Abstract
The Savings and Credit Cooperative Societies (SACCOS) which are co-operative financial models are flourishing in most of the developing economies recently. However, loan repayment capacity remains a challenge that threatens their future. Using financial statements data for the year 2012, from 36 SACCOS in Kilimanjaro Region, Tanzania, and using descriptive statistics and regression models in the analysis, this study examines the relationship between financial performance and loan repayment capacity. It thus examines the extent by which SACCOS are capable of recovering the loan issued and also the financial ratios that explain loan repayment capacity in SACCOS. The study depicts that there is a severe financial risk management problem among Tanzanian SACCOS. Focusing on sustainability is significant for improvements of loan repayment, but focusing on profitability in SACCOS results to an adverse loan repayment. The study asserts that the primary focus of SACCOS should not be profit but member’s wealth maximization and sustainability of the institution. Moreover, we suggest that in addition the traditional means of dealing with financial risk, the uses of a modern risk management tool like credit scoring should be considered in evaluating borrowers. Key words: SACCOS, loan repayment, Tanzania.
Highlights
Loan repayment performance is an important concept for all the lending institutions
Using financial statements data for the year 2012, from 36 Savings and Credit Cooperative Societies (SACCOS) in Kilimanjaro Region, Tanzania, and using descriptive statistics and regression models in the analysis, this study examines the relationship between financial performance and loan repayment capacity
The findings suggest that despite the available traditional tools used in SACCOS to manage financial risks, there is a higher level of credit risk problem in SACCOS
Summary
Loan repayment performance is an important concept for all the lending institutions. It is a measure of whether loans are settled up in full according to the loan contract or not. This study focused on the Savings and Credit Cooperative Societies (SACCOS), which are co-operative based microfinance institutions, to add understanding of Credit Risk Management (CRM). As co-operative, they focus on social objectives, for instance, enable members to save their money and access credit and at a lower costs Three, they have to mobilize savings and to repackage the savings received to issue loans at a favorable price that benefits the members of the institution. Many stakeholders take for granted that SACCOS have a worthy portfolio, given the fact that these institutions play as cooperatives and have their standards of operations In this case, the assumption lies in the three traditional methods of credit risk management in SACCOS that bonded to the cooperative attributes. This study contributes knowledge on these issues by employing portfolio at risk for 30, 90, 365 and total, as proxy measures for the loan repayment performance in SACCOS. The central issue, which requires continuous investigation, be their long-term viability, so as to ensure that SACCOS model remains the long run development model, which is the subject of this study
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