................. i

APPROVAL ................................................................................................................................... ii

DEDICATION ............................................................................................................................... iii

ACKNOWLEDGEMENT ............................................................................................................. iv

LIST OF TABLES AND FIGURES............................................................................................ viii

ABSTRACT................................................................................................................................... ix

CHAPTER ONE: INTRODUCTION ............................................................................................. 1

1.1. Background to the Study.......................................................................................................... 1

1.2. Problem statement .................................................................................................................... 5

1.3. Purpose of the Study ................................................................................................................ 5

1.4. Specific objectives of the study ............................................................................................... 5

1.5. Research Questions .................................................................................................................. 6

1.6. Scope of the study .................................................................................................................... 6

1.7. Significance of the Study ......................................................................................................... 6

1.8. Limitation of the study ............................................................................................................. 7

1.9 Delimitations of the study ......................................................................................................... 7

CHAPTER TWO: LITERATURE REVIEW ................................................................................. 9

2.0 Introduction ............................................................................................................................... 9

2.1 The nature of debt financing ..................................................................................................... 9

2.2 The performance indicators of Microfinance Institutions ...................................................... 12

2.3 The effects of debt financing on the performance of Microfinance Institutions .................... 13

CHAPTER THREE: RESEARCH METHODOLOGY ............................................................... 17

3.1 Introduction ............................................................................................................................. 17

3.3 Study population and Sample Size ......................................................................................... 17

3.4 Sampling Techniques .............................................................................................................. 18

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3.5 Data Type and Source ............................................................................................................. 18

3.6 Data collection instruments..................................................................................................... 18

3.6.1 A questionnaire (Appendix I) .............................................................................................. 18

3.6.2 Interview method (Appendix III) ......................................................................................... 19

3.7 Research Procedure ................................................................................................................. 19

3.8 Data Analysis and Presentation .............................................................................................. 19

CHAPTER FOUR: DATA ANALYSIS, PRESENTATION AND INTERPRETATION OF THE

FINDINGS .................................................................................................................................... 20

4.1. Introduction ............................................................................................................................ 20

4.2. Importance of debt financing in Mukono-Kayunga SACCO ................................................ 20

4.2.1. Capital accumulation .......................................................................................................... 21

4.2.2. Debt financing and customer base ...................................................................................... 21

4.2.3. Debt financing and SACCO growth ................................................................................... 21

4.2.4. Debt financing and business paths ...................................................................................... 22

4.3. Nature of debt financing employed by Mukono-Kayunga SACCO ...................................... 22

4.3.1. Mortgages ........................................................................................................................... 23

4.3.2. Debt factoring ..................................................................................................................... 23

4.3.3. Trade credit ......................................................................................................................... 23

4.3.4. Bank overdraft .................................................................................................................... 24

4.3.5. Loans ................................................................................................................................... 24

4.3.6. Debentures .......................................................................................................................... 24

4.3.7. Lease hire purchase ............................................................................................................. 25

4.4. Performance indicators .......................................................................................................... 25

4.4.1. Interest rate.......................................................................................................................... 26

4.4.2: Liquidity preference ............................................................................................................ 26

4.4.3: Portfolio quality .................................................................................................................. 26

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4.4.4 Number of customers ........................................................................................................... 27

4.5. Effects of debt financing in Mukono-Kayunga SACCO ....................................................... 27

4.5.1. Debt financing allows companies pay off its creditors ....................................................... 28

4.5.2. Short term finances are raised outside the business ............................................................ 28

4.5.3. It also leads to increased customer base ............................................................................. 28

4.5.4. There are is also increased market share due to ready funds .............................................. 28

CHAPTER FIVE : SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMENDATIONS

TO THE STUDY .......................................................................................................................... 30

5.1. Introduction ............................................................................................................................ 30

5.2. Summary of findings.............................................................................................................. 30

5.2.1 Nature of debt financing in microfinance institutions ......................................................... 30

5.2.2. Performance indicators of microfinance institutions .......................................................... 31

5.2.3. Effects of debt financing on the performance of Microfinance Institutions ....................... 31

5.3. Conclusion ............................................................................................................................. 32

5.3.1 Nature of debt financing in microfinance institutions ......................................................... 32

5.3.2. Performance indicators of microfinance institutions .......................................................... 32

5.3.3. Effects of debt financing on the performance of Microfinance Institutions ....................... 32

5.4. Recommendations to the study .............................................................................................. 33

5.6. Areas for Further Research .................................................................................................... 34

REFERENCES ............................................................................................................................. 35

APPENDIX I : QUESTIONNAIRE FOR THE MANAGEMENT OF MUKONO-KAYUNGA

TEACHERS’ SACCO-MUKONO DISTRICT ............................................................................ 38

APPENDIX II : QUESTIONNAIRE FOR CLIENTS.................................................................. 41

APPENDIX III: INTRODUCTORY LETTER ............................................................................ 44

APPENDIX IV: INTRODUCTORY LETTER ............................................................................ 45

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 LIST OF TABLES AND FIGURES

Table 4.1: Importance of debt financing ...................................................................................... 20

Figure 4.1. Nature of debt financing ............................................................................................. 22
Table 4.2: Performance indicators of Mukono-Kayunga Teachers’ SACCO .............................. 25
Table 4.3. Effects of debt financing .............................................................................................. 27

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 ABSTRACT

The study was focused on the effect of debt financing as an option of raising funds on the financial
performance of Microfinance Institutions taking a case study of Mukono-Kayunga Teachers
SACCO. Three research objectives were used and these were; to examine the nature of debt
financing in Mukono-Kayunga Teachers’ SACCO, to establish the financial performance
indicators of Mukono-Kayunga Teachers’ SACCO and to establish the effects of debt financing
on the financial performance of Microfinance Institutions. This study used a cross-sectional
research design involving both qualitative and quantitative methodologies. The study population
included the employees of the SACCO, 35 clients, 5 managers, 10 loans officers and credit officers
and these comprised of thirty (50) respondents who were knowledgeable about the problem under
study.

From the findings, there are various ways of debt financing employed by microfinance institutions
to transact their businesses, and these were, mortgages, debentures and trade credit and leasing
hire purchase. It was established that the portfolio quality is one of the performance indicators of
Mukono-Kayunga Teachers’ SACCO, the interest rate charged by SACCOs and microfinance
institutions greatly determines their performance. According to the findings, majority of the
respondents affirmed that debt financing allows companies pay off its creditors; other respondents
revealed that there are is also increased market share due to ready funds as suggested by
respondents.

Conclusively, debt financing is a strategy that involves borrowing money from a lender or investor
with the understanding that the full amount will be repaid in the future, usually with interest. In
contrast, equity financing in which investors receive partial ownership in the company in exchange
for their funds does not have to be repaid. In most cases, debt financing does not include any
provision for ownership of the company. The study recommended that Mukono-Kayunga teacher
SACCO should review and adjust the existing loan evaluation procedures and parameters in an
effort to re-engineer them to suit the financial needs and capabilities of its members. The major
elements of the operational framework of institution credit delivery mechanisms such as the
compulsory savings policy, provision of a range of credit products, lead time, and credit
monitoring and loan recovery should be reformed to ensure that a clear link exists between them
and members needs as well as performance targets.

ix
 CHAPTER ONE

INTRODUCTION

1.1. Background to the Study

David Symons, et al, (1992), agreed that microfinance institutions find it difficult to raise finance
from outside sources and in case they want to improve on their products and services, they may be
forced to provide their own capital. A starter in business as a sole trader, therefore, will normally
provide at least part of the star-up finance whereas a partnership will rely heavily on the partners
to make a contribution towards the initial capital required. However, many businesses will also
need to borrow money from an outside source.

Needham et al., (1995), believed that, borrowing is considered an acceptable feature of commercial
activity. The charge for borrowing is interest, and a crucial element in calculating the interest
charge is the amount of risk involved with the loan. In order to obtain a loan, an organization needs
to use its business plan to convince its financial backers of the viability of its proposition. Many
financial institutions involved with lending activities will try to provide a package of lending
facilities to match the specific requirements of each borrower.

Jaramillo and Schiantarelli, (1996), stated that the availability of long-term finance allows firms
to improve their productivity. If a firm has access to long-term debt finance, it can invest in new
capital and equipment which helps to increase productivity. According to Marcouse et al., (2003),
by investing in more modern and sophisticated machines, productivity per worker increases.
Ventire et al., (2004), adds that modern know-how fuels greater output per unit of effort. The firm
can also invest in new technologies which are more productive. The inability to access long-term
finance can force firms to use short-term debt to finance long-term projects. This will create
mismatches of assets and liabilities and depletes working capital. Depletion of working capital will
negatively affect firm operations. It is crucial that the primary source of loan repayments should
be cash flows from the project.

The operations of Microfinance require capital which can be raised in different ways. One way of
raising capital is through debt from financial institutions. Debt finance can be short-term or long-
term in nature. Microfinance can use debt finance to start-up or expand their operations. The
purposes of finance are investing in capital and meeting working capital requirements. Marcouse
1
et al., (2003), argued that both working capital and money for capital expenditure have to be found
before business starts to generate any income. Working capital is needed for the day to day running
of the business (Paul, 2004).

Eddie Fox et al., (2004), believed that, debt financing is the act of a business raising operating
capital or other capital by borrowing. Most often, this refers to the issuance of a bond, debenture,
or other debt security to the borrower. In exchange for lending the money, bond holders and others
become creditors of the business and are entitled to the payment of interest and to have their loan
redeemed at the end of a given period. Debt financing can be long-term or short-term. Long-term
debt financing usually involves a business' need to buy the basic necessities for its business, such
as facilities and major assets, while short-term debt financing includes debt securities with shorter
redemption periods and is used to provide day-to-day necessities such as inventory and/or payroll.
Firms usually use equity financing when they are unable to raise sufficient funds through retained
earnings or when they have to raise additional equity capital to offset debt.

Pandey, (2005), pointed out that the capital structure of the company will be planned initially when
the company is incorporated and the initial capital structure should be designed very carefully. The
management of the company should set a target capital structure which is either debt, equity or
both and the subsequent financing decision should be made with a view to achieve the target capital
structure.

Pandey, (2005), pointed out that, given the capital budgeting decision of a firm, it has to decide
the way in which the project will be financed. Every time a firm makes an investment decision, it
is at the same time making a financing decision also. For example a decision to buy a new plant
or to buy a new machine implies specific way of financing that project either employing equity or
debt or both, Philip, (2007). The assets of a company can be financed either by increasing the
owners’ claims or the creditors’ claim. The various means of financing represent the financial
structure of an enterprise.

Pride et al, (2009), contends that debt is a means of using anticipated future purchasing power in
the present before it has actually been earned. Some companies and corporations use debt as a part
of their overall corporate finance strategy. When a firm raises money for working capital or capital
expenditures by selling bonds, bills, or notes to individual and/or institutional investors. As a result
of lending the money, the individuals or institutions become creditors and fully expect to be repaid

2
on the principal and interest. Debt financing includes both secured and unsecured loans. Security
involves a form of collateral as an assurance the loan will be repaid. If the debtor defaults on the
loan, that collateral is forfeited to satisfy payment of the debt.

Ebaid, (2009), partially agreed with Ahmad et al., (2012). In the study Ebaid wanted to establish
the relationship between debt level and financial performance of companies listed on the Egyptian
stock exchange. The study used return on assets, return on equity and gross profit margin as
dependent variables and short-term debt, long-term debt and total debt as independent variables.
The results from the study showed that there was a negative impact of short-term debt and total
debt on return on assets (ROA). The study also concluded that there was no significant relationship
between long-term debt financing AND ROA. Ebaid also concluded that there was insignificant
relationship between total debt, short-term debt and long-term debt and financial performance
measured by gross profit margin and ROE.

De Schrevel et al., (2009), indicate that the rapid growth of MIVs between 2004 and 2008 is
explained by a narrow targeting of the most profitable and professional MFIs. This could indicate
that there is a positive relationship between access to subsidized funding and the financial
performance of the microfinance institutions. As for subsidized funding, the lifecycle theory
predicts that MFIs in their early stages need subsidized funding to compensate for their lack of
profitability. We could, therefore, expect that international subsidized funding is negatively related
to the MFI's financial performance. However, the relationship might not be that clear cut. The SRI
literature provides insight into what type of MFIs the socially oriented investors would typically
target. As previously outlined, social investors put their money into projects that yield social
benefits. However, socially oriented investors also intend to ensure good economic performance
from their investments (Porter and Kramer, 2002). Therefore, MIVs claim to have “double bottom
line” objectives, and thus they invest in socially and financially sound MFIs.

Armendariz and Morduch, (2010), argued that, the development of specialized investment funds,
called microfinance investment vehicles (MIVs), illustrates the emergence of this new specialized
capital market. MFIs typically have both financial and social objectives and attract funding from
actors with varying degrees of profit motivation, from purely development-oriented to maximum
profit-oriented.

3
Debt financing is positively related to the financial performance of the microfinance institutions
because in cases where they run short of funds, they resort to debt financing so as to boost the
performance of their activities. Debt financing in microfinance institutions is mostly in form of
loans and grants from donor agencies such as World Bank. Indeed existing evidence shows that
whereas globally most MFIs rely heavily on donations and retained earnings to fund their
activities, Africa MFIs fund only 25 percent of their assets with equity. However, Goodman et al.,
(2010), stipulates that debt financing acquired through the sale of ownership shares, via capital
markets, is the most expensive source of capital for MFIs, but most attractive for investors because
of high returns prevalent in the microfinance sector. This source of funds is the subject of
widespread criticism because some public MFIs seem to lose track of their social objectives

Reille et al., (2011), believed that, during recent decades, the provision of microfinance services
to poor families and micro-entrepreneurs has evolved to become a global industry. Until recently,
donations and subsidies have been the main source of funding for microfinance institutions (MFIs).
Lately, however, the growth of the industry and the pressure by donors toward financial
sustainability has pushed MFIs to turn to debt financing. Moreover, debt financing is regarded by
many as essential to fuel the growth of the MFI and other businesses, arguing that only
international capital markets can handle the estimated finances needed to reach the potential
demand for microfinance services worldwide. Recent academic research (Mersland et al., 2011)
has also shown that internationalization, notably through investments, can have an overall positive
influence on the social performance of MFIs.

Cecchetti et al., (2011), studied the effects of debt on firms and concluded that moderate debt level
improves welfare and enhances growth but high levels can lead to a decline in growth of the firm.
Rainhart and Rogoff, (2009), argued that when debt impacted positively to the growth of a firm
only when it is within certain levels. When the ratio goes beyond certain levels financial crisis is
very likely. The argument is also supported by Stern Stewart and Company which argues that a
high level of debt increases the probability of a firm facing financial distress. Over borrowing can
lead to bankruptcy and financial ruin (Ceccetti et al., 2011). High levels of debt will constrain the
firm from undertaking project that are likely to be profitable because of the inability to attract more
debt from financial institutions.

4
1.2. Problem statement

The importance of debt financing for MFIs raises a number of questions about how MFIs fund
their operations. What types of actors lend money to MFIs? What instruments are used to finance
them? Debt financing occurs when the MFIs borrow money that must be repaid with interest within
a specified period. Balunywa, (1997), asserts that without funding, MFIs would be almost
impossibly impended and the living will never be attained hence making debt financing a preferred
option. However, the major sources of raising funds for business ventures or projects are debt
financing and owners’ equity but more dominant in Uganda is debt financing, (Gonzalez et al,
(2002). It was upon this basis that this study was conducted to establish the effect of debt financing
on the financial performance of microfinance institutions taking a case study of Mukono-Kayunga
Teachers SACCO-Mukono district.

1.3. Purpose of the Study

The study established the effect of debt financing as an option of raising funds on the financial
performance of Microfinance Institutions taking a case study of Mukono-Kayunga Teachers
SACCO.

1.4. Specific objectives of the study

1. To examine the nature of debt financing in Mukono-Kayunga Teachers’ SACCO

2. To establish the financial performance indicators of Mukono-Kayunga Teachers’ SACCO

3. To establish the effects of debt financing on the financial performance of Microfinance

Institutions

5
1.5. Research Questions

1. What is the nature of debt financing in Mukono-Kayunga Teachers’ SACCO?

2. What are the financial performance indicators of Mukono-Kayunga Teachers’ SACCO?

3. What are the effects of debt financing on the financial performance of Microfinance
Institutions?

1.6. Scope of the study

The subject of the study was the effect of debt financing on the financial performance of
microfinance institutions. The research was conducted in Mukono-Kayunga Teachers’ SACCO.
The above mentioned as a case study was chosen because of its convenience and it is easily
accessible to the researcher. The research covered debt financing between the periods 2006-2018
because it was the time the researcher is mostly interested in.

1.7. Significance of the Study

The study will be important to various stakeholders which include;

Business persons (Entrepreneurs/companies will be able to assess whether debt financing is an

effective way of raising funds for business ventures or not. They will also be able to learn various
issues they should consider when negotiating for credit from the banks. Policy makers. These will
benefit from the dissertation in the following ways;

The study is expected to help policy makers and planers in formulating strategies on how to adhere
to financial credit terms. They will also be able to assess the effectiveness of credit especially on
government programmes like NUSAF.

Financial institutions will be able to assess whether they are doing the right job of advancing credit
to the public to try to eradicate poverty or they are worsening the situation. This is due to the fact
that the study will show whether debt financing is effective or not hence helping financial
institutions in their endeavour to provide credit to the public.

6
1.8. Limitation of the study

The time for study was not enough as the targets for the study may spread over a wide area and
therefore it required a lot of time to look for them and get the necessary data. However, the
researcher drafted a favourable time table that helped her to meet all the respondents in time.

Some respondents were not cooperative; it was difficult to get the required responses from them.
The researcher explained the respondents about the importance of the study and this helped her to
win their hearts

The researcher faced the problem of limited funds to cater for her feeding, transport, and printing
costs among others. However, the researcher got funds from relatives that were used to cater for
emergencies like transport, lunch among others.

The researcher faced the problem of unavailability of some of the key informants from whom she
could get the necessary information. This was solved by making contacts through telephone to the
respondents who were to be involved in this study.

The researcher was faced with the problem of insufficient funds to facilitate transport, stationery,
typing and printing of the information; this was compromised the scheduled time frame for the
study. This was solved by making the budget for all costs which helped the researcher to minimize
costs.

Some of the respondents were unwilling to give correct information. The researcher worked hand
in hand with the respondents to avert any fear and confidentiality assured.

1.9 Delimitations of the study

This particular study was conducted at Mukono-Kayunga Teachers SACCO yet there are more
than 1000 SACCOs in Uganda therefore the results of this study may not be generalizable for all
the SACCOs in the country.

7
1.10 Definition of operational terms

Debt financing is when a firm raises money for working capital or capital expenditures by selling

debt instruments to individuals and/or institutional investors. In return for lending the money, the

individuals or institutions become creditors and receive a promise that the principal and interest

on the debt will be repaid.

Financial performance is a subjective measure of how well a firm can use assets from its primary

mode of business and generate revenues. This term is also used as a general measure of a firm's

overall financial health over a given period of time, and can be used to compare similar firms

across the same industry or to compare industries or sectors in aggregation.

Microfinance is the provision of savings accounts, loans, insurance, money transfers and other

banking services to customers that lack access to traditional financial services, usually because of

poverty. Making small loans to individuals who lack the necessary resources to secure traditional

credit is known as microcredit.

A Savings And Credit Co-Operative (SACCO) is an association of like minded individuals,

registered under the Ministry of Trade Industry and Cooperatives in Uganda, and authorized to

take deposits from and lend to its members. SACCOs are governed by the SACCO bylaws which

state the objectives, membership, share capital, organization structure, management and lending

regulations.

8
 CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter consists of the literature mostly from the library, and other peoples reports about the

over view of the nature of debt financing, the performance indicators of microfinance institutions

and the effect of debt financing on the performance microfinance institutions in relation to the

topic of study.

2.1 The nature of debt financing

Needham et al., (1995), suggest that an overdraft is the most frequently used form of short term

bank finance which is used to ease cash flow problems. Arrangements are made between the

customer and the bank to include agreed limit of an account beyond which the customer will not

draw and the interest is calculated on the level of overdraft on a daily basis.

Dave Needham et al., (1995), noted that another way in which the company can gain the use of an

asset without having to pay for it is through leasing. The lessee uses the asset and makes regular

payments to the lesser, who owns it. An operating lease is for a small amount, a capital or finance

lease is for a large item over extended period. As the asset does not belong to the lessee, it will not

appear in the balance sheet.

Carysfoth et al., (2002), puts it that, bank overdraft is another form of bank loan whereby the

business is allowed to spend more than it has in its account for a limited period. This is usually

cheaper than the loan if the money is required for a very short period, as overdraft charges are

usually calculated daily.

9
Carysfoth et al., (2002), loans are made by banks to businesses. For large businesses, there are

special types of loans such as corporate bonds. However, for small and medium size businesses, a

bank loan is straightforward way of getting capital. Allan (2004) posits that a loan is where the

business borrows a fixed amount, for a fixed term, makes regular repayments and is charged

interest on the full amount for the term of the loan.

Carol et al., (2002), the lease company (known as the lesser) owns the business property and

reclaims it at the end of the lease period and entails regular instalments payments, either every

month or every year. Some lease agreements allow the business which has been using the asset

(known as the lessee) to buy it at the end of the lease period.

Dransfield et al., (2004), observed that, debentures are not strictly a type of shares; they are a loan

to business, which is often secured on assets of the company. Debenture stock can be issued only

if the firm is a public limited company. A fixed rate of interest is fixed to debenture holders and

this must be paid at the set amount regardless of the profit levels of the firm. Debentures are for a

fixed term and the company repays them in full to debenture holders once the maturity date is

reached.

Fox et al., (2004), for a company, long term loans are more accessible from the financial

institutions or through the issue of debentures. A debenture is a marketable security because it is

issued as certificates under the company’s seal and can be bought or sold in the capital markets.

The certificate will give details of the loan, including the interest rate that will be paid, the date of

redemption if it is not an irredeemable debenture and any security attached to the loan. This means

of raising funds according to Fox is advantageous in that the company will not be vulnerable to

just one lender, and more funds can be raised when required by issuing more securities.

10
Dransfield et al., (2004), contends that the nature of debt financing is described by different forms

upon which a company can have access to credit and what is important is the decision of how

long you need the finance as different authors have categorized the forms of debt financing into

short term, medium term and long term. A sensible way to differentiate such sources is by length

of time and the terms and conditions for repayment and these include;

Dransfield et al., (2004), noted that hire purchase has many features in common with leasing. You

choose an asset that you need for your company, and then agree to make regular payments for a

fixed period to hire purchase company in exchange for the right to use that asset. The asset remains

the property of the hire purchase company until the final payment is made and at that point

ownership of the asset transfers to you. You are free to continue to use or sell the asset.

Philip, (2007), contends that through trade credit arrangement, a business promises to pay in the

future for goods that it has received (hopefully it will pay for the goods after it has sold them). The

period of trade credit can be up to 90 days but is often less. He adds that usually, interest is seldom

charged-but there will be penalties if payment is not made and there could be a discount for early

payment.

Thomas, (2008), pointed out that, debt financing is a strategy that involves borrowing money from

a lender or investor with the understanding that the full amount will be repaid in the future, usually

with interest. In contrast, equity financing in which investors receive partial ownership in the

company in exchange for their funds does not have to be repaid. In most cases, debt financing does

not include any provision for ownership of the company (although some types of debt are

convertible to stock). Instead, small businesses that employ debt financing accept a direct

obligation to repay the funds within a certain period of time. The interest rate charged on the

borrowed funds reflects the level of risk that the lender undertakes by providing the money. For

11
example, a lender might charge a start up company a higher interest rate than it would a company

that had shown a profit for several years. Since lenders are paid off before owners in the event of

business liquidation, debt financing entails less risk than equity financing and thus usually

commands a lower return.

Symons et al. (2012), noted that mortgages are available to businesses which wish to buy land or

buildings and do not have enough finances. Building societies do lend to businesses, so the usual

source of the mortgage is a bank and the period of the loan is usually between twenty to thirty

years. The lender of a mortgage has certain legal rights over the property, including the right of

sale, if the borrower is unable to meet the repayments.

David et al., (2013), observed that a further means of raising short term finance open to businesses

facing cash flow problems is factoring. This involves a business which has a debt owed to it selling

the right to this money to a factor which is an organization willing to provide immediate cash in

return for the right to collect and keep the monies owed by the business debtors.

Needham et al, (2015), noted that a useful form of finance for all organizations is that of trade

credit allowed by suppliers and this depends on the credit period which is the time between

receiving the goods or services and being obliged to make payment for it. Businesses can receive

trade credit from their suppliers by negotiating the option to pay later.

2.2 The performance indicators of Microfinance Institutions

According to Warner, (2000), the major performance indicators of a company include profitability

which is measured at different levels, efficiency and effectiveness as measured in “assets per

employee” and “revenue per employee”, and market niche which is measured by how customers’

needs are being satisfied.

12
Callagham et al., (2004), noted that before we begin to look at the performance of a business we

need to recognize that it can be measured only against its objectives. Different businesses have

different objectives and he adds that these are dependent on the type of business it is. He further

added that a trading company seeking to maximize profit will have very different objectives to a

government department serving the community. Nationalized industry may be seeking to achieve

the duo objective of being commercial profitable, and providing a wide service to its customers as

possible.

Callagham et al., (2004), further notes that the measure of performance depends so much on the

earnings as benchmark to profitability. According to Paul, the measures of performance in a

commercial organization include return on capital, profit margins and turnover of capital. Pandey,

(2005), stresses that the key performance indicator of an organization is earnings and the earnings

must grow if the firm retains them. If the retention rate is zero, growth rate would be zero. He adds

that growth as opposed to mere expansion is dependent on the existence of opportunity to invest

retained earnings at a rate higher that the capitalization rate.

Philip, (2007), argues that one of the key measures of performance is growth. He adds that growth

can be internal and the indicators for this are increases in sales, use of new technology, widening

of its product range or expansion of its markets and externally the business can grow by joining

other businesses. It can also either merge with other businesses or takeover other businesses.

2.3 The effects of debt financing on the performance of Microfinance Institutions

According to Symons et al., (1992), bank overdraft is generally the most common and cheapest

way of raising short term finance outside the business. Many businesses will operate permanent

overdraft facilities which will give them some flexibility in their cash flow management thus the

13
business will only be required to pay an interest owed on a daily basis on the amount. According

to Fox et al., (1993), debenture borrowing as a means of raising funds according is advantageous

in that the company will not be vulnerable to just one lender, and more funds can be raised when

required by issuing more securities.

In the view of Needham et al., (1995), the benefits of lease are; it enables the business to have

complete use of the asset without having to use risk or loan capital to finance it, leasing payments

are expenses and are charged to the profit and loss account before tax is assessed, and finally

leasing enables business to their equipment more often and their by keeping them up to date with

modern technology.

Lewis et al., (1995), posits that the money borrowed from either banks, finance houses, building

societies, creditors and government, may be used to pay day to day expenses, purchase of fixed

assets, funding expansion programmes of business, fund promotional activities and to pay

employees in some instances hence these will lead to the enhanced performance of the firm.

Richards, et al (2001), suggest that borrowed finance can help a firm keep trading while it is

waiting to be paid from past sales. It can also help to meet ongoing costs of operation or provide

means for the firm to expand and hence leading to the success of the firm.

Carysfoth et al., (2002), contends that leasing is often used for acquiring cars, photocopiers and

transport vehicles and its advantages are; the asset can be used immediately while allowing

repayments to be staggered, the most up to date technology can also be acquired which will

increase productivity and efficiency, and also the finance company may take the responsibility for

repairs, serving and even insure the asset.

14
According to Dransfield et al., (2004), obtaining credit from suppliers is a good way of helping

your cash flow situation. As the sales activity of the firm grows, however, it often requires

additional working capital, and trade credit can help with this. Dransfield et al., (2004), further

highlights that trade credit allows a company to pay its creditors sometime after goods have been

delivered; therefore giving the chance to sell them on to customers and receive income before

paying what is due. He further adds that obtaining such credit, a company can build up a good

credit history by paying suppliers on time and keeping up payment on loan and credit cards.

Dransfield et al., (2004) suggests that borrowing through hire purchase is an easy and quick way

to raise finance- one that does not require any security other than the asset its self but however, the

main disadvantage is that the company does not own the goods, so if payments are not made

promptly, the asset will be reclaimed by the hire purchase company and also the asset cannot be

sold while the hire purchase agreement is still in force, so the asset of no financial value to the

company until the agreement is paid in full.

Symons et al., (2011), points out that, borrowing over fewer than three years is considered to be

short term finance. Mostly such borrowing is needed to maintain a satisfactory cash flow and acts

as a buffer between paying suppliers and employers and receiving money from debtors.

Occasionally short term finance is used to buy an asset which has a relatively a short life, a car or

van for example which is used to support the firms’ operations. Medium term forms of debt

financing are used to purchase assets which have a particular lifespan, refinance an overdraft, and

fund medium term programmes. Long term forms of debt financing are used to purchase plant or

machinery which will have prolonged lifespan, finance takeovers and other forms of expansion.

William, et al., (2009), noted that banks, saving and loan societies, credit unions and other financial

institutions provide short and long term loans to both individuals and businesses. Businesses

15
generally use shot term loans to provide working capital that will be repaid using future sales

revenue. Typical use for money obtained through short term loans include purchasing inventory,

financing promotional needs and meeting unexpected emergencies which will all lead to the

improvement of business performance. Long term loans are used to finance the expansion of

buildings and retail facilities, replacement of equipment or development of the firms’ product mix

which will all bring about better performance of the firm.

Buffett, (2010), highlights that, debt financing allows companies to make investments without

having to commit a lot of their own capital, but the even greater purpose is to maximize shareholder

value. As in personal finance, too much debt can be a very, very bad thing, but a little can go a

long way. For most investors, it is thus usually unwise to avoid investing in companies with debt;

the trick is to find companies that manage their debt well. The world's most popular investor,

Warren Buffett, looks very carefully at a company's debt burden before investing, and many of his

equity holdings had relatively low debts when he invested. He prefers companies that fuel future

growth through shareholder equity. Buffett hasn't wavered in his focus on leverage.

16
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

Under this chapter, the researcher explains the research design, population of the study, sample

size and composition, sampling technique, sources of data, data collection tools and, processing

and presentation, data collection procedure, reliability and validity of data, measurement of

variables, legal and ethical considerations.

3.2 Research design

This study used a cross-sectional research design involving both qualitative and quantitative

methodologies. A cross-sectional survey collects information from a random sample that has been

drawn from different categories of the population at a point in time. Quantitative analysis was used

to establish the impact of debt financing on the financial performance of microfinance institutions.

The dependent variable was debt financing and the independent variable was financial

performance of microfinance institutions.

3.3 Study population and Sample Size

The study selected a total of 50 respondents as described below. The study population included

the employees of the SACCO, 35 clients, 5 managers, 10 loans officers and credit officers and

these comprised of thirty (50) respondents who were knowledgeable about the problem under

study.

17
3.4 Sampling Techniques

Purposive sampling technique was used to select the management of Mukono-Kayunga SACCO.

This was because the managers were few and were deemed to have the relevant information as

overseers so they had to be included. Simple random sampling technique were used in selecting

clients. This technique involved randomly selecting respondents interviewed. This was used

because the clients were many and it gave a chance for every member to be interviewed. So, it

avoided bias.

3.5 Data Type and Source

The study used primary data. Primary data was obtained from the study population of the research

by use of questionnaires. The questionnaires was administered by the researcher on face-to-face

contact to the respondents. Primary data was used because it gives raw facts about the impact of

debt financing on the financial performance of microfinance. Also secondary data was used in the

study and this involved the use of institutional records such as credit references and loan

application. Secondary data provided evidence on debt financing among MFIs in the past years

which helped the researcher to establish its impact on financial performance of microfinance

institutions.

3.6 Data collection instruments

3.6.1 A questionnaire (Appendix I)

Schultz, (2010), defined questionnaire as an instrument consisting of a series of questions and

other prompts for the purpose of gathering information from respondents. A self-administered

questionnaire was a means of data collection from the management and clients of the voluntary

saving schemes. This instrument was preferred because it allows respondents to internalize

18
questions before answering and also it was less free from the biases of the interviewers. The

researcher used questionnaires because they are easy to administer and they save time.

3.6.2 Interview method (Appendix III)

An interview is an organized conversation aimed at gathering data about a particular topic. This is

a method where a researcher interviews respondents to obtain information on the issue of interest.

(Kim 2009). Together with the questionnaire method, the management and clients of the teachers’

SACCO were interviewed to obtain detailed information to reduce errors arising from using one

data collection instrument. This method was used because interviews provided information about

individuals’ experiences, interests, beliefs, values, knowledge and their perceptions about others’

views and acts Schostak, (2005).

3.7 Research Procedure

After the approval of the research proposal by the University research supervisor, a letter of

introduction was obtained from the Department of Economics and statistics, Kyambogo University

this helped to introduce the researcher in the leaders of Mukono-Kayunga teachers SACCO.

Further still, permission was sought from the different leaders and clients of Mukono-Kayunga

Teachers SACCO; this enabled the student to carry out research. After getting permission, the

researcher briefed the participants on how to fill the questionnaires, and on how to answer the

questions on the interview guides. The student then started the data collection process.

3.8 Data Analysis and Presentation

The study findings were analyzed descriptively by use of tabulations, charts, graphs and

percentages. Descriptive analysis was also done on qualitative data and conclusions and

recommendations were made about the study.

19
 CHAPTER FOUR

DATA ANALYSIS, PRESENTATION AND INTERPRETATION OF THE FINDINGS

4.1. Introduction

This chapter presents the analysis and interpretation of the findings meant to establish the effect

of debt financing as an option of raising funds on the performance of Micro finance Institutions.

The study was guided by three specific objectives.

4.2. Importance of debt financing in Mukono-Kayunga SACCO

The study was set to establish the importance of debt financing on performance of SACCOs. It is

believed that most SACCOs have opted for debt financing as a way of improving on their

performance as discussed in the table below;

Table 4.1: Importance of debt financing

Importance Frequency Percentage

Accumulated capital base 20 40

Increased customer base 8 16

Leads to growth of SACCOs 11 22

It expands business paths 6 12

Others 5 10

Total 50 100

Source: Primary data

20
4.2.1. Capital accumulation

According to the findings in table 4.1, 40% of the respondents revealed that debt financing leads

to the accumulation of capital base among SACCOs. This implies that when SACCOS opt for

funding in terms of debt financing, they will have accumulated capital base which is ready to help

them improve on their performance. These results also indicate that performance of SACCOs due

to debt financing will be improved in terms of high turn up of customers due to the availability of

capital to meet customers/clients demands.

4.2.2. Debt financing and customer base

It was established in table 4.1 that 16% of the respondents also agreed that debt financing helps to

increase customer base. This means that customers will be informed of the funds available within

SACCOs and therefore will prompt for a high turn of customers. A high turn up of customers is

also associated with improved performance of SACCOs due to accumulated capital base arising

from debt financing.

4.2.3. Debt financing and SACCO growth

The findings in table 4.1 also exemplify that 22% of the respondents suggested that debt financing

leads to the growth of SACCOs. The results demonstrate that because SACCOs have accumulated

funds or capital base, this will encourage investment in various ways there by leading the growth

and better performance of SACCOs. Also growth of SACCOs is in terms of outreach, because

there are ready funds or capital to be disbursed, most people or potential customers will be reached

and informed about the roles and importance of SACCOs which eventually will improve on their

performance.

21
4.2.4. Debt financing and business paths

Results in table 4.1 further illustrate that there is increased customer base due to availability of

funds within the SACCO as 12% of the respondents also affirmed that it has expanded business

paths for most SACCOs among others like market share. The table 4.1 above exemplifies how

debt financing has improved on the performance of Mukono-Kayunga teachers SACCO through

accumulated capital which leads to growth of SACCOs in the long run. Also more and more

business opportunities will open up for SACCOs because of the accumulated capital base.

4.3. Nature of debt financing employed by Mukono-Kayunga SACCO

The study was also examined the nature of debt financing that are opted by microfinance

institutions or SACCOs and it was discovered that they are many types which included mortgages,

debt factoring, trade credit, bank overdraft, loans, debentures as well as lease hire purchase.

Figure 4.1. Nature of debt financing

Source: Primary data

22
4.3.1. Mortgages

The results in figure 4.1 demonstrate that another way in which the institution can gain the use of

an asset without having to pay for it is through mortgage as stated by 21% of the respondents.

Mortgages are available to businesses which wish to buy land or buildings and do not have enough

finances. Building societies do lend to businesses, so the usual source of the mortgage is a bank

and the period of the loan is usually between twenty to thirty years. The lender of a mortgage has

certain legal rights over the property, including the right of sale, if the borrower is unable to meet

the repayments.

4.3.2. Debt factoring

Findings in figure 4.1 demonstrate that 10% of the respondents stated another means of raising

short term finance open to SACCOs facing cash flow problems. This involves a business which

has a debt owed to it selling the right to this money to a factor which is an organization willing to

provide immediate cash in return for the right to collect and keep the monies owed by the business

debtors. Debt factoring is said to improve the performance of financial ways by providing the

funds for business activities.

4.3.3. Trade credit

According to the findings in figure 4.1, 17% of the respondents suggested that businesses can

receive trade credit from their suppliers by negotiating the option to pay later. This is a useful form

of finance for all organizations and that trade credit allowed by suppliers and depends on the credit

period which is the time between receiving the goods or services and being obliged to make

payment for it.

23
4.3.4. Bank overdraft

From the findings in figure 4.1, twelve percent (12%) of the respondents suggested that bank

overdraft is another form of bank loan whereby the business is allowed to spend more than it has

in its account for a limited period. This is usually cheaper than the loan if the money is required

for a very short period, as overdraft charges are usually calculated daily. This form of debt

financing greatly improves the performance of SACCOs and other financial institutions.

4.3.5. Loans

Results in figure 4.1 further demonstrate that 7% of the respondents revealed SACCOs obtain

loans from major financial institutions as a form of debt financing. A loan is where the institution

borrows a fixed amount, for a fixed term, makes regular repayments and is charged interest on the

full amount for the term of the loan. Loans are made by banks to MFIs. For large institutions, there

are special types of loans such as corporate bonds.

4.3.6. Debentures

The findings in figure 4.1, nineteen percent (19%) of the respondents also suggested that another

form or nature of debt financing is through debentures. Debentures are for a fixed term and the

company repays them in full to debenture holders once the maturity date is reached. Debentures

are not strictly a type of shares; they are a loan to business, which is often secured on assets of the

company. Debenture stock can be issued only if the firm is a public limited company. A fixed rate

of interest is fixed to debenture holders and this must be paid at the set amount regardless of the

profit levels of the firm.

24
4.3.7. Lease hire purchase

The findings in figure 4.1 also demonstrate that 14% of the respondents agreed that debt financing

also takes a form of lease hire purchase. The lease company owns the business property and

reclaims it at the end of the lease period and entails regular instalments payments, either every

month or every year. Some lease agreements allow the business which has been using the asset to

buy it at the end of the lease period. The lessee uses the asset and makes regular payments to the

lesser, who owns it. An operating lease is for a small amount, a capital or finance lease is for a

large item over extended period. As the asset does not belong to the lessee, it will not appear in

the balance sheet.

4.4. Performance indicators

It was vital for the study to establish the performance indicators of Mukono-Kayunga Teachers’

SACCO, the performance indicators included interest rates, liquidity preference, portfolio quality,

number of customers among others as presented as below;

Table 4.2: Performance indicators of Mukono-Kayunga Teachers’ SACCO

Indicators Frequency (n) Percentage (%)

Interest rate 14 28

Liquidity preference 5 10

Portfolio quality 16 32

Number of customers 9 18

Others 6 12

Total 50 100

Source: Primary data

25
4.4.1. Interest rate

According to the findings in table 4.2 the indicators of Mukono-Kayunga Teachers’ SACCO is the

interest rate charged as suggested by 28% of the respondents. An interest rate is the rate at which

interest is paid by borrowers for the use of money that they borrow from a lender. Specifically, the

interest rate is a percent of principal paid a certain amount of times per period (usually quoted per

annum). For example, a small company borrows capital from a bank to buy new assets for its

business, and in return the lender receives interest at a predetermined interest rate for deferring the

use of funds and instead lending it to the borrower. Interest rates are normally expressed as a

percentage of the principal for a period of one year.

4.4.2: Liquidity preference

Another performance indicator of Mukono-Kayunga Teachers’ SACCO in table 4.2 is the liquidity

preference which means the desire to hold money rather than other assets. According to the

respondents, liquidity-preference relation can be represented graphically as a schedule of the

money demanded at each different interest rate. The supply of money together with the liquidity-

preference curve in theory interact to determine the interest rate at which the quantity of money

demanded equals the quantity of money supplied. These findings therefore depict that the

performance indicators stated above greatly influence the performance of microfinance

institutions.

4.4.3: Portfolio quality

The findings in table 4.2 also reveal 32% of the respondents suggested that portfolio quality is

another indicator of performance among the SACCOs. This means that the money that is held hand

of the borrowers must be paid back within the specified and agreed period of time so as it can be

26
utilised by the lending institution. Portfolio Quality relates to the status of the two major assets of

the Microfinance institutions - loans and savings. Loan portfolio is the total outstanding loan

principal owed by the borrowers that the MFI expects to receive.

4.4.4 Number of customers

Results in the table 4.2 above illustrate that 18% of the respondents stated that the number of

customers is one of the performance indicators of Mukono-Kayunga Teachers’ SACCO. There is

also liquidity preference as suggested by 10% of the respondents and others suggested the number

of customers.

4.5. Effects of debt financing in Mukono-Kayunga SACCO

The effects of debt financing on the performance of Microfinance institutions included; Debt
financing allows companies pay off its creditors, Short term finances are raised outside the
business, It also leads to increased customer base and there are is also increased market share due
to ready funds as outlined in the table below;

Table 4.3. Effects of debt financing

Effects Frequency Percent

Debt financing allows companies pay off its creditors 18 36

Short term finances are raised outside the business 11 22

It also leads to increased customer base 6 12

There are is also increased market share due to ready funds 10 20

Others 5 10

Total 50 100

Source: Primary data

27
4.5.1. Debt financing allows companies pay off its creditors

The findings from the above table 4.3, demonstrate that 36% of the respondents suggested debt

financing allows companies pay off its creditors sometime after goods have been delivered;

therefore giving the chance to sell them on to customers and receive income before paying what

is due. In this case, obtaining such credit, a company can build up a good credit history by paying

suppliers on time and keeping up payment on loan and credit cards.

4.5.2. Short term finances are raised outside the business

According to the findings in table 4.3, from the above table, majority 22% of the respondents

affirmed that as a result of debt financing, short term finances are raised outside the business which

allows companies pay off its creditors. These results portray that debt financing impacts on the

performance of microfinance institutions as discussed above.

4.5.3. It also leads to increased customer base

The findings in table 4.3 further show that as a result of increased customer base through debt

financing as suggested by 12% of the respondents, it enables the business to have complete use of

the asset without having to use risk or loan capital to finance it, leasing payments are expenses and

are charged to the profit and loss account before tax is assessed, and finally leasing enables

business to their equipment more often and their by keeping them up to date with modern

technology.

4.5.4. There are is also increased market share due to ready funds

According to the results in table 4.3, 20% of the respondents affirmed that due to debt financing,

there is increased market share due to ready funds. The table above exemplifies how debt financing

28
has improved on the performance of Mukono-Kayunga teachers SACCO through accumulated

capital which leads to growth of SACCOs in the long run. Also more and more business

opportunities will open up for SACCOs because of the accumulated capital base.

29
 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMENDATIONS TO THE

STUDY

5.1. Introduction

This chapter presents the discussion of the findings, summary, conclusion and recommendations

to the study meant to establish the impact of debt financing as an option of raising funds on the

performance of Micro finance Institutions.

5.2. Summary of findings

5.2.1 Nature of debt financing in Microfinance institutions

According to the study findings, there are various ways of debt financing employed by

microfinance institutions to transact their businesses, and these were, mortgages, debentures and

trade credit and leasing hire purchase. It was also discovered that another way of debt financing

employed by microfinance institutions is bank overdraft as well as debt factoring and through

loans. This was in agreement with Symons et al. (2012) who noted that mortgages are available to

businesses which wish to buy land or buildings and do not have enough finances. Building

societies do lend to businesses, so the usual source of the mortgage is a bank and the period of the

loan is usually between twenty to thirty years. The lender of a mortgage has certain legal rights

over the property, including the right of sale, if the borrower is unable to meet the repayments.

30
5.2.2. Performance indicators of microfinance institutions

It was established that the portfolio quality is one of the performance indicators of Mukono-

Kayunga Teachers’ SACCO, the interest rate charged by SACCOs and microfinance institutions

greatly determines their performance. There is also liquidity preference and the smallest

percentages suggested the number of customers among other indicators. This is in line with

Warner, (2000) who noted that, the major performance indicators of a company include

profitability which is measured at different levels, efficiency and effectiveness as measured in

“assets per employee” and “revenue per employee”, and market niche which is measured by how

customers’ needs are being satisfied

5.2.3. Effects of debt financing on the performance of Microfinance Institutions

According to the findings, majority of the respondents affirmed that debt financing allows

companies pay off its creditors; other respondents revealed that there are is also increased market

share due to ready funds as suggested by respondents. Results further show due to debt financing,

short term finances are raised outside the business while other respondents suggested that debt

financing leads to increased customer base. This was in agreement with Carysfoth, (2002) when it

was observed that bank overdraft is another form of bank loan whereby the business is allowed to

spend more than it has in its account for a limited period. This is usually cheaper than the loan if

the money is required for a very short period, as overdraft charges are usually calculated daily. He

loans are made by banks to businesses. For large businesses, there are special types of loans such

as corporate bonds. However, for small and medium size businesses, a bank loan is straightforward

way of getting capital. Allan (2004) posits that a loan is where the business borrows a fixed

amount, for a fixed term, makes regular repayments and is charged interest on the full amount for

the term of the loan.

31
5.3. Conclusion

5.3.1 Nature of debt financing in microfinance institutions

Conclusively, there are various ways of debt financing employed by microfinance institutions in

their businesses. These include mortgages, debentures, trade credit and leasing hire purchase. It

was also discovered that debt financing employed by microfinance institutions is in inform of bank

overdraft, debt factoring and loans.

5.3.2. Performance indicators of microfinance institutions

One of the performance indicators of Mukono-Kayunga Teachers’ SACCO is portfolio quality

followed by interest rate charged by SACCOs and microfinance institutions greatly determine their

performance. There is also liquidity preference as suggested by respondents and the number of

customers. These findings therefore depict that the performance indicators stated above greatly

influence the performance of microfinance institutions.

5.3.3. Effects of debt financing on the performance of Microfinance Institutions

Basing on the findings, it found that debt financing allows companies’ pay off their creditors and

increase market share due to ready funds. Results further showed that due to debt financing, short

term finances are raised outside the business and which in the long and short run leads to increased

customer base.

32
5.4. Recommendations to the study

The following recommendations are suggested for the study;

The study recommends that Mukono-Kayunga teacher SACCO should review and adjust the

existing loan evaluation procedures and parameters in an effort to re-engineer them to suit the

financial needs and capabilities of its members.

The major elements of the operational framework of institution credit delivery mechanisms such

as the compulsory savings policy, provision of a range of credit products, lead time, and credit

monitoring and loan recovery should be reformed to ensure that a clear link exists between them

and members needs as well as performance targets.

Further the study recommends that Mukono-Kayunga teacher SACCO should sensitize its

members or borrowers on the value of debt financing so as to encourage more members to borrow

since clients to will be able to understand the relevance of credit.

The study recommends that microfinance institutions should ensure provision of adequate and

relevant training to its credit officers to acquire the appropriate skills concerning debt financing.

This is because debt financing in microfinance institutions and SACCOs is complex and dynamic.

33
5.6. Areas for Further Research

Basing on the study findings the researcher recommends further study in the following area;

Assessing the relationship between debt financing and loan portfolio quality in MFIs. The

researcher suggested the area due to the many unanswered questions from the respondents while

in the field whereby misunderstandings arose on issues like – “how does debt financing affect loan

portfolio quality in MFIs?”.

34
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37
 APPENDIX I

QUESTIONNAIRE FOR THE MANAGEMENT OF MUKONO-KAYUNGA

TEACHERS’ SACCO-MUKONO DISTRICT

Introduction

I am Kaahwa Ritah a student of Kyambogo University pursuing a Bachelor’s degree in

Microfinance. I am undertaking an academic research study on “The effect of Debt financing on
the financial Performance of Microfinance Institutions.” The information collected will be
purely for academic purpose and will be treated with ultimate confidentiality.

SECTION A: BIO DATA

1. Sex of respondent
a) Male
b) Female

2. Position held in the SACCO

a) Manager

b) Credit officer

c) Loans officer

3. How is your SACCO owned?

Sole proprietor Partnership

Close corporation Private Company

Others specify…………………………………………………………

4. How do you analyse the rules governing this institution?

Very strict They are flexible

Not strict at all If others, please specify ……………………

38
5. How many years has the enterprise been trading/been in business?

1-5 years 6-10 years 11-15 years

16-20 years Over 20 years

6. How many people are currently employed in this SACCO?

1-20 employees 21-40 employees Over 40 employees

7.a) Does your SACCO employ debt financing to improve on financial performance of its
activities?

Yes No

7b). Give reasons for your answer in 7a) above

………………………………………………………………………………………………………
………………………………………………………………………………………………………

8. What is the nature of debt financing employed by microfinance institutions?

Trade credit Bank overdraft Loans

Debentures Leasing Hire purchase Mortgages

Debt factoring Others, Specify………………………………………..

9. How has debt financing improved the financial performance of Mukono-Kayunga SACCO?

………………………………………………………………………………………………………
………………………………………………………………………………………………………

10. Have the above mentioned methods improved the financial performance of microfinance
institutions?

Yes No

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14. What are the performance indicators of Mukono-Kayunga Teachers’ SACCO?

………………………………………………………………………………………………………
………………………………………………………………………………………………………
……………………………………………………………………………….……………………...

15. How has debt financing affected the financial performance of Microfinance Institutions?

………………………………………………………………………………………………………
………………………………………………………………………………………………………

16. Any other comment as regards the financial performance of MFIs due to debt financing

………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………….…………………………………...
………………………………………………………………………………………………………

End

Thank You for Your Response

40
 APPENDIX II : QUESTIONNAIRE FOR CLIENTS

Introduction

I am Kaahwa Ritah a student of Kyambogo University pursuing a Bachelor’s degree in

Microfinance. I am undertaking an academic research study on “The effect of Debt financing on
the financial Performance of Microfinance Institutions.” The information collected will be
purely for academic purpose and will be treated with ultimate confidentiality.

SECTION A: BIO DATA

1. Sex of respondent
a) Male
b) Female

2. How long have you been saving with this SACCOs

a) 1-5 years
b) 6-10 years
c) 11-15 years
d) 16-20 years
e) Over 20 years

3. How much is your current savings in this SACCO?

a) 250,001 – 350,000

b) 350,001- 450,000

c) 450,001 – 550,000

d) 550,001 and above

4. How is your SACCO owned?

Sole proprietor Partnership

Close corporation Private Company

Others specify………………………………………….

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5. How do you rate the rules governing this institution?

Very strict They are flexible

Not strict at all If others, please specify ……………………

7. Are you satisfied with the employees of this SACCO?

Yes No

8. Does your SACCO borrow money to improve on financial performance of its activities?

Yes No

9. What is the nature of debt financing employed by your SACCO?

Trade credit Bank overdraft Loans

Debentures Leasing Hire purchase Mortgages

Debt factoring Others, Specify………………………………………..

10. Which of the above debt financing methods have you used (Mentioned all those that you have
used)

Trade credit Bank overdraft Loans

Debentures Leasing Hire purchase Mortgages

Debt factoring Others, Specify………………………………………..

11. Have you seen any improvement in the performance of your SACCO?

Yes No

12. Under which circumstances may debt financing be required in this SACCO?

………………………………………………………………………………………………………
………………………………………………………………………………………………………

13. What are the performance indicators of Mukono-Kayunga Teachers’ SACCO?

………………………………………………………………………………………………………
………………………………………………………………………………………………………
……………………………………………………………………………….…………………….

14. How has debt financing affected the financial performance of Microfinance Institutions?

42
………………………………………………………………………………………………………
………………………………………………………………………………………………………

15. Any other comment as regards the financial performance of MFIs due to debt financing

………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………….…………………………………...
………………………………………………………………………………………………………

End

Thank You for Your Response

43
 APPENDIX III: INTERVIEW

Dear Respondent,

I am Kaahwa Ritah undergraduate student of Kyambogo University pursuing a Bachelor’s Degree

in Microfinance. Currently, I am carrying out a research with a case study of Mukono-Kayunga
Teacher’s SACCO. You have been selected to be part of the study and the success of the study
solemnly depends on you. I therefore request you to give the required information by answering
the following question appropriately. Please note that all the information given is for academic
purposes and shall be treated with high level of confidentiality.

1. For how long have you been a client or a staff member with this SACCO?

2. What are some of the services offered by this SACCO?

3. How have benefited from these services?

4. Are the services provided by the SACCO effective?

5. If no above why?

6. If yes in above why?

7. Are there any challenges faced by this SACCO in trying to improve its performance?

8. If yes, what are some of the challenges faced?

9. Are there any measures taken by this SACCO to improve its performance?

10. If yes, what are some of the strategies taken?

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APPENDIX IV: INTRODUCTORY LETTER

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