Effects of Unsecured Commercial Bank Loans on Services Offered by Saccos With Fosas in Kenya

Abstract

Competition in the financial sector in Kenya is growing more intense and fierce. Saccos have operated a closed-shop type of business enjoying almost monopoly power on its market niche of teachers without any competition from other financial institutions. This has made the Sacco to relax and forget to continuously advertise its product, diversify its services and improve their quality as well as innovate new products. Today, Saccos have been caught unaware by commercial banks that have aggressively penetrated into its business circles by introducing the unsecured loans targeting members of public including members of Saccos. The study is motivated by rivalry and competition in the Sacco sector which is causing ripples in the Sacco business that the electronic press and print media had described and put as, "Banks battle it out for potential customers with Saccos. There has been contradictory opinion among researchers on the effects of unsecured commercial bank loans on Saccos. The purpose of this study was to establish the effects of unsecured commercial bank loans on services offered by Saccos with Front office saving account (FOSAs) in Kenya. This study was conducted through the use of a descriptive design. The study used purposeful sampling to pick thirty eight (38) Saccos that have been licensed by SASRA in Nairobi County and census approach for all the 43 commercial banks in Kenya. Secondary data for the period (2008-2012) was exposed to sensitivity analysis using OLS regression. The study found that there were several factors influencing the Sacco lending, which are unsecured commercial banks loans, interest rate and inflation. They either influenced it positively or negatively. The study concludes that unsecured commercial banks loans have a strong negative but significant influence on the Sacco lending in Kenya. The study recommends that the Saccos management should also come up with structured solutions and strategies such as international diversification to mitigate the effect of unsecured commercial banks loans. Saccos to come up with strategies and products to assist them cope with these challenges such as extending to alternative markets from what they had predominantly served and diversifying their product range. Saccos should develop credit procedures, policies and analytical capabilities and these efforts should be expanded into full credit management including origination, approval, monitoring and problem management tailored to the needs of each Sacco.