Effect of Loan Management Practices on Non-Performing Loans for Deposit Taking Savings and Credit Cooperative Societies in Kenya

Abstract

Deposit taking SACCOs have contributed to financial deepening and increased financial inclusion in Kenya because they improve social and economic welfare of members. However, the sector has seen several institutions collapsing. Current studies on non-performing loans for Saccos have focused on credit management practices such as credit scoring systems and repayment enforcement practices that are specific to banks and this do not align with the goal of Sacco’s business models. This study seeks to include the practice of using guarantors and its efficacy in control of non-performing loans relative to the mainstream practices established by financial institutions like banks. The main purpose of this study was to assess the relationship between loan management practices and non-performing loans for deposit taking Savings and Credit Cooperative Societies in Kenya. The study has three specific objectives; to determine the effect of credit scoring systems on non-performing loans for deposit taking Savings and Credit Cooperative Societies in Kenya, to assess the effect of guarantorships requirements on non-performing loans for deposit taking Savings and Credit Cooperative Societies in Kenya and to find out the effect of repayment enforcement practices on non-performing loans for deposit taking Savings and Credit Cooperative Societies in Kenya. This study is anchored on three theories: lender-based theory of collateral, informal finance theory and financial intermediation theory.  This study adopted a descriptive research design. The population of this study was all deposit taking SACCOs in Kenya. A sample of 44 deposit taking SACCOs within Nairobi County was selected. This study collected primary data by use of a structured questionnaire. Data analysis was done using descriptive statistics such as averages and standard deviations and inferential statistics in a regression model by use of SPSS. Presentation of data was done using tables and graphs. Results were reported using robust standard errors model. Findings showed that credit scoring systems, guarantorship requirements and repayment enforcement practices had a negative and insignificant effect on non-performing loans for deposit taking Saccos in Kenya. This means that all loan management components examined in this study better loan performance. It is recommended that SACCOs need to lay more emphasis on establishing robust and apt frameworks for mitigating non-performing loans other than those credit scoring systems, guarantorship requirements and repayment enforcement practices this has insignificant effect on non-performing loans.