EFFECTIVENESS OF SECURITY ON LOAN RECOVERY IN SACCOs (A CASE STUDY OF MHASIBU SACCO)

BY

ANDREW TALAM

BBM/9058/2009.

A RESEARCH PROJECT PROPOSAL SUBMITTED TO MOI UNIVERSITY IN PARTIAL FULFILMENT OF REQUIREMENTS OF A BACHELOR DEGREE IN BUSINESS MANAGEMENT, FINANCE & BANKING

APRIL, 2011

DECLARATION

THIS PROJECT IS MY RESEARCH WORK AND HAS NOT BEEN PRESENTED FOR AWARD OF ANY DEGREE IN OTHER UNIVERSITIES

------------------------------ANDREW TALLAM

-----------------------------------DATE

THIS RESEARCH PROJECT HAS BEEN SUBMITTED FOR EXAMINATION FOR MY APPROVALE BY MY UNIVERSITY SUPERVISOR.

--------------------------------

..............................................

MR JULIUS

DATE

ABSTRACT There are about 5,000 sacco societies in Kenya which by December 2007, had mobilized Kshs 200 billion representing about 31 percent of the countrys savings or 1/3 of the countrys GPD. MHASIBU SACCO SOCIETY Ltd is situated in Nairobi and established in 1974. It is one of the largest SACCO Societies in the country. Mhasibu Sacco has a branch in Major cities in the country. Its objective is to mobilize savings and grant loans to members. By December 2007, Mhasibu Sacco Society Ltd had mobilized Kshs 8.8 Billion, which is equivalent to 4.4% of all Sacco Savings in the country. By then the outstanding loans stood at Kshs. 8.2 Billion out of which about Kshs 23.5 Million was delinquent. The securities for the loans are loanees expected future income and guarantors.

Granted, that Sacco Societies mobilize large amounts of Savings and consequently give huge loans on the premise that the latter will be paid promptly, a mechanism of compelling loanees to pay such loans from other sources of income in absence of employment income is lacking. Further the retirement benefits authority (RBA) prohibits the use of a loaneess pension in clearing the loan liability. Given the magnitude of funds lent out, there is need to examine factors that influence the effectiveness of security in loan repayment.

TABLE OF CONTENTS
DECLARATION ............................................................................................................ ii ABSTRACT ....................................................................................................................... iii CHAPTER ONE ................................................................................................................. 1 1.0 INTRODUCTION ................................................................................................. 1 1.2 STATEMENT OF THE PROBLEM ...................................................................... 3 1.3 THE STUDY OBJECTIVES .................................................................................. 4 1.4 RESEARCH QUESTIONS ................................................................................... 5 1.5 JUSTIFICATION OF THE STUDY ...................................................................... 5 1.6 SIGNIFICANCE OF THE STUDY........................................................................ 5 1.7 LIMITATION OF STUDY.................................................................................... 6 1.8 ASSUMPTIONS OF THE STUDY....................................................................... 6 1.9 SCOPE OF THE STUDY....................................................................................... 6 CHAPTER TWO ................................................................................................................ 8 2.0 LITERATURE REVIEW ...................................................................................... 8 2.1 INTRODUCTION ................................................................................................ 8 2.2 CONCEPTUAL FRAMEWORK ......................................................................... 9 2.3 SAVINGS ........................................................................................................... 11 2.4 CREDIT GRANTING ......................................................................................... 11 2.5 GUARANTORSHIP ........................................................................................... 11 2.6 DEFAULT IN LOAN REPAYMENT ................................................................ 13 2.7 REVIEW OF PAST STUDIES DONE IN THE AREA ..................................... 14 2.8 REVIEW OF MAJOR ISSUES .......................................................................... 15 2.9 GAPS TO BE FILLED BY THE STUDY ......................................................... 16 CHAPTER THREE .......................................................................................................... 17 3.0 RESEARCH METHODOLOGY......................................................................... 17 3.1 INTRODUCTION ...............................................................................................17 3.2 RESEARCH DESIGN .......................................................................................... 17 3.3 POPULATION .................................................................................................... 17 3.4 SAMPLING DESIGN ......................................................................................... 18 3.5 DATA COLLECTION PROCEDURES .............................................................. 18 3.6 DATA ANALYSIS ............................................................................................... 18 REFERENCES ................................................................................................................. 20 APPENDIXES ..................................................................................................................22

CHAPTER ONE

1.0

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The ultimate goal of every nation is uplifting the living standards of its people.

Countries all

over the world have tried to achieve this goal either by directly involving themselves in activities that lead to improvement of welfare or by creating the infrastructure that encourages the people to be involved in programmes that lead to improvement of their standard of living..

Disparities in natural resource endowment coupled with the effectiveness of development policies adopted by respective countries have contributed to social and economic strata among nations. This is manifested by existence of the well to do, middle and low income (Todaro MP 1980). According to the theories of demand and supply, the demand for goods and services is infinite while the resources to satisfy them are finite and scarce (Samuelson 1981). The per capita output of goods and services is an indicator of the level of development of a country and the relative incidence of poverty.

Countries have therefore adopted and employed a number of strategies that increase the quantity and range of goods and services that will meet the limitless demand. In so doing, peoples standard of living improves and economies develop. Availability of financial services spurs enterprise growth and the economy as well (Atieno 2001).

Financial services are available from formal, informal and semi formal providers. Thus financial services providers range from commercial banks, Non Banking Institutions, Micro finance institutions, money lenders, friends and relatives. Rotating Savings and Credit associations (ROSCA) and Savings and Credit Co-operative societies (SACCO) are some of the best examples of micro finance institutions.

Each of these financial services providers serves a specific segment of customers. Income differentials account for this segmentation. The high income segment obtain financial services from formal financial services providers especially, commercial banks, as they are able to full fill most of the account maintenance conditions. These conditions lock out the poor and the middle income earners (Atieno 2001).

About fifty percent of Kenyans earn less than Kshs.1230 per Month implying that most Kenyans live below the poverty line(Republic of Kenya 2005). Uplifting the living standards of the poor calls for availability of secure avenues of savings and affordable credit. The low income earners obtain such financial services from informal and semi formal financial institutions(Thapa Et Al 1992). These financial services providers range from SACCOs, ROSCAS and NGOs to money lenders, friends and relatives.

Co-operative societies form the best avenue of obtaining credit for the low income earners in regular employment. SACCOs are an integral part of microfinance as they provide savings and credit facilities to the low income and poor households.

Some members of SACCO societies have obtained credit from their co-operatives and have utilized it to buy graded dairy cows and after two or three years of loan repayment the cow would have a calf. By the time the loan is fully repaid, the member has a bigger herd of cattle and income from milk sales(Ouma 1996).

Savings and credit co-operative societies have had the most viable impact on the lives of many Kenyans(Mugwanga 1999). SACCO societies play an important role in economic development by way of mobilizing savings and giving loans for financing real estate, members personal expenses and human capital development. This has led to uplifting the living standards of their members.

Membership to a SACCO is open and voluntary provided applicants meet preset admission conditions. Once admitted the member is expected to save for a specified period before applying for a loan.

Loan applicants are required to use a specially designed loan form. Loans are granted at the rate of three times a members savings. The security for the loans is savings and expected future earnings from salary and this is reinforced by guarantors.

The extent to which guarantors are able to make good for defaulted loans can only be assessed in event of loanees defaulting in loan repayment. Hence there is need to assess the effectiveness of guarantors, who are the security, for those who default in loan repayment.

The co-operative society Act only makes it an offence if deductions are not remitted to the cooperative once recovered from the payroll or source. (Cap.No.12 of laws of Kenya, 1997).SACCOs drawing their membership from formal employers depend on the latters payroll system to process and remit members contributions. There lacks a provision that compels employers to effect deductions. Consequently, employers are at liberty to effect deductions. The SACCOs are not under a supervising agent/organization reminiscent to the commercial banks and micro finance institutions despite providing with similar services. Loan default risks are very high to the members and the co-operative society and yet the legal framework for full guarantee for members loans is lacking.

1.2

STATEMENT OF THE PROBLEM

There about 5000 registered Cooperative Societies in Kenya. Those members have contributed about Kshs 200 billion with a loan portfolio of Kshs 170 billion. And a total member ship of 7 million person. The loan portfolio represents about 85% of the total savings. This clearly states that the largest number of Cooperative Society Members are on loan. There are about 42 commercial banks in Kenya. 1/3 of Kenyas G.D.P contribution is in the Cooperative Movement. The growth rate of Cooperative Movement in Kenya is 20%.

It is therefore apparently clear that the Cooperative Movement is a vehicle for poverty eradication and economic development in Kenya.

The core business of savings and credit co-operative societies is to mobilize savings and grant loans to members. Loans are granted upon members filling prescribed loan application forms to which guarantors, who act as security of the loan, append their signatures committing themselves to repay the loan in event of default in payment. Owning to current economic hardships people have turned to borrowing from NGOs Microfinance institutions, SACCO Societies and Banks. These borrowed funds have to be guaranteed. Members of SACCOs find themselves with a long schedule/list of loans to pay. In ability to pay by the principle leads to default and hence forcing the guarantors to pay.

There is no safety net for guarantors on defaulted loans. Dishonest members have abused trust by guarantors and proper rules to protect guarantors should be put in place. Cessation of operations by a members employer and subsequent loss of job, salar y over commitments and dishonest among members leads to non-recovery of loans granted despite existence of guarantors. A mechanism of compelling members to pay such loans from other sources of income is lacking. The Retirements Benefit Authority (RBA) prohibits the use of members pension in paying off their liabilities. Hence there is need to examine the factors influencing the effectiveness of securities in loan recovery.

1.3 THE STUDY OBJECTIVES The study will be guided by the following objectives: To identify how effective is security in SACCO loan recovery To find out the basis upon which members guarantee each other loans. To find out why default in loan repayment occurs.

1.4

RESEARCH QUESTIONS

The following research questions will be used as a basis for the study: What factors influence effectiveness of loan security? On what basis do SACCO members guarantee each other loan? Why do borrowers default on repayment even when the loans have been guaranteed?

1.5

JUSTIFICATION OF THE STUDY

This study will expand the existing body of knowledge in this area by providing insights into factors influencing loan security, reasons for default and effectiveness of loan recovery process. The research findings provide valuable information on security to existing and potential SACCO members. Findings from the study can also enable management of SACCOs make rational/informed decisions on loan granting and repayment period and hence minimize incidences of loan defaults.

The research findings will provide valuable information to the government that may be useful in policy formulation on SACCO loans repayment. The findings from this study also provide literature on loan repayment for interested researchers.

1.6 SIGNIFICANCE OF THE STUDY Past studies in SACCOs have Largely focused on cash flow problems. (Nabangi T 2005). Financial Mismanagement (Goto D H 2004) and members attitudes towards SACCO Lending Policies (Omweri L. 1980).

The study will provide insight information into effectiveness of security, reasons for default and effectiveness of loan recovery process to the members, and the SACCO. This will help in making rational decision on granting and repayment of loans. The research finding will also provide valuable information to the government that may be useful in policy formulation on SACCO loan repayment.

To the public and potential members it will enable them to know how useful loans from SACCOs should be paid back by the citizens since the SACCO movement is a driving force of the countrys economy. 1.7 LIMITATION OF STUDY Time to carry out study is not sufficient Finances for operations are scarce Spread of the membership in the Institution of Study Co-operation of the staff in the institution in providing classified information.

1.8

ASSUMPTIONS OF THE STUDY

For the purpose of this study, the following assumptions are made:

All loans granted are fully guaranteed. A mechanism of recovering defaulted loans from guarantors exists The respondents will provide honest answers. Relevant legal framework governing the management of SACCO societies exists. There will be no major changes in political, economic, socio-cultural and technological changes between/within the period of study.

1.9

SCOPE OF THE STUDY

The study will be carried out in MUHASIBU SACCO society which is among the biggest SACCO societies in Kenya. The SACCO is chosen on the basis of the fact that it has a very broad membership spread in the country cutting across Accountants, Auditors, Investment analysts, Bankers , civil servants, University lecturers and individuals in private sector employment. This spread also captures members of different cultural set ups and diverse geographical regions reflecting different tastes and preferences for consumption of funds. Hence the findings from this study will be a representative of savings and credit societies in the country.

CHAPTER TWO
2.0 2.1 LITERATURE REVIEW INTRODUCTION

This chapter will deal with a review of literature relevant to the study. Savings and credit Cooperative Societies offer financial services to individual members and not groups or companies. Kenya aspires to become an industrialized nation by 2030 (Vision 2030). Given the limited market for the metallurgical industry, this goal can only be achieved trough the service industry. The financial market is critical to the attainment of this objective. Some sectors of this market such as SACCOs are extremely vibrant and if fully harnessed can be crucial in accelerating economic development.

Saving and credit co-operative societies take a number of different medium though which members save and are granted loans. In the event of default in loan repayment, threat of sale of collateral or social sanctions by peers often compels repayment.

Traditional co-operative and Savings Societies have existed since time immemorial. Amongst the Kenyan Communities, These Cooperatives took different forms. The Kikuyu Community had Ngwatio, a form of group work in which members of the group assisted each other in turns, during farm cultivation and construction of traditional dwelling huts. The Luo Community had group work called Saga in which members of the group ploughed or harvested individual garden of their members in turns (Ouma 1990). Similar groups that existed among the Kisii were called, Risaga while the Kalenjin Community had Kokwet and Kambas had Ngwatano for cultivating and cattle rearing. While Membership to these groups was voluntary, their main objective was to enhance community cohesion and elimination poverty.

The first legislation to govern the legislation of Co-operative Societies in Kenya was enacted in 1931. The first to be registered was Kenya Co-operative Creameries in February, 1931 (Now the new Kenya Cooperatives creameries).

The management of co-operative societies in Kenya is governed by the co-operative societies Act No. 12 of 1997 and subsequent cooperative societies (Amendment) Act No. 2 of 2004 that comply with the guidelines of the International Co-operative Alliance (ICA, 1995). Currently there are about 10,000 co-operative societies and unions in the cooperatives of Kenya. They have a membership over eight million.

People join co-operatives for a number of motives that are broadly grouped in to three. The establishment of SACCO societies was as a result of a desire to accord low and middle income cadre employees an opportunity to save and borrow at more favourable terms than commercial banks (Chambo S A 2005). Social motives to form co-operative arise from a basic need to join a co-operative in order to survive. Members who face similar conditions of poverty see the need to form co-operatives without which they risk marginalisation as individuals.

The generic survival of co-operatives depends on positive attitude of members as individual persons, their social solidarity and their mutual perception of successful business. The SACCO Society account for 1/3 of the countrys GDP with a growth rate of 20% of these can therefore, be used in stimulating economic growth (C. Ademba 2008). Cooperative societys ability to hold together individuals from different backgrounds is due to the trust the members have in their leadership and policies. Members of co-operatives are known to each other as a result of frequent transactions in general meetings and guaranteeing each others loans and this has built ethical standards transparency and accountability leading to a sustained good corporate reputation.

2.2

CONCEPTUAL FRAMEWORK

Effectiveness of securities of SACCO loans depends on the financial stability of members employer, insurance for default on account of members demise, savings and other sources of income, government regulations as enacted in statutes and co-operative societies by-laws. The conceptual framework shows the interaction between factors that influence the effectiveness of securities in SACCO loans repayment.

Independent variables

Dependent Variable

Effectiveness of securities

Basis of loan guarantee

Loan recovery

Causes of loan defaulting Researcher (2011)

Areas of literature study include:-

2.3 SAVINGS Savings help avoid pitfalls of seasonal variations in income, act as collateral for loan insurance against illness, disability or loss of income in case of retirement. The demand for Savings Services depends on the confidence in the Institution to safe guard deposit and easy and immediate access to funds (Wiswiwski & hanning 1991).

The culture of savings has not fully been embraced by most Kenyan Society. This has resulted to most members being net borrowers as opposed to savers (C. Ademba 2008).

2.4

CREDIT GRANTING

Credit is an arrangement to receive cash, goods or services now and pay for them in future. Improving the avail ability of credit facilities to poor households is one of the incentives that the Government has proposed for stimulating growth (Republic of Kenya 1994). Access to credit depends on the individuals age, education, fulfilment of lending conditions as set out by the lender. The young and old ones borrow less while the head of the household request for more credit than others.

2.5 SECURITY Every loan taken by a member of a SACCO has to be secured. Security is provided by means of guarantorship. A security which is also known as a guarantor is an undertaking whereby one person becomes answerable to the debts of another in case of default in payment. This implies that the guarantor is only secondary liable. The contract of guarantee has three parties. These include the principal debtor, the creditor and the guarantor.

The guarantor is totally unconnected with the contract, save for the loss in the event of the principal debtor failing to pay the amount owed (Kibanga 1994). The guarantor becomes liable to pay the debts of the principal when the latter fails to pay a debt

which was already in existence at the time the guarantee was agreed. The parties to the contract of guarantors must be in a position to enter into contract SACCOs set up minimum age , character etc for one to qualify to be admitted as a member. This minors and insane persons cannot enter into valid contracts of guarantee within the SACCO Movement.

Guarantors are bound by contract of guarantee and each guarantor is required to make a contribution to the liability in event of default. For a guarantee to be enforced, it must be in writing and the guarantor can only suffer loss or damage if the borrower defaults in paying due debts. When the principle debtor defaults, the right of action at once arises against the guarantor. The guarantor is not liable when the transaction between the principle debtor and creditor are not legally binding or the principle debtor is discharged.

A guarantor is discharged from being liable to make good the debts due to the creditor under a number of circumstances. These include :- Variation of terms of loan contract without the knowledge and consent of the guarantor. - Any alterations made after the loan has been guarantee (Amounts, periods, Signature e.t.c Any guarantee which the creditor has obtained by means of concealment of material facts is invalid. A misrepresentation of material facts by the creditor also invalidates the guarantorship.

A contract of guarantee may be terminated by revocation of the parties involved. Discharge of the principle debtor either through payment of the loan or disqualification of the loan discharges the guarantor. (Husein Ibrahim 1987)

2.6

DEFAULT IN LOAN REPAYMENT

The problem of default affects commercial banks and other formal credit institutions as it affects their financial viability and erodes the value of loan portfolio in addition to reducing the number of potential loanees. In extreme cases, default in loan repayment can lead to collapse of the financial services provider.

SACCO societies grant loans to members on the basis of their level of savings. The loan may be more or less than the savings of the borrower. Loans less than the members savings are secure and repayment is assured. Loans in excess of the members savings must be guaranteed by other members. Loans that are not being repaid are considered to be delinquent and hence defaulted. A default occurs when a loanee cannot pay a loan that is already overdue.

Default in loan repayment by SACCO members is brought about by commitments to other loans, diversion of salary, withholding of salary by employer due to cash flow problems or employees having discipline issue, unwillingness to pay and unprofitability of the financed units.

The image that the lender must receive loan repayments promptly and philosophy of nontolerance of late loan repayments default implies that borrowers will be committed to loan repayment. Potential borrowers are screened and only those who are committed to loan

repayment end up applying.

The manner in which borrowers are selected and the amount of loan given to each successful borrower determines the magnitude of loan delinquency. Borrowers who are given loans they can repay without hardships hardly default in repayment. In any case default in loan repayment is as a result of bad loans and not bad borrowers. A bad loan is one that the borrower repays with a lot of hardships. Information system helps in tracking down loan repayment. Borrowers credit history is easily obtained from a good information system. Those in arrears are easily identified and if necessary alternative ways of loan repayment are identified and applied.

2.7

REVIEW OF PAST STUDIES DONE IN THE AREA

SACCO Societies have a higher concentration of low and middle income earners. They provide a basic set of services that are not appealing to the affluent (K-Rep 1999). For example they do not operate current accounts, and the use of loans given is relatively small given the amount disbursed to loanees.

Lenders insist that borrowers assure them of loan repayment by way of giving them income projections based on salary or business income. At this moment they have better bargaining powers over loan granting but as soon as the loan has been dispatched the borrower gets a stronger position. This creates a lending dilemma in credit administration and it compels the lender to set up measures that will ensure that the borrowers repay the loan on time.

Members save with their SACCO so as to obtain low cost loans as compared with commercial banks. They follow a minimalist approach to credit delivery as they rarely provide technical assistance training or auxiliary services to members. Some of the research carried out in the field of SACCOs have addressed to problems of cash flow (Nabangi E T 2005). A study undertaken to examine factors that lead to cash flow problems amongst SACCOs in Nairobi. It revealed that employers withholding remittances contributed greatly to cash flow problems in urban SACCOs. This study did not address the role of guarantors in improving cash flows where the default in loan repayment has occurred. Consequently SACCOs sampled experienced cash flow problems inspite of existence of guarantors. Another study (Omweri 1998) on members attitudes towards lending policies was carried out at Mwalimu SACCO Society. The study revealed that there are certain lending conditions/policies that are unpopular with members. The study also revealed that members are unhappy about some government policies on supervision of SACCOs.

However, the study did not address on the issue of guarantorship as a condition of obtaining loans and this is an important aspect of SACCO lending policies. This study should have explored members views on guarantorship since it is integral part of SACCO loans.

A study carried out to examine the financial management problems reveal that lack of skilled manpower and staff systems, favourism, corruption and limited review of operating systems by the supervisory committee led to financial mismanagement problems at Nyati SACCO (Goto

D.H 2004). The study also revealed that these problems affect the operations of many SACCOs in the country. However the study did not address the issue of how guarantors can pressurise the loanees to pay the loan. Other study concentrated on caused of delinquency for loan. This also did not address the effects of guarantorship in ensuring repayment of loans (Oketh and Bondo 1994).

2.8 REVIEW OF MAJOR ISSUES SACCOs tend to put emphasis on loan granting than loan recovery. Employee based SACCOs have low delinquency because the employer guarantees loan recovery and remittance. The biggest challenge in credit management is to set up sustainable and cost effective system of loan recovery and default control. Defaulted loans are a cost to the society in terms of foregone or delayed interest, high recovery costs and finance costs associated with external borrowing to meet cash flow deficits. Although government has encouraged the establishment of front office services in the SACCOs a regulatory frame work is lacking (Republic of Kenya 1987). They give advances based on salary and guarantorship provided by other members. Ceasation of operations by employer and subsequent loss of jobs leads to non recovery of loans granted despite existence of guarantors. A mechanism of compelling members to pay such loans from other sources of income need to be explored.

The retirement benefits authority rules prohibits the use of retirement benefits in off-setting a members liability including outstanding SACCO loans (Section 22 Act NO 3 of 1997). The retirees may be drawing their monthly pensions which the SACCO Society cannot easily access for the purpose of loan repayment. The mechanism of recovering retirees loan is cumbersome and costly to the Society and member.

2.9

GAPS TO BE FILLED BY THE STUDY

The study will provide information on the significant factors that affect effectiveness of loan guarantee and insight into factors causing default in loan repayment. It may reveal any contradictions on generally held views that members save more with their SACCO as their salary and incomes increases.

It may reveal that the members level of savings do not commensurate with their salary levels and sources of income.

A low levels of income members save proportionately more. Savings increase as income increase up to a point where a member is unable o secure a loan that is below the generally applied criterion.

CHAPTER THREE
3.0 RESEARCH METHODOLOGY 3.1 INTRODUCTION

This chapter will deal with Research Design and the descriptive approach which will be carried out. It will further disclose the population of defaulted loans in the year 2011 at Mhasibu Sacco within members on TSC payroll, Ministries and private institutions.

The Chapter will in addition to the above deal with the sampling method to be used in the research to achieve the highest degree of representation, methods of data collection and procedures to be adopted, use questionnaires and the type of questions to be framed for the purpose of the research. Finally, the data collected will be analysed using statistical package for social sciences software.

3.2

RESEARCH DESIGN

A descriptive approach will be adopted in this study approach. This study design will enable the researcher to examine factors leading to non-payment of SACCO loans, and factors that ensure prompt and reliable recovery of defaulted loans from guarantors. It will involve search of literature, talking to experts, conducting interviews with branch leaders, focused group leaders and employees of the SACCO.

3.3

POPULATION

The target population is on all guarantors who were attached in 2011 for loans they had guaranteed that later became defaulted.

There were a total of 1481 males and 869 female guarantors who were attached as a result of defaulted loans. The population shows that men guarantors are more than women guarantors who were attached. It may indicate that women are more keen on the people they guarantee for loans compared to male counterparts.

3.4

SAMPLING DESIGN

The study will use a combination of purposive and stratified random sampling. Attached guarantors are from 10 T.S.C payroll departments, and other organizations with 2 departments will be sampled and randomly used to obtain a sample from different departments.

There are 2350 guarantors who were attached in 2011. About 230 will be sampled from all the departments reflecting 10 % of the guarantors.

3.5

DATA COLLECTION PROCEDURES

The research instruments for this study will be members questionnaires and Mhasibu SACCO Societys Records.

Use of questionnaires will enable the researcher to accumulate data with ease and also help in obtaining important data from a number of respondents. The researcher will apply open-ended questions covering loan granting an repayment of defaulted loan. The members questionnaire will be designed to collect information on gender, age, perception on loan guarantor ship, level of savings and reasons for default in loan repayment. The questionnaire also sought to find out how long a member has been with the SACCO, whether they guarantee loans and on what basis. Members views on the impact of Government rules and regulations in enhancing loan recovery were sought. Members will also be asked to indicate their level of savings with the SACCO and whether they use their other source of income in repaying loans. The questions will be structured and open ended (Sample attached).

3.6 DATA ANALYSIS AND REPORTING The raw data obtained from pre-coded questions will be entered into a computer and analyzed using Statistical Package for Social Sciences software (SPSS) version 11.5. This software is chosen because it is able to handle large quantities of data and is thus efficient for this study.

Qualitative information generated from open-ended questions will be organized into themes and the report produced will enrich the quantitative analysis. The data will be analyzed by getting the mean mode and standard deviation of the samples.

CHAPTER FOUR: RESEARCH FINDINGS 4.0 Data Analysis

The purpose of this study was to investigate the effectiveness of securities on loan recovery in the SACCOs. The population used in the study was all from Mhasibu SACCO, which is the case of this study. Questionnaires were distributed to the 50 members. However, 45 responded to the questionnaires while others refused to fill in the questionnaires due to the nature of the topic. This was around 90% success rate of the research carried out but did not affect the findings. The findings are represented according to the objectives of the study. First with the effect of securities in SACCO loan recovery, second is basis of securing the loans, third is why borrower default on payment and lastly the effectiveness of the loan recovery process.

4.1

Response rate

The researcher gave out 50 questionnaires to the respondents, from which 45 were collected, giving a response rate of 90%.

4.2

Background Information

4.2.1 Age of respondents The study in the table below shows that about 64% of the respondents are between the ages of 26 to 45 years. This forms the largest group of the selected respondents. They are followed by those between the ages of 18 to 25, who stand at about 29%. The respondents selected who were over 45 years of age, make up 7% and was the least age group in the respondents list.

Table 1:

Age of respondents Age 18 - 25 26 - 45 Over 45 Total Frequency 13 29 3 45 Percent 29 64 7 100

Source (Questionnaire)

Figure 4.1 showing age of respondents

Over 45 7%

18 - 25 29%

18 - 25 26 - 45 Over 45

26 - 45 64%

Source (Questionnaire)

4.2.2 Gender According to the study, 67% of the respondents were male while 33% were female as shown in the table below.

Table 2: Showing Gender

Gender Male Female Total Source (Questionnaire)

Frequency 30 15 45

Percentage 67 33 100

Figure 4.2 showing gender

Female 33% Male Male 67% Female

Source (Questionnaire)

4.2.3 Level of Education In the study, the respondents selected were categorized according to their education level. This showed that most of the respondents had reached college level of education. This had a

representative percentage of 40. Those who reached university level and secondary level were 33% and 11% respectively. About 16% did not specify their education level.

Table 3: Showing Education Level Education Secondary College University Other Total Source (Questionnaire) Frequency 5 18 15 7 45 Percentage 11 40 33 16 100

Graph 4.3 showing education level

45 40 35 30 25 20 15 10 5 0

Percentage

Se co nd ar y

ol le ge

ity

ni ve rs

Education level

Source (Questionnaire)

4.2.4 Membership duration According to the finding shown in the table below, 16 respondents, whose age bracket is between 10 to 15 years of age, are the one who has been with the SACCO the longest. This forms about 36% of the respondents. This was followed by the age group 5 to 10 years who are 29%. About 22% of the respondents were relatively new to the SACCO and were less than 5 years old with the SACCO. About 9% have been with the SACCO between 15 to 20 years while only 4% have been with the SACCO for over 20 years.

Table 4: Showing duration with SACCO Duration Less than 5 years Between 5 10 years Between 10 15 years Between 15 20 years Over 20 years Total Frequency 10 13 16 4 2 45 Percentage 22 29 36 9 4 100

th er

Source (Questionnaire)

Graph 4.4 showing duration with SACCO

40 35 30 25 20 15 10 5 0 Less than 5 years Btwn 5 - Btwn 10 Btwn 15 10 years - 15 - 20 years years Duration with SACCO Over 20 years

Source (Questionnaire)

4.2.5 Amount of saving with the SACCO From the findings, we can see that 64% of the respondents have saved less than Ksh. 100,000 with the SACCO. This forms the largest percentage. This was followed by those who have saved between 100,000 to 500,000, who were 22%. The rest who have saved more than 500,000 were about 14%.

Table 5: Showing amount saved in the SACCO Amount (Ksh) Less than 100,000 Between 100,000 500,000 Over 500,000 Total Source (Questionnaire) Frequency 29 10 6 45 Percentage 64 22 14 100

Percentage

Figure 4.5 showing amount saved with the SACCO

Over 500000 14% Btwn 100000500000 22% Less than 100000 64%

Less than 100000 Btwn 100000500000 Over 500000

Source (Questionnaire)

4.2.6 Frequency of SACCO loan application From the research, we can see that 49% of the respondents often apply for loans twice per year, making up the largest population. About 22% take loans once in 3 years and about 13% take loans annually. About 16% have not taken any loan from the SACCO.

Table 6: Showing loan application Frequency of loan application Annually Twice per year Once in three years Never Total Source (Questionnaire) Frequency 6 22 10 7 45 Percentage 13 49 22 16 100

Figure 4.6 showing rate of loan application

Annually Never 16% Once in three years 22% Annually 13% Twice per year Once in three years Never

Twice per year 49%

Source (Questionnaire)

4.3

Research questions and findings

The first research question is;- What factors influence the effectiveness of securities of loans? This research question sought to get information on which types of securities are required for loan borrowing, the process of vetting the securities and the extent to which the securities ensure the effectiveness of loan recovery.

4.3.1 Types of securities required The respondents indicated that the SACCO requires guarantors for the loans, of which they have to be members of the SACCO. Furthermore, the guarantors shares, and the borrowers own share can be used as securities for the loans. In addition, the respondents also indicated that under special circumstances such as property financing, the SACCO would use title deeds or logbooks as securities but this is exceptional.

4.3.2 Process of vetting the securities Table 7: Indicating response to the vetting process of securities

Responses Excellent Good Fair Poor Total Source (Questionnaire)

Respondents 7 25 6 7 45

Percentage 15 56 14 15 100

Figure 4.8 showing response to vetting process

Poor 15% Fair 14%

Excellent 15%

Excellent Good Fair

Good 56%

Poor

Source (Questionnaire)

The table shows that a good number, about 56% believe that the vetting process of the securities is done well, while 15% rated it as excellent. About 14% thought it to be fairly done. However 7% indicated the vetting process being done poorly leading to loan defaultment and money cost.

4.3.3 Do the securities provide a good cover for loan defaultment Table 8 shows reactions on securities providing a cover for loan defaultment.

Responses Yes No Total Source (Questionnaire)

Respondents 35 10 45

Percentage 78 22 100

Figure 4.9 showing reaction on securities providing cover to loans defaulted

No 22% Yes No Yes 78%

Source (Questionnaire)

Of the respondents polled, 22% indicated that the securities do not provide enough securities for the loans taken. This is due to members, at times, taking more loans than the value of their securities. However 78% of the respondents indicated the securities are adequate enough to cover the loans granted.

The second research question is:- On what basis do the SACCO members guarantee loans? This research question sought to get information of factors to consider before guaranteeing a members loan, the amount guaranteeing a members loan, the amount guaranteeing and the number of members guaranteeing.

Table 9: Showing factors to consider before guaranteeing a loan. Factor Colleague at work Close friend Income level Integrity Disciplinary record Total Source (Questionnaire) Response 11 17 10 4 3 45 Percentage 24 38 22 9 7 100

Graph 4.10 Showing factors to consider before guaranteeing a loan.

40 35 30 25 20 15 10 5 0

Percentage

Series1

Integrity

Factors
Source (Questionnaire)

The table shows that majority, that is 38% of the respondents world guarantee another members loan only if it were a close friend. A further 24% and 22% would guarantee a colleague at work and by looking a favourable income level respectively. A partly 9% would based their

guarantorship on integrity of the borrower while 7% would first evaluate the disciplinary record before guaranteeing.

Disciplinary record

Colleague at work

Income level

Close friend

Table 10: Showing the number guaranteed Members guaranteed Over 10 Between 5 10 Between 1 5 None Total Source (Questionnaire) Frequency 5 12 12 16 45 Percentage 11 27 27 35 100

The table shows that the highest number of respondents have not guaranteed any member on a loan. This is represented by 35%. About 27% have guaranteed both between 1-5 members and 5 10 members. Only 5% of the members have guaranteed over 10 borrowers. Graph 4.11 Showing the number guaranteed

40 35 30 25 20 15 10 5 0 Over 10 Btwn 5 - Btwn 110 5 None

Percentage

Series1

members guaranteed
Source (Questionnaire)

The third research question is:- Why do borrowers default on loan repayments? This question sought to get information on causes of loan defaulting, how the loan is recovered and the effectiveness of the recovery process.

Table 11: Showing causes of loan defaultment

Causes Loss of job Lack of alternative income sources Death of member Lax SACCO rule Total Source (Questionnaire)

Frequency 22 6 10 7 45

Percentage 49 13 22 16 100

Graph 4.12 Showing causes of loan defaultment

60
Percentage

50 40 30 20 10 0
Lack of alternative incomes Loss of job Death of member Lax SACCO rules

Series1

Causes
Source (Questionnaire)

From the table above, the respondents indicated that loss of job is the leading cause of loan defaultment in the SACCO, attributed by 49% of the respondents. About 22% attributed to death of a borrower member may lead to defaultment of the loan taken Lax SACCO rules was also seen as a cause where 16% members acknowledged. About 13% out it as lack of alternative

sources of income as a cause of loan defaultment. How loans are recovered From the results in the questionnaires, nearly all members agreed that the loans would be recovered from the shares of the defaulter. If defaulters shares are not enough, then those of the guarantors will be attached to the loan. If any securities were attached to the loan, then the securities would be used for the loan recovery process.

Table 12: Showing effectiveness of the recovery process Loan recovery process Effectiveness Not effective Total Source (Questionnaire) Frequency 30 15 45 Percentage 66 34 100

The table above shows that the majority of the respondents, 66% believed that the loan recovery process is effective while the others, 34%, believe there may be flaws in the recovery process.

Figure 4.13 Showing effectiveness of the recovery process

Not effective 34% Effective 66%

Effective Not effective

Source (Questionnaire)

CHAPTER FIVE CONCLUSIONS AND RECOMMENDATIONS

This chapter discusses and concludes the research study and makes recommendations concerning the securities and loan recovery process. The first section discusses whether or not the findings of the study are coherent with the research questions. In the second section, the implications of these findings are presented and in the third section, the recommendations made on the findings of this study.

5.1

Discussion of the results

The main aim of this study was to investigate the effectiveness of securities on the loan recovery process in SACCOs. This study also attempted to establish the factors influencing the

effectiveness of securities of loans, the basis members guarantee loans of other members in the SACCO and to establish why borrowers default on loans and the process of loan recovery in the SACCO. The study was centred on the research questions guiding the study.

5.1.1 Factors influencing the effectiveness of securities on loans The results of the study have revealed of securities on loans mostly relied on guarantorship as the major form of loans security and other properties would be used as securities under very special circumstances. A sizeable number of members, 15%, indicated that the vetting of the securities wasnt done well enough thereby putting the guarantorship in jeopardy. But still quite a large number, 56%, said that process was done fairly well. About 22% of the members indicated that the securities used did not fully cover for the loans taken. This can be concluded that some members still feel the securities were not adequate cover enough for the loans borrowed.

5.1.2 Basis of members guaranteeing other members on loans The study revealed that most of the members will guarantee other members if they were their close friends or colleagues at work. This indicates that one has to have an intimate knowledge of another member before guaranteeing the loans. Others would guarantee members based on their income level considering the ability to repay the loan. Furthermore a good number of members,

35% of those polled, have never guaranteed any other members loan, or simply do not want to guarantee.

5.1.3 Why borrowers default on loan repayment and the process of recovery The study revealed that 49% of the members polled indicated loss of job as the primary cause of loan defaulting. This leads to loss of income and failure to submit loan payments. Death is another major cause of loan defaulting. Upon defaulting, the study reveals that the members shares which were attached as securities may be used as a cover. And in case they are not sufficient, then the guarantor would be forced to inherit the loan.

5.2.

Implication of the research

The studys main idea was to establish the implications of the research findings on the effectiveness of securities on loan recovery in SACCOs. It is hoped that the SACCOs management at all levels would prepare well calculated strategies and if well executed then the SACCO would secure their loans and prevent loan defaulting. The SACCO would also

encourage other members to borrow and others guarantee the loans with the improvement of their service. From the findings of the study, the securities on the loan are not as effective as they should be since they still do not prevent loan defaultment and may make members to shy away from guaranteeing other members. This implies that the SACCO has to redraft its policies to ensure proper loan services are delivered.

5.3

Conclusions

The research findings were concluded as follows:1) Most of the SACCO members are professionally qualified 2) Majority of the members have been in the SACCO for more than 5 years. 3) Majority of the SACCO members have savings below 100,000 4) Most members have taken loans from the SACCO. 5) Loss of job is the leading cause of loan defaultment 6) Process of vetting securities is barely good 7) Members still believe securities provided are not enough to guarantee a loan. 8) The loan recovery process is not as effective as if should be

9) Other securities other than shares and guarantors should be considered.

5.4

Recommendations

Having looked at the implications of the study and made the above conclusions, the researcher has made some recommendations based on the findings of the study and for their studies / researches.

5.4.1 Recommendations based on the findings of this study 1. The management of the SACCO should address the members concern on guarantorship and securities. This can be done by putting the members suggestions into action and act on them immediately they are expressed.

2.

The management should consider other forms of securities other than shares. This can also smoothen the process of borrowing and on loan recovery.

3.

The SACCO should renew the lending laws to enable extensive vetting process on securities before lending.

5.4.2 Recommendations for further research Given that the findings on the effectiveness of securities on the loan recovery were for Mhasibu SACCO, the researcher suggests that more research be conducted in other SACCOs and other financial institutions as well.

REFERENCES

Atieno R., 2001, formal and Informal Institutions lending policies and access to credit by small scale enterprises in Kenya: An empirical assessment. AERC Research Paper 111, Nairobi, Kenya. Chambo S. A. 2006. Co-operating out of poverty in Tanzania. ILO conference 6th to 10th February 2006. Pretoria South Africa. Goto D. H. 2004. Financial mismanagement of Nyati SACCO. Unpublished MBA research project. Kothari, 2004. Research methodology. Methods and techniques. New Age International (P ) Ltd, New Delhi, India. Mugwanga 1999. Use and impact of Savings services for poor people in Kenya. A research paper for AERC. Nabangi, T. 2005: Assessment of factors that affect cash flows of savings and credit societies in Nairobi. Unpublished MBA research project. School of business and Management Moi University. Nairobi, Kenya. Manyara K. M., 2004, Co-operative Law in Kenya. Rock Graphics, Nairobi Kenya. Republic of Kenya 1997, Co-operatives Societies Act. 12. Republic of Kenya 1997, Retirements Benefits Act No. 2

Ouma J. S, 1990, The transformation of the informal sector. The co-operative perspective. Shirikon Press, Nairobi.

Oswaldo C. P. 2001. National Survery of Credit Unions Ecuador. WOCCU Inc. Jean Thiboutot 2008, Delinquency Management. African SACCO Technical Conference, The Gambia

Ademba C. 2008, The SACCO Societies regulatory bill 2008. African

SACCO Technical

Conference. The Gambia.

Omweri L, 1998. An investigation of members attitudes as regards the lending policies for savings and credit co-operatives in Kenya. A case of Mwalimu Sacco Society. Unpublished MBA Kenyatta University. Steams K, 1991, Methods for Managing delinquency. Tools for micro-enterprise programmes, Germinii Technical series USA. Narayan 1997. Voices of the poor. Poverty and social capital in Tanzania. World Bank.

APPENDIX 1
Questionnaire for collecting information covering guarantorship.
Please respond to the following questions as appropriate. 1. Your gender Male 2. Female

Your highest level of education Secondary College University Other specify ________________________________________________

3.

Please tick your age bracket. 18 25 years 26 45 years

Above45 years 4. How long have you been a member of Mwalimu SACCO society? Less than 5yrs Between 5 10 years Between 10 15 years Between 15 20 years Over 20 years

5.

Indicate your level of savings with the SACCO. (v) Less than 100,000 (vi) Between 100,00 500,000 (iii) More than 500,000

6.

How often do you apply for SACCO loans Yearly Twice per year Once in 3 years Once in 4 years Not applicable

7.

What do you think is the Most Probable reason why members default SACCO Loans? Loss of job/Salary Lack of alternative sources of income Lax SACCO rules Guarantors willingness to pay Lengthy recovery process Salary over commitment

8.

What is the greatest single factor that you consider when guaranteeing a members loan? Being colleagues at school Being close friend

Employment/income level Integrity of member Commitment to career Disciplinary record of member Age in profession

9.

Are you aware of the amount of loan that you guarantee? Yes No No

10.

How often have you guaranteed loans? Once Twice Thrice More than thrice Never

11.

How often have you been attached defaulted loans? Once Twice More than twice

12.

How was the defaulted loan repaid? From your salary From your shares Pressured the defaulter to pay From the defaulters spouse Defaulter paid by cash

13.

As a guarantor, what action should you recommend in order to enforce payment of defaulted loans? Take legal action Take possession of defaulters properties Request the SACCO to shame him/her at members forum Request employer to use dues relating to the member to pay the loan Persuade spouse/relatives to pay Briefly explain the factors that ensure recovery of defaulted loans from guarantors. (vii) _____ (viii) _____ (ix) ________________________________________________________ (x) ________________________________________________________ (xi) _______________________________________________________ ___________________________________________________ ___________________________________________________

14.

15.

From the above explanations, explain the basis upon which SACCO loans should be granted. (xii) _____ (xiii) _____ (xiv) _____ (xv) _____ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________

(xvi) _____

___________________________________________________

16.

Explain ways through which you accelerate repayment of your SACCO loans (xvii) _____ (xviii) _____ (xix) _____ (xx) _____ (xxi) _____ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________

17. Briefly explain whether increased salaries and sources of income leads to increased savings

(xxii) _____ (xxiii) _____ (xxiv) _____ (xxv) _____

___________________________________________________

___________________________________________________

___________________________________________________

___________________________________________________

(xxvi) _____

___________________________________________________

18.

Briefly comment on other factors that may affect the defaulted loans recovery process. (xxvii) _____ (xxviii) _____ (xxix) _____ (xxx) _____ (xxxi) _____ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________

19.

Briefly explain role of the government in ensuring loan repayment. (i) (ii) (iii) (iv) ________________________________________ ________________________________________ ________________________________________ ________________________________________

10.

What factors do you consider when you choose a guarantor for your loans? (xxxii) ________________________________________________________ (xxxiii)________________________________________________________ (xxxiv) ________________________________________________________ (xxxv) ________________________________________________________ (xxxvi) ________________________________________________________

21.

Does appending your signature on a members loan form provides a guarantee for loan repayment? Yes No

Explain your answer ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ __________________________________________

22.

Are SACCO loans are fully guaranteed? Yes No

Please explain answer above (xxxvii) _____ (xxxviii) _____ (xxxix) _____ (xl) ________________________________________________________ (xli) _____ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________