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CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction
Savings and Credit Cooperative Organizations (SACCOs) have played a pivotal role in promoting rural development and enhancing access to financial services among rural populations. This chapter presents a synthesis of existing literature on the contribution of SACCOs to improving household incomes and reducing poverty in rural communities.
2.1 Theoretical Perspective
The credit industry has undergone significant transformations, as highlighted in the CBK (2011) annual report, with most lending institutions adopting sustainable credit appraisal standards for effective risk management. Various theoretical models have been advanced to explain the governance, operations, and management of these institutions.
2.1.1 Contingency Theory
Developed by Fred Fiedler in 1967, contingency theory asserts that there is no universally best approach to organizing, leading, or decision-making within an institution. Instead, optimal decisions depend on specific internal and external conditions. Applied to credit appraisal, this theory emphasizes that borrowers’ circumstances vary, necessitating individualized assessments. Lending institutions must balance credit risk and liquidity, often without a one-size-fits-all strategy.
2.1.2 The Influence of Credit Standards on Loan Recovery
According to Mehta (2010), appropriate credit standards foster lender confidence, ensuring optimal credit issuance with minimal cost. Van Horne (2010) distinguishes between tight and loose credit standards—tight standards may reduce customer numbers, while loose ones can increase clientele but heighten default risks. Thus, an optimal credit policy is necessary. Kakuru (2010) emphasizes the “5 Cs” of credit assessment: Character, Capacity, Capital, Collateral, and Conditions. Each element aids in evaluating the borrower’s creditworthiness, repayment ability, and the overall lending environment.
Campsey and Brigham (2010) elaborate that sound credit evaluation involves collecting relevant applicant data, assessing it for creditworthiness, and determining credit limits. Collateral remains critical as a fallback in case of default, while Capital reflects the applicant’s financial strength. Conditions refer to broader economic trends that influence repayment ability. Chan and Thakor (2010) stress that collateral should be marketable and maintain value despite economic changes.
Pandey (2010) further suggests that effective credit standards not only minimize bad debts but also optimize institutional returns by reducing credit administration costs. Institutions must therefore assess borrowers thoroughly and ensure they align with the set credit standards.
2.2 The Role of SACCO Credit in Poverty Reduction
Guilford (2007) notes that microcredit enables individuals to start businesses, recover from crises, and improve living standards. In Africa, Anupam (2004) observed that microfinance boosts agricultural productivity by increasing access to inputs. Magyezi (2013) found that savings also serve as collateral, encouraging a saving culture despite low interest earnings.
Gash (2013) noted that SACCO clients who participate in business training programs tend to save consistently. Bundervoet, Annan, and Armstrong (2012) recommend financial literacy as a means of enhancing household incomes. Co-operatives have historically supported collective development in East Africa, but their effectiveness waned with market liberalization. In response, Tanzania’s 2002 Cooperative Development Policy aimed to revitalize their relevance.
Brunie et al. (2014) emphasized the importance of education in building client confidence and communication skills. Sinclair (2013) added that training fosters creativity and enhances market success. SACCOs also help smoothen household incomes by offering consumption loans for essential items.
2.3 Financial Advice and Its Impact on Poverty Reduction
Uganda’s SACCOs are supported by various cooperative policies. The Co-operative Societies Act (2003) provides a conducive environment for SACCO operations, while the 2002 Cooperative Development Policy aligns with the National Poverty Reduction Strategy. The National Microfinance Policy (2000) targets financial inclusion for low-income populations.
The government, through the Rural Financial Services Programme (RFSPP), has prioritized financial infrastructure development across Uganda. Historically, credit schemes such as the Cooperative Credit Scheme (1961) and Progressive Farmers Loan Scheme (1964) aimed to transition farmers to commercial practices. However, high default rates, poor disbursement policies, and administrative inefficiencies led to their failure (Ferguson, 2012).
The Public Finance Authority (PFA) under the Rural Development Strategy promotes production, competitiveness, and access to financial services (Microfinance Support Centre, 2007). Dusuki (2008) and Clarisse (2005) note that SACCOs leverage social capital—such as peer guarantees—to reduce moral hazard and default risk.
Luyirinka (2010) found that SACCOs provide accessible and simplified credit, encourage savings for investment, and promote financial literacy. These elements collectively contribute to poverty alleviation and economic empowerment, especially for women.
2.4 The Role of Savings in Poverty Reduction
Despite their potential, SACCOs often face financial constraints that limit their capacity to mobilize member savings or generate investment returns (Gatete, 2004). Microfinance services often do not reach rural populations due to high operational costs and service gaps. SACCOs fill this gap by providing savings services tailored to the poor, who might otherwise lack such access.
In Nakawa Division, some SACCO clients report harsh loan recovery practices, including high interest rates and aggressive loan officers. These practices hinder financial inclusion. Vision 2030 emphasizes the role of financial intermediaries in promoting savings and development.
Loan recovery methods, such as forceful collection and unfavorable terms, are a deterrent to rural participation (Harambee SACCO, 2014). According to the Boston University Center for Law and Policy (2014), SACCOs regulated by the SACCO Societies Regulatory Authority (SASRA) must obtain licenses, which can discourage informal savings initiatives (Lidgerwood, 1999).
Allen and Panetta (2010) argue that SACCOs must offer favorable loan conditions—reasonable interest rates, flexible repayment schedules, and appropriate loan sizes—to ensure accessibility for low-income groups. These financial services empower rural households to grow their enterprises and improve national economic performance.
2.5 Conceptual Framework
This study conceptualizes the relationship between SACCO operations and poverty reduction, considering how financial services such as credit access, financial advice, and savings mobilization influence rural household incomes. Moderating variables such as government policies, financial infrastructure, and economic conditions also affect this relationship.
