DETERMINANTS OF LOAN DEFAULT BY SAVINGS AND CREDIT CO- OPERATIVE SOCIETIES’ MEMBERS IN BARINGO COUNTY, KENYA

ABSTRACT 
Loan delinquency in SACCOs is a major threat in the sustainability of granting loan to the loan applicants and the growth of the business. Gradual increase in delinquency rate implies that SACCOs are unable to recover what they have lent out to loan beneficiaries. This affects the SACCOs' financial obligations. SACCOs' financial growth is a critical issue and failure to maintain cash in circulation affects their core business. SACCOs in Baringo County has realized increasing loan default since the year 2010, which was ksh.76, 987,450 and rose gradually to Ksh. 225,464,348 in the year 2013. Management in SACCOs impress on proper loan appraisals, timely reminders on repayments by loan beneficiaries and escalating on timely follow-up on loan defaulters. Delinquency continues to increase despite the measures taken to mitigate the problem by SACCOs. The study sought to establish the social factors that affect loan repayment by the borrowers, to determine economic factors that affect loan repayment by the borrowers, and to establish terms of loan factors that affects both SACCOs and borrowers regarding loan repayment. The study employed descriptive survey design targeting the 39 SACCOs in Baringo County. A sample of 39 credit officers and 196 loan beneficiaries ‘respondents obtained. The primary data collected using a questionnaire, and analyzed using both descriptive statistics and inferential statistics that is correlation and regression analysis. The result of the study indicated that economic factors, and terms of the loan factors significantly affect loan default however social factors does not significantly affect the loan default. The study recommends that a credit policy should be maintained that is in built in Sacco software. Also more training programs sponsored by Sacco’s aiming at enhancing the members on economic and social factors.

CHAPTER ONE 
INTRODUCTION 
Background of the Study 
Savings and Credit Co-operative Societies (SACCOs) are started locally and have solid bases of small saving accounts constituting a stable and relatively low- cost source of funding and low administrative costs. Sacco Societies constitute not only the fastest growing sub sector of the Cooperative Movement in Kenya, but also the most significant in impacting on the livelihoods of their member (Olando 2013). They are currently regulated through the Cooperative Act under SACCO Societies Regulatory Authority (SASRA) which is prudentially regulating FOSA operating SACCOs . The target market that SACCO’s deals with is mostly the poor and neglected segment thus innovate products that suits their needs. It is of importance to understand the steep competition in the financial institutions that limit the stretch of one player to cover extra new market. The cost associated with such move may not be beneficial to such SACCOs thus renders their performance lower than expected. According to a report by Fin Access (2009) , SACCOs lost their market share in spite of their geographical spread in the country compared to other financial providers. This could be attributed to challenges that SACCOs faces due to the characteristics of the market segment it serves. 

SACCOs advances loans at interest rates lower than those charged by other financial providers. In addition, SACCOs have the ability and opportunity to reach clients in areas that are unattractive to banks, such as rural or poor areas SACCO’s loan delinquency is measured because it indicates an increased risk of loss, warnings of operational problems, and may help predicting how much of the portfolio will eventually be lost because it never gets repaid. Majority of the SACCOs are facing rising rate of loans default. Though SACCOs take necessary action to appraise loan and use methods like credit rationing, rate of default is still growing. SACCOs incur huge funds to monitor and make loan recovery that in turn will affect its efficiency providing finance (Olando 2013). 

Loan default is defined as the failure to pay back a loan when due which may occur if the debtor is either unwilling or unable to pay its debt. Sacco’s societies grant loans based on member’s savings and guarantee from other members. The loan may be more or less than the savings of the borrower. Loans less than the member savings are secure and assure the repayment. Other members must guarantee loans in excess of the member’s savings. Unrecovered loans were considered delinquent and hence defaulted. Most SACCOs either have no loan policy and procedures or what exists is not very clear and comprehensive. There are cases where loan-aging analysis is hardly practiced, there are no provision for loan write offs and losses. No guidelines exist as to what to do in cases where a member defaults in loan repayment. Where they exist, they are inadequate to serve the purpose as intended. Practice like the one risk analysis management is therefore made impossible. Failure to prevent loans default risk has implication with sustainability and performance for rural SACCOS. If the SACCOS have large number of overdue loans implies that borrowers hold the capital of the SACCOS, hence this affect their operations. Those SACCOs that faces rising rate of default fails to issue new loans (Magali 2013). 

The primary objective of credit unions is to satisfy the depository and borrowing needs of the members and failure to meet solvency, result in inability to finance even its operations. Magali (2013) argues that the large size loan has higher risk of default than the small one. Hence, the SACCOS should offer large size of loan to their members after deep analysis of credit risks mitigation techniques. Some of the SACCOS have installed technology in their operation systems. Effective management of the loan portfolio and the credit function is fundamental to a financial institution liquidity safety and financial soundness. However, lending technology, risk management, and MIS faces underutilization in most SACCOs. This is a significant challenge for the sector, given that large SACCOs have several thousand clients and a wide variety of products. 

Microfinance loans require staff that can assess creditworthiness of loan applicants and monitor closely repayment of loans issued. They also require loan management systems that allow staff and managers to generate the necessary types of reports for proper loan monitoring and recovery management. Lack of good computerized systems is a major constraint in efficient operations. In its absence, it is very difficult to track loan-delinquencies, aging and provisioning and loan write offs, and ensure that accountants and financial managers apply business rules consistently. Most SACCOs have manual or simple spreadsheet-based accounting and MIS systems (Owen 2007). Loan default s attributed to both individual member and the SACCOs themselves since failure on the institution to thoroughly screen the potential of the member to repay the loan could lead to providing loan to unworthy member. The chances of such a loan to be recovered is slim and on the other hand, if the member qualifies on the set criteria for the loan but intentionally or unintentionally fails to service the loan when it falls due, then delinquency will be experienced. 

According to Chege (2006), SACCOS grant loan subject to some key variables. These variables can be new products, interest rate and client’s ability to repay. New products such as microfinance loans and withdrawal savings products require sophisticated cash flow and maturity management (Owen 2007). Kairu (2009) argues that loans be distributed according to the established credit policy and procedures. The two diverging perspective put the management in conflicting situation on what actually yield in minimizing credit default. However, as a rule of the thumb, the loan policy gives the management specific guidelines in making individual loan decision and in shaping the institution’s overall loan portfolio, Kenya Societies Act (2008). 

In addition, Act 2008 stipulates that SACCOs should advance loans to members who have ability to pay. Collection policies and procedures will apply equally to all members regardless of their professional or social standing. It is an object of the SACCOs to comply with applicable national and regional regulations, to follow Board approved procedures and guidelines, to train adequately staff to perform their duties, and to properly document loan files (Raaiji et al., 2005).Act 2008 provides for the establishment of a risk reserve out of the SACCOs profits to safeguard loss of capital. Some SACCOs in their own accord have established risk funds in which members pay monthly contributions. This is to cushion SACCOs from loan loss due to the death of a member. This approach ensures that guarantors do not suffer from deductions and the deceased family is spared from the burden of repaying the loan. (Tayari, Kimanzi, &Mwiti, 2014). 

Seyfried (2001), contend that we should assess the credit risk by checking at the borrower’s economic and financial situation as well as the relevant environment (industry, economic growth). Prudent risk selection is vital to maintaining favorable loan quality. SACCOS strive to offer cheap loans compared to other financial institutions. This poses a challenge for SACCOS to cushion unforeseen eventuality in case of high default rate. Other commercial institutions factor in risk in their interest charges over loan portfolios. This is not the case with SACCOS since they target low- income market that is constrained to qualify for commercial loan. However, variables such as prices of farm produce, and environmental factors are beyond the control of both the SACCOS and borrowers. Changes in prices of produce due to environmental and market forces leads to misleading appraisal results. In addition, government legislation for example increasing taxation on farm inputs and exports had the final consequence of reduced profitability of farmers that may lead to non-performance of loans. In general, the macroeconomic environment has an impact on the assessment borrowers and their ability to have a loan. An economy in growth is favorable to an increase in revenues and a decrease in financial distress. As a result, real GDP growth and employment are negatively associated with the loan default. 

According to Fofack (2005), economic growth and the real interest rate are important determinants for bad loans in the sub-Saharan African countries. Unlike commercial banks, SACCOS fails to charge higher interest rate however, high default rate persist. Commercial banks can improve revenue by either increasing interest rates and commissions or portfolio volume. Okpugie (2009) also indicated that, high interest charged by the microfinance banks has been discovered to be the reason behind the alarming default. Similarly, Vandel (1993), concur that high interest rates charged by banks tend to facilitate default by borrowers. Olomola (1999), argue that loan disbursement lag and high interest rate can significantly increase borrowing transaction cost and can adversely affect repayment performance. These factors are within the domain of the institution providing the loan. 

Despite the above mention factors, other scholars like Akinwumi &Ajayi (1990) cite farm size, family size, and scale of operation, family living expenses and exposure to sound management techniques as some of the factors that can influence the repayment capacity of farmers. On the other hand, Berger and De Young(1995) assert that the main causes of default of loans from industrial sector as improper selection of an entrepreneur, deficient analysis of project viability, inadequacy of collateral security/equitable mortgage against loans, unrealistic terms and schedule of repayment, lack of follow up measures and default due to natural calamities.

For more Business Administration Projects Click here
===================================================================
Item Type: Kenyan Postgraduate Material  |  Attribute: 61 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
===================================================================

Share:

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.

Search for your topic here

See full list of Project Topics under your Department Here!

Featured Post

HOW TO WRITE A RESEARCH HYPOTHESIS

A hypothesis is a description of a pattern in nature or an explanation about some real-world phenomenon that can be tested through observ...

Popular Posts