the effect of micro credit policy on … · web viewthus customer retention is related to customer...

MAKERERE UNIVERSITY

COLLEGE OF BUSINESS AND MANEGEMENT SCIENCE

MICRO CREDIT POLICY AND CUSTOMER RETENTION IN MICRO

FINANCE INSTITUTIONS IN UGANDA:

A CASE STUDY OF HOFOKAM LIMITED – KASESE BRANCH.

KIRUNGI FRANK FRED

04/U/13449/Ext

SUPERVISOR: Mr. NUWAGABA GEOFFREY

A RESEARCH REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENT FOR THE AWARD OF BACHELOR OF COMMERCE OF

MAKERERE UNIVERSITY

JULY 2011

1

DECLARATION

I declare that this research report is my original work and has never been submitted to any other

institution of higher learning for any other award.

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

Kirungi Frank Fred

(Student)

i

APPROVAL

This is to certify that this research report on “Micro Credit Policy On Customer Retention In

Micro Finance Institutions In Uganda A Case Study: HOFOKAM Limited - Kasese Branch, has

been under my supervision and is now ready for submission and examination

Signed:…………………………… Date:……………………………………………..

Mr. NUWAGABA GEOFFREY

(Supervisor)

ii

DEDICATION

I dedicate this report top my mother, Mrs. Y. Rwaheeru, my brothers John and Godfrey, my wife

Patra and to my daughter Isabel for their great support during my studies.

God Bless You.

iii

ACKNOWLEDGEMENT

I first thank God for seeing me through this adventurous exercise of research with all the huddles

I went through

Special thanks to my supervisor Mr. Nuwagaba Geoffrey for all the guidance and support. His

unwavering perseverance and presence guaranteed success of this work.

Am grateful to the staff of HOFOKAM Ltd for all the information, cooperation and guidance.

My friends Julius, Albert and Bernard, I thank you, not forgetting Margaret and my Mother.

Special recognition goes to my course mates for all the love, support and care.

Lastly my family for all the support and perseverance.

iv

LIST OF ABREVIATIONS AND ACRONYMS

ACP Average Collection Period

AMFIU Association of Micro Finance Institutions in Uganda

HOFOKAM Hoima, Fort Portal, Kasese Microfinance Company

Ltd Limited

MFIs Micro Finance Institutions

SPSS Statistical Package for Social Sciences

v

TABLE OF CONTENTS

DECLARATION..............................................................................................................................i

APPROVAL.....................................................................................................................................i

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

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

LIST OF ABREVIATIONS AND ACRONYMS...........................................................................v

TABLE OF CONTENTS...............................................................................................................vi

List of Tables...................................................................................................................................x

List of figures..................................................................................................................................xi

ABSTRACT..................................................................................................................................xii

CHAPTER ONE............................................................................................................................1

1.0 Introduction..............................................................................................................................1

1.1 Background to the study..........................................................................................................1

1.2 Problem Statement...................................................................................................................4

1.3 Purpose of the study.................................................................................................................4

1.4 Objectives of the study............................................................................................................5

1.5 Research questions...................................................................................................................5

1.7 Significance of the study.........................................................................................................6

vi

CHAPTER TWO:LITERATURE REVIEW..............................................................................7

2.1 Introduction..............................................................................................................................7

2.2 Credit Policies used by MFIs...................................................................................................7

2.3 Customer Retention.................................................................................................................15

2.3.2 How Customer retention can be enhanced...........................................................................23

2.3.2.1Listening to customers’ complaints....................................................................................23

2.3.2.2 Creating a Complaint and Suggestion System..................................................................25

2.3.2.3Employing a customer service representative....................................................................26

2.3.2.3Implementing a Complaint Solicitation Strategy..............................................................27

2.2.3.4 Instituting a Customer Advisory Board.............................................................................27

2.4 Relationship between credit facilities and customer retention................................................29

2.4 Conclusion...............................................................................................................................32

CHAPTER THREE:METHODOLOGY..................................................................................33

3.1 Introduction..............................................................................................................................33

3.2 Research design.......................................................................................................................33

3.3 Study area................................................................................................................................33

3.4 Study population......................................................................................................................33

3.5 Sampling Design......................................................................................................................33

vii

3.6 Sources of Data........................................................................................................................34

3.6.1 Secondary data sources.........................................................................................................34

3.6.2 Primary data sources.............................................................................................................34

3.7 Data Collection Methods/ Instruments....................................................................................35

3.7.2 Interview guide.....................................................................................................................35

3.7.3 Observation...........................................................................................................................35

3.8 Data processing, analysis and presentation.............................................................................35

3.8.1 Data processing.....................................................................................................................35

3.8.2 Data analysis.........................................................................................................................35

3.8.3 Data Presentation..................................................................................................................36

3.9 Limitations of the study...........................................................................................................36

CHAPTER FOUR:PRESENTATION AND ANALYSIS OF FINDINGS.............................37

4.2. Background characteristics of the respondents;.....................................................................37

4.3 Credit policies used by HOFOKAM.....................................................................................40

4.3.1 HOFOKAM has a credit management committee that is responsible for reviewing and

monitoring risk management policies............................................................................................40

4.3.2 Application forms are used by clients applying for credit....................................................41

4.3.3. HOFOKAM bases on the value of security to advance loans.............................................42

4.3.5 The character of the clients is considered when processing a loan for a client....................43

viii

4.3.7 HOFOKAM Ltd has an upper credit limit.........................................................................45

4.3.8 The terms of getting loans from HOFOKAM Limited are favourable.................................45

4.3.9 The Nature of the business operated by the client is considered before extending the credit

.......................................................................................................................................................46

4.4 Level of Customer retention in HOFOKAM Ltd..................................................................48

4.4.1 HOFOKAM Limited keeps client’s records.....................................................................48

4.4.2 Rate of desertion of the clients.............................................................................................49

4.4.3 The clients of this institution have on average been getting services for the last three years

.......................................................................................................................................................50

4.5 The relationship between credit policy and customer retention in HOFOKAM Ltd..............50

CHAPTER FIVE:SUMMARY, CONCLUSION AND RECOMMENDATIONS................52

5.1 Introduction............................................................................................................................52

5.2 Summary of major findings...................................................................................................52

5.3 Conclusion.............................................................................................................................53

5.4 Recommendations and suggestions.......................................................................................54

REFERENCES..............................................................................................................................56

Appendices....................................................................................................................................59

Appendix A: QUESTIONNAIRE................................................................................................59

Appendix II: Interview Guide.......................................................................................................64

ix

List of Tables

Table 1 : Description of respondents by Gender...........................................................................37

Table 2: Description of respondents by working experience........................................................38

Table 3: HOFOKAM has a credit management committee for reviewing and monitoring the risk

management policies.....................................................................................................................41

Table 4: HOFOKAM has application forms that are use by clients in applying for loans............41

Table 5: HOFOKAM bases on the value of security before advancing loans..............................42

Table 6: HOFOKAM considers the adequacy of information before extending a loan to the client

.......................................................................................................................................................43

Table 7: The character of the clients is considered while processing the loans for clients..........43

Table 8: Capacity to pay is considered when processing loans for clients....................................44

Table 9: HOFOKAM has an upper limit on the loans...................................................................45

Table 10: Terms of getting loans from HOFOKAM are favourable.............................................45

Table 11: The nature of the business run by the clients is considered when advancing credit.....46

Table 12: Clients are given a satisfactory credit period to pay back.............................................47

Table 13: Clients are sent reminder letters....................................................................................47

Table 14: Loans officials pay visit to the clients reminding them of the dates to pay back.........48

Table 15: HOFOKAM Limited keeps clients records..................................................................48

Table 16: Rate of desertion of the clients from HOFOKAM Limited..........................................49

Table 17: Relationship between credit policy and customer retention..........................................50

x

List of figures

Figure 1: Customer complaint map...............................................................................................25

Figure 2: A customer complaint card............................................................................................26

Figure 3: Interpretation and use of customer feed backs...............................................................29

Figure 4: Description of respondents by age.................................................................................38

Figure 5: Description of respondents by level of education..........................................................39

Figure 6: Description of respondents by designation....................................................................40

xi

ABSTRACT

This study was designed to find out the relationship between credit policy and customer retention

in Micro finance Institutions (MFIs) in Uganda taking Hoima, Fort portal, Kasese Microfinance

Company (HOFOKAM) as a case study. It describes how credit policy has an effect on

customer retention in MFIs.

The study used both qualitative and quantitative methods through questionnaire and semi

structured interviews. A simple random sampling design was used to select respondents from the

clients and purposive sampling was used to select staff respondents. The study covered 20

respondents and data was collected with the help of questionnaires and an interview guide. Data

presentation was done using tables showing frequencies and percentages. Data analysis was done

using a computer package of SPSS.

The findings were that HOFOKAM has credit policies in place which it was using, that the level

of client dropout was relatively high (moderate) and that credit policy and customer retention had

a negative relationship as evidenced from Pearson correlation coefficient of r=-0.803. The results

indicated that the increased client dropouts were as a result of high interest rates put in place as a

credit policy forcing borrowers to join other financial institutions.

The study recommended that interest rates should be revised; clients should be given a grace

period in case they fail to repay their loan in time, need for periodic review of credit policy and

training of staff. Clients also recommended the encouragement of individual loans so as to

prevent loyal clients from being penalized for those members of the group who fail to fulfill their

loan obligations.

xii

CHAPTER ONE1.0 Introduction

This chapter presented the background information about the variables of the study, the problem

statement, purpose of the study, objectives, research questions, scope, and significance of the

study

1.1 Background to the study

Microfinance institutions (MFIs) are those institutions that provide credit or savings facilities to

small scale enterprises. MFIs provide financial support to people especially those in rural areas

that cannot obtain these services from the formal banking and credit institutions because their

businesses, savings levels and credit needs are all small Wright, (1999). However, most MFIs

have sometimes disappointed its supporters. Only few of the hundreds of microfinance programs

inaugurated in the last decade have proven their sustainability AMFIU, (2002).

The success of any micro finance institution involved in lending money to its customers should

rely on its credit policy which in any case should be developed with customer needs and

expectations at the back of their mind, the neglect of which can lead to lending disaster. The

credit policy should be a living document. Besides there are some lending guidelines that

financial institutions can follow so as to ensure that the borrower will be able to schedule

payment in full and within the required period of time. It is probable that financial institutions

should follow a logical approach taking each important factor in the lending process one at a

time and assessing with the pending preposition.

1

A credit policy is a framework formulated by an organization as a guide to credit decisions.

Credit is one of the most important inputs in assisting community enterprises to grow Kakuru,

(2000). Credit policy combines three decision variables that is, credit standards which are

predetermined criteria to establish credit worthiness of a customer, credit terms as conditions or

stipulations under which credit is granted Pandey, (1995) and then collection efforts referring to

efforts applied in order to accelerate collection from slow paying customers and to reduce debt

losses.

Customer retention on the other hand is a strategy whose objective is to keep a company’s

customer, building a big customer base and to retain their revenue contribution. Customer

retention also refers to the creation of loyal customers, who feel satisfied with the services of the

micro finance institution’s products and come back to buy again and again Mbonigaba, (1998). It

also means having the same customers enjoying the same organization’s services, clients

referencing their friends to a particular organization for services, clients talking favorably about

the company and its services, less attention being paid by clients to competing institutions, and

clients are positively appreciating and tolerating some problems encountered by the organization

Kotler, (1998).

Thus customer retention is related to customer satisfaction as dissatisfied customers do not

return. It is a tactically driven approach based on customer behavior and a core activity going on

behind the scenes in relationship to marketing, loyalty marketing and so forth.

2

Positive impacts have been detected at the enterprise as well as household level. Several studies

indicate microfinance services help the poor to diversifying their income sources, building up

physical, human and social assets, and focus on good money management, rebuild the

household’s base of income and assets after economic shocks have occurred and to smooth

consumption (Cohen 1997; Cohen 1999; Hulme 1998, Ito 1998; Sebstad and Chen 1996).

In addition, interest in microfinance has soared in the recent decade and the instrument is now

seen as one of the most promising tools to tackle poverty 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 Uganda

Poverty Reduction Strategy Paper Progress Report, (2000). For donors, microfinance is

especially attractive as it can be delivered in an institutional and financially sustainable manner

that permits them to withdraw after making relatively modest investments.

HOFOKAM is an acronym meaning Hoima , Fort portal, Kasese Micro finance company,

limited by guarantee. The company started in 1993 as three separate savings and credit

institutions in three Dioceses of Hoima, Fort portal and Kasese but all with funding and technical

support from Catholic Relief Services (CRS). In 2003, these three diocesan programmes on an

understanding of the three Bishops of the above Dioceses and CRS the joint main donor, were

merged to form one credit institution – HOFOKAM.

The company operates in the districts of Bushenyi, Kasese, Kabarole, Ibanda, Kamwenge,

Bundibugyo, Kyenjojo, Kibaale, Buliisa, Hoima, Masindi, and Oyam, It has got main branches

3

in Hoima, Kyenjojo and Fort portal and Kasese with field offices in Bundibugyo, Kamwenge,

Kibaale, Kagadi, Nalweyo, Oyam, Buliisa, Kyenjojo, Masindi Hiima, Bwera, Nyakasharu,

Katerera and Kisinga . The head office is in Kabarole - Fort portal town.

1.2 Problem Statement

While Uganda boasts of a long history of informal finance, semi-formalized micro finance began

emerging as an industry in the early 1990’s. There are approximately 100 registered operators

and more than 100 unregistered MFIs offering Microfinance services in Uganda AMFIU, (2002).

Microfinance institutions such as HOFOKAM Limited have adopted various measures to

increase on the accessibility of the services such as opening up out reach centres in rural areas,

encouraging group lending where group members access bank credit without physical collateral

security, adequate customer care, long opening hours and training of the clients on better loan

investment decisions, most MFIs including HOFOKAM limited have continued to experience a

problem of low customer loyalty leading to desertion Urquizo, (2006). According to

HOFOKAM limited Social Performance Audit report (2006), the company has been faced with

increased number of client dropouts for the last three years. The probable cause could be

stringent credit management policies. If this situation is left unchecked, it could lead to more

dropouts, which can have significant consequences on the future operations of the institution

which could lead to closure of the institution.

1.3 Purpose of the study

The study aimed at finding out the relationship between credit policy and customer retention in

HOFOKAM Ltd

4

1.4 Objectives of the study

1. To assess the credit policy of HOFOKAM ltd

2. To establish the level of customer retention in HOFOKAM

3. To establish the relationship between credit policy and customer retention in HOFOKAM

LTD

1.5 Research questions

1. What are the credit policies used by HOFOKAM ltd?

2. What is the level of customer retention in HOFOKAM Ltd?

3. What is the relationship between credit policy and customer retention in HOFOKAM

Ltd?

1.6 Scope of the study

1.6.1 Geographical scope

The study was carried out at HOFOKAM Ltd, Kasese Branch. It focused on the micro credit

policies as used by HOFOKAM Ltd as an independent variable and Customer retention as a

dependent variable.

1.6.2 Time scope

The study considered the period between 2006 and 2010. This was considered because the period

was long enough to enable the researcher come up with a comparative analysis of the status of

customer retention and the varied credit policies that have been adopted by the institution over

time.

5

1.7 Significance of the study

The study findings will help in the following:

(1) The Management of HOFOKAM Micro finance Ltd in making proper policies that are

aimed at having the Institution achieve its goals.

(ii) The Staff of HOFOKAM will be able to focus on quality client selection and carry out

feasibility analysis for prospective borrowers with the background of customer retention.

(iii) Other institutions may use the findings of this study for example other MFIs in making

policies on products development and refining to reflect customer satisfaction and

consequent retention.

(iv) Academicians may use it a useful addition to the body of the available information on

credit policies and their effects.

(v) The Government can use this research especially in the impending Micro finance bill to

moderate the policies of micro lending as the level of client rotation has a direct bearing

on the socio-economic standards and activities of the active poor, who contribute the

greatest percentage of the population in developing countries.

6

CHAPTER TWO

LITERATURE REVIEW2.1 Introduction

In this chapter, discusses the available literature as regards to credit policies and customer

retention. It also presents an overview of MFIs in Uganda and specifically it provides detailed

background information about HOKOFAM.

2.2 Credit Policies used by MFIs

A credit policy is a set of policy actions designed to minimize costs associated with credit while

maximizing the benefit Kakuru, (2000). A credit period is a length of time for which credit is

extended to customers normally stated in terms of net date. Credit institutions can lengthen or

tighten the credit period depending on the norms of the industry, objectives of the firm and if

customers are frequently building up debts Semukono, (1997). However with the credit

institutions these days, the credit period is so tightened that clients have no room for adjustment

in case of situational changes.

The Credit Standards set by MFIs are levels or trends that are predetermined guidelines to enable

credit officers to make decisions; this is the criterion, which a firm follows, in selecting

customers for the purpose of extending credit. Credit standards provide guidelines for

determining whether to extend credit to a customer or not. In this case two aspects are

considered, the average collection period (ACP) that is the period in which the debts remain

outstanding and the ratio of uncollected receivables to the total receivables. From the ACP, the

firm can be able to determine whether the customer will meet his credit obligations or not. The

7

institutions need to consider the aspects of character, capacity, condition, capital and collateral to

estimate the profitability.

The overall debt collection policy of the firm should be such that the administration costs do not

exceed the benefit of incurring those costs. Most MFIs employ extra abnormal costs charged to

clients who fail to pay on time, but make efforts to pay later with out an MFI chasing them. A

tight collection procedure may offend and send away customers Don, (1998)

Findings by Okumu and Opondo, (2000) show that 50% of the interest rates charged by MFI’s

are the interests on operating costs and that not only are they increasing but also highly varying

and non uniform, yet most depend on the loan savings for the group loans. However, this view

has been overtaken by the coming into force of the Micro Deposit taking Institutions Act where

MFIs are prohibited from savings intermediation and this accounts for the high interest rates

charged by these institutions as a window for their inability to use savings as a cheap source of

loan-able funds Okumu an Opondo, (2000).

Benjamin and Ledgerwood, (1998) ADEMI (Association To The Development Of Micro

Enterprises) also strongly advocates that applicants who are unable to provide collateral should

not be limited in their ability to access credit. However, this argument should also have its

limitations based on amounts involved lest the institution risks heavy losses if clients failed to

pay back genuinely or otherwise

8

Micro finance institutions have the credit policy as one of their mainstream activities that

smoothens their capacity of operation, given the fact they are meant extend credit to the clients.

According to Brockington, (1987) all corporate plans enunciate a profit objective and financial

policy is designed mainly to achieve profit as an objective, growth and liquidity stability through

the credit policy formulated.

According to Pandey, (1995) should the institution fail to put in place favorable viable credit

policies, it will not only fail to operate and realize its objectives but may also find its self out of

business. Accordingly, the institution should evolve policies that would allow it to deliver a

service or product with the expectation of receiving back the reward later from the customers.

The credit must have an acceptable level of acceptance to allow the operators give a maximum

amount of credit at the lowest possible cost. The assessment exercise of risks should be

embedded with in the policy.

Giving credit is the most controversial and risky business as it is looked at by both sellers and

buyers. Van Horne, (1989) narrates that sellers looks at consumer credit as an opportunity for

gaining a competitive marketing advantage over others (Competitors) through expanding the

market share and general appeal of the people they serve. And to the buyer, she looks at it as way

of exploiting her, generally making her loose in the return.

Accordingly institutions should develop policies that strike a balance between the two aspects.

One that make them stay in business, and one that put customers in a position to pay back the

principle together with the interest with out leaving a strain on the businesses. It is against that

9

background that Armstrong, (1993) agued that if any micro finance is to realize its objectives as

well as help communities break the cycles of poverty, should use the credit policies as a weapon.

In the rural Uganda, the problem arises as credit policies are basically set along town setting and

does not suitably appeal to people in the rural areas. According to Pandey, (1995) a wrong

judgment is made by these institutions over helping people assess their projects and how they

can best return those money(s) borrowed.

Virtually all organization both Government and non governmental have the reduction or

elimination of poverty at the heart of their operations. Like wise, micro finance institutions have

got the primary purpose of helping in reducing poverty in specifically the rural areas. According

to Kakuru, (2000) firms advance credit to customers with a view to make a profit in return for

sacrifice made. In the event of that they help people get their projects financed.

The firm needs to assess the impact of credit to both their operation and its impact on the

proposed project of the customer. According to Van Horne, (1989) a financial institution should

look at its credit policy in terms of returns and cost. The costs involved in the selling of the

product (advancing the loan to the customer), the cost of servicing it, and the collection cost on

top of the risk involved in not being collectable.

The institution has got to strike a balance between the costs if they are to remain in business.

According to Ross & water field (1988), there are two disguised costs involved in credit

advancement. The carrying costs – costs associated with credit extension and investment in

10

receivables; they include the required rate of return from bad debts and the costs pertaining to

credit analysis, monitoring and collection. Opportunity cost – costs related to loss of sales as a

result of grant credit.

Micro finance institutions operate with a view to realize a profit on their credit advanced to the

customers, and for the recipient to better her economic life in terms of breaking the poverty

cycle. However for this to happen, the cost involved either side has got to be analyzed, measured,

and translated into the policies effected in the extension of this credit. According to Water field,

(1988) the costs have got a fundamental role in the execution of credit. The failure of the firm to

put in place proper efficient policies would cast doom over its operations.

The formulated credit polices act as guidelines for the assessment of the person to extend credit

to and how much the principal should be. Normally the institution looks at what is stipulated in

its guidelines and determine who to give. According to Edminster, (1980) the institution must

bare in mind not only the established credit standards but also credential concern must be paid to

the correct adherence to those standards in the making of the credit award decision.

Gitman, (1976) agrees when he says that many Institutions forget that they have a moral

obligation to guide their customers on how to best use the money borrowed. According to him

obscured implementation of a credit policy will not produce optimal results.

The financial credit has got a combination of three credible aspects; credit terms, credit standards

and collection measures.Before a credit is given to a customer, there are various criteria’s that

11

the customer must first fulfill. Credit standards according to van Horn, (1994) are the minimum

criteria’s that has got to be considered for the extension of the loan. Such criteria’s include credit

rating of the customer, reference, average payment periods and other relative financial aspects

that together form a prudent assessment of the customer claim for the loan.

Since the primary aim of the financial institution is to foster reductions in the poverty levels in

particularly the rural Ugandan community, they have the moral obligation to assess the viability

of the proposed project of the customer and help the customer in looking at how best the

customer can best reap from the venture. According to Pandey, (1993) this is the basic stage in

the lending process, by assessing the risks involved.

From the ancient periods, the fundamental risks have been categorized as including character,

capital, capacity, conditions, and collateral.

Character; the process should involve the aspect of looking at the true picture of the customer.

The borrowers’ honest and trustworthiness. The loan officer must consider the integrity and

transparence of the potential customer and his will to pay back. Should there be any element of

doubt over those aspects; the loan should not be advanced.

Capital: the borrowers’ wealth position measured by the financial muscle of the customer in

terms of soundness and market standing. Can the firm withstand or individual withstand any

deviation from such balances? Pandey, (1995) was particularly concerned over this as most rural

based people do lack this aspect.

Capacity; this involves the borrower’s legal standing and management expertise in facing the

challenges of the operations of the project proposed. This further looked at in the rural contest

12

leaves a lot wanting as rural Ugandan community lacks the skills to management fragmented

projects.

Conditions; this refers to the economic environment or industrial specific supply, production

and distribution factors influencing a firm’s operations.

Collateral; this refers to the customers’ asset staked against the loan advanced that would act as

a source of income in case of default. This is the asset that the institution can seize and

eventually sell to recoup its principal amount.

Pandey, (1993) observed that loose credit standards would lead the bank to having a lot of

money advanced as loans; however the risk will as well be great. On the other hand, the bank if it

extends credit only to those most reliable and strong may not be able to expand lending.

The fact that most of the 5Cs do apply in an urban setting where people have got some money

and assets but not applicable in the rural setting. Walker, (1993) identified the 5Cs of bad credit

representing facts to guard against in any micro financial institution. These include complacency,

carelessness, communication breakdown, contingencies and competition. They should be looked

at more carefully to safe guard against defaulting.

When structuring those traits, the institution must put in consideration the rural poor, the people

who are going to borrow from those firms. For instance, the rural poor lacks the professional

management skills of business, the firm should be prepared to help them realize their dream of

breaking the poverty cycles through accelerating proper management of businesses.

13

The credit to be advanced must be stipulated. The lengths of the credit period and the interest and

how it is charged must all be stipulated. The cash discount, the period, and terms of repayment

have got all to be stipulated. The way those three aspect are structured have got a burning effect

on the lending profit, average collection period and loan expenses. Van Horne, (1994) noted that

the exact effects of a decision to change any of the three credit term components depend on the

direction and degree of change.

Any institution has got procedures in place that facilitate the collection of these loans. According

to Kabir Hassan, (2002) it should be done in an organized manner that would accelerate the

collection of the loan without straining the relationship with the customer. The inability of clients

to pay back may result from the short falls from the amounts realized or the will not to pay at all.

The procedures should be in place to collect money from non responding customers.

Reminders should be sent reminding her of the due date of payment and the exact amount to pay

in for of a credit note. Further development in micro finance credit requires that the firm takes an

insurance policy against debtors since they cannot accurately measure the risk. They also adopt

the method of factoring of debtors to other firms who can collect on the behalf of the firm.

According to Buckley, (1993) most of the micro finance institutions have no systematic credit

collection measures blended on the rural poor, they just resort to more aggressive collection

techniques like confiscation of property and eviction of clients from the staked property. This has

been a common scenario in both the urban and the rural Uganda leading to the potential

customers to shun them; only to leave them plunged in the desperate levels of poverty.

14

2.3 Customer Retention

Few studies have been carried out on the dropout issue, not because it is unimportant, but

because it is difficult and expensive to locate clients once they leave an MFI. The factors for

dropping out identified by previous studies are many and illustrate a wide range of reasons. In

overall, the majority of studies found that most clients exit due to organizational failures,

idiosyncratic shocks and/or systemic shocks, client maturity and competition (Meyer et al, 2001;

Wright and Al, 2001; Hulme et al, 1999; Stark and Nyirumuringa, 2002; Musona and Coetzee,

2001). However, Pagura, (2004) has taken the debate a step further in making an in-depth

analysis of the factors leading to clients‟ dropouts, using duration models in order to examine the

clients decision to remain or exit the borrowing relationship in group loan program state in Mali.

In line with the above insights, this study aims to analyze some elements of dropout issue that

Pagura, (2004) did not explicitly study, namely (i) the determination of the profile of ex-clients;

(ii) the identification of the main reason leading to dropout and (iii) the determination of the

variables which influence the length of time in the MFI which is the cornerstone of this research.

The greatest business secret in the world is the value of a satisfied customer. A satisfied

customer will buy again and again and in large amounts and will be considered retained, thus

providing a free yet highly credible advertising. In the business world there are three major

challenges, customer attraction, satisfaction and retention. To attract a customer in business, the

focus should be put on his needs and his buying behavior. Although majority purchases are made

emotionally, boosting customer image and making them feel important is the key to customer

attraction Bara, (2001).

Customer satisfaction is one of the factors of customer retention and as one of the challenges of

business today. It is reported that to win a customer (attraction, satisfaction and retention); a

15

business must focus on the needs of customers and his buying behaviors Balunywa, (1995).

Customer retention can only be talked of when the company has successfully delighted and

satisfied its customers. A satisfied customer will buy again and again and in large amounts and

will be considered retained Kambuga, (2000). This is supported by Bara, (2001) who expressed

that the greatest business secret in the world is the value of a satisfied customer. A satisfied

customer can be considered retained and provides free, yet highly credible advertising.

A customer is not a stranger on our business premises therefore, deserves the best services

(Tumwesige 2003). Clients must be sweet talked especially at getting loans, but on recovery they

wear different faces. This is contrary to the principle of positive expression and being neutral.

Bank of Uganda internal Journal, (2001).

Furthermore, Survey, (2000) indicates that customer retention reflects “the mind that customers

have about a company and its products or services when their expectations have been met or

exceeded and that this state reflects the life time of the product or service experience”.

Despite all this international consecration, there are still dropouts from MFI. The East African1

MFIs case illustrates the high rate of dropouts (25%-60%) some MFI can face and that could

undermine the success of the programs. Although clients dropout over-time, even from the most

successful organisations, in microfinance sector, dropout is portrayed as a negative phenomenon

by many practitioners, because both MFI and clients have much to gain from a long-tem banking

relationship. For those authors, customer loyalty reinforce interactions between clients and MFI,

it mitigates the two mains problems of credit market: moral hazard and adverse selection and

also increases the availability of credit Duflo, (2010).

16

Meyer and Al, (2001) in their paper examining the determinants of borrower dropouts in Mali,

said that retaining clients is very important for MFIs because it reduces MFI‟s administrative

costs, lowers default risks and increases the average loan balance as well as the institution‟s

productivity. This is confirmed by Schreiner, (2004) according to whom, the cost of acquiring

new clients is higher than keeping old ones, a conclusion he arrived at when scoring dropouts at

a micro lender in Bolivia.

Ongena and Smith, (2001) who have focused more on the client benefit, believed that, by staying

with the MFI, clients‟ income increases because they have an ongoing access to financial

services which helps to boost their confidence. Moreover, the customer loyalty contributes to

lower interest rate (Berger and Dell, 1995; Angelini and Al, 1998; Uzzi, 1999) and can also be a

competitive advantage value Wright and Al, (1999). However, other practitioners highlight that,

this is valid portrayal when MFIs are losing “good” clients. When MFIs are losing “bad” clients,

dropouts can be a positive phenomenon. It is for this reason that many employees, especially

credit officers argued in the Hulme et al. (1999) paper presenting East African microfinance

institutions that “they have to remove the weed to get a good harvest”. In some cases, dropouts

may also represent a success, when the client has graduated beyond the need for the MFI‟s

services Simanowitz, (2000).

However, whether “good” or “bad” client or graduated client, understanding why clients dropout

can provide a valuable source of information about the program. Indeed, by understanding why

clients exit, a clearer picture of MFI strengths and weaknesses can emerge, notably for policies

of clients‟ retention, which is a proof of sustainability Simanowitz, (2000).

17

2.3.1 Causes of withdraw of desertion of microfinance clients

2.3.1.1 Inadapted products

Many authors in microfinance literature found that financial services of MFIs are inflexible.

Guérin, (2009) has shown that MFIs still had difficulties to adapt their offer to the diversity of

clients‟ needs. Hulme and Mosley, (1999) have pointed to similar observations and therefore

have called MFIs to more diversification of products and segmentation of the clientele in order to

better serve them. In the same line of ideas Wright, (1999) has stated that MFIs would gain by

standardizing less their products and services. He has emphasised as has Hulme et al, (1999) that,

much of this standardizing problem is driven by the attempts to “replicate” products and services

from foreign cultures without taking into account the socio economic environment into which

they are being imported. Thus, when MFIs products and services do not meet clients‟ needs,

there is a high dropout rate. Loan size, delays in loan disbursement, repayment schedule, costs of

loan, loan eligibility criteria, group lending issue are the variables most cited as proof of this

inadaptation.

Loan size

Hulme et al, (1999) have pointed out that many clients voluntarily withdrew from MFIs due to

the loan amount. In fact, the group has shown that, when the loan amount is small, leading

wealthier clients to dropout. The opposite holds insofar that when the loan amount is increased,

poorer clients voluntarily dropout.

Repayment schedule and delays in loan disbursement

Musona and Coetzee, (2001) have highlighted that the repayment schedule was perceived as too

rigid and therefore not adequately taking into account the realities of micro businesses. Hulme et

al,(1999) in the same line of thought, have observed that a long period of waiting for

18

disbursement of a loan, most of the time, pushes clients out of MFIs Hulme et al., (1999). This

means that the longer the loan disbursement takes the more clients exit from MFIs.

Group lending

Problems related to group borrowing concerned group dynamics issue such as group size, group

liability and the lack of time for weekly meetings Painter and Mc Knelly, (1998), Mustafa and

Al, (1996) Wilson, (2001) Meyer and Al, (2001), Wright, (1999).

Staff attitude

In a study done in South Africa, Stark and Nyirumuringa, (2002) have shown that the lack of

products and services information between management staff and clients lead to clients‟

dropouts. However, Urquizo, (2006) has a different opinion about the quality of services. He

contends that the staff attitude rarely accounts for clients‟ desertion, because the clients have

lower expectations towards it. He gets support from Dackauskaite, (2009) whose study was

carried out in Ethiopia.

Competitive environment

As far as the competitive environment is concerned, many authors have recognized that over the

past few years, microfinance sector has faced high competition. The so many institutions which

have been created over the last years and which are competing in the same market account for

the above. As observed by Wright, (2001) and Pagura, (2004) dropouts are frequent because of

dissatisfaction with the financial services being offered by one MFI and the belief that other

MFIs or other financial institutions can offer better facilities. Thus, they switch from one

financial institution to another.

19

In brief, inadapted products and competition have been unanimously recognized by the

microfinance practitioners, as reasons which lead to high dropout rate. However, authors have

different opinions concerning the relationship between staff attitude and clients.

2.3.1.2 Demand reasons

This group is more related to crisis reasons, socio economic characteristics and clients‟ maturity.

Crisis reasons

It is stated by many practitioners that microfinance allows poor people to increase their income

and assets and decrease their vulnerability because households have better health outcomes

Morduch and Hashemi, (2003); Armendáriz and Morduch, (2007). Therefore, microfinance is

being seen as a virtuous circle which has increased well-being, economic, social and political

empowerment especially of women. However, sometimes, the reality is often much complicated.

Some studies have shown different results: over-indebtedness of many clients, reallocation of

loan, clients‟ delinquency and the decrease of schooling levels Meyer et al., (1999). One reason

for the conflicting results could be that the poor face continual risks and unexpected events such

as illnesses, death of a family member, the loss of a job, funeral expenses and wedding or

children‟s education Rutherford, (1999).

Socio economic characteristics

This group includes variables such as age, gender, location of residence and occupation as well

as socio economic characteristics.

20

Age and dropouts

PRIDE, a Tanzania‟s Arusha Branch has revealed that age clearly plays a role in those

individuals who are recruited and their likelihood to dropout. The 21 year olds and less dropped

out at the highest rate while 60 years old and more dropped out at the lowest rate. However, most

MFIs highlight that members must dropout of the organisation on retirement because they stop to

be an entrepreneur Musona and Coetzee, (2001).

Gender and dropouts

Many studies has argued that one of the main reasons for the success of microfinance institutions

is because they target women Armendáriz and Morduch, (2007); Guérin et al., (2009). In dropout

issue, Schreiner, (2004) has shown with empirical evidence that women are less likely to exit

than men and also that occupation is correlated with dropout. In the East African research

however, there was no clear evidence indicating that women were more or less likely to drop out

of MFIs that serve both men and women Wright et al., (1999). Moreover, while some credit

officers in Uganda have claimed that women were more likely to dropout than men Hulme et al.,

(1999), other studies have implicitly argued that men can dropout more than women, because,

they are less reliable.

Location of residence and occupation and dropouts

Pagura, (2004) and Lehner, (2009) have shown that crisis reasons are generally the main factors

for dropouts. In Bangladesh and in Africa for instance, many clients migrate to other areas

because they are looking for better life conditions6 or news markets, therefore resulting in

dropouts. Other studies have just mentioned occupation and location of residence without giving

a real correlation between those variables and the causes of departure Musona and Coetzee,

(2001).

21

Client maturity

Client maturity means that clients will take larger loans to expand or maintain the working

capital of their business or to finance asset acquisition (Wright, 1999; Simanowith, 2000;

Dackauskaite, 2009). Client maturity also means that clients will accumulate enough capital and

they do not need another loan (Dackauskaite, 2009).Therefore, this phenomenon can also

lead to clients‟ exit. In the same of thought Wright, (1999) has shown that there were two

schools of graduation: One held that after a limited number of subsidized loan cycles, the

beneficiaries would no longer need credit. However, for Wright, this was a supreme naïveté,

because there is scarcely a business in the world that does not use overdraft facilities. The other

school, more plausibly, believed that poor clients could “graduate” with enough wealth and self-

confidence to become the clients of commercial banks.

In their East African studies, Wright et al. (1999) has observed that socio economic

characteristics and crisis reasons play a tremendous role in the reasons that lead to clients

dropouts. However, based on the above development and considering that this study will be done

in Mali, one of the poorest countries in the world, Malian people will be more vulnerable to

financial difficulties due to crisis as illness, death of a member, or loss of job. It seems scarce

that client maturity be the reason of the high dropout rate. Therefore, we can draw our second

group of hypotheses.

2.3.1.3. Environmental reasons

22

Environmental reasons are linked to downturn in the national economy and adverse climatic

conditions. Clients generally served by MFIs have fewer assets and their income is not

diversified. Thus, the poor are more vulnerable to financial difficulties due to economic

downturns or other crises. All the African MFIs studies have reported that dropout rates increase

when there is a bad economic climate, seasonality and natural calamities Wright and al., (1999);

Meyer et al., (2001), because clients have fewer ways of coping with such events and are more

likely to drop out. African countries as others faced climatic conditions these last years.

However, in Africa more than other countries, people who face economic downturns or other

crises receive fewer supports.

2.3.2 How Customer retention can be enhanced

2.3.2.1Listening to customers’ complaints

Chances are that if good customers are dissatisfied with the offerings of your institution, they

will borrow elsewhere. When an unhappy customer leaves, it is estimated that she will tell at

least ten other people of the bad experience. Often, the institution doesn’t suspect that a problem

exists in the first place, but the result is negative advertising, declining profits, and lost

opportunities to serve customers. The good news is that this scenario is avoidable. By actively

soliciting complaints, MFIs can spot dissatisfied customers, resolve their complaints, find ways

to meet their needs, and ultimately retain highly-valuable repeat customers who will spread the

good news about your institution.

The best way to prevent defection is by listening to customer complaints and quickly acting upon

them, through the following steps:

Create channels for dissatisfied customers to complain

23

Encourage all customers to use these channels

Personally attend to customers who are dissatisfied

Quickly resolve customer complaints to turn dissatisfied customers into long-term, happy

customers who will be loyal to the institution

Following these steps will allow MFIs to avoid costly defections while enhancing their long-term

relationships with customers who are crucial to lasting growth and profitability.

Figure 1 provides a rough map of what kinds of complaints to expect and a general idea of what

to do with them. Using this framework, MFIs might consider developing their own tailored

guidelines to clearly indicate to branch staff what they can and cannot resolve. Not all complaints

have immediately apparent answers. Some can (and should) be solved immediately, while others

require some investigation. The most important response to any complaint is concern and

appreciation. A complaint not only provides useful feedback, but it also creates an opportunity

for you to exceed the customer’s expectations. With this in mind, you should make it easy for the

dissatisfied customer to complain.

24

Figure 1: Customer complaint map

2.3.2.2 Creating a Complaint and Suggestion System

A complaint and suggestion system provides a communication channel for unhappy customers. It

enables them to share their dissatisfaction with the institution and (hopefully) to suggest ways to

improve conditions. A complaint and suggestion system typically consists of comment cards, a

receptacle for the cards, and an attention-getting display to encourage its use. Comment cards

should have ample room for all complaints and suggestions. The display might say something

like, “We care about your concerns,” to let customers know that you value their opinions.

Figure 2 provides a sample comment card.

25

Figure 2: A customer complaint card

2.3.2.3Employing a customer service representative

A customer service representative, prominently positioned at a desk in each branch, is a live

version of the complaints and suggestions box. The customer service representative is trained to

listen to customers and respond to their complaints. As with the complaints and suggestions

system, the customer service desk includes a sign that says, “We care about you” and an eye-

catching display about the institution’s commitment to customer satisfaction. It is best if the

customer service representative has sufficient authority to quickly solve customer complaints. To

make the position most cost-effective, the customer service representative can assume other

responsibilities, such as welcoming new customers and opening new accounts. The customer

26

service desk provides an easy-access channel for customers to voice their concerns and resolve

their complaints. Often, when a customer is unhappy, he feels (often rightfully) that there is no

one who can address his concerns. Many times, customers will simply leave rather than taking

the time to find out whom to talk to. The option to talk to the representative is also useful for

illiterate customers.

2.3.2.3Implementing a Complaint Solicitation StrategySince credit officers and other frontline staff have the most contact with customers, they are in an

ideal position to observe customer preferences, needs, and sources of dissatisfaction. Customers

will casually comment on operations while making loan repayments or filling out loan

applications, and frontline employees have to keep an open ear to customers’ thoughts. Not only

are employees in an ideal position to identify dissatisfied customers, they are also in an ideal

position to suggest solutions that will make customers happier. To encourage this behavior and

boost customer satisfaction, MFIs could reward loan officers who make the best suggestions.

The customer information generated by your staff members is most valuable if it is documented,

collated and analyzed.

2.2.3.4 Instituting a Customer Advisory BoardCustomers are an effective and reliable source of advice for finding ways to prevent defections.

A customer advisory board can formalize this function. The advisory board consists of a small

group of customer representatives who meet periodically to discuss the current state of affairs in

the institution from the customers’ point of view. A customer advisory board assumes a

preventive role for customer dissatisfaction, pinpointing small problems before they become

sources of major disappointment. The advisory board can provide ideas for product or service

27

innovations, alert the MFI to the greatest sources of customer dissatisfaction, and otherwise act

as a voice for customers. Unlike focus groups, a customer advisory board consists of a fixed or

rotating group of customers. Since not everyone feels comfortable complaining directly to staff

members, customers need to know that they can share their concerns with their local

representatives on the customer advisory board.

2.3.2.5 Establishing a Customer Feedback Database

The customer feedback database aggregates data gathered by all four information gathering

methods. Without a formal tabulation of customer feedback, it will be difficult to filter and

respond most quickly to the more serious complaints (e.g. fraud or mistreatment), as opposed to

more common problems with easier remedies. One staff member should manage input of data.

The database includes the following categories:

Type of feedback (complaint/suggestion)

Description of complaint

Date of complaint

Description of customer (length of relationship with MFI, size of business, type of business,

etc)

Recommended action

Follow-up procedures

28

Figure 3: Interpretation and use of customer feed backs

2.4 Relationship between credit facilities and customer retention

A growing body of evidence show that few micro enterprises experience sustained growth, while

the majority grow only a little or maintain their operations at a constant level Kakuru, (2000). It

is also unusual for credit to trigger a continuous increase in technical sophistication, output or

employment. It is much more common for each of these variables to reach a plateau after one or

29

two loans and remain in a steady state. As far as empowerment is concerned, microfinance

services have shown little potential to thoroughly change existing inequalities in power relations

or the role of women in society (Buckley 1997; Goetz and Gupta 1996; Hulme and Mosley 1996;

Zaman 1998). However, empirical evidence shows that microfinance interventions have indeed

the capacity to reduce poverty, contribute to food security, and change social relations for the

better.

In some cases there is also extreme precaution by the loan officers to reduce the amount the

customer may access in order to assure the payment. Ironically, however, customers requiring

additional amounts will look for other credit providers, increasing the institution’s risk. Also, the

research in a Central American country revealed different correlation with some customer

service satisfaction issues depending on the loan amount. The higher the amount, the lower the

satisfaction with “service hours” and “service speed” and also more demands for other financial

services as well as fewer requirements of other related services such as training. This shows us

how important it is to fine-tune the target and align the capacities of the MFI to the market being

targeted.

Although, lowering the interest rate for the best customers has been demonstrated to be an

effective short term retention tactic. For now it is complicated to reward customers with good

payment behavior with a lower interest rate, since the budgets and projections of most MFIs

work with average pricing, which creates constraints on offering price discounts without

negatively impacting MFI income. In fact, MFIs are very inelastic in terms of decreasing interest

rates, unless there exists an institutional commitment for improving efficiency and transfer those

gains to the clients or the competition forces this efficiency.

30

Various sources indicate that customer service is not the main factor for desertion, such as the

research undertaken by Inez Murray which shows that, in Bangladesh, desertion for service-

related reasons represented only 3% of the stated cause for desertion, as opposed to another

investigation made in Uganda, where this percentage was 9%.

Research done by ACCION International similarly illustrates that poor service is not an

important driver of client desertion. In the case of the MFIs studied in Central America, it was

found that only 3% of desertion was due to service issues, and it was 10% in the MFI in South

America. Nevertheless, improving customer service is essential to permit the MFI to accomplish

its social mission, balancing the Customer-MFI relationship: going from a LOSE-WIN to a

WIN-WIN perceived relationship will establish the basis for loyalty.

Customers with potential payment problems are, in general, rejected for loan renewals. Research

undertaken with former customers of individual loans indicates that customers, who were

rejected by their own loan officer or because of a MFI policy, account for between 12% and 15%

of the desertion. In addition, Kim Wilson shows a chart of a MFI where involuntary desertion

(due to delinquency issues) was about 13%. Many MFI incentive systems penalize loan officers

for their delinquent accounts, leading them to be more conservative in accepting renewals. The

research done in a Central American country with solidarity and individual loans indicates that 2

out of 5 former customers left involuntarily based on the group or loan officer decision.

As indicated below, it is recommendable when monitoring desertion to adjust the rate to account

for involuntary client desertion by registering those who leave as a result of being rejected by

MFI policies

31

2.4 Conclusion

As much as the above literature demonstrates the importance, of MFI in reducing poverty, it is

clear that there are many challenges on the both sides of the MFIs and the clients. Moreover,

little attention in the literature has been given to the relationship that exists between the credit

policy and customer retention. Therefore this study intended to establish this relationship.

32

CHAPTER THREE

METHODOLOGY

3.1 Introduction

This chapter is about the methodology that was used in the study. It includes research design,

study area, study population, sample size and selection, research tools, data collection and data

analysis.

3.2 Research design

A cross sectional research design was used. This is a basic research method in which a bigger

number of respondents was studied at one specific time and the difference between individual

groups within the population compared, therefore workers at HOFOKAM limited were studied

and the differences or similarities between them were compared.

3.3 Study area

The study was conducted from HOFOKAM Limited, Fort Portal Branch, and Western Uganda.

The area was selected because of being within the easy reach of the researcher and so data was

easily collected at minimum cost.

3.4 Study population

The study targeted employees and clients of HOFOKAM limited

3.5.1 Sample size

The study involved 20 respondents. These were staff of the institution but working under

different departments

3.5.2 Sampling design

The researcher adopted stratified random sampling where by the departments in HOFOKAM

Limited constituted the strata. From Each stratum, simple random sampling technique was used

33

so as to enable the employees under each department have an equal representation and therefore

avoid bias. This enabled the researcher to come up with findings that were reliable and valid. The

clients were selected using convenience sampling. This was selected because only those who

were willing to participate were selected as found at the premises of the institution.

3.6 Sources of DataThe study employed both primary and secondary data collection approaches.

3.6.1 Secondary data sources

Roston, (2001) defines secondary data as that kind of data that is available, already reported by

some other scholars. Secondary data included policy documents and abstracts of the various

scholars relating to the topic of discussion in question. Secondary data for this study was got

from sources like libraries, archived records from HOFOKAM Limited. This was because it was

readily available and easier to comprehend, as it comprised of extensively researched work.

3.6.2 Primary data sources

According to Roston, (2001) primary data is that kind of data that has been gathered for the first

time, it has never been reported anywhere. Short comings of secondary data sources such as out

datedness and inadequacy in terms of coverage, necessitated the use of primary source for first

data. Self administered questionnaire was used and this enabled the researcher to cover a large

population quickly and at a reasonable cost.

3.7 Data Collection Methods/ Instruments

The researcher used the following instruments to collect data for this study

3.7.1 Questionnaire

34

Semi structured Questionnaire was used to obtain responses from the respondents. The

questionnaire was semi structured according to the study objectives. Semi structured questions

was used to help the respondents make quick responses.

3.7.2 Interview guide

These were administered to the top managers of HOFOKAM Limited. The interviews were

meant to enable the researcher come up with detailed information to back the information that

was got through questionnaires.

3.7.3 Observation

The researcher observed the charts that were pinned in the Loans office depicting the trend of

clients joining the institution as well as the trend of client desertion.

3.8 Data processing, analysis and presentation

3.8.1 Data processing

Data collected was checked for completeness, categorized and coded and entered into a computer

where it was summarized into frequency tables.

3.8.2 Data analysis

The data got was analyzed automatically using SPSS (Statistical Package for Social Sciences).

The SPSS package was opted for, because it handles a large number of variables. Pearson’s

linear correlation index was used in order to correlate credit policy and customer retention. The

index was selected because it measures the degree and direction of the relationship between

variables.

3.8.3 Data Presentation

Quantitative data was presented in form of descriptive statistics using frequency tables, graphs

and pie-charts. Pie charts and graphs were generated using Microsoft Excel 2007 Version.

35

Qualitative data was sorted and grouped into themes. The researcher thereafter evaluated and

analyzes the adequacy of information in answering the research questions through coding of

data, identifying categories and parameters that emerge in the responses to the variables of the

study. Qualitative data was presented using narrative text.

3.9 Limitations of the study

Financial constraints: Financing the research study was too costly in terms of transport

costs, feeding and processing of the proposal and research report

Limited time: Inadequate time frame required for a detailed research study. Comprehensive

research study involves a great deal of collecting, analyzing and processing that requires a

lot of time

Hesitation of the respondents: The respondents were hesitant to release information to the

researcher. However, the researcher having made the questionnaire anonymous assured

them that the study was purely for academic purposes.

36

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS

4.1 IntroductionIn this chapter presentation and analysis of findings in relation to the research objectives will be

made. The chapter incorporates the background, response rate, age structure of respondents, sex

of the respondents and findings on the objectives of the study and the summary. These findings

are presented in tables showing frequencies and percentages obtained from the primary sources.

4.2. Background characteristics of the respondents;

Table 1 : Description of respondents by Gender

Frequency Percent Valid Percent

Cumulative

Percent

Valid Male 16 80.0 80.0 80.0

Female 4 20.0 20.0 100.0

Total 20 100.0 100.0

Table 1 above shows that majority of the respondents, 16(80.0 %) were male as compared to

females, 4(20.0%). This finding indicates that males continue to dominate positions of

responsibility in financial institutions as well as business enterprises as compared of women.

37

Figure 4: Description of respondents by age.

0%

10%

20%

30%

40%

50%

60%

15.020.0

55.0

10.0

Series1

Age group

Perc

enta

ge

Figure 1 above indicates that 10 % of the respondents were aged 25 years and below, 55.0%

were aged between 26 and 36, 20.0% were aged between 37 and 47, 32% were aged between

48 and 58 while 32% were above 48 years of age. By implication, majority of the respondents

being mature meant that they were informed and knowledgeable about the variables.

Table 2: Description of respondents by working experience

Frequency Percent Valid Percent

Cumulative

Percent

Valid Below 3 year 6 30.0 30.0 30.0

3-5 years 4 20.0 20.0 50.0

6 -8years 10 50.0 50.0 100.0

9 years and above 0 0 0 100.0

Total 20 100.0 100.0

38

Table 2 shows that 30% of the respondents indicated that they have been engaged with their

respective departments for a period less than 1 year, 20.0% indicated that they have been

engaged with their departments for the period between 1-2 years while 50.0% indicated that they

have been engaged for more than 3 years. In all, majority, 50.0% indicated that they have been

engage with the institution for the last three years. This creates an impression that the

respondents had a vast experience on the dynamics of the institutions and therefore more

knowledgeable and informative as regards the operations of HOFOKAM Limited.

Figure 5: Description of respondents by level of education

2; 10%

13; 65%

3; 15% 2; 10%

Diploma Degree MastersOthers

Figure 2 shows that 2(10.0%) of the respondents were diploma holders, 13(65%) were degree

holders, 3(15.0%) had completed masters degree while 2(10.0%) had professional accreditations

such as Diploma in Banking and ACCA. Majority respondents (75%) were degree holders

( Bachelors and Masters) implying that HOFOKAM Limited considers graduate employees to

be very creative, knowledgeable and possessing expertise in varied areas of banking as compared

to employees from other cadres.

39

Figure 6: Description of respondents by designation

0%5%

10%15%20%25%30%35%40%45%

45%

20%

30%

5%

Series1

Designation of the Respondents

Perc

enta

ge

Figure 2 shows that 9(45.0%) of the respondents were credit officers, 4(20.0%) were loans

officers 6(30.0%) were finance officers while 1(5.0%) was a Public Relations Officer. The

representation of he key respondents from the most crucial departments regarding information on

interest rates and loan portfolio investment implies that the responses given were cross cutting

the departments in the bank and therefore were reliable.

4.3 Credit policies used by HOFOKAM

This section presents findings of the credit policy used by HOFOKAM Ltd

4.3.1 HOFOKAM has a credit management committee that is responsible for reviewing

and monitoring risk management policies

Findings on whether HOFOKAM has a credit management committee that is responsible for

reviewing and monitoring the risk management policies were considered and the results are

shown in the Table below

40

Table 3: HOFOKAM has a credit management committee for reviewing and monitoring the risk management policies

Frequency Percent Valid PercentCumulative

PercentValid Strongly Disagree 1 5.0 5.0 5.0

Disagree 1 5.0 5.0 10.0Not sure 1 5.0 5.0 15.0Agree 11 55.0 55.0 70.0Strongly Agree 6 30.0 30.0 100.0Total 20 100.0 100.0

Table 3 shows that 1(5.0%) of the respondents strongly disagreed there is a credit management

committee that is responsible for reviewing and monitoring risk management policies in

HOFOKAM Limited 1(5.0%) disagreed, 1(5.0% were not sure, 11(55.0%) agreed while 6(30%)

strongly agreed. In all, majority respondents 85% agreed that there is a credit management

committee that is responsible for reviewing and monitoring risk management policies in

HOFOKAM Limited.

4.3.2 Application forms are used by clients applying for credit

Findings on whether HOFOKAM had application forms for clients to use while applying for

credit were considered and the results are shown in the Table below;

Table 4: HOFOKAM has application forms that are use by clients in applying for loans




41

Table 4 shows that 5(25.0%) of the respondents strongly disagreed that people apply for credit

using application forms, 3(15.0%) disagreed, 2(10.0%) were not sure, 6(30.0%) agreed while

4(20.0%) strongly agreed. Majority respondents (50.0%) agreed that clients of HOFOKAM

Limited apply for credit using application forms. This is a better credit management practice

because it enables management to keep track of the records pertaining to the funds that have

been borrowed by the clients.

4.3.3. HOFOKAM bases on the value of security to advance loans

The study investigated whether the institution based on the value of security to extend credit to

the clients. The following results were obtained.

Table 5: HOFOKAM bases on the value of security before advancing loans




Table 5 shows that none of the respondents strongly disagreed that HOFOKAM Limited bases

on the value of security, 2(10%) disagreed, 2(10%) were not sure, 6(30%) agreed while

10(50.0%) strongly agreed. In all 80% of the respondents agreed that the value of the property

mortgaged is considered greatly because this enables the staff of the SACCO to easily convert

the property into money to recover the funds given to the clients

42

4.3.4 The institution considers adequacy of information about the clients

The study further investigated as to whether HOFOKAM considered adequacy of information

about the clients before extending credit. The following results were obtained;

Table 6: HOFOKAM considers the adequacy of information before extending a loan to the client




Table 4 shows that 2(10.0%) of the respondents strongly disagreed that HOFOKAM Limited

considers adequacy of information, 3(15.0%) disagreed, 2(10.0%) were not sure, 6(30.0%)

agreed while 7(35.0%) strongly agreed. Majority respondents (65.0%) agreed that clients of

HOFOKAM Limited considers adequacy of information. This narrows down the chances of

default that may arise due to deficiency information provided.

4.3.5 The character of the clients is considered when processing a loan for a client

Findings on whether management of HOFOKAM Limited based on the character of the clients in

processing of the loans were considered and the results are shown in the Table below;

Table 7: The character of the clients is considered while processing the loans for clients




43

Source: Primary Data

Table 7 above shows that none of the respondents strongly disagreed and disagreed that

HOFOKAM Limited extended credit to the clients basing on their character 2(10.0%) were not

sure , 8(40%) agreed while 10(50.0%) strongly agreed. This implies that the character of clients

was considered by the institution before they were given a loan since majority of clients

responded positively to the statement.

4.3.6 Findings on capacity as a mode of assessing clients

The findings on whether the capacity of the clients to repay the loan was considered before they

are given a loan and the responses were as follows;

Table 8: Capacity to pay is considered when processing loans for clients


PercentValid Strongly

Disagree 0 0.0 0.0 0.0

Disagree 2 10.0 10.0 10.0Not Sure 2 10.0 10.0 20.0Agree 4 20.0 20.0 40.0Strongly Agree 12 60.0 60.0 100.0Total 20 100.0 100.0

The table above shows that none of the respondents strongly disagreed that capacity to pay is

considered when processing loans for clients, 2(10.0%) disagreed, 2(10.0%) were not sure,

4(20.0%) agreed while 12(60.0%) strongly agreed. This implies that no staff member will grant a

client of doubtable character a repeat loan, thus letting them go.

44

4.3.7 HOFOKAM Ltd has an upper credit limit.

The findings on whether the institution had a maximum amount it lends to clients are shown in

the table below;

Table 9: HOFOKAM has an upper limit on the loans




Table 9 shows that none of the respondents strongly disagreed that the institution has an upper

limit on the loans, 2(10.0%) disagreed, none indicated they were not sure, 10(50.0%) agreed

while 8(40.0%) strongly agreed. In all, majority of the respondents (90.0%) agreed that the

institution has an upper limit on the credit that it extends to the clients. This implies that the

institution cannot grant a loan which is above the credit limit for that specific category of loan.

4.3.8 The terms of getting loans from HOFOKAM Limited are favourable

Findings on whether the terms for getting loans from HOFOKAM were favourable were

considered and the results are shown in the Table below

Table 10: Terms of getting loans from HOFOKAM are favourable




45

Table 10 shows that 2(10.0%) of the respondents strongly disagreed that the terms of

getting loans from HOFOKAM Limited were favorable, 1(5.0%) disagreed, 3(15.0%) were

not sure, 6(30.0%) agreed while 8(40.0%) strongly agreed. In all, majority of the respondents

(70.0 %) agreed that accessing and processing loans from HOFOKAM Limited was easy. This

could imply that holding other factors constant, HOFOKAM Limited has more clients than

could be other microfinance institutions.

4.3.9 The Nature of the business operated by the client is considered before extending the credit Findings on whether the nature of the business run by the clients was considered and the results are shown in the Table below:

Table 11: The nature of the business run by the clients is considered when advancing credit




Table 11 shows that 1(5.0%) strongly disagreed that HOFOKAM Limited also considers the

nature of business, 2(10.0%) disagreed, (5.0%) were not sure, 5(25.0%) agreed while 11(55.0%)

strongly agreed. Such ensures that credit is accessed by people with high propensity of paying

back.

4.3.10 Findings on whether the institution extends a satisfactory credit period to the

clients.

The findings on whether the clients given a satisfactory credit period were considered and the

results obtained were as follows;

46

Table 12: Clients are given a satisfactory credit period to pay back.



Disagree 2 10.0 10.0 20.0Agree 9 45.0 45.0 65.0Strongly Agree 7 35.0 35.0 100.0Total 20 100.0 100.0

Table 12 shows that 2(10.0%) of the respondents strongly disagreed that HOFOKAM limited

gave them a satisfactory period to pay back, 2(10.0%) disagreed, none were not sure, 9(45.0%)

agreed while 7(35.0%) strongly agreed. In all, majority of the respondents (80.0 %) agreed that

clients are given a satisfactory period to pay back. This could imply that holding other factors

constant, HOFOKAM Limited has more clients than could be other microfinance institutions.

4.3.11 Clients are sent reminder letters

Findings on whether clients were sent reminder letters considered and the results are shown in

the Table below:

Table 13: Clients are sent reminder letters




Table 13 shows that 3(15.0%) of the clients strongly disagreed and disagreed respectively that

clients are reminded about their obligation to pay using reminder letters,1(5.0%) were not sure,

6(30.0%) agreed while 7(35.0%) strongly agreed. Sending reminders to clients pertaining to

their obligations to clear is a better credit management policy because it enables management of

the institution to keep the clients focused about the dates of clearing the installments.

47

4.3.12 Clients are visited to remind them to pay their loan.

Findings on whether clients were visited were considered and the results are shown in the Table below:Table 14: Loans officials pay visit to the clients reminding them of the dates to pay back


PercentValid Strongly Agree 1 5.0 5.0 5.0

Disagree 2 10.0 10.0 15.0Not Sure 3 15.0 15.0 30.0Agree 4 20.0 20.0 50.0Strongly agree 10 50.0 50.0 100.0Total 20 100.0 100.0

The above table shows that 1(5.0%) of the staff strongly disagreed that visits were paid to clients

reminding them of the dates to pay back, 2(10.0%) disagreed, 3(15.0%) were not sure, 4(20.0%)

agreed while 10(50.0%) strongly agreed. The clients are visited to be reminded about repaying

their loan if the credit period given to them elapses. This implies that once the period given to a

client elapses, he/she can be visited by the field staff and reminded about repaying the loan.

4.4 Level of Customer retention in HOFOKAM Ltd.

4.4.1 HOFOKAM Limited keeps client’s records.

The researcher inquired from the staff as to whether they kept or maintained their clientele

records and the findings were as follows:

Table 15: HOFOKAM Limited keeps clients records



Disagree 0 0.0 0.0 0.0Not Sure 0 0.0 0.0 0.0Agree 6 30.0 30.0 30.0Strongly Agree 14 70.0 70.0 100.0Total 20 100.0 100.0

48

Table 15 shows that none of the respondents strongly disagreed, disagreed and were not sure that

HOFOKAM kept and maintained the records of clients, 6(30.0%) agreed, while 14(70.0%)

strongly agreed. This implies that the institution maintained proper records as regards their

clients and this provided basis for the comparative analysis of the entry and exit of the clients as

well as the repetitive applications made by clients for credit.

4.4.2 Rate of desertion of the clients

The respondents were asked to indicate as to whether the institution had registered the problem

of clients deserting from the institution. The following results were obtained.

Table 16: Rate of desertion of the clients from HOFOKAM Limited


PercentValid Very Low 2 10.0 10.0 10.0

Low 9 45.0 45.0 55.0Moderate 4 20.0 20.0 75.0High 3 15.0 15.0 80.0Very high 2 10.0 10.0 100.0Total 20 100.0 100.0

Table 16 shows that the 2(10.0%) of the respondents indicated that the rate of desertion of the

clients was very low, 9(45%) indicated that it was low, 4(20.0%) indicated that it was moderate,

3(15.0%) indicated that it was high while 2(10.0%) indicated that it was very high.

4.4.3 The clients of this institution have on average been getting services for the last three years

49

The respondents were asked to indicate as to whether the clients of HOFOKAM Limited had

stayed with institution for more than three years. The following results were obtained.

Table 17: Clients from HOFOKAM Limited have stayed with the institution for more than 3 years


PercentValid Strongly Agree 1 5.0 5.0 5.0

Disagree 2 10.0 10.0 15.0Not Sure 3 15.0 15.0 30.0Agree 4 20.0 20.0 50.0Strongly agree 10 50.0 50.0 100.0Total 20 100.0 100.0

The above table shows that 1(5.0%) of the staff strongly disagreed that clients of HOFOKAM

limited had stayed with the institution for more than 3 years, 2(10.0%) disagreed, 3(15.0%) were

not sure, 4(20.0%) agreed while 10(50.0%) strongly agreed. This implies that the clients have

stayed with the institution for a reasonable period of time.

4.5 The relationship between credit policy and customer retention in HOFOKAM Ltd.

The relationship between credit policy and financial performance was statistically tested using

Pearson’s correlation matrix. This was used because both credit policy and customer retention

were numerical. The results obtained are shown in Table 17 below

Table 18: Relationship between credit policy and customer retention Credit policies customer retention

credit policies Pearson Correlation 1 .703** Sig. (2-tailed) .000 N 20 20customer retention Pearson Correlation .703** 1 Sig. (2-tailed) .000 N 20 20

** Correlation is significant at the 0.01 level (2-tailed).

50

A strong positive relationship (r=.803*, p<0.01) was established because .803 is close to 1, with

a p-value of 0.000 which is less than 0.01 implying that a positive relationship that was

significant at 0.01 level existed between credit policy and customer retention

To further establish the significance of the contribution of credit policy to customer retention the

coefficient of determination (r2) was computed. Since r=0.803, r2=0.644. This implies that

effective credit management contributed 64% on the levels of customer retention of HOFOKAM

Limited while 36% was contributed by other factors. The implication of the above relationship

is that effective credit policy procedures positively influence customer retention and therefore

reminds the management of HOFOKAM Limited of the need to effectively streamline credit

management procedures and strategies if they are to achieve higher levels of customer retention

51

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

This chapter includes the summary of the findings from the study, the conclusions drawn from

the same findings and the recommendations made by the researcher on how to improve the credit

policy in MFI’s especially in HOFOKAM Ltd where the research was conducted.

5.2 Summary of major findings

The research findings revealed that HOFOKAM Ltd has a strong credit policy it uses when

carrying out its lending business. The institution’s credit standards are put into consideration

before a client is granted a loan.

For credit limit, the institution has different credit limits which are based on the type of loan

given and the graduation policy of growing clients’ loan sizes in phases to avoid over financing

and trickery by unscrupulous clients.

For the collection efforts, the institution has a well organized collection procedures, however,

high cost are incurred in the loan collection mechanism and clients are not comfortable with

some especially arresting, and embarrassing them.

The research findings revealed that the institution is having a moderate rate of client desertion

The researcher noted that the major cause of desertion was the high interest rate charged by the

institution poor customer handling especially by the field staff, credit terms and policies, failure

of the clients to honor their loan obligations thereby forcing the institution to do away with them

and the mushrooming competing alternative lending institutions with apparent or relative better

policies.

52

Some policies are not being followed like agricultural loans are extended to commercial farmers

with payments expected in a balloon form taking care of the crops gestation period but which

condition does not actually apply as they also pay monthly.

The findings from the study revealed that there is a significant inverse relationship between the

credit policy and customer relation of 0.803 (as shown by Pearson correlation coefficient). This

implies that the level of customer relation in HOFOKAM is influenced by the credit policy being

used.

5.3 Conclusion

The Conclusion from the research findings as guided by the study objectives:

The Interest rate is high and repayment schedules are not favorable to some clients. However

there may be other factors that affect the customer retention levels of MFI,s such as ignorance of

the client on how to use the loans properly and pay back the required interest and principal

amount in the stipulated period which prompts the institution to discard such clients.

The level of customer retention was established basing on the indicators of the clients going back

to borrow from the institution again and again. The researcher was also notified that some clients

especially those who acquire salary loans may drop out just the reason as to why they had

acquired the loan was to solve a certain problem in which case if the problem is solved, such

clients drop out.

53

From the Summary of findings from the study, it can be concluded that the credit policy used by

the Institution has an effect on their customer retention levels. The Institution credit policy is so

stringent thus affecting the level of customer retention.

5.4 Recommendations and suggestions

In light of the above findings and conclusions the researcher suggests the following

recommendations to improve credit policy in HOFOKAM ltd

The management of HOFOKAM should charge competitive interest rates and on a reducing

balance if possible. Clients should be extended a period of grace at least two weeks in case they

delay to pay their loan in time. Agricultural borrowers should be allowed to pay periodically.

Management should encourage clients to acquire individual loans so as to prevent the loyal

clients from being penalized on behalf those members of the group who fail to fulfill their part.

Loan officers should emphasize constant monitoring and training of clients on how to manage

their businesses in order to pay back the loan promptly. These will reduce client diverging loaned

money for other purposes other than the intended one and hence fail to pay back the loan.

There is need for periodic review of the credit policy and management should ensure that staff

members are well trained and are aware of the credit policy in place.

54

Management should endeavor to compare their services with those of other service providers so

as to improve on the weak areas as regards their credit policy.

Credit officers should emphasize reminder letters, reminder visits and reminder calls before

embarking on harsher measures of recovery which scare off clients.

55

REFERENCES

Armendáriz de Aghion, B. and Morduch, J. (2007). The Economics of Microfinance. London, First MIT Press paperback edition.

Armstrong K.R (1993); Financial Management fifth Edition Allan and Baan, Boston United

States of America.

Association of Micro finance Institutions of (Uganda AMFIU) publications 2002

Awava J. (2000), An assessment of the role of MFIs in development of small scale business

Balunywa W. (1995). Customer service and the business. Paper presentation, Uganda Investment

Authority, pp.1-7.

Bank of Uganda internal records (2001)

Bank of Uganda presentation at the AMFIU workshop. December (1997)

Bara V. (2001) customer satisfaction and delight. The micro finance banker. Issue 1 vol.4,pp.4

Dackauskaite, A. (2009). Client Exit in Microfinance, Utrecht University

Edminister Robert (1980); Financial Institutions Markets and Management revised Edition

McGraw Hill Publications France

EPRC (1996) Credit Accessibility to the Rural poor in Uganda. Economic Research Policy

Bulletin, Vol 2 no .1 April. (1996)

Gopaal, E.G (1997). Marketing and Business Management. (3rd ed) England : Colleen publishers

ltd

HOFOKAM ltd (2004-2009) business plan

56

Hulme, D. ; Mutesasira, L.; Mugwanga, H. ; Kashangaki, J. ; Maximambali, F. ; Lwoga, C. ;

Wright, G. ; Rutherford, S. (1999) “Client Drop-outs From East African Microfinance

Institutions”. - MicroSave Report, Kampala.

Hulme, D. and Mosley, P. (1997) “Finance for the Poor or the Poorest? Financial Innovation,

Poverty and Vulnerability.” In who Needs Credit? Poverty and Finance in

Bangladesh. G.D. Wood and I. Sharif, eds. Dhaka, Bangladesh : The University Press

Limited.

Kakuru J (2000). Financial dimensions and the business (1st ed). MUBS

Kakuru J (2000). Financial dimensions and the business (2nd ed). MUBS

Kambugu A M (2002) Investigating how organization culture and climate customer orientation,

and innovation affect performance of service firms.

Kotler P and Gray, A. (1998) Principles of marketing (8th ed) New Jersey: prentice Hall incl.

Maximambali, F. (1999).“Client Exits (Drop-outs) amongst Tanzanian MFIs”. MicroSave- Africa Research Report.

Mbonigaba, W (1998). Internal bench marking and business process. Industry newsletters

Meyer, R.; Graham, D. and Pagura, M. (2001) “Determinants of borrower drop out in microfinance: an empirical investigation in Mali”.

Mukweli, J. (2001). Business administration and Management (2nd ed). London: Gee and

Company publishers.

Murray, I. (2001). “Cultivating Client Loyalty”. - The Microbanking Bulletin, Washington, D.C.; Issue no. 6, pp. 20-24

Ngahu, C. (2001) Customer care and delight. The profoto Magazine vol. 5 no 2. pp. 14-16

No 159. Pp.8-9

57

Ongena, S., and Smith, D.C. (2001). “The Duration of Bank Relation Ships”. Journal of Financial Economics 61 449-475.

Pagura, M. (2003). “Examining Client Exit in Microfinance : Theoretical and Empirical

perspectives”. PhD Dissertation, The Ohio State University.

Pagura, M. (2004). “Client Exit in Microfinance : A conceptual Framework with Empirical

Results From Mali”. CSAE Conference : Growth, Human Capital, and Povert

Reduction in Africa.

Painter, J., and MKNelly, B. (1999). “Village Banking Dynamics Study: Evidence from Seven Programs.” Journal of Microfinance1 (Fall 1999) : 91-116.

Pandey .I.M.(1995); Financial Management seventh Edition New Delhi India

Pandey, M. (1995). Financial Management.

Roston.J.F (2001): Research report writing (A contemporary Approach for beginners) Koran

page limited London.

Schreiner, M. (2001). “Scoring drop out at a Micro lender in Bolivia”. Center for Social Development. Washington University in St. Louis.

Schreirer,M.(2002).Credit Scorching for micro finance:Can it work?Journal of micro finance

Vol 2

Simanowitz, A. (1999). “Client Exit Surveys: A tool for understanding client drop out”. Journal of Microfinance 2: 91-116.

Tumwesige, G (2003). The art of Customer design. MCC reports, pp. 22-26

Uganda Poverty reduction strategy paper progress report (2002

Urquizo, J. (2006). “Improving And Monotoring Customer Retention”. - Paper prepared for the Microcredit Summit Campain.

58

Van Horne (1994); Financial Management and Policy (Fifth Edition) Prentice Hall Englewood.

Wright, G. (2001). “Drop-outs and Graduates: Lessons from Bangladesh”. - The Micro-banking

Bulletin, Washington, D.C. Issue no. 6pp. 14-16.

59

Appendices

Appendix A: QUESTIONNAIRE

Dear respondent,

The questions here set under are intended to facilitate the study on micro finance institution’s

credit policy and customer retention, a case study of HOFOKAM ltd.

You are kindly requested to give in some time to provide you opinion by answering the

following questions, by placing a tick in the appropriate box.

The questions are entirely for academic purposes and all the information provided will be treated

with utmost confidentiality.

Section A: General information

(Tick the appropriate answer)

1. Gender

Male Female

2. Age

Below 20 years 20-30 years 31-40 years Above 40years

3. What is your highest qualification level

Certificate Diploma Degree Others Specify

4. What position do you hold in HOFOKAM

Senior Management Middle Management Other (Specify)

60

Section B: Credit standards

5. Is the character and credit history of a client considered when evaluating him or her for a

loan?

Strongly Disagree Disagree Not sure Agree Strongly Agree

6. Is the capacity of a client to use and repay the loan considered before giving a loan?


7. The client’s security, its value and ownership are always considered before loan approval.


8. HOFOKAM considers clients capital contribution into the business before giving a loan.


Section c: Credit terms

9. The institution has credit limits for each specific group of clients.


10. The institution has a credit period it extends to clients to pay a loan considering the

inability to pay due to certified conditions.


11. The interest rates payable to the institution are affordable to all clients.

Strongly Disagree Disagre Not sure Agree Strongly Agree

61

e

12. A client can be allowed to negotiate on the terms of the loan given his /her type of

business.

Strongly Disagree Disagre

e

Not sure Agree Strongly Agree

Section D: Collection procedures

13. HOFOKAM Ltd rings clients to discuss about loan payments.


14. Reminder letters are sent to clients about paying up their loans


15. Visits are made to clients to remind them of their loan obligation


Section E: Customer retention

16. Proper records about clients of the institution are maintained


17. All clients come back to borrow again


62

18. The prevailing rate of the number of clients dropping out of HOFOKAM ltd is

Very low Low Moderate High Very high

19. High interest rates cause HOFOKAM clients to drop out of the institution


20. HOFOKAM loan collection methods cause clients to drop out of the institution


21. The credit policy in use by HOFOKAM Ltd has an effect on the customer retention level


22. Suggest ways of improving credit policy in HOFOKAM Ltd

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

Thank you for being part of this academic research.

63

Appendix II: Interview Guide

Questions for the management of HOFOKAM Ltd

1) Under what circumstances do you call clients?

2) Under what circumstances do you send clients remainder letters?

3) Under what circumstances do you visit clients to remind them to pay their loans?

4) Does the institution offer services on credit?

5) Do some clients fail to fulfill their loan obligations?

6) What do you do to such clients?

7) Do you receive complaints from the clients concerning the quality of your services?

64

the effect of micro credit policy on … · web viewthus customer retention is related to customer...

Documents