Article Type : Research Article
Authors : Mungai JN, James M, Muathe SMA
Keywords : Credit assessment; Credit policy; Revolving fund; Collateral; Sustainability
Loaning operation procedures is a basic requirement of
institutions dealing with borrowing and lending money, in order to improve
efficiency and bring down the level of default that is common phenomena in this
field. In most cases by default or design the procedures are kept aside to
benefit a few individuals and at times to deflect the institution its resources
without minding the recourse. The government of Kenya like any other
institution dealing with money has set out revolving funds institutions where
borrowing and lending is done to the youths and women from year 2006 to date.
The government role has been to provide revolving start-up funds to identified
groupings; the youth enterprise development fund, the women enterprise fund and
the Uwezo fund which was geared to reduce poverty to the youths and women
respectively. The study was guided by the following specific objective, to
determine the effects of institutional operational loaning procedures to
government revolving funds sustainability in Murang’a County. The study adopted
a positivism philosophy of research, where the researcher was independent on
what was being observed and studied. Descriptive survey design was used to
determine the level of government revolving fund repayment and its effect on
sustainability for other borrowers. The target population was 1520 social and
economic groups in Murang’a County. Clustering and Simple Random Sampling
techniques were applied to select a sample size of 307 groups, in addition a
census of 16 constituency credit officers, who were also interviewed. This, in
total accounted to 19.5% of the total population. A questionnaire and an
interview schedule were used to collect data. Descriptive data were analysed
using tables and charts. Quantitative data were analysed using Chi-square,
Analysis of Variance and Logit Regression Model. The results indicated that
government revolving funds operation procedure was statistically significance
to loan repayment and sustainability. The study underpins the importance of
demanding business plans to WEF and YEDF which in the past has been a
formality. The credit reference bureau which has been a preserve of the
commercial banks should be made compulsory to all micro- credit institutions
including the government initiated ones and that government revolving funds
organization management systems should be strengthened to facilitate up-to-date
loan repayment statements to lonees follow-up, in order to take action early in
case of defaults.
Background
to the study
Documenting institutional lending and borrowing
procedures is very crucial. This activity helps in streamlining the institution
operations, geared to reduce wastage and enhance customer satisfaction
throughout the entire process. The step by step guidance is made to ensure
abidance processing, good supervision, effective screening mechanism, ensure
satisfactory financial literacy exposure and proper verification of the entire
money system. The process ensure credible credit investigation in order to
review the loan applications, approval of the loan applicants to make sure the
money ends up with the right people as per policy. The documentation procedure
ensures risk control operations are in place while ascertaining that the
borrowers do not exceed the limit as per policy. In some cases collaterals are
required from the borrowers which need a review guideline before lending is
done. The loaning procedure also helps lender to evaluate the status of the
loanee before lending, to ascertain his/her character, it should be the role of
every government to come up with lending and borrowing policies that will help
to dismantle the poverty trap prevailing in any economy, by ensuring that money
lent out is recouped to be lent further to other needy members of the society
without wastage. Policies and strategies that would increase consumption of the
poor in general are principal components of a pro-poor development program,
improving access to financial services being one of the policies [1,2]. A
report to the legislature of the state asserts that; coming up with a revolving
fund could be instituted with an appropriation of start-up money from the
general fund, and should be tried by any existing government to investigate its
impact to the society’s wellbeing [3]. A revolving fund which may be in small
amounts but very crucial, according to the report must demonstrate the capacity
to be self-sustaining, through regular repayments of loans plus interest given
out to different parties and individuals.
Statement
of the problem
A lot of revolving funds have been initiated by the
Government of Kenya towards reducing youth and women unemployment since
independence in 1963. However, there has been reports’ of high default that has
affected sustainability of almost every fund initiated. Studies done on the
women funds in Kenya shows a lot has been give out, but very little recovered.
In Murang’a County, according to Public Accountability Statement out. 4.35
million disbursed to the women groups about Kshs. 2.68 million have been recovered.
The recovery rate was slightly above 50% since its inception in 2007. There is
a general fear that, if the issues affecting the repayment of the revolving
funds including the institution loaning procedures are not tackled
substantially, the sustainability of the revolving funds will be elusive [4].
Specific
objectives
Determine the effects of revolving fund
institutional operational loaning procedures to sustainability of government
revolving funds in Murang’a County, Kenya.
Research
hypothesis of the study
H01: There is no
relationship between institutional operation procedures to sustainability of
Government revolving funds in Murang’a County, Kenya
The study was guided by the following theories
Group
lending theory
Group lending in theory, also referred to as
solidarity group theory was the main theory applied in this study which is the
first and most often-discussed “solution” to information asymmetries in
developing countries. In this theory, as postulated by adverse selection and
moral hazards are dealt with by effectively changing the responsibility of
screening, monitoring, and enforcement from the lender to clients. The peer
group, who normally consist of five or more individual group members, borrow a
loan together in solidarity. Members are self-selected based on their
reputation and relationship with each other. Group liability requires that in
case one group member defaults, the fellow group members will be responsible
for his/her payment. Under group liability funds then, clients have an
inducement to screen other clients so that only the trustworthy individuals are
allowed into the programme [5]. The study describes group lending as a means of
addressing moral hazard by providing incentives for clients to employ peer
pressure to ensure that funds are invested properly and effort exerted until
the loans are repaid in full. By lowering default, the expected total cost of
borrowing for borrowers can be condensed, improving welfare especially for
households without collateral.
Principal-agent
theory
The principal-agent
theory postulated was developed on relationships between economic agents with
different objective functions in which one party is the principal, delegates to
another, the agent, some actions (control over resources) was observed [6]. The
theory studied different ways in which the principal could induce the agent to
take actions that are beneficial to the principal but may not be optimal for an
unconstrained agent. The agent’s actions are induced by the principal by
varying the incentives provided in the contract in order to make these actions
attractive to the agent. In this research, some revolving fund institutions use
agents to disband funds to the loanees.
A successful revolving fund scheme requires a
long-term commitment from government authorities, donors and other
stakeholders, because time and effort are needed to establish the
infrastructure and to build the necessary capacities [7]. It takes even longer
to develop the trust, group confidence and financial discipline on the part of
borrowers to make such funds sustainable. Systems for monitoring and evaluating
the funds' performance are important, and borrowers must be helped to graduate
gradually to other systems of credit. Cameroon were slow to enlarge, but with
the right combination of leadership, technical know-how and innovative capital
injections and partnerships, this approach fostered both growth and
sustainability to them. A magic solution of creating broad sustainable
mechanisms for providing revolving fund services needs to be invented. The
above study suggests investigation of borrowers’ aims, needs and strategies and
to establish possible approaches of enhancing contribution to empowerment that
does not unnecessarily increase borrowers’ vulnerability.
Revolving
fund operation procedures and loan sustainability
Sustainability relates to the ability of a programme
to continuously maintain its activities and services to meet its objectives.
For revolving fund operation to be effective and successful there should be
sustainability. The issue of revolving fund sustainability has been receiving
high attention recently as revolving fund lenders try to reduce poverty in
developing economies. The challenge noted by the Desta was lack of evaluation
and mapping out the progress made by beneficiaries of revolving fund towards
sustainability, so that, decision-makers could be able to monitor and evaluate
effectiveness of the program, and adjust accordingly [8]. A successful revolving
fund scheme requires a long-term commitment from government authorities, donors
and other stakeholders, because time and effort are needed to establish the
infrastructure and to build the necessary infrastructures.
Loan
supervision for repayment
Supervision includes visiting the spot of loan money
investment; verify the goods in the spot along with the loan in a scheduled
meeting. The supervision is to be carried out through the group leader
regarding the proper utilization of the loan money in presence of other
members. This is a participation and responsibility of all members of the
groups concerned. After taking the loan money, the investment of the same
within specified time is to be ensured. Afterwards, all members are to be in
touch with each other to ensure the intended investment is done. The group
leader will take special initiative for the supervision and the revolving fund
institution staff and other responsible persons concerned with loan will visit
the spot of investment periodically. The utilization of the loan in question
will be discussed regularly and necessary step taken in the meeting order to
discover misuse in advance. Supervision is also intended to know the total
status of the group and every member to ensure the loan purpose and capacity
for investment of each other. In scheduled meetings, the members are supposed
to express independent opinion regarding utilization of others loans for early
detection of defaults. The general problem for lack of supervision of a member,
affects the loan consumption and makes the members to out themselves from group
meetings [9]. Again, if the loan is not supervised frequently, it encourages
abuse of loan and members are not able to pay up their instalments,
self-confidence on one another and the control of the group is hampered.
Additionally, a lot of work will be created for the staff as they try to
follow-up the loan defaulters, the members also lose faith with the revolving
fund institutions and conceive of wrong ideas of the borrowed fund and eventually,
the individual group member loses his/her social status. Assert that,
non-supervision of borrowers influences the loan repayment. The study noted
various supervisory methods that can be used by any management which include;
off the-site surveillance, on-site examination, follow-ups and special
assignment. Off-site examination entails analysis of prescribed reports
submitted periodically by the revolving fund institutions. The prescribed
reports are meant to provide information on performance of institutions.
On-site examination entails supervisory of the physical books, records and data
to assess the accuracy of reports submitted and to review details of
compliance. The follow-up site visits should be undertaken to discuss
supervisory concerns raised during examination and to ensure conformity with
recommendations. Special responsibilities involve on-site activities such as
investigation with respect to concerns and needs to be enforced. Strengthened
skills of supervisory staff in knowledge of methodologies and ways of
tightening enforcement of reporting including application of sanctions for
non-compliance with directives are lacking in most revolving fund institutions.
Business
plan requirement and loan repayment
Access to sustainable financial services by
small-holders is normally seen as one of the constraints limiting their
benefits from credit facilities. However in most cases, the access problem,
especially among formal financial institutions, is one created by the
institutions mainly through their lending policies [10]. The study notes that,
this is displayed in the form of prescribed minimum loan amounts, complicated
application procedures and restrictions on credit for specific purposes. For
small-scale enterprises, reliable access to short-term and small amounts of
credit are more valuable, and emphasizing it could be more appropriate in
credit programmes aimed at such enterprises. Notes that a business plan as a
written document that describes in detail how a new business will achieve its goals.
It lays out a written plan for marketing, financial sourcing and operation of
the business [11]. It’s sometimes prepared for an established business that is
moving into a new direction. It is tailored to a particular industry and may
target changes in perception and branding by the customer, client, taxpayer, or
larger community. Business plans may be internally or externally focused to
cover 3 to 5 years. Externally, focused plans target goals that are important
to external stakeholders, particularly financial stakeholders. Internally,
focused business plans target intermediate goals required to reach the external
goals. They may cover the development of a new product or a new service. The
financier requires the borrowers’ credit history, the collateral securities in
place, ability to meet the lenders’ demands, whether demand for the product or
service is adequate, whether the borrower has established a proprietary
position and whether the business has a position in the market which is
realistically projected and some of these information can be extracted from a
business plan. The strength of the business plan must be substantial and the
annual revenue estimates convincing for an existing business in order to get
funding.
Financial
literacy exposure and loan repayment
Notes that both the youth and women groups in
Kisumu, have started defaulting on loans given to start businesses [12]. The
default is attributed to widespread financial illiteracy in the area. The
default rate according to the study was at about 40% and the fund managers fear
that the revolving funds could dry out very soon and deny opportunities to new
borrowers. Funds managers according to the study on both the YEDF and the WEF
in Kenya are concerned as most borrowers have stopped servicing their loans
completely. Stipulate the need to move closer financial systems to the users.
For this to happen, the authority needs to formulate market enabling policies,
formulate financial literacy programmes and ensure financial products are
tailored to specific groups that are in place. The government role according to
the study is the participation in the financial market and ensures enabling
environment, deficiencies in financial literacy exposure requires more profound
structural reforms, mostly outside the reach of even financial sector
policy-makers and once effectively implemented, will increase access to
sustainable credits and use of financial services [13].
Screening
mechanism for loan repayment
Unlike formal finance, informal lenders often attach
more importance to loan screening than to monitoring the use of credit [14].
The screening process usually involves the lender’s assessment of the
prospective borrower through non-credit transactions over a number of seasons,
asking for references or personal sureties, asking questions from other people
from the lender’s village, and visiting the applicant’s farm or business. In
group lending, screening practices include group observation of individual
character, personal knowledge by individual money-lenders and recommendations
by members of the group. In this lending programme, members are made jointly
liable for the loans given and the joint liability plus the threat of losing
access to future loans motivates members to perform the function of screening
of loan applicants, monitoring borrowers and enforcing repayment. In most
cases, the borrowers are very cunning and most of them create lies to the
lenders. In order to convince the lenders for higher amount of loans, and their
ability to repay, some borrowers obtain some items from neighbours and friends
and assume their ownership for a while. Cheating takes place because these
borrowers are able to access the loan officers’ assessment schedule
before-hand, which make them able to set the borrowed items in a manner they
will not display suspicion postulate that information asymmetries in Malawi
coupled with costly enforcement of repayment influence and reduce the
profitability of money lenders. The study notes that, when identification of
clients is not possible, borrowers can obtain a fresh loan even if they have
defaulted in the past by simply using a different identity. As a result,
lenders are forced to offer the same contract every period or borrowers forced
to surrender their personal identity cards, as they cannot tailor the terms of
the contract to individual credit histories. Lenders sometimes are forced to
respond by limiting the supply of credit, due to the inability to sanction
unreliable borrowers [15].
Micro-insurance
and loan repayment
Notes that saving is
hard work in Kenya, and the Kenyan institutions are largely designed to make it
easy to spend, and not to save. To address the issue of how saving might be
increased among lower-income families, as per the study, a typology of saving
policies needs to be introduced. The study discussed policies ranging from: -
coerced (mandated) savings such as Social Security; programmes that make it
hard not to save such as automatic enrolment in employer-sponsored savings
plans; policies that bribe (or provide incentives for) people to save through,
for example, savings matches; programmes like lottery-linked savings plans that
actually get people excited to save [16]. Most communities have experimented
the use of one or more savings plans outlined above including insurance, but
the study notes lack of an acceptable national saving plan in Kenya and
recommends for its invention soonest possible. Asserts that micro-insurance is
the protection of low-income people against specific perils in exchange for
regular premium payments proportionate to the likelihood and cost of the risk
involved. It is the insurance services to low-income people, traditionally
underserved and underinsured [17]. The insurance product is deemed to be
targeted or sold the product to low-income people. World Bank notes that, loans
for agricultural production or livestock breeding in South Africa usually have
longer terms than those for trade or small industry [18]. In addition, rural
households need financial services that are adapted to the agricultural cycle,
such as savings funds to provide cash for the season in between harvests, or
transfer funds for remittances for migrants who leave the rural areas for
seasonal work. The study notes the need for agricultural insurance funds among
small farmers who have to protect themselves against weather-related risks.
Providing affordable insurance to small farmers remains a challenge due to the
pooled risks involved (natural disasters causing damage to many clients at
once). Institutions providing such insurance funds need to be reinsured by big
international insurance companies to spread the risk beyond their geographic
region. Even though profitability in agriculture is generally low and interest
rates are high, it is possible for rural financial institutions to operate on a
cost-covering basis and offer financial services to farmers.
Conceptual
framework
Based on the preceding literature review and discussion, the systematic Diagram was developed to show the relationship between the independent, moderating and dependent variables. A discussion on how each of the variables was operationalized is given below (Figure 1).
Figure 1: Schematic diagram.
Table 1: Summary of Literature Review and Gaps.
Study by |
Title |
Findings |
Knowledge gap |
Focus on proposed study |
[5] |
Development of finance in USA |
Customers have become much more sophisticated
regarding financial matters |
Technological change needs to be phenomenal |
Use of innovations in revolving fund institutions |
[7] |
Women and credit in Cameroon |
Borrowers must be helped to graduate to other
systems of credit. |
Investigation of borrowers aims, needs and
strategies to establish possible strategies enhancing contribution to
empowerment |
Solutions of
creating large scale sustainable mechanisms |
[14] |
Cost structure and sustainability in micro-finance
institutions in Bangladesh |
Borrowers are very canning and a lot of lying taking
place |
How to deal with borrowers that are liars |
Finding ways
to reduce cheating by group members |
Mahajan & Ramola |
Empowerment of women through micro-finance in India |
-Women-headed households are significantly
disadvantaged in income compared to households headed by men. -Older household heads have lower income from off- farm sources |
Agricultural extension had no measurable impact on
either net crop income or livestock sales |
Analysis of
farm and of the farm income in determining loan repayment and sustainability |
[13] |
Causes of default in government micro credit
programmes. A
case study of Uasin- Gishu sub-county trade development joint loan board.
|
-Lack of appropriate Management Information Systems (MIS) to be able to
detect slow borrowers and potential defaulters. -Non-prosecution of defaulters is
contributing to the rising trends in default |
Determine how much debt the borrower can comfortably
handle, income streams and any other obligations that could interfere with
repayment. |
How to intensify borrower follow-up to, improve
recovery of outstanding loan balances accruing to slow borrowers and prosecute
defaulters
|
Giné |
Use of biometric in the micro- credit institution in
Malawi |
Increased loan repayment was far much higher than
the cost of outsourcing the biometric instruments. |
Improve loan recovery methods |
Ensure innovations are applied to increase loan
recovery |
Jamal |
Microfinance and loan repayment performance: a case study of the Oromia credit and savings share company(Ocssco) in Kuyu |
- Need for a
continuous supervision on loan
utilization and training -Screening system efficiency |
Need to test if there is some sort of association
between loan repayment and purpose of borrowing. |
Relationship between
revolving fund loan repayment and the amount borrowed |
Kibaara
|
Rural finance services in Kenya |
-Poor road network increases transaction costs -Lack of proper policy framework to spur the growth of rural financial
services |
Lack of proper policy framework to spur the growth
of rural financial services |
Need to ensure necessary management skills in community associations |
Research
philosophy
The study adopted a positivism research philosophy
which is an epistemological position that advocates an observable social
reality that allows replication and end product that can be generalised
elsewhere [15].
Research
design
The study adopted a cross-sectional descriptive
survey research design. The design was chosen because it ensured complete
description of the situation, making sure that there is minimum bias in the
collection of data and allowed data collection from sizeable population in an
economical way [16].
The empirical model
Discrete regression models like the probit, discriminant and logit models are ideal to use when the dependent variable is of a binary choice. Generally, any of the three models can be used as they tend to generate more or less similar results. The choice of any of the model is a matter of convenience. This study employed the logit model to examine the sustainability or (non-sustainability) of government revolving funds as a matter of personal preference. The following logit model was adopted as suggested [20].
This outcome has more than one independent variable. The outcome
of the logistic regression will be 0 or 1, where 1 indicates that the outcome
of interest is present, and 0 indicates the outcome is absent. Logistic
regression generates the coefficients and standard errors and significant
levels of a formula to predict a logit transformation of the probability of
presence of the characteristic of interest. The logit model estimates the
probability of dependent variable to be 1(Y=1). This is the probability that
some events have happened. Both logit and probit models are preferred because
they help in overcoming weaknesses inherent in linear probability models such
as heteroscedasticity and linearity problems [21].
To measure the study’s main objective; to determine the effects
of revolving fund institutional operational loaning procedures to government
revolving funds sustainability in Murang’a County, Kenya (X1); the multiple
logistic regression model was applied as modelled.
Where Pr is the probability of presence of the characteristics
of interest,
Y is the level sustainability of government revolving fund, is a
multiple (partial) regression coefficient i.e. the expected change in Xi
assuming other X’s are entirely held constant,
·
X1 = Loaning operation procedures,
·
X2 = Socio-economic functions,
·
X3 = Borrower’ characteristics,
·
X4 = Use of Technology,
·
?i =
Error term.
Target
population
Table 2: Distribution of the Population.
STRATA Sub-counties
in Murang’a County |
WEF groups
Year 2013 |
YEDF groups Year 2013 |
Total (N)
|
Percentage of
the total |
Gatanga |
253 |
100 |
353 |
23% |
Kandara |
151 |
100 |
251 |
16.5% |
Murang’a South |
62 |
77 |
139 |
9.14% |
Kigumo |
42 |
67 |
109 |
7.17% |
Mathioya |
137 |
91 |
228 |
15% |
Kiharu |
79 |
40 |
119 |
7.8% |
Kahuro |
78 |
40 |
118 |
7.76% |
Kangema |
116 |
71 |
187 |
12.3% |
Constituency credit
officers |
8 |
8 |
16 |
1.05 |
Total |
926 |
594 |
1520 |
100 |
Table 2 shows the WEF and YEDF groups that are registered with the ministry of culture and youth services in Murang’a County. The county has been sub-divided into 8 sub-counties out of which 7 constituencies have been curved. Kiharu Constituency serves both Kiharu and Kahuro sub-counties. Results from the table 2 indicate that most groups for both WEF and YEDF were found in Gatanga Sub-county with 23% of the groups respectively. Kigumo and Kahuro Sub-counties had the lowest number of groups with 7.17% and 7.76% respectively.
Table 3: Sample Determination.
STRATA Sub-counties
in the County |
Total WEF and
YEDF groups in Murang’a County (N) |
Weighting from
the total number of groups |
Sampling rate |
Sampled WEF
and YEDF per Sub-County |
Gatanga |
353 |
23% |
19.5% |
69 |
Kandara |
251 |
16.5% |
19.5% |
50 |
Murang’a South |
139 |
9.14% |
19.5% |
27 |
Kigumo |
109 |
7.17% |
19.5% |
21 |
Mathioya |
228 |
15% |
19.5% |
44 |
Kiharu |
119 |
7.8% |
19.5% |
23 |
Kahuro |
118 |
7.76% |
19.5% |
23 |
Kangema |
187 |
12.3% |
19.5% |
36 |
Constituency
loan officers |
16 |
1.05 |
100% |
16 |
Total |
1520 |
100 |
|
307 |
Table 4: Loaning Procedures and
Revolving Fund Repayment.
N |
Mean |
Std. Deviation |
|
Personal account vital for loan repayment |
261 |
3.45 |
1.383 |
Ability to repay loans depends on which institutions
the borrowing was done |
261 |
3.70 |
1.314 |
Administrative fee charged on borrowed amount
effects repayment |
261 |
3.86 |
1.234 |
Number of other loans an individual has effect on
borrowing and repayment |
261 |
3.88 |
1.198 |
Delay in loan processing influences borrowing and
repayment |
261 |
4.21 |
.933 |
Business plan essential to borrowing and payment
should be mandatory |
261 |
4.28 |
.856 |
Quality of services provided by revolving fund
institutions effect repayment |
261 |
4.29 |
.912 |
Flexibility of revolving fund institutions on
lending determines loan repayment |
261 |
4.30 |
.829 |
The borrowing terms put in place influence on
loan borrowing repayment |
261 |
4.30 |
.823 |
Valid N (list wise) |
261 |
|
|
Sampling
design and procedure
Clustering of the entire county into eight sub-counties and then
applying a Simple Random Sampling technique to select a sample size of 307
respondents, which included 291 groups and 16 constituency loan officers was
done. From every group sampled, one executive official was sampled using simple
random sampling. In addition, a census of 16 constituency loan officers which
entitled 8 constituency loan officers or the YEDF and 8 constituency loan
officers for WEF were interviewed. This, in total accounted for 19.5% of the
total population. Formula to determine the sample size is given below [22]:
Where n was the desired sample size
Z = z values e.g. (1.96 for 95% confidence interval)
P = percentage picking a choice expressed as decimal (0.5 used
for sample size needed)
d = level of statistical significance set (0.05)
n= sample size
Where =
the desired sample size (when the population size is less than 10,000)
n= the desired sample size (n = 384) (when the
population is more than 10,000)
N = the
estimate of the population size (N = 1502
Saunders, Lewis & Thornhill (2009) note that, a sample size
of 10% and above are counted to be ideal to represent the entire population. A
sample size of 19.5% for this study would be even be better and help to check
any type I or type II error that may arise. Table 3 below shows the sampling
strategy that was undertaken to arrive at the required respondents (Table 3).
Table
3 shows the sampling procedure to arrive at the number of respondents.
Probability sampling technique where the chance or probability is known and is
usually equal to all cases was applied [23]. After adding the WEF and YEDF
together, a common rate of 19.5% per constituency was applied. To arrive at 307
respondents, 100% of the constituency loan officers were also included in the
sample.
Effect
of Loaning Procedure on Repayment
The respondents were requested to indicate procedures that
influence micro-credit loan repayment. The results are presented on (Table 4).
The results in Table 4 show that the larger part of respondents
with (Mean score = 4.30) indicated that the borrowing terms put in place and
flexibility of revolving fund institutions on loan lending influences the
influence of repayment. Respondents with (M= 4.28) indicated that a business
plan is essential to borrowing and payment should be mandatory. Both variables
had the lowest standard deviation of 0.823 and 0.829 respectively. The results
from the findings indicate a mean (above 3.00) thus clearly showing that the
loaning procedures has influence on revolving fund loan borrowing and repayment
which was in line on breaking the financial services barriers in USA which
voiced the importance of a business plan before borrowing and lending. Study
cost structure and sustainability in micro-finance institutions in Bangladesh
also voiced the importance to loan screening than monitoring lending and
borrowing as part of loaning procedure. Currently, according to report by
constituency loan offers in Murang’a County, business plan requirement was a
formality.
Group
members’ failure to save
The study intended to know the reasons why group members were
failing to save resulting to poor repayment of revolving fund repayment (Table
5).
Results in Table 5 shows that most of the respondents (Mean = 4.37) with the lowest standard deviation (Stdv 0.788) indicated that strong preference to current consumption results to low savings. Lack of motivation for savings to build a reserve fund to fall back had a standard deviation (stdv 0.909) and lack of pre-commitment measures to ensure preference of savings dominates (stdv 0.886) and lack of knowledge of advantages of maintain a financial buffer in the group had a standard deviation (stdv 1.001). The mean as indicate by Table 5 were 4.25, 4.21 and 4.18 respectively. The findings were in line with the study done on bank regulation that are changing in Kenya which had noted that saving is hard work, and many Kenyan institutions are largely designed to make it easy to spend, and not to save. The study recommendations of the means to improve savings including coerced (mandated) or otherwise should enforced. Most respondents (38.4%) supported a monthly visitation by the constituency loan officers and others for dissemination of information [16].
Table 5: Reasons for not Saving.
Reasons |
N |
Mean |
Std. Deviation |
No Knowledge of advantages of maintaining a financial buffer |
261 |
4.18 |
1.001 |
No Pre-commitment measures to ensure the preference of savings
dominates |
261 |
4.21 |
.886 |
No motivation for savings to build a
reserve fund to fall back |
261 |
4.25 |
.909 |
Strong preference for current
consumption to future consumption |
261 |
4.37 |
.788 |
Valid N (list wise) |
261 |
|
|
Source: Survey
data (2014) |
Multiple
lending
The respondents were requested to indicate whether institutions
in the constituencies were failing to reduce multiple lending and borrowing.
Figure 2 below provides the outcome (Figure 2).
Results from Figure 2 show that a good number of the respondents (41.%) indicated that all the variables (ranging from irresponsible officers, lack of elaborate plans, lack of standing requirement and not providing training to borrowers as the key reasons that encourage multiple borrowing. About (5.4 %) indicated that, irresponsible officers are the main cause of multiple borrowing. Among the respondents, (19.4%) indicated that lack of providing training to borrowers on financial matters as the main cause of multiple borrowing.
Figure 2: Multiple Lending.
Table 6: Loaning Procedure extent to Borrowing and Repayment.
N |
Mean |
Std. Deviation |
Variance |
Kurtosis | ||
Statistic |
Statistic |
Statistic |
Statistic |
Statistic |
Std. Error | |
Importance of screening on
micro - credit borrowers |
261 |
4.68 |
.736 |
.542 |
10.314 |
.300 |
Micro-insurance
introduction to YEDF and WEF |
261 |
4.44 |
.770 |
.593 |
4.143 |
.300 |
Every micro-institutions
should demand on business plans before issue of borrowed fund |
261 |
4.33 |
.863 |
.745 |
2.343 |
.300 |
Use of technology should be applied by every revolving fund
institutions for mining data |
261 |
4.02 |
1.259 |
1.584 |
.374 |
.300 |
Multiply the amount lent
out to the groups |
261 |
4.53 |
.797 |
.635 |
5.027 |
.300 |
Review the administrative fee upwards |
261 |
3.00 |
1.777 |
3.158 |
-1.547 |
.300 |
Valid N (listwise) |
261 |
|
|
|
|
|
Table 7: Screening Process in Groups Including the Interview Report.
Category |
Frequency |
Percentage | |
|
Loan application and integrity checks |
225 |
86.5 |
Technical assessment |
12 |
4.6 | |
Approval by
secretariat based on ability |
9 |
3.5 | |
Ability to insure the loan |
5 |
1.9 | |
Collateral security checks |
4 |
1.5 | |
Proposed development
criteria checks |
3 |
1.2 | |
Site eligibility checks |
3 |
.8 | |
Total |
261 |
100.0 |
The results supports on the study of causes of default in
government revolving fund in Uasin-Gichu District who noted high existence of
multiple borrowers and recommended the need for early detection of the multiple
borrowers.
Extent
of loaning procedure to influence borrowing and repayment
The respondents were requested to indicate the extent to which
screening mechanism, micro-insurance, demand of business plan, use of
smart-cards, amount lent out and administrative fees influence revolving fund
borrowing and repayment. The results are as indicated on (Table 6).
Results from Table 6 show that a good number of respondents (M =
4.68) and a lower standard deviation of (Std dev = 0.736) indicated the
importance of screening on revolving fund borrowers. Kortosis captures whether
the actual distribution was more peaked or flatter than the normal distribution.
From the findings, kortosis measure for impotent of screening was (K=10.34)
showing how peaked the category was comparatively. The respondents with
(M=4.44) indicated that introduction of micro-insurance to YEDF and WEF very
much needed and should be hastened. The respondents indicated that loan
screening mechanism was most vital aspect in revolving fund borrowing and
repayment compared micro-insurance, demand for business plan, use of smart
cards and administrative fees put in place to others.
Screening
process taking place in most groups
The study intended to know the screening process that takes
place in the groups the respondents belonged (Table 7).
Results from Table 7 show that most of the respondents (86.6%)
indicated that main screening process they had come across was loan application
and integrity checks, site eligibility checks had the least respondents (0.8%).
The importance of screening but warn the credit officers on borrower’s cunning
and lying that takes place in many villages.
Rounds
of borrowing and amounts
The respondents were asked to state the number of rounds they
had borrowed since the inception of both the YEDF and the WEF (Table 8).
Results from Table 4.5 show that large part of respondents
(41.4%) indicated they had borrowed in the second round, showing most of them
were not new members to the groups. (38.7%) of the respondents only borrowed in
the first round. The results were in line with the challenges that were stated
in 2009 on both YEDF and WEF status reports. The reports had indicated a
negative perception and attitude on the funds as they were established on the
eve of a general election and hence perceived as a political organization to
influence voting pattern particular among the youth and women. The individuals
concerned have proved the assertion to be not true and are now joining in
numbers. On the other hand, many did submit their borrowing documents in good
time, resulting to delay in release of funds and this accounts as to why they
were in round one. The fund was not sufficient as reported by the YEDF and WEF
reports to cater for the high demand and the expectation of the youth and
women. This was another reason for the high rate of respondents in round one in
2013 survey. On the amount borrowed as indicated by the results on Table 8,
most of the respondents (52.5%) had borrowed (between Kshs. 10,000 - 100,000).
Very few (2.7%) had borrwed above Kshs. 400,000.
Seminars
attendance and workshops for financial literacy
The researcher needed to find out whether group members attend
training/workshop/seminars for financial literacy (Table 9).
Results on Table 9 show that most of the respondents (82.5%)
indicated they have attended workshops and seminars on financial literacy. Only
(11.9%) of the respondents had not attended any seminar. The results reflect
the positive initiative taken by the WEF and YEDF initiatives but still
question on the (11.9%) who have already borrowed and have not being trained.
The expectation should be (100%) training on all the groups. The results support
on whether micro-crest programmes alleviate poverty in South Africa, who
attributed the need to external reliance, provide financial literacy education
and revolving fund institutions to work closely with village administration.
The constituency loan officers confirmed the mild involvement of the village
administration in identifying members in their villages for financial literacy
training but rarely involved during the process of loan repayment. They are
only involved when the deal does not materialize which needs to be checked [8].
Sustainability
using the operating self-sufficient ratio (SSOR)
The study computed operating self-sufficient ratio (OSSR) of the
amount borrowed and repaid by all the constituencies in Murang’a County. This
was meant to determine whether the operating revenue as a percentage of
operating and financial expenses including loan loss provision expense was
greater than 100%. If the OSSR is greater than 100%, it means that the
institution(s) in question is able to cover the costs through own operations
and therefore do not rely on contributions from other donors to survive. The
general formula as modelled for computing revolving fund sustainability was:
Table show the analysis of the loan borrowed, repaid, cost and
amount recovered including the risk level for WEF in 2012 and 2013 (Table 10).
In the researcher’s point of view in Table 10, the total amount
recovered (2013)(b) Loan cost was (c) which was 5% of the amount borrowed and
amount due to date was (a)
OSSR< 1(Not sustainable but near to 1)
The Operating Self- Sufficiency Ratio (OSSR) for WEF year 2012 was 0.91:1. Which was an indication of non-sustainability of the government revolving fund initiative. The findings indicated a satisfactory trend since the OSSR was positive from 0.91:1 to 0.95:1. The computed risk level in all the constituencies in 2013 as reported by the public account statement (2013) on WEF was found to be greater than 10% thus sending unsatisfactory results. Kandara constituency was outstanding with the lowest risk level of 11%. The risk level in Kangema constituency (62%) was rather worrying and measures should be put in place to arrest this scenario. The Average County risk level for WEF (2013) was computed as 33%. The OSSR for the YEDF for year (2012- 2013) was computed as 0.417:1 and 0.540:1 (APPENDEX 6) for years 2012 and 2013 respectively. This was also an indication of non-sustainability of the YEDF but the trend was positive. The study agrees with the results indicated in the Youth Fund Status Report (2009) that noted the loan repayment rate in two constituencies in Murang’a County, namely; Kandara and Maragua to be at 40%. This rate as noted from the computation has improved but still a lot needs to be done for YEDF to reach sustainability level.
Table 8: Rounds of Issue and Amount Borrowed.
Classification
Factor |
Frequency |
Percent | |
Rounds of issue |
Round 1 |
101 |
38.7 |
Round 2 |
108 |
41.4 | |
Round 3 |
38 |
14.6 | |
Round 4 |
9 |
3.4 | |
Non-respondents |
5 |
1.9 | |
Total |
261 |
100.0 | |
Amount borrowed |
Between 10,000 and 100,000 |
137 |
52.5 |
Between 101,000 and
200,000 |
89 |
34.1 | |
Between 200,001 and
300,000 |
20 |
7.7 | |
Above 400,000 |
7 |
2.7 | |
Non-respondents |
8 |
3.1 | |
Total |
261 |
100.0 |
Table 9: Attendance to Seminars and Workshops for Information.
Category |
Frequency |
Percent |
Attended training |
221 |
82.5 |
Did not attend training |
32 |
11.9 |
Non-respondents |
8 |
3.0 |
Total |
261 |
100.0 |
Table 10: Amount Lent out and Repaid (WEF- 2013 and 2012 Report).
Constitu-ency |
No. of Groups |
Amount Distributed
|
Amount due to date
|
Paid to date
|
Loan balance
|
Loan cost/ expenses 5% |
Risk level
| ||||||||||||
(Millions) | |||||||||||||||||||
Year
20 - - | |||||||||||||||||||
12 |
13 |
12 |
13 |
12 |
13 |
12 |
13 |
12 |
13 |
12 |
13 |
12 |
13 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
% |
| ||||
Gatanga |
208 |
253 |
10.8 |
13.1 |
3.15 |
5.7 |
6.27 |
6.9 |
6.27 |
6.3 |
0.54 |
0.66 |
<1 |
25 |
| ||||
Kandara |
121 |
151 |
6.34 |
8.1 |
2.2 |
3.2 |
3.7 |
4.2 |
3.7 |
3.8 |
0.32 |
0.41 |
<1 |
11 |
| ||||
Kangema |
112 |
116 |
6.05 |
6.3 |
3.76 |
4.3 |
3.45 |
3.3 |
3.45 |
2.9 |
0.30 |
0.31 |
23 |
62 |
| ||||
Kigumo |
40 |
42 |
1.9 |
2.1 |
1.5 |
1.6 |
0.74 |
1.2 |
0.74 |
0.9 |
0.10 |
0.11 |
23 |
50 |
| ||||
Kiharu |
140 |
157 |
7.4 |
8.6 |
3.6 |
4.1 |
3.9 |
5.1 |
3.9 |
3.5 |
0.37 |
0.43 |
<1 |
24 |
| ||||
Maragua |
61 |
62 |
3.3 |
3.3 |
1.8 |
2.2 |
1.6 |
2.1 |
1.6 |
1.2 |
0.17 |
0.17 |
9 |
36 |
| ||||
Mathioya |
119 |
137 |
5,21 |
7.1 |
3.91 |
4.1 |
2.23 |
3.7 |
2.23 |
3.7 |
0.26 |
0.36 |
24 |
24 |
| ||||
Total |
801 |
918 |
48.6 |
48.6 |
19.8 |
25.5 (a ) |
22.3 |
26.5 (b) |
22.3 |
22.3 |
2.01 |
2.43 (c ) |
|
|
|
Table 11: Correlation analysis.
Correlations | |||
|
Level of sustainability |
Loaning operation procedure | |
Level of loan
sustainability |
Pearson Correlation |
1 |
.622 |
Sig. (2-tailed) |
|
.024 | |
N |
261 |
261 | |
Loaning operation
procedure |
Pearson Correlation |
.622 |
1 |
Sig. (2-tailed) |
.024 |
| |
N |
261 |
261 |
Table 12: Parameter Estimate of Logit Model.
B |
S.E. |
Wald |
df |
Sig. |
Exp(B) |
95% C.I.for EXP(B) | |||
Lower |
Upper | ||||||||
Step 1a |
Loan operation procedure |
-.018 |
.292 |
.004 |
1 |
.048 |
.982 |
.554 |
1.741 |
Socio-economic functions |
-.838 |
.264 |
10.064 |
1 |
.002 |
.432 |
.258 |
.726 | |
Borrower characteristic |
-.965 |
.341 |
8.005 |
1 |
.005 |
.381 |
.195 |
.743 | |
Use of technology |
-.519 |
.285 |
3.317 |
1 |
.069 |
.595 |
.340 |
1.040 | |
Constant |
1.618 |
.230 |
49.475 |
1 |
.000 |
5.04 |
|
| |
|
Chi-square
Predicted overall performance
-2log likelihood
Negelkerke R2
|
22.761
73.4*
344.29
0.402
|
|
|
|
0.000 |
|
|
|
Hypothesis
testing
The previous results had presented descriptive statistics on
government revolving fund repayment and sustainability however, to draw
inferences about the population on the basis of the sample, there was need to
empirically analyse data using the Pearson correlation coefficient (Table 11).
From the table 12, the loaning operation procedure was
significantly correlated to the level of loan sustainability as the
significance level was (<0.05). The Pearson correlation coefficient the two
variables are (0.622) which was positive and large. This indicates a stronger
relationship between loaning operation procedure and level of sustainability of
government revolving funds.
Measuring
of the multiple logit regression model
The result of regression analysis is as indicated below (Table
12).
The regression results of the logit model in Table 13 are
reflected by the regression coefficient standard errors t- values, Wald statistics
and p-value. The logit model generates a chi-square value of 22.761 and p-value
of 0.000 which was statistically significant because the p= value was less
than? = (0.05). The results indicated that loan operation procedure had a
significant level of 0.045 < 0.05. This called for the rejection of the null
hypothesis and adopting the alternative was; there is a relationship between
revolving fund institutional operation procedures to loan sustainability in
Murang’a County. Result on Table 4.8 above shows the logit model’s accuracy of
overall prediction was 73.4 %, showing that the overall fit of model was
satisfactory. Additionally, the logit model yielded a Negelkerke R2 is 0.402,
meaning that 40.2% of the dependent variables can be explained by the
independent variable, namely the loaning operation procedures. Asserts that a
Negelkerke R2of 0.2 and <1(excluding 1) is satisfactory. Logit model
generated a -2loglikelihood value of 344.26 which means that the model was good
(a perfect model has a -2loglikeli-hood value of zero and above). The easiest
way of assessing Wald statistics is to consider the significance value, and if
(< 0.05), it means that the null hypothesis should be rejected; that there
is no statistical relationship between the independent variable to the
dependent variable. For interpretation of Exp (B) shown on table 4.8 above,
results of values from the regression analysis is taken to account, and if the
value (>1), then the odd of an outcome occurring increases, and if the figure
is (< 1), any increase in the predictor variable leads to a drop in the odd
of the outcome occurring. From the table Loan operation procedure as a
predictor has a value of Exp (B) at 95% Confidence interval(CI) of 1.741 that
implies that, when the predictor is raised by one unit, will increase level of
sustainability by 1.741 times. The summary of hypothesis testing is provided
below [24-25] (Table 13).
Summary
of hypothesis testing
The summary of the hypothesis in Table 4.9 indicates the
significance of the coefficients tested. The results showed that the first
three variables were significant and hence the null hypotheses were rejected
and the alternative hypotheses taking effect. The regression model appears as
shown in equation 14 below;
The
modal summary and ANOVA tests
The ANOVA test which partitions the observed variance based on
explanatory variables and the general equation after substituting the
coefficients was done. It compares partitions of test significance of
explanatory variables (Ayers, 2008). The ANOVA tests results are as indicated
in Table 15 below (Table 14):
Source: survey data (2014)
Table 13: Summary of Hypothesis Testing.
Hypothesis |
Construct |
Result |
Explanation |
H1 |
There is no statistical significant relationship between micro credit
institutions’ operation procedures to loan sustainability |
Reject null hypothesis |
Significant level of 0.045 < 0.05 |
Table 14: ANOVA Test.
Model |
Sum of Squares |
df |
Mean Square |
F |
Sig. |
Regression |
1.329 |
4 |
.332 |
2.508 |
.043b |
Residual |
33.912 |
256 |
.132 |
|
|
Total |
35.241 |
260 |
|
|
|
a. Dependent Variable: level of sustainability |
|
| |||
b. Predictors: (Constant), borrower
characteristic , loaning procedure , socio-economic factors |
|
|
The results in table 15 on ANOVA test showed an F- statistics of
2.508, (significance level = 0.043) which were statistically significant at
0.05(P < 0.05). This shows that the model adopted in the study was
significant and that, the variables tested fitted well in the model. A multiple
logit regression analysis was performed to determine how the independent
variables influenced the independent variables. The logit regression model for
the study was as shown in equation 4.1 above. Results on Table 4.10 above show
that, the first three independent variables were found to be significant. The
values of betas were referred to as (?0=1.618, ?1= -0.018,. The model is
represented below:
From the model above, the coefficient of revolving fund loaning
procedures is negative but significant as p-value was less than ? = 0.05 on the
three variables (Table 14 above) and the predicted probability resulted to high
and positive results (Table 15 below). Logit coefficients are log-odds units
and cannot be read as Ordinary least squares (OLS) coefficient. To interpret,
one needs to estimate the predicted probabilities of Y= 1, using a formula
provided below as modelled.
The logit regression shows that loaning operation has positive
and statistical influence on the level of sustainability. The ?-value of (X1)
was provided as negative 0.018 as indicated in the above general equation which
means in theory that, an increase in loaning operation procedures (X1) by one
unit is associated with an increased chance ratio of micro-credit
sustainability by 0.83 computed as follows
The study made some policy recommendations to loan repayment and
sustainability of government revolving funds. To start with, the study
underpins the importance of demanding business plans to WEF and YEDF which in
the past has been a formality. Business plans help one to organize his/her
thoughts, as well as the individual resources. It helps one to communicate the
specifics of the business idea to others, including business advisors,
potential suppliers and major customers, family and friends. The plan provides
a “yardstick” against which one can measure progress during the initial years
of the business. Studies have shown that businesses that started with a formal
business plan are considerably more likely to succeed than those that go
without a written plan. Developing a business plan is the first step to a
successful business. This guide will provide an outline in organizing
individual effort to gather and evaluate information about the business.
Effectively completed business plan must identify the strengths, weaknesses,
opportunities, and threats that may affect the business and the strategy one
may use to succeed. In view of the above, business plans should be subjected to
a thorough adjudication process by the qualified staffs that are able to review
and make decisions on certain plans, to demonstrate viability for better
loaning operation procedure. Use of business plan as one of the revolving fund
loaning operation procedure was found to have a significant relationship to
repayment and sustainability. Constituency loan officers, on top of
dissemination of information on what makes a business plan, should be in a
position to review the plans to measure their viability and advise accordingly
before loans are issued. This would help reduce uncertainty in repayment. The
credit reference bureau which has been a preserve of the commercial banks
should be made compulsory to all revolving fund institutions and should be
net-worked to share some important information on borrowers. It should assist
in making credit accessible to more people, and enabling lenders and businesses
to reduce risks and fraud. Revolving fund institutions play great role in
extending financial services within an economy especially to the rural areas.
In support of this role, credit bureaus will help lenders to make faster and
more accurate credit decisions. The government revolving funds organization
management systems should be strengthened to facilitate up-to-date loan
repayment statements to lonees follow-up and take action early in case of
defaults. Some groups identified prosecution/blacklisting of defaulters as a
solution to some of the problems they are currently facing. Due to problems of
high risk and high cost of borrowing, uncertainty of repayment capacity on the
rural borrower has been reported high due to irregular income streams. Systems
should be developed to ensure consistent incomes and expenditure to
reduce/remove uncertainty. The study supported the importance of
micro-insurance on loans borrowed by both the WEF and YEDF. Micro-insurance
according to this study reflected that kind of insurance protection arrangement
with low premiums and low coverage. In this context, “micro" refers to the
small financial transaction that each insurance policy generates.
Micro-insurance is a financial arrangement to protect low-income people against
specific perils in exchange for regular premium payments proportionate to the
likelihood and cost of the risk involved. The target population typically
consists of persons ignored by mainstream commercial and social- insurance
funds, as well as persons who have not previously had access to appropriate
insurance products. The study emphasized the importance of agricultural
insurance scheme among small farmers who have to protect themselves against
weather-related risks. Institutions aimed at providing such insurance need to
be reinsured by big international companies in order to spread risks beyond the
agricultural regions.