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Effects of default rates in Rural SACCOs resource mobilization on income of SSDF
The objective of SACCOs is to promote the habit of saving among its members. It provides
financial assistance or credit to its members when they need. Participation in rural SACCOs,
non-farm income; farming experience had major effect on repayment ability while family size,
farm size and return on investment, had a minimal effect on repayment ability. Poor record
keeping, low literacy, and fear of high interest rates were some of the problems and constraints
encountered by the farmers and the credit institutions. It is recommended that farmers should be
encouraged to keep good records; financial institutions should also ease the process of loan
acquisition to enable farmers with low educational background better access to funds. It is also
recommended that credit worthiness of to be beneficiaries should be calculated in advance to
reduce the frequency of loan default (Ramesh, 2010).
The second task of the cooperative is to grant loans to its members. Loans are granted from the
members' accumulated savings. Obviously, not all the members can take out loans, or obtain
them immediately or simultaneously. Members are granted loans in accordance with their
seniority within the cooperative and the amount of their savings. Generally speaking, the size of
loans granted from the cooperative's fund is governed by the liquidity regulations of the country
in which it is located, (Ramesh, 2010).
Clearly therefore, the size of loans granted to members does not exceed the total of their savings.
But there are some exceptional cases where the cooperative serves as an intermediary for
obtaining additional credit for members. This subject will be discussed more extensively later.
The member pays the (cooperative) fund interest on the credit he receives. The rate of interest
will be lower than that at other, commercial financial institutions, for this is part of the service
the cooperative provides to its members. The interest rate is calculated according to a simple
formula: the total interest paid on the loans granted by the fund must cover the total amount of
interest paid to members on their savings as well as the fund's total operating cost. Clearly, the
more efficiently the fund is managed, the smaller the difference between the interest charged on
loans and the interest paid to members on their savings - a factor which also encourages
members to save more.
Let us take an example where the SACCOs pay interest of 7% on savings, while the interest
charged on loans is 15%. On the basis of this 8% differential, therefore, the cooperative must
cover its entire operating expenses, plus a certain reserve for unforeseen circumstances. It also
follows that these operating expenses must be much lower than the 8% differential, in order to
ensure that the interest paid on members' savings will be higher than that available elsewhere and
that the interest on loans granted to them will be lower. A common misunderstanding among
cooperative members is that the cooperative should earn profits in the course of the year in order
to pay interest to members. Making profits is not the objective of the cooperative, which is
actually intended to be a system that exclusively serves its members. Theoretically, it could be
said that the ideal cooperative is one which ends the year with zero profits or surplus. This means
that it would have served its members in the best possible manner, by collecting the minimum
amount necessary to cover its operating costs while enabling members to obtain the maximum
service from it.
Thus brings us to another task of the credit cooperative. As it is built on the principles of mutual
aid and responsibility, the cooperative effectively acts as a guarantor for its member’s loans. An
individual requiring a loan, which is usually for productive purpose, will find it very difficult to
negotiate with a SACCOs. He will often receive a negative reply and even if his loan application
is approved, he will have to produce a large number of guarantors and fulfill numerous
conditions aimed at assuring the SACCOs that the loan will be repaid.
Duration for repayment of loans advanced by the Rural SACCOs to the SSDF
The agricultural sector is the largest sector of the State’s economy, employing over 70% of the
adult labour force. The sector impacts on many aspects of development in the state. Apart from
striving to meet the food needs of the citizenry, the agricultural sector impacts strongly on the
needs of the people, the state’s industrialization efforts, particularly agro-industrial sector and the
over all quality of life of the people. At the same time, agricultural production and productivity
depends largely on the access to finance to facilitate the acquisition of the resources required
for \production. Consequently, there is a need to make agriculture economically viable by
seeking a balance between efficient and productive agricultural enterprise and environmental
protection and sustainability (Olawepo, 2003).
Duration for payments for any credit amounts advanced to the small scale dairy farmers is of
great importance since this among other criteria will determine the amounts so advanced. Rural
SACCOs while appraising members who require credit must ascertain the proper repayment
period that will enable the member acquire the deserved amounts. The duration of repayment if
not considered well may eventually lead to the loans being defaulted.
Members requests in the Rural SACCOs for deferred loan repayment
Assessment of creditworthiness of loanees is paramount to having the loans repaid in full. While
most efforts to save are voluntary repayment of loans in full is compulsory. In the SACCOs
industry while the holding of a savings account is voluntary in some cases the holding of savings
account is compulsory especially for those who must access the loans. Funds mobilization
strategies according to Mauri (2008), governments in many African countries neglected personal
savings in the 1960s. In the wake of the “vicious circle” model (Nurkse, 2003), aid programs
were considered the only tool for fighting underdevelopment in the last three decades (Von
Pischke, 2004), while the mobilization of savings was “the forgotten half” of development
finance programs (Vogel 6, 2004). The awareness that poor people are potential savers, resulting
from studies of micro finance activities, is leading to a new paradigm in development issues
(Vogel, 2007). The mobilization of domestic savings for economic development is the next
century’s challenge for Africa. Indeed, “no country is too poor to save if the available potential is
effectively used” (Adera, 2005). Rural SACCOs could be a vehicle for this task because they are
currently the only formal financial institutions able to provide financial services to remote areas
of Africa.
The role of financial markets in mobilizing savings and in channeling funds into productive
investments is central to a successful strategy for economic and human development (Musinguzi,
2000). In the rural areas of many developing countries the lack of access to effective formal
financial markets may be seen as a severe constraint that prevents low-income households from
improving their lot and leads to the persistent poverty. To mobilize savings and enhance their
operation in the market Rural Financial Institutions (RFIs) including SACCOs, have undertaken
various measures .These include the following (RURAL SPEED, 2005).
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