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

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 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 SACCO
To 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 students
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 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 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 for three years
mainly from 2012 to 2014for the financial year of 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. 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 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
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 risk
According 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 risk

The 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 saccos
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 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 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). Ssembabule 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

Transversal Analysis of

(AMT)

report

(2008)

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