The Contribution of Loan Management on the Financial Performance of Umurenge Savings and Credits Cooperatives in Rwanda

Review Article

Austin J Bus Adm Manage. 2020; 4(2): 1047.

The Contribution of Loan Management on the Financial Performance of Umurenge Savings and Credits Cooperatives in Rwanda

Nsengiyumva A and Harelimana JB*

National Bank of Rwanda Financial Stability Directorate Microfinance Supervision Department, Rwanda

*Corresponding author: Harelimana JB, National Bank of Rwanda Financial Stability Directorate Microfinance Supervision Department, Rwanda

Received: March 26, 2020; Accepted: April 29, 2020; Published: May 06, 2020


The study analyzed the contribution of loan management on the financial performance of Umurenge Savings and Credit Cooperatives in Rwanda. The study adopted the use of descriptive survey using both qualitative and quantitative methods for a total sample size of 78 clients who have received more than two times the loan. Purposive and simple random sampling was used for this purpose. Primary and secondary data were collected and then analyzed. The study found that loan management determinants used such as membership enrolment, client appraisal, credit risk control and collection policy impact on financial performance respectively at 23,9%; 24,1% ; 39,2% ; 28,4%. Loan management practices have a high influence on the SACCO’s financial performance during the five years. The correlation results imply that suitable loan management in a saving and credit institution has a positive impact on financial sustainability and profitability and on financial efficiency and productivity as they move in the same direction (R=0.980).

Keywords: Savings; Credit Cooperatives; Loan Management Procedures; Micro Finance Financial Performance


The Savings and Credit Cooperatives (SACCOs) are financial institutions in the line of cooperatives Societies that aims to meet common needs of the members through savings mobilization, loans and financial advisory services [1]. They enhance economic growth and development by availing funds to members so as to engage in viable business ventures. SACCOs offer most similar products with other financial institutions such as commercial banks. In this sense, they are suitable for low income households who find it difficult to access credit from banks. Delivering financial services to the members is the key function of Savings and Credit Cooperatives. These include financial products and advisory services [2]. To adequately do this, they ought to perform effectively. Financial performance is subjective measure of how well a Sacco can undertake its activities using the available resources and generate optimal revenues. This indicates the organization financial health and sustainability.

According to [3]. Desirable performance in Savings and Credit Cooperatives indicates that they are efficient and effective in their resource utilization. This also involves management of transaction costs. They have to measure their performance to determine whether they have desirable outcome for survival. Planning for future helps organizations to cope with uncertainties and unexpected changes in economic and technological groups. Therefore, they have established financial strategies to guide that purpose. In Rwanda, the ultimate objective long term development plan is to transform the country into a middle-income country and an economic trade, communication and financial hub by the year 2020. Towards the achievement of this GoR has recently adopted an Economic Development and Poverty Reduction Strategy (EDPRS), with Financial Sector Development as one of its key components. According to BNR report (2018), SACCOs are created in line with UMURENGE SACCO program started in the year 2009 by the government initiative to promote financial inclusion. FinScope 2008 results indicated that only 21% of bankable population was able to access and use formal financial services. After introduction of UMURENGE SACCOs and other initiatives, the formal access to financial services doubled to 42% in 2012 and reached 68% in 2016. Umurenge SACCO’s non-performing loans increased to 12.5 percent in 2015-2016 from 8.2 percent in the year 2014-2015 SACCOs in Rwanda are tied and regulated by National bank of Rwanda, Rwanda Cooperative agency and Association of Microfinance in Rwanda. In December 2008, the government of Rwanda recommended the creation of at least one SACCO at the level of each administrative sector (Umurenge). Accordingly, a task force was established to propose a strategy to implement this directive. The task force proposed a strategy in line with the national microfinance policy implementation strategy and the national savings mobilization strategy. The concept of Umurenge SACCO in Kigali City was initiated on the understanding that banks and other financial institutions are more concentrated on rich people and do not serve the poor. As such, establishing Umurenge SACCO at every administrative sector would bridge this gap. Umurenge SACCO in Kigali City is a financial institution under the cooperative form. According to the National Bank of Rwanda the minimum required non-performing loans ratio is 5 percent and the report presented on 22nd December, 2016 in Kigali called for tough measures to tackle the problem of bad debts showed that bad loans had gone up, with 13 per cent and others represented a ratio above 20 per cent of nonperforming loans in Kigali City whereas in other districts the non-performing loans stood at 12.5 percent Despite all the measures and controls including Seminars, Trainings, and Supervision and employing qualified workers to tackle the problem of non- performing loan, still non-performing loan is very high exceeding the benchmark of 5% set by National Bank of Rwanda. This drew the researcher’s intention to carry out research on credit management practices and loan recovery in KUNGAHARA SACCO as one of financial institution cooperative operating in Kigali City. Loan repayment performance is an important concept for all the lending institutions. It is a measure of whether loans are settled up in full according to the loan contract or not. The higher loan repayment performance leads to the higher probability of the collecting interest revenues and lower loan losses in a lending institution [4]. On the other hand, the poor loan repayments have a harmful impact on institutions capital, earning as well as in realizing its objectives and may even lead to a financial institution collapse. For instance, failure to manage loan repayment performance results in losses and high delinquency management costs [5]. The higher expenses are for closer monitoring, more frequent portfolio and legal fees for pursuing seriously delinquent loans. Such costs adversely affect the generated income, and, in general, the operations of the lending institution, thus, the institution becomes financially unperformed and so unsustainable. Savings and Credit Cooperative (SACCOs) contribute immensely to the growth and development of economies. They promote savings culture among people that is crucial for planning in terms of investments and expenditures. SACCOs plays a big part in financial accessibility thus enabling members to engage in viable businesses that generate income to improve living standards. Despite the potential and contribution of SACCOs in Rwanda, they have not delivered financial services to members as expected due to undesirable performance. Most of them engage in financial malpractices such as giving huge loans without proper appraisal or the same. Lack of competent management leads to adoption of mediocre financial decisions that never prove performance. Supervision of SACCOs has not catered for the needs of members in terms of consumer protection. This means that it has not been done as it should be. Moreover, some SACCOs fail to meet loan requirements as sought by members due to insufficient funds at their disposal leading to stagnant or decrease of membership. Undercapitalization makes some unstable and to some extent unsustainable in terms of operations. Past studies have not solved the problem of undesirable performance of SACCOs to the satisfaction of members. In such cases, there is an interest to carry out a research on loan management practices and the financial performance of microfinance institution in saving and credit cooperatives in Kigali City. This study is important in that it provides relevant information on loan management practices in occurrence, membership enrollment, client appraisal, credit risk controls, and collection policy in regard to financial performance of an institution. These constructs have been analyzed well based on their effect on financial performance of SACCOs in Rwanda and recommends how undesirable performance can be rectified.


The main objective of this study is to analyze the loan management strategies and evaluate their contribution on the financial performance in Savings and Credits Cooperatives in Rwanda; specifically the objectives are the following:

• To assess the indicators of loan management strategies in KUNGAHARA SACCO.

• To analyze the level of financial performance in KUNGAHARA SACCO.

• To determine the relationship between loan management strategies and the financial performance in KUNGAHARA SACCO.

Literature Review

Loans Management according to [6]. Is the process by which risks that are inherent in the loan process are managed and controlled. The assessment focuses on what management does to identify issues before they become problems. According to Burt Edwards, the Loans Management component offers functions for mapping the complete loan process for loans given and loans taken, from entering data on a potential contract right through to contract disbursement and the data transfer to Financial Accounting. It incorporates complex collateral management functions, support for decision-making and a range of options for tailoring the contracts [7]. There are many determinants of loan management but the researcher considered only the mainly four following: membership enrollment, client appraisal, Credit risk control and Collection policy. On membership enrolment, a study by [3]. Noted that capacity to generate revenue influences the performance of a SACCO. This capacity is largely determined by the number of members that belongs to a SACCO. When other factors are constant, the higher the number, the higher the amount of revenue. Therefore, membership size of SACCOs determines its financial performance Poor financial service delivery leads to decline in membership. Emphasizes that education of members enhances the borrowers’ ability to repay. The better educated borrowers are deemed to have more stable and higher income employment and thus a lower default rate. Borrowers with high level of education are more likely to repay their loan since they occupy higher positions and with high income levels. Borrower financial education can go a long way towards reducing default rates. Prior to disbursement, institutions should educate and train the client and guarantor about the implications of obtaining a loan, how the product works, the benefits of paying on time and the payment schedule, while also providing information about the closest and easiest way for this particular client to make loan payments. Conducted a study to assess the challenges and opportunities facing SACCOs in the current devolved system of government of Kenya; A case study of Mombasa County. The study pointed out education as one of the major challenges facing SACCOs in Mombasa County. He found out that education is an important ingredient that helps the members to invest the loans they acquire into viable business ventures. Membership size determines the level of organization revenue and performance. Confirm that older borrowers are more risk adverse, and therefore the less likely to default. Thus banks are more hesitant to lend to younger borrowers who are more risk averse. Note that gender in addition to age is one of the most used socio-demographical variables to differentiate the predictive power between men and women. There is clear evidence that women default less frequently on loans possibly because they are more risk adverse. According to [8] gender is a fair discriminatory base on the statistical default rates of men versus women. There are ample evidences that women default less frequently on loans because women are more risk adverse. According to marital status affects the borrower’s level of responsibility, reliability, or maturity. The probability of default is higher for married than single borrowers. They discover that the marital status is typically related to number of dependents which in turn reflects financial pressure on the borrower and borrower’s ability to repay a loan. The researcher considers the following key Credit management variables: client appraisal, credit risk controls and collection policy. Client appraisal is according to [9]. The first step in limiting credit risk which involves screening clients to ensure that they have the willingness and ability to repay a loan. Microfinance Institutions use the 5Cs model of credit to evaluate a customer as a potential borrower. The 5Cs help MFIs to increase loan performance, as they get to know their customers better. These 5Cs are: character capacity, collateral, capital and condition.

Character - refers to the trustworthiness and integrity of the business owners. It’s an indication of the applicants’ willingness to repay and ability to run the enterprise. Capacity assesses whether the cash flow of the business (or household) can service loan repayments. Capital - Assets and liabilities of the business and/or household. Collateral -Access to an asset that the applicant is willing to cede in case of non-payment, or a guarantee by a respected person to repay a loan in default. Conditions- A business plan that considers the level of competition and the market for the product or service, and the legal and economic environment. The 5Cs need to be included in the credit scoring model. The credit scoring model is a classification procedure in which data collected from application forms for new or extended credit line are used to assign credit applicants to good or bad credit risk classes. It is important to note that capital (equity contributions) and collateral (the security required by lenders) are major stumbling blocks for entrepreneurs trying to access capital. This is especially true for young entrepreneurs or entrepreneurs with no money to invest as equity; or with no assets they can offer as security for a loan [10]. Key Credit risk controls include loan product design, credit committees, delinquency management and collection procedures [11]. The World Bank [2]. Recommends the management of financial institution to set up credit policy that could not negatively affect profitability. For [12] SACCOs can mitigate a significant portion of default risk by designing loan products that meet client needs. Loan product features include the loan size, interest rate and fees, repayment schedule, collateral requirements and any other special terms. Loan products should be designed to address the specific purpose for which the loan is intended.

According to [11]. The credit committee has the responsibility not only for approving loans, but also for monitoring their progress and, should borrowers have repayment problems, getting involved in delinquency management. Establishing a committee of persons to make decisions regarding loans is an essential control in reducing credit (and fraud) risk. If an individual has the power to decide who will receive loans, which loans will be written off or rescheduled, and the conditions of the loans, this power can easily be abused and covered up. While loan officers can serve on the credit committee, at least one other individual with greater authority should also be involved.

According to [11] SACCOs can minimize delinquency management by using the following delinquency management methods Institutional Culture: A critical delinquency management method involves cultivating an institutional culture that embraces zero tolerance of arrears and immediate follow up on all late payments. SACCOs can also remind clients who have had recent delinquency problems that their repayment day is approaching. Pointed out that if collection procedures are carefully formulated, administered from top and well understood at all levels of the institution, proper credit standards and elimination of excess risk can be achieved. There are various procedures that an organization should put in place to ensure that credit management is done effectively; one of these procedures is a collection procedure which is needed because all customers do not pay the firms bills in time. The Savings and Credit Cooperatives (SACCOs) are financial institutions in the line of cooperatives Societies that aims to meet common needs of the members through savings mobilization, loans and financial advisory services [1]. Financial performance is a measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm’s overall financial health over a given period of time and it is one of major indicator of organizational performance. For Zeller et Al., (2002), financial performance can be defined as the accomplishment of a given task that is measured using predetermined standards of accuracy, completeness, efficiency and effectiveness. There are many studies carried out on impact of Loan Management on financial performance of SACCOs. In this part, the study presents some of studies related to the topic. Carried out a study to determine the relationship between credit management and financial performance of SACCOs in Kenya. He found that there was a positive relationship between credit risk management and financial performance of SACCOS in Kenya [13]. Assessed the effects of performance management practices on provision of financial services by savings and credit cooperative societies. The study findings that efficiency and effectiveness influenced performance via appropriate performance management practices [12]. In their study on Effectiveness of Credit Management System on Loan Performance: Empirical Evidence from Micro Finance Sector in Kenya found out that credit risk controls adopted by microfinance institutions have an effect on loan performance [14]. In his study on Effective Collection Policy stated that there are various policies that an organization should put in place to ensure that credit management is done effectively, one of these policies is a collection policy which is needed because all customers do not pay the firms bills in time. Some customers are slow payers while some are non-payers. The collection effort should, therefore aim at accelerating collections from slow payers and reducing bad debt losses.

According to [15] in their empirical investigation on credit risk management and loan performance of micro finance banks of Pakistan indicated that credit collection procedure is a systematic way required to recover the past owing from clients within the legal framework. Different financial institutions have different collection policies and processes which have to be lawful. For better performance of credits or loan a well structure collection policy is needed and if the financial institutions do not implement it would lead to loan delinquency [15, 16]. Carried out a study to answer the question what is the effect of credit policy on financial performance of SASRA regulated SACCOs in Nairobi. The study adopted correlation research design and revealed that regulated SACCOs had adopted credit standards as a credit policy and credit term policy loan ratio in determination of how much a client would borrow. The study concluded that credit terms policy significantly increased ROA of regulated SACCOs hence decreasing loan to assets ratio significantly leading to increase in financial performance [17]. Carried out a survey on selected SACCOS to establish the relationship between membership and financial performance of SACCOS in Kenya. The results showed that membership had a significant relationship with financial performance [12]. in her study on Effectiveness of Credit Management System on Loan Performance: Empirical Evidence from Micro Finance Sector in Kenya found out that Credit terms formulated by the microfinance institutions do affect loan performance; the involvement of credit officers and customers in formulating credit terms affects loan performance.


This section summarized dimensions of the research, tools and techniques and methods used to achieve the research objectives.

Data collection

Data were collected, as primary data, using observation, interview and questionnaire techniques and secondary data. A Self-administered questionnaire was designed for 78 members in collection of primary data and the technique of documentation for secondary data was used. Consequently, the sample in this study has been chosen purposively based on who have received more than once loan from KUNGAHARA SACCO NYAKABANDA with using Alain Bouchard’s formula with confidence interval of 95% and a permissible margin error of 10%. The total population is categorized into two: The first category (Staff) of population size equals 6 and the second (clients) equals 862 with the sample size 6 and 72 respectively. The total sample size is 78.

Data analysis

To assess the impact of loan management on financial performance of Savings and Credit Cooperatives, the researcher considered both quantitative and qualitative data which were coded, summarized and presenting using SPSS and excels software. Apart from descriptive statistics of Mean, Frequency and percentages on the characteristics of the respondent, regression analysis was used to measure and predict the relationship between the predictor variables and the dependent variable. The general form of the model was as follows:

Y = a + ß1X1+ ß2X2+ ß3X3+ ß4X4+ e

Where, Y= financial performance,

X1 = Membership enrolment, X2= client appraisal, X3=Credit risk control, X4=Collection procedures, is a constant and ß1, ß2, ß3 and ß4 are coefficients to estimate, and e is the error term.

Since the study intends to assess whether Loan Management practices have any relationship with the financial performance of KUNGAHARA SACCO- NYAKABANDA which is the dependent variable, the most commonly used relational statistic is correlation (r) and it is a measure of the strength of a relationship between two variables, but not causality. Beside this equation, the correlation coefficient was calculated using the SPSS. The statistical method helped in computing the correlation between loan management practices (X) and financial performance (Y) of KUNGAHARA SACCO-NYAKABANDA.

Results, Discussion and Findings

Data on assertion of loan management indicators was gathered on the following themes: membership enrollment, client appraisal, Credit risk control and Collection policy on the financial performance of SACCOs.

To analyze the level of financial performance (second objective) based on loan management indicators, data from KUNGAHARA SACCO-NYAKABANDA financial management was collected using Fact sheet. All those data was used finally to assess if there is any relationship between loan management and financial performance (last objective).

Assessment of Loan management indicators in KUNGAHARA SACCO-NYAKABANDA

The study intended to assess the Impact of Loan Management practices on financial performance of Savings and Credit Cooperatives in Rwanda by determining the Loan management determinants and its relationship to the financial performance indicators of KUNGAHARA SACCO-NYAKABANDA during the period of study.

Gender respondents: The researcher wanted to establish how savings and investments in SACCOs can be influenced by an individual gender status Figure 1.