The significance of financial statements towards loan default

The Research sought to establish the causes of loan default by SMEs with a specific focus on Pride Microfinance Limited, Uganda. The objectives of the study were: i. To establish the quality of financial statements prepared by SMEs and the role they play in loan defaulting by SMEs in Pride Microfinance Limited, Uganda. ii. To assess the extent to which financial statements guard against loan defaulting by the selected SMEs. iii. To assess whether personal character influences loan default by the selected SMEs. iv. To review other causes of loan default by SMEs in Pride Microfinance Limited, Uganda other than the ones above. The research employed a cross sectional survey design and a mixed methods approach to capture both qualitative and quantitative data necessary to comprehend the findings of the study. The research population consisted of 100 respondents including credit staff, auditors and SME clients. Data were obtained using self-administered questionnaires. The findings of the study indicate that financial statements prepared by SMEs and presented to auditors are of poor quality however the audited financial statements that are presented to the microfinance are fairly of good quality. The study revealed that to a large extent financial statements do not guard against loan default. Other factors such as peer pressure, time of loan disbursement and the type of loan product are equally responsible for loan default among SMEs. The research vi also discovered that some Chorelics personality individuals are more predisposed to loan default as opposed to the Sanguines, Phlegmatic and Melancholic personalities. The study recommends that while accessing loan applications for SME clients, credit staff in Pride Microfinance need to ask for guarantors as an additional requirement for SMEs to obtain loans, improve turnaround time (TAT) for approving SME loans, include covenants requiring regular client visits and monitoring of disbursed SME loans by relationship managers and only approve loans to SME clients with verifiable and consistent profit margins. Keywords: Finacial statements, SME's, credit default.