THE CORPORATE GOVERNANCE AND FINANCIAL

PERFORMANCE OF
SACCOS

(A CASE STUDY OF TALA LYA MAWOGOLA CREDIT SAVING

SOCIETY)

BY

Mariam
REG NO:

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF

MANAGEMENT, FACULTY OF BUSINESSES AND MANAGEMENT ISLAMIC
UNIVERSITY IN UGANDA

FEBRUARY 2015

Table of Contents
ABSTRACT.................................................................................................................
CHAPTER ONE..........................................................................................................
1.0 Introduction......................................................................................................
1.1 Background of the Study..................................................................................
1.2 Problem statement............................................................................................
1.3 Research Objectives........................................................................................
1.3.1

Specific Objectives......................................................................................

To examine the relationship between corporate governance and

financial performance of Tala Lya Mawogola SACCO in Ssenbabule
District....................................................................................................................
1.4 Research Questions..........................................................................................
1.5 Significance of the study...................................................................................
1.6 Scope of the study.............................................................................................
1.6.1 Subject scope.................................................................................................
1.6.2 Geographical scope......................................................................................
1.6.3. Time Scope....................................................................................................
CHAPTER TWO..........................................................................................................
LITERATURE REVIEW...............................................................................................
2.0 Introduction......................................................................................................
2.1 Meaning of SACCOs........................................................................................
2.2 Environment surrounding SACCOs in Uganda...................................................
2.3 Risk...................................................................................................................
2.4 Corporate Governance and Risk........................................................................
2.5 Financial Performance.......................................................................................
2.6 Risk and financial performance.........................................................................
2.7 Relationship between corporate governance and financial
performance..........................................................................................................
CHAPTER THREE....................................................................................................
METHODOLOGY......................................................................................................
3.0 Introduction.....................................................................................................
3.1 Study Design......................................................................................................
3.2 Data Collection...............................................................................................
3.6 Research Methods..........................................................................................
3.7

Data Analysis Methods................................................................................

REFERENCES:............................................................................................................

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 ONE
1.0 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 Tala 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 examine the relationship between corporate governance and
financial performance of Tala Lya Mawogola SACCO in Ssenbabule
District.
To establish the level of compliance with corporate governance
guidelines in Tala Lya Mawogola SACCO in Ssenbabule District
To determine the relationship between corporate governance and
risks faced within the SACCO.

1.4 Research Questions

i) What is the level of compliance with corporate governance
guidelines in Tala Lya Mawogola SACCO?
ii) What is the relationship between corporate governance and 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.
SACCO 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 scope
The study will focus on corporate governance and financial
performance 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 scope
The 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 Scope
The study will be based on financial and non financial information
of the previous financial year for the SACCO.

CHAPTER TWO

LITERATURE REVIEW
2.0 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(Mutesasira et al.,

1999). 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 savingsled. 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 Uganda
The 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 bolster 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.
Many SACCOs have fallen victim to poor management (CGAP report,
2006). Ssemwanga (2009) concurs with CGAP (2006) adding that in
the past, management of many SACCOs in Uganda was so poor that
most of them collapsed. Vices like conflict of interests, over

politicization were a common practice and a lot of members savings

were lost.
Were (2009) points out a different cause of SACCO collapse as
opposed to the BoU research 2007, Kairu (2009) observing that the
increase in number of SACCOs coupled with the fact that their
formation is driven by membership and mutual benefit, led to wrong
elements in community taking the advantage to establish SACCOs
under unclear procedures, and disappearing with the mobilized
savings resulting into loss of confidence in SACCOs from the poor. The
CGAP report (2005) generally put it that SACCOs have had a history
of instability, often supervised by the same government 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

intermediarys 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.

2.4 Corporate Governance and Risk.

According to Brogi (2008) the governance system of financial
intermediaries is all the more important because these institutions are
mainly in the business of risk acceptance. However, many firms are
yet to implement practices for better risk management (Kleffner et al,
2003). Tandelilin (2007) 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 (Vrajlal, 2006).
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.
2.5 Financial Performance
Branch & Baker (1998) noted that the basis for a self-sufficient or
balanced 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 favour
conditions lax discipline, low loan rates, easy access to loans which
adversely affect the financial stability of the credit union.
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.

2.6 Risk and financial performance

According to Wenner, et al (2007) adequately managing credit risk in
financial institutions is critical for their survival and growth. Young
(2006) adds that when organizations have structured platforms for
effective risk management, it may lead to the effectiveness of overall
performance. Tandelilin (2007) agrees with Young (2006) confirming
that financial institutions get the benefit of increased performance
when they manage their risks better.
According to Bald (2007) the key to success lie in not entirely avoiding
the risks, but to properly balance the risks against the rewards from
potential profits. Wenner et al (2007) adds that failure to control risks,
especially credit risk, can lead to insolvency. SACCOs 27 have highly
variable performance illustrated by the wide gap in delinquency rates
as opposed to the relatively solid nature of regulated institutions
(Staschan, 2003).
According to the Microfinance network report (2000), financial losses
may result when risks are poorly managed. However, Goddard,
McKillop & Wilson, (2008) agrees with the Microfinance network
report of 2000 and they state that over the period 19932001 an
increased reliance on fee income generating activities was associated
with increased risk. Credit unions with more highly concentrated
income streams tended to have higher risk and returns.
After the SACCOs were formed, many people largely the rural based
peasants joined a host of SACCOs as a requirement to qualify for the
loan scheme. Little did they know that some of these SACCOs could
turn out be a source of more poverty and misery?

Nuatata Rural Communities Development Foundation Limited based in

Northern Uganda was alleged to have conned of its clients over Shs
2.5 billion

(Bagala, 2009).Credit union managers are faced with

conflicting objectives. The issue becomes to what extent their social

objectives and responsibilities can be allowed to jeopardize their long
term viability. If the primary objective of lending is to make trouble
free

advances,

the

financial

capacity

and

previous

borrowing

experience of a loan applicant and their determination to repay their

debt is all the more important. However, if the primary objective of
lending is society based then the lending criteria which discriminates
against certain high risk borrowers constrains the achievement of this
objective (Weaver, 1994).
However, Ralston & Wright (2003) warns that credit unions need to
monitor carefully the risk return profile of their lending portfolio to
ensure long term survival since unlike 28 banks; their objective is not
to maximize profits but maximize services to their members some of
whom may be high risk borrowers.

2.7 Relationship between corporate governance and financial performance.

Corporate governance has been identified to have a significant impact
on the performance of firms (Coleman & Osei, 2007), (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, 2001). 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). Many SACCOs
also report concerns about connected party loans.
These 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

METHODOLOGY

3.0

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 Design

The 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 Collection
Both primary and secondary data will be collected. Research
instruments will be developed for each category of data as indicated
below;
3.6 Research Methods
1 Interview
2 Questionnaires
3 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 70 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 farmers.
2) Observation method
Direct 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 Methods

Qualitative 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.3
Appunyo, H. (2009, July 20). Lira SACCO Faces Audit over Impropriety.
The Daily

Monitor

AMFIU 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, 2007
African Microfinance Transparency (AMT) report (2008) Transversal
Analysis of

Microfinance Institutions in Africa 2 nd 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