EVALUATION OF CASH MANAGEMENT ON FINANCIAL PERFORMANCE OF SAVINGS AND CREDIT COOPERATIVE SOCIETY. A CASE STUDY OF KENYA POLICE SACCO IN NAIROBI COUNTY.
1.1 INTRODUCTION
This chapter presents the background of the study, statement of the problem, general and Specific objectives, research questions, justification, and scope of the study.
1.1.1 Global perspective of savings and credit cooperative society
According to the 2014 International Co-operative Alliance’s World Cooperative Monitor, the turnover of the largest 300 cooperatives in the world grew by 11.6% to $2.2 trillion in 2012, corresponding to the gross domestic product (GDP) of Brazil. (Kahuthu et al., 2015)
The overall turnover of almost 2,000 cooperatives in the 65 countries analysis by the Monitor totals $2.6 billion. The top 300 cooperatives are active in three leading sectors: insurance (41%), agriculture, food (27%) and wholesale and retail (20%). Next, come industry and utilities (5%), banking and financial services (4%), health and social care (1%), and others (2%). Of the 1,926 cooperatives included in the Monitor, 1,313 have a turnover of over $100 million and are spread across 50 countries.
The World Council of Credit Unions (WOCCU) statistical report for 2015, recorded a total of 57,000 Credit Unions (SACCOs), spread across 105 countries and 6 continents. The world’s Credit Union system has a combined savings of $ 1.5 trillion (US dollars), and an asset base of $ 1.8 trillion (US dollars), out of which $ 1.2 trillion (US dollars) constituted the loan portfolio. The average worldwide penetration rate of the Credit Union system stood at 8.2 percent. The United Nations declared 2012 the Year of Co-operatives to identify and celebrate the significant role Cooperatives have played and continue to play over the last 170 years of their survival.
1.1.2 Regional perspective of SACCOs
Recent research indicates that approximately seven percent of the African population is affiliated with cooperatives (Pollet, 2009). The research indicates that while cooperatives are large in number and represent an organized movement, the movement suffers constraints that are related to lack of voice or effective representation in society. Pollet (2009)
It was also found that specific social protection mechanisms associated with cooperatives in Africa are limited. In 2008 savings in SACCOs across Sub-Sahara Africa grew by an average of 31.9 percent, which is comparable to average saving growth rates for previous years. Loans grew at an average of 12 percent, which is lower than the growth rates of previous years (ACCOSCA, 2016).
For instance, in 2007, loans issued by SACCOs grew by 35.3 percent; in 2006, loans grew by 21.2 percent. Growth in new membership has been steady. This suggests that SACCOs across Africa may be exercising caution in responding to the loan requests of members. Indeed, it was reported that some SACCOs have been scaling down loans associated with export commodities to protect themselves from potential loss (ACCOSCA, 2016).
The first SACCO was registered in 1964 after the country became independent in 1963. In the
1960s, the other African countries were at various stages of forming cooperatives including
Savings and credit cooperatives which formed a continental force known as ACCOSCA (African
Confederation of Cooperative Savings and Credit Associations). (Kahuthu et al., 2015)
Savings and Credit Cooperative Societies (SACCOs) are quasi financial institutions that mobilize savings, provide loans as well as other products to their members [Kenya Union of Savings and Credit Co-operatives (KUSCCO, 2009)]. SACCOs plays an essential role in Kenya’s financial sector in the provision of affordable financial services to their members, both urban and rural households (Co-operative Bank of Kenya, 2013).
It can be traced back in 1908 when European settlers formed the Lumbwa Co-operative Society near Kericho (Kiragu, 2014). Kenya Co-operative movement is currently ranked 1st in Africa and 7th internationally (SASRA, 2013). The SACCO business, like the banking business, thrives on trust and confidence of the depositors and investors (Odhiambo, 201)(Githaka et al., 2017)
The Kenyan SACCO subsector is the largest in Africa with several of Kenya’s large
SACCOs having capital base on large enough to rival the banks the SACCO movement has evolved in the past 40 years into a difficult force for the social and economic transformation of Kenyan people with about 63% of the Kenyan population directly or indirectly depending on the cooperative related activities for their livelihoods(Kahuthu et al., 2015)
The SACCO industry is part of the Cooperative sector in Kenya, which has impacted on many
financial and non-financial cooperatives. Non-financial Cooperatives deal with the marketing
of members’ products and services such as dairy, livestock, coffee, tea, handicrafts, and many more similar Cooperatives. Financial Cooperatives comprise of SACCOS, housing and
Investment Cooperatives. Kenyan SACCOs play a significant role in the Kenyan financial sector.
The Kenyan SACCO subsector is the largest in Africa. These SACCOs have capital base large enough to rival the banks. The SACCO movement has evolved in the past 40 years into a formidable force for the social and economic transformation of Kenyan people, with about 63% of the Kenyan population directly or indirectly depending on the cooperative related activities for their livelihoods.
The SACCO sub-sector can be described as two-tiered, given the range of financial services to members and regulatory regimes. The traditional SACCOS are described in law as Non-Deposit Taking SACCOS. These provide a limited range of savings and credit products, which are registered and supervised under the Cooperative services Act, CAP 490.
The Deposit-Taking SACCOs (DTS), besides the basic savings and credit products, also provide essential ‘banking’ services (demand deposits, payments services, and channels such as quasi banking services commonly known as ATMs), FOSA and are licensed and supervised under the Sacco Societies Act of 2008. The new SACCO law (Sacco Societies Act 2008) was operationalized on 26th September 2009. (Njeru Mugambi Duncan et al., 2015)
By the close of 2013, over 215 deposits were taking Sacco’s out of 135 were licensed by SASRA. The remaining 80 SACCOs were still working to satisfy the licensing requirements as they had up to 17th June 2014 to comply or cease deposit taking Sacco business. The 200 DTS account for 78% of the total assets and deposits of the entire Sacco sub-sector.
Further, they command 82% of the membership in the Sacco industries(Song’e, 2015)
Once registered, the SACCO has to operate according to the following aspects of prudential management of societies as provided for in the Act: No member other than a cooperative society shall hold more than one – fifth (20%) of the issued and paid-up capital for any cooperative society. (Sacco Act, 2008); Books of accounts must be kept and audited every year by an external auditor appointed at the annual general meeting. (Njeru, 2016)
The registrar can carry out an inquiry or inspection of a cooperative society at the expense of society. The Ministry of Cooperative Development has developed guidelines that contain detailed operational requirements for the SACCOs to follow. The societies also prepare and submit monthly reports to the Ministry. In addition, in conjunction with the Rural Banking Project and SASRA, an inspection team has been put in place, which monitors whether the societies are operating under sound banking principles.
Section 43 of the Act prohibits a Cooperative Society from giving loans to non – members unless the by-laws of the society provide for giving such a loan. Therefore the law gives SACCOs the leverage to develop a policy framework for lending to both members and non-members as the Act may prescribe. In addition to the above, SACCOs are restricted in terms of where to invest their funds of deposits. (Sacco Act, 2008).
Amendment of the Cooperative Societies Act No. 12 of 1997 vide the Cooperative Societies (Amendment) Act No. 2 of 2004 and prepared new Cooperative Societies Rules hence the role of Cooperative Tribunal Court.SACCO Societies Act was enacted in 2008 to pave way for vigorous enforcement of prudential standards for SACCOs with FOSAs. This gave rise to SACCO Regulatory Authority (SASRA) whose functions include licensing SACCOs to carry out deposit-taking business as well as regulating and supervising SACCOs in an effort to reform SACCOs and ensure that the public has confidence in the SACCOs sector and thus spur Kenya’s economic growth through mobilization of domestic savings
There was also the drafting of cooperatives management guidelines and Prudential Standards on inspection and inquiries, which led to the entrenchment of good corporate governance and best business management practices. This was achieved by establishing The Ethics Commission for Cooperative Societies (ECCOs) and the strengthening of the Audit Department.
1.2 Statement of the problem
SACCOs are found in almost all sectors of the economy. The Ministry of Cooperative and marketing estimates that about 80% of the Kenyan population derives their income either directly or indirectly through SACCO initiatives. It is estimated that a significant 24.6million people (63%) participate either directly or indirectly in SACCO enterprises.
The government has made a significant initiative to support cooperative movements through legislation to achieve the millennium development goals and vision 2030 objectives of increasing financial inclusion. Deposit Taking SACCOs (DTSs) remain competitive in the interests they charge their membership in respect of loans and other credit facilities advanced, compared to interest rates charged by banking institutions.
This is important because it emphasizes the critical role of DTSs as alternative channels of comparatively cheap credit facilities to the Kenyan population. It also shows the potential of deposit-taking SACCO as a rich alternative of capital for startups or other business ventures (SASRA2017)
It can be unquestionable fact that members’ loan demand is very high and well-suited compared with the availability of funds. This follows that SACCOs face a risk arising from cash management, and this has been a significant cause of the malfunction of many cooperatives (Sambasivam 2017). SACCOs convert immediately available savings deposits into loans with longer maturities (Njeru, 2016)
Management and finance teams need to impose adherence to cash policy put in place to guide and control cash management. Murkor, Muturi, and Oluoch (2018) observed that finance managers should come up with compulsory cash flow policies to enable the organization to come up with clear policies for cash flow management, including the investment of surplus funds if the need arises. Liman & Aminatu (2018) noted that institutions should set a policy to keep bankruptcy costs at a lower level, and also management efficiency is required in managing costs, increasing efficiency, and financial performance. However, these researchers failed to analyze cash planning influence on the financial performance of SACCOs.
The main activities of the Kenya police Sacco is to offer Savings and credit services. They require a higher level of cash management. However, currently, Kenya police Sacco is facing the problem of
illiquidity hence not adequately operating on their daily activities such as offering soft loans to
members and meeting operational expenses. This has forced it to borrow cash from other
expensive commercial banks. This has strained its activities and, therefore, cannot compete fairly
with other financial institutions.
It is on this ground that the study seeks to investigate the effects of cash management on the financial performance of Kenya police Sacco
1.3 General objective
The general objective of this study is to evaluate cash management on the financial performance of Kenya police SACCO in Nairobi County
1.4 Specific objective
- To determine the effect of cash planning on the financial performance of Kenya police Savings and Credit Cooperative Society in Nairobi county
- To evaluate the impact of cash flow forecasting on the financial performance of Kenya police SACCO in Nairobi county
- establish how liquidity management affects the financial performance of Kenya police To Savings and Credit Co-operative Societies (SACCOs)
1.5 Research objective
- What are the effects of cash planning on the financial performance of Kenya Police Savings
and Credit Cooperative Society in Nairobi County?
- How does cash flow forecasting affect the financial performance of Kenya police Savings and Credit Cooperative Society in Nairobi County?
- How liquidity management affect the financial performance of Kenya Police Savings and Credit Cooperative Society in Nairobi county?
1.6 Significance of the study
Savings and credit cooperative society are the first to benefit from this research. Management will be able to understand the strategies to be taken to improve the performance of their respective SACCOs based on the findings; the members will be able to understand the performance of their SACCOs. This ensures that they become more informed, especially in their contributions to the directions they will desire the management to take in improving profitability and other performance indicators.
It will benefit higher learning in the extension of skills and knowledge on the growth and expansion of institution for the benefit of students hence it will be available within the university repository systems for access to researchers and scholars
It will also benefit the county and national government in the sense of member fund protection and ensuring the institution towards the development of the economy towards the achievement of vision 2030 and finally SASRA and WOCCU that ensures SACCOs are efficiently managed with established and governance structures.
1.7 scope of the study
The study will evaluate cash management on financial performance in Kenya police SACCO in Nairobi County. The sample will be drawn from the Kenya Police Savings and Credit cooperative society, which is located in Ngara road along the Fig Tree.
The targeted population will be 40 members of the SACCO from different departments., this is the registry for maintaining and ensuring safe conditions of members records, customer care, and marketing, internal audit, claims and refunds, loans, managers. I will also provide a job ranking position to ensure inclusivity and non-bias.
This study will be carried out between March and April 2020 for the financial period between 2014 and 2018. The scope will also be limited to the stated objectives of the study, which spells out the stated Objectives.
References
Githaka, J. M., Maina, K. E., & Gachora, S. (2017). Effect of liquidity management on liquidity of savings and credit cooperative societies in Kirinyaga County, Kenya. http://repository.embuni.ac.ke/handle/123456789/1689
Kahuthu, D. G., Muturi, W., & Kiweu, J. M. (2015). The Impact of Credit Management and Liquidity on financial performance of Deposit Taking Savings and Credit Cooperatives In Kenya.
Njeru, M. D. (2016). Effect of Liquidity Management on financial performance of Deposit Taking Saving and credit cooperative society in Kenya [Ph.D. Thesis]. Business Administration (Finance), JKUAT.
Njeru Mugambi Duncan, D., Njeru, A., Member, F., & Tirimba, O. I. (2015). Effect of Cash Management on Financial Performance of Deposit Taking SACCOs in Mount Kenya Region. International Journal of Scientific and Research Publications, 5(2), 1–6.
Song’e, H. K. (2015). The effect of liquidity management on the financial performance of deposit-taking SACCOs in Nairobi county. Unpublished MBA Project), University of Nairobi, Kenya.