ANALYSING THE LOAN APPRAISAL PROCESS, LOAN TERMS, MONITORING, AND TECHNICAL SUPPORT AS DETERMINANTS OF LOAN PERFORMANCE AMONG SMALL AND MEDIUM ENTERPRISES IN UGANDA: A CASE STUDY OF BORROWERS AT THE MICROFINANCE SUPPORT CENTRE

Abstract

The financial performance of Small and Medium Enterprises (SMEs) remains critical for economic growth and poverty reduction in Uganda. Despite their significance, many SMEs continue to face challenges in sustaining satisfactory loan repayment performance. This study examined the determinants of loan performance among SMEs in Uganda, focusing on borrowers from The Microfinance Support Centre Limited (MSC). Specifically, the study assessed the influence of the loan appraisal process, loan terms, and monitoring and technical support on SME loan performance. A cross-sectional research design was adopted, employing both quantitative and qualitative approaches. Data were collected from 108 SME borrowers using structured questionnaires and from eight MSC management staff through key informant interviews. Quantitative data were analysed using descriptive statistics, Pearson correlation, and simple linear regression to examine relationships between variables. Qualitative data were subjected to thematic analysis to provide contextual interpretation of the quantitative findings. The results revealed that the loan appraisal process had a statistically significant and positive influence on SME loan performance (r = .479, p < .01), explaining 43.4 percent of the variance. Key factors included the thoroughness of financial analysis, accuracy in risk assessment, and transparency in credit evaluation. Loan terms also showed a strong positive relationship with loan performance (r = .639, p < .01), accounting for 58.4 percent of the variance, with interest rates, loan tenure, and repayment flexibility emerging as significant contributors. Furthermore, monitoring and technical support exhibited a moderate positive effect (r = .413, p < .01), explaining 35.9 percent of the variation in SME loan performance, with regular follow-ups and targeted business support identified as critical drivers. The study concludes that enhancing loan appraisal rigour, tailoring loan terms to SME financial realities, and strengthening monitoring and technical support mechanisms are essential for improving SME loan performance. It recommends targeted capacity-building for credit staff, improved loan restructuring processes, adoption of digital monitoring tools, and the development of sector-specific technical support packages for SMEs.