38C r E d i t M a n a g E M E n t

THE CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF SACCOS

(A CASE STUDY OF TALA LYA MAWOGOLA CREDIT SAVING SOCIETY)

BY

NABAKOOZA MARIAM REG NO: 212-033023-04694

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF MANAGEMENT, FACULTY OF BUSINESSES AND MANAGEMENT ISLAMIC UNIVERSITY IN UGANDA

February 2015

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Table of ContentsABSTRACT1CHAPTER ONE21.0 Introduction21.1 Background of the Study21.2 Problem statement.31.3 Research Objectives.31.3.1 Specific Objectives3To examine the relationship between corporate governance and financial performance of Tala Lya Mawogola SACCO in Ssenbabule District.31.4 Research Questions31.5 Significance of the study.41.6 Scope of the study.41.6.1 Subject scope41.6.2 Geographical scope41.6.3. Time Scope4CHAPTER TWO5LITERATURE REVIEW52.0 Introduction.52.1 Meaning of SACCOs.52.2 Environment surrounding SACCOs in Uganda52.3 Risk72.4 Corporate Governance and Risk.82.5 Financial Performance82.6 Risk and financial performance92.7 Relationship between corporate governance and financial performance.10

CHAPTER THREE11METHODOLOGY113.0 Introduction113.1 Study Design113.2 Data Collection113.6 Research Methods113.7 Data Analysis Methods12REFERENCES:13

ABSTRACT

This research aims at looking at Corporate Governance, and financial performance of SACCOs with Tala Lya Mawogola Credit Saving Society in Uganda as the Case study. Some of SACCOs have come under spotlight for cases of mismanagement and a number of them have closed. The research set out to: establish the level of compliance with corporate governance guidelines, determine the relationship between corporate governance, examine the relationship between risks and financial performance, as well as examine the relationship between corporate governance and financial performance of SACCOs.

CHAPTER ONE1.0 Introduction This chapter will peruse through the background of the study, the problem statement, objectives of the study, general objectives and specific ones, research question, the scope of the study and the importance of the study.1.1 Background of the Study Savings and credit cooperatives or other terms that differ across regions of the world are among the poorly understood entities in most countries that comprise the existing institutional base for financial intermediation (Cuevas and Fisher, 2006). These institutions are member owned whose core business is to encourage thrift and easy access to credit to their members. Members pull resources together in form of savings, and the SACCO uses the mobilized savings to extend small credit facilities to them (Were, 2009). They are user owned financial cooperatives that offer savings, credit and other financial services to their members (WOCCU report, 2005). Co-operatives, like other private sector enterprises, have not remained untouched by the recent corporate governance scandals (Shaw, 2006). SACCO governance is the system in which SACCOs are led, enabled and its leadership held accountable for the actions taken in a bid to manage the SACCOs in the interests of all members (Ssemwanga, 2009).According to the Rural SPEED report published in 2007, a typical stylized organizational structure of a SACCO in Uganda consists of the Annual Shareholder Assembly which isthe highest organ of the SACCO that elects volunteer officers to serve on the Board of Directors and the various committees as the member representatives. The Board adopts the fundamental policies of the SACCO and has them ratified by the Shareholder Assembly. The Executive Management develops proposals for the policies and important business decisions, refines them through consultation with the appropriate Board Committees, which endorse them for adoption by the full Board. Finally, the Executive Management is responsible for running the daily operations within the confines of the Boards approved policies and procedures.Corporate governance in SACCOs is a fairly touchy and much more complex issue as cooperatives are based on the principle of democracy in regards to decision making with much more spread ownership than classical firms (Labie and Prilleux, 2009). According to the AMFIU Report (2008) governance challenges still existed particularly among SACCOs where risk were highest, given that they collected and intermediated members savings.1.2 Problem statement. SACCOs in Uganda have traditionally suffered from opaque governance as a result there has been mismanagement in some SACCOs. Management of Taala Lyamawogola SACCO for instance reportedly misappropriated about Ugx 700m with by the manager of the SACCO less money than the loans approved by the authorities. There has also been poor management of loan portfolio, appraisal of loan applications and subsequent loan monitoring.In addition, there have been challenges of managing liquidity for instance Tala Lya Mawogola SACCO in Ssembabule District had an insufficient loan portfolio of Ushs.12, 690,000 as well as low profitability resulting into some SACCOs failing to repay loans lent to them with recovery rate of loans advanced to SACCOs worse in the Mawogola sub county. If this trend is not checked, it may lead to depletion of SACCOs funds and collapse of more SACCOs in Mawogola and Uganda at large thus the interest of the research to examine the corporate governance and financial performance of SACCOs 1.3 Research Objectives. The primary objective of the study is to determine the relationship between corporate governance and financial performance of Taala Lya Mawogola SACCO in Mawogola Ssenbabule district as to obtain an insight on the performance of these SACCOs and suggest possible recommendations for improvement.1.3.1 Specific Objectives TO determine the level of compliance with the corporate governance guidelines in taala lya mawogola sacco in senbabule district.To determine the financial performance of the Sacco in relation to risk faced saccos mainly by taala lya mawogola SACCOTo examine the relationship between corporate governance and financial performance of Tala Lya Mawogola SACCO in Ssenbabule District. 1.4 Research Questions i) What is the level of compliance with corporate governance guidelines in Tala Lya Mawogola SACCO?ii) What is the performance of the sacco in relation to risk within Tala Lya Mawogola SACCO? ii) What is the relationship between corporate governance and financial performance of SACCOs Taala Lya Mawogogla Specifically?1.5 Significance of the study.The findings of this study at the end with the preparation of research report after proposal approval will enhance the efforts of government regulators in coming up with regulations that will govern the operations of SACCOs.The researcher will gain immense knowledge in the way SACCOs should be run and thus organize programs aimed at creating awareness on how to run these institutions for the benefit of the members.The study will contribute to the achievement of the governments policy of prosperity for all through sensitizing the rural poor on how to benefit from properly run SACCOs.The study will facilitate better SACCOs management by enhancing the knowledge of the board members in overseeing the management of the Institutions.The study will contribute to the award of degree after completion of it which is most desirable by most of studentsSACCO members will also be able to realize their roles in the operations of SACCOs and begin or continue to play their part. 1.6 Scope of the study. 1.6.1 Subject scopeThe study will focus on corporate governance and financial performance of Taala Lya Mawogola SACCO located at Ssenbabule District, Uganda. Specifically, the study shall concentrate on internal governance aspects of Board structure and CEO duality. Financial performance looked at in terms of profitability, loan portfolio quality and liquidity.1.6.2 Geographical scopeThe study focuses on Taala Lya Mawogola SACCO associated in Mawogola Ssembabule District. The results could explain collapse of SACCOs in other regions as well since all SACCOs operate on similar principles and guidelines.1.6.3. Time ScopeThe study will be based on financial and non financial information for three years mainly from 2012 to 2014for the financial year of the SACCO.

CHAPTER TWOLITERATURE REVIEW2.0 Introduction. This chapter looks at and reviews the various literatures on background of SACCOs, challenges facing SACCOs as well as corporate governance, risks and financial performance of SACCOs from authentic sources.2.1 Meaning of SACCOs.SACCOs are user owned and managed organizations ranging in size from a handful to several thousand members, organized on the basis of the work place (among formal employees), markets (among vendors) or around a specific product in rural areas. Each SACCO is governed by its members, who elect (from within the membership) unpaid volunteer officers and directors to determine the policies under which the SACCO operates. Voting is one-member-one-vote, regardless of the size of the members savings or loan balances (Goddard, McKillop, and Wilson, 2008). According to Branch and Baker (1998) member ownership and control is a key to credit unions. Credit unions have always been socially-minded and democratic financial institutions and traditionally savings-led. However, these very strengths could easily be impediments to the effective governance that credit unions require to expand and compete in the financial market place. 2.2 Environment surrounding SACCOs in UgandaThe liberalization of the financial sector by the Government of Uganda and Its policy of prosperity for all led to establishment of SACCOs (Mutesasira et al., 1999). Government has since adopted the strategy of supporting these SACCOs in a bid to booster the level of savings mobilization and investment among the poorest of the poor. The objective was to assist communities to start and operate these institutions for financial service delivery at the sub-county and subsequently at the parish level by supporting creation of new SACCOs where they were absent, revitalizing and restructuring existing but

weak SACCOs, and supporting SACCOs that have attained financial sustainability and that are willing to decentralize their services to the parish level (MoFPED Report, 2005). In Uganda, the SACCOs belong to Tier 4 in the Bank of Uganda (BoU) categorization of financial Institutions. Tier 4 Institutions share two key features: first, the BoU does not exercise prudential supervision over them, secondly, they are forbidden to mobilize deposits from the general public. They can accept only member savings (voluntary deposits and share capital). SACCOs fall under the Uganda Cooperatives Act 1992, which governs all cooperatives and which charges the Ministry of Trade, Tourism and Industry (MTTI) with maintaining a registry of cooperatives and overseeing their functioning and stability (CGAP report, 2005). According to Kyazze (2010) SACCOs operate under a generic cooperative law, shared with other cooperatives such as growers, marketing and consumers and hence their unique needs as financial institutions go unattended.A large number of SACCOs were formed between 2001 and 2003 following announcements that the Government planned to inject USD 5,000 into each of Ugandas 5,000 parishes to support Tier 4 institutions. Many ceased operating, or never became active, when the funding was not forthcoming (Goodwin, Bruett & Alexia, 2004), (Kohler, Wolfgang & Winter, 2005). A research by BoU in 2007, showed that two out of three SACCOs collapsed in the first or second year due to poor governance, fraud and mismanagement, failure to balance between social and commercial missions and inadequate loan capital. Kairu (2009) agreed with the research by BoU, adding that governance challenges existing among SACCOs in Uganda stemmed from the fact that these SACCOs were faced with numerous operational hurdles as well as regulatory issues as several of them had collapsed only a year and half after inception.

agency that is responsible for all kinds of non-financial cooperatives, including agricultural and marketing. Such agencies do not have the financial skills and political independence needed to oversee financial intermediaries effectively.According to Deshpande (2006) policy frameworks are often inappropriate for financial cooperatives noting that in Uganda, for example, SACCOs are not governed by dedicated legislation. They operate under a variety of legal regimes, including the Cooperatives, Companies, and NGO Acts adding that some of regulators like the MTTI are widely acknowledged to lack the capacity to supervise the over 1400 SACCOs registered. Were, (2009) concurs with Deshpande (2006) stating that the current financial sector regulatory framework provides for tier one to tier three institutions leaving out SACCOs which are vital in provision of financial services to low income people but whose activities, unless regulated, could also disrupt peoples economic lives adding that absence of clear regulation for SACCOs has resulted into huge losses to the poor who use these institutions to cumulatively build their savings and access credit for future investments. 2.3 Risk Deelchand & Padgett (2009) refers to risk as the variability of returns associated with a given asset hence must be controlled or minimized. Pagach & Warr (2008) pointed out that risk is generally considered to be the possibility of outcomes that deviate from what were expected however, it is primarily negative outcomes that are of most concern to organizations.Risk taking is fundamental to every business (Spira, 2003). Cooperative Financial Institutions have a high exposure to credit risk (Cuevas and Fischer, 2006). According to Wenner, et al (2007) taking credit risk is part and parcel of financial intermediation hence its effective management by financial intermediaries is critical to institutional viability and sustained growth. Bald, (2007) re affirms the statement by Wenner, et al (2007) saying it is the conscious engagement in risks that constitutes the economic value of financial intermediation.SACCOs convert immediately available savings deposits into loans with longer maturities (maturity transformation). Individual savings deposits are also typically much smaller than an average loan, requiring multiple deposits to fund a single loan (size transformation) and these savings deposits are converted by the SACCOs with an absolute expectation of safety and repayment into credit-risky loans to members (credit risk transformation). Most importantly, the loans advanced by SACCOs carry a fixed interest rate for their entire term, as opposed to those of commercial banks that can be adjusted at any time according to changes in market interest rates (interest rate risk transformation). All of these financial transformations are risky (Bald, 2007)SACCOs are also faced with operational risk (losses caused by internal failures or shortcomings of people, processes, and systems, as well as the inability of people, processes, and systems to cope with the adverse effects of external events). Mutesasira, et al (1999) observed that informal savings and credit mechanisms are often characterized by high transaction cost and high risks. As a consequence, the poor regularly lose their savings to fraudulent schemes, dishonest friends and neighbors, to thieves, to unnecessary spending. However, Deelchand & Padgett (2009) offers a relief stating that credit risk can be controlled whereas operational risk can only be minimized. 2. 2.1 TO determine the level of compliance of Corporate Governance guidelines at taala lya mawogola and riskAccording to the governance of the SACCOs here the sacco look at how it is ruled or governed and many firms are yet to implement practices for better risk management maintains that implementation of good corporate governance is not only concerned about better expected return but is also concerned about better managing of risk. The most important types of operational risk involve breakdowns in internal controls and corporate governance ,In survey on the status of missing SACCOs in Uganda, 23% of the SACCO collapse was explained by fraud and mismanagement by board executives and management (AMFIU report, 2007). Governance challenges still existed, particularly among SACCOs where risk was highest, given that they collected and intermediated members savings (AMFIU Report, 2008). This confirmed earlier studies by AMFIU in 2007 which discovered that poor management of the loan portfolio, poor appraisal of loan applications and subsequent loan monitoring by SACCO management had led to depletion of institutional funds due to high default rates.

2.2.2TO determine the Financial Performance of the sacco in relation to riskThe performance of the saccos mainly financial intermediary comes as a result of the simultaneous presence of savers and the borrowers of funds. However, the conflicts of interest are inherent in this balance as borrowers want 22 low loan rates, low transaction costs and lax discipline while savers demand high deposit rates and strong prudential disciplines because savers have strong incentives to see the institutional viability strengthened by profitability yet the borrowers short-term incentives favor conditions lax discipline, low loan rates, easy access to loans which adversely affect the financial stability of the Saccos,. for example taala lya mawogola being located in sembabule district its performance is fair not only that it has low saving capacity.Allen & Maghimbi (2009) observed that some cooperatives in Uganda were finding it difficult to operate largely because of their poor financial state. This was confirmed by the findings of the African Microfinance Transparency (AMT) report (2008) that discovered that funding structures indicated growth in SACCOs being mostly funded by access to debt rather than by savings. This was in line with previous studies by AMFIU in 2007 which discovered that over indebtedness had been a problem to most SACCOs.

.2.2.3 Relationship between corporate governance and financial performance.Corporate governance has been identified to have a significant impact on the performance of firms (Dittmar & Mahrt-Smith, 2007). However, according to Hermalin and Weisbach (2003) there does not seem to be consistent evidence to support the fact that board size or composition affects performance. According to Kairu (2009) an appraisal of the performance of the cooperative movement by the parliamentary committee on finance, revealed that SACCOs are faced with numerous operational hurdles including poor governance and regulatory issues emerging as key challenges. Wright (1999) observed that most stakeholders, including government officials, were wary about their future SACCOs due to their poor performance and inherent governance problems.Ssemwanga (2009) however noted that good governance had enabled Uganda to witness some levels of acceptable progress in terms of how SACCO matters are managed and made to grow. SACCOs like Agaru and WAZALENDO which have been able to register high returns on their investments over the past years have embraced the practice of good SACCO governance.The lack of involvement of the membership in the affairs of the institution regularly provides opportunities for the board, management and their friends to take loans without living up to their repayment duties (the IMF Report, 20

In addition, some SACCOs had illiterate committee members who lacked basic skills to effectively supervise operations and were defrauded by management who took advantage of their ignorance29 (AMFIU report, 2007). example manager of taala lya mawogola misused funds ( 700million in 2009)this contributed to its poor performance and not only that this brought poor loan payment in the saccosThese are loans to officers themselves or their close relatives and business associates. It is therefore not practical to entirely rule out loans to board members and their families and associates because of the nature of SACCOs (Bald, 2007).

CHAPTER THREE METHODOLOGY3.0 Introduction This part presents details of the research plan information about how data is to be collected, the study population, sample unit and design, data collection instruments, and data analysis and data presentation techniques.3.1 Study DesignThe researcher used a cross sectional research design that was analytical and descriptive to understand the relationship amongst the study variables because the performance of SACCOs in the country had come under the spot light only recently. This will be appropriate because the study involves inter SACCO performance comparison at a point in time. 3.2 Data CollectionBoth primary and secondary data will be collected. Research instruments will be developed for each category of data as indicated below;3.6 Research Methods1. Interview 1. Questionnaires1. Observation 1) Interview schedule.Data from Taala Lyamawogola SACCO will be collected in the study using an interview schedule administered by me the researcher. Sample size of 40 respondents is targeted in this category. This method will be used since it is suitable for both illiterates and literates groups of people to give data and answer the questions needed by the researcher. It simplifies for the researcher if questions are interpreted in the language understood by the farmers2) Observation methodDirect observation is another tool of data collection to be used by the researcher when visiting the Taala Lyamawogola SACCO, Ssenbabule District. Here the researcher is to use logical conclusion after observing the status of cost control at the organization and how it affects the financial performance of the organization.3) Questioners Structured questioners are to be designed to capture the above question from the different stake holders. The method to be used while collecting data is mainly qualitative information .however, thereafter there is an analysis to assess the difference in some perception issue between the different groups of respondents.3.7 Data Analysis MethodsQualitative analysis will be used throughout the research though some aspects need a quantitative analysis data analysis.

REFERENCES:

Allen, .E & Maghimbi, S. (2009) African cooperatives and the financial crisis; CoopAFRICA Working Paper No.3Appunyo, H. (2009, July 20). Ssembabule SACCO Faces Audit over Impropriety. The Daily MonitorAMFIU Report (2008): Microfinance Tomorrow: Refocusing the vision for the Industry in Uganda; An Analytical booklet for the proceedings of the 2008 AMFIU Pre AGM Workshop.Association of Microfinance Institutions In Uganda (AMFIU) report, 2007African Microfinance Transparency (AMT) report (2008) Transversal Analysis of Microfinance Institutions in Africa 2nd Edition, ADA publishers, Luxemberg.Bagala, A. (2009, February, 6) Fake SACCOs Fail Prosperity for All Programme, The Daily Monitor.Basel Committee report on Banking Supervision Consultative Document (2001, January 31) Operational Risk Supporting Document to the New Basel Capital Accord.Bauer, K