The effect of financial loans on the performance of local businesses: a study of Brac Financial Organizations clients, Kira Branch

Abstract

The study investigated the effect of microfinance loans on the performance of local businesses in Uganda. It specifically analyzed the effect of independent variables, which included current loan, previous loan, age of client and monthly sales on clients’ monthly profits. Primary data was collected from Brac microfinance Kira town Wakiso district from clients. Data was analysed by generating frequency tables, graphs and pie charts. Data was further subjected to OLS regression analysis technique.

The study found that on average a 10.0 percentage change in current loan, holding other factors constant, affects positively a client’s profits by 1 percent. This implies that more loans are beneficial in generating more profits for the clients. Loans if invested well result in increased output of goods and services, which are then sold to generate profit. The study also found that a percentage change in the previous loan, holding other factors constant negatively affects clients profits. Results again indicate that on average a 10 percent change in the age of the client, holding other factors constant, negatively affects profits but by a very small value, which does not make economic sense. This study also found that the effect of sales by a client increases profits but by a small value. Likewise, this result although significant is too small. Loans were found to improve production, employment, sales and profits of a client. Most clients sourced their loans from microfinance institutions.

Basing on the above results, the study recommends that the government should ensure that a policy enabling low-income earners to easily access finance is put and enforced. Financial institutions should avoid over charging firms for loans through lowering interest rates. In order to stimulate better performance at the firm level, a special fund should be set up that charges firms lower than market rates. This will in effectively reduce on the burden that many clients face.