EFFECT OF LOAN DELINQUENCY ON THE PERFORMANCE OF SACCOS IN

KENYA. A CASE STUDY OF WEVASITY SACCO.

BY

PERIS KAMAU BCM/B/01-00173/2018

BEN NGUJUNA BCM/B/01-00374/2017

ODIWUOR AUSTINE BCM/B/01-00396/2018

WINJOY NKIROTE BCM/B/01-00221/2018

BRIAN OGWANG BCM/B/01-00359/2018

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENT OF THE DEGREE IN BACHELOR OF COMMERCE (FINANCE
OPTION) MASINDE MULIRO UNIVERSITY OF SCIENCE AND TECHNOLOGY.

MAY 2022
 DECLARATION

Declaration by the researchers;

We, the undersigned declare that this is our own original work and has not been submitted to any
other college, institution or university other than Masinde Muliro University of Science and
Technology for the award of any degree.

NAME SIGNATURE DATE

PERIS KAMAU ………………………………. ……………………..

BCM/B/01-00173/2018
BEN NGUJUNA ………………………………. ……………………..
BCM/B/01-00374/2017
ODIWUOR AUSTINE ………………………………. ……………………..
BCM/B/01-00396/2018
WINJOY NKIROTE ………………………………. ……………………..
BCM/B/01-00221/2018
BRIAN OGWANG ………………………………. ……………………..
BCM/B/01-00359/2018

Declaration by the supervisor;

The research has been submitted with my consent as the official University appointed supervisor.

Signed……………………………….. Date………………….

Dr. Ben Oseno

Department of Accounting and Finance

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 DEDICATION

We would like to dedicate this research project to our dear parents; Mr.and Mrs. Kamau, Mr.And
Mrs. Njuguna, Mr.And Mrs. Ogwang, Mr. and Mrs. Natalie, Mr. and Mrs. Kang’ote for their
financial support throughout our academic journey. We would also like to dedicate this project to
our supervisor Dr. Ben Oseno for his guidance throughout the research project.

ii
 ACKNOWLEDGEMENTS

We would like to thank God for giving us strength to carry out our project from the beginning to
the end. Also, we appreciate our dedicated supervisor Dr. Ben Oseno for his guidance and
direction throughout the research period. We thank the School Of Business and Economics and
also library department for the use of library resources. We also like to appreciate the Higher
Education Loan Board for their financial support throughout our academic journey. Finally we
would like to acknowledge the support of our family and friends not forgetting our own
dedication and corporation as researchers too.

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 TABLE OF CONTENTS

DECLARATION............................................................................................................................i

DEDICATION...............................................................................................................................ii

ACKNOWLEDGEMENTS.........................................................................................................iii

TABLE OF CONTENTS.............................................................................................................iv

LIST OF TABLES.......................................................................................................................vii

LIST OF FIGURES....................................................................................................................viii

LIST OF ABBREVIATION AND ACRONYMS......................................................................ix

ABSTRACT....................................................................................................................................x

OPERATIONAL DEFINITION OF TERMS...........................................................................xi

CHAPTER ONE............................................................................................................................1

INTRODUCTION.........................................................................................................................1

1.1 Background of the study....................................................................................................................1

1.2 Statement of the problem,..................................................................................................................3

1.3 Objective of the study........................................................................................................................4

1.3.1 General objectives..........................................................................................................................4

1.3.2 Specific objective...........................................................................................................................4

1.4 Research Question.............................................................................................................................4

1.5 Significance of the study..............................................................................................................5

1.6 Scope of the study..............................................................................................................................6

1.7 Chapter Summary..............................................................................................................................6

CHAPTER TWO...........................................................................................................................7

LITERATURE REVIEW.............................................................................................................7

2.1 Introduction.......................................................................................................................................7

2.2 General overview of loan delinquency..............................................................................................7

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 2.3 Causes of loan delinquency...............................................................................................................7

2.3.1 Loan policy.....................................................................................................................................9

2.3.2 Insider lending..............................................................................................................................14

2.3.3 Cost of loans.................................................................................................................................16

2.3.4 Insurance schemes........................................................................................................................18

2.4 SACCO performance.......................................................................................................................19

2.4.1 Performance based on dividends...................................................................................................20

2.4.2 Performance based on growth of member’s share capital.............................................................20

2.4.3 Performance based on growth in savings volume.........................................................................21

2.4.4 Performance based on the ratio of fixed asset to total assets.........................................................22

2.5 Relationship between loan delinquency and the SACCO performance...........................................22

CHAPTER THREE.....................................................................................................................26

RESEARCH METHODOLOGY...............................................................................................26

3.1 Introduction.....................................................................................................................................26

3.2 Research design...............................................................................................................................26

3.3 Population and Sampling Design.....................................................................................................27

3.3.1 Population.....................................................................................................................................27

3.3.2 Sampling design...........................................................................................................................27

3.3.2.1 Sampling frame..........................................................................................................................27

3.3.2.2 Sampling technique...................................................................................................................27

3.3.2.3 Sample size................................................................................................................................28

3.4 Data collection methods..................................................................................................................28

3.5 Research procedures........................................................................................................................29

3.6 Data analysis methods.....................................................................................................................29

3.7 Chapter summary.............................................................................................................................29

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CHAPTER FOUR.......................................................................................................................31

DATA ANALYSIS AND PRESENTATION OF THE FINDINGS......................................................31

CHAPTER FIVE.........................................................................................................................46

SUMMARY, CONCLUSIONS AND RECOMEDATIONS....................................................46

5.1 Introduction.....................................................................................................................................46

5.2 Summary.........................................................................................................................................46

5.3 Conclusion.......................................................................................................................................49

5.4 Recommendation.............................................................................................................................50

5.5Suggestions for further research.......................................................................................................50

REFERENCES............................................................................................................................51

Appendices....................................................................................................................................54

Appendix 1: Approval Letter.................................................................................................................54

Appendix 2: Introduction Letter............................................................................................................55

Appendix 3: Research Questionnaire.....................................................................................................56

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 LIST OF TABLES

Table 3. 1: Sample Size Distribution..........................................................................................28

Table 4. 1: Distribution of respondents according to age group....................................................32

Table 4. 2: Response whether loan policy influence performance of the Sacco...........................33

Table 4. 3: Respondents agreement on the following statements on loan policy..........................34

Table 4. 4: Respondents agreement with statement on insider lending.........................................37

Table 4. 5: Response whether insurance scheme ensure better financial performance of

Saccos............................................................................................................................................39

Table 4. 6: Respondents agreement with the following statements on insurance schemes...........39

Table 4. 7: Respondents agreement on the following statements about cost of loans...................42

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 LIST OF FIGURES

Figure 2. 1: Conceptual framework..............................................................................................25

Figure 4. 1: Respondent rate.......................................................................................................30

Figure 4. 2: Distribution of respondents according to gender.......................................................31

Figure 4. 3: Respondents level of education..................................................................................33

Figure 4. 4: Rating of loan policy in influencing financial performance of the Sacco..................35

Figure 4. 5: Opinion whether proper loan policies are essential in ensuring sound financial
performance of the Sacco..............................................................................................................36

Figure 4. 6: Whether insider lending influences financial performance of the Sacco...................37

Figure 4. 7: Rating of insider lending effectiveness in ensuring better financial performance in

Saccos............................................................................................................................................38

Figure 4. 8: Rating of extent of insurance scheme in influencing better financial performance...41

Figure 4. 9: Respondents views on the influence of the cost of loans on Saccos financial
performance...................................................................................................................................42

Figure 4. 10: Rating of the effect of the cost of loans on financial performance of Saccos..........44

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 LIST OF ABBREVIATION AND ACRONYMS

SACCO : Saving and Credit Cooperative Organization

SASRA : Sacco Societies Regulatory Authority

CRB : Credit Reference Bureaus

FOSA : Front Office Service Activities

NPLS : Non Performing Loans

ROI : Return on Investment

MMUST : Masinde Muliro University of Science and Technology

KIBU : Kibabii University

KAFUCO : Kaimosi Friends University College

ACCES : African Canadian Continuing Education Society

HELB : Higher Education Loans Board

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 ABSTRACT

Savings and credit cooperative societies (Saccos), operate in an environment of considerate risks
and uncertainties. Loan delinquency is one of the main challenges faced by financial institutions
as well as Saccos in any parts of the world. Thus, the, main purpose of this study was to carry out
an analysis on the effects of loan delinquency on the performance of Saccos in Kenya. A case
study of WEVASITY Sacco in Kakamega County. The study was guided by the following
research questions; what effects does the cost of loan have on the performance of Saccos? To
what extent does insider lending influence the performance of Saccos? What contribution does
insurance scheme has on the Saccos performance? How does loan policy affect Sacco
performance? The research adopted descriptive research design which allowed the description of
the causes ranking the causes themselves to determine the degree of influence on Sacco
performance. The Sacco size used comprised of a 28 clients who benefited from WEVASITY
limited services. Sampling technique employed was non-probabilistic convenient sampling
approach which obtains the people or unit that are most conveniently available (miles, 2010).
The whole population as used in the study and semi-structured questionnaire were administered
to the respondents as primary tool with magazines, newspapers, files catalogue, and research by
other authors being the secondary sources of data collection. Tables, graphs, charts and figures
were used in data analysis. The study findings indicated that 89% of the respondents agreed that
lack of well-defined loan policy, cost of loan and insider lending negatively influence the
performance of Saccos concerning the loan disbursement while the list number of respondents at
11% chose lack of insurance scheme as a cause of loan delinquency. On the research findings,
regression analysis is between independent variables( causes) and dependent variables
( performance of saccos) indicated that the strength of association between the variables is very
high (r=0.981) and that 93.8% (rsquare) change in dependent variable is caused by independent
variable while 6.2% is caused by other factors. The study concluded by a asserting that the
internal related factors of the Sacco’s influences loan delinquency. These internal related factors
asserts that they could be addressed internally through the implementation of strict measures to
address the staff related causes and clients related causes. Following the study, the following
recommendations were made; firstly, the WEVASITY Sacco should adopt a management style
that is well organized with proper credit operation structure, strong policy and system of
communication of procedures and a proper system of measuring portfolio quality and
performance. This would minimize the internal related factors that fuel loan delinquency.

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 OPERATIONAL DEFINITION OF TERMS

Loan - An amount of money borrowed from a bank or financial institution (Shekhar and
Shekhar, 2005)

Loan delinquency - Refers to a situation where a loan is “past due”. It is an occurrence in loan
portfolio where payments are in arrears (Helms, 2006). For this particular study, a loan
account is considered past due at the beginning of the month. Monthly installment are
made on the outstanding amount.

Delinquent loan - A loan account is termed as delinquent when repayment is due and a loanee
has failed to honor a payment obligation at the stipulated time. A loan account can be
past due when the loan date has passed or one week after the due date or one entire
loan cycle. The due date must be stated in the micro-finance policy document very
clearly (Kairu, 2009).

Loan default - A loan shall be declared to be in default when it is one installment overdue. Such
a loan shall be realized through security pledged or held (kairu, 2009).

Sacco - Saving and Credit Corporative Organization (Sacco) is owned, managed and run by its
members who have a common bond. A Sacco is a person admitted to membership
after registration accordance with the Sacco’s by laws and its membership is open to
all Kenyans regardless of race, tribe, gender, political affiliation, religion, or job status.
Examples of top performing Saccos in Kenya are Hazina Sacco, Ardhi Sacco, Sheria
Sacco, Mhasibu Sacco among others.

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 CHAPTER ONE

INTRODUCTION

This chapter contains the background of the study, statement of the problem. It also provides
the objective of the study that form the also is of the study that form the basis for
investigation and research question. The chapter also contains the study significances as well
as the scope of the study that provides the location under consideration for the study.
Definition of terms has also been looked at in this chapter and lastly the chapter summary.

1.1 Background of the study

SACCOS are mostly private or members owned intermediaries where members are sole
owners through shareholding and membership is mostly open and voluntary. Most SACCOS
are established to, mobilize saving and deposits, maximize wealth creation and vehicle for
investment and also provide diversified financial products and services including health
financing. SACCOS in majority of developing countries have established a deeper and
extensive outreach to the financial marginalized communities than any other type of financial
institution (Njoku, 2007). Therefore, high performance of SACCOS promotes development
of vibrant economic business all over the country by creating entrepreneurial morale to small
businesses.

However, regardless of SACCOS, most financial sectors in low income countries in Africa
and other parts of the world Countries seemed to have failed to serve people in regard to soft
loans as a means of social economic growth in 1960s with respect to the formal sector, banks
and other financial institutions generally required significant collateral and they seemed to
prefer high income loan clients out by the lending institutions unfortunately are not paid back
and eventually result in bad debt with adverse consequences for the overall financial
performance of the unions. High default rates in lending by SACCOS should be a major
concern to policy makers in developing countries because of its unintended negative impacts
on the SACCOS performance (Ntiamoah, 2014). Mikwamba (2004) traces first SACCOS in
Africa to have been introduced in Tanzania in 1930 and in Ghana in 1959.This SACCOS are
formed to assist villagers improve the social economic conditions. However, in many

1
countries in Africa, they are formed it the intention of offering alternative source of financing
the rural and urban lo income citizens to improve their livelihoods.

In most cases they are mainly community membership based financial institution and they
are owned by the membership in promotion of their members economic interests (Grazios,
2006). The chances that a SACCO may not receive its money back from borrowers plus
interest is the most common and often the most serious vulnerability in a credit union since
most microloans are unsecure, delinquency and default can quickly spread from a handful of
loan to a significant portion of the portfolio. Therefore SACCOS level of performance highly
depends on high loans recovery portfolio. Thus, the policies of execution, debt collection and
discipline level are very important in SACCOS (Njoku, 2007). Also debt need to be carried
out with outmost care, constantly and with consistency of analyzing loan portfolio. The
SACCO’S management and loan officers are directly responsible for the implementation,
collection action and enforcing both policies and procedures.

According to (Ogilo, 2017), the policy framework on credit and collection plan need to be
based on stages of validation prior to loan advancement as agreed on. However, the
collection procedure and discipline should complement with the primary loan portfolio
granting and management plan by the financial institution. Loan delinquency in finance
refers to an occurrence in a loan portfolio where payments are in an arrears. Therefore,
delinquency management is an important function in every credit union and the main causes
can be analyzed as follows: Internal related causes that due to the nature of the institution and
its operation. They include, lack of loaning policy, insider lending, high cost of loan and lack
of insurance scheme. Further studies have also identified unrealistic terms and schedule of
repayment, lack of follow up measures, inadequacy of collateral security, and the time of
disbursement to be the cause of high loan delinquency rates among SACCOS.

WEVARSITY SACCO which is institutional based SACCO located in Kakamega Town

serves the staffs of MMUST, Kibabii University (KIBU), Kaimosi Friends University
College (KAFUCO), Lake Victoria North Water Services Board, ACCES and resident of
kakamega town among others. It offers a wide variety of loan products including FOSA
loans, instant plus loan, FOSA plus loans, fixed deposit account, salary advance, joint saving

2
account among other services. Credit risk management is one of the most expensive venture
in any financial institution (Chijoriga, 2007). Consequently, many clients may be exposed to
these risks creating volatility in microloan portfolio, quality, heightening importance of
controlling this risks since credit risks brings about laxity of credit standards of borrowers,
counter parties, poor loan collection methods, lack of attention and not putting consideration
to the risk management policies(Basel, 2009).

In this regard, SACCOS need a monitoring system that highlights repayment problem clearly
and quickly so that loan delinquency can be focused on before it gets out of hand. In lending
service, a default is the failure to pay back a loan. A loan is delinquent when a repayment is
late (Wazure, 2012). As noted by Baku and Smith (1998), the cost of loan delinquencies
would be felt by both the lenders and the borrowers. The lender has costs in delinquency
situation including, lost interest, opportunity cost of the principal legal fees and related costs.
For the borrowers, the decision to default verses the opportunity cost of forgoing investment
due to working out the current loan.

1.2 Statement of the problem,

Credit unions are generally a central source of credit for the poor in many countries.
Therefore, the main objective of WEVARSITY SACCO is similar to other SACCOS in
Kenya which is to empower the citizens through savings mobilization, disbursement of credit
and ensuring that it gets long-term sustainability through careful monetary performance. In
the study of WEVARSITY SACCO similar to other SACCCOs, many SACCOS are faced
with default problem which pose a serious challenges to SACCOS sustainability. However
according to SACCOS society Regulatory Authority (SASRA) report 2021, loan disbursed
by SACCOS to members accounted to 30% of total loan assets.

A loan account is termed as delinquent when repayment is due and a loanee has failed to
honor payment obligation at the right time. Therefore, making a loan account be past due
date or one entire cycle. ACOSCA (2000) found that loan delinquency and default problems
as observed among borrowers is caused by: high interest rates, weak monitoring, poor
appraisal and borrowers related causes such as death, illness, burden of other debts and

3
family problems. Delinquency has a negative effect on the cash flows. When the principal
amount is not recovered at the scheduled time, loans to other borrowers cannot be made and
other expenses incurred by the SACCOS may also not be met (Kairu, 2009). Research done
by Kofi and Dadzie (2012) found that some of the reasons for default include poor sales,
sickness, poor record keeping and inadequate monitoring by loan officers. Moreover, it was
observed that implications of loan delinquency to SACCOS include: affect long term
viability of the SACCOS, increase in legal fees, and reduces the firms’ profitability.
Therefore, it was important to investigate the effect of loan delinquency on the SACCOS
performance using WEVARSITY SACCO as a case study.

1.3 Objective of the study

1.3.1 General objectives

This study focused on the effect of loan delinquency on the performance of SACCOS in
Kenya, case of WEVARSITY SACCO.

1.3.2 Specific objective

This study was guided by the following specific objectives:

i. To determine the influence of loan policy on the performance of SACCOS.

ii. To establish the effect of cost of loans on the performance of SACCOS.
iii. To examine the contribution of insider lending on the performance of SACCOS.
iv. To assess the influence of insurance scheme on the performance of SACCOS.

1.4 Research Question

i. How does the loan policy influence the Sacco’s performance?

ii. What is the effect of cost of loans on performance of SACCOS?
iii. What contribution does insider lending have on the performance of SACCOS?
iv. How does the insurance schemes influence the performance SACCOS?

4
1.5 Significance of the study

i. The SACCOS management and stakeholders

The research information was beneficial to the SACCOS management and other stakeholders
since they were enlightened on the effect of loan delinquency, causes of loan delinquency
from both the internal and external environment and strategies to ensure that loans did not
become due by managing these causes very effectively and efficiently. It also assisted in
ensuring that endings controlled and repayment initiated in order to ensure there was sound
financial management.

ii. Financiers

The study findings were beneficial to financiers as well as the government itself since they
are the donors or organizations that provide the funds. They could gauge the efficiency and
sustainability of a credit union through the quality and performance of their loan portfolio.

iii. Clients of the SACCOS

Customers of the SACCO also benefited from the study findings as they were in a position to
understand the critical role they play(ed) in loan portfolio management, Members of the
SACCOS too benefited from the study findings, in that they were able to get more returns
from the SACCO as dividends when the repayments of the loans were initiated and
delinquent accounts identified and settled bringing cash flows to the SACCOS that can be
made available to them as loans and pay back later at an interest.

iv. Researchers and academicians

Finally for the researchers, the study did not only fulfil the partial requirements for the award
of Bachelors Degree of commerce but also serve as a basis for further researches in the field
SACCOS performance and loan delinquency.

5
1.6 Scope of the study

The study was carried out on SACCOS within Kakamega Town, Kakamega County. The
research objectives included the internal causes of loan delinquency on the performance of
SACCOS. The research focused on one SACCO, WEVARSITY SACCO Limited.

1.7 Chapter Summary

This chapter covered the introduction to the study, which sought to carry out an analysis of
the effect of loan delinquency on Sacco’s performance using WEVARSITRY SACCOS
Limited as a case study.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter reviews literature on loan delinquency management at the WevasitySACCO in

Kakamega. In general, it reviews the multi-dimensional factors that are responsible for loan
delinquency in SACCO institutions in Kenya.

2.2 General overview of loan delinquency

Numerous authors suggest that when a loan is delinquent it may be as a result of the
borrower’s willingness or inability to repay the loan leading to defaulting. Therefore, loan
delinquencies occurs when one installment payment is late (CGAP, 1999) that is, the debt
part or all of principal and or interest is overdue. In other words, Non-Performing Loans
(NPL) occurs when a borrower cannot or will not repay his/her loan and the SACCO no
longer expects to be repaid. High default rates in Sacco’s lending should be of major concern
to policy makers in developing countries because of its unintended negative impacts on
Sacco’s performance. As noted by Baku and Smith 1998, the costs of loan delinquencies will
be felt by both the lenders and the borrowers. Delinquency is measured because it indicates
an increasing risk of loss, warning of operational problem and may help to predict how much
of the portfolio will eventually be lost because it never gets repaid. There are three types of
loan delinquency indicators; collection rates which measures the amount actually paid
against amount that have fallen due, arrears rates measures overdue amounts against total
loan amounts; and portfolio at risk rate which measures the outstanding balance of loans that
are not being paid in time against the outstanding balance CGAP, 1999).

2.3 Causes of loan delinquency

According to Ahmad, (1997), causes of loan delinquency include; lack of willingness to pay
loans coupled with diversion of funds by borrowers, willful negligence and improper
appraisal by credit officers. In addition, Hurt and Fesolvalyi (1998), cited by Kwakwa,

7
(2009) found that, corporate loan default/delinquency increases as real gross domestic
product decline, and that the exchange rate depreciation directly affects the repayment ability
of borrowers. Balogun and Alimi (1988) also identified the major causes of loan delinquency
as loan shortages, delay in time of loan delivery, high interest rate, age of farmers, poor
supervision, non-profitability of farm enterprises. Moreover, Akinwumi and Ajayi (1990)
found out that farm size, family size, scale of operation, family living expenses and exposure
to sound management techniques were some of the factors that can influence the repayment
capacity of farmers. The study conducted by Okorie (1986) in Ondo state in Nigeria revealed
that the nature, time of disbursement, supervision and profitability of enterprises, contributed
to the repayment ability and consequently high default rates. According to Gorter and Bloem
(2002) non-performing loans are mainly caused by an inevitable number of wrong economic
decisions by individuals and plain bad luck (bad weather, unexpected price changes for
certain products, etc.). Under such circumstances, the holders of loans can make an
allowance for a normal share of non-performance in the form of bad loan provisions, or they
may spread the risk by taking out insurance. The problem of non- performing loans is
widespread. Most of the SACCOS loan delinquencies arose from poor management
procedures, loan diversion and unwillingness to repay loans, Kohansal and Mansoori (2009).

From the findings of the study conducted by Warue(2012) in Kenya, most cases of loan
delinquency are caused by microfinance institution, SACCOS and self-help groups’
management failure to efficiently manage specific factors which are considered to be within
the direct control of the MFIs’ ,SACCOS and Self Help Groups’ (SHGs’) management. The
external factors outside the direct control of the MFIs’, SACCOS and SHGs’ management
seem to contribute little to the levels of delinquent loans. Therefore, for effective
management of delinquency, it is critical for SACCOS to understand and focus more on the
internal causes of delinquency which they have more control over and seek practical and
achievable solutions to redress these problems. The upheaval that hit mainstream financial
markets and the effects that continue to be felt across the globe from the resulting economic
crisis impacted MFIs and their clients. The early stages of the downturn saw MFIs
experience significant liquidity shortages, but as the capital markets recovered, concerns
turned from funding to asset quality (CGAP, 1999). This scenario points to links between

8
external factors and loan delinquency. The relationship between the macroeconomic
environment and loan quality was investigated in the literature linking the phase of the
business cycle with lending institutions stability.

According to Olomola 1999, loan disbursement and high interest rates can insignificantly
increase borrowing transaction cost and can also adversely affect repayment performance.
After surveying different banks in India, Berger and De young (1995), identified the main
causes of loan delinquency from industrial sectors 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, death
and insanity of the borrower, economic conditions and delinquency due to natural calamities.
Other critical factors associated with loan delinquency are; type of the loan, term of the loan,
interest rate on the loan, borrowers income, transaction cost of the loan, lack of insurance
schemes and insider lending. Okugie (2009), also indicated that high interest rates charged on
loans by SACCOS has been discovered to be the reason behind alarming defaults rate. This
was also confirmed by Vandel (1993), who also found that high interest rates charged by
SACCOS tend to facilitate default rate by borrowers.

2.3.1 Loan policy

Loan policy is the primary means for guiding lending activities.it forms the credit philosophy
in addition to imposing standards for achieving earnings objectives and risk tolerance levels
[comptroller handbook 1998]. Therefore a loan policy protects a lenders interest and is based
on the dollar amount someone is borrowing from a SACCO not on the full value of the
property. The policy amount gradually decreases as the loan is paid down and is dissolved
completely once the loan is paid off .there is no ideal format of loan policy, they vary in
detail, length and organizations. Loan policy may vary because of factors such as economic
conditions, geographical location or portfolio objectives thus the fortunes of a SACCO have
been closely tied historically to how well they managed credit risks.

A written loan policy approved by a SACCO’s board of directors and adhered to in practice,
is of critical importance in ensuring that the SACCO operates within prescribed risk

9
tolerances. Thus, loan policy are tailored to fit the needs of the organization and the scope
should be commensurate with lending activities involved. Responsibilities of those involved
should also be established, [comptroller handbook 1998].in today’s fiercely competitive and
challenging lending environment, an up to date policy, appropriate to an institution’s lending
function and business plan, may be more important than ever.

Loan policy involves three decision variables [interest charged, loan size, loan period],
[collateral requirement, eligibility criteria, responsibility of the board of directors in
approving loans, lending authority of loan officers and committees and safeguard to
minimize potential environment liability],(credit standards and collection efforts),(Pandey,
1995).other factors that an effective loan policy can address are normal trade areas ,general
field of lending , limitation on loan to value,aggregate and overdraft among other factors.
Written loan policy vary considerably in content length, and specificity as well as style and
quality. No two institutions share the same tolerance for risks, offer the same product mix
and faces the same economic condition. It is therefore important to scrutinize the three policy
decision variables in order to enhance loan repayment, reflect the size and complexity of a
SACCO and its lending operations and should be tailored to its particular needs and
characteristics. Revisions of the loan policy should occur as circumstances change, and the
policy should be flexible enough to accommodate a new lending activity without a major
overhaul. SACCOS societies act, 2008 requires SACCOS to have a written loan policy
consistent with the relevant provision of the Act, Regulations any other applicable laws.

The loan policy contains loaning procedure and their documentation requirements for a grant
of a loan, loan concentration limit, maximum loan size, loan type, interest rates and
guaranteeing requirements among others. Financial policy and procedure provided by the
department of cooperative development and marketing provides guidelines for the
development of loan policies by Sacco’s. a loan policy should include more detailed
guidelines for each lending departments or function. In addition, in 1995, the federal banking
regulatory agencies established basic operational and managerial standards for loan
documentation and credit underwriting. These standards should also be incorporated into a
Sacco’s written policy. For example, loan documentation practices should take into account
the size and complexity of a loan, the purpose and source of repayment, and the borrower

10
ability to repay indebtedness in a timely manner. Among other things, underwriting practices
should include a system of independent, ongoing credit review and appropriate
communication to management and the board of directors.

Generally, SACCOS offer long term loans, short term loan and deposit facilities. Long term
loans are guaranteed for development purposes usually for a period over twelve months at an
interest rate of ten percent for a month on reducing balance method. A sound loan policy,
established and overseen by the board of directors, reflects favorably on the board and
management. When a board sets forward its expectations clearly in writing, management is
better position to control lending risks, ensure the institution stability and soundness and
fulfill oversight responsibilities. An effective and up to date loan policy increases the
likelihood that actual loan documentation and underwriting practices will satisfy the board’s
expectations. Furthermore a well-conceived policy clearly and comprehensively describes
management system of control and helps examiners identify high risk areas and prioritize and
allocate examination time.

A written policy is tangible evidence of the process that has been established to identify
measures, monitor and control risk in the lending areas. An incomplete or inadequate policy
makes it more difficult to identify potentially high risk areas and may raise supervisory
concerns about an institution risk management practices. In a state that the policy does not
provide adequate assurance, a careful review of the entire policy should be done to reveal the
extent of shortcomings; however, even a cursory review can provide clues that a policy needs
a overhaul. Some of the red flags that brings a loan policy to a new tune-up are; if a new
regulation are not addressed, the table of content is not accurate, the policy contain
misspelling, typing and grammatical errors. Also if multiple version of the policy are in
circulation, policy has not been revised or reapproved in more than a year, the policy is
disorganized or contains addendums from years past that have never be among other factors.

In addition, a review of lending decisions may identify areas where management is departing
from the specifics of loan policy such as, policy limits are being ignored, actual lending
practices vary significantly from those outlined in the policy and numerous exceptions to
policy requirement have been approved. Exceptions to policy should be few in number and

11
properly justified, approved and tracked. If actual practices vary materially from the written
guidelines and procedures, the source of discrepancy should be identified, and either actual
practices or the written policy should be changed. Management may conclude that specific
sections of the written policy are no longer relevant.

Outdated and ineffective loan policies can contribute to a range of problems. Introducing a
loan product that is not adequately addressed in the written loan policy can have a variety of
challenges for the lending staff and involve risk that management did not anticipate. If
lending authorities, loan – to- value limits, and other lending limitations are not revised when
circumstances change, a SACCO could be operating within guidelines that are too restrictive,
too lenient or otherwise inappropriate in line to the SACCOS current situation and lending
environment. If guidelines do not comply with current rules and regulations, lending
decisions may not reflect best practices or regulatory requirements. Imprudent lending
decisions can have a ripple effect. A loan policy that does not anticipate the risk inherent in
an insured institution lending practices can lead to asset quality problems and poor earnings.
In turn, earnings that do not fully support operation increase an institution vulnerability to
adverse movements in interest rates, a downfall in the local economy or other negative
economic effect. A SACCO loan policy is not a static document thus should be revised as the
institution, business conditions or regulatory change. A current and effective loan policy is a
tool to help management ensure that SACCOS lending functions is operating within
established risk tolerances. Such a policy is more likely to be consulted and followed by staff
and contributes to uniform and consistent board approved practices, therefore insured
institution staff, borrowers and regulators will be well served by implementation of a process
that help ensure that a Sacco’s loan policy remains comprehensive.

Relationship between loan policy and SACCO performance cab be looked at in terms of
profitability and rate of return. Financial performance measures the result of the firm loan
policy and operations in monetary terms. In SACCOS it is the efficiency with which loans
are guaranteed and repaid at maximum possible return. Broadly it looks the number of clients
applying for loans, how much they are borrowing, timely payment of installments, security
pledged against the borrowed funds and rate of arrears recovery. SACCOS sustainability and
level of development basically depends on high recovery of their loans. Loan policies

12
therefore have in questionable importance and must be carried out constantly and with
consistence (kobia, 2010). (Eales and Bosworth, 1998) stated that institutions financial
viability is weakened by the loss of principal and interest, the cost of recovery and the
opportunity cost of management, time taken to recover defaulted loans. Organizations for
Economic Co.-operation and Development (OECD) provides the measure for performance as
the SCALE. This measure determines Self-sufficient ratio, Capital adequacy, Asset qualify
liquidity and Earnings quantity (OECD, 1996).

In the recent past, new development and intense competition in lending industry in Kenya’s
Economy has been witnessed since the introduction of economic liberalization which has
posted serious challenges to the SACCOS which are restricted in terms of where to invest
their funds of deposits (SACCO’S Act, 2008). Therefore, loan policies very much contribute
to the sustainability and financial viability of SACCOS given that issuance of loan is their
major activity. They operate under the objectives of maximizing benefits to members by
providing loans and paying a return on their investment. It is the loan performance that
guarantees return on the deposit. ( Puxity and Dodds,1999) stated that the essence of loan
policy is to maximize the value of a firm. (Mutesasira, 1997), in agreement with ( Pandey,
1993) stated that when there is evidence or a good reason to assume that client is unable to
make profitable investment with their loan and repay, they should not br excluded from
future kendings. (GTZ reports, 1997) stated that weaknesses in loan policy encouraged loan
delinquency or delay in reo=payment which can result in loan loss. This is to say that proper
policy should be applied in lending for enhanced financial performance.

The main object of application of loan policy is to maximize earnings over the short term and
long range within managed limitarion and generating sound and profitable long term loan
and deposit of customers (Morsman, 1982). SACCOS are therefore expected to generate
profit with proper application of loan policy. A study by Shafter in 1998 on credit union
policy and performance established that performance depended on incentives of borrowers to
repay and incentive of credit unions ability to screen loans. A study by Owizy on impact of
credit management on financial performance of SACCOS in Nigeria established that a
management continuously set up policy that could not negatively affect profitability.

13
2.3.2 Insider lending

According to co-operative act (2008) insider lending comprises of loan issued to employees
and directors. By facilitating investment, sound financial system, faster economic growth and
development. Many less developed and transition economies however, lack sophisticated
forms of financial intermediaries that can effectively link independent savers with
independent borrowers. Privately order frequently substitutes of public order under
insufficient property rights systems (McMillan and Woodruff, 2000). As manifestation of
private order, indsider lending practices dominates the financial sectors of less developed
economies. It also includes borrowing giving to kick-backs managers to bend control offer
facilities in which they are not qualified for. Excess insider lending therefore, can lead to
high losses which jeopardize the objective of a financial institution, (leaven, 2001).

Leaven (2001) defines insider lending as the loan and advances made to a SACCO through
shareholding or the capacity to control, on the terms, conditions and scale that are more
advantageous that would be economically justified normally. Insider lending is regulated by
Federal Deposit Insurance Corporation (FDIC) and a regulation Act of 1991. The efficacy of
insider lending has been a subject of debate among economies La Porta, Lopez- de-Silances
and Zamarripa identified two competing views of these practices; the information view and
looting view. The information view contends that insider lending addresses the severe
information asymmetries that confounds arm’s length intermediation in less developed
nations. “Bankers know more about related borrowers than unrelated ones because they are
represented on the borrower’s board of directors and day-to-day management of the
borrowers” (La Porta, el al, 2003,231). The looting view argues “that close ties between the
SACCOS and borrowers allows insider to convert resources from depositors and/ or minority
shareholders to themselves “( LaPorta, el la,2003,231). In General, looting occurs when
insider lenders, “have an incentive to go broke for profit at society expenses (to loot) instead
to go for broke (to gamble on success).

14
A SACCO can extend loans to several types of insiders, including major shareholders,
subsidiaries, affiliated companies, directors and even members of the board of directors. A
potential for abuse when insider receives loans at favorable terms. In some cases, SACCO
managers may simply roll-over the bad debt of insiders with whom they have close ties with.
A contributory factor to the growth of insider lending has been the fact that the interest of the
members of the board directors are aligned with the interest of the major shareholders of the
SACCOS. A study report in Russia, Akamatsu (1995) shows that Russia’s company did not
allow outsiders who do not represent the interest of the major shareholders on the board of
directors until recently. Another contributory factor to insider lending has been the minimal
implementation of bankrupt law. Perotti (2000) reports that removing insiders from control
has turned out to be almost impossible; the law explicitly excluded banks from its
introduction in 1990 until its reform in 1999. Insider lending has a negative correlation with
financial risk among SACCOS in Kenya which is about 0.068. This risk exposure need to be
mitigated to a low level. The risk attached to a risk facilityis the likelihood that the loan may
not be repaid as and when due (Ogbuagu, Udo and Udo, 2016). Insider lending are often the
major reason for large non-performing loans portfolio by Sacco’s, the extension of loans and
advances done outside the arm’s length that involves organization outsiders. Non-performing
loan portfolio has a negative effects on Sacco’s profitability thereby exposing SACCOS to
financial risks (Ugoani, 2006).

The Kenyan financial institutions are substantial in cover of immense loans to their
stakeholders, loans in which the payment period get broken resulting into the increase in
loans not performing, brounbridge (2007). Such loans gets defaulted in clearly overseen
venture including real estate property that can earn no venture on investment, clearly
resulting into Mortgage default. Agency theory (Jensen and Meckling, 1976) anticipates
insider lending to create agency problems thus ÷financial risk negatively. Moral Hazard
theory (1970) foresees insider borrowers obtaining the incentives not to repay or service their
facilities, thus negatively impacting financial risk. According to Bender and Ward, 2009,
credit risk, liquidity risk and market risks constitute financial risk which is the likelihood that
a firm could fail of encounter difficulties in monitoring its financial obligations and when
they fall due therefore, firms including SACCOS cannot operate without assuming any risk,

15
however, taking excessive financial risk can destroy a firm. Thus prudent financial risk
management is essential (Mutei, 2014). SACCOS regulations to limit the exposure of
SACCOS to related parties is not sufficient. SACCO managers and regulators should be
given incentives to limit imprudent behavior, public information on firms and SACCOS
should become widely available at low costs, minority shareholders rights should be
protected and the enforceability of contacts should be improved.

2.3.3 Cost of loans

Transaction costs in credit markets are indirect financial costs generated by various
processes, including the cost of searching and collecting relevant information about agents,
negotiation procedures and agreements, opportunistic behavior of agents failing to fulfil loan
terms, risk averse behavior associated with rationing and monitoring and enforcement cost
incurred to determine whether agents are adhering to contract terms(Gray,1993).Transaction
costs are also defined as non-interest expenses incurred by lenders in evaluating, disbursing
and collecting loans and by borrowers in applying, getting approval for and repaying their
loans. The existence of transaction costs in loan market implies that financial institutions
must become more actively involved in monitoring activities and strategic behaviors of firms
because financial institutions invest substantial amounts of funds in business firms
(Williamson, 1985).Many governments and international financial institutions have tried to
address the problems of high transaction costs(A.P.E.I.S, 2007).However ,in the current
empirical studies, transaction costs are not directly measured, but rather proxies such as
uncertainty, transaction frequency, asset speficity, opportunism and so on are used instead .
These are believed to critically affect the cost of doing transactions (Pessali, 2006).
Transaction costs therefore, are indirect costs caused by frictions in the flow of credit funds,
preventing credit markets from reaching efficient market equilibrium. (Nalukenge, 2003).
The existence of transaction cost means borrowers receives small size but costly loan.
Transaction cost has been one of the major causes of high cost of funds to borrowers and this
has been found to be responsible for the high lending interest rate in Africa. Lack of
sufficient information regarding activities of agents in credit markets is the inherent source of
transaction cost (Stiglitz and weis,1981). If information is fragmented or missing leader’s
interest in investing funds, resulting in shortage of loan funds and credit constraints.

16
Therefore, if transaction costs are significant due to lack of the necessary information to
process loans, a SACCO must pay additional funds to cover the expenses associated with
increased agency costs that are heavily influenced before loan monitoring and opportunistic
behavior of agents (Crocker and Masten, 1991). Consequently, transaction cost of lending
consists of the cost of administering credit, coordination costs and costs of the risk of default.
It is further highlighted that administrative costs are those which are directly attributable to
the processing, delivering and administering of loans while coordination costs are those
resources a financial institution dedicates to ensuring that clients adhere to terms stimulated
in loan contracts (Saito and vilanveva, 1981)-According to Polski and Kearney (2001),
SACCO activities generates two types of transaction cost, which are subject to different
political and economic influences. One type of transaction costs, interest expense reflects the
cost of funds for saving activities and services and the second type non-interest expense,
reflects the costs of information and coordination. Shankar (2007) went further to break
down transaction costs into direct and indirect costs, Direct transaction costs consists of
training costs, costs of direct administrative activities and cost of monitoring. Shankar (2007)
further noted that indirect transaction costs include allocated fixed costs of the branch office,
regional office and head office, depreciation and taxation costs. Films thus adopts
governance forms that minimize the sum of transaction costs. (Zhao, 2004) which has to take
into account both formal and informal norms and formal structures to avoid failures. To meet
the effective monitoring and enforcement needs, additional loan officers and managers must
be employed and a financial constitution falls liable to overpay for services rendered in the
monitoring process making the loan disbursement process to be very expensive because of
the high probability that the loan transaction process consumes more resources to transfer
and recover loan funds that is technically required to obtain the same level of loan transaction
(Rubin, 1990). To compensate for the large cost of the lending process, financial
intermediaries must charge an interest rate commensurate with the magnitude of the cost thus
making loans very expensive. Interest rate is the amount of interest paid per unit of time
expressed as a percentage of the amount borrowed. Anyanwu, (1997), interest rates differ
mainly in terms of maturity. Interest rates can either be nominal or real; where nominal rates
can be measured on monetary terms not in terms of goods. The nominal interest rate
measures the yield in money per year per the amount invested while the real interest rate is

17
calculated as the nominal interest rate minus the rate of inflation. (Pandey, 1999). Felicia
(2011) , in his study that interest rate charged has the greatest impact on the lending behavior,
individuals are motivated by the low interest rate charged to take more loans. According to
Olomola (1999), loan disbursement lag and high interest rate can significantly increase
borrowing transaction costs and can adversely affect loan repayment performance. Okpugie
(2009), also indicated that high interest charged by the Sacco’s has been discovered to be the
reason behind the alarming default. Existence of transaction cost in credit market therefore,
implies that agents are unable to exploit economies of scale associated with greater
diversification of financing products and a limited choice of loan products is available to
particular borrowers. With significant transaction costs especially in development concerns
regarding the ability of the agent to take full advantage of economic opportunities in loan
markets(Gabre-Madhin,2001). High transaction cost has been found to be blocking formation
of markets and becomes a major cause of persistent poverty. As a result of increased
transaction costs in SACCOS, unauthorized growth speed of transaction costs has led to
default in loan repayment, thus ways to minimize them so as to expand lending to top clients
and enhance the viability of SACCOS

2.3.4 Insurance schemes

An insurance scheme can be defined as an insurance product that is generally available with
standard policy coverage but when a scheme is constructed, it will then focus on particular
sector. Schemes can cover both commercial and personal lines insurance and a niche they
will have a unique selling point in their business as well as getting new sources of revenues.
A borrower of loan always has a right to take a loan protection insurance which is a scheme
that helps policy holders meet their monthly debt up to a predetermined amount. Thus
providing financial support in times of need, whether the need is due to disability or
unemployment, this insurance can help cover monthly loan payment and protect the insured
from being delinquent or defaulting.

According to the findings of the study done by Angweye and Otinga (2019), there were
mixed reaction about the statement that insured loans were easily recovered than non-insured
loans. This meant that possibly most SACCOS in Kakamega County had not yet

18
implemented insurance policy on loans; because a small percentage on loan insurance cover
could be viewed as hidden deductions by customers who might opt out from SACCOS that
had implement the insurance policy. However, the rate of insurance affects loan
performance. This implied if the rate of loan insurance cover is high, most customers would
experience difficulties in opportune repayment of loans thus contributing to high loan
delinquency rates (Arishaba, 2011).

The policy terms offer short term protection providing coverage generally from twelve to
twenty-four months, depending on the insurance company and policy. The benefits of the
policy can be used to pay personal loans, car loans or credit cards. For loans or mortgages
short term loans income protection, insurance may involve entire monthly payments, whereas
for credit cards, it is typically the minimum monthly payment. This was closely supported by
study results of (Ojeka, 2012) who agreed (56.7%) and strongly agreed (15.5%) that loan
insurance terms affect loan performance, in addition, he strongly agreed that loan insurance
restrictions affect loan performance. Therefore, perceived harsh loan insurance terms would
have adverse effect on affected SACCOS total loan ratio since few customers will come to
SACCOS with harsh loan insurance terms to secure a loan. Loan insurance policy also
impacts positively on Sacco’s financial growth in the sense that convenient loan insurance
rates or premiums can assist cover non-performing loans which would subsequently impact
on financial growth of a SACCO (Tengey, 2014). Thus, SACCOS should embrace this new
concept of loan insurance covers as strategic form loan loss provisioning so as to check on
non-performing loans ratios which always influence financial performance of SACCOS

2.4 SACCO performance

Performance is an action or achievement considered in relation to how successful it is. It is

the ability to operate efficiently or to react quickly. According to Armstrong (2005),
performance is often defined simply in output terms; achievements of qualified objectives.
According to Mwaura (2005), lack of credit analysis, credit follow ups, as well as hostile
lending are key factors that contribute to poor performance of SACCO lending in Kenya.
How best a firm is performing can be looked at in terms of profitability and rate of return.

19
Financial performance measures the results of a firm’s policies and operations in monetary
terms.

In SACCOS it is the efficiency with which loans are granted and repaid at maximum possible
returns. Broadly, it looks at the number of clients applying for loans, how much they are
borrowing, time repayment or installment, security pledged against borrowed funds and rate
of arrears recovery.Sacco’s sustainability and level of development basically depends on
their loans. Loan delinquency therefore has questionable effect with consistency (Kabian,
2010). Eales and Bosworth, 1998 states that institution nor financial viability is weakened by
the laws of principles and interest, cost of recover and the opportunity cost of
management ,time taken to recover delinquent loans. Organization for Economics
Cooperatives and Development (OECD) provides the measure for performance as scale. This
measure determines self-sufficiency ratio, capital adequacy ratio, asset quality and earnings
quality (OECD, 1997).

2.4.1 Performance based on dividends

Before issuing dividends in SACCOS it is advisable that all related concerns be addressed.
Dividends are considered important since they will show the earnings a firm generates. For
SACCOS to pay dividends they must perform well financially and know viable investment
expected by shareholders since management decisions and SACCO conditions are the
determining factors for dividend payment. Dividends paid to members in SACCO involve a
reduction in retained earnings and in most cases if the society is not a financial sound,
amount to be given out as loans will consequently be reduced. A study by Michaely and
Womack, (1995) showed that there is existence of positive excess returns on the firms after
the initiation of the dividends. Dividend payments depends on how the organization has
performed in terms of net income since it is out of the surplus that the payment is made as
losses negate the payments. Gosh and sirmans, (2006) noted that companies paying high
dividends attracts investors, customers, employees and other stakeholders therefore
performance in SACCOS is critical as it determines the ratio dividends to be distributed.

20
The payment of dividends by firms as different impacts according to various performance
indicators and also dividends acts as a yardstick that SACCOS formulate in order to identify
and use as earnings distributed in form of dividends or the amount retained as dividends.

2.4.2 Performance based on growth of member’s share capital

The assessment of growth of member’s share capital is important as it helps establish

whether SACCOS are improving or maintaining their shares for the purpose of meeting
government requirements. According to Lesotho financial cooperative policy of 2011,
SACCOS are given a grace period of four (4) years after which they maintain adequate share
capital (10%-20%) of the total asset. Members share capital ratio in required levels for a
short period of time implies that growth of the members’ share capital was not acceptable for
most of the period. For example, hypothetical results showed that from year 2008 to 2011
members’ share capital increased at a decreasing rate while from year 2011 to 2012 it
decreases at a decreasing rate and between 2012 and 2015 it decreased at a low rate. The
implications depicted by the trend is that the SACCO was not receiving large number of new
members between 2011 and 2015. Generally, the continuous rate means the number of
members who were withdrawing from the SACCO were more than the number of those
joining. The continuous decreasing rate between 2013 and 2015 on the other hand leads
SACCOS to a point where they will have inadequate capital which may have negative effect
on effectiveness of SACCOS.

The growth is computed as;

( )÷( ) ×100

Where; TSCY is the total savings for the current year

TSPY is the total savings for the previous year

21
2.4.3 Performance based on growth in savings volume

Growth of volume of savings for SACCO is very important because that is basket where they
can draw funds for the purpose of providing loans to members. Hypothetical situation; shows
that rate of growth os savings for the SACCOS decreases from 30% in 2008 to 8% in 2010.
In 2011 it decreased again from 12% to 7% in 2012 and finally, it decreased from 28% in
year 2014 to 23% in the year 2015. On the hand growth in volume of savings for the
SACCOS under study increased from 8% in 2010 to 12% in 2011, and from 7% in 2012 to
28% in 2014. Generally, the rate of growth of savings for the SACCOS experienced
fluctuation trends for the entire period. Despite these fluctuation trends, the rate of savings
growth was above the inflation rate which was 4%. But generally the performance in terms of
growth of savings was not promising as it kept fluctuating but the general SACCO
performance was fair

. Growth in savings is computed as follows;

( )÷( ) ×100

Where; TSVCY is the total savings Volume for the current year

TSVPY is the total savings volume for the previous year

2.4.4 Performance based on the ratio of fixed asset to total assets

This ratio is important in determining proportion of fixed that are likely to be required as
other asset levels change.

The ratio is computed using;

[Total fixed asset total asset]×100

This ratio is recommended by WOCCU (2009) is equal or less than 5 %( that is x is less than
5%) in other it should not exceed 5% of the total asset of the SACCO. WOCCU (2009)
22
discourages large investment in fixed asset because once purchased, they are normally
difficult o liquidate. In a situation where the ratio is higher than 5%, when the investigation is
conducted it can imply that there was investment more in unproductive asset than it was
necessary. Further information from key informants would reveal that the SACCO had
invested may be in land while other insupermarkets in order to generate more money. This
situation may force Sacco’s to charge higher interest rate on some of their products for the
purpose of compensating money spent in fixed asset and the consequent effect o members
would be negative due to investment in fixed assets which means funds redirection
fromliquid investment to liquid asset.

2.5 Relationship between loan delinquency and the SACCO performance

Rate of loan delinquency had a direct negative influence on SACCO performance. It affected
SACCO negatively because money which might have been planned to be invested in certain
projects in order to generate profits disappear and consequently no interest is made. The
higher the rate of loan repayment in SACCOS the higher the chances of collecting revenue in
terms of interest and the lower the rate of loan losses in any lending institution (Alfred,
2011). On the other hand, poor loan repayment has a harmful negative impact on SACCO’s
earnings as well as in fulfilling its objectives and can cause the institution to collapse.
Huyein, (2011) noted that failure to manage loan repayment results in losses and high
delinquency management costs. The higher the expenses of monitoring loan portfolio and
cost of handling legal issues associated with serious loan delinquency, the less the rate of
performance which will be achieved by SACCOS, such costs adversely affect income
generated by lending institutions.

According to Johnson and Scholes (2007), many managers finds a process of developing a
useful set of performance indicator for their organization difficulty. One of the main reason
for this is that many indicators are qualitative in nature. Whilst the hard quantitative and
accessing performance has been dominated by financial analysis. According to Kibui and
Moronge (2014) issues such as labor, capital adequacy in the SACCO system, and the role of
rating agencies in financial regulations and fair value assessment of Saco assets are the most
debated ones. In response to this crisis a lot of reformation has been carried out in the

23
SACCO regulatory system. A critical review of literature shows that several conceptual and
contextual research gap existed in the effect of credit risk management practices on the
financial performance of SACCOS. For instance, the studies of soke fun Ho and Yusuf
(2009), credit risk management strategies of selected financial institutions in Malaysia the
majority of financial institution and banks losses stem from outright default due to inability
of customers to meet obligations in relation to lending, trading, settlement and other financial
transactions default risk emanates from a bank’s dealing with individuals, corporate,
financial institutions or sovereign entities.

A bad portfolio may attract liquidity as well as credit risks, Roseline (2007) conducted a
study about loan delinquency among members in SACCOS. The study revealed that factors
that influence reimbursement of loans in SACCOS are earnings, nature of loans and
management recovery measures that the SACCO has to examine defaulters or delinquent
loans. The study recommended that there was requirement for SACCOS to implement sound
management and loan recovery measures, loan advance costs to be supplied past
compensation history of the recipients, earning levels, contributors and there ought to be
numerous loan merchandize. The study further showed that the growth of SACCO was
associated with the management of loan by the steward.

Winti (2004), undertook study on factors influencing financial performance of SACCO. The
study indicated that there was a positive relationship between time period of credit settlement
and retaining of clients.

Another study by Mwangi (2012) found that there exist a relationship between financial
performance ( in terms of profitability) and credit risk management in terms of ( non-
performinf loans and capital adequacy ratio) to make through loan appraising before
disbursement to avoid unnecessary loan being delinquent.

Employee based SACCO have low delinquency because the employer guarantees loan
recovery and emittance. The biggest challenge in credit management is to have sustainable
and cost effective system of loan recovery and default control Yan (1995). The firm’s credit

24
policies and are the main influence on the level of debtors, measuring the manager’s position
to invest optimally in its debtors to be able to trade profitably with increased revenue.

Huge SACCO losses are caused by delinquent loans due to inability or unwillingness of
borrower to adhere to set standards and policies in relation to loan repayment which will
result to deterioration of SACCO credit quality Oloo (2013). When loans become non-
performing Sacco’s balance sheet and cash flows are adversely affected as well as their
financial performance which is measured in relation to the strength of their balance sheet and
net income. This study will be of great help to determine how loan collection affect return on
funds invested and whether revenue generated cover their operating expenses.

Fielfe (2009) argued that one of the obstacle on improving financial performance of any
micro-finance institution is the lack of knowledge about dynamics of loans, recovery
strategies affecting them which may arise due to inability of debtors to meet their financial
commitments when they fall due. In Malaysia for period 1996-2002, a study done by (Ahmed
2004) compared social SACCOS and connectional SACCOS, the result revealed that
variables namely; management efficiency and weighted average of total assets has positive
relationship with loan delinquency. Social factors shared a weak influence in loan
delinquency by SACCOS as compared to economic factors. The effect of loan recovery to
the SACCOS performance was a concern to this study because loan delinquency is now the
alarming factor to the financial performance of the whole SACCO system in Kenya.
Although some scholars argue that turbulences of national and international economic factors
have an impact on their financial performance, the widespread loan default and low recovery
rate on both regulated and non-regulated SACCOS as a special significance (Alam, 2011)
therefore to ensure high financial performance, all types of borrowers and stakeholders must
be put into consideration when formulating loan policy to ensure effective management and
recovery in order to curb adverse effect on the SACCO financial performance.

Independent variables
Dependent variable
Loan Policy
-interest charged, loan size,
loan period, collateral, Financial performance of
eligibility creteria, e.t.c 25 Sacco
Return on investment
(dividends
Cost of loan transaction
 Affects
Loan processing fee Return on asset

Growth in savings volume

Insider Lending
Employees and directors
lolonhvcgb

Insurance Scheme,
- Insured versus non-insured
loans
-Loan size and limits to be
insured
- Rate of insurance and
insurance premium
-Type of insurance policy

Figure 2. 1: Conceptual framework

(Source: Researchers, 2021)

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter describes the methodology and procedures that were used to carry out the study.
The general methodology that was used in this study was descriptive research. The chapter
started with the description of the research of the research design, the population and
Sampling design, the data collection methods, the research procedures, the methods used for
data analysis and lastly; the chapter summary.

26
3.2 Research design

The research design for the study was descriptive design. According to Kothari (2000),
research design is defined as conceptual structure within which research is conducted. The
design is classified into experimental design, case study design, and longitudinal design and
cross sectional design.

This research adopted the descriptive research design because it was flexible in the methods
of collecting data and analysis (Senga, 2011). The design also enhanced the analysis of the
qualitative and quantitative data, Kothari (2004). According to Kothari (2018) descriptive
research studies are those studies which are concerned with describing the characteristics of
particular individual or group.

Wevarsity SACCO was selected because most of the SACCOS in Kakamega are found at
working place and only few numbers are of business places that is why purposive sampling
was used. Then by using simple random sampling, 28 names of Wevarsity SACCO members
were drawn. The simple random sampling was made objective as possible.

3.3 Population and Sampling Design

3.3.1 Population

A population is defined as the total number of elements upon which inferences can be drawn.
Population refers to the entire group of people, events or things of interest that the researcher
wishes to investigate (Saunders, Lewis and Thomhill, 2012). The population for the study
was 28 employees.

3.3.2 Sampling design

3.3.2.1 Sampling frame

Sampling frame can be defined as the list of elements in a population from which the sample
was actually drawn from. It is also known as the working population.

27
The SACCO has seven branches and in every branch; one branch manager and his assistance
and two credit officers were chosen and that makes a total of twenty eight (28) respondents.
They are constantly in contact with constituency officers and loan applicants during their
field work exercise. Loan vetting committee is made of employees and credit officers from
the head office. The constituency officers are employees who are continuously in contact
with th clientele and lives among them.

3.3.2.2 Sampling technique

The study employed a non-probabilistic convenient sampling approach, this is the sampling
procedure of obtaining the people or units that are most conveniently available. Twenty eight
(28) respondents in the population will be studied. This means that branch managers,
assistant branch managers and credit officers will be approached to participate in the study.

The technique had two advantages which were; use of resources (time, money and workload)
available was efficient and it gave results with known accuracy that can be calculated
mathematically.

3.3.2.3 Sample size

According to the rule thumb for determining the sample size, when the population (N) is less
than 100, the entire population is studied.

In our study, the population was twenty eight (28) respondents; therefore all the respondents
participated.

Table 3. 1: Sample Size Distribution

Category Population Sample size Sample%

28
 Wevarsity SACCO employees 28 28 100%

3.4 Data collection methods

Primary data was mainly collected in the study.

Secondary data was also collected but was used to confirm primary data collected. Self-
administered drop and pick questionnaires were distributed to the intended population for
data collection.

The questionnaires were made up of the following sectors; Background information of the
respondents, the effects of insider lending causes, the effects of loan policy, the effects of
insurance schemes and the cost of loans causes and effects.

The respondents were the persons directly dealing with the loan administration, appraisal,
disbursement and recoveries of the field level.

3.5 Research procedures

Before the actual questionnaires administrations, a pretest was done to ensure that all
questions were clear and understandable.

The pretest was administered to the 17 branch managers and revision of the questionnaires
was done accordingly. The questionnaires, after revision were administered by physically
issuing the questionnaires to the respondents.

In order to ensure a favorable response rate, the questionnaires were issued with a cover
letter that will explain how the respondents were chosen, anonymity of the identity of the
respondents and surety of using the results for the intended purpose.

29
3.6 Data analysis methods

After the data was collected, it was prepared for analysis. The data was edited to do away
with omissions, improve legibility and consistency and coding was done appropriately so as
to assist in interpreting, classifying and recording of data. Tabulation was the form in which
data was recorded and categorized in order for it to be analyzed.

Data analysis was done through descriptive statistics and inferential statistics. This included
percentages, frequencies, measures of dispersion and central tendency. Specific data analysis
techniques used were mean, percentages, variance, standard deviation, regression analysis
and Pearson correlation which were the techniques for Statistical Package for Social Sciences
(SPSS) version 20 was performed on the data. Specific inferential statistics used were
parameter estimation through confidence interval estimation. Data presentation was done
using; tables, bar graphs, pie charts and figures.

3.7 Chapter summary

In summary, descriptive research design was used in the study. The population comprised of
branch managers, assistant branch managers and credit officers. Convenience sampling was
used during the issuance of questionnaires for the collection of primary data. The
questionnaire were pretested and revised before being issued to the actual respondents. Data
that was collected was edited, codified and tabulated for analysis. Descriptive and inferential
statistics were used for data analysis and presentation was done in form of bar graphs, pie
charts, tables and figures.

30
 CHAPTER FOUR

DATA ANALYSIS AND PRESENTATION OF THE FINDINGS

4.1Introduction

The chapter involves data analysis, research findings and interpretation of the data in relation
with the research objectives. The data analyzed was presented in bar chart, pie charts, graphs
and tables. Both qualitative and quantitative data analysis is used. Total number of twenty-
eight (28) questionnaires were issued to Wevarsity Sacco management

4.2Quantitative analysis

Figure 4. 1: Respondent rate

Source: Research Data (2021)

Figure 4.1 shows that from the twenty-eight (28) questionnaires that were issued, 20
questionnaires were returned. That totals to 71% response rate while 29% never responded.
The questionnaires that were not correctly filled and those that were never returned and were
thus were not considered for the purpose of the study.

31
Figure 4. 2: Distribution of respondents according to gender

Source; Research Data (2021)

Figure 4.2 showed that 56% of the respondents are male while the remaining 44% were
female. This showed that the organization employs more gents than ladies in the Sacco which
is an indication that, when employing its staff, it does not ensure that there is gender balance.

Table 4. 1: Distribution of respondents according to age group

Age(years) Frequency Percentages

18- 23 2 10%
24- 29 4 20%
30-35 7 35%
36-41 2 10%
42-47 4 20%
48-53 1 5%
Over 53 0 0
TOTALS 20 100%
Source; Research Data (2021)

32
Table 4.1 above, shows that,5ages 18-23 make 10%, 24-29 years make up-to 20%, 30-35
comprises of 35%, ages 36-41 make up-to 10%, ages 42-47 make up to 20% age 48-53 5%
and 0% for 53 years and above.

This shows that the Sacco employs people from different age groups and most of the
employees were in the middle age bracket of 35 years and below.

Figure 4. 3: Respondents level of education

Source; Research Data (2021)

Figure 4.3 shows that, 50% of the respondents have degrees as their highest level of
education, 40% have college diploma or certificate and 10% have attained Secondary school
certificate.

The analysis shows that most of the employees have the required educational background
that enables them to work professionally which is basic for better performance in their
different line of work in the Sacco.

33
Table 4. 2: Response whether loan policy influence performance of the Sacco

Response Frequency Percentage

Yes 18 90%
No. 2 10%
Totals. 20 100%
Source; Research Data (2021)

Table 4.2 indicates that 90% of the respondents agree that loan policy influence financial
performance in the Sacco while 10% shows that it does not influence Sacco financial
performance. While explaining, the respondents argue that an increase in loan policy results
to an increase in the loan portfolio and thus enhance interest earning, effective recoveries,
delinquency management and reduction of bad debts.

Table 4. 3: Respondents agreement on the following statements on loan policy

Statement SD D I A SA
Loan policy is crucial in ensuring better performance of 2 1 1 6 10
the Sacco
10% 5% 5% 30 50%
%
Loan policy is regarded as a key factor in Sacco 1 2 2 4 11
performance
5% 10% 10 20 55S%
%
My Sacco offers training to the staffs handling clients 1 1 1 4 13
over loan disbursement
5% 5% 5% 20 65%
%
My Sacco loan policy is crucial in explaining sound 1 1% 2 6 10
financial performance
5% 5% 10% 30 50%
%

34
 My Sacco engages stakeholders during the 2 2 1 7 8
development of loan policies
10% 10% 5% 35 40%
%
Source; Research Data (2021)

The study sought to establish whether loan policy was crucial in ensuring better financial
performance of the Sacco. As indicated in table 4.3 above 10% of the respondents strongly
disagreed that loan policy is crucial in ensuring better financial performance of the Sacco,
while 5% indicated that they disagreed, 5% were indifferent, as 30% agreed and 50%
strongly agreed with the statement. In regard to the statement that, loan policy is regarded as
key factor in my Sacco performance, 5% of respondents strongly disagreed, 10%disagreed,
10% were indifferent, while 20% agreed with the statement and 55% strongly agreed. To
ascertain whether the Sacco offer training to the staff handling clients over loan disbursement
5% of the respondents strongly disagreed,5% disagreed and 5% indifferent while 20% agreed
and 65% strongly agreed. In order to ascertain whether Saccos loan policy is crucial in
explaining sound financial performance of the Sacco firms realize sound financial
management, the research shows that 5% of the respondents strongly disagreed with the
statement, 5% disagreed, 10% were indifferent, 30% agreed and 50% strongly agreed. In
regard to whether the Saccos engages stakeholders during the development of loan policies,
10% of the respondents strongly disagreed while 10% disagree, 1% were indifferent, 35%
agreed while 40% indicated they strongly agreed.

35
Figure 4. 4: Rating of loan policy in influencing financial performance of the Sacco

Source; Research Data (2021)

Figure 4.4 show that majority of the respondents at 60% agreed that loan policies influence
financial performance of the Sacco at a very great extent, while 20% indicated the rate of
influence as great extent, while 10% indicated the rate of influence as moderate, 5% as little
extent and 5% indicated that loan policies do not influence financial performance of the
Sacco

36
Figure 4. 5: Opinion whether proper loan policies are essential in ensuring sound financial
performance of the Sacco

Source; Research Data (2021)

Figure 4.5 shows that 80% of the respondents agreed that proper loan policies are essential in
ensuring sound financial management in the Sacco while 20% indicated that proper loan
policies are essential.

These findings indicate that it is very crucial for the Saccos management to ensure sound
financial performance there is great need to ensure that proper loan policies are formulated.

37
Figure 4. 6: Whether insider lending influences financial performance of the Sacco

Source; Research Data (2021)

Figure 4.6-shows insider lending influences financial performance of the Sacco as indicated
by 60% of the respondents while only 40% indicated that insider lending does not influence
financial performance. These findings as explained by the respondents shows that with more
loans to insiders will result to more interest income but if not controlled, it will regularly
affect financial performance.

Table 4. 4: Respondents agreement with statement on insider lending

Statement SD D I A SA
Does insider lending take place in your Sacco 2 1 2 3 12

10% 5% 10% 15 60%

%
Insider lending is a major cause of loan delinquency in the 1 1 2 12 4
Sacco
5% 5% 10% 60 20%
%

38
 There is a relationship between insider lending and Sacco 2 1 1 8 8
performance
10% 5% 5% 40 40%
%
Source: Research Data (2021)

The researchers through this, was finding out the respondents’ agreement on various aspects
of insider lending and how much they agree with the statements provided. In regard to
whether insider lending takes place in the Sacco 10% of the respondents strongly disagreed,
5%disagreed, 10% were indifferent, 15% agreed while 60% strongly agree. In regard to
whether insider lending is a major cause of loan delinquency in the Sacco, 5% strongly
disagreed,5% disagreed, 10% were indifferent, 60% agreed with the statement while 20%
strongly agreed. 10% of the respondents strongly disagreed with the statement that there is a
relationship between insider lending and Sacco performance while 5% disagreed, 5% were
indifferent, 40% agreed and 40% strongly agreed with the statement.

Figure 4. 7: Rating of insider lending effectiveness in ensuring better financial performance

in Saccos

Source; Research Data (2021)

39
Figure 4.7 above shows, that 50% of the respondents rated insider lending effectiveness in
ensuring better financial performance in Saccos as very great extent, 30% as great extent,
10% rated the rate of influence as moderate while 5% as little extent and 5% indicated that
insider lending does not influence better financial performance in Saccos at all.

Table 4. 5: Response whether insurance scheme ensure better financial performance of

Saccos

Rating Frequency Percentages

Yes 12 60%
No 8 40%
Total 20 100%
Source; Research Data (2021)

Table 4.5 shows that, 60% of the respondents agreed that a proper insurance scheme ensures
that Saccos financial performance is enhanced as 40% indicated that it does not ensure.

The respondents indicated that with a good insurance scheme indemnity for the loans held by
deceased members is provided (acting as a loan guard), assets of the Sacco are insured
together with members’ savings.

Table 4. 6: Respondents agreement with the following statements on insurance schemes

Statement SD D I A SA
Insured loans of my Sacco are easily 1 1 2 10 6
recovered
5% 5% 10% 50% 30%
The rate of insurance affects loan 1 2 2 10 5
performance as well as my Saccos
5% 10% 10% 50% 25%
performance
Loan insurance terms affect loan 1 10 7 1 1
performance and my Sacco performance
5% 50% 35% 5% 5%

40
 Loan insurance restrictions affect loan 1 1 8 8 2
performance as well as my Saccos
5% 5% 40% 40% 10%
performance
In my Sco influences loan repayment 7 10 1 1 1

35% 50% 5% 5% 5%

Table 4.6 indicated that 5% of the respondents strongly disagreed with the statement that
insured loans of my Sacco are easily recovered

While 5% disagreed with the statement, 10% were indifferent, 50% agreed and 30% strongly
agreed with the statement. Concerning the statement on whether the rate of insurance affects
loan performance as well as my Saccos performance, 5% of the respondents strongly
disagreed, 10% disagreed, 10% were indifferent, 50% agreed and 25% strongly agreed. 5%
of the respondents strongly disagreed that loan insurance terms affect loan performance and
my Sacco performance, 50% disagreed, 35% were indifferent, 5% agreed and 5% strongly
agreed with the statement.

About the statement on whether loan insurance restrictions affect loan performance as well
as my Saccos performance; 5% of the respondents strongly disagreed, 5% disagreed, 40%
were indifferent, 40% agreed while 10% strongly agreed with the statement. Concerning the
statement whether my Sacco loan insurance policy influences loan repayment 35% of the
respondents strongly disagreed with the statement, 50% disagreed, 5% were indifferent while
5% agreed with the statement and 5% of the respondents strongly agreed.

41
Figure 4. 8: Rating of extent of insurance scheme in influencing better financial performance

Source; Research Data (2021)

Figure 4.8 shows that 30% gave the extent rating at which insurance scheme influence better
financial performance of the Saccos as very great extent, 60% gave the rating as great
extent,10 % as moderate, and rated the influence of insurance scheme on financial
performance as not at all for agreeing and strongly agreeing. This shows that insurance
scheme if well employed can ensure better financial performance of the Saccos owing to the
extent indicated by the respondents.

42
Figure 4. 9: Respondents views on the influence of the cost of loans on Saccos financial
performance

Source: Research Data (2021)

Figure 4.9 shows that 80% of the respondents agrees cost of loans does influence financial
performance in Saccos while only 20% indicated that it does not.

Respondents indicated that high cost associated with loan borrowing reduces the rate of
borrowing hence reduces the financial performance. The higher the cost of loans and the
higher the processing fees charged on loans ,the more the interest income from such streams
to the sacco while the higher the cost of loans to members the lesser the application by
members

Table 4. 7: Respondents agreement on the following statements about cost of loans

Statement SD D I A SA
There are certain costs associated with 1 1 2 2 14
processing of loans in my Sacco
5% 5% 10% 10% 70%
The transaction cost of our Saccos loans can 4 2 2 4 8
lead to loan delinquency in my Sacco
43
 20% 10% 10% 20% 40%
High interest rates on the loan may lead to 6 4 2 3 5
poor loan performance
30% 20% 10% 15% 25%
There is relationship between the cost of 1 1 2 6 10
loans and return on investments.
5% 5% 10% 30% 50%
Source: Research Data (2021)

Table 4.7 shows that none of the respondents strongly disagreed or disagreed there are
certain costs associated with processing of loans in my Sacco, while none were indifferent,
10% agreed while 90% strongly agreed. As to whether the transaction cost of our Saccos
loans can lead to loan delinquency in my Sacco, 20% of the respondents strongly disagreed,
10% disagreed, 10% were indifferent, 20% agreed with the statement while 40% strongly
agreed.

30% of the respondents strongly disagreed that high interest rates on the loan may lead to
poor loan performance, 20% disagreed with the statement, 10% of the respondents were
indifferent, 15% agreed and 25% strongly agreed with the statement.

On the, there is relationship between the cost of loans and return on investments statement,
none of the respondents strongly disagreed, none disagreed, 10% were indifferent, 30%
agreed while 60% strongly agreed.

44
Figure 4. 10: Rating of the effect of the cost of loans on financial performance of Saccos.

Source: Research Data (2021)

Figure 4.10 shows that 65% of the respondents rated the effects cost of loans on financial
performance of the Saccos as very high, 30% gave the ratings as high,5% as fair while none
as low. This indicated that cost of loans can be used as a great tool to ensure sound financial
performance of the Saccos.

4.3 Qualitative Analysis

The study found out that loan policy, insider lending, cost of loans, and insurance scheme
influence financial performance of Sacco.

According to this study, loan policy is very crucial in ensuring that Sacco’s financial
performance is improved. In order to ensure that loan policy is enhanced for better financial
performance of the Sacco, it is crucial for the Sacco to formulate written loan policies that
are easily understood by the clients and the people responsible for loan disbursement and are
tailored to fit the needs of the organization and the scope should commensurate with lending
activities involved. The policies should include more details guidance for each lending
department or functions. A written policy is tangible evidence of the process that has been

45
established to identify measures, monitor and control risk in the lending areas.

The study also established that insider lending also influences financial performance of the
Sacco. With more loans to insiders will result to more interest incomes but if not controlled it
will regularly affect financial performance in the Sacco.

Cost of loans associated with loan borrowing reduces the rate of borrowing hence reduces the
financial performance of Sacco. However, the higher the cost of loans and processing fees
charged on the loans the more the interest income from such streams to the Sacco, thus
increasing the financial performance of the Sacco and therefore this is proof that cost of loans
affect the financial performance of Sacco.

Insurance scheme if well employed can ensure better financial performance of the Sacco
indemnity of the loan held by the deceased members is provided (acting as a loan guard),
assets of the Sacco are insured together with the loan savings.

46
 CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMEDATIONS

5.1 Introduction
This chapter gives the summary of the study, conclusions drawn based on the study and
makes recommendations for further readings.

The main aim objective of the study was to find out the effect of loan delinquency on the
performance of Sacco in Kenya. The research was carried out in Kakamega County and
majorly on Wevarsity Sacco.

The study had sample size of twenty eight (28) respondents and twenty (20) returned their
fully filled questionnaires while eight (8) questionnaires were not returned.

Out of which 56% were males and 44% were females.

5.2 Summary

The main objective of this study was to find out the effect of loan delinquency on the
performance of the Sacco.

The study sought to find answers to issues like effects of loan policy, insider lending, cost of
loans and insurance scheme to the Sacco performance.

Out of which 56% were males and 44% were females. Most of the Sacco members, about
50% are degree holders, 40% have diploma or certificate level of education and only few
members about 10% have secondary education.

Also about the loan policy 90% of the respondents agreed that loan policy influences
financial performance of the Sacco while 10% showed that it does not influence Sacco
performance. While explaining the respondents argued that, an increase in loan policy
resulted to an increase in the loan portfolio thus enhancing interest earning, effective
recoveries, delinquency management and reduction of bad debts.

47
The findings found that 60% of the respondents agreed that insider lending influences the
financial performance of the Sacco while 40% indicated that it does not affect the financial
performance of the Sacco. The respondents argued that with more loans to insiders the end
result will be more interest incomes but if not controlled it will regularly affect the financial
performance of the Sacco.

The findings on insurance scheme were as follows, 60% of the respondents agreed that a
proper insurance scheme ensures that Sacco financial performance is enhanced and 40% did
not agree with this statement. With a good insurance scheme, indemnity for the loans held by
the deceased members is provided; assets of the Sacco are insured together with the
members’ savings.

On the cost of loans 80% of the respondents, agreed that cost of loans does influence
financial performance of the Sacco while 20% indicated that it does not.

They argued that, high cost associated with loan borrowings reduce the rate of borrowing
hence reducing the overall financial performance of the Sacco. The higher the cost of loans
and higher the processing fees charged on loans, the more the interest income from such
streams to the Sacco.

5.2.1 Insurance schemes

From descriptive statistics above, there were mixed reactions about the statement that insured
loans were easily recovered than non-insured loans. 70% of respondents agreed, 30%
strongly agreed while none were uncertain and none disagreed. This meant that possibly most
SACCOs in Kakamega County had not yet implemented insurance policy on loans; because a
small percentage on loan insurance cover could be viewed as hidden deductions by
customers who might opt out from Sacco that had implemented the insurance policy.
However, a good percentage of respondents agreed (60%) and strongly agreed (40%) that the
rate of insurance affects loan performance. This implied that if the rate of loan insurance
cover is high, most customers would experience difficulties in opportune repayment of loans
thus contributing to high loan delinquency rates. This was closely supported by most
respondents who agreed (35%) and strongly agreed (5%) that loan insurance terms affects
loan performance; while (40%) and (10%) of respondents agreed and strongly agreed
48
respectively that loan insurance restrictions affects loan performance. Therefore, perceived
harsh loan insurance terms would have adverse effect on affected SACCOs total loan ratio
since few customers will come to SACCOs with harsh loan insurance terms to secure a loan.

5.2.2 Cost of loans

On the cost of loans 80% of the respondents, agreed that cost of loans does influence
financial performance of the Sacco while 20% indicated that it does not.

They argued that, high cost associated with loan borrowings reduce the rate of borrowing
hence reducing the overall financial performance of the Sacco. The higher the cost of loans
and higher the processing fees charged on loans, the more the interest income from such
streams to the Sacco.

According to Stiglitz and Weis, 1981, the existence of higher cost of loans means that
borrowers receives small size but costly loan. Cost of loans to borrowers has been found to
be responsible for the high lending interest rate in Africa. Lack of sufficient information
regarding activities of agents in credit markets is the inherent source of higher cost of loans.
Moreover, According to Olomola (1999), loan disbursement lag and high interest rate can
significantly increase borrowing transaction costs and can adversely affect loan repayment
performance.

5.2.3 Insider lending

These research findings support the positions postulated by such theories as agency theory
(Jensen 1967), portfolio theory (Markowitz 1952)

Agency theory (Jensen 1976) anticipates insider lending to create agency problems thus
influencing financial risk negatively. The research findings concur with this position. Moral
Hazard Theory (Arkelf, 1970) insider borrowers obtain the incentive not to repay or service
their facilities, thus negatively influencing financial risk. The study therefore finds that
insider lending has a slightly negative correlation with financial risks.

Based on the findings above, insider lending has a very negative relationship with financial
performance of Sacco in Kenya. This conclusion is very similar to Muteti (2014) whose

49
conclusion was that financial risk has a negative influence on financial performance of
financial institutions.

5.2.4 Loan policy

From the study findings about the loan policy, 90% of the respondents agreed that loan
policy influences financial performance of the Sacco while 10% showed that it does not
influence Sacco performance. While explaining the respondents argued that, an increase in
loan policy resulted to an increase in the loan portfolio thus enhancing interest earning,
effective recoveries, delinquency management and reduction of bad debts.

According to the SASRA act of Kenya,2008 concurs with the requirement that loan policy
and procedures and manuals specifying the criteria and procedures applicable in the
evaluation, processing, approval ,documentation and release of loan or credit facilitates are to
be put in writing by any licensed Sacco. According to Geleta (2012), in his study on
determinants of non-performing loan; a case of Ethiopian banks he revealed and agrees that,
there’s need to formulate a prudent loan policy or credit policy for individual manufacturing
firms as well as the need for a conducive micro and macro environment in order to
synchronize benefits of using credit facilities to facilitate financial mobilization of funds
which can be linked to institutions also.

5.3 Conclusion
The study concluded that loan insurance scheme also positively affects SACCO’s financial
growth in the sense that convenient loan insurance rates or premiums can assist cover
delinquent loans, which would subsequently influence financial growth of a SACCO.

The study also concludes that Sacco practice insider lending but this is undertaken
prudentially; Wanjohi (2013) indicates that financial risk management has a strong influence
on effects of financial performance of Sacco in Kenya.

50
5.4 Recommendation
The study recommended that SACCOs should embrace this concept of loan insurance covers
as strategic form loan loss provisioning to check on non-performing loans ratios, which
always influence financial performance of Saccos. The study also recommend Saccos to offer
favorable costs associated with borrowing. This will attract a large number of borrowers in to
the Sacco who can afford to pay at such a cost. This will in return reduce loan delinquency
and lead to improvement in the financial performance of the Sacco.

Based on the research, findings and conclusions we recommend that Sacco and related
stakeholders should manage little insider lending since it has insignificant effect on financial
performance of Sacco.

Therefore, formulation of a prudent loan policy for a Sacco is important to avoid loss of its
market to its rivals and improve performance in terms of development.

5.5Suggestions for further research.

Based on the data limitations and research study conclusions, we suggest that further research
on the research topic be undertaken mainly dwelling on the insurance scheme as a variable to
be causing loan delinquency to SACCOs .Another research methodology could be adopted
towards this suggestion.

51
 REFERENCES

ACOSCA (2000), A report on status of rural SACCOS in Tanzania, Nairobi ASCC

Baisi, M.D. (2008), Corporate Financial Management, Students manual, University of DSM

Bahoum, I. (1989), banking the unbankable Bringing Credit to the poor, London,

Panos

Bee, F.K., Chambo, S.A and Mtanga, H (2003) Market and Institutional Assessment of the
SACCOS of Bahati and Monduli Districts as part of the Modernization process,
Arusha Community Initiative Trust

Besley, T. and Coate,S (1995),”Group lending Repayment incentives and social collateral
“Journal of Development Economics,vol.46,No.1

Chandavarkar, A.G. (1997), Informal credit markets in support of micro or commercial

Business, Washingston DC. Institute of Human Resource press

Chambo, S.A. (2004), The role of SACCOS in Rural Tanzania paper presented to the

3rd conference on microfinance 15th- 17th March 2004 at the AICC Arusha Tanzania

CMF (2005), Impact Assessment of SACCOS in Nepal’s Hills Districts, Centre for

micro-finance limited Kathmandu.

Friends consult LTD. (2012), Financial delinquency and repayment management for the
Umurenge SACCOS. Consult LTD, Umurenge

Ica (2001), Rural Savings and Credit Co-operative Societies in Tanzania, published by
International Co-operative alliance (ICA)

52
Kaleshu J.T., (2006), Improvement of SACCOS, Business through Assets- liability
management, promotion of SACCOS Inter – Lending and loan syndication
Activities, Journal of Cooperative and Business studies Vol.1 2006, pp 4-24

Kothari, C., (2000), Research methodology and methodology and technique (2nd ed), New
age International, New Delhi India

Leaven, L (2001); Insider lending and bank ownership; the case of Russia comparative
economics29 (1), 207-229

Matogoro, N.M., (2009), Factors influencing loan repayment and delinquency on SACCOS
performance in Tanzania. The analysis of selected SACCOS in Kilimanjaro Region.
Dissertation University of Dar es Salaam.

Muteti R.S (2014); Relationship between financial risk management and financial
performance of commercial banks in Kenya, unpublished MSC Finance project,
University of Nairobi.

Muzinduki, P. (2008), Micro credit Fund Through SACCOS. Analysis of Inclusion and
Exclusion of the Poor in Kabarole District, Uganda. Research of Institute of Social
Studies, Graduate School of Development Studies Uganda.

Mwakilema, N.S., (2006), The role of SACCOS in the provision of financial services in
rural areas. The case of Arumeru district, Arusha unpublished MBA (Finance)
Dissertation, University of Dar es salaam.

Omunga P. (2011); the determinants of financial risk faced by Saccos in Kenya. An

unpublished MBA project, University of Nairobi.

Wanjohi J.G. (2013); the effect of financial risk management on the financial performance of
commercial banks in Kenya, an unpublished finance project, University Of Nairobi.

53
Stella.E, L; Loan delinquency and the factors influencing non-performance of loans. A case
of traders Sacco Ilala Municipal, The Open University of Tanzania.

Moses, M.B (2015); the causes and impacts of loan default to Saccos in Kenya, an
unpublished MSC Finance project, University of Nairobi

54
Appendices

Appendix 1: Approval Letter

55
Appendix 2: Introduction Letter

56
Appendix 3: Research Questionnaire

SECTION 1: PERSONAL INFORMATION

1. Gender
Male ( ) Female ( )

2. State your age

18 - 23 ( ) 24 - 29 ( ) 30 - 35 ( ) 36 - 41 ( )

42 - 47 ( ) 48- 53 ( ) Above 53 ( )

3. State your highest level of education.

Secondary ( ) Diploma/ certificate level ( ) Degree level ( )

Others (specify) -----------------------------------

4. Respondents years worked with the Sacco

Less than a year ( ) 1-5 ( ) 6 - 10 ( ) 11-15 ( )

Above 16 years ( )

SECTION 2: LOAN POLICY

5. Does your loan policy influence financial performance of your Sacco?

Yes ( ) No. ( )

6. If yes or no list some reasons;

i)____________________________________________________________________
ii)___________________________________________________________________
iiii)_____________________________________________

7. By ticking an appropriate box below in the five-point Likert Scale (Where Strongly
Disagree has a weighting of 1, Disagree=2, Indifferent=3, Agree=4 and Strongly

57
 Agree=5), please indicate the extent to which you agree with the following statements
about loan policy on the loan delinquency and financial performance of saccos.

SN Statement SD D I A SA
2.1 Loan policy is crucial in ensuring better financial performance
of my Sacco
2.2 Loan policy is regarded as a key factor in my Sacco
performance
2.3 My Sacco offers training to the staff handling clients over loan
disbursement
2.4 My Sacco’s loan policy is very crucial in explaining sound
financial performance of our Sacco.
2.5 My Sacco engages stakeholders during the development of
loan policies.

8. How would you rate the extent at which loan policy influence financial performance
your Sacco?
Very great extent ( ) Great extent ( )

Moderate extent ( ) little extent ( )

Not sure ( )

9. In your own opinion, do you agree that proper loan policies are essential in ensuring
sound financial management in the Saccos?
Yes ( ) No. ( )

SECTION 3 Insider lending

10.Does insider lending influence financial performance of your Sacco?

Yes ( ) No ( )

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11.If yes give reasons please;

i)___________________________________________________________________
ii)___________________________________________________________________
iii)_______________________________________________________________

12.How would you rate the extent to which insider lending influence the performance of
organizations?

Very high ( ) High ( ) Fair ( ) Low ( )

13.By ticking an appropriate box below in the five-point Likert Scale (Where Strongly
Disagree has a weighting of 1, Disagree=2, Indifferent=3, Agree=4 and Strongly
Agree=5), please indicate the extent to which you agree with the following statements
about Insider lending.

SN Statement SD D I A SA
3.1 Does insider lending take place in your Sacco
3.2 Insider lending is a major cause of loan delinquency in my
Sacco.
3.3 There is a relationship between insider and my Sacco
performance.

14.How would you rate the effectiveness of insider lending in ensuring better financial
performance of Sacco?

Very great extent ( ) Great extent ( )

Moderate extent ( ) Little extent ( )

Not sure ( )

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SECTION 4: Insurance scheme

15.Does a good insurance scheme ensure better financial performance of your Sacco?

Yes ( ) No. ( )

16.state some reasons for your answer please;

i)_________________________________________________________________________
ii)_________________________________________________________________________
iii)_______________________________________________________

17.By ticking an appropriate box below in the five-point Likert Scale (Where Strongly
Disagree has a weighting of 1, Disagree=2, Indifferent=3, Agree=4 and Strongly Agree=5),
please indicate the extent to which you agree with the following statements about insurance
scheme.

SN Statement SD D I A SA
4.1 Insured loans of my Sacco are easily recovered.
4.2 The rate of insurance affects loan performance as well as my
Sacco’s performance.
4.3 Loan insurance terms affects loan performance and my
Sacco’s performance.

4.4 Loan insurance restrictions affects loan performance as well

as my Sacco’s performance.
4.5 In my Sacco loan insurance policy influences loan repayment.

18.Do you agree that by having a good insurance scheme may result into better financial
performance of your Sacco?

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 Yes ( ) No ( ) I don’t know ( )

19.How would you rate the extent to which insurance scheme policy influences financial
performance of your Sacco?

Very great extent ( ) Great extent ( )

Moderate extent ( ) Not sure ( )

SECTION 5: Cost of loans (transaction cost)

20.Does the cost of loans influence financial performance of your Sacco?

Yes ( ) No ( ) I don’t Know ( )

If yes give some reasons please;

i)___________________________________________________________________
___iii)_______________________________________________________________
_______iii)_________________________________________________

21.By ticking an appropriate box below in the five-point Likert Scale (Where Strongly
Disagree has a weighting of 1, Disagree=2, Indifferent=3, Agree=4 and Strongly Agree=5),
please indicate the extent to which you agree with the following statements about cost of
loan.

SN Statement SD D I A SA
4.1 There are certain cost associated with the processing of loans
in my Sacco.

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 4.2 The transaction costs of our Sacco loans can lead to loan
delinquency in my Sacco
4.3 High interest rates of the loan may lead to poor loan
performance.
4.4 There is a relationship between the cost of loan and return on
investment

22.How would you rate the effects of transaction cost of the loan on financial performance of
the Sacco’s?

Very high ( ) High ( ) Fair ( ) Low ( )

Thank you for your time and cooperation.

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