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Review of Related Literature

Cooperatives are not operating purely for financial reasons; their main purpose are social
aspects and caring for other interests of its members. Because of this fact, principal-agent problems
occur more often in cooperatives compared with proprietary firms. (Nilsson, Rakic, & Skoldberg,
Rural Cooperative Rural Banks are most profit-efficient, despite their somewhat regular
cost-efficiency, a manifestation that they are able to charge higher fees for the quality of services
they offer. Large Cooperative Rural Banks are not able to pass their higher costs to customers
through higher fees. We found that small CRBs might have a better interest rate policy, that is,
they offer lower rates on both loans and deposits. (Desrochers & Lamberte, 2003)
Credit cooperatives that mobilize savings deposits are less dependent on external sources
and increase the borrowers' incentive to repay. The success of credit cooperatives requires training
of members as well as management. Experience suggests that credit cooperatives should not
expand their activities beyond financial intermediation until they develop strong institutional and
managerial capabilities. (Huppi & Feder, 1990)
Lending groups and credit cooperatives have the potential to provide affordable credit to
small-scale farmers because they can reduce transaction costs and lower the risk of default. In
developing countries these two kinds of lending arrangements have a mixed record, although their
difficulties reflect shortcomings in implementation rather than in the lending arrangements
themselves. (Huppi & Feder, 1990)
In the absence of formal resource management schemes, cooperative members adopt self-
management strategies to protect their resource base only if the sustainability of their livelihood is
seriously threatened. (Baticados, 2004)
Fishing cooperatives, however, fail as a source of information on regulation and
conservation education of members. But if they were to undertake more education and training
programs on nearshore management, cooperatives may become an effective social force in
changing the present fisheries management system. (Baticados, 2004)
The economic development of low-income countries is hampered by an inability to bring
adequate financial services to vast numbers of rural microentrepreneurs in a timely fashion and at
reasonable cost. This failure reinforces market segmentation, prolongs economic inequality,
precludes marginalized rural producers from taking advantage of opportunities created by
economic reform, and limits the expansion of nationwide financial markets. (Agabin & Daly,
To this day, despite the efforts of governments, multilateral development banks, and
development practitioners in general, an effective solution to this problem is not in sight. Rural
financial markets remain underdeveloped, largely because of the legacy of glaring failures in
government-led programs. The record shows that such programs, riddled by large and politically
condoned loan defaults, were not sustainable and in fact worsened income distribution, because
they were coopted by large rural producers who benefited from subsidized loan rates. Furthermore,
they were carried out under a policy framework that was generally unfriendly to the development
of finance. These programs left the vast majority of rural entrepreneurs with only the empty
promise of access to credit or the services of informal lenders. (Agabin & Daly, 1996)
Providing financial services to rural populations is important for at least three reasons.
First, it has a positive impact on their economic welfare. Households and small entrepreneurs in
rural areas cannot possibly sustain rising incomes without access to lending and deposit facilities
at reasonable cost. Rural savers benefit from access to deposit facilities and instruments with
above-inflation yields that boost their wealth and make possible the financing of additional
expenditures. Rural borrowers benefit from access to credit for financing consumption or
investment. In both applications, consumption and investment, credit plays a crucial function. For
example, when expected income is interrupted due to economic downturns and/or unforeseen
natural calamities, credit enables rural households and entrepreneurs to avoid the sale of assets,
otherwise necessary to maintain the same level and pattern of consumption. As regards investment,
access to credit enables firms to finance expanded levels of production and sales.
Second, the development of rural finance brings tangible benefits to the national economy.
If rural financial markets function properly, the overall result is an improvement in the allocation
of resources and higher growth of the rural economy. This sets the stage for a more dynamic
integration of urban and rural markets. When linkages between rural and urban financial markets
are strong, financial markets are homogeneous nationwide, and there is no sharp divide between
the so-called “formal” and “informal markets,” financial intermediaries are able to reach a large,
critical mass of customers and benefit from economies of scale. In increasingly competitive,
globalized markets, scale operations are important in contributing to lower financial intermediation
costs and, consequently, to lower the cost of capital. It is worth emphasizing that the high cost of
capital is a major impediment to the competitiveness of firms in less developed countries.
Third, providing rural financial services at reasonable cost is important because it lessens
the effects of marginalization and inequality. Rural producers who are denied financial services
find it difficult to adopt new technologies, change factor proportions, and enlarge their scale of
operations to respond to favorable domestic and international market signals. These difficulties
mean missed opportunities to increase economic efficiency and, consequently, they prolong
marginalization. Moreover, small rural producers do not benefit from the more attractive credit
terms that are normally available to urban borrowers in formal markets. Urban borrowers can
obtain loans more cheaply and with longer maturities, enabling them to undertake longer-term
investment projects that result in higher returns. (Agabin & Daly, 1996)
Serbian cooperatives face just about every possible hindrance: for example, an incomplete
and unfriendly legislative and regulatory environment, lack of legislative and regulatory
enforcement, lack of capacity of the justice system to enforce commercially related legislation, an
underdeveloped banking system, lack of information on foreign and domestic markets, low levels
of technology and managerial skills, and a poor basic infrastructure. Financial management skills
are particularly important for the survival and efficient functioning of cooperatives. These skills
involve, but are not limited to, risk management techniques, working capital management
techniques and similar. Development of cooperatives in Serbia can be supported through ongoing
non-financial and financial assistance program to cooperatives. These consist of various
interventions: creation of business centers, associations and cooperatives, extension visits,
advisory services and credit support. (M., 2003)
Financial Management
Financial management practices positively impacted on a shipping company’s financial
performance and could be presumed to be an integral management tool for shipping companies
and that not all the financial management practices that are employed would give raise to the
financial performance in all the industries regardless of the nature of the business activity.
(Kitonga, 2013)
Financial management practices are defined and demarcated as the practices performed by
the accounting officer in the areas of fixed asset managements, accounting information systems,
working capital management, financial reporting analysis and capital structure management.
(Kitonga, 2013)
It has been argued that the use of financial management practices may be related to
improved financial performance. Sophisticated capital budgeting techniques mostly Net Present
Value and Internal Rate of Return had a positive relationship with Return on Assets while the
traditional methods showed an insignificant relationship. Similar reported a negative relationship
between the capital budgeting techniques and financial performance. Mere adoption of various
analytical tools is not sufficient to bring about superior performance and that, other factors such as
marketing, product development, executive recruitment and training, labor relations may have a
greater impact on profitability. (Kitonga, 2013)
Works Cited
Agabin, M. H., & Daly, J. (1996, August). An Alternative Approach to Rural Financial Intermediation: The
Philippine Experience. Chemonics International.

Baticados, D. B. (2004, March). Fishing Cooperatives' Participation in Managing Nearshore Resources:

The case in Capiz, Central Philippines. Fisheries Research, pp. 81-91.

Desrochers, M., & Lamberte, M. (2003, May 19). Efficiency and Expense Preference in Philippines'
Cooperative Rural Banks. PIDS Discussion Paper.

Huppi, M., & Feder, G. (1990, July 1). The Role of Groups and Credit Cooperatives in Rural Lending. The
World Bank Research Observer, pp. 187-204.

Kitonga, K. G. (2013). The Relationship Between Financial Management Practices and Financial
Performance in the Shipping Industry in Kenya.

M., V. (2003). Financial Management of Cooperatives. Food and Agricutlural Organization of the United

Nilsson, M., Rakic, N., & Skoldberg, L. (1998). Cooperatives and Other Agri-Food Systems,Spring 2004
Principal Agent Relationships in Agricultural Cooperatives:An Empirical Analysis from Rural
Alberta. Journal of Cooperatives.