Credit risk, liquidity risk and financial sustainability of microfinance institutions in Uganda The case of Finca Uganda Ltd, Lira Branch

Abstract

The study was carried out with the purpose of examining the relationship between credit risk, liquidity risk and sustainability of microfinance institutions in Uganda. The conceptual frame work was based on relevant literature on credit risk, liquidity risk and relating it to sustainability of microfinance institutions. A cross – sectional survey design combined with descriptive and analytical methods was carried out among a sample of 30 FINCA staff. Purposive sampling method was used to select the sample for the study. Self administered questionnaires were employed to collect data from both FINCA’s staff.

The results were analysed using SPSS software. Findings from the study showed that credit risk and liquidity risk predicts 53% of the variance in the general sustainability of microfinance institutions in Uganda. However, the significant contributors to sustainability were repayment rate and default rate, repayment cycle and asset/liability management as measures of credit risk and liquidity risk respectively. On the other hand, asset/liability management and collection policy as measures of credit risk and liquidity risk had negative relationship with sustainability.

Since credit risk and liquidity risk have significant impact on sustainability, MFIs should enforce efficient asset/liability management and collection policy in order to achieve their goal of self – sustainable operations as required by donors.