Assessing credit lending terms of microfinance institutions among Small and Medium Enterprises (SMEs): a case study of Namutumba District.

Abstract

Small and medium enterprises (SMEs) play a vital role in fostering economic growth and alleviating poverty, both in developed and less developed countries. This study focuses on assessing the credit lending terms of microfinance institutions within the context of SMEs in Namutumba District. The study was guided by specific objectives: firstly, to explore how SMEs perceive the credit lending terms offered by microfinance institutions; secondly, to identify the factors that influence the credit lending terms of these institutions; and thirdly, to evaluate the appropriateness and significance of these terms for SMEs. Utilizing a descriptive study design, the research involved 153 licensed SMEs. The study employed convenience sampling and relied on primary data sources through a questionnaire survey. The findings indicated that SMEs perceived the credit lending terms as inadequate, particularly concerning grace periods and collateral requirements, which hindered their growth potential. Respondents noted that stringent loan standards, while effective for microfinance institutions' risk management, created significant barriers to accessing necessary capital. Despite these challenges, the study emphasized the vital role of microfinance institutions in promoting financial inclusion, enabling SMEs to invest in new projects and contribute to local economic development. The study recommended that microfinance institutions prioritize transparency in their credit lending terms by simplifying language, providing clear explanations, and eliminating hidden fees. Ultimately, while microfinance institutions served as crucial financial support for SMEs in Namutumba District, the study underscored the need for improved lending terms to foster a more inclusive financial environment. This, in turn, would empower SMEs and drive economic growth while ensuring the stability of the financial system. Future research could focus on assessing the actual impact of improved credit lending terms on the growth and sustainability of SMEs in Namutumba District.