Professional Documents
Culture Documents
SOCIETIES
By
Abigael Marco
2022
CERTIFICATION
We, the undersigned, certify that we have read and hereby recommend for
acceptance by the Mzumbe University, a business case entitled Reducing loan
delinquencies in Cooperative societies in partial/fulfilment of the requirements for
award of the degree of Master of Business Administration of Mzumbe University.
Signature
______________________________
Major Supervisor
Signature
_______________________________
Internal Examiner
Signature
____________________________________________
CHAIRPERSON, SCHOOL/CAMPUS BOARD
i
DECLARATION
I, Abigael Marco, hereby declare that this business case is my own original work
and that it has not been presented and will not be presented to any other university
for a similar or any other degree award. In case any information given in this
business case proves to be false or incorrect, I shall be responsible for the
consequences. Also, I shall be responsible for any errors, typos, and omissions found
in this business case.
Signature ___________________________
Place ________________________________
Date________________________________
ii
COPYRIGHT
This business case is a copyright material protected under the Berne Convention, the
Copyright Act 1999 and other international and national enactments, in that behalf,
on intellectual property. It may not be reproduced by any means in full or in part,
except for short extracts in fair dealings, for research or private study, critical
scholarly review or discourse with an acknowledgement, without the written
permission of Mzumbe University, on behalf of the author.
©2023
iii
ACKNOWLEDGEMENT
I would like to extend my sincere gratitude and appreciation to the Almighty God for
providing me a good health and I would also like to appreciation and thanks my
academic supervisor Dr. Moshi James for giving me, guidance, time, tolerance and
for being hand to hand with me throughout the time of my studies. Wisdom
throughout the time of study and project preparation
Finally, I would like to thanks my family for her support and encouragement in
different situation in a way that I was comfortable in all time of my studies
iv
DEDICATION
v
LIST OF ABBREVIATIONS AND ACRONYMS
FE Female
ME Male
vi
ABSTRACT
This study analyses the loan delinquency problem in Cooperative Societies and ways
to reduce it. Purposive sampling technique was employed to select study
respondents, who were manager and loan officer of UWAMU SACCOS. Interview
methods was used to collect data for the study.
In UWAMU SACCOS the loan default amount increases and decrease (Fluctuate)
from year to year such that in 2017 Tzs 189,206,999 in 2018 Tzs 129,649,800, in
2019 Tzs 153,471,376, in 2020 Tzs 220,708,900 and in 2021 Tzs 214,667,900
The study found that there are different factors which causes the loan deliquesce in
cooperative societies. This factors include lack of motivation to pay loans, small
farm size, age of farmers, poor supervision, loan disbursement delays and high
interest rates, improper entrepreneur selection.
Also other factors like inadequate project viability analysis, inadequacy of collateral
security/equitable mortgage against loans, Lack of follow-up measures.
Also default occur due to natural calamities exorbitant interest rates charged by
microfinance banks, Unavoidable number of poor economic decisions made by
individuals, Faulty management processes, External variables and insufficient
financial analysis.
Also in the study the proposed measures employed to reduce them are Introduce
group lending, Evaluation and monitoring of members, Prohibit Shareholders in
Holding Multiple Loans, Prohibit Shareholders in Holding Multiple Loans and
Increase collateral property.
vii
TABLE OF CONTENTS
CERTIFICATION ...................................................................................................... i
DECLARATION ........................................................................................................ ii
ACKNOWLEDGEMENT ........................................................................................ iv
DEDICATION ............................................................................................................ v
LIST OF APPENDICES........................................................................................... xi
4.3.2 Small farm size, high interest rate, age of farmers, poor supervision ........ 10
4.3.5 Lack of follow-up measures, and default due to natural calamities .......... 11
5.1 METHODOLOGY............................................................................................. 15
ix
LIST OF TABLES
Table 1.1 Below shows the number of clients (Shareholders) trend from 2003 to
2022 .............................................................................................................................. 2
Table 2.1 Loan offered and loan default in UWAMU SACCOS at a period of five
years (TZS)................................................................................................................... 7
x
LIST OF APPENDICES
xi
1.1 INTRODUCTION
UWAMU SACCOS LTD is nineteen (19) years old since its commencement. The
meeting with the General Manager was one day after the Annual General Meeting of
October 2021 at his office. The main concern of our discussion was loan defaults as
addressed by external auditor COASCO in AGM. The situation looks chronic based
on the other previous reports presented on the AGM.
SACCOS members didn’t put a tone of emphasis since they are part of this problem.
The General manager promised that he cannot remain silent and tolerating the
miserable situation facing the SACCOS. The amount of loan default account Tzs
907, 704,975 out of the total loan portfolio of above 9 billion.
The General Manager has reviewed the SACCOS strategic plan and is coming up
with the improved plan on loan default control by eighty percent (80%) by 2026 in
order to achieve the institutional goal of promoting social and economic interest of
the members through loans provisions.
2.1 BACKGROUND
1
Table 1.1 Below shows the number of clients (Shareholders) trend from 2003 to
2022
2
2.2 Roles of SACCOS
Section 3 of Cooperative society act No.06 of 2013 states the Roles of cooperative
societies such as; SACCOS shall be based in the promotion of the economic and
social interests of its members by means of common undertaking, based upon mutual
aid and which conforms to the cooperative principles of a society which is
established for the purpose of facilitating operations of societies SACCOS also
It has been proved to be crucial for long-term development and economic progress.
(Eyben, R 2008). Empowerment is defined as "the increase of people's ability to
make strategic life choices in situations where this ability was previously denied to
them." Thus, empowerment is primarily about improving individuals' capacities to
make a change in their environment, which impacts their lives. N. Kabeer (1999)
Individual empowerment also refers to an individual's effect on social and cultural
norms, informal institutions, and formal institutions in society. Women can be
empowered in a variety of ways, including socially, economically, politically, and
legally. In compared to other disadvantaged groups, women's empowerment is more
complex. Another scholar states that, the promotion of the financial sector by the UN
for providing access to services for all income levels was a strategy designed to fulfil
the MDGs (Rabobank, 2007).
According to another academic, the UN's support of the financial sector for
providing access to services for people of all income levels was a strategy meant to
achieve the MDGs (Rabobank, 2007). Furthermore, according to Rabobank (2007),
economic study has showed that expanded access of financial services is clearly one
of the main drivers of economic growth. Households' full access to financial services
3
has a significant impact on easing the persistent poverty problem that most
developing nations experience (Rabobank, 2007).
This can be achieved through the use of SACCOs, which aid in the development of
adolescents' capability by providing funds for various economic activities. It has
been discovered that the effect of cooperative societies' activities on youth
development is favorable (Okoli and Eucharia, 2018). SACCOs play an important
role in women's empowerment because efforts to encourage and promote the
economic activities of women cooperative members are important factors of
women's empowerment (Ezeokafor 2021). SACCOs give shareholders access to
financing, and the UN's promotion of the financial industry as a means of providing
services to people of all income levels was part of a strategy to achieve the MDGs
(Rabobank, 2007). Furthermore, Rabobank (2007) claims that economic analysis has
demonstrated that expanded financial service availability is unquestionably one of
the most important drivers of economic growth
Although SACCOS solves many different problems in community but also there are
many challenges facing it such as, Lack of knowledge and capacity of management
committees and poor members’ participation, lack of transparency and
accountability, lack of appropriate support from cooperative promoters and NGOs,
and non-awareness of the existing opportunities by the members , Delays in loan
repayment; poor database management; a lack of sufficient capital; insufficient debt
and equity money to convey to the poor; and a delay in the presentation of financial
reports to clients/members (Kipuyo, 2013).
5
3.1 BUSINESS CASE PROBLEM
6
Table 2.1 Loan offered and loan default in UWAMU SACCOS at a period of
five years (TZS)
Brokers were employed in order to help UWAMU SACCOS to collect the default
loan amount by determining the market values of collateral properties, Listing and
advertising the property for sale, showing the property to prospective buyers.
When SACCOS hire brokers such as Kivanga Auction Mart, City Brokers, Jalas
Company and Planet Company the
Regards to low interest rate loan, SACCOS is not able to collect all the loaned
amount to customers as which lead to default of loan by all five consecutive years.
Having low interest rate loan one would expect all loan amount would be paid on
time without any default however, the situation is not so, as UWAMU SACCOS
experience a severe default and continue to happen in each year. Various efforts
made by UWAMU to rescue the situation as the protagonist tried to solve the
problem by employing different brokers year by year such as Kivanga Auction mart,
7
Jalas Company and Planet company together with continuing in offering loan of low
interest rate but yet the problem exist.
8
4.1 LITERATURE REVIEW
When money is given to another person in exchange for repayment of the loan
principal plus interest, it is referred to as a loan. Before any money is issued, both
parties agree on the loan terms. A loan might be collateralized, such as a mortgage,
or it can be unsecured, such as a credit card. (www.investopedia.com)
The term "loan default" describes a circumstance in which a borrower fails to repay a
debt. It happens when a borrower is unable or unwilling to return a loan, and the MFI
no longer expects to be paid (Maina and Kalui, 2014). Debt service default and
technical default are the two types of default. Technical default occurs when a
borrower fails to make a scheduled interest or principal payment, whereas debt
service default happens when an affirmative or negative covenant is broken. The
latter, on the other hand, is more common in banks than in microfinance firms. Loan
default has been identified as the single most important factor in the demise of
financial firms that provide credit. As a result, the goal of obtaining a low loan
default rate in order to maintain a healthy loan portfolio will ultimately contribute to
MFI sustainability. Mensah (2013, Mensah,
When a borrower fails to repay a debt according to the terms of the original
agreement, he or she is said to have defaulted on the loan. In the case of most
consumer loans, this means that multiple payments have been missed over a period
of weeks or months
9
4.2 Case Theory
“Credit default theory” the situation where there is an indirect relation between the
effects of loan default and the financial performance exist
This theory has been hypothesized by one scholar Sy (2007) who delineates credit
default for a secured loan as the occurrence of both delinquency and insolvency and
an occurrence of delinquency in the case of unsecured loan therefore the author
postulates that a credit default is brought about by both delinquency and insolvency
4.3.2 Small farm size, high interest rate, age of farmers, poor supervision
10
4.3.3 Loan disbursement delays and high interest rates
According to Olomola (1999), can greatly raise borrowing transaction costs and have
a negative impact on repayment performance.
Berger and De Young (1995) identified the main causes of industrial loan default as
improper entrepreneur selection, inadequate project viability analysis, inadequacy of
collateral security/equitable mortgage against loans, unrealistic repayment terms and
schedules,
After surveying different banks in India. Okorie (1986) discovered that the kind,
timing of distribution, monitoring, and profitability of firms all related to repayment
capabilities and, as a result, high default rates in Ondo state, Nigeria. Other key
characteristics connected with loan delinquencies include: loan type, loan length,
loan interest rate, bad credit history, borrowers' income, and loan processing costs.
Okpugie (2009) further said that exorbitant interest rates charged by microfinance
banks were determined to be the cause of the worrisome default. This was further
corroborated by Vandel (1993), who discovered that high interest rates offered by
banks encourage borrowers to default.
according to Gorter and Bloem (2002), are mostly caused by an unavoidable number
of poor economic decisions made by individuals, as well as plain bad luck (bad
weather, unexpected price changes for certain products, etc.). In such cases, loan
holders can make an allowance for a typical proportion of non-performance in the
11
form of bad loan provisions, or they can spread the risk by purchasing insurance.
Nonperforming loans are a frequent issue. According to Nishimura, Kazuhito, and
Yukiko (2001), the non-performing or bad loan problem is one of the fundamental
reasons of Japan's persistent economic stagnation. They said that as the bubble burst,
some of the loans granted to corporations and industries by financial institutions
were non-performing. This slowed structural improvements and hampered the
operation of the financial intermediary system.
Outside the direct control of the management of MFIs and SHGs appear to contribute
little to the levels of overdue loans. As a result, for successful delinquency
management, it is vital for MFIs to understand and focus more on the internal causes
of delinquency over which they have greater influence, and to seek practical and
feasible solutions to these problems. The turmoil that shook mainstream financial
markets, as well as the impacts of the subsequent economic crisis, harmed MFIs and
their clients. MFIs had major liquidity constraints in the early stages of the crisis, but
as capital markets recovered, worries shifted from funding to asset quality (CGAP,
1999).
12
This example demonstrates the existence of linkages between external causes and
loan delinquency. The literature has looked at the relationship between the
macroeconomic environment and loan quality, as well as the phase of the business
cycle and the stability of lending institutions. Fofack (2005), for example,
investigated the causative analyses and macroeconomic implications of loan default
in Sub-Saharan African nations Fofack demonstrated that macroeconomic stability
and economic development are connected with a lower degree of default, but
unfavorable macroeconomic shocks combined with greater costs of capital and lower
interest margins are associated with an increase in the scope of nonperforming loans.
USA Center for Promoting Ideas www.aijcrnet.com 39 Waweru and Kalani (2009)
discovered that national economic slump, lower consumer purchasing power, and
legal challenges were some of the reasons of non-performing loans in Kenyan banks.
The study recognizes that the notions of nonperforming loan and loan delinquency
are identical.
Loan default may cause different negative impact to SACCOS. Such impact includes
but not limited to decreasing the number of employees, conflict among staff
members and Board of directors, raising of conflict during Annual General Meeting,
Loss of trust to the Board by shareholders.
Also due to existence of default in every year the UWAMU SACCOS have bad
reputation to members and to the Government.
14
5.1 METHODOLOGY
This part includes, Procedure used to select and contact the protagonist, Data
Collection methods and tools, Data management and analysis
Purposive sampling technique was employed to select study respondents, which were
manager and loan officer of UWAMU SACCOS.
Interviews method was used to collect data to investigate the level and causes of loan
default, to determine the impact on loan defaults in the financial performance of
UWAMU SACCOS and to assess the control mechanisms adopted to minimize the
loan default.
Interviewee was provided to both loan officers and manager of UWAMU SACCOS
and was conducted by asking questions face to face from manager and loan officers
The case was based on primary data which the author gathers information by face to
face interview and telephone calls with the Manager and loan officers of UWAMU
SACCOS. Additional information was gathered form COASCO Audit Report and
Cooperative Officer Audit Report. The interview was used semi structured questions
that helped the interviewee to focus on crucial items and allow the interviewee to
make sure specific issues were covered.
Primary data was used to investigate the level and causes of loan default in UWAMU
SACCOS together with the assessment of control mechanisms adopted to minimize
the loan default in UWAMU SACCOS.
Secondary data was used to determine the impact of loan defaults in the financial
performance of UWAMU SACCOS which was helped in the data analysis and data
presentation, this was obtained by reviewing the related literatures such are loan
15
foam, cashbook, leger, receipt, Revenue and expenditure book, Cooperative officer
Audit report and loan contract.
16
6.1 PROPOSED BUSINESS SOLUTION
In order for UWAMU SACCOS to reduce the risk of loan delinquencies amount, the
study proposing that UWAMU should introduce group lending program that will
allow shareholders to join together in order to empower the repayment capacity by
protecting among themselves. The group will provide collateral through a group
repayment pledge, the incentive to repay the loan will base on peer pressure, if one
group member defaults the other group members will make up the payment amount
When the UWAMU SACCOS issued new loan need to have proper assessment to
shareholders in order to determine the borrower’s ability to repay the loan with
interest within a time frame.
From the discussion with manager and loan officer the study found that after
evaluation and reviewing of member’s capacity to pay loan will reduce the default
rate due to fact that loan will only be granted to those members with the ability and
capacity to repay it.
The study revealed that many shareholders hold multiple loan which causes some of
loaned amount to default, so as the study revealed that the number of loan must be
reduced by limiting the shareholders not holding many loan in in different financial
institutions in order to decrease the defaulted loan to UWAMU SACCOS
The study proposing that, the borrowers should increase the collateral value to
UWAMU SACCOS that will enable the borrower to have more security for the loan.
In this case, if the borrower will agree to pledge all future property up to a certain
17
amount as additional collateral for the loan will help to reduce the default loan
amount to increase year by year.
18
7.1 CONCLUSION
The causes of loan default by clients of UWAMU SACCOS differ; clients assign
different factors, while loan officers who are on the field also assign different factors.
It is found that factors assigned by clients as reasons for default of payment are not
explicitly the main reasons thereby much consideration should be given to that of
loan officers in order to reduce loan default. It must be noted that the UWAMU
SACCOS have the potential for helping create wealth and hence reduce poverty. The
following are recommended to control or minimize default;
SACCO’s members must clearly understand their roles and responsibilities and fully
understand that they are individually signing for the loans of each group member.
SACCOS should have clear and effective credit or lending policies and procedures
and must be regularly reviewed. The credit supervisor should check with credit
officers daily to ensure that policies are followed and the supervisor must respond
quickly to solve credit officers’ problems. It makes no sense to have strong policies
on paper that are not followed in the field.
Also if credit officers have a specific geographic region, they can visit clients more
often; limiting geographic scope, reduces time and money wasted traveling from the
office to clients’ businesses. More visits enable credit officers to develop
relationships in their neighborhoods. Management and credit officers need to pay
attention to details. Credit officers must respond quickly to problem clients in their
portfolios.
Generally, the rate of loan default has been fluctuating from year to year because the
solution to solve the problem is not properly applied.
19
8.1 REFERENCES
Aballey, F.B. (2009). Bad loans portfolio: The Case of Agricultural Development
Bank Unpublished Dissertation
Ahmad, S.A. (1997) Natural Hazards and Hazard Management in the Greater
Caribbean and Latin America. The University Printers Publication,
University of West Indies, Kingston, Jamaica, No. 3.
Akinwumi, J.A. and Ajayi, A. O. (1990). The Role of Loan Repayment Capacity in
Small Scale Farmers Credit Administration. Quarterly Journal of Credit
Administration, 15(2)
20
Wharton School Centre for Financial Institutions, University of
Pennsylvania.
Ezeokafor Uche R, Jacobs Chineze J., and Ekwere Gabriel E., “Influence of
Cooperative Society on Women Empowerment in Nigeria.” Journal of
Applied Agricultural Economics and Policy Analysis, vol. 4, no. 1 (2021):
25-33. doi: 10.12691/jaaepa-4-1-3
Felister Kipuyo 2013 Challenges and prospects of saving and credit cooperatives in
South Wolo Zone, Amhara Region, Ethiopia
Felsovalyi A., (1998). Measuring Loss on Latin American Defaulted Bank Loans, a
27-Year Study of 27 Countries”. The Journal of Lending and Credit Risk
Management, 80: 41-46.
21
Hunte(1996). Microfinance and Poverty Alleviation: case studies from Asia and the
Pacific. Routledge; USA.
Mlowe, L.H.K. (1994). Savings and credit society as sources of productive credit for
small scale farmers: The case of Kilimanjaro region and Babati district.
MIMEO.
Nishimura, K., Kazuhito I., and Yukiko O., (2001). “The Disposal of Non-
Performing Loans and Its Potential Influence”. [http://www5.cao.go.jp/
keizai3/2001/ 0628furyousaiken-e.pdf], (accessed 13th December, 2010)
22
https://mpra.ub.uni-muenchen.de/84380/ MPRA Paper No. 84380, posted
13 Feb 2018 15:09 UTC
Olomola, A.S. (2001). The nature and determinants of rural loan repayment
performance in Nigeria: The case of FADU’s micro-credit programme.
NISER monograph series NO 3, (NISER), Ibadan.
23
Warue, B.N., (2012). Factors affecting loan delinquency in Microfinance in Kenya.
International Journal of Management Sciences and Business Research.
Vol.1 Issue 12.
Waweru, Nelson Maina and Kalani, Victor Mutisya, Commercial Banking Crises in
Kenya: Causes and Remedies (August 10, 2009). Global Journal of Finance
and Banking Issues, Vol. 3, No. 3, 2008, Available at
SSRN: https://ssrn.com/abstract=1536159
24
INTEVIEW GUIDE
To Manager
5. Does Training before receiving Loans will decrease the loan default rate?
To loan officer
5. Does Training before receiving Loans will decrease the loan default rate?
25