THE EFFECT OF RISK MANAGEMENT ON THE PERFORMANCE OF

MICROFINANCE INSTITUTIONS
A CASE STUDY OF UGAFODE MICROFINANCE LTD, BOMBO ROAD,
KAMPALA UGANDA

BY
EKOMU JOEL
15/U/8712/MFE/PE

A RESEARCH PROPOSAL SUBMITTED TO THE SCHOOL OF MANAGEMENT

AND ENTREPRENEURSHIP IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE AWARD OF BACHELOR’S DEGREE IN
MICROFINANCE OF KYAMBOGO UNIVERSITY

JULY 2024
 Table of Contents
CHAPTER ONE...............................................................................................................1
INTRODUCTION............................................................................................................1
1.0 Introduction................................................................................................................1
1.1 Background of the study................................................................................................1
1.1.1 Historical background..............................................................................................1
1.1.2 Theoretical background............................................................................................2
1.1.3 Conceptual background............................................................................................2
1.2 Statement of the problem................................................................................................3
1.3 General Objective of the study.........................................................................................4
1.3.1 Specific objectives of the study...................................................................................4
1.4 Research questions.......................................................................................................4
1.5 Conceptual Framework for the Study.................................................................................4
1.6 Significance of the study................................................................................................5
1.7 Justification for the study...............................................................................................6
1.8 Scope of the study........................................................................................................6
1.8.1 Geographical scope.................................................................................................6
1.8.2 Content Scope........................................................................................................6
1.8.3 Time scope...........................................................................................................6
1.9 Assumptions and limitations............................................................................................6
1.10 Operational Definitions................................................................................................7
CHAPTER TWO..............................................................................................................8
LITERATURE REVIEW....................................................................................................8
2.0 Introduction................................................................................................................8
2.1 The effect of risk identification on the performance of microfinance institutions............................8
2.2 The effect of risk monitoring on the performance of microfinance institutions.............................10
2.3 The effect of risk control on the performance of microfinance institutions..................................11
CHAPTER THREE.........................................................................................................14
METHODOLOGY..........................................................................................................14
3.0 Introduction..............................................................................................................14
3.1 Research Design........................................................................................................14

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3.2 Target Population.......................................................................................................14
3.3 Sample Size and Sampling Procedures.............................................................................14
3.4 Sampling techniques...................................................................................................15
3.5 Data Collection Instruments..........................................................................................15
3.5.1Questionnaires......................................................................................................15
3.5.2 Interviews...........................................................................................................15
3.6 Sources of Data.........................................................................................................16
3.6.1 Primary Data..........................................................................................................16
3.6.2 Secondary Data.......................................................................................................16
3.7 Data Processing, Presentation and Analysis.......................................................................16
3.7.1 Qualitative Data...................................................................................................16
3.7.2 Quantitative Data..................................................................................................16
3.7.3 Data Analysis......................................................................................................17
3.8 Limitations of the Study...............................................................................................17
REFERENCES..............................................................................................................18
QUESTIONNAIRE FOR RESPONDENT.............................................................................21

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 CHAPTER ONE

INTRODUCTION

1.0 Introduction

The study is focused on the effect of risk management on the performance of microfinance
institutions. This chapter contains the background to the study, statement of the problem,
objective of the study, research questions, scope of the study, significant of the study,
conceptual framework and definitions of key terms.

1.1 Background of the study

1.1.1 Historical background

Risk management has become the driving force for the performance of microfinance
institutions due to the ever-changing business environment. Microfinance institutions are
continuously gaining recognition as vital tools for economic and social development in most
countries throughout the world (Abor and Quartey, 2022). According to Abor and Quartey
(2022), in the Republic of South Africa, it is estimated that 91% of the formal business
entities are Microfinance institutions. Risk management, a prioritization process must be
followed whereby the risk with the greatest loss and greatest probability of occurrence is
handled first and risks with lower loss are handled later (Kiochos, 2022, and Stulz, 2022).
There is however, no specific model to determine the balance between risks with greatest
probability and loss and those with lower loss, making risk management difficult. Proper risk
management is important in the daily operations of any firm to avoid financial losses and
bankruptcy (Terwiesch, 2022).
In other word, effective risk management deals with market risks that the company is facing
and tries to take advantage of business opportunities that these risks might have (Terwiesch,
2022). It is an effective tool of contending with external market threats that are out of
management control and result in reduction of profit variances (AliBaba and VazirZanjani,
2020). The tools and facilities that management use to face external market threats are

1
financial hedging, insurance contracts, management controls systems, transportation of
resources and careful decisions that are made to improve the performance of Microfinance
institutions (Healy, 2018).

1.1.2 Theoretical background

The study is premised on institutional risk management theory by Hakan Jankensgard in the
year 2019 which suggests that the risk is predicting the probability and the consequence and
outcomes of that risk (Hakan Jankensgard, 2019). Institutional risk management theory
stipulates that the managers of microfinance institutions cannot create value for shareholders,
also called its investors, by taking on projects that shareholders could do for themselves at the
same cost.
The theory is applied to the study in the way that the business managers should not hedge
risks that investors can hedge for themselves at the same cost to improve the performance of
Microfinance institutions. Institutional risk management theory prescribes that the enterprise
should take on a project if it increases shareholder value and stipulates that risk management
involves the adoption and application of rational choice for the management of risks in an
efficient manner (Terwiesch, 2022). The theorist argued that deciding is choosing between
alternative courses of action. It can even mean choosing between action and non-action for
managing risks (Markham, 2019). However, institutional risk management theory neglects
the facts that microfinance institutions can not accurately identify the risks the enterprise is
likely to experience and may not accurately assess the financial impact or likelihood of an
outcome (Watt, 2018).

1.1.3 Conceptual background

Rejda (2021) defines risk management as the process through which an organization
identifies loss exposures facing it and selects the most appropriate techniques for treating
such exposures. Risk management is defined as the ‘process of understanding and managing
risks that the entity is inevitably subject to in attempting to achieve its corporate objectives’
(CIMA, 2021).

2
Risk management is a major concern for all businesses especially microfinance institutions
which are particularly sensitive to business risk and competition (Abor and Quartey, 2022).
In this study therefore, risk management is defined as a systematic approach to identifying,
measuring, monitoring and managing the various risks faced by the enterprise. It is an
approach to management and procedure designed to prevent occurrence of risks in the
enterprise. Risk management is measured in terms of risk identification, risk monitoring and
risk control.
Dobbins (2021) defined performance of microfinance institutions as the relationship between
the set targets or planned targets and the actual output achieved. Performance of microfinance
institutions is defined as the extent to which the target task of the microfinance institutions is
accomplished at the end of a business period (Yıldız et al., 2019). In this study, performance
of microfinance institutions is used to evaluate the work accomplished by the institution at
the end of business period.

1.2 Statement of the problem

Risk management (RM) is a term that is synonymous to different area of human endeavors.
Risk management was defined by Baffa (1990) as the planning and controlling of all the
conceivable elements of risks which are inherent in the daily operations of an organization to
ensure the organization’s continued existence as well as the realization of its set goals and
objectives’. Meyer (2000) opined that in managing risk, banks must decide which risks to
take, which to transfer and which to avoid. If banks have options as to their risk exposure, do
MFI have such options? Oluyombo, O. O. and Olabisi, J. B. (2008)
Nagarajan (2001) in his study of risk management for microfinance institutions in
Mozambique found that risk management is a dynamic process that could ideally be
developed during normal times and tested at the wake of risk. It requires careful planning and
commitment on part of all stakeholders. It is encouraging to note that it is possible to
minimize risks related losses through diligent management of portfolio and cash-flow, by
building robust institutional infrastructure with skilled human resources and inculcating client
discipline, through effective coordination of stakeholders.

3
Despite many attempts to address the effects of risk management on the performance of
microfinance institutions, there is still poor performance among the microfinance institutions
prompting the researcher to conduct further investigation on the effect of risk management on
performance of microfinance institutions.

1.3 General Objective of the study

The general objective of the study is to investigate the effect of risk management on the
performance of microfinance institutions.

1.3.1 Specific objectives of the study

i. To establish the effect of risk identification on the performance of microfinance

institutions.
ii. To assess the effect of risk monitoring on the performance of microfinance
institutions.
iii. To examine the effect of risk control on the performance of microfinance institutions.

1.4 Research questions

i. What is the effect of risk identification on the performance of microfinance

institutions?
ii. What is the effect of risk monitoring on the performance of microfinance institutions?
iii. What is the effect of risk control on the performance of microfinance institutions?

1.5 Conceptual Framework for the Study

The conceptual framework below illustrates the relationship between risk management and
performance of Microfinance institutions. The independent variable is risk management
process, and the dependent variable is performance of microfinance institutions as presented
below:

4
Source: Adopted from Bashabe Shieler, Kalu O. Emenike, Christian U. Amu (2017) and
modified by the researcher
The independent variable is represented by the risk management which includes risk
identification, risk monitoring and risk control. While performance of microfinance
institutions will be measured in terms of profitability, timeliness, efficiency and effectiveness.
Bashabe Shieler, Kalu O. Emenike, Christian U. Amu (2017) defines the independent
variables as seen below
Risk identification process includes risk-ranking components and that they help in sorting
risk according to their importance and assists the management to develop risk management
strategy to allocate resources efficiently and therefore improving their credit performance.
Risk monitoring requires reporting and reviewing structure to ensure that risks are effectively
identified and assessed, and that appropriate controls and responses are in place

1.6 Significance of the study

The study will add the knowledge and ideas for use by future researchers, students of higher
institutions and universities. The research findings will benefit the banking sector, or industry
and the financial sector by showing the sensitive areas where risk management should be
conducted.
The research will also provide a useful guide to policy makers, academic society, civil society
and the managements of public and private organizations as regards choosing the best risk
management approach.

5
The findings will also be useful to both potential and existing entrepreneurs in managing their
microfinance institution. The study will help the researcher to accomplish his bachelor’s
degree in microfinance institution.
The research findings will benefit the stakeholders by lighting sensitive areas where risk
management is to be conducted and its effect of risk management on performance of
microfinance institutions.
The research will also provide a useful guide to policy makers, academic society, civil society
and the managements of Microfinance institutions as regards choosing the best risk
management approach.

1.7 Justification for the study

Research has been undertaken on credit risk management and the performance of
microfinance institutions. However, there is an information gap on how risk management
practices such as risk identification, risk monitoring and risk control influence the
performance of microfinance institutions. The gap will be filled by adding more knowledge
to the already existing literature and be adopted by various microfinance institutions thus
motivating the researcher to carry out the study.

1.8 Scope of the study

1.8.1 Geographical scope

The study will be carried out at Ugafode Microfinance Ltd, located in Kampala district,
central region of Uganda. It was chosen for the study due to its convenience and potential
ease of accessibility to the location.

1.8.2 Content Scope

The study will be based on the effect of risk management on the performance of microfinance
institutions. The study will specifically look at the effect of risk identification, risk
monitoring and risk control on the performance of microfinance institutions.

6
1.8.3 Time scope

The study will be focused on 2017 -2023. This period was chosen because it contains recent
information that is necessary for the study.

1.9 Assumptions and limitations

There is a possibility of less cooperation from the respondents which may limit the data
collection process. The researcher will introduce himself to the respondents, explain that the
purpose of the study is purely academic and guarantee them confidentiality of their responses.
There is a likely possibility of some authorities concealing their information as confidential
hence limiting the researcher’s data as expected. This will be solved by presenting a research
introduction letter from Kyambogo University to the authorities.
There will be a time shortage in which the study will be conducted. This is because the
research may be conducted alongside general academic studies at Kyambogo University. The
researcher will draw up a work plan to schedule his research activities alongside academics.

1.10 Operational Definitions

Risk management is the continuing process to identify, analyze, evaluate, and treat loss
exposures and monitor risk control and financial resources to mitigate the adverse effects of
loss. (Defined by the researcher)
Performance of microfinance institutions is defined as the relationship between the set targets
or planned targets and the actual output achieved. (Defined by the researcher)

7
 CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This literature review provides the conceptual architecture and theoretical support for this
research by grounding it on prior knowledge. It is an attempt to review the existing relative
literature to the case study.

2.1 The effect of risk identification on the performance of microfinance institutions.

A structured approach to identifying the events that, if they were to occur, could have a
negative impact on the University (Kiochos, 2022). A standard approach to risk management
allows risks to be correctly prioritized across all the institution’s operations, which in turns
means that effective controls can be put in place to ensure the institution is able to manage its
operations effectively now and into the future (Lenskold, 2019).
Risk identification applies to all activities undertaken during university business, whether on
the university campuses or other locations and it is the Risk Owner’s responsibility to provide
the risk manager with information to report to the Audit and Risk Management Committee on
progress against mitigation plans (Terwiesch, 2022). In addition, the results of risk
assessments performed on new initiatives and the assurance providers play a role in
monitoring and reporting to the Council and Audit and Risk Management Committee on the
institution ’s management of its risks by assessing the risk management in place to mitigate
risks and recommendations to enhance the institution s’ risk management framework and the
risk manager is responsible for ensuring that risk management activities are carried out
effectively within the financial institution (Terwiesch, 2018).

8
Risk identification requires reasonably foreseeable risks that have the potential to have a
meaningful impact on the university to be identified. A risk to the financial institution is any
event or action that could have a negative impact on the institution. This includes events that
could be: A common approach to risk ranking is necessary to ensure that the largest risks to
the institution which can readily be identified, and management of risks can be prioritized in
a way that has the greatest overall benefit to the financial institution (Lenskold, 2016).
Risks are identified during the normal course of work; these risks are managed at the time
and reported by staff to the Senior Staff Advisory Committee. Determine whether immediate
action is necessary to reduce the risk, and if so carry it out; for example there may be a safety
risk where immediate action is necessary to prevent injury and on receipt of a complete risk
identification report form, the Risk Manager must: Assess the risk in consultation with
appropriate staff to determine whether any further immediate action is required, Initiate any
further immediate action that is required; this may involve escalating the issue to institution
manager and All identified risks must be entered in the University’s Risk Register by the
Risk Manager.
As a minimum the following information must be included: The name of the risk: this is a
short, meaningful title so that the risk can readily be referred to in the future, A full
description of the risk, including information on how the risk impacts on the financial
institution (Stulz, 2022). The details of the controls that are currently in place to manage the
risk, including temporary controls that are being used to manage the risk until further action
is taken, details of any other controls that are planned for the risk, including a due date for
implementation and a person responsible for putting the control in place and the risk rating
determined from the assessment of the potential consequences and likelihood for the risk,
(Michael, 2017).
Risk identification is a crucial component of risk management, and its contribution to the
financial performance of microfinance institutions (MFIs) has been extensively studied.
Ahmed and Khan (2017) found that risk identification is essential for MFIs to understand
their risk exposure and develop strategies to mitigate them. The authors noted that MFIs that
identified and assessed risks effectively experienced lower loan defaults and higher financial

9
returns (Ahmed & Khan, 2017). Similarly, Muriu and Ng'ethe (2015) revealed that risk
identification was positively correlated with MFIs' financial performance, as measured by
return on assets (ROA) and return on equity (ROE) (Muriu & Ng'ethe, 2015).
Risk identification is a critical component in the risk management process for microfinance
institutions (MFIs). The ability to effectively identify risks enables MFIs to proactively
address potential threats that can adversely impact their performance. According to a study by
Derban, Binner, and Mullineux (2005), risk identification involves recognizing the various
forms of risks such as credit risk, operational risk, market risk, and compliance risk that MFIs
may face. Their research highlights that comprehensive risk identification helps in developing
appropriate strategies to mitigate these risks, thereby enhancing the sustainability and
performance of MFIs.
Moreover, Adekunle (2011) emphasizes that a systematic approach to risk identification
allows MFIs to pinpoint potential vulnerabilities within their operations. This process
involves the use of risk assessment tools and techniques such as risk registers, SWOT
analysis, and scenario planning. Adekunle's study demonstrates that MFIs that adopt rigorous
risk identification practices tend to experience lower incidences of loan defaults and financial
losses, which in turn positively influences their overall performance.

2.2 The effect of risk monitoring on the performance of microfinance institutions.

Zhao (2015) says that risk monitoring is an ongoing and continuously developing process; the
need for risk management in the organization is into nature of the production company, poor
asset quality and low levels of liquidity are the two major causes of company failures and
during periods of increased uncertainty, organizations may decide to diversify their portfolios
and or raise their liquid holdings in order to reduce their risk. He reports that in terms of
credit risk management, the goal is to maximize the organization’s risk-adjusted rate of return
by maintaining credit risk exposure within acceptable parameters and the maximization of
shareholder value. Colquitt (2017) postulates that organizations need to manage the credit
risk inherent in the entire portfolio as well as the risk in individual credits or transactions and

10
organizations should also consider the relationship between credit risk and other risks, for
example, the relationship between credit risk, interest risk, liquidity risk, and market risk.
Zhao (2015) suggests that the effective risk monitoring on credit risk is a critical component
of a comprehensive approach to risk management and essential to long-term success of any
organization. He adds that undeniably risk management in the modern business world takes
place in such a great scale and unexpected manner and on the one hand, the creation and
development of several risk instruments allow higher risk diversification, better prediction
and more effective solutions to the potential dangers in the global financial market.
On the other hand, growing interactions among financial institutions in the world make room
for a possible sequential effect if something goes wrong. The consequences might be “far
beyond the doors of the organizations and investors themselves”. (Utrecht University, 2022).
According to Peterson (2020) “risk is always bad as a false assumption and can mislead the
way people deal with risks. Eliminating each risk is not the way because risk is an
unavoidable element of life. Moreover, there is a special relationship between risk and
reward.
Risk monitoring is another essential aspect of risk management, and research has shown that
it has a significant impact on MFIs' financial performance. Ouma and Muriu (2017) found
that MFIs that monitored risks regularly experienced lower credit risk and higher financial
performance (Ouma & Muriu, 2017). Similarly, Kipesha and Kimani (2018) revealed that
risk monitoring was positively correlated with MFIs' financial performance, as measured by
asset quality and profitability (Kipesha & Kimani, 2018).
Risk monitoring is an ongoing process that ensures risks are continuously evaluated and
managed throughout the life of a microfinance institution. It involves the regular review and
tracking of identified risks and the effectiveness of implemented risk mitigation strategies.
According to a study by Nawai and Shariff (2012), effective risk monitoring enables MFIs to
detect early warning signs of potential issues, thereby allowing timely interventions that
prevent minor problems from escalating into major crises.
The research conducted by Al-Tamimi and Al-Mazrooei (2007) supports the notion that
robust risk monitoring frameworks contribute significantly to the performance of MFIs. They

11
found that institutions that employ advanced monitoring tools such as Key Risk Indicators
(KRIs) and risk dashboards are better positioned to manage risks effectively. These tools
provide real-time data and insights that facilitate quick decision-making, thus enhancing the
resilience and performance of MFIs.

2.3 The effect of risk control on the performance of microfinance institutions.

Risk control approach to identifying the events that, if they were to occur, could have a
negative effect on the University and this approach allows risks to be correctly prioritized
across all of the organization’s operations, which in turns means that effective controls can be
put in place to ensure the organization is able to manage its operations effectively now and
into the future (Lucas, 2022). Evaluation represents a whole range of actions, measures and
strategies taken by management to eliminate or reduce risks. They include documenting
policies and procedures, ensuring separation of duties in certain functions, implementing
quality assurance programs, including appropriate clauses in contracts, etc. The process in
determining risk controls includes assessing the risk, assessing risk appetite and evaluating
how to treat the risk through mitigating actions (Terwiesch, 2022).
Risk control requires reasonably foreseeable risks that have the potential to have a
meaningful effect on the university to be identified. A risk to the financial institution is any
event or action that could have a negative effect on the institution. This includes events that
could be: A common approach to risk ranking is necessary to ensure that the largest risks to
the organization which can readily be identified, and management of risks can be prioritized
in a way that has the greatest overall benefit to the financial institution (Lenskold, 2019).
One way to develop risk-control practice is to incorporate resources published online by
similar organizations. A check list that covers all operations of a similar organization helps
your company avoid the cost of starting from scratch. An example of a check list you might
use is provided online by the University of Massachusetts. This document lists several areas
of concern for the institution. Areas include physical security for equipment like personal
computers, environmental controls, such as water drainage, personnel considerations,

12
hardware and software considerations, communications and network infrastructure, computer
usage, data controls and contingency planning (Terwiesch, 2022).
Risk control should also be conducted when new information about a hazard is received or
whenever there is a change in legislation or the workplace for example Change in work
practices & systems of work, new equipment, new personnel (Terwiesch, 2022). Depending
on the nature of the hazard, the Risk control process will vary from straightforward visual
inspection of the workplace, through formal quantitative assessment for high-risk situations.
Risk control is the final stage of the risk management process, and it involves implementing
measures to mitigate identified risks. Research has shown that effective risk control can
significantly improve MFIs' financial performance. Ahmed and Khan (2017) found that MFIs
that implemented effective risk control measures experienced lower operational risk and
higher financial returns (Ahmed & Khan, 2017). Similarly, Muriu and Ng'ethe (2015)
revealed that risk control was positively correlated with MFIs' financial performance, as
measured by ROA and ROE (Muriu & Ng'ethe, 2015).
Risk control involves the implementation of measures designed to reduce the likelihood and
impact of identified risks. This aspect of risk management is crucial for maintaining the
operational stability and financial health of microfinance institutions. According to a study by
Iqbal and Mirakhor (2011), effective risk control mechanisms, such as internal controls, risk
transfer, and risk avoidance strategies, play a pivotal role in safeguarding MFIs against
potential losses.
Additionally, research by Giné and Yang (2009) highlights the importance of risk control in
the context of microfinance. Their study illustrates that MFIs with strong risk control
practices, including stringent credit appraisal processes and effective loan recovery
procedures, tend to exhibit better financial performance and higher repayment rates. This, in
turn, enhances their credibility and attractiveness to investors and donors, further contributing
to their overall performance.

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 CHAPTER THREE

METHODOLOGY

3.0 Introduction

This captures the research design, study population, sample size, types and sources of data,
data collection instruments, data processing, presentation, analysis and the limitations and
delimitations of the study.

3.1 Research Design

Cross sectional research design will be used to collect qualitative and quantitative data
following the specific objectives of the study and research questions. The research design will
be cross-sectional in nature. The researcher will use qualitative and quantitative research
designs. This is because qualitative research design gives the researcher better insight and
understanding of the phenomena. Correlation research design will be used to collect the
information for the two variables.

3.2 Target Population

The population of the study will include the Branch manager, Heads of departments and other
employees of Ugafode Microfinance Ltd. The study will target about 34 respondents from
Ugafode Microfinance Ltd.

3.3 Sample Size and Sampling Procedures

The study will select 32 respondents from Ugafode Microfinance Ltd.

14
A sample comprising of 32 people will be used as a representative of the entire population.
Slovin’s formula will be used to calculate the sample size (n) and was calculated as follows.
Slovin’s sampling table (Umar, 2005)
Where: n is the sample size, N is the population size and e is the level of precision at 95%
confidence level and ±5% precision
Table 3.1: Shows Sample size distribution of the respondents
Category of population Population Sample Size
Branch manager 1 1
Loan officers 7 6
Other staff members 26 25
Total 34 32

3.4 Sampling techniques

Purposive sampling method will be used whereby a few respondents having the required
information will be selected from the whole population to participate in the study. Simple
Random sampling will be used, and each respondent will get an equal chance of being
selected for sample. Simple random sampling will be adopted for selection of respondents
and to ensure more representative and equal chance of participation in the study. In a simple
random sample, individuals are chosen at random and not more than once to prevent a bias
that will negatively affect the validity of the result.

3.5 Data Collection Instruments

3.5.1Questionnaires

These will include open-ended and closed-ended questions to be administered to the target
population to extract primary data from them. Gall and Borg (1996) point out that
questionnaires are appropriate for studies since they collect data that is not directly
observable as they inquire about feelings, motivations, attitudes, accomplishments, thoughts
as well as experiences of respondents. The questionnaires will be distributed to those who are
to fill them in, and then collect them after an appropriate period of time. These questionnaires

15
will be employed because they are flexible; they will yield more information and will help in
controlling the sample size.

3.5.2 Interviews

Interview guides will aid the study to obtain accurate information by making appointments
with individual respondents to answer questions related to the study topic. This will allow
room for flexibility in asking some of the questions, Bailey (1994). Also, intercept
interviewing will be used amongst the study population, especially the clients. These
interviews will aid in eliminating ambiguities in response and help in quick collection of data.

3.6 Sources of Data

3.6.1 Primary Data

This will include firsthand data that will be collected by the researcher by use of data
collection instruments such as questionnaires and interviews. The respondents for primary
research will include administrators, loan officers and other staff members of Ugafode
Microfinance Ltd.

3.6.2 Secondary Data

This is data gathered by other persons for a different purpose yet still useful for the study.
The secondary data for this study will be got from, among others, journals, financial reports,
previous research projects, newspapers, textbooks and records of Ugafode Microfinance Ltd.

3.7 Data Processing, Presentation and Analysis

3.7.1 Qualitative Data

Qualitative data analysis will involve the qualitative approach of identifying the major themes
arising from respondents’ answers; assigning of codes to these major themes; classification of
the major responses under the main theme; and integrating the responses into the report in a
more descriptive and analytical manner.

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3.7.2 Quantitative Data

On receipt of questionnaires, manual editing will be done to eliminate errors. After editing
and coding, tabulation will be done to give a clear presentation of various responses and
significance of each interpretation. Frequencies and percentages will be used in tabulation to
portray statistics used to analyze and interpret the findings of the study. Frequency tables,
graphs and charts aided in presenting the collected data to make it summarized and more
understandable using statistical packages like Microsoft excel.

3.7.3 Data Analysis

Data from the field will be compiled, sorted, edited and coded to have the required quality,
accuracy and completeness, then will be entered into the computer using the Statistical
Package for Social Sciences (SPSS) for analysis. Data will be analyzed according to the
research objectives, and it will be presented in the form of tables and figures which will help
to explain the variables of the study. Analysis of the components will be done by manual
editing of questionnaires to eliminate errors whereas factors will be analyzed through
tabulation, frequencies and percentages that will be used to portray statistics from the
findings of the study.

3.8 Limitations of the Study

There is a possibility of less cooperation from the respondents which may limit the data
collection process. The researcher will introduce himself to the respondents, explain that the
purpose of the study is purely academic and guarantee them confidentiality of their responses.
There is a likely possibility of some authorities concealing its information as confidential
hence limiting the researcher’s data as expected. This will be solved by presenting a research
introduction letter from Kyambogo University to the authorities.
There will be a time shortage in which to conduct the study. This is because the research may
be conducted alongside general academic studies at Kyambogo University. The researcher
will draw up a work plan to schedule his research activities alongside academics.

17
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND DISCUSSION OF STUDYFINDINGS

4.0 Introduction
The study looked at the effect of risk management on performance of microfinance
institutions in Uganda. The findings from the study were presented and analyzed orderly
based on the formulated study objectives. This was made possible with help of computer
packages MS word, and Excel where by tables, graphs and pie-charts were generated. The
chapter begins by presenting the biographic characteristics of respondents in terms of gender;
age, education levels, department, position and period of time spent in the organization. The
study there after discusses findings as per the formulated objectives of the study.

4.1 Background information of the respondents

Under the gender distribution of respondents, the study was delighted with both male and
female respondents as shown in below;

4.1.1 Gender of Respondents

The study sought to identify the gender of respondents. Responses were obtained from both
female and male as presented in figure 4.1 below;

18
Figure 4.1: Gender of Respondents

43%

Male
Female

57%

Source: Primary Data, 2024

According to figure 4.1 above, majority of respondents (57%) were female while 43% were
male. This implies that the organization employs both female and male however, more
priority is given to female.

4.1.2 Age bracket of Respondents

Respondents were required to indicate their age. Responses were obtained from respondents
who were less than 30yrs, 30-40yrs, 25-29yrs, 31-34yrs, 35-39yrs and 40yrs and above as
presented in table 4.1 below;

Table 4.1: Age bracket of Respondents

Category Frequency Percentage
Below 30 09 28.1
30-40 8 25
41-50 11 34.4
51 and above 4 12.5
Total 32 100.0
Source: Primary Data, 2024

From the table 4.1 above, (28.1%) were below 30, (25%) were in the age bracket of 30-
40years, 34.4% of the respondents were between 41-50years, 12.5% of the study respondents
were 51 years and above. From the study, majority of the respondents were in the age group

19
of 41-50 years. This can be explained by the fact that it’s mainly the adults in this bracket that
are employed.

4.1.3Level of education
Respondents were required to indicate their levels of education. Responses were obtained
from respondents as presented in figure 4.2 below;

Figure 4.2: Level of education

25%
28%

Secondary
Diploma
Degree
Masters

47%

Source: Primary Data

From figure 4.2 above, majority of respondents constituting 46.67% were diploma holders,
28.33% of them acquired degree, 25% of the respondents had acquired secondary level and
no study respondents had masters and PhD. This justifies that the organization employees are
highly qualified human resource to fill the positions of the organization, employees who are
capable of sustaining human resource management which implies that the selected sample
had the capacity to avail the researcher with reliable and appropriate information on the topic
under study.

4.1.4 Period spent in the organization

Study respondents were required to state the period spent in the organization. The following
results were obtained as presented below;

20
Figure 4.3: Distribution of Respondents by Period of Service
60%
54%

50%

40%

30% 28%
Series 1

20% 18%

10%

0%
1-4 years 5-9years 10 years and above

Source: Primary Data, 2024

Findings in figure 4.3 above revealed that majority (54%) of respondents have worked at the
institution between 5-9years, followed by 1-4 years with 28%. Meanwhile 18% of the
respondents have worked at the institutions for a period of 10 years and above. This implies
that the majority of the employees had relevant experience.

4.2 The effect of risk identification on the performance of microfinance institutions

The study sought to identify the effect of risk identification on the performance of
microfinance institutions. Various responses were obtained and are presented in the table 4.2
below;

21
Table 4.2 Effects of risk identification on the performance of microfinance institutions.

Statement 1 2 3 4 5

Risk identification leads to efficiency and effectiveness 0 5 0 10 17

of microfinance institutions
(0%) (15.6 (0%) (31.3% (53.1%)
) )

Risk identification leads to profitability of

microfinance institution

Risk identification leads to timeliness in microfinance

institution

Source: Primary Data

Table 4.2 above shows that, (61.5%) of the respondents agreed that risk analysis identifies the
relevant risks for decision making in microfinance institutions, (32.7%) strongly agree, while
3.8% of the respondents were not sure, 1.9% of them disagree and no respondents strongly
disagree. This implies that majority of the respondents agree.

Results from the table 4.2 also indicate that (46.2%) of the respondents strongly agreed that
Risk analysis forms a basis for determining how the risks are managed so that the institution
can attain decision making in microfinance institutions, (26.9%) agreed, (15.4%) disagreed,
(9.6%) of the respondents strongly disagreed and 1.9% of the respondents were not sure. This
implies that majority of the respondents agreed.

Findings as presented above indicate that, (36.5%) of the respondents strongly agreed that
risk analysis modifies internal control to address the gaps in the institution such that the
institution attains its competitiveness, (23.1%) agreed, 5.8% of the respondents were not sure,
(21.2%) of them disagreed and (13.5%) strongly disagreed. This implies majority of the
respondents were positive.

Results in table 4.2 above also indicate that (25%) of the respondents strongly agreed that
Risk analysis performs a comprehensive analysis of all risks associated with finance
department of microfinance institution hence contributes to the decision making in
microfinance institutions, (21.2%) agreed, (17.3%) were not sure, (15.4%) disagreed and
(21.2%) strongly disagreed. This implies that majority of the respondents were positive.

22
Results in table 4.2 above reveal that (40.4%) of the respondents strongly agreed with risk
analysis identifies the relevant risks for improved decision making in microfinance
institutions, (1.9%) agreed, 26.9% of respondents were not sure, (19.2%) of the respondents
disagreed and another (11.5%) of the respondents strongly disagreed. This implies that
identifying the relevant risks for improves the decision making in microfinance institutions.

The results in Table 4.2 above shows that (69.2%) strongly agreed that risk analysis identifies
the relevant risks for decision making in microfinance institutions, (17.3%) agreed, no
respondents were not sure, (13.5%) disagreed and no respondents strongly disagreed. This
implies that majority of the respondents agreed implying that risk analysis has greater effect
on the decision making in microfinance institutions.

4.3 The effect of risk monitoring on decision making in microfinance institutions

The study sought to examine the effect of risk monitoring on decision making in
microfinance institutions. Results were obtained and are presented below;

Table 4.3: The effect of risk monitoring on decision making in microfinance institutions
Statements Strongly Disagree Not Agree Strongly
disagree sure agree
Existing risks are monitored to identify any 9 4 0 11 28
(17.3%) (7.7%) (0%) (21.2%) (53.8%)
changes which may effect on the decision
making in microfinance institutions
Risk monitoring is important because it 3 4 1 12 31
(5.8%) (7.7%) (1.9%) (23.1%) (59.6%)
helps to highlight whether strategies are
effective for decision making in
microfinance institutions.
Risk monitoring encourages proper 1 2 3 5 41
(1.9%) (3.8%) (5.8%) (9.6%) (78.8%)
utilization of institution resources which
helps them to attain their competitiveness.
Risks are monitored so that management 4 14 04 11 19
(7.7%) (26.9%) (7.7%) (21.2%) (36.5%)
can act promptly to have greater effect on
decision making in microfinance institutions
Risk monitoring and control is a really 0 0 0 3 49
(0%) (0%) (0%) (5.8%) (94.2%)
important institution management activity,
because it enables companies to attain its

23
 completeness.
Risk monitoring encourages the employees 6 5 0 27 14
(11.5%) (9.6%) (0%) (51.9%) (26.9%)
and workers to deliver services in time
which is a sign of high level of decision
making in microfinance institutions.
Risk monitoring gives the feedback 13 10 2 20 07
(25%) (19.2%) (3.8%) (34.5%) (13.5%)
regarding complaints, grievances and
problems of subordinates to superiors thus
influencing decision making in
microfinance institutions.
Source: Primary Data
From Table above, findings show that most respondents (53.8%) strongly agreed that existing
risks are monitored to identify any changes which may affect on the decision making in
microfinance institutions, (21.2%) of them agreed compared to (17.3%) who strongly
disagreed and (7.7%) disagree while only no respondents were not sure. Majority (75%)
agreed implying that risks are monitored to identify any changes in Microfinance institutions.

Majority (59.6%) of the respondents strongly agreed that risk monitoring is important
because it helps to highlight whether strategies are effective for decision making in
microfinance institutions, (23.1%) of them agreed while (7.7%) of the respondents disagreed,
(5.8%) of them strongly disagreed and only (1.9%) were not sure. Since majority (82.7%)
agreed implies that risk monitoring is relevant to Microfinance institutions.

From results, (78.8%) strongly agreed that risk monitoring encourages proper utilization of
institution resources which helps them to attain their competitiveness and (9.6%) agreed as
compared to (3.8%) of the respondents who disagreed and (1.9%) of them strongly disagreed
and only (5.8%) of the respondents were not sure. Most responses (88.4%) of the respondents
were positive.

Fewer respondents (7.7%) strongly disagreed that risk monitoring encourages proper
utilization of institution resources which helps them to attain their competitiveness and

24
(26.9%) of them disagreed compared to those who concurred (36.5%) strongly agreed and
(21.2%) of them agreed while only (7.7%) were not sure with the findings implying that Risk
monitoring encourages proper utilization of institution resources as (57.7%) agreed.

From the table 4.6 above, majority (94.2%) of the respondents strongly agreed that risk
monitoring and control is a really important institution management activity, because it
enables companies to attain its competiveness and only (5.8%) of the study respondents
agreed. However, no respondent strongly disagreed, disagreed or were not sure. According to
table above, majority of the study respondents (51.9%) agreed that risk monitoring
encourages the employees and workers to deliver services in time which is a sign of high
level of decision making in microfinance institutions and (26.9%) strongly agreed as
compared to (11.5%) of the respondents who strongly disagreed and (9.6%) disagreed.

Majority of respondents (34.5%) agreed that risk monitoring gives the feedback regarding
complaints, grievances and problems of subordinates to superiors thus influencing decision
making in microfinance institutions, followed by (25%) of the respondents who strongly
disagreed, (19.2%) disagreed while (13.5%) of the study respondents strongly agreed and
only (3.8%) of the respondents were not sure implying that Risk monitoring gives the
feedback regarding complaints of Microfinance institutions.

4.4 The effect of risk mitigation on decision making in microfinance institutions

The third objective of the study was to establish the effect of risk mitigation on decision
making in microfinance institutions. Various responses were obtained and are presented as
follows;

Table 4.4: The effect of risk mitigation on decision making in microfinance institutions
Statements Strongly Disagree Not sure Agree Strongly
disagree agree
Tracking risk management 6 5 0 27 14
execution and continuing to (11.5%) (9.6%) (0%) (51.9%) (26.9%)
identify and manage new risks

Addressing risks appropriately and 13 10 2 20 07

effectively deal with each risk in a (25%) (19.2%) (3.8%) (34.5%) (13.5%)

25
 timely manner.

Each risk should be assessed to 0 0 11 30 11

determine the likelihood of it (0%) (0%) (21.2%) (57.6%) (21.2%)
becoming a concern, its level of
severity, and the probable effect.

Risk assessments should be 0 1 0 08 43

systematic, documented, and (0%) (1.9%) (0%) (15.4%) (82.7%)
should be reviewed at least
annually.

There should be risk avoidance so 1 3 2 09 37

as to eliminate the risk by (1.9%) (5.8%) (3.8%) (17.3%) (71.2%)
removing the cause

Source: Primary Data

According to table above, majority of the study respondents (51.9%) agreed that tracking risk
management execution and continuing to identify and manage new risks and (26.9%)
strongly agreed as compared to (11.5%) of the respondents who strongly disagreed and
(9.6%) disagreed. Majority of respondents (34.5%) agreed that addressing risks appropriately
and effectively deal with each risk in a timely manner, followed by (25%) of the respondents
who strongly disagreed, (19.2%) disagreed while (13.5%) of the study respondents strongly
agreed and only (3.8%) of the respondents were not sure implying that respondents were
positive.

Most respondents (57.6%) agreed that each risk should be assessed to determine the
likelihood of it becoming a concern, its level of severity, and the probable effect, followed by
(21.2%) who strongly agreed and a significant percentage (21.2%) were not sure with the
findings.

Furthermore, most respondents (82.7%) agreed that risk assessments should be systematic,
documented, and should be reviewed at least annually, (15.4%) agreed and only (1.9%)
disagreed while no respondents were not sure or strongly disagreed. Majority of respondents
(71.2%) of the respondents strongly agreed that there should be risk avoidance so as to

26
eliminate the risk by removing the cause, (17.3%) of them agreed as compared to (5.8%) of
the respondents who disagree and (1.9%) of them strongly agreed while (3.8%) of the
respondents were not sure. Since the majority were positive implies that there should be risk
avoidance so as to eliminate the risks in microfinance institutions.

27
 CHAPTER FIVE

DISCUSSION OF FINDINGS, CONCLUSIONS, RECOMMENDATIONS AND

AREAS OF FURTHER STUDIES

5.1 Introduction
This chapter shows the detailed discussions of major findings, conclusion drawn,
recommendations and suggestions on areas of future research.

5.2 Discussion of the findings

5.2.1The effect of risk analysis on decision making in microfinance institutions

The study found out that risk analysis identifies the relevant risks for decision making in
microfinance institutions; risk analysis forms a basis for determining how the risks are
managed so that the institution can attain decision making in microfinance institutions. The
findings are in line with Lenskold, (2020) who reported that risk analysis requires reasonably
foreseeable risks that have the potential to have a meaningful effect on the university to be
identified. A risk to the financial institution is any event or action that could have a negative
effect on the institution. This includes events that could be a common approach to risk
ranking is necessary to ensure that the largest risks to the organization which can readily be
identified and management of risks can be prioritized in a way that has the greatest overall
benefit to the financial institution

The findings revealed that risk analysis modifies internal control to address the gaps in the
institution such that the institution attains its competitiveness; risk analysis performs a
comprehensive analysis of all risks associated with finance department of microfinance
institution hence contributes to the decision making in microfinance institutions. The findings
are in line with Healy, (2018) who reported that Risk analysis is the process that a risk
manager uses to determine the likelihood of loss that's associated with a particular financial
process or individual. The financial risks could include the likelihood that a project might
fail, how much money could be lost, how likely the institution would be to make money from
that venture and other similar processes and Risk managers in the insurance field must
measure the risk associated with potential losses.

28
5.2.2 The effect of risk monitoring on decision making in microfinance institutions
The study found out that existing risks are monitored to identify any changes which may
affect on the decision making in microfinance institutions, risk monitoring is important
because it helps to highlight whether strategies are effective for competiveness of
microfinance institution and risk monitoring encourages proper utilization of institution
resources which helps them to attain their competitiveness. The findings are in line with Zhao
(2015) says that risk monitoring is an ongoing and continuously developing process; the need
for risk management in the organization is inherent in the nature of the production institution,
poor asset quality and low levels of liquidity are the two major causes of institution failures
and during periods of increased uncertainty, organizations may decide to diversify their
portfolios and or raise their liquid holdings in order to reduce their risk. He reports that in
terms of credit risk management, the goal is to maximize organization’s risk-adjusted rate of
return by maintaining credit risk exposure within acceptable parameters and the
maximization of shareholder value.

The findings revealed that risks are monitored so that management can act promptly to have
greater effect on decision making in microfinance institutions, risk monitoring and control is
a really important institution management activity, because it enables companies to attain its
competiveness and also risk monitoring encourages the employees and workers to deliver
services in time which is a sign of high level of decision making in microfinance institutions.
The findings are in line with Culp (2018) who reported that Risk management is a central part
of any organization’s strategic management. It is the process whereby organizations
methodically address the risks attaching to their activities with the goal of achieving
sustained benefit within each activity and across the portfolio of all activities. The risk
management’s primary mission is to bring benefits to the companies and makes them
sustainable, risk management is at the heart of any firm’s strategy and the significance of risk
management in an organization’s activities.

29
5.2.3 The effect of risk mitigation on decision making in microfinance institutions.
The study found out that tracking risk management execution and continuing to identify and
manage new risks, addressing risks appropriately and effectively deal with each risk in a
timely manner and it was also found out that each risk should be assessed to determine the
likelihood of it becoming a concern, its level of severity, and the probable effect. The
findings are in line with

The study found out that risk assessments should be systematic, documented, and should be
reviewed at least annually. Furthermore, there should be risk avoidance so as to eliminate the
risk by removing the cause. The findings are in line with Lenskold, (2014) who argued that
risk mitigation requires reasonably foreseeable risks that have the potential to have a
meaningful effect on the university to be identified. A risk to the financial institution is any
event or action that could have a negative effect on the institution. This includes events that
could be: A common approach to risk ranking is necessary to ensure that the largest risks to
the organization which can readily be identified and management of risks can be prioritized
in a way that has the greatest overall benefit to the financial institution.

5.3 Conclusion

The conclusion was done that risk analysis identifies the relevant risks for decision making in
microfinance institutions; risk analysis forms a basis for determining how the risks are
managed so that the institution can attain decision making in microfinance institutions. Risk
analysis modifies internal control to address the gaps in the institution such that the institution
attains its competitiveness; risk analysis performs a comprehensive analysis of all risks
associated with finance department of microfinance institution hence contributes to the
decision making in microfinance institutions. The study concluded that tracking risk
management execution and continuing to identify and manage new risks, addressing risks
appropriately and effectively deal with each risk in a timely manner and it was also found out
that each risk should be assessed to determine the likelihood of it becoming a concern, its
level of severity, and the probable effect.

30
1.4 Recommendations
i. The management of microfinance institution should find other ways of managing
risks so as to avoid losses and to improve the competitiveness.
ii. The management of the institution should be more effective when assessment risks in
Microfinance institutions.
iii. The management of microfinance institution should also find other better ways of
increasing its profitability.
iv. The management of microfinance institution should develop all the employees in
form of training them to enable them manage the organizational risks effectively.
v. microfinance institution should clearly state their objectives, required activities to be
performed, areas of improvement, budget, timeframe and relevant steps to be
undertaken in order to achieve their goals and objectives in order to manage the
financial risks.

5.5 Areas of further studies

The researcher suggests the areas where further studies need be conducted which included
the following:

 Further studies should be conducted on the relationship between financial risks and
the productivity of Microfinance institutions.
 Further studies should be conducted on the challenges of managing risks in
Microfinance institutions.
 Further studies should be conducted on the relationship between risk assessment and
the decision making in microfinance institutions.

31
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QUESTIONNAIRE FOR RESPONDENT

My name is Ekomu Joel, a student pursuing a bachelor’s degree in Microfinance at

Kyambogo University. I am carrying out a study to examine the effect of risk management on
the performance of microfinance institutions. A case study of UGAFODE Microfinance Ltd,
Bombo Road, Kampala Uganda. This is aimed at getting your views through filling in the
questionnaire.
The information provided is for study purposes and it will be treated with confidentiality.
Date ………. /…….2024
Instructions: Please answer the questions to the best of your knowledge and experience. Your
responses will be treated with confidentiality and used for academic purposes only.
Section A: Demographic Information
1.1 Gender:
a) Male

36
b) Female
1.2 Age
a) Under 30
b) 30-40
c) 41-50
d) 51 and above
3. Highest level of education completed:
a) Secondary School
b) Diploma
c) Bachelor’s Degree
d) master’s degree
e) PhD/Doctor

4. Length of time you have been employed at Ugafode Microfinance Ltd:

a) Less than 3 years
b) 4-6 years
c) 7-10 years
d) More than 10 years
Section B: Effect of Risk Identification on Performance
5. To what extent does your institution prioritize the identification of risks that may
affect its operations?
a) Very low
b) Low
c) Moderate
d) High
e) Very high
6. How frequently does your institution conduct risk identification exercises? a) Never

37
b) Rarely
c) Occasionally
d) Frequently
e) Always
7. In your opinion, how does effective risk identification contribute to the performance
of microfinance institutions? Please provide specific examples if possible.
…………………………………………………………………………………………………
…………………………………………………………………………………………………..
Section C: Effect of Risk Monitoring on Performance
8. How effectively does your institution monitor identified risks?
a) Not effectively at all
b) Slightly effective
c) Moderately effective
d) Very effective
e) Extremely effective

9. What methods does your institution use to monitor risks? (Check all that apply)
a) Regular reports and analysis
b) Key performance indicators (KPIs)
c) Monitoring committees or teams
d) Other (please specify: ____________)
…………………………………………………………………………………………………
…………………………………………………………………………………………………

10. How has effective risk monitoring positively impacted the performance of your
microfinance institution?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
Section D: Effect of Risk Control on Performance

38
11. How would you rate your institution's ability to control identified risks? a) Very
poor
b) Poor
c) Fair
d) Good
e) Excellent
12. What strategies does your institution employ to mitigate or control identified risks?
(Check all that apply)
a) Risk transfer (e.g., insurance)
b) Risk avoidance (e.g., not engaging in high-risk activities)
c) Risk reduction (e.g., improving internal controls)
d) Other (please specify: ____________)
…………………………………………………………………………………………………
…………………………………………………………………………………………………

13. Can you provide examples of how effective risk control measures have influenced
the overall performance of your microfinance institution?
…………………………………………………………………………………………………
…………………………………………………………………………………………………

Section E: Overall Assessment

14. In your opinion, how significant is the role of risk management in determining the
overall performance of microfinance institutions?
a) Not significant at all
b) Slightly significant
c) Moderately significant
d) Very significant

39
e) Extremely significant
15. What improvements or changes would you recommend in the current risk
management practices of your institution to enhance its performance?
…………………………………………………………………………………………………
…………………………………………………………………………………………………

Thank you for your corporation

40