INSTITUTION : MOUNT KENYA UNIVERSITY

UNIT : COOPERATIVE AND MICRO FINANCE MANAGEMENT

CODE : BED 2202

NAME :

REG NO :

TASK : CONTINUOUS ASSESSMENT TEST (CAT 1&2)

SEMESTER : January- April 2021

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 CAT 1
QUESTION ONE
Critically discuss the role of cooperatives in development  (10 Marks)

First cooperative societies plays crucial role in tackling poverty through creation of food
security. They do so by enabling small-scale holders in a country to market products together.
This enable the produces to get stronger in the supply chain. Example, in Kenya most cash crops
producers have come together to market their farms produce. Such cooperatives assist them on
best practices of producing the products, they in addition offer free Agricultural outputs
including other benefits. This lead to increased Agricultural output, increased incomes to the
farmers and a general improvement in the standard of living. Cooperatives have the capacity of
realizing industrialization in rural areas through the value addition of agricultural products and
marketing. Example includes dairy and coffee sectors.

Secondly, savings and credit cooperative societies play a crucial role in mobilizing savings
from their members. After saving a reasonable amount of money, they led it to willing members
who can afford it at a low interest rate. These financial cooperatives offers sustainable finance
for most of the Kenyan excluded from traditional banking. Example in Kenya, mwalimu savings
and credit cooperative society mobilize saving from teachers and allows them to borrow such
finances at a low interest rate. Because such cooperatives are managed by people at community
level, they offers a safe approach to savings and offering of loans. Therefore savings and credit
cooperatives are in forefront in mobilizing savings and investments through provision of
affordable loans. It has resulted to huge impact in financial deepening among Kenyans.

Also cooperatives societies creates employment to millions of people in the world. They
normally provide decent job opportunity and good working conditions, whether it be farmers,
laborers or office workers.

On the same note, cooperative societies normally empower women particularly in rural areas.
This is because cooperatives are open and democratic in their organizations, they are able to
foster gender equality. Many women holds senior position in cooperatives which enable them to

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earn an income. Example in Uganda most of the cooperative societies are strongly committed to
women empowerment. These action is aimed at developing female business skills and capacity.

Lastly cooperative societies plays crucial role in raising government revenues. Most
cooperative societies in Kenya are not profit making organizations. However the few which are
profit making organizations declare profit at the end of the year. From such declared profit, a
portion of it is remitted to the Government in form of taxes. Therefore cooperatives societies
play great role in contributing to National government revenue.

 QUESTION TWO

Compare and contrast credit unions and micro-finance institutions (MFIs)   (10 Marks)

Credit unions are owned by members and formed mainly to serve their members without a profit
motive. They are a form of cooperatives that provide savings and credit to their members. On the
other hand micro finance institutions are formed with a major aim of making profit.

Credit unions are financed by members and are financing is largely voluntary through member’s
deposit. Microfinance institutions are funded by external loans, grants and from external
investors.

Credit union membership is based on a common bond, a linkage shared by savers and borrowers
who belong to a specific community, organization, religion or place of employment. The
common bond maybe where members work, live, work or worship. There major aim is to offer
service to the poor and therefore offer credit at competitive rates and fees. On the other hand,
microfinance institutions target low income clients mostly belonging to same community.

Also credit unions board of directors are elected from membership. Each member has a single
vote in board elections regardless of their amount of savings or shares in the credit union. On the
other hand microfinance institutions are run by an appointed board of directors or salaried staff.

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In addition in credit unions, the net income is applied to lower interest rates on loans, higher
interest on savings or new product and service development. On the contrary for micro finance
institutions, the net income builds reserves divided among investors.

Further credit unions offers a Full range of financial services, primarily savings, credit,
remittances and insurance. On the other hand, micro finance Focus on microcredit. Some MFIs
offer savings products and remittance services.

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 CAT 2

QUESTIONONE

Discuss the pros and cons of prudential financial regulation   (10 marks)

Prudential financial regulation is essential in a country due to its many benefits. Some of these
benefits include;

It improves transparency

A prudent financial regulation is quite essential in a country as it improve the overall

transparency of the financial system. Example, since there is lots of requirements regarding
reporting of banks, the general public and the regulators are usually better informed regarding
equity position of financial institutions.

Moreover, also the overall financial situation can be evaluated much better. Therefore, the
transparency level in the banking system can be vastly increased through the introduction of
strict financial regulatory frameworks.

Higher equity requirements

Another advantage of financial regulation is that it requires banks and other financial
institutions to hold a certain minimum amount of equity. Thus, through stricter financial
regulation, banks are forced to hold a higher minimum amount of equity and will therefore be
better able to absorb losses.

Incentive of risk-taking for banks decreases

Banks have incentive to lower risk taking strategy since they can lose more equity in case
losses occur. This also implies that banks have a bigger incentive to engage in a long-term
business strategy and to avoid excessive risks. In turn, this will also benefit the general public
since the financial system will be less vulnerable and stock market swings tend to be lower.

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Lower risk for financial crisis situations

Since the financial system will be less vulnerable to swings, the overall risk for the
development of global financial crisis situations will also be much lower if strict regulations are
in place. A global financial crisis often occurs due to structural weaknesses in the financial
sector.

Government bailouts will become less likely

Since the risk for financial crises as well as the risk for the failure of financial institutions
decreases due to the introduction of strict regulations, also the chance for the necessity of
government bailouts decreases. With higher regulatory requirements, it is less likely that those
institutions will need financial help and the risk that bailouts become necessary will be much
lower as well.

Lower costs to taxpayers

There is lower chance that taxpayers’ money has to be used for those bailouts. In turn, plenty
of money that would have been used for bailouts could now be used for other important
infrastructural projects that will be much more beneficial for the general public.

It creates accountability

Financial regulation is also crucial to hold banks and other market participants accountable for
their actions. For instance, when a financial institution engages in risky investments, it should
bear the possible losses since it also gets the financial upsides in case the investment delivers
high returns.

Assist in curbing monopolies

Monopolies are rather harmful to customers since monopolists can charge high prices for their
products and also due to various other reasons. Also in the financial sector, monopolistic market
power can lead to unhealthy developments.

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 Thus, in order to prevent those monopolies to form, it is crucial to limit the number of
acquisitions a bank can make in order to control and confine the size and the market power of
financial corporations.

Protection of private investors

Financial regulation protects institutional as well as private investors from losing their money
due to excessive speculations by financial institutions.

Through higher equity requirements, banks are better able to cover their losses and to pay
back money to their creditors.

DISADVANTAGES OF FINANCIAL INSTITUTIONS REGULATIONS

Regulators lack sufficient information

One downside of financial regulation is that regulators often have insufficient information
about the processes and the politics inside a bank. Moreover, they often don’t know the long-
term strategy of those financial institutions. This will make it quite difficult to impose
appropriate measures since there will be significant differences across banks and some
institutions may require much higher regulations than others.

Insufficient Manpower

Plenty of manpower is necessary. For instance, there have to be controls on a regular basis
and regulatory authorities have to monitor the progress of individual institutions quite carefully
in order to ensure the stability of those financial institutions. However, it may not be easy to find
enough people to carry out this work that can be quite complex and demanding.

Lack of necessary skills to regulate banks

The skill set of regulators may be insufficient. This creates a lot of problems since bankers
may outsmart regulators and may be able to disguise excessive risk-taking strategies. Thus, if the

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skill set of regulators is rather limited, chances are that they may be fooled by the clever people
working in investment banks in the long run.

Difficult to lobby

Since large amounts of money are present in our financial markets, it is quite logical that
banks also have many lobbyists that try to influence regulations in their favor. Example, if the
power of lobbyists is too strong, chances are that regulations may be set in the favor of banks
rather than to comply with the preferences of the general public.

High level of administrative work

Overall, banking regulation implies significant administrative work, both for the regulatory
authorities as well as for financial institutions.

Regulation is costly

Since the monitoring and the ongoing changes in regulations require plenty of manpower,
they also imply significant costs. People who have the experience to work in this field are often
quite costly and a high number of those people can add up to significant labor costs for
regulatory authorities.

Alots of effort is required from financial institution

Another problem with banking regulation is that financial institutions will often have a hard
time adapting to the new requirements that are set by regulators.Sometimes, the deadlines for
implementing those regulations are quite strict and banks will have to take high levels of effort in
order to comply with those regulations in time.

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REFERENCES

Henock, M. S. (2019). Financial sustainability and outreach performance of saving and credit
cooperatives: The case of Eastern Ethiopia. Asia Pacific Management Review, 24(1), 1-9.

Quraisy, M., Alhabshi, S. O., & Razak, S. H. A. (2017). The impact of Islamic microfinance in
enhancing the well-being and quality of life: Case study of Islamic financial cooperative
(BMT) in Indonesia. South East Asia Journal of Contemporary Business, Economics and
Law, 13(1), 1-12.

Kang, K., Zhao, Y., Ma, Y., & Li, Z. (2019). Green supply chain poverty alleviation through
microfinance game model and cooperative analysis. Journal of Cleaner Production, 226,
1022-1041.

Oluyombo, O. O. (2018). Analysis of Cooperative Financial and Enterprise Financial Crises.

African Journal of Management, 3(2), 11-26.

Mateos-Ronco, A., & Guzmán-Asunción, S. (2018). Determinants of financing decisions and

management implications: evidence from Spanish agricultural cooperatives. International
Food and Agribusiness Management Review, 21(1030-2018-3329), 701-721.