COMMERCIAL BANKS LENDING POLICIES AND FINANCIAL PERFORMANCE OF SMALL

SCALE BUSINESSES.A CASE STUDY OF SELECTED SMALL

SCALE BUSINESSES IN IBANDA TOWN

BY

AINEMIGISHA EVALYNE

12/BSU/BBA/011

A RESEARCH REPORT SUBMITTED TO THE FACULTY OF BUSINESS AND DEVELOPMENT

STUDIES IN PARTIAL FULFILLMENT OF

REQUIREMENTS FOR THE AWARD OF BACHELORS’

DEGREE IN BUSINESS ADMINISTRATION OF

BISHOP STUART UNIVERSITY

MAY, 2015

ii

DECLARATION

I AINEMIGISHA EVALYNE hereby declare that this report is my own

knowledge, effort and it has never been submitted by any other person for

degree in any University or institution of higher learning except where

acknowledged.

Signed……………………………………………

AINEMIGISHA EVALYNE

Date…………………………………………………

i

SUPERVISOR’S APPROVAL

This report on “Commercial Banks lending policies and financial

performance of small scale business in Ibanda Town Council, has been

done under my supervision and is now ready for submission .

Signed………………………………………………

MR. AGUME ANTHONY

Date……………………………………………….

ii

DEDICATION

Dedicated to with joy to my parents; Mr. Ngasiirweki Naboth and Mrs.

Tuhirirwe Perinah, also to my brothers Bruce, Wickliffe, Johnson and

sisters Patience, Provia, Prossy, Charity,

ritah,Claire,shivan,mercy , my cousin francis and friends

joseph,provia,Ronald,buradina and my supervisor for the wonderfull

support and guidance towards this report. May the Almighty bless them

all.

iii

ACKNOWLEDGEMENTS

Such kind of Work can only be completed with external support and

guidance. There fore under this note .I wish to extend my sincere

gratitude and appreciation to the following people;

I thank the Almighty God for making it possible for me to complete this

piece of work Glory be to Him.

I greatly acknowledge my thanks to my supervisor Mr. Agume Anthony for

his guidance and critical articulation through out the research

process. His support has enabled me to produce this work.

I also extend my special thanks to my parents; Mr. Ngasiirweki Naboth and

Mrs. Tuhirirwe Perinah, also to my brothers Bruce, Wickliffe, Johnson

and sisters Patience, Provia, Prossy,

Charity,Mercy,shivan,Claire,Ritah and my cousin Francis for their

financial support, love, prayers and encouragement, I am very grateful

for that.

Special thanks also go to my respondents who sacrificed their time in

giving me relevant information that backed my research more especially

small business owners in Ibanda Town Council for their great response.

My sincere gratitude further goes to my dear friends Joseph, Provia,

Ronald and Buradina for their prayers, encouragement, support and ideas

when I needed them most.

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TABLE OF CONTENTS

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

SUPERVISOR’S APPROVAL...........................................ii

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

ACKNOWLEDGEMENTS................................................iv

TABLE OF CONTENTS.................................................v

LIST OF TABLES.................................................viii

LIST OF ABBREVIATIONS............................................ix

ABSTRACT.........................................................x

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

1.0 Introduction of the study......................................1

1.0 Background of the study........................................1

1.2 Statement of the problem.......................................4

1.3 Purpose of the study...........................................5

1.4 Objectives...................................................5

1.6 Scope of the study.............................................5

1.6.1 Geographical Scope..........................................5

v

1.6.2 Time Scope..................................................5

1.6.3 Subject Scope...............................................6

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

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

2.0 Introduction.................................................7

2.1 Historical perspective of lending policy........................7

2.2 Lending policies used in commercial banks.......................7

2.3 Factors influencing the financial performance of Small Scale

Businesses......................................................11

2.4. Relationship between Commercial Banks lending policies and

financial performance of selected Small Scale Businesses...........16

CHAPTER THREE: METHODOLOGY.......................................21

3.0 Introduction................................................21

3.1 Research design..............................................21

3.2 Area of the study.............................................21

3.3 Study population.............................................21

3.4 Sampling method..............................................22

3.5 Sample size..................................................22

3.6 Data sources.................................................22

3.7 Data collection instruments..................................23

3.8 Study Variables and their measurements.........................23

3.9 Research procedures..........................................24

3.10 Data analysis...............................................24

3.11 Limitations of the Study.....................................24

vi

CHAPTER FOUR: PRESENTATIONS, ANALYSIS AND DISCUSSIONS OF STUDY

FINDINGS........................................................25

4.0 Introduction................................................25

4.1 Background information of the respondents......................25

4.1.1 Gender composition of respondents...........................25

4.1.2 Education level the respondents.............................26

4.1.3 Age of the respondents......................................26

4.1.4 Period Spent in business in years............................27

4.1.5 Responses on if understand the term lending policies..........27

4.1.6 Small Scale Business activities in Ibanda Town Council........28

4.2.0 Analysis of study findings on the basis of study objectives....30

4.2.1 Lending policies used in Commercial Banks in Ibanda Town Council.

................................................................30

4.3.0 Factors influencing the Financial Performance of by Small Scale

Businesses in Ibanda Town Council.................................33

4.4 The relationship between commercial Banks lending policies and

financial performance of small scale businesses in Ibanda Town Council

................................................................37

4.5 Regression Analysis..........................................40

CHAPTER FIVE: SUMMARY OF THE FINDINGS CONCLUSIONS RECOMMENDATIONS AND

................................................................42

5.0 Introduction................................................42

5.1 Summary of the Findings.......................................42

5.2 Conclusions.................................................48

5.3 Recommendations.............................................48

REFERENCES......................................................51

vii

APPENDIX A: QUESTIONNAIRE TOOL...................................53

APPENDIX B: INTERVIEW GUIDE......................................57

viii

LIST OF TABLES

Table 1: Showing Sample size......................................22

Table 2: Gender of the respondents.................................25

Table 3: Education level the respondents...........................26

Table 4: Age of the respondents....................................26

Table 5: Period Spent in business in years..........................27

Table 6: I understand the term lending policies.....................28

Table 7: Showing Small Scale Business activities in Ibanda Town Council

................................................................28

Table 8 : Showing lending policies used in Commercial Banks in Ibanda

Town Council....................................................31

Table 9: Showing factors influencing the financial performance of small

scale businesses in Ibanda Town Council............................33

Table 10 : Showing the relationship between commercial banks lending

policies and financial performance of small scale businesses in Ibanda

Town Council....................................................38

ix

LIST OF ABBREVIATIONS

N Total population.

F Number in the category

n Total number of the respondents

P Number of respondents in the category obtained from the group

DEMFI Dramatic Expansion of the Micro Finance Industry

TV Television

SPSS Statistical Package for Social Scientists

US United States

x

ABSTRACT

The purpose of the study was to determine the relationship between

commercial banks lending policies and financial performance of

selected small scale businesses in Ibanda Town Council. The study was

guided by three objectives namely; to examine the lending policies used

in Commercial Banks by Small Scale Businesses, t o establish the factors

influencing the financial performance of Small Scale Businesses and to

examine the relationship between Commercial Banks lending policies and

financial performance of selected small scale businesses. The study

used data collected using a questionnaire and interviews and during the

study descriptive research design was used as both quantitative and

qualitative research methodologies were also used while sample of 60

respondents was used.

The study examined the lending policies used in Commercial Banks by

Small Scale Businesses in Ibanda town council, interest rate, property

valuation, repayment period, type of loan needed and minimum and

maximum amount of loan are the profoundly used policies to determine the

lending out of credit also various small scale businesses operated in

Ibanda town council and they conclude; hard ware, clothe selling,

general merchandise, restaurants and pubs, stone quarrying and food

processing and selling. Meanwhile the relationship between lending

policies and performance of small scale businesses in Ibanda was

manifested in; amount of money given, relationship with commercial

banks, high value of security needed, low repayment period and high

interest, On addition, small scale business in Ibanda town council have

been influenced by very many factors such as; poor communication, lack

xi

of focus, high taxes, electricity supply, high interest, poor roads,

high value of security, unskilled employees, rent, lack of trade

credits and customer care.

The study recommends that there is need for Commercial Banks to reduce

further on the interest rate they charge on credits business clients

apply for, business persons ought to form business associations; these

will enable entrepreneurs lobby support from government also business

training is important for entrepreneurs in Ibanda town council and

Commercial Banks should adjust on the collateral security demanded as a

prerequisite for a loan.

xii

CHAPTER ONE

1.0 Introduction

This chapter of research report discusses the background of the

study, statement of the problem, purpose of the study, objectives of

the study, scope of the study and significances of the study as well.

The study focus on the Commercial Banks lending policies as an

independent variable and financial performance of Small Scale

Businesses as a dependent variable.

1.0 Background of the study

Small Medium Enterprises (SMEs) are the main driving forces of

economic growth & job creation that have a special importance, not

only in developed countries but also in developing and emerging

economies (Cabbar, 2000). SMEs in most countries have barriers to

access to finance, difficulties in exploiting the technology,

insufficient managerial capabilities, low productivity and

regulatory burdens in their business environment. Some SMEs face

certain constraints that are less applicable to large companies in

Uganda especially 28% of loan defaults, dependent on business

development services for growing their businesses, face major

constraints in their access to finance and export markets, and are

disproportionately affected by regulatory barriers (AMFIU Report,

2008).

Indeed, Goldberg and White (1999) study reveals that MFIs across

developing countries affects small business lending positively in

urban markets and negatively in rural markets. This kind of

borrowing is necessary for business performance and improving SMEs

development if it is fully accessible and reasonably fair cost of

1

money. SMEs are some of the businesses in the world that cannot

function/survive without an appropriate finance because of the

nature of their operations and management style (Kasekende &Opondo,

2003).

Most SMEs in Uganda have had access to financial resources from

Commercial Banks ; however, they end up in the poor financial state

and leading to business collapse before its first anniversary due to

lack of entrepreneurial skills, lack of adequate technical and

management support services (GEM report, 2008). Also, the cost of

money on micro credits is very high, due to the large administrative

costs in relations to their location of operations (Sacerdoti,

2007).

Lending to SMEs entails higher administration and transaction cost

owing to inadequacy of records and information relating to their

operations. Some SMEs had difficulties in raising short-term funds

for working capital as well as long-term funds for business

investment. Enterprises can take in trade credits in addition to

institution loans in short-term finances which later hinder their

performance in the short period (Ebong, 2007). In order to achieve

this role, the SMEs need a good state of financial health and enable

them to play economic role through access to financial services from

the Commercial Banks . Therefore, this makes it difficult for them to

achieve their performance in term of liquidity, long term solvency

and profitability hence leading to lost business opportunities, and

failure to grow in terms of size and financial resources (Badagawa,

2008). This has been linked to high lending terms by Commercial

Banks of between 30% and 36% per annum (MFPED, 2009).

2

According to Wanja (2009), Access to credit facilities is the main

constraint for SMEs in Uganda and limited access to capital to meet

their operating working capital and long term investments. Lending

rates for short and medium term loans range between 17-28% per annum

(Mugisha and Kibirige, 2009). The CGAP assessment report (2008)

also revealed that Ugandan MFIs clients still existed in the loan

cycle and others had dropped out due to poor business performance

and difficulty in loan recovery. In line with (IMF report, 2006) and

Boehlje et al (1999) citing poor performance which is being

contributed by low profitability, high cost of borrowings, small

loan size and short period of lending to the clients. The

development of SMEs would lead to poverty eradication, job creation

and increased income levels in relations to achieving MDGs (MFPED,

2008).

The Small Medium Enterprise Sector in Uganda SMEs are the backbone

of the Ugandan economy, providing a prime source of new jobs,

playing a crucial role in income generation, reducing poverty by

helping boost employment in rural areas and recognized as an engine

of economic growth and development (BIDS report, 2008). Uganda has

an extensive small and medium enterprise sector with an estimated

number of 1,069,848 SMEs in urban and rural areas which account for

90% of the private sector. They contribute 75% of Uganda's GDP and

employ some 2.5 million people (Badagawa, 2007). The SME sector in

Uganda, like other developing economies, is highly diversified by

ownership, type of enterprise and stage of development (Bid report,

2008). Uganda Small Scale Industries Association reported that SMEs

are spread across all sub-sectors of the economy with the majority

operating in the informal sector and mainly operated by women

3

especially in food processing, textiles and clothing,

manufacturing and handicrafts.

The SMEs sector offers a range of investment possibilities,

covering all sectors from resource-based industries to

manufacturing and services. SMEs occupy a highly useful niche in

industrial structure, sub-contracting with large firms engaging in

small batch production, made–to-order work, or finishing

operations complimentary to large scale industry (BIDS Report,

2008)

Lending policy concerns the actions of a central bank or other

regulatory authorities that determine the size and rate of growth of

the money supply . In the United States, the Federal Reserve is in

charge of lending policy , and implements it primarily by performing

operations that influence short term interest rates. Lending policy

in the United States is determined and implemented by the United

States Federal Reserve System , commonly referred to as the Federal

Reserve (Hannig, A. 2009). Currently, the South African government

maintains over US$800 billion in cash in circulation throughout the

world, up from a sum of less than $30 billion in 1959 as the lending

policy keep changing with the level of inflation in the economy. The

amount of money in circulation to businesses generally increases to

accommodate money demanded by the growth of the country's

production (Hulme, D. 2010).

Lending is a risky enterprise because repayment of loans can seldom

be fully guaranteed. According to Brown, Falk, & Fehr, (2009),

implicit contracts between lenders and borrowers, thus, banking

relationships can motivate high effort and timely repayments. Fehr

4

& Zehnder, (20) also confirm that long-term relationships are a

powerful disciplinary device. They posit that in credit markets

dominated by short-term interactions, borrowers may only be

motivated to repay if they know that, due to credit reporting, their

current behaviour is observable by other lenders. The work of Fehr &

Zehnder, (2010) indicates that the impact of credit reporting on

repayment behaviour and credit market performance is highly

dependent on the potential for relationship banking. Therefore,

when bilateral relationships are not feasible, the credit market

essentially collapses in the absence of acceptable borrower

behaviour. As repayments are not third-party enforceable, many

borrowers default and lenders cannot profitably offer credit

contracts (Brown, Falk, & Fehr, 2009). The availability of

information on past repayment behaviour allows lenders to condition

their offers on the borrowers' reputation. As borrowers with a good

track record receive better credit offers, all borrowers have a

strong incentive to sustain their reputation by repaying their debt

(Orebiyi, 2010).

The bank of Uganda in 1999 issued a policy statement where all

financial institutions are categorized in four tiers namely

Commercial banks, Credit institutions, Micro -finance deposit

taking institutions and institutions involved in micro-finance

business that do not qualify for tier 1,2,or 3 (Micro Finance Forum,

2001). By identifying the different tiers, Bank of Uganda

recognized Micro-finance Institutions as one of the key players in

Uganda Finance Sector. It is therefore important to investigate and

learn more about Commercial banks and Micro-finance institutions

success and failure in the area of credit delivery. Commercial banks

5

are broadly defined as Banks that are engaged in keeping, lending

money and providing other monetary services to the commercial

sector. The commercial sector includes delivery of services, trade,

and small and light industry (Dennizer, 2009). Commercial banks

focus on profits in providing services to the commercial sector.

Uganda cooperative Alliance report (2004) says that Commercial

Banks reduce on poverty through provision of loans to small and

medium businesses. In developing countries like Uganda, the

government is trying to strengthen micro finance industry in order

to pool together scarce resources which will create a significant

funding for credit facilities to business owners towards poverty

reduction. In doing this, the government has committed and dished

out five million shillings to each sampled Commercial Banks to

support and help the poor peoples start small projects though some

of these financial institutions tend to set stringent policies such

high interest rates, high value of the security needed restricting

the number of beneficiaries and added that as towns expand,

Commercial Banks also increase to provide their services to the

people in the area

In Ibanda Town Council, many traders operate their businesses with

the help of Commercial Banks who provide them with financial

services especially bank credits. But it is also embarrassing that

most of the businesses do seem not to be expanding. According to the

study done by Kazooba (2006) in the towns of Mbarara and Bushenyi

found out that once businesses are established they confront

competition from other businesses in their similar or related

businesses. Basing on the above background, the study was therefore

6

try to establish the impact of Commercial Banks lending policies on

financial performance of Small Scale Businesses in Ibanda Town.

1.2 Statement of the problem

With improved credit risk assessment afforded by the credit bureau,

new products including medium and long-term financing like business

credits and mortgages have been introduced by most Commercial Banks

in Ibanda Town. The interest rates in Commercial Banks which were in

the 10% to 20% range before 2010 have been increased to 28%. Despite

of numerous commercial banks in Ibanda Town, more than 50 percent of

selected Small Scale Enterprise owners fight uphill battle from the

start and fail in the first five years (Kazooba, 2006). It is

therefore not clear whether bank credits accessed by small scale

enterprise owners are useful to their businesses given the ever

increasing rate of business failure. Therefore, the study was to

establish relationship between Commercial Banks lending policies

and financial performance of Small Scale Businesses in Ibanda

District using a case of selected small scale businesses in Ibanda

Town Council.

1.3 Purpose of the study

The purpose of the study was to determine the relationship between

commercial banks lending policies and financial performance of

small scale businesses in Ibanda Town

1.4 Objectives

i. To examine the lending policies used in Commercial Banks by Small

Scale Businesses.

ii. To establish the factors influencing the financial performance

of Small Scale Businesses .

7

iii. To examine the relationship between Commercial Banks lending

policies and financial performance of small scale businesses.

1.5 The research questions of the study

i. What are lending policies used in commercial banks by Small Scale

Businesses?

ii. What are the factors influencing the financial performance of

Small Scale Businesses?

iii. What is the relationship between Commercial Banks lending

policies and financial performance of Small Scale Businesses?

1.6 Scope of the study

1.6.1 Geographical Scope

This research was carried out at small scale businesses in Ibanda

Town Council. Ibanda Town Council is found in Ibanda District, South

Western Uganda. The Town Council is composed of differing selected

small scale businesses and such businesses were not performing

financially very well despite the commercial banks in the area with

different lending policies.

1.6.2 Time Scope

The study considered information relating to the period of four

years that is 2011-2015. The time of three years was considered as

there was decline in financial performance of the small scale

businesses as the researcher is attaching it to the lending policies

in commercial bank around the study area.

1.6.3 Subject Scope

The study was interested in information related to examine the

lending policies used in Commercial Banks by Small Scale

8

Businesses, t o establish the factors influencing the financial

performance of Small Scale Businesses and to examine the

relationship between Commercial Banks lending policies and

financial performance of selected small scale businesses.

1.7 Significance of the study

The research may benefit the Commercial Banks since it has

highlighted areas that may badly need adjustments in lending

policies and the ability for improved Small Scale Business’s

financial performance.

The study may further act as a material for scholars and other

academicians interested in studying the same study variables of

lending policy in commercial banks and financial performance of

Small Scale Businesses in Ibanda Town since the study has provided

information in relation to such.

In addition, the study may help the researcher to acquire her

bachelor’s in Business Administration of Bishop Stuart University

since it is one of the requirements for the University program.

9

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter focuses on the review of the related literature in line

with the study variables. The researcher obtained theoretical

written data by different authors about the variables under the

study.

2.1 Historical perspective of lending policy

Apollo (2004) argued that every lending policy impulse (e.g. an

interest rate change by the central bank, change in the monetary

base resulting from changes in the minimum reserve rate) has a

lagged impact on the economy.  Moreover, it is uncertain how exactly

lending policy impulses are transmitted to the price level or how

real variables develop in the short and medium term.  The difficulty

of the analysis is to adjust the effects of the individual channels

for external factors.  The effect of such external factors for

instance supply and demand shocks, technical progress or structural

change may be superimposed on the effect of central bank measures,

and it is difficult to isolate monetary policy effects on various

variables for analytical purposes.  Moreover, the time lag in the

reaction of the real sector to monetary measures renders the

analysis more difficult hence monetary policy must be forward

looking. Interest rate channel which is the major lending policy has

been seen as an expansion of the money supply by the central bank

feeds through to a reduction of short-term market rates through this

channel.  As a result, the real interest rate and capital costs

decline, raising investment.  Additionally, consumers save less and

10

opt for current consumption over future consumption.  This, in turn,

causes demand to strengthen.  However, this stepped-up demand may

cause prices and wages to rise if goods and labor markets are fully

utilized.

2.2 Lending policies used in commercial banks

Lending Terms: The terms of the credit deal with the loan period,

cost of money and loan size. They are mainly credit terms that

stipulates the conditions under which credit is given based on the

borrowing charges related to the loan (pandey, 1995). He also

emphasized that the charge of using money borrowed on credit for a

given stipulated short period with high interest rates hinders SMEs

access to financial services like Uganda.

Cost of money : Whited (2004) in his contemporary study on rural

finance argued that the cost of money is intended to compensate a

contractor for the capital cost of employing certain facilities in

the performance of contract. The cost of money charged by lending

institutions includes operating costs, administrative costs, and

an acceptable rate of return (levasseur, 2002). He also cited the

studies of Heath and Gibson (1991) that cost of money may be fixed

for the term of the loan, or adjusted to reflect changing market

conditions. Adams et al (1984) also concurred with the above authors

that the cost of money is looked at on the SMEs borrowing side as the

charges paid for borrowing from financial institutions and mention

four main components of cost of money are reflected as cost of funds,

loan loss expenses, operating expenses, and profits. Indeed, they

added that MFIs charge high cost of money to their low-income

borrowers because SMEs have a tendency not to keep proper financial

11

records and difficult to confirm their financial performance in the

near future.

Altman et al (1998) indicated that it’s labor-intensive to deliver

tiny loans to large numbers of SMEs without collateral and making

loans to low income enterprises is a risky business. He contended

that most MFIs charge high cost of money far below rates charged by

commercial banks. Pulfer (2008) in his study of interest rate

analysis of local and international banks found that the interest

rate is 39% compared to 10% and 14% for international development

banks and banks respectively. This implied that MFIs use personal

contact as a substitute for formal collateral or computerized

credit scoring (Rosenberg, 2008). He also agreed that the costs of

making a small loan will always be higher in percentage terms than

the costs of a larger loan.

Brigit et al (2004) in his empirical review identified three types

of costs need to be covered by cost of money: the cost of funds for on-

lending, the cost of risk (loan loss), and administrative costs

(identifying and screening clients, processing loan applications,

disbursing loans, collecting repayments, and following up on non-

repayment). Rosenberg (2008) in his microfinance analysis further

showed that MFI clientele are varied and consist of high risk

borrowers due to the nature of their core business. He also found

that some are concerned with access to financial services and

willingness to pay the cost of the loan borrowed because it’s only

alternative available source of finance. He also added that the

global average interest rate is about 35 percent, but the average in

Mexico is above 60 percent and in Sri Lanka is below 20 percent.

Small loan sizes are the most commonly cited reason why microcredit

12

rates are higher than normal bank rates because microcredit is a

“high-touch” business, and MFIs have to process thousands of tiny

transactions. Rosenberg (2008) concluded that there is strong

empirical evidence that operating costs are much higher for tiny

micro loans than for normal bank loans and therefore, Some few MFIs

had charged their borrowers cost of money that seem considerably

higher than what would make sense

Loan size: Rosenberg (2009) in his study findings supported

financial institutions that prefer large loans because the

administrative costs decrease proportionately to the size of the

loan. Kalema (2008) conducted a research study on access to

financial services in Uganda and found that the average loan size

was under Ugx300, 000 ($180) and loan terms are generally between

one and twelve months. Because of the small size of SMEs combined

with small loans means that lending rates are typically in excess of

30 percent to reduce the risks involved in unsecured lending.

On the contrary, IMF financial sector assessment (2003) reported

that this is unattractive means of financing SMEs activities. The

report further continued that most low income SMEs are better

advised to defer borrowing until they have the necessary finance

rather to borrow at such rates. Various studies also indicated that

most SMEs consider small loans amount to meet immediate needs

because SMEs don’t capacity or experience to handle large sums of

money in their businesses and even can lead to business failure.

Loans are given depending on your savings with financial

institution and the SMEs previous loan repayment. Most of these

13

loans are lent out depending on the collection convenience, payment

and flexibility with experienced clients.

Commercial banks tend to meet their clients working capital by

giving short term loans and limit long term loans. Financial

institutions cite weak SME management and governance, unreliable

financial information on SME operations, lack of medium- and long-

term resources for typical SME lending, and complicated procedures

to register and seize collateral as the main constraints to funding

SMEs with large loans amount (Rennie and Laurens, 2008)

Loan period

The IMF report (2007) attributes that lending is predominantly

short term and low to SMES due to poor credit discipline,

contractual enforcement problems, and scarcity of projects and lack

of collateral. Despite SMEs’ perceptions of excessively high

interest rates, the cost of finance is found to compare favorably

with and generally the issue relates to the amount (monetary value)

of the installment as opposed to the cost of credit. When

installments are high (due to inadequate loan maturities or

inadequate product structure) the cost of money is perceived to be

high (Rennie and Laurens, 2008). Low installment amounts represent

a much higher cost of money, are perceived as being less expensive.

The maturity of loans is also a serious issue, as Uganda seems to

have the shortest average loan maturity (12 months) among

comparable countries such as Kenya, Brazil, China and India (CGAP

report, 2009). The MFIs short term loans are not conducive for rural

farmers who rely on climatic conditions to pay the loans and long

term loans are not available to cater for animal production which

are costly and risky. The financial institutions credit terms are

14

recognized to meet SMEs working capital not for asset accumulation

in the long run and limited access to loans of not more than 12 months

(Kalema, 2008).

Wellen and Mulder (2008) assert that shorter term credits will

prevail. This direct impact on SMEs will be noted when attracting

new funding; loan period will possibly be shorter as the MFIs might

be afraid that they are not able to pay their own loan because they

are less sure that they will get their outstanding credits back.

They concluded that some MFIs require borrowers to make compulsory

deposits before they can receive a loan; borrowers typically must

maintain these deposits during the life of the loan. The costs of

money borrowers receive on these deposits are well below the rates

borrowers pay on their loans. The effect of such deposit

requirements is to reduce the net additional cash borrowers realize

from their loans and, thus, to increase the effective cost of the

loan to them. About one-third of the sustainable MFIs reporting to

microfinance information exchange for 2006 required such savings

deposits, and on average these MFIs are smaller than the ones that do

not use compulsory savings (Rosenberg & Gonzalez, 2009).

Commercial bank lending sets the objectives, standards, and

parameters that guide loan officers in granting loans and

management of the loan portfolio. The lending policy provides a

framework within which the credit risk arising from lending will be

originated and managed in order to minimize the risk of financial

loss (CERUDEB Credit policy and Procedures Manual, 2005). Bank

lending encompasses decisions made in advance and adhered to, so as

to ensure operational consistency. Gitman (1992) identified three

important aspects in a sound lending which include: credit terms,

15

credit standards, and collection procedures. In addition, credit is

usually granted following the bank’s stated guidelines namely;

interest rate, credit limit, and loan period (Apegu, 2005).Lending

policy provides the Board of Directors, regulators, internal and

external auditors with a basis for evaluating bank’s credit

management performance.

Credit terms are stipulations under which credit is granted. The

stipulations involve interest rate, credit limit, and loan period

(Apegu, 2005). Brownbridge (2002) emphasized that loan term is one

of the most important variables in lending. The loan term affects

the repayment schedule of the customer, revenue of the financial

institution, financing costs for the client and the ultimate

sustainability of the use of the loan. Since the banks are not able

to control all the actions of the borrowers due to imperfect and

costly information, they formulate terms of the loan contract that

include; Interest Rate, Credit Limits and Loan Period to induce the

borrowers to take action in the interest of the bank and to attract

low risk borrowers.

Credit decisions should be made on rational basis and according to

the bank’s policies and procedures in as far as lending is concerned

(Van Greuning, 2003). Credit standards provide guidelines for

determining whether to extend credit to a customer or not, and how

much credit to be extended (Carson & Gilmore, 1998). A bank

following loose credit standards tends to attract borrowers using

very liberal quality standards and credit is granted even to those

borrowers whose creditworthiness is not fully known. In contrast, a

bank following stringent credit standards lends on a highly

selective basis only to those borrowers who have proven credit

16

worthiness. It therefore follows that, the more relaxed the credit

standards are, the easier the access to agricultural credit and vise

visa. According to Greengard (2003), in order to do proper credit

analysis or estimate the probability of default risk, information

on the (5) Cs should be considered.

According to Pavela (2002) commercial banks deliver out loans to

their customers depending on interest factors. He pointed out the

view that their aim is to gain profits though earning an interest

rate. Without interest rates, commercial banks would not deliver

out loans at to their customers. Many commercial banks deliver out

loans to their customers as their financial policy depending on

levels of interest rates. Statistics show that about 76% of the

financial institutions deliver loans to their customers

considering a gain of interest as the main priority factor.

According to JS Chardan (2002) in his book entitled principles and

practices of management he points out the view that financial

institutions deliver loans to their customers so as to attract and

win them. He further points out the view that financial institutions

like customers to remain in their respective banks. Accordingly

this has encouraged the rapid growth and expansion of most

Commercial banks in the whole world in both developing and developed

economies. Therefore, attract and win of customers has been a factor

behind the delivering of loans by financial institutions to their

customers as a lending policy.

2.3 Factors influencing the financial performance of Small Scale

Businesses

17

Some writers believe that the performance of SMEs is measured by

many factors such as internal and external to the SMEs themselves

(Kotey and Meredith, 1997; Pearce and Robinson, 2002). They cited

sales turnover, caliber of management and ability to meet daily

obligations of the business. However, there are few studies on

performance measurement of the SMEs and there is only small number

of researches in developing countries (Bjerke, 2000). In the last

two decades, it seems that researches on SMEs focus on government

role and policy in developing SMEs (Ainuddin and Saodah, 2001).

In year 2000, Hashim (2000) used strategic model approach to explain

the financial performance measurement of SMEs. Craig and King

(1988) also formulated a model to find out about SME performance.

Financial measures are typically derived from or directly related

to the chart of accounts and found in a company’s profit and loss

statement or balance sheet, such as inventory levels or cash on

hand. Kaplan & Norton (1996:21) remarked that historically, the

measurement system for business has been financial. A few centuries

later, during the age of exploration, the activities of global

trading companies were measured and monitored by accountants’

double entry books of accounts (Kaplan & Norton, 1996:21).

Moreover, in the information age environment, the early twentieth

century, enterprises understood the importance of reporting and

evaluating of business unit performances, in order to find new

capabilities for competitive success (Olve, et al. 2001:13). In the

last decade there has been a growing criticism of traditional

measurement control systems as being too narrowly focused on

financial measures. The reason is that conditions today are no

longer the same as when traditional measurement systems emerged. In

18

addition, markets fluctuate, customers appear ever more demanding,

and investors are requiring more transparent reporting (Ashton,

2001:80). The increasing interest has been driven by the increased

rate of change in the business environment in both the private and

public sectors. This rapid change has led to general

dissatisfaction with traditional issues of performance

measurement systems, identifying their shortcomings and arguing

for change (Neely, 1998:3).

According to Zairi (1996:390) “today’s management accounting

information, driven by procedures and cycles of the organizations

financial reporting system, is too late, too aggregated, and too

distorted to be relevant for managers planning and control

decision. Managers need clear, timely and relevant signals from

their internal information systems to understand root causes or

problems to initiate corrective action and to support decisions at

all levels of the organization”. Financial measures showed the

effect of decisions already taken (Olve, et al. 2001:13).

Therefore, they also agreed that management control must take

account of non-financial factors and be broadened to include

strategic information, which will indicate whether or not the

business will continue to be competitive.

Mohinder & Anastasia (2007) also qualify multiple organizational

financial performances like profit, cash flow and assets.

Furthermore, Fabbri and Klapper (2008) added that profitability has

been most widely used measure of financial performance of SMEs.

Profitability is the excess revenue over expenses, which can be seen

by the ratios like gross profit margin and pre-tax profit margin.

They further argued that profits have got a lot of shortcomings as a

19

measure of performance. Some economist and accountants view

profitability differently and has received a lot of criticisms from

many studies as the reasons are given below. From all the above

definitions, it can be said that performance is the ability of the

firm to meet both its long term and short term goals efficiently and

effectively. The understanding of the important performance

measurements of SMEs will help toward better planning to cater for

the needs of the SMEs.

Irwin (2001) cited that many people find it difficult to look at a

profit and loss statement or a balance sheet and derive a full

picture. As result, ratios are often used to interpret accounts.

They indicate how a business is performing and provide indications

of trends and patterns. They also supported that it can be compared

to the same ratios in previous years’ accounts and the accounts of

other business operating in a similar environment. It can be noted

that therefore, due to the nature of SMEs, it’s difficult to measure

the levels of profitability as they rarely keep proper books of

accounts, seasonality of business operations, sensitivity of

business information, and analysis and valuation problems

(barrow(1997), Lisa (1999), liedholm (1991) and blank (2002).

Measurement of financial performance by ratio analysis helps to

identify enterprises strength and weaknesses by detecting

financial anomalies and focusing attention on issues of enterprise

importance. Ratio analysis is a well established tool to evaluate an

enterprise’s profitability, liquidity and financial stability

(Glynn et al, 2003). Financial ratios are normally used in

interpreting financial statements and comparison of other

company’s results in the similar industries or different industries

20

in order to gauge the performance of the companies sector over a

given period of analysis.

Dobbins et al (2002) also argued that it can provide a predictive

past and present performance of the company and able to point out the

weak areas of the company. Financial performance can be measured

using return on equity, solvency, sales growth, liquidity and

profitability (lavasseur, 2002). According to Blank (2002), sales

growth is the good measure of the SMEs financial performance because

we are able to look at the sales turnover and the market share in the

market, increase in profits and customer base maintained for a

company to breakeven. He further agrees that the ability of the SMEs

to meet all their financial obligations, asset accumulation and

number of years in business is the good measure of financial

performance.

Other scholars argued that repayment capacity of SMEs measures

shows the degree to which cash generated from the enterprise and

other sources will be sufficient to pay principal and interest

payments as they come due. For the purpose of this research,

performance will be looked at in terms of solvency, financial

efficiency and liquidity. Solvency gauges the business’s ability to

pay all financial obligations if all assets are sold or continue

viable operations after financial adversity and measured by debt to

asset ratio, debt to equity ratio and equity to asset ratio (Dobbins

et al, 2000). The higher the long term solvency, the more

substantial the buffer for difficult times. According to Williams

(2004) asserts that having a debt-asset ratio of zero is not

necessarily a desirable goal either. It should be earning higher

return on equity than debt. However, a high debt-asset level

21

involves a higher degree of financial risk. While higher levels will

require a higher return on assets to service the debt.

Rosenberg (2008) stated that liquidity of the SMEs should be able to

meet short- term obligations of the business or a company’s ability

to pay current liabilities. (Boehlje et al, 1999) also supported

that its ability of a business to meet financial obligations as they

come due in the short term, without disrupting the normal operations

of the business and its measured by current ratio which shows basic

indicator of short-term debt servicing and/or cash flow capacity

and the extent to which current assets, when liquidated, will cover

current obligations. They further argued that SMEs face financial

constraints due to insufficient cash flows to settle off the debts

incurred. MFIs amount of loans in default as a percentage of the

total loan portfolio increased by four percent to 12 percent in the

first six months of 2009, according to the central bank of Uganda

report.

The National Bank of Uganda (NBU) reported that increase in the

delinquency rate is due to the failure of loan holders especially

SMEs to honour their debt obligations, hence a significant loss to

MFIs. It can be measured by current ratio by dividing current assets

over current liabilities and quick ratio by dividing Cash plus

debtors over current liabilities.

According to Kalema (2008) SMEs do not have the quality of the asset

that makes it easily convertible into cash with little or no risk of

loss and failure to meet the desirable liquidity range acceptable

worldwide. Financial efficiency measures the intensity with which a

business uses its assets to generate gross revenues and the

22

effectiveness of production, purchasing, product pricing,

financing decisions (Dobbins et al, 2000). The management of assets

and liabilities is particularly important in the case of small and

medium-sized companies. Most of these companies’ assets are in the

form of current assets. Also, current liabilities are one of their

main sources of external finance in view of their difficulties in

obtaining funding in the long-term capital markets (Petersen and

Rajan, 1997) and the financing constraints that they face (Whited,

1992; Fazzari and Petersen, 1993).

In this respect, Elliehausen and Woken (1993), Petersen and Rajan

(1997) and Danielson and Scott (2000) show that small and medium-

sized firms use vendor financing when they have run out of debt. The

assets are measured by stock turns, debtors’ turns and sales to

assets and efficiency with which managers use assets to generate

profits. The financial strength of the company is the good asset

management and accumulation and guarantees the company future

ability of meeting business risk in term of good return on assets

(Pedro et al, 2004). Effectiveness is assessed by relating net

profit to the asset utilized in the generation of profits. From the

owner’s point of view, profitability means the returns achieved,

through efforts of management, on the funds invested by the owners

(helfer, 1991).

According to Epstein Marc et al, (2001) small businesses often face

a variety of problems related to their size. A frequent cause of

bankruptcy is undercapitalization. This is often a result of poor

planning rather than economic conditions. It is a common rule of

thumb that the entrepreneurs should have access to a sum of money at

least equal to the projected revenue for the first year of business

23

in addition to his anticipated expenses. For example, if the

prospective owner thinks that he will generate $100,000 in revenues

in the first year with $150,000 in start up expenses, then he should

have no less than $250,000 available. Failure to provide this level

of funding for the company could leave the owner liable for all of

the company’s debt should he end up in bankruptcy court, under the

theory of undercapitalization.

However Argyris, Chris (1999) social media has proven to be very

useful in gaining additional exposure for many small businesses.

Many small business owners use face book as a way to reach out to

their loyal customers to give them news about specials of the day or

special coupons and generate repeat business. The relational nature

of social media, along with its immediacy and 24 hour presence lend

intimacy to the relationship small businesses can have with their

customers, while making it more efficient for them to communicate

with greater numbers.

In addition to the social networking sites, blogs have become a

highly effective way for small businesses to position themselves as

experts on issues that are important to their customers. This can be

done with a proprietary blog and/or by using a backlink strategy

wherein the marketer comments on other blogs and leaves a link to the

small business’ own Web site. A solid public relations strategy that

utilizes speaking engagements, press releases, feature stories,

events and sponsorships can also be a very cost effective way to

build a loyal following for a small business (Kahneman, Daniel et

al, 2000).

24

Small businesses in Mexico often face a variety of problems related

to their size. A frequent cause of bankruptcy is

undercapitalization . This is often a result of poor planning rather

than economic conditions it is common rule of thumb that the

entrepreneur should have access to a sum of money at least equal to

the projected revenue for the first year of business in addition to

his anticipated expenses (Gerhard Fink, 2005). For example, if the

prospective owner thinks that he will generate $100,000 in revenues

in the first year with $150,000 in start-up expenses, then he should

have no less than $250,000 available. Failure to provide this level

of funding for the company could leave the owner liable for all of

the company's debt should he end up in bankruptcy court , under the

theory of undercapitalization (Charreaux, 1996).

In the United States , some of the largest concerns of small business

owners are insurance costs (such as liability and health ), rising

energy costs and taxes . In the United Kingdom and Australia , small

business owners tend to be more concerned with excessive

governmental red tape (Ken Giles and Nicki Hedge, 1998). Building

trust with new customers can be a difficult task for a new and

establishing business. Some organizations like the Better Business

Bureau and the International Charter now offer Small Business

Certification , which certifies the quality of the services and

goods produced and can encourage new and larger customers. These

services may require a few hours of work, but a certification may

reassure potential customers. However, the most effective way to

earn trust in Uganda is through customer referrals ( Brunner, Allan.

et al, 2004).

25

2.4. Relationship between Commercial Banks lending policies and

financial performance of selected Small Scale Businesses.

Cost of money and financial performance

Gonzalez and Sushma (2009) argued that today, there’s widespread

agreement that most MFIs should operate sustainably, keeping their

costs as low as possible and charging interest rates and fees high

enough to cover those costs. Inability to access finance may be one

of the reasons why we do not see a robust correlation between SME

prevalence and economic growth and financial constraints are

particularly preventing small firms from reaching their growth

potential in terms of financial performance (Demirgüç, 2005). The

authors further asserts that in most situations SMEs ought to pursue

financial sustainability by being as efficient as they can but MFIs

charge high cost of money to cover the costs of their lending and

other services.

Rosenberg (2009) concurs with Gonzalez and Sushma (2009) that the

cost of money charged to SMEs represents money taken out of clients’

pockets, and it is unreasonable if it not only covers the costs of

lending. Even the cost of money that only covers costs and includes

no profit can still be unreasonable if the costs are excessively

high because of avoidable inefficiencies and resulted to poor

consistence financial performance of SMEs. There is an inverse

relationship between cost of money and financial performance

because the low cost of money can lead to improved performance on

SMEs activities while high cost of money leads to stagnated

performance and SMEs businesses collapsed in the short period due to

non-existence of financial records (Demirgüç, 2005)

Loan period and financial performance

26

There are obviously many dominant factors that could influence an

MFI to give short, medium and long period for a loan to the SMEs due to

high cost of resources (funds), high competition, unclear client

credit history, security offered for loan, and loan sizes (Suran,

2009). Pulfer (2007) added that in microfinance, the type of lending

product is very short-term, low value, and to clients with no good

credit histories.

Guttman (1994) also concurred that short-term loan is from

overnight to less than one year which makes SMEs not to perform well

in their operations because of big installment payments to be

remitted back to the MFIs in the short time like weekly, fortnight

and monthly payment since the loan grows bigger in the given time

with high interest rates charge. The loan period given is not

suitable for SMEs performance in the current economic crises

(Lascelles, 2009). However, loan period of lending to SMEs can

contribute positive performance and enhances the SMEs business

operations and expansion to its survival and productivity in

achieving it goals and objectives in the short period of time.

Contrary to the above authors, prior researchers have shown that

SMEs can perform well in the shorter period as well as they are able

to maintain their financial records in order to ascertain their

financial credit worth (Suran, 2009).

Loan size and financial performance

Empirical evidence suggests that borrowers who take loans from more

than one MFI are more likely to default on their loans repayment and

drops to 50% for households with membership in three or more MFIs

because of the small loan size borrowed from one MFI (Martin et al,

2002). SMEs overstrained in their repayment capacity by several

27

loans, poor capacity to pay, misuse of loan, no adequate income

generation, un willingness to repay, utilizing for repayment of old

loans (Christoph, 2008). This has related effect on the working

capital of the business as they tend to have poor business

performance and later disrupts the management capacity of the

business owners.

Regarding the borrowers’ stress from the loans, this hinders the

financial performance of SMEs leading to non-performing loans and

diversion of the loan borrowed for a different purpose (Roodman,

2009). SMEs tend to lose commitment of repaying the loan because of

the small loan amount borrowed and there is high possibility of not

performing to the expectations of the MFIs since they also don’t

meet SMEs needs as they expect to bigger amount of loans (Cane,

2009).

While the loan size can have some impact on the SMEs performance but

it is minimal compared with those of big loan size in the same sector

and its relationship to create good performance is insignificant to

this kind of businesses (Cane, 2009). Micro enterprises activities

are short term in nature and financial assistance which tend to meet

business operational needs in the short period leading to low wealth

accumulation and financial performance of SMEs. However, the study

also showed that the rate of poor financial health state and failure

of businesses in Uganda was also one of the highest in the world,

citing that for every business that was started nearly one other

closed. Mostly, these are micro enterprises (GEM report, 2004)

Costs of money, loan period and loan size are good predictors of SMEs

performance . According to Blank (2002), costs of money, loan period

28

and loan size are good predictors of the SMEs financial performance

because we are able to look at the sales turnover, payment ability,

good returns in assets and the market share in the market, increase

in profits and customer base maintained for a company to breakeven.

He further agrees that the ability of the SMEs to meet all their

financial obligations, asset accumulation and number of years in

business is the good predictor of financial performance.

Beck, Demirguc-Kunt and Martinez Peria (2008) report that the

average share of SME lending is smaller in developing countries (16

percent of total lending) by comparison with the average share in

developed countries (22 percent of total lending) gives

contradicting predictors of SMEs performance. Banks in developing

and developed countries are primarily attracted by the potential

profitability of the SME sector and serve SMEs primarily through

dedicated SME units. Government programs are considered favorable

and prudential regulations are not perceived as burdensome. Scoring

models are used by most banks but they are just one of the inputs in

loan decision. Banks in developing countries report that

macroeconomic instability is the main obstacle to SME lending and

also affecting their performance, rather than flaws in the legal and

contractual framework.

However, the second study by Beck, Demirguc-Kunt and Martinez Peria

(2009) based on the statistical analysis of the dataset concludes

that the differences in SME lending between developing and

developed countries are actually explained by differences in the

quality of the legal and contractual environment (weaker in

developing countries). Overall, their analysis suggests that the

enabling environment is more important than firm size or bank

29

ownership in shaping bank financing to SMEs and it may not be a good

predictor of SMES performance in such areas of operation.

Lebas, Michel & Euske, K (2002), Small scale businesses are financed

through credit debt usually a poor choice, given that the interest

rate on credit is often several times the rate that would be paid on a

line of credit or bank loan . Many owners seek a bank loan in the name

of their business, however banks usually insist on a personal

guarantee by the business owner. Small Business Administration runs

several loan programs that help a small business secure loans for

improving the performance. The Small Business Administration

guarantees a portion of the loan to the issuing bank and thus

relieves the bank of some of the risk of extending the loan to a small

business. The Small Business Administration requires business

owners to pledge personal assets and sign as a personal guarantee

for the loan ( Meyer Marshall W. 2002).

Commercial Banks in Uganda have since the mid 1990s gained wide

recognition for the role they play in providing financial services

despite their high interest rate to small scale business to help in

their expansion and their contribution to poverty alleviation. This

recognition is evidenced by rapid advances by the government,

donors and practitioners in the development and implementation of

programs that support micro finance initiatives in Uganda, as well

as the dramatic expansion of the micro finance industry (MFPED,

2004).

The issue of capacity building has been on the forefront of the

efforts of the practitioners and support structures to the micro

finance industry over the past few years. With the help of micro

30

finance institutions several other small businesses in many

economies have come in to implement some of the activities of

capacity building. Business owners are trained and educated to

understand factors that constrain them to achieve performance in

their business (Katar 1999).

31

CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter of the study presents the research methodology which

includes; research design study population, sampling method,

sample size, data sources, data collection methods, study variables

and their measurements, research procedures, data analysis and

Presentation and limitations of the Study

3.1 Research design

The study used causal research design. This kind of research design

aims at generating information after the incidence has occurred.

The research design looked at the relationship between commercial

banks lending policies and financial performance of small scale

businesses in Ibanda Town Council, Ibanda District. The design

exploited both qualitative and quantitative research

methodologies. Qualitative included use of respondents’ responses

from the study while quantitative will involve use of descriptive

statistics generated with frequency tables. These approaches used

enabled the researcher to get and analyze relevant information

concerning the study variables of lending policy in commercial

banks lending policies and financial performance of small scale

businesses in Ibanda Town Council.

3.2 Area of the study

32

The area of the study was Ibanda Town Council, Ibanda District,

Which is located in S outh-western of the country (Uganda). The study

looked at the relationship commercial banks lending policies and

financial performance of small scale businesses in Ibanda Town

Council and the study respondents comprised of traders in the town

council plus representatives from commercial banks in the study

area. The researcher selected Ibanda Town Council because the

financial performance of small scale businesses in the area is not

despite the commercial banks in the area.

3.3 Study population

Study population is a complete set of individuals, cases or objects

with some common observable characteristics. The researcher

obtained information from residents in the town Council who

involved traders plus representatives from commercial banks in the

study area. The researcher involved all these categories in the

study because he assumed of them to possess the necessary study

information. However, during data collection the researcher could

not select all the people from the study area but a representative

sample size of 60 respondents (See table 1) selected from the area to

save both time and money.

3.4 Sampling method

The study used purposive and Snowball Sampling during the process of

data collection from the study respondents. The study used

purposive sampling techniques because it allows the selection of a

sample with experience and knowledge and this method used to select

traders who are small scale business owners in the area.

33

In addition, Snowball Sampling was used during the selection of

representatives from commercial banks in the area as the researcher

first selected one person that helped him in the way of getting in

touch with another respondent until the total number of the

respondents in the same category was got.

3.5 Sample size

The sample size consisted of 60 respondents from the study area and

these will be selected as in table 1

Table 1 : Showing Sample size

Category Study

population

Sample

Size

Small Scale Business owners 4,340 45

Commercial banks Employees 30 15

Total 4370 60

Source: Ibanda Town Council (2015)

The study used a sample size selected 60 respondents because as it

was enough for the study to obtain reliable information. The study

determined the sample size of the respondents by using the following

formulae.

P= F/N x n. Where:

N = Total population.

F= Number in the category

n = Total number of the respondents

P = Number of respondents in the category obtained

from the group

3.6 Data sources

34

Both primary and secondary data were the main sources of data to be

used in the study as explained below;

i) Primary source Data

Concerning the primary data method, the study used a questionnaire

and interview guide. Primary data was got by the researcher herself

from the study respondents that were selected from the study area

during data collection process. This kind of data contained

responses as per the study respondents.

ii) Secondary Data source

The researcher collected secondary information from different

sources like; text books, internet, local council reports, news

paper, magazines, and journals. This information was reviewed by

visiting places like libraries and internet cafes and this type of

information was used to supplement the collected data from

different categories of the respondents that selected from the

study area.

3.7 Data collection instruments

i) Questionnaire tool

The questionnaire tool was used and this was closed in nature and

this was self administered where the researcher was allowed to fill

the questionnaire in the study field as per respondents’ responses.

The tool used to collect information from respondents in the

category of business owners. The questionnaire method of data

collection was used because of being cheap and that the method

collects responses with minimum errors and high level of

confidentiality.

ii) An interview guide

35

An interview guide was also drafted with a set of questions that the

researcher was able to ask during an interview and this was closed. The

researcher personally recorded the provided responses as per the study

respondents during the process of carrying out an interview. The tool

used to collect information from respondents especially the

representatives from commercial banks from the study area.

3.8 Study Variables and their measurements

The study used commercial banks lending policies an independent

variable while and financial performance of small scale businesses as

a dependent variable. It is assumed that financial performance of

small scale businesses was measured by the trend of profits and sales

in such businesses over a given period of time. In addition, lending

policy in financial institutions was measured by the rate of interest

rate, pay back period, and the types of credits granted to commercial

banks clients in the area

3.9 Research procedures

The letter of introduction was obtained from BBA head of department

seeking permission to conduct the study after being directed by the

supervisor. The obtained letter was first presented to the local

authorities and later to the respondents in the study area where

research was conducted for permission to conduct the study. The

researcher after data collection analyzed it to write the study

report.

3.10 Data analysis

The collected data was edited to find out how well the answered

questionnaires were and this was done in line with consideration paid

to questionnaires and interview guide. The edited data was then coded.

36

Coding involved assigning numbers to similar questions from which

answers/responses were given unique looks to make the work easier. In

this case SPSS (Statistical Package for Social Scientists) was used to

analyze the coded data for presentation. Presentation of data involved

use of tables that were generated from the questions relevant to the

study variables. Interpretation and discussion of the results was then

done as the researcher has been able to explain the strength of the

study variables basing on the frequencies and percentages generated

3.11 Limitations of the Study

The researcher faced a problem of some respondents not providing

information for the study as information relating to the study

variables, however to this, researcher was explained to them that the

information was only for the academic purpose while making them to

understand the study variables clearly.

The study further faced with a problem of not finding all respondents

in the study area. The researcher may however arrange with them to fix

for him an appropriate time in order to collect reliable and valid

information from them for the study to be successful.

The study was expensive in terms of stationary and other associated

costs. However the researcher tried to get financial assistance from

his friends plus relatives for the study to be completed successfully

in time with the help of his supervisor.

CHAPTER FOUR

37

PRESENTATIONS, ANALYSIS AND DISCUSSIONS OF STUDY FINDINGS

4.0 Introduction

The chapter presents and discuses the findings of the study. The

findings serve to reinforce the existing knowledge proven about the

relationship between Commercial Banks lending policies and

financial performance of Small Scale Businesses in Ibanda District

using a case of Selected Small scale Businesses in Ibanda Town

Council. The chapter involves presentation, interpretation and

analysis of the data. Data is analyzed, presented and discussed

according to the research objectives and /or questions formulated.

Data was collected and analyzed in the form of tables and figures

basing on the responses got from the study respondents. The

discussion of findings has been arranged in accordance with Social

demographic characteristics of respondents’ and objectives of the

study as were formulated in chapter one of this report. The

interpretation of the data was intended to enable the researcher

make appropriate conclusions and recommendations as well as

providing appropriate areas for further studies.

4.1 Background information of the respondents

4.1.1 Gender composition of respondents

The gender of respondents was established. This aimed at knowing how

males and females as community members were actively participating

in the process of running Selected Small Medium Business in Ibanda

Town Council. The study targeted both male and female which gave a

variety of findings that were not biased making it gender sensitive

and this was established as represented by table 2.

Table 2 : Gender of the respondents

Gender Frequency PercentMale 41 68.3

38

Female 19 31.7Total 60 100.0

Source: Field Data, 2015.

The study found out as in table 2 that the majority of the

respondents were male as compared to the female. The number of male

who participated in the study was represented by 41(68.3%) as

compared to 19(31.7%) of the female respondents who were selected

from the study area. To the researcher more males than females could

have emanated from the fact that majority of small businesses are

operated by men as women tend to keep at home doing agrarian related

kind of tasks like digging, taking care of homes and other house

chores.

4.1.2 Education level the respondents

The study ascertained the education levels of respondents and four

levels were designed by the study namely; Primary, Secondary,

Master’s level and Others like Certificates Degrees and Diplomas as

presented in table 3

Table 3 : Education level the respondents

Education level Frequen

cy

Percent

Primary level 09 15.0 Secondary level 27 45.0

Master's level 09 15.0 Others ( Certificate

levels), degree levels, and

diploma)

15 25.0

Total 60 100.0 Source: Field Data, 2015.

From the study findings presented in the table 3, the majority of

respondents 27(45.0%) had acquired secondary education, followed

39

by other levels of education like certificate levels, degree

levels, and diploma with 15(25%) of the study participants, then

primary and masters level with 09(15%) of the respondents each. It

was established that the majority of respondents had attached

secondary level. This was an indication that respondents agreed

that they had failed to continue with their studies due to reasons

like fees and tuition hence ventured in Small Medium Businesses to

earn a living. Also it was noted that reasons like lack of

knowledge, age and no school fees were given as justifications by

primary level attained for having not continued with education

hence they ended up beginning Small Scale Businesses.

4.1.3 Age of the respondents

The study presented the age respondents as a background variable, to

this, various age groups were designed by the study to enable

respondents establish exactly the group they belong in, therefore

below 20 years, 20-30 years age group, 40-50 years as well as above

50 years age group as put in table 4

Table 4 : Age of the respondents

Age Frequency

Percent

Below 20 08 13.3 20 - 30 26 43.3 40 - 50 14 23.3

Above 50 12 20.0Total 60 100.0

Source: Field Data, 2015.

Table 4 above shows that most of the respondents were between the

ages of 20 -30 accounting for 26(43.3%), and theses were followed by

14(32.3%) of the respondents with their age group of 40 -50 years,

then only 12(20%) were of above 50 years of age and finally 08(13.3%)

with their age below 20. The information obtained from respondents

40

revealed that most are in the active age group of 20 -30 as this age

range comprise of people who have ambitions in doing their work

since people in such group need money to make their family survive.

They in return will be the elders of tomorrow to sensitize the

incoming generation on how to run businesses to improve on their

welfare for the economic development of Ibanda Town Council. The age

composition of respondents could thus be important in generating

varied yet relevant information on issues relationship between

lending policy in Commercial Banks and financial performance of

small scale businesses in Ibanda Town Council since all the people

said that had participated in using Commercial Banks in one way or

the other.

4.1.4 Period Spent in business in years

The study took it as a necessity to ascertain the period in years

that respondents had spent in business. It was found out that

majority of the respondents had spent in business a period between

3- 5 years as in Table 5

Table 5 : Period Spent in business in years

Period Spent Frequency Percent Less than 1

year03 5.0

1 - 3 16 26.7 3 - 5 21 35.0

Above 5 20 33.3Total 60 100.0

Source: Field Data, 2015.

From the study findings, 21(35%) of total respondents had spent 3- 5

years in running businesses, then 20(33.3%) had run their

businesses for the time above 5 years, while the least 03(5%) for

41

only less than one years. It was informed by the study that these

study participants were mostly fresh graduates who are trying to

apply their businesses skills practical despite facing a challenges

of acquiring credits from Commercial Banks due to lack of

securities.

4.1.5 Responses on if understand the term lending policies

The study inquired from respondents about their knowledge on the

term lending policies and surprisingly all study participants were

informed as indicated in the 6.

Table 6 : I understand the term lending policies

Response Male Female Frequency PercentYes 60 100.0No 00 00.0Total 41 19 60 100.0

Source: Field Data, 2015.

As illustrated in table 6, above respondents were required to

indicate whether they knew the term lending policies. Regarding the

same study variables all the study participants 60(100%) was able to

indicate that they knew the term as none of the respondents

indicated of not knowing the meaning of the term lending policy.

Qualitative findings further indicated that different lending

policies are known since many business owners use Commercial Banks

in the study area of Ibanda Town Council.

4.1.6 Small Scale Business activities in Ibanda Town Council

The researcher wished to examine the small scale business

activities in Ibanda town council .it was found out that a great deal

42

of small scale businesses are operating in Ibanda town council as

revealed by the proceeding table 7

Table 7 : Showing Small Scale Business activities in Ibanda Town Council

Variables

Agree Disagree

TotalFrequen

cy

%age Frequen

cy

%age

Hard ware52 87% 08

13.3

%

60(100

%) Clothe selling

60100.0

%

00 00.0

%

60(100

%) General merchandise

60100.0

%

00 00.0

%

60(100

%) Restaurants and pubs

60100.0

%

00 00.0

%

60(100

%) Stone quarrying

32 53% 2846.7

%

60(100

%) Food processing and

selling35 58.3 25 41.7

60(100

%) Source: Field Data 2015

Hard ware: From the study findings it is indicated that hard aware

business is one of the common small scale business activities

operated in Ibanda town council. This was justified by a majority of

respondents’ that agreed to the view that hard ware selling is among

the small scale business activities in Ibanda town council.

According to table, it is indicated that 52(87%of the respondents

agreed with the statement that hard ware selling is a major business

operated in Ibanda, while a least number of 08(13%) disagreed with

the statement that hardware selling is among the small scale

business activities operated in Ibanda town council. According to

43

the researchers’ establishment 08 of the respondents disagreed

because they were not very much familiar with all the town council

and its suburbs whereas the 52 were well versed with all corners and

had spotted hard wares around

Clothe selling: The study established whether clothe selling was

among the small scale business in Ibanda town council. A rated agree

or disagree close ended response question was administered to

respondents and results are presented in table above. According to

results, non of the respondents disagrees with the fact that clothe

selling is among the small scale businesses activities in Ibanda

town council whereas all the respondents amounting to 60(100%) as

indicated in table above agreed with the statement.

This signifies that clothe selling is a well spread business

activity in Ibanda Town Council that it was familiar to not only the

respondents but all the residents of the district it was learnt that

the business is common due to the fact it does not require a lot of

capital and skills to begin hence all sections of masses can join

explaining why it is a major business activity

General merchandise: In continuing to look at the different small

scale business activities in Ibanda Town Council the study sought of

respondents to reveal if general merchandise is among the small

scale business activities operated in Ibanda. According to

responses as presented in table above, all the respondents reported

the knowledge of existing General merchandise small scale

activities in Ibanda. To this, 60(100%) of the respondents agreed

that General merchandise is among the small scale business

activities in Ibanda Town. General merchandise involves sale of

house hold items edible and non edible ones like food stuffs, house44

equipments respectively among others. This indicates that general

merchandise is widely practiced business activity, one of the

lucrative businesses in Ibanda town.

Restaurants and pubs: The study demanded of respondents to reveal

whether restaurants and pubs are among the small scale business

activities in Ibanda town council. According to table 15 it is

indicated that all the respondents unanimously agreed that

restaurants and pubs is a widely spread business activity in Ibanda

town council. It is clear that 60(100%) of study informants cited.

However none of the respondents disagreed with the statement.

According to the researchers establishment this is because there is

high market for food and drinks given the ever increasing population

in Ibanda town council given the strategic location and booming

business. More so it is a high way to other districts like Kamwenge,

Kyegegwa, Kyenjojo among others hence travelers make stop-overs and

dine in Ibanda town council.

Stone quarrying: The study sought of respondents to identify if

stone quarrying is among the small scale business activities in

Ibanda Town. Consequently a close ended agree or disagree question

was administered to respondents like showed in table above. the

findings indicate that 32(53%) of respondents agreed that Stone

quarrying is among the small scale business activities in Ibanda

Town while 28(47%) of respondents disagreed with the statement that

Stone quarrying is among the small scale business activities in

Ibanda Town. Findings are so, implying that the small scale business

takes place in the town but also a considerable number of

individuals are unaware of its existence. This due to the fact that

45

the business is practiced in the out-skirts of the town and by few

people since it requires a lot of energy to maintain and earn a

profit

Food processing and selling: Investigation was also made on whether

food processing and selling is among the small scale business

activities in Ibanda Town Council. The study got a close range of

response scores out of the 60 respondents that the research

interacted with. Table above shows that 35(58%) of the respondents

agreed to the fact that food processing and selling is among the

small scale business activities in Ibanda Town Council while a close

number of 25(48%) disagreed with the statement that food processing

and selling is among the small scale business activities in Ibanda

Town Council. Findings indicate that is among the common small

scale business activities but some people are unaware of the fact

that packing of the food products and refining is considered food

processing, hence 25 of respondents disagreed.

4.2.0 ANALYSIS OF STUDY FINDINGS ON THE BASIS OF STUDY OBJECTIVES

4.2.1 Lending policies used in Commercial Banks in Ibanda Town

Council.

The lending policies used in Commercial Banks in Ibanda Town Council

were established using a set of questions in which the respondents

rated their views by either agreeing or disagreeing in a set of

variables. The results were as indicated in the following table 8.

46

Table 8 : Showing lending policies used in Commercial Banks in Ibanda

Town Council

Agree Disagree

TotalVariables Frequen

cy

%age Frequen

cy

%age

Interest rate 60 100% 00 00% 60(100%)

Property valuation 58 96.7% 02 3.3% 60(100%)

Repayment period 60 100% 00 00% 60(100%)

Type of loan needed 50 83.3% 10 16.7% 60(100%)

Minimum and maximum

amount of loan 51 85.0% 09 15.0%60(100%)

Source: Field Data, 2013.

Interest rate: The researcher sought to know whether Interest rate

was among the lending policies used by commercial banks in Ibanda

Town council. This was answered by the respondents’ views, as

indicated in the table 8 above as all 60(100%) were in agreement with

the same statement while none of the respondents showed

disagreement. This means that interest rate is given consideration

when Commercial Banks are giving out money to business persons.

Property valuation: The researcher also sought to understand

whether property valuation is among the lending policies used by

Commercial Banks in this area. Results from respondents’ views

indicate that 58(96 %) agreed with the statement while 02(04%)

disagreed with the administered statement. Therefore the study

findings have an implication that property of clients is often taken47

note of when assessing options on whether to give credit to the

client or not to give them

Repayment period: Investigation was also made on whether repayment

period is among the lending policies used by Commercial Banks in

Ibanda town council. The study findings indicate that all the

respondents agreed with the statement that “Repayment period is

among the lending policies used by Commercial Banks “as was reported

by 60(100%) of the respondents as none of the respondents disagreed

with the same statement that “Repayment period is among the lending

policies used by Commercial Banks “. The above is an indication that

Commercial Banks in Ibanda town council take it seriously when it

comes to negotiating on the terms of loan repayment periods. It also

implies that different repayment periods are offered to clients

according to the credit scheme they apply for, thus a respondent

accesses financial service after agreeing with the stipulated

repayment periods as per the agreement.

Type of loan needed: The researcher was further interested in

knowing whether the loan needed is among the lending policies used

by Commercial Banks in Ibanda town council. It was discovered

according to majority of respondents that the type of loan is an

issues that is laid down in the lending policies of Commercial

Banks. From respondents’ views, there were mixed reactions on

whether the type of loan is a must policy or not. It is indicated that

50(83%) of respondents agreed to the view that the type of loan

needed is among the lending policies used by Commercial Banks in

Ibanda town council, on contrary 10(17%) of the respondents

disagreed with the fact that the type of loan needed is among the

lending policies used by Commercial Banks in Ibanda town council.

48

The results above can be interpreted that commercial banks have it

as a policy to establish the type of loan a client would wish to

obtain thus it is considered a lot. Qualitative results as obtained

from the interview further confirmed this is due to the fact that

different loans have got different requirements and varying

interest rates , therefore making it necessary for the loan officers

to establish the exact type of loan a client would wish to take.

Minimum and maximum amount of loan: The study found it necessary to

look at if the minimum and maximum amount of loan is among the

policies by Commercial Banks in Ibanda town council. The study

revealed that 51(85%) of the respondents agreed with the statement

that“Minimum and Maximum amount of loan set is among the lending

policies used by Commercial Banks”. On contrary 09(15%) of the study

participants disagreed with the statement that “Minimum and Maximum

amount of loan set is among the lending policies used by financial

institutions”. The findings imply that in most cases the amount of

loan a client is considering to take is given attention to evaluate

the status of the individual and also study carefully the kind of

business one would love to invest the funds in. For instance

according to responses of loan officers while in an interview they

disclosed that a big a mount of loan raises questions of inspecting

ones business or evaluating carefully the property pledged as

collateral where as when the amount is small, it is some times not

given much attention provided the applicant beats the minimum

requirements.

49

2.3.0 Factors influencing the Financial Performance of by Small

Scale Businesses in Ibanda Town Council.

In the second objective of the study, the researcher wished to

establish the factors influencing the financial performance of

small scale businesses in Ibanda Town Council. Differing views

concerned to the same issue revealed a number of agreements and

disagreements and these were as in the following table as below.

Table 9 : Showing factors influencing the financial performance of

by small scale businesses in Ibanda Town Council.

Agree DisagreeTotalVariables Frequen

cy%age Frequen

cy%age

Poor communication 21 35.0% 39 65.0

%60(100%)

Lack of focus 12 35.0% 48 65.0

%60(100%)

High taxes 53 88.3% 07 11.7

%60(100%)

Electricity supply 12 20.0% 48 80.0

%60(100%)

High interest 12 20.0% 48 80.0

%60(100%)

Poor Roads 24 40.0%

36 60% 60(100%)

High value of Security 47 78.3% 13 21.7

%60(100%)

Unskilled employees 47 78.3% 13 21.7

%60(100%)

Rent 16 26.7% 44 73.3

%60(100%)

Lack of trade credits 43 71.7% 17 28.3

%60(100%)

Customer Care 18 30.0%

42 70% 60(100%)

Low repayment period 36 60.0%

24 40% 60(100%)

Source: Field Data, 2015

50

Poor communication: The study findings also indicated that poor

communication among business people does not necessary lead to loss

of profits in Ibanda Town Council as reflected by 39(65%) of the

covered study participants who were in a disagreement with the

statement as illustrated in table above com-pared to the least

number of the respondents who showed an agreement with the same

study results. However, it should be noted that communication of the

business persons especially in the process of performing business

dealing can attract more customers leading to more sales in the

business that improves on the profitability level. In addition to

the descriptive results the views of the respondents, qualitative

results also confirmed that most of the businesses persons do not

use business language in dealing with their customers that was also

affecting the financial performance of small business enterprises

in Ibanda Town Council.

Lack of focus: As in the table above, respondents’ views about the

question whether because of lack of focus, sales in businesses have

been reducing in Ibanda Town Council, revealed that majority of the

study respondents 48(65%) were in a disagreement with the statement

while the least 12(35%) of the respondents agreed with the statement

that “because of lack of focus, sales in businesses have been

reducing in Ibanda Town Council”. The above study findings can be

interpreted that most of the small scale business owners in Ibanda

Town Council are focused in the process of running their businesses

since majority of the study participant revealed that lack of focus

is not greatly affecting people in running their businesses that

could be anticipated to be reducing sales in the Town Council among

businesses.

51

High taxes: According to the study results as illustrated in table

above, high taxes charged by the tax authorities is among the common

factors affecting small scale businesses performance. It was

revealed by majority of the respondents amounting 53(88.3%) that

because of high taxes, retained earnings of most businesses in

Ibanda Town Council have been reducing as compared to the few

respondents 07(11.7%) who reflected that because of high taxes,

retained earnings of most businesses in Ibanda Town Council have

been reducing.

Small scale businesses in Ibanda Town Council are required to pay

taxes charged on them by tax authorities and this tax was reducing on

the amount of money made from businesses by the business owners that

could have been used for further business expand. As revealed from

the study findings, one can conclude that taxes are among the

factors affecting small scale businesses in Ibanda Town Council.

Electricity supply: The researcher also investigated whether

because of electricity supply; sales in most businesses have been

reduced in Ibanda Town Council. Respondents’ views revealed the

following results: It was found out from respondents that

electricity supply is not commonly affecting sales of small scale

businesses in Ibanda Town Council and this was indicated by 48(80%)

who disagreed as compared to the least number of the study

respondents totaling to 12(20%) who were in the agreement with the

same statement. The above results indicated that electricity supply

is not a common factor affecting most of the small scale businesses

in Ibanda Town Council. This is so because most of the businesses in

Ibanda Town Council do not commonly depend of power supply despite

of some few businesses enterprises like stationary, and computer in

52

addition to restaurants where power is one of the influencing

factors that would make the business to perform well.

High interest: Results in the table above show that despite the high

interest rate in Commercial Banks, businesses in Ibanda Town

Council are not closing and this was reflected by 48(80%) of the

study participants who were in agreement with the statement that

“Due to high interest rate in Commercial Banks, businesses in Ibanda

Town Council have been closing”, and this was followed by only

12(20%) respondents who disagreed with the same set question.

Further study findings also showed that some businesses in Ibanda

Town Council are closing due to the failure of paying the Commercial

Banks credits. It was revealed by the study respondents that

business owners in the study area are found of not using credits from

the Commercial Banks in proper ways that for the business purposes

but divert the credits to their personnel needs.

Poor Roads: The study demanded of respondents to reveal whether due

to poor roads, businesses in Ibanda Town Council were lacking what

to sell. According to table it is indicated that majority of the

respondents 36(60%) showed disagreement with the statement while

the least 24(40%) of the respondents indicated agreements that due

to poor roads, businesses in Ibanda Town Council have been lacking

what to sell. It was revealed by the respondents that products sold

by most of the business shops come from near by towns like Mbarara

Town making products to be sold available since the road from

Mbarara to Ibanda is good hence showed a disagreement with the

statement. According to the researcher’s establishment, some

businesses especially those selling agricultural products get what

to sell deep in villages that make it hard to research Ibanda Town

53

Council hence some of the respondents were able to indicated

agreements that “Due to poor roads, businesses in Ibanda Town

Council have been lacking what to sell”.

High value of Security: The study sought of respondents to identify

if due to high security value needed by Commercial Banks before

giving loans, most businesses have been lack enough capital in

Ibanda Town Council. Consequently a close ended agree or disagree

question was administered to respondents as shown in table above.

The findings indicate that majority 47(78.3%) of respondents agreed

that due to high security value needed by financial institutions

before giving loans, most businesses have been lack enough capital

in Ibanda Town Council while 13(21.7%) of respondents disagreed

with the same statement during data collection process.

The above study results could mean that Commercial Banks in Ibanda

Town Council demand securities before providing credits to business

customers that was affecting the performance of businesses since

the value of the security needed is always higher than the loan

value. This could be due to the fact that Commercial Banks should use

loans portfolios that will help then to recover their credits in

time.

Unskilled employees: From the study findings it is indicated in the

above table, the researcher sought of understanding if employing

unskilled employees in small scale businesses in Ibanda Town

Council were shouting down. This was justified by a majority

47(78.3%)of respondents’ that agreed to the view unlike the few

13(21.7%) of the respondents who showed disagreements that because

of employing unskilled employees, small scale businesses in Ibanda

Town Council were not shouting down. Many of the small scale

54

businesses in Ibanda Town Council are managed by people who have

studied up to both secondary and primary level that lack business

knowledge like book keeping, cost controls techniques knowledge

that affect financial performance of their businesses.

Rent: The study established whether due to high rent, most shops

were not growing in Ibanda Town Council. A rated agree or disagree

close ended response question was administered to respondents and

results are presented in table above. According to results, more of

the respondents 44(73.3%) disagrees with the fact that “due to high

rent, most shops have not been growing in Ibanda Town Council”

whereas least of respondents amounting to 16(26.7%) as indicated in

table agreed with the statement. This signifies that despite the

problem of rent affecting most of businesses organizations, some of

the small scale businesses in Ibanda Town Council are growing as was

revealed by the study respondents. Results from the study during an

interview indicated that some of the small scale businesses in

Ibanda Town Council sub-rent to reduce on the fraction

Lack of trade credits: Investigation was also made on whether lack

of trade credits was affecting most businesses in Ibanda Town

Council in terms of growth. The study got informed that trade

credits was affecting businesses owners in Ibanda Town Council.

Table 27 above shows that 43(71.7%) of the respondents agreed to the

fact that due to lack of trade credits, most businesses in Ibanda

Town Council do not grow while a close number of 17(28.3%) disagreed

with the statement that due to lack of trade credits, most

businesses in Ibanda Town Council do not grow. Findings indicate

that most businesses in Ibanda Town Council do not purchase credit

commodities to be paid later after they have closed the sale.

55

Customer Care: Furthermore, in trying establishing the factors

influencing the financial performance of small scale businesses in

Ibanda Town Council, the study sought of respondents to reveal if

poor customer care has led to loss of profits in small scale

businesses in Ibanda Town Council. According to responses as

presented in table above, more of the respondents showed

disagreement with the same statement 42(70%) of the covered

respondents while the remaining 18(30%) revealed that poor

customer care has led to loss of profits in small scale businesses in

Ibanda Town Council. This indicates that customer care is

considered by businesses in Ibanda Town Council as most of the study

participants were able to indicate that customer care was not among

the major factors affecting the financial performance of small

scale businesses in Ibanda Town Council.

Low repayment period: From the study findings it is indicated that

due to low repayment period in most Commercial Banks, most

businesses in Ibanda Town Council are failing. This was justified by

a majority of respondents’ that agreed to the view that due to low

repayment period in most Commercial Banks, most businesses in

Ibanda Town Council are failing. According to table above, it is

indicated that 36(60%) of the respondents agreed with the same

statement that while the minority number 24(30%) of the study

participants disagreed with the statement that due to low repayment

period in most Commercial Banks, most businesses in Ibanda Town

Council are failing. According to the researcher’s establishment,

36(60%) of the respondents agreed with statement because most

56

financial institutions in the study area charge high interest rate

coupled by low repayment period for the loans acquired by their

customers.

4.4 The relationship between commercial Banks lending policies and

financial performance of small scale businesses in Ibanda Town

Council

According to the study objective three, the relationship between

commercial lending policies and financial performance of small

scale businesses in Ibanda Town Council was sought to be examined.

Different views regarding the relationship between the two study

variables were revealed by the study respondents as shown in tables

under;

Table 10 : Showing the relationship between commercial banks lending

policies and financial performance of small scale businesses in

Ibanda Town Council

Variables

Agree Disagree

TotalFrequen

cy

%age Frequen

cy

%age

High interest rates32

53.3

%28

46.7

%

60(100

%) Low repayment period

3355.0

%

27 45% 60(100

%) High value of security 39 65.0 21 35.0 60(100

57

needed % % %)

Poor relationship with

commercial banks. 4880.0

%

12 20% 60(100

%)

Amount given16

26.7

%44

73.3

%

60(100

%) Source: Field Data, 2015

High interest rates: The study established whether due to high

interest rates in Commercial Banks, profits have reduced. A rated

agree or disagree close ended response question was administered to

respondents and results are presented in table above. According to

results, more of the respondents 32(53.3%) agreed with the fact that

“due to high interest rates in financial institutions, profits have

reduced” whereas least of respondents amounting 28(46.7%) as

indicated in table disagreed with the statement.

The above study findings could mean that due to Commercial Banks

interest rates, small scale businesses are affected negatively

since most of the study participants showed a reduction in profits

due to Commercial Banks interest rates. Therefore, one can come up

with a conclusion that there is a relationship between Commercial

Banks lending policies and financial performance of small scale

businesses in Ibanda Town Council.

Low repayment period: Investigation was also made on whether due to

low repayment period in Commercial Banks, small scale business

owners were making their businesses to growing in stock in Ibanda

Town Council. The study got a close range of response scores out of

the 60 respondents that the researcher interacted with. Table above

shows that 33(55%) of the respondents agreed while only 27(45%)

58

disagreed with the statement that “Due to low repayment period in

Commercial Banks, my business has not been growing in stock”.

Findings indicate that Commercial Banks do not give long period

business owners to repay loans provided to them. Results from the

study during an interview with the respondents indicated that the

common loan period granted by Commercial Banks ranges from 3 months

to 6 months. This repayment period for the loan is very short for

business owners to have accumulated the money to repay from the

business.

High value of security needed: The study also required respondents

to establish if due to high value of security needed by Commercial

Banks; businesses in Ibanda town Council were not selling all the

products needed by the customers. Consequently a close ended agree

or disagree question was administered to respondents like showed in

table above, the findings indicate that 39(65%) of respondents

agreed unlike the least number of the study respondents who showed

disagreement with the same study respondents that “due to high value

of security needed by Commercial Banks, my business has not been

selling all the products needed by the customers”.

The above study results indicated that most small scale business

owners in Ibanda district do not have what to put into the bank as

security and this was affecting the performance of their

businesses. This is so because, many people can not get credits from

commercial banks to expand their businesses in relation to selling

all products customers could need from the shops.

Poor relationship with Commercial Banks

59

As illustrated in table above, the study had it in making to know

whether small scale business owners in Ibanda Town Council were

lacking money to put in their businesses due to poor relation ship

with Commercial Banks. The findings showed that majority of the

respondents 48(80%) were in agreement that due to poor relationship

with Commercial Banks, they are lacking money to put in their

businesses unlike the least 12(20%) who showed contrary

relationship between the two variables of Commercial Banks and

money to put into the business.

The results above can be interpreted that Commercial Banks lending

policies and financial performance of small scale businesses are

significantly related since majority of the respondents were able

to reveal that their businesses were affected by the terms and

conditions the Commercial Banks used the process of providing

credits and other services to them.

Amount given: The researcher also sought to understand whether

amount of money given by Commercial Banks in Ibanda Town Council was

also affecting businesses in Ibanda Town Council. Results from

respondents’ views indicate that many of the study participants

44(73.3%) showed disagreements with the statement that “due to

little money given by Commercial Banks, my business has been

growing” as compared to the minority 16(26.7%) study participants

who revealed that the amount of money given to them by commercial

banks do not affect their businesses in terms of growth. Further

investigation by the study showed that Commercial Banks in Ibanda

Town Council provide credit services to their customer to improve on

their businesses and such services are given on the capacity of the

person requesting to them.

60

The above findings can be interpreted that due to many of the small

scale business owner depending on the size of their businesses and

other kinds of security provided to the bank by the, business

persons can be granted financial services to improve on the

performance of their businesses. Therefore the study findings have

an implication that there is a relationship between Commercial

Banks and financial performance of small scale businesses in Ibanda

Town Council especially in relation to growth as was revealed by

majority of the study participants.

4.5 Regression Analysis

r = n x y -∑ ﴾∑ x y)∑

√ n ﴾∑ x2 ) - ﴾∑ x) 2 √n﴾∑y2 ) -﴾∑y)2

There is a relationship between Commercial Banks

lending policies and financial performance of

small scale businesses

Number

of

Respons

esYes 57 (x)No 03 (y)Total 60 (n)

Source: Primary Data, 2015

By Substitung the Values

r = 60﴾ 57 × 3) -﴾ 57 x 3)

√60﴾572 ) -﴾57)2 × √60﴾32 ) - ﴾3)2

r 10260- 171

√ 194940 x √531

r 10089

441.52 x 23.04

r = 10089

61

10174.1

r = 0.992

From the calculation above, the correlation coefficient (r) was

determined and found to be approximately 1.0. This made the study to

conclude that there is a perfect positive relationship between two

variables of Commercial Banks lending policy in Commercial Banks and

financial performance of small scale businesses . This could mean

that financial institutions set policies to help small scale

businesses to improve on their financial performance in Ibanda

District.

62

CHAPTER FIVE

SUMMARY OF THE FINDINGS CONCLUSIONS RECOMMENDATIONS AND

5.0 Introduction

The purpose of the study was to determine the relationship between

commercial banks lending policies and financial performance of

small scale businesses in Ibanda Town . The proposed objectives for

the research study were as follows; to examine the lending policies

used in Commercial Banks by Small Scale Businesses, to establish the

factors influencing the financial performance of Small Scale

Businesses and to examine the relationship between Commercial Banks

lending policies and financial performance of selected small scale

businesses.

In this regards, the chapter contains conclusions, recommendations

and suggestions for further studies as these were mostly done

according to major study themes in relation to the study objectives.

5.1 Summary of the Findings

The study established interest rate was among the commercial banks

lending policies and financial performance of small scale

businesses in Ibanda Town . Interest rate is given consideration

63

when Commercial Banks are giving out money to business persons. It

was also revealed by the study that property valuation is among the

commercial lending policies used by commercial banks in Ibanda Town

council. Results from respondents’ views indicate that property of

clients is often taken note of when assessing options on whether to

give credit to the client or not to give them.

The above information can be compared with Pavela (2002),

commercial banks deliver out loans to their customers depending on

interest factors. He pointed out the view that their aim is to gain

profits though earning an interest rate. Without interest rates,

commercial banks would not deliver out loans to their customers.

Many commercial banks deliver out loans to their customers as their

financial policy depending on levels of interest rates. Statistics

show that about 76% of the commercial banks deliver loans to their

customers considering a gain of interest as the main priority

factor.

The study findings indicate that all the respondents agreed with the

statement that “Repayment period is among the lending policies used

by commercial banks “as was reported by 100% respondents as none of

the respondents disagreed with the same statement that “Repayment

period is among the lending policies used by commercial banks “. The

above is an indication that commercial banks in Ibanda town council

take it seriously when it comes to negotiating on the terms of loan

repayment periods. It also implies that different repayment periods

are offered to clients according to the credit scheme they apply

for, thus a respondent accesses financial service after agreeing

with the stipulated repayment periods as per the agreement.

64

It was also discovered according to majority of respondents, the

type of loan is an issue that is laid down in the lending policies of

commercial banks . Qualitative results as obtained from the

interview further confirmed this is due to the fact that different

loans have got different requirements and varying interest rates,

therefore making it necessary for the loan officers to establish the

exact type of loan a client would wish to take. However, according to

Lord Keynes the great economist (2002) indicated that that

commercial banks delivers out credits to customers with the aim of

accumulating profits. He further pointed out the view that

financial institutions especially in developing countries need

more money to expand and develop. Therefore over such an issue of the

time they deliver loans to their customers so as to get enough money

for their growth and expansion. This has ever promoted and created

employment opportunities to citizens of the many countries of the

world.

The study found it necessary to look at if the minimum and maximum

amount of loan is among the amount of loan a client is considering

taking is given attention to evaluate the status of the individual

and also study carefully the kind of business one would love to

invest the funds in. For instance according to responses of loan

officers while in an interview they disclosed that a big a mount of

loan raises questions of inspecting ones business or evaluating

carefully the property pledged as collateral where as when the

amount is small, it is some times not given much attention provided

the applicant beats the minimum requirements.

From the study findings, hard aware business is one of the common

small scale business activities operated in Ibanda town council.

65

This was justified by a majority of respondents’ that agreed to the

view that hard ware selling is among the small scale business

activities in Ibanda town council. According to 87% of the

respondents agreed with the statement that hard ware selling is a

major business operated in Ibanda. According to the researchers’

establishment 08 of the respondents disagreed because they were not

very much familiar with all the town council and its suburbs whereas

the 52 were well versed with all corners and had spotted hard wares

around.

The study established whether clothe selling was among the small

scale business in Ibanda town council. According to results, non of

the respondents disagrees with the fact that clothe selling is among

the small scale businesses activities in Ibanda town council

whereas all the respondents amounting to 60(100%) as indicated in

table above agreed with the statement. This signifies that clothe

selling is a well spread business activity in Ibanda town council

that it was familiar to not only the respondents but all the

residents of the district it was learnt that the business is common

due to the fact it does not require a lot of capital and skills to

begin hence all sections of masses can join explaining why it is a

major business activity

In continuing to look at the different small scale business

activities in Ibanda town council the study sought of respondents to

reveal if general merchandise is among the small scale business

activities operated in Ibanda. All the respondents reported the

knowledge of existing General merchandise small scale activities in

Ibanda. All the respondents agreed that General merchandise is

among the small scale business activities in Ibanda Town. General

66

merchandise involves sale of house hold items edible and non edible

ones like food stuffs, house equipments respectively among others.

This indicates that general merchandise is widely practiced

business activity, one of the lucrative businesses in Ibanda town.

The study demanded of respondents to reveal whether restaurants and

pubs are among the small scale business activities in Ibanda town

council. All the respondents agreed that restaurants and pubs is a

widely spread business activity in Ibanda town council as none of

the respondents disagreed with the same study statement.

According to the researchers establishment this is because there is

high market for food and drinks given the ever increasing population

in Ibanda town council given the strategic location and booming

business. More so it is a high way to other districts like Kamwenge,

Kyegegwa, Kyenjojo among others hence travelers make stop-overs and

dine in Ibanda town council. The study sought of respondents to

identify if stone quarrying is among the small scale business

activities in Ibanda Town. Findings are so, implying that the small

scale business takes place in the town but also a considerable

number of individuals are unaware of its existence. This due to the

fact that the business is practiced in the out-skirts of the town and

by few people since it requires a lot of energy to maintain and earn a

profit.

The study findings also indicated that poor communication among

business people does not necessary lead to loss of profits in Ibanda

Town Council as reflected by the study participant who were in a

disagreement with the statement as illustrated in table above com-

pared to the least number of the respondents who showed an agreement

67

with the same study results. However, it should be noted that

communication of the business persons especially in the process of

performing business dealing can attract more customers leading to

more sales in the business that improves on the profitability level.

In addition to the descriptive results the views of the respondents,

qualitative results also confirmed that most of the businesses

persons do not use business language in dealing with their customers

that was also affecting the performance of small business

enterprises in Ibanda Town Council.

This is in disagreement with information that building trust with

new customers can be a difficult task for a new and establishing

business. Some organizations like the Better Business Bureau and

the International Charter now offer Small Business Certification,

which certifies the quality of the services and goods produced and

can encourage new and larger customers. These services may require a

few hours of work, but a certification may reassure potential

customers. However, the most effective way to earn trust in Uganda

is through customer referrals ( Brunner, Allan. et al, 2004).

Findings from the study revealed that because of lack of focus,

sales in businesses have been reducing in Ibanda Town Council,

revealed that majority of the study respondents 65% were in a

disagreement with the statement while the least 35% of the

respondents agreed with the statement that “because of lack of

focus, sales in businesses have been reducing in Ibanda Town

Council”. The above study findings can be interpreted that most of

the small scale business owners in Ibanda Town Council are focused

in the process of running their businesses since majority of the

study participant revealed that lack of focus is not greatly

68

affecting people in running their businesses that could be

anticipated to be reducing sales in the Town Council among

businesses.

According to the study results, high taxes charged by the tax

authorities is among the common factors affecting small scale

businesses financial performance. It was revealed by majority of

the respondents amounting 88.3% that because of high taxes,

retained earnings of most businesses in Ibanda Town Council have

been reducing. Small scale businesses in Ibanda Town Council are

required to pay taxes charged on them by tax authorities and this tax

was reducing on the amount of money made from businesses by the

business owners that could have been used for further business

expand. As revealed from the study findings, one can conclude that

taxes are among the factors affecting small scale businesses in

Ibanda Town Council.

The researcher also investigated whether because of electricity

supply; sales in most businesses have been reduced in Ibanda Town

Council. Respondents’ views revealed the following results: It was

found out from respondents that electricity supply is not commonly

affecting sales of small scale businesses in Ibanda Town Council.

The above results indicated that electricity supply is not a common

factor affecting most of the small scale businesses in Ibanda Town

Council. This is so because most of the businesses in Ibanda Town

Council do not commonly depend of power supply despite of some few

businesses enterprises like stationary, and computer in addition to

restaurants where power is one of the influencing factors that would

make the business to perform well.

69

Results from the study further showed that despite the high interest

rate in financial institutions, businesses in Ibanda Town Council

are not closing and this was reflected by 480% of the study

participants who were in agreement with the statement that “Due to

high interest rate in commercial banks , businesses in Ibanda Town

Council have been closing”. Further study findings also showed that

some businesses in Ibanda Town Council are closing due to the

failure of paying the commercial banks credits. It was revealed by

the study respondents that business owners in the study area are

found of not using credits from the commercial banks in proper ways

that for the business purposes but divert the credits to their

personnel needs.

The study demanded of respondents to reveal whether due to poor

roads, businesses in Ibanda Town Council were lacking what to sell.

According to table 23 it is indicated that majority of the

respondents 60% showed disagreement with the statement. It was

revealed by the respondents that products sold by most of the

business shops come from near by towns like Mbarara Town making

products to be sold available since the road from Mbarara to Ibanda

is good hence showed a disagreement with the statement. Some

businesses especially those selling agricultural products get what

to sell deep in villages that make it hard to research Ibanda Town

Council hence some of the respondents were able to indicated

agreements that “Due to poor roads, businesses in Ibanda Town

Council have been lacking what to sell”.

The findings from most of the respondents showed agreements that

due to high security value needed by commercial banks before giving

70

loans, most businesses have been lack enough capital in Ibanda Town

Council. This met that commercial banks in Ibanda Town Council

demand securities before providing credits to business customers

that was affecting the performance of businesses since the value of

the security needed is always higher than the loan value. However,

Lebas, Michel & Euske, K (2002) indicated that small scale

businesses are financed through credit debt usually a poor choice,

given that the interest rate on credit is often several times the

rate that would be paid on a line of credit or bank loan . Many owners

seek a bank loan in the name of their business, however banks usually

insist on a personal guarantee by the business owner. From the study

findings indicated also established that many of the small scale

businesses in Ibanda Town Council are managed by people who have

studied up to both secondary and primary level that lack business

knowledge like book keeping, cost controls techniques knowledge

that affect financial performance of their businesses.

The study established whether due to high rent, most shops were not

growing in Ibanda Town Council. A rated agree or disagree close

ended response question was administered to respondents. This

signifies that despite the problem of rent affecting most of

businesses organizations, some of the small scale businesses in

Ibanda Town Council are growing as was revealed by the study

respondents. Results from the study during an interview indicated

that some of the small scale businesses in Ibanda Town Council sub-

rent to reduce on the fraction

The study also indicated that due to low repayment period in most

commercial banks , most businesses in Ibanda Town Council are

failing. This was justified by a majority of respondents’ that

71

agreed to the view that due to low repayment period in most financial

institutions, most businesses in Ibanda Town Council are failing.

Accordingly, 60% of the respondents agreed with the same statement

that while the minority number 30% of the study participants

disagreed with the statement that due to low repayment period in

most commercial banks , most businesses in Ibanda Town Council are

failing. Most financial institutions in the study area were

chargimg high interest rate coupled by low repayment period for the

loans acquired by their customers. But, Meyer Marshall (2002)

argued that Small Business Administration runs several loan

programs that help a small business secure loans for improving the

performance. The Small Business Administration guarantees a

portion of the loan to the issuing bank and thus relieves the bank of

some of the risk of extending the loan to a small business. The Small

Business Administration requires business owners to pledge

personal assets and sign as a personal guarantee for the loan.

The study established whether due to high interest rates in

commercial banks , profits have reduced. A rated agree or disagree

close ended response question was administered to respondents These

study findings could mean that due to commercial banks interest

rates, small scale businesses are affected negatively since most of

the study participants showed a reduction in profits due to due

commercial banks interest rates. Therefore, one can come up with a

conclusion that there is a relationship between commercial banks

lending policies and financial performance of small scale

businesses in Ibanda Town Council.

Findings from the study respondents also indicated that commercial

banks do not give long period business owners to repay loans

72

provided to them. The common loan period granted by commercial banks

ranges from 3 months to 6 months. This repayment period for the loan

is very short for business owners to have accumulated the money to

repay from the business.

5.2 Conclusions

Basing on the first objective of the study that examined the

commercial banks lending policies used by commercial banks in

Ibanda town council, the study concludes that; interest rate,

property valuation, repayment period, type of loan needed and

minimum and maximum amount of loan are the profoundly used policies

to determine the lending out of credit. The study concludes also

that there are various small scale businesses operated in Ibanda

town council and they conclude; hard ware, clothe selling, general

merchandise, restaurants and pubs, stone quarrying and food

processing and selling.

It is concluded further that small scale business in Ibanda town

council have been influenced by very many factors however the study

revealed some of them ranging from social-economic to political

factors influencing business such as; poor communication, lack of

focus, high taxes, electricity supply, high interest, poor roads,

high value of security, unskilled employees, rent, lack of trade

credits and customer care. The study examined the relationship

between commercial banks lending policies and financial

performance of small scale businesses in Ibanda and it is concluded

that; amount of money given, poor relationship with financial

institutions, high value of security needed, low repayment period

and high interest rates as commercial banks lending policies have

73

the relationship with financial performance of small scale

businesses.

5.3 Recommendations

The study recommends that there is need for commercial banks to

reduce further on the interest rate they charge on credits business

clients apply for. Relaxing down the interest rate will encourage

business persons to increase the borrowing rate and those who fear

to borrow could also get the energy to acquire credits thus improve

the financial performance of their businesses.

The study also recommends that business persons ought to form

business associations; these will enable entrepreneurs lobby

support from government under the micro-credit scheme of prosperity

for all. Also such associations enable the forwarding of grievances

related to business for joint redress, such grievances that can be

addressed include license and transport sharing problem.

The study further recommends that commercial banks should adjust on

the collateral security demanded as a prerequisite for a loan. Many

times potential borrowers have been scared away from banks and other

institutions lending money due to the failure to raise the required

collateral security hence they fail to increase the business stock

after lacking capital while others fear to start business because of

inadequate capital, therefore the study calls upon the reducing on

the amount value of collateral security demanded by commercial

banks.

The study wraps up also that business training is important for

entrepreneurs in Ibanda town council. Such trainings will impart

skills in the business owners to know how to handle customers

74

through efficient customer care, bookkeeping skills and inventory

management. Therefore business owners in Ibanda town council ought

to embrace such techniques of handling business through business

trainings.

Commercial banks should make more funds available to the

development of SMEs in Uganda not only to large Corporations. The

Central Bank of Uganda should introduce stern measures against any

bank that failed or refused to follow the stipulated guidelines for

the financing of small scale businesses. This implies that it is not

just enough to make the policies but there should be certain forms of

checks and balancing. This should be made known to the institutions.

The stringent conditions made by banks should be trimmed down for

the SMEs for instance, interest rate can be reduced. The mandated

credit institutions should be persuaded to change their policies in

such a way that will now favors the small-scale businesses more that

the large-scale ones. This is something the Government of Uganda

can achieve for its citizens by partnering with these institutions.

Commercial Banks should consider loan proposals of SMEs as urgent as

that of larger corporations or industrial sector in the country.

There is the need for reducing time lag between loan application,

processing and approval for disbursement. To reduce the lag, there

is the need to remove cumbersome administration procedures,

simplifying of application forms, standardization of

documentation and open policy in credit appraisals are required.

The problems of equity contributions and collateral requirement

must be addressed.

75

SME operators should operate in such a way that the commercial banks

will be able improve their confidence in them and thereby see

prospect in them. SMEs should keep more records, and be more

transparent in their operations.

Government should do everything possible to encourage the

development of small-scale businesses. It can do this by providing

financial assistance in the form of soft loans and favorable

legislation. Other way government can assist is through the

provision of basic amenities such motor-able roads, electricity;

water etc .It can also open skill acquisition institutions and train

small-scale owners in entrepreneurship

76

REFERENCES

Alfred Lakwo (2006), Rural Livelihood and Women empowerment in

Uganda, Fountain publishers Kampala

Argyris, Chris. (1999). Why Individuals and Organizations Have

Difficulty in Double-loop Leaning, in on Organizations Leaning, 2nd

Edition. Blackwell Publishing.

Beer, Stafford (1966). Decision & Control: the Meaning of

Operational Research & Management Cybernetics. John Wiley & Sons,

Ltd.

Clementia (2004) Development of Financial Institutions In

Developing Countries Pretoria South Africa

Dresner, Howard (2007), the Performance management Revolution:

Business Results Through Insight and Action.

Dresner, Howard (2008), Profiles in Performance: Business

Intelligence Journeys and the Roadmap for Change.

77

Epstein, Marc J. et al (2001). Linking actions to profit in

strategic decision making. MIT Sloan Management Review.

JS Chandan (2002) management of finances in banks Cambridge press

Kahneman, Daniel & Lovallo, Dan. (1993,). Timid Choices and Bold

Forecasts: A Cognitive Perspective on Risk Taking. Management

Science.

Kahneman, Daniel et al, (2000). Choices, Values, and Frames, in

Choices, Values, and Frames.

Kaplan, Robert & Norton, David (2001). The Strategy – Focused

Organization. Harvard Business School Press.

Kaplan, Robert. (2001). Integrating shareholders value and

activity-based costing with the Balanced Scorecard. Balanced

Scorecard Report.

Lebas, Michel & Euske, K (2002). A conceptual and operational

delineation of performance, in Business Performance Measurements:

Theory and Practice.

78

Meyer Marshall W. (2002). Finding performance: the new discipline

of management, in Business Performance Measurement: Theory and

Practice. Neely, Andrew, editor.

MFPED (2004), Understanding the financial extension works

component in the micro finance outreach plan.

Pavela (2002) Banking And Financial Institutions In Developing

Countries Evans brothers limited.

79

APPENDIX A: QUESTIONNAIRE TOOL

Dear Respondent,

I am Ainemigisha Evalyne a year three student doing Bachelor of

Business Administration student at Bishop Stuart University. As

part of the program am undertaking a study on “ the relationship

between Commercial Banks lending policies and financial

performance of small scale businesses in Ibanda Town was using a

case study of Selected Small Scale Businesses in Ibanda Town” Your

feedback is very important as your inputs will be used for academic

purposes only. I greatly appreciate if you could take a few minutes

to provide me with information. Your response will be kept

confidential and it will not be divulged to any person or

institution outside this corporation.

Thank You In Advance

SECTION A: BACKGROUND INFORMATION

Gender of the respondent

MaleFemale

Education level of the respondent

Primary level Secondary Level

Degree Master’s Level

Others (Specify)

Age of the respondent in years

Below 20 20 – 30

40- 50

80

Above 50 Years Period Spent in business in years

Less than 1 year 1 – 3 years 3 - 5 years

Above 5 years

I understand the term lending policies I do not understand the term lending policies

SMALL SCALE BUSINESS ACTIVITIES IN IBANDA TOWN COUNCIL

Hardwares selling is among the small scale business activities in Ibanda Town Council

1 2 3 4 5

Clothes selling is among the small scale business activities in Ibanda Town Council

1 2 3 4 5

General mechandise is among the small scale business activities in Ibanda Town Council

1 2 3 4 5

Food Staff selling is among the small scale business activities in Ibanda Town Council

1 2 3 4 5

Restaurants and Pubs is among the small scale business activities in Ibanda Town Council

1 2 3 4 5

Stone quelling is among the small scale business activities in Ibanda Town Council

1 2 3 4 5

Food processing selling is among the small scale business activities in Ibanda Town Council

1 2 3 4 5

SECTION B: LENDING POLICIES USED IN COMMERCIAL BANKS IN IBANDA TOWN

COUNCIL

Note: Please, indicate the degree to which you are in agreement with

each of the statements on the following scale as; 1 = strongly

disagree 2 = disagree 3 = Not sure 4= Agree 5 = strongly Agree in the

preceding sections.

Interest rate is among the lending policies used by 1 2 3 4 5

81

Commercial Banks in this area Property valuation is among the lending policies

used by Commercial Banks in this area

1 2 3 4 5

Pay back period is among the lending policies used by

Commercial Banks in this area

1 2 3 4 5

Type of loan needed is among the lending policies

used by Commercial Banks in this area

1 2 3 4 5

Understanding the history of their is among the

lending policies used by Commercial Banks in this

area

1 2 3 4 5

Minimum and maximum amount of loan set is among the

lending policies used by Commercial Banks in this

area

1 2 3 4 5

SECTION C: FACTORS INFLUENCING THE FINANCIAL PERFORMANCE OF

SELECTED SMALL SCALE BUSINESSES IN IBANDA TOWN COUNCIL

Poor communication among business people leads to

loss of profits in Ibanda Town Council

1 2 3 4 5

Because of luck of focus, Sales in businesses have

been reducing in Ibanda Town Council

1 2 3 4 5

Because of poor high taxes, retained earnings of

most businesses have been reducing in Ibanda Town

Council

1 2 3 4 5

Because of electricity supply, sales in most

businesses have reduced in Ibanda Town Council

1 2 3 4 5

Due to high interest rate in Commercial Banks ,

businesses in Ibanda Town Council have been closing

1 2 3 4 5

Because of high prices ,customers of small scale

businesses have reduced in Ibanda Town Council

1 2 3 4 5

82

Due to poor roads, businesses in Ibanda Town have

been lacking what to sell

1 2 3 4 5

Due to high security needed by Commercial Banks

before giving loans, most businesses have been

lacking capital in Ibanda Town

1 2 3 4 5

Because of employing un skilled employees, small

scale businesses have been shouting down.

1 2 3 4 5

Due to high rent, most shops have not been growing in

Ibanda Town

1 2 3 4 5

Poor customer care has led to loss of profits in

small scale businesses in Ibanda Town Council

1 2 3 4 5

Due to lack of trade credits, most businesses in

Ibanda Town Council do not grow

1 2 3 4 5

Due to low repayment period in most Commercial

Banks, most businesses in Ibanda Town Council are

failing.

1 2 3 4 5

SECTION D: COMMERCIAL BANKS LENDING POLICIES AND FINANCIAL

PERFORMANCE OF SELECTED SMALL SCALE BUSINESSES IN IBANDA TOWN

COUNCIL

Due to high interest rates in Commercial Banks ,

profits have reduced

1 2 3 4 5

Due to low repayment period in Commercial Banks ,

my business has not been growing in stock

1 2 3 4 5

83

Due to high security needed by Commercial Banks ,

my business has not been selling all the products by

the customers

1 2 3 4 5

Due to poor relationship with Commercial Banks , I

have been lacking money to put in my business

1 2 3 4 5

Due to little money given by Commercial Banks , my

business has not been growing

1 2 3 4 5

What can improve on your small scale businesses performance?

--------------------------------------------------------------

--------------------------------------------------

--------------------------------------------------------------

--------------------------------------------------

What is your recommendation on Commercial Banks lending policies

and financial performance of selected Small Scale Businesses in

Ibanda Town Council?

--------------------------------------------------------------

--------------------------------------------------

THANK YOU VERY MUCH

84

APPENDIX B: INTERVIEW GUIDE

Dear Respondent,

I am Ainemigisha Evalyne a year three student doing year three

Bachelor of Business Administration student at Bishop Stuart

University. As part of the program am undertaking a study on “The

relationship between Commercial Banks lending policies and

financial performance of small scale businesses in Ibanda Town

using a case study of Selected Small Scale Businesses in Ibanda

Town”” Your feedback is very important as your inputs will be used

for academic purposes only. I greatly appreciate if you could take a

few minutes to provide me with information. Your response will be

kept confidential and it will not be divulged to any person or

institution outside this corporation.

Thank You In Advance

1. Gender of the respondent.

2. Education level of the respondent.

3. Period Spend at Commercial Banks (in years).

4. What are lending policies used in this Commercial Banks?

5. What are Small Scale Business activities in Ibanda Town

Council?

6. What do you think are the factors influencing the financial

performance of by selected Small Scale Businesses in Ibanda

Town Council?

7. What is the relationship between lending policies and

financial performance of selected Small Scale Businesses in

Ibanda Town Council?

85

8. What do you think are some of the challenges faced in running

businesses in this area?

9. What do you think are some of the measures to challenges faced

in running businesses in this area?

10. What is your recommendation on lending policies and

financial performance of selected Small Scale Businesses in

Ibanda Town Council?

11. What is your conclusion about Commercial Banks lending

policies and financial performance of selected Small Scale

Businesses in Ibanda Town Council?

THANK YOU VERY MUCH

86