Procedure of Granting Loans and Loan Repayment in Financial institutions

CHAPTER ONE

INTRODUCTION

1.1 Background to Study

Business enterprises today use loan repayment as a prominent strategy in the area of marketing and financial management. Thus, trade credit is necessary in the growth of the businesses. When a firm sells its products or services and does not receive cash for it, the firm is said to have granted trade credit to its customers. loan repayment thus creates accounts receivables which the firm is expected to collect in future (Kungu, Wanjau, Waititu&Gekara, 2014).

Accounts receivables are executed by generating an invoice which is delivered to the customer, who in turn must pay within and with the agreed terms. The accounts receivables are one of the largest assets of a business enterprise comprising approximately 15% to 20% of the total assets of a typical manufacturing firm (Dunn, 2009). Investment in receivables takes a big chunk of organization’s assets. These assets are highly vulnerable to bad debts and losses. It is therefore necessary to manage accounts receivables appropriately.

Loan repayment  is very important to a firm because it helps to protect its sales from being eroded by competitors and also attracts potential customers to buy at favourable terms. As long as there is competition in the industry, selling on credit becomes inevitable. A business will lose its customers to competitors if it does not extend credit to them. Thus, investment in accounts receivables may not be a matter of choice but a matter of survival (Kakuru, 2001). Given that investment in receivables has both benefits and costs; it becomes important to have such a level of investment in receivables at the same time observing the twin objectives of liquidity and profitability. 

To remain profitable, businesses must ensure proper management of their receivables (Foulks, 2005). The management of receivables is a practical problem, businesses can find their liquidity under considerable strain if the levels of their accounts receivables are not properly regulated (Samuels & walkers, 1993).

1.2 Statement of the Problem

Effective and efficient management of the loan and the credit function is fundamental to microfinance’s safety and soundness, but due to lax credit standards, poor loan repayment management, or weakness in the economy, loan management problems have historically been the major cause of microfinance losses and failures.

In almost half the world, over 3 billion people still live on less than 2.50 dollars a day, of which 80 percent are in Africa, according to Poverty Facts and Statistics report conducted by the World Bank Development indicators. Since then, microfinance institutions have been promoted as a means through which many peoples’ lives can be transformed through access to credit. So-far-so good-as this has given a chance to many people to depend on their own abilities, however loan repayment remains a major challenge. Therefore there is a need to investigate the state of loan repayment on management of microfinance institutions.

According to Tesfamariam(2015) from many challenges of SEQUOIAs one is lack of financial education. Lack of financial literacy can act as a barrier to saving: if people do not manage their money well they may not have enough left to save after day-to-day expenses, or may accumulate debt they cannot repay. Put another words, lack of financial skills also means people do not plan ahead, or understand how financial products can help meet savings goals and attempts may be limited by their lack of or narrow knowledge. In other ways, 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 (Benson et al., 2016)

Gogo & Oluoch (2017) by the effect of savings and credit co-operative societies’ financial services on demand for credit by members – a survey of deposit taking SEQUOIAs conclude that It is also necessary that SEQUOIAs society share financial knowledge by offering advisory services, especially to members who may have inadequate financial training. In this regard, it is not surprising that without sufficient financial knowledge; customers of SEQUOIAs Union members even might earn a negative return on their capital and of course unable to repay their loan .

Mohamad Fazli Sabri and Nurul Farhana Zakaria (2015) in their study on young Malaysian individuals find that respondents who had moderate levels of financial literacy, financial capability and financial well-being scored high in effort, money attitudes and had a low level of financial strain. Demographic characteristics such as gender, household income, financial literacy, retention-money attitude, financial strain and financial capability had significant influence on financial wellbeing. However, they don’t use finance, budget and debt management variables to explain effect of financial literacy on loan repayment performance.

This study area also face financial literacy problems on loan repayment performance which includes loan default, budgeting, non-repayment ,debt management , knowledge on interest rate etc. Hence, this study focus and attempt to analyse the effect of financial literacy on loan repayment. As discussed by (Wanjiku & Muturi, 2017) there was negative relationship between financial literacy and loan repayment.

1.2 Background of the study

The study was conducted to investigate some of the factors affecting loan repayment performance of banks. In order to study to achieve this purpose, three objectives were evaluated .First, to find out the extent by which the characteristics of the loan borrowers affect the payment performance in the district. Secondly was to find out the loan characteristics effects on loan repayment and lastly was to establish the effects of the purpose of the loan to the loan repayment concerning the borrowers. While carrying the research, the independent variables were found out to be, the loan distinctiveness.

1.3 Main Objective

The general objective of the study was to evaluate the Procedure of Granting Loans and Loan Repayments in Financial Institutions.

1.4 Specific objectives

• To examine the procedure of granting loans in financial institutions
• To evaluate the relationship between loan granting procedures and loan repayment in financial institutions

1.5 Specific research questions

1. What are the procedures of granting loans in financial institutions?
2. What is the relationship between loan granting procedures and loan repayment in financial institutions?

1.6 Hypothesis.

This research is statistically out to test out the specific following

H₀; Loan granting procedure doesn’t significantly affect loan repayment in financial institution

H₁; Loan granting procedure significantly affect loan repayment in financial institution