Sacco Loan Effectiveness: A Case Study

Savings and Credit Cooperative Societies (SACCOS) have a global history exceeding 150 years, with a presence in Tanzania for over four decades. Their core function centers around the mobilization of savings from members and the subsequent provision of loans at pre-agreed interest rates. SACCOS offer an alternative to traditional commercial banking systems, actively promoting thrift and savings habits amongst their cooperative members (URT, 2002). They are member-owned, non-profit financial cooperatives, operating on a common bond principle, connecting savers and borrowers within shared communities, organizations, religions, or workplaces. This foundational structure establishes the framework for understanding the dynamics of savings and loan accessibility within the SACCOS system in Tanzania.

Shinyanga Region in Tanzania boasts approximately 96 active, registered SACCOS, with twelve specifically located in workplaces. These workplace SACCOS, including notable examples like Kurugenzi SACCOS, Maswa Teachers SACCOS, and Shinyanga District Council SACCOS, collect shares, savings, and deposits from members to provide loans at low interest rates. Their primary funding source is monthly salary contributions from members. The high demand for loans, often exceeding available savings, forces many SACCOS to seek additional funding from external financial institutions. This reliance on external sources highlights a critical challenge: insufficient member savings to fully support loan demands, despite regular contributions. The Cooperative Societies Rules of 2004 stipulate that loans should not exceed three times a member's savings, but the practical application of this rule is central to the research's focus.

The concept of 'savings' is explored through various definitions, drawing from sources like businessdictionary.com and Deposits.org. These sources define savings as the portion of disposable income not spent on consumption, instead accumulated or invested. Within the SACCOS context, savings represent member deposits forming the foundation for loan disbursement. The research incorporates the consumption smoothing hypothesis, suggesting a correlation between age and savings behavior. Other motivational factors for saving include precautionary measures (such as insurance), and accumulating funds for specific purposes like education or home purchases. Traditional economic theories, based on self-interest, rationality, and time-consistent preferences, are also considered in relation to savings patterns. The research analyzes different savings mechanisms, including the prevalent 'saving up,' 'saving down,' and 'saving through' approaches. These mechanisms, ranging from individual savings accounts to ROSCAs (Rotating Savings and Credit Associations), form part of a broader investigation into the effectiveness of various savings practices within the Tanzanian context.

The research directly addresses the question of whether the savings practices of workplace SACCOS members are affected by broader saving culture. Recognizing that income for these members largely derives from monthly salaries and wages, the study explores the rationale behind existing savings policies. It seeks to determine whether SACCOS provide a perceived secure environment for member savings and investment, ultimately investigating the saving behavior of employment-based income earners within the SACCOS framework. The research aims to analyze the effectiveness of SACCOS policies in fostering a savings culture and ensuring the sustainable delivery of loans to members. This specific focus, within the broader context of SACCOS operations in Tanzania, guides the research methodology and data analysis.

The study explores established theoretical frameworks to understand savings behavior. The consumption smoothing hypothesis is introduced, suggesting that individuals, particularly those in their middle years (30-60), tend to be net savers. This is driven by a need to maintain consistent consumption levels throughout their lives. The document also touches upon precautionary saving motives, where households save for unforeseen circumstances, often taking the form of short-term insurance policies. Another reason for saving is the accumulation of funds for specific future goals, such as education or major purchases. These observations are contextualized within traditional economic theories assuming perfectly self-interested, rational individuals with consistent preferences over time. The life-cycle hypothesis is referenced, suggesting that per capita income growth and age dependency ratios are key determinants of savings rates (Narayan, 2006). The National Treasury (2012) also highlights consumption smoothing as a crucial driver of savings, enabling expenditure during retirement or unemployment.

Several factors influencing savings rates are discussed, drawing upon existing research. Maimbo and Mavrotas (2004) highlight macroeconomic conditions such as poverty, unemployment, and bank closures as significant obstacles to private sector savings. The study also notes the impact of financial literacy and financial management practices on savings behavior. Research suggests that strong financial management skills lead to higher savings and fewer financial problems. Furthermore, the influence of interest rates on savings is ambiguous; while higher rates can encourage saving, they might also decrease it due to associated uncertainty. Empirical studies show varying results, with some finding a negligible or even negative impact of inflation on savings (Corbo and Schmidt-Hebbel, 1991; Masson et al., 1998; Haque et al., 1999; Chaturvedi et al., 2009). Irwin (1986) posits that factors like expected future income, initial wealth, interest rates, income uncertainty, and wealth distribution all impact savings propensity. Inflation can affect any of these, influencing overall savings rates.

The research contrasts compulsory and voluntary savings approaches, particularly within the context of Microfinance Institutions (MFIs). In some institutions, borrowers are required to save in illiquid products, with their savings used to finance the MFI’s loan portfolio. Compulsory savings are sometimes treated as collateral against loan defaults. However, this approach often limits client choice and provides little or no return on savings. Sylvia (1998) argues that voluntary savings schemes attract more depositors and larger savings volumes than compulsory ones. This is because the expansion of compulsory savings is limited by the number of borrowers, while the savings market is far more competitive. Moreover, compulsory savings systems may dissuade clients, potentially leading to less overall savings. The research cites Robinson (2004) and Stenga (2010), emphasizing the restrictive nature of compulsory savings within MFIs and its impact on client behavior. The study suggests that while compulsory savings might instill discipline, voluntary, open-access systems often generate higher net savings per client.

The research was conducted in Shinyanga Region, Tanzania, specifically within Shinyanga Municipality and Maswa District. Two SACCOS were selected from each district to represent workplace SACCOS in the region. These included Kurugenzi and Shinyanga District Council SACCOS from Shinyanga Municipality, and Maswa Teachers and Nyerere SACCOS from Maswa District. The selection criteria prioritized easy accessibility and data availability from the chosen SACCOS. The study gathered information from both management and individual members of the selected SACCOS. The inclusion of both management and member perspectives is crucial for a holistic understanding of savings and loan practices within the selected SACCOS. The specific selection of these four SACCOS provides a representative sample within the defined geographical area and type of financial institution.

The study employed a mixed-methods approach, collecting both primary and secondary data. Primary data were obtained through structured questionnaires featuring both open-ended and closed-ended questions, supplemented by interviews with key stakeholders. These questionnaires were administered to obtain direct insight from respondents. Secondary data sources included audited SACCOS financial statements, official documents, and relevant publications. The collection of both primary and secondary data strengthens the reliability and validity of the research findings. The sample size encompassed a total of 600 members across the four selected SACCOS, an average of 150 members per SACCOS. Fifty questionnaires were distributed to respondents within each SACCOS. Random sampling was used for member selection, while non-random sampling was employed for SACCOS leaders to facilitate focused inquiries related to specific aspects of SACCOS operations and policies.

The study's findings indicate a generally positive correlation between members' savings and the loans issued by the studied SACCOS. The total loans disbursed did not exceed the 1:3 savings-to-loan ratio stipulated by Rule 90(1) of the Cooperative Societies Rules, 2004. This suggests that at an aggregate level, the SACCOS are adhering to this regulatory framework. However, this overall compliance masks a deeper issue. Further analysis reveals that the majority of members (52.8%) base their loan applications on their monthly salary instead of their savings, contradicting the established rules. This discrepancy between overall compliance and individual practices points to a crucial area needing attention. Furthermore, the annual average savings deposited by members fell below TZS 600,000, which is significantly lower than might be expected to sustainably support the level of loan demand. This low average savings amount further emphasizes the precarious financial position of many SACCOS and the potential need for policy interventions to improve savings mobilization.

A significant finding is the inconsistency in loan disbursement practices. While the overall loan-to-saving ratio for the four studied SACCOS was within the regulatory guidelines, a substantial portion of members (52.8%) reported obtaining loans based on their monthly salary rather than their savings as required by Rule 90(1) of the Cooperative Societies Rules, 2004. This suggests a lack of awareness among many SACCOS members regarding the specific rules and loan policies. SACCOS leaders confirmed that loan approvals are often influenced by both savings and salary, depending on the source of funds. Loans funded by members' savings are indeed based on individual savings, while loans from external institutions (banks) consider members' monthly salaries. This dual approach highlights a weakness in the consistency of loan disbursement practices, pointing to the need for improved member education and clarity regarding the rules. The discrepancy also indicates a need for better alignment between SACCOS lending practices and the stated regulatory framework.

Analysis of savings trends from the four SACCOS (Maswa Teachers, Nyerere, Kurugenzi, and Shinyanga District Council SACCOS) revealed fluctuations. Maswa Teachers and Nyerere SACCOS exhibited a decreasing trend from 2008 to 2012, while Kurugenzi and Shinyanga District Council SACCOS showed fluctuating savings levels during the same period. The relatively low annual average savings (less than TZS 600,000) suggests a reliance on compulsory, locked-in savings schemes. This aligns with Wright's (1999) observation that compulsory savings systems often result in lower overall deposits. The savings methods used mirror the 'saving up,' 'saving down,' and 'saving through' mechanisms described by Rutherford (1999a). Regarding interest rates, the study revealed that most respondents perceived low impact on their savings levels, contrasting with Sylvia's (2011) findings. This discrepancy likely stems from the studied SACCOS' lack of a formal interest rate policy on members' savings.

The key implication of the study is the insufficient member savings to fully finance loan demands within the studied SACCOS. This necessitates reliance on external funding from other financial institutions to meet the borrowing needs of members. This reliance on external sources creates vulnerabilities for the SACCOS, making them dependent on factors outside their direct control. The insufficient savings also undermines the long-term sustainability and viability of the SACCOS, as they are not able to build their lending capacity solely from members' contributions. This dependence on external financing is a significant constraint on the growth and development of these crucial financial institutions within the community. The insufficient savings directly impact the SACCOS' ability to fulfill their core purpose of providing affordable credit to their members, potentially limiting economic growth at the community level.

Another critical implication is the apparent lack of awareness among SACCOS members regarding Rule 90(1) of the Cooperative Societies Rules, 2004, which governs loan disbursement based on member savings. The finding that a significant percentage of members (52.8%) base their loan applications on monthly salary rather than savings demonstrates a gap in understanding and adherence to established regulations. This lack of awareness undermines the intended mechanism for loan allocation and the overall financial stability of the SACCOS. The reliance on salary as a basis for loan approval circumvents the principle of using member savings to build lending capacity. This necessitates a more robust educational program to improve the understanding and implementation of these regulations within the studied SACCOS.

To address the identified issues, the study recommends several key actions. SACCOS management, in collaboration with the Cooperative Development Department, should conduct training seminars for members on Cooperative Societies Rules, SACCOS by-laws, and operational policies. This training should extend to basic personal financial management to improve members' financial literacy. Furthermore, the study recommends that SACCOS management, alongside employers, initiate savings mobilization strategies to increase lending capacity and decrease dependence on external borrowing. The goal here is to strengthen the financial foundation of SACCOS. Finally, it is recommended that the government review the current Cooperative Societies Rules to clarify ambiguities regarding loan acquisition and align regulations with best practices for savings and loan management. These multifaceted recommendations aim to create a more sustainable and equitable financial ecosystem within the Tanzanian SACCOS system.