CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter contains the literature review of the variable of the study; the review was based on the objectives of the study.
2.1 Services offered by SACCOs to its members in the society
According to Kyendo, (2011), over the years the SACCOS have expanded their services and products to meet diverse needs and aspirations of the members. The Society being a member owned entity prides itself in being member focused so that the development of products and services are centered on the members needs.
According to Bailey, (2001), the most common form of products offered by SACCOs is savings. He notes that saving constitutes the key elements on which the development of the community depended. Local savings provide asset for the community’s investment in future. Without it, the community and the economy at large cannot grow and get out of poverty, unless the alternative sources of investment such as foreign capital from donors are injected in the community.
Davis & Worthington, (2005) note that SACCOs offers the widest variety of specialized savings products, including a savings program for women. The customers have a choice between immediately accessible, liquid products, or semi-liquid accounts or time deposits with accordingly higher interest rates. Customer orientation is also reflected in the fact that simple savings products are often offered alongside more complex products which allows customers to graduate as their demands change. Simple and clear design of basic savings products enables depositors to easily select the product that best suits their needs. In line with the above, Pelrine & Kabatalya, (2005) report that the simple and transparent design of the savings products also enables staff to administer them with ease, reducing administrative costs.
This is in line with Lipsey (1995) who reports that it is desirable that SACCOs’ membership embrace a saving culture so as to increase their low incomes, leading to improved quality of life.
Further still, development is induced by saving in that, high levels of saving led to capital accumulation, later on investment lead to high income levels, ultimately breaking through the vicious cycle of poverty, hence, development in the long run.
Kirkpatrick (2002) report that the other most common product offered throughout the SACCO fraternity is the Credit and Loan services. Many of the Institutions have no Institutional capacity or capital base to offer other services. Services are also offered mainly to members of the SACCOs. He further reports that members are entitled to the following loans: Development loans, School fees loans, Emergency loans, Rural / agricultural loans, Normal loans, Special loans, Welfare loans, Working capital loans and Capital development loans.
According to Pelrine et al., (2005), SACCOs also get involved in marketing of the products they sell for wider outreach. They sell their policies, social gatherings (funerals), promotion meetings, the church structure, women groups, local leaders and society meetings.
According to Mutekanga (1998), SACCOs provide financial services to their members through existing product or marketing societies. He further argues that members also have the opportunity of saving with their SACCOs through banking sections of the district cooperative unions, which maintain savings account for their members.
To Afroz, (2013) micro credit institutions make investments without approval from the Ministry of Finance, Planning and Economic Development. He notes that this has greatly removed bureaucracy from the day-to-day operations of the societies though it has increased the risk of making unsound investments. Already some SACCOs have suffered in the recent bank crisis.
Kyendo, (2011), using IV and Propensity Score Matching (PSM), found that the effects of micro-loans are not robust across all groups of poor household borrowers; the poor participants are among those who benefit the most and the effect of participation is, in general, stronger for male borrowers.
2.2 Effect of financial strategies on savings mobilization
Kibanga and Mania, (2004) report that competition between SACCOS and other Financial Institutions is characteristic of a globalized economy in which the business environment is very dynamic and firms have adapt to such changes.
The modern customer is empowered and very difficult to please. Marketers are contending with consumers who are very knowledgeable, smarter, more price conscious, more demanding and less forgiving .The consumers also a variety of firms that are promising to offer them better products and services than their competitors (Kotler, 2002). SACCOS like any other business firms have to contend with such customers.
According to Hertog, (2007) a Saving and Credit Co-operative society accords members an opportunity for saving regularly, accumulating the savings and thereby creating a pool from which they can borrow exclusively for productive purposes at fair and reasonable rates of interest than would be obtained in other financial Institutions.
Gachara (1990) found that Saccos are seen as vehicles for resource mobilization and gateways to economic prosperity for families, communities and nations. These two studies are in agreement with the primary objectives of a Sacco which are: the creation of an opportunity to the members to save and later borrow.
SACCO is a facility that makes it possible for the focused poor people to get a small loan to start a business, pay for school fees, procure housing or receive health care (Microfinance vital to economic growth 2005:15). Such an initiative is instrumental in changing the poverty patterns in view of improved facilities to lessen the challenge posed by startup capital.
According to UN, (2005), SACCOs have been changing people’s lives and revitalizing communities since the beginning of trade (United Nations 2005). The United Nations declared the year 2005 the year of micro-credit because since 1959, the UN has designated International Years in order to draw attention to major issues and to encourage international action to address concerns that have global importance and ramifications.
Mudibo, (2005) argues that the SACCOs’ purpose is to encourage savings among members and using the pooled funds, to make loans to its members at reasonable rates of interest and providing related financial services to enable members improve their economic and social conditions.
According to Bottelberge, (2010), Savings and Credit Cooperatives (SACCOs) have found themselves commanding a large percentage of savings in the financial sector.
This has driven the citizenry to trust the management of the SACCOs in not only safekeeping of their money but also to provide a good return on it.
Mutugu and Mwarania (1986) argues that SACCOs are capable of developing a portfolio of investments that can achieve a desired rate of return for a given level of risk and desired maturity structure and to wipe out all diversifiable risks. These suggestions even though important cannot be fully relied on since the writers did not carry an empirical research to ascertain their allegations.
2.3 Challenges affecting SACCOS in the society
At the level of the individual, the lack of appropriate institutional savings facilities forces the individual to rely upon in-kind savings such as savings in the form of gold, animals or raw materials, or upon informal financial intermediaries, such as Rotating Savings and Credit Associations (ROSCAs) or money-keepers. These informal savings options, however, do not offer a combination of security of funds, ready access or liquidity, positive real return and convenience in order to meet the various needs of the particular saver.
At the institutional level, SACCOs have microproducts service windows on both sides of the balance sheet, serving micro and small savers and borrowers with an average savings balance or loan amount below the average per capita annual income in the respective countries. Yet the number of MFIs that exclusively offer credit is much larger than MFIs with both savings and credit facilities. Empirical studies have demonstrated that the performance records of credit-only MFIs in outreach and sustainability have not been widely successful, (Hertog, 2007; Saunders & Cornett, 2007).
Mutesasira (1999) opines that SAACOs lack effective savings mobilization strategies and thus they are unable to increase their outreach to a significant number of clients on a regional or national scale. In addition, few SACCOs that do not mobilize savings have attained full financial self-sufficiency, independently covering their expenses for operations, loan loss, cost of funds and inflation with their revenues.
According to Mudibo, (2005) throughout the world, SACCOs have often experienced that exclusively offering credit services can lead to undue dependency on external sources of financing. This dependency can cause the SACCOs and other MFIs to concentrate on the demands of the donors rather than on the demands of potential clients, especially potential savings clients.
According to Fred (2007) Most SACCOs either have no loan policy and procedures or what exists is not very clear and comprehensive. There are cases where loan-aging analysis is hardly practiced, there are no provision for loan write offs and losses. No guidelines exist as to what to do in cases where a member defaults in loan repayment. Where they exist they are inadequate to serve the purpose as to why it is intended.
Adam, et al. (2011), report that SACCOs lack Institutional capacity to introduce other Products & Services. According to him, most SACCOs lack capacity to expand their product range because of lack of capital & also lack of necessary management systems. They lack in capacity for market research and product development to introduce other services.
Kyendo, (2011), reports that SACCO’s lack of Sufficient Funds for provision of services hinders their progress. He further notes that Some SACCOs suffer from lack of sufficient funds to provide services especially loans to its members. Whereas waiting period for loans in some institutions could be 14 – 30 days, members have to wait for between 6 – 12 months to have access to the loans. Even seemingly organized SACCOs with comprehensive loan policies suffer from lack of enough capital for service provision.
2.4 Strategies to overcome the challenges affecting SACCOs in the society
In order to ensure that appropriate financial intermediaries for the poor to exist, appropriate external and internal incentives to mobilize and administer micro and small savings efficiently and effectively must exist. High performance standards required by regulatory authorities and effective supervision will necessarily translate into higher management capabilities, especially with regard to cost, liquidity and risk management (Fred, 2007).
According to Kyendo, (2011), SACCOs need to devote particular attention to cost accounting in order to improve their operational efficiency and ensure the long-term provision of their services on a sustainable basis.
According to Pelrine & Kabatalya, (2005) SACCOs members especially rural dwellers require more guidance, training and financial development assistance than the urban and semi-urban SACCO clients do. He noted that the poor are eager and determined to save if the opportunity is made available. They can be organized and take leadership, this is of great advantage since they can easily be mobilized into groups, that are able to give loans to people in their own communities and recover the money with interest. Such intervention requires long-term institutional and financial support. Small, poor communities cannot become sustainable in a short period due to their small size, low absorptive capacity, high illiteracy and lack of exposure to the MFIs best practices, (Kishindo, 2001).
According to Bategeka (1999), one of the ways for fighting poverty in Uganda has been the promotion and development of SACCOs. SACCOs as a form of delivery of financial services to the poor has now taken root in Kampala district and Uganda in general.
Kyendo, (2011) reports that a number of operators – ranging from government – funded programmes, donor – funded programmes, NGOs (both indigenous and foreign), community – based organizations, credit institutions, and banks, etc are involved in the delivery SACOOs. In Uganda case, Government has taken steps to create an appropriate environment for their operation. A policy framework to accommodate the diverse operations of the players in this sector as well as taking on the new initiatives being promoted by government in an effort to achieve “Prosperity for all” has been developed, Fred (2007).
