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The Role of Strategic Planning on Enhancing Investment in Public Transport Sacco’s in Kenya

ckson Moseti Ongaki, Dr. Okibo Walter Bichanga & Dr. Willy Muturi
Jomo Kenyatta University of Agriculture and Technology P.
This study will seek to find out the effects of strategic planning on enhancing investments in
public transport Saccos in Kenya. The study will also seek to find out recent
changes in operation of public transport in Kenya for example new vehicles on the road,
new safety rules and the registration of co-operative societies to replace the Matatu
Welfare Associations in a new development which started from early 1990’s.
Cooperatives are economic units by which members mobilize their financial resources
through  savings.  It  is  estimated  that  this  sector  contributes  about 20%  to  the  gross
Domestic Product. Although this sector is considered both economically and socially important, sectoral report indicates that nearly  2% of savings and Credit Cooperative Societies (SACCOs) collapse every year and about 6% of registered members withdraw their membership annually. Some SACCOs pay dividends which are as low as 3.5%. It is not clear why there is a deteriorating trend in most of the societies despite government’s financial regulations being in operation since  2004 that were meant to help SACCOs achieve sustainability through growth and financial stability. The objective of this study was to assess the effect of government’s financial regulations on investment performance in  SACCOs  in  Nairobi  County.  The  study  adopted  descriptive  research  design  and purposive sampling method.
The  research  adopted  a  self  administered  questionnaire  which  was  used  to  collect quantitative data. The study units comprised 104 sacco societies of public transport in Nairobi County. The questionnaire was designed based on a Five Lickert scale. However, only 95 Saccos were actively in operation. The other 9 were either dormant or inactive. Therefore, 87 Saccos were randomly sampled and studies.
The findings show that government financial regulations have been moderately regulated
with a weighted mean of 2.805. Concerning the approval of maximum borrowing powers
by members, a weighted mean score of 3.816 on the scale was posted. It is therefore
expected that with this large extent of implementation of this regulation, Saccos will have
a strong financial stability since they will have fewer loans to service. The study also
found out that performance of Saccos in terms of efficient and prompt disbursement of loans is quite wanting with a weighted mean score 2.0919. Key recommendations were to the Ministry of Co-operative Development to mobilize resources to educate the members and management committees of the societies for better performance, and adherence to the regulations laid down by the government.
1.1 Background of the Study
Investment plays an important role in sustaining growth and development of any country.
High rates of investments depend on high rates of saving (Pelrine & Kabatalya, 2005).
Many scholars have written on this subject but little effort has been made in determining
the  effect  of  regulation  on  enhancing  investment  in  public  transport  in  savings  and
cooperative societies  (SACCOs) on members’ investment.    According to Lipsey and
Chrystal (1995) a high saving economy accumulates assets faster and thus grows faster
than a low saving economy. SACCOs link borrowers and savers  (Tache,  2006). The
savers pool their money as savings and shares against which they borrow in form of
loans.  SACCOs  are  not-  for-  profit-  organizations  as  their  basic  purpose  is  to  help
members save (Kyendo, 2011). Bailey (2001) defines SACCOs as cooperatives which
provide their members with convenient and secure means of saving money and obtaining
credit at affordable interest rates.   Tache (2006) has shown that SACCOs were invented
in south Germany in 1846 by two community business leaders: Freidrich and Herman.
The  two  are  the  founding  fathers  of  SACCO  movement.  In  Italy,  Luigi  Luzzatti
established saving and credit cooperatives which combined the principles established by
the two business leaders.
The SACCO movement spread all over Europe, Northern America, Latin America, and
Asia from 1900 to 1930 and thereafter to Ghana by a catholic Bishop. Towards the end of
1950s  African  farmers  promoted  and  registered  cooperatives  for  cash  crops  like
pyrethrum and coffee.   Mudibo (2005) suggests that cooperatives have played a prime
role in the development of the economies of Kenya, Uganda and Tanzania.    According to
the Republic of Uganda report of 2008, cooperative movement in Uganda was started in
1913  to  involve  Ugandans  in  domestic  and  export  marketing.  SACCOs  emerged  in
Kenya in the years 1965- 1970 (Chao-Beroff,, 2000). The SACCOs came as a result
of the credit systems of the farming cooperatives. In these cooperatives farmers would access  financial  services  through  the  union’s  banking  sections.  In  the  cooperatives’ banking sections farmers saved and obtained advances that were serviced from income earned from the harvest. The SACCOs’ banking services are provided even today in Kenya with already 219 SACCOs that offer banking services spread all over the country (Kyendo, 2011).
The first co-operative society in Kenya was Lumbwa cooperative society (Bottleberge &
Agevi,  2010). In  1908 the European Farmers made this cooperative formal. Its main
objective was marketing and purchasing of farm inputs. According to KUSCCO report of
2011 cooperatives in Kenya have led to the development in agriculture, storage, housing,
fishing and credit. The Ministry of Cooperative Development and Marketing (MCDM)
conference report of 2010 indicates that there are currently over 5200 registered SACCOs
with over 5.6 million registered members in Kenya.       Like in most African countries,
cooperatives in Kenya have developed through two main eras, that is, the era of state
control and the era of liberalization (Wanyama, 2009). According to Wanyama, the first
era made cooperatives platforms for implementing socio-economic policies to the extent
that failure of state policies expressed themselves in the cooperative movement. The
failures saw the need for the liberalization of the cooperative movement in early 1990s
(Porvali, 1993).
1.1.1. Regulation in public transport saccos
SACCOs  in  Kenya  are  required  to  adhere  to  regulations  set  in  Sacco’s  regulation authority (SASRA). The management has to present the capital adequacy return reports, liquidity statement report, Statement of financial position and Statement of deposit return as well as   return on investments report which compares land, building, and financial assets to the SACCO’s total assets and its core capital.
Developments in Legal and Regulatory Framework the rapid growth of Sacco Societies
growth has come with increased challenges which could not be adequately addressed
within  the  provisions  the  Cooperatives  Societies  Act (CSA)  CAP  490  in  spite  of
numerous amendments. In response to this challenge the MoCDM recognized the need
for a regulation specific to the Sacco subsector. Section 91A(1) of Co-operative Societies
Act 1997 as amended in 2004 provided that “The Minister shall in consultation with the
apex society constitute by notice in the Gazette a body to regulate the operations of
savings and credit co-operatives. The MoCDM commenced the development of a Sacco
specific  regulation  in 2004  culminating  in  the  Sacco  Societies  Act  (SSA)  that  was
enacted  and  assented  to  in               2008.  SSA  provides  for  the  licensing,  supervision  and
regulation  of  Sacco  Societies;  and  establishment  of  the  Sacco  Societies  Regulatory
Authority (SASRA) with the mandate to enforce the new legal and regulatory framework.
In addition to prudential regulation, the Act also establishes the Deposit Guarantee Fund
(DGF)  which  shall  provide  protection  to  members’  deposits  up  to  Ksh.100,000  per
member. The SSA commenced in 2009 but SASRA started operations in June 2010 upon
publication of the Sacco Societies (Deposit Taking Sacco Business) Regulations.
The new legal and regulatory framework modeled along the same principles as those for the regulation of banks and deposit taking microfinance institutions has the primary purpose of improving governance of Sacco societies through enhanced transparency and accountability in the conduct of Sacco business. Section 3(1) provides that the Act shall apply to every deposit taking Sacco business and specified non-deposit taking business. In  respect  of  the  non-deposit  taking  business,  the  Minister  may  make  regulations specifying the non-deposit taking business to which this Act will apply including the measures for the conduct of the specified business. The Regulations published by the Minister  in  June  2010 like  the  name  suggest  applies  to  every deposit  taking Sacco business. The deposit taking Sacco business refers to the taking of demand deposit from members which occur in Sacco societies operating the Front Office Service Activity (FOSA) (Sacco Supervision Report 2010)
SASRA  is  therefore  mandated  to  license  and  regulate  the  FOSA  operating  Sacco
societies which numbered  218 at the date of publication of the Regulations.   License
applications Section 69 of the Sacco Societies Act provided one year from the date of
publication of the Regulations for all the FOSA operating Sacco societies to apply for
license under the Sacco Societies Act. This period lapsed in June 2011 by which date 200
Sacco societies had submitted their applications for license with SASRA.   The balance of
eighteen (18) Sacco societies discontinued or closed the deposit taking business as they
did not satisfy the licensing requirements. This left them to operate the Back Office
Service Activity (BOSA) referred to in the Act as non-deposit taking business since they
do not collect demand deposits from members. The supervision of BOSA Sacco societies
remains under the Cooperative Societies Act and hence under the Commissioner for
Cooperative Development.   The licensed Saccos are required to submit periodic financial
reports to the Authority for monitoring the financial performance and taking necessary
action in case of violations. A key output from these returns will be data and information
on the performance of the Sacco subsector to the policy makers and the public in general.
This is necessary to bring confidence in the Saccos, a prerequisite for the Sacco subsector
to attract new members and professionals who have shied away due to perceived bad
governance practices.
1.1.2. Investments
Savings and Credit Cooperatives (SACCOs) have found themselves commanding a large
percentage of savings in the financial sector. This has driven the citizenry to trust the
management of the SACCOs in not only safekeeping of their money but also to provide a
good return on it. A statement of financial condition of the SACCO gives a snapshot of
the ‘health’ of the institution at any given time. The statement has a liability side (sources
of Funds) and Assets (Uses of Funds). Once the members deposit their money in the
SACCO, the management has a responsibility to ensure the members will get their money
back, and should give interest being a reward for using the members’ money for their
operations.  While  the  sources  of  funds  for  the  SACCO  Marjory  include  members’
savings, the uses of funds are the SACCOs’ investments. The investments include loans
which  take  a  major  share,  financial  investments,  liquid  investments,  non  financial
investments and other investments in regulated financial institutions. The SACCO while
looking for where to invest members’ funds should consider the Safety, Liquidity and
Yield. This should all be integrated into the SACCOs investment policy and a proper
appraisal should be done on the investment vehicle being considered for use  (Kenya
Sacco Net)
Safety refers to the ability to collect 100% of the SACCO’s investments plus interest
earned in that period. When there are no regulations on investments and also there is no
guarantee on their investment, so there is a great deal of risk. In addition, there are other
certain investment risks that do exist for SACCO’s. These risks include: market risk,
interest rate or maturity risk, credit risk, and other risks. Investment policy must be
flexible enough to allow for changes in the balance sheet items that represent member
needs, i.e., savings and loans. As such, investment practices can be considered a function
of savings and loan behavior. Each time there is a shift in either savings or loan volume;
this may require a shift in the investment strategy. Suppose, for example, the board of
directors decides to expand loan policies by offering longer-term loans to meet member
needs. This will result in a slower turnover of funds, and thus will expand the loan
portfolio. If savings deposits cannot be expected to meet the increased loan demand,
investment policies must reflect a change. In this case, the SACCO would probably
shorten investment maturities to meet the expected loan demand. Another factor, which
would affect liquidity, is the movement and direction of interest rates. As they increase,
the value of long-term securities decreases. Thus a SACCO with long-term securities
during a period of increasing interest rates would become illiquid unless the loss incurred
through their sale could be absorbed (Kenya Sacco Net).
Only after liquidity and safety are considered should investment analysis center on yield. As  a  general  rule,  investments  with  higher  risk  factors  and  greater  price  volatility command the greater yield. Thus the potential for greater income must be weighed very carefully against the risks of reduced liquidity and/or potential losses. The yield of each investment portfolio should be continuously appraised and should be justifiable. The SACCO should invest most of its funds in loans. However, once a SACCO diversifies to other investment channels, the SACCO has to invest in a portfolio that gives more or equal than the market rates of return. Yield for investment X is calculated as; Yield = Income from investment X 100% Amount of Investment. The rule of thumb is the higher the yield the greater the investment. However as previously explained, yield should not be the major factor (Kenya Sacco Net).
1.1.3. Effect of regulation on investment
Government regulations can limit or even foreclose entry to potential competitors and therefore a change in government control can greatly affect the value of current and prospective investments in Sacco’s. Investment in projects or entities under government regulation  can  lead  to  extra  ordinarily  better  performance.  However,  what  the government gives, it can also take away (Joel et al 1998).
Deregulation of the cooperative sector in addition has left the movement with virtually no single  regulator.  Given  that  Sacco  societies  receive  deposits  from  members  against background of high moral hazard in the society, wonders how safe the deposits are in the absence of a regulator.
Deregulation is the transfer of control from the government to the owners. Ongore (2001)
refers deregulations as the freeing up of the market from direct control by the government
and its agencies so that largely the forces of demand and supply determine prices of
goods and services. Deregulation of co-operative was officially initiated in Kenya in
1997  through  the  sessional  paper  number 6  without  first  conducting  empirical
investigation  to  find  out  whether  the  co-operatives  performance  will  be  better  in  a deregulated market than regulated one.
The new regulatory framework brings immense challenges to Sacco societies as they are
expected to conduct business in a different way. While a majority of the Sacco societies
satisfy  the  minimum  licensing  requirements  namely  capital  adequacy,  physical
infrastructure  and  internal  controls,  there  are  notable  challenges  for  the  effective
compliance with the Act and Regulations. These include, Low understanding of the Act
and Regulations,   There is limited in depth understanding of the Act and the Regulations
in most Saccos to integrate the regulatory requirements in the operational policies for the
day-to-day running of the Sacco business, Governance structure,   The historical practice
where the management committee (now called Board of directors) comprising of elected
officers are heavily involved in the operational affairs of the Sacco to the exclusion of the
technical staff is deeply entrenched limiting the effectiveness of the Act and Regulations
in licensed Sacco societies, Technical capacity,   The effective implementation of the new
legal and regulatory framework requires a new set of skills and knowledge. This requires
financial  resources  and  time  besides  the  attitude  change  amongst  the  leaders,
Management Information systems,   The operating regulations and prudential standards
define  new  ways  of  doing  business  thus  requiring  heavy  investments  by  the  Sacco
societies in upgrading the existing information systems for effective compliance.
The pace of the changes is slow due to multiplicity of factors including governance, technical  capacity  and  financial,  Costs  of  regulation,  there  are  numerous  costs  to compliance, most of which are immediate and direct but the benefit of regulation are not obvious and take time to show in the business. This coupled with the above mentioned challenges acts as a disincentive to the regulated entities to commit resources and time for faster compliance.
The Authority working with the stakeholders has initiated a number of programmes to
address the key challenges in the subsector.    This includes, Developing of technical
guides to assist in the interpretation of the Act and Regulations for   ease of application by
the Saccos. These are provided to the Saccos through the Authority’s website as well as
hard copies issued during trainings, Continuous engagement with the key providers of
training in the Sacco subsector to ensure they   understand the regulatory requirements.
This is in addition to the direct training conducted by SASRA to Saccos, both licensed
and unlicensed, Under a Sacco subsector reform programme, funded by Financial Sector
Deepening Trust   Kenya (FSD Kenya), technical materials and toolkits will be developed
covering governance, planning and change management. Besides, the technical materials,
the programme will also develop a pool of service providers to provide technical support
to the Sacco societies. Other areas that this programme has addressed include automation
and financial reporting.
1.1.4. Public Transport in Nairobi County
Kenya,  like  other  developing  countries,  has  been  urbanising  fast,  with                3.4%  of  its
population residing in urban areas. Main transport providers include matatu (which is a
minibus), whereas the railway plays a pivotal role in public transport. In addition, taxis
and tuk tuk (motorised 3‐ wheel taxis and cycle taxis) are operated in the metropolitan area. Matatus are minibuses with 14‐passenger capacity and are the main operators in the City of Nairobi, but they are closely rivalled by bus companies. These companies include the Citi Hoppa, Kenya Bus and Double M connection, which unlike matatus have been licensed to operate in some parts of the Central Business District of Nairobi. Buses and Matatus have designated routes, following the introduction of new regulations by the government on public transport. They also have designated stopping areas, but this is normally disregarded, mainly by Matatus. Matatus are popular among some Nairobi residents due to their flexible operation, as mentioned above.
However, they are the main source of traffic jams and accidents because of the dangerous
manner in which their drivers shuttle them. By the year 2004, the Matatus had about a
30%  share  of  total  vehicle  traffic  in  Nairobi  (JICA,  2006).  The  share  has  dropped
drastically since the year 2004, when the government introduced road safety reforms in
the public transport sector that led to the introduction of strict regulations on public
transport operations, such as the enforcement of a maximum travel speed of 80 km/h. The
reforms also saw the entry of more bus companies into the public transport business in
Nairobi metropolitan area (NMA). The traffic demand for Nairobi has been increasing
rapidly during the past decade, culminating in a shortage of road capacity to meet the
drastic rising demand for road use against the urgent need to improve and increase public
transport  supply  in  the  city.  Inadequate  road  capacity,  road  structure  and  traffic
management have led to heavy traffic congestion and traffic accidents (KIPPRA, 2009).
Accordingly, in order to improve this situation, it is necessary to undertake a number of
initiatives,  which  include  the  improvement  of  the  public  transport  system,  the 130
construction of the missing links and the improvement of road structures/facilities and
traffic management capacity (JICA Study, 2006, KIPPRA Study, 2005).Of the nearly 4.8
million trips made each day in Nairobi in 2004, only 16% were made in private vehicles;
36% used public transport and 48% were made on foot. The vast majority (about 80%) of
public transport trips in Nairobi are carried by Matatus. The remaining public transport
trips are served by traditional bus routes, commuter rail line and other shuttle services,
such as those run by schools. On the major corridors, Matatus make up anywhere from
15% to 50% of the vehicles on the road, making them a significant component of the
vehicular traffic on Nairobi’s road network. As Nairobi’s population grew following
Kenya’s independence, and the need to travel to the city centre for work became more
important, so did the need for public transport services. Matatus were not always a
prominent  mode  in  Nairobi,  but  they  emerged  to  meet  unmet  demand,  as  the
British‐established formal bus company Kenya Bus Service (KBS) deteriorated (Aligula, 2005).
Matatus and now bus companies play a critical role in Nairobi’s transport system because
they serve a need that is not met by other modes. Where the Matatu service becomes
critically important is in connecting the city centre to outlying township communities.
Where distances are too far to walk, Matatus provide the only affordable means of
transport  for  many  people.  With  such  a  major  role  in  the  regional  transport  mix,
disruptions  to  Matatu  operations  result  in  significant  and  hard‐felt  effects  on  the
population at large. The significance of this is that policies affecting Matatu performance
will have an effect on Matatu riders, and thus strategies to improve traffic congestion
must consider the effects on these users of the road network, in addition to people who
travel in private vehicles. Apart from the Matatus, we also have the railway, which plays
a partial role in public transport. In addition we have buses, taxis, tuk‐tuks (motorised
3‐wheel taxis) and cycle taxis, are also operated in the metropolitan area. By January
2004 when reforms were introduced, we had 175 routes (50 bus routes and 125 matatu
routes)  served  by  12,376  public  transportation  modes,  i.e.  bus  and  matatu.  Of  this
number, approximately  12,000 were matatus and  78% of them were small,  14‐seater
matatus, which are the main contributors to traffic congestion in Nairobi. Total daily
passengers of bus and matatu were approximately 830,000.
When the government introduced reforms in the public transport sector more private bus
companies were registered, including Citi Hoppa, Double “M” Services and others which
operate with less than two buses. Matatus largely ignore official bus stops, especially
during peak hours. Matatus and buses depart from the terminal only when fully occupied
and generally do not drive non‐stop to the final destination. In off‐peak periods, drivers try to pick up as many passengers as possible on the way, which leads to erratic driving and stopping behaviour. During congested periods, traffic rules are often ignored (e.g. they use the road shoulders or lanes for opposing traffic to bypass traffic jams).
1.2. Research Problem
Investment is a prime component in any development effort as it is believed to be the
most certain way of enhancing income and promoting productivity with the intention to
break  through  the  vicious  cycle  of  poverty  (Keynes,  1936).  However,  the  levels  of
domestic savings and investment in Kenya have been very low (Lawrence, Benjamin,
Desterio,  &  George, 2009).  The  deterioration  of  public  infrastructure,  governance
problems and insecurity has discouraged private investment in Kenya (UNCTAD, 2005). Moreover, some of the installed capacity has deteriorated due to lack of investment or maintenance. World Bank  (2003) approximates capacity utilization in Kenya at  63%. Kenya’s  vision 2030  for  financial  services  is  to  create  a  successful  and  globally competitive sector that drives savings and investments in the country. However, the vision 2030 argues that access to financial services still remains low (Adam et al., 2011). WOCCU (2008) has shown that 38.3% of Kenyans are not included in financial services and use. All these indicate low levels of investment in Kenya.
The problem of low savings and investment comes at a time when African Confederation
of  Co-operative  Savings  and  Credit  Association  [ACCOSCA],  2011)  workshop  has
classified  SACCOs  as  vehicles  for  economic  growth.  Moreover,  the  government  of
Kenya recognizes cooperatives as the major contributor to national development with the
country’s population approximately 37.2 million (RoK, 2008).   Kyendo (2011) confirms
that most SACCOs have been lending at 12% per annum, which is lower than what banks
have offered. The basic function of SACCOs is to provide credit facilities at low cost
(Saunders & Cornet,  2007). This is done through pooling together members’ savings.
SACCOs  have  been  pooling  together  members’  savings  until 1990s  when  sector
liberalization enabled them to diversify their financing sources through offering of FOSA
services  (Owen,  2007).  According to  Landi and Venturelli  (2002), diversification of
financing sources improves the performance of the diversifying institution. The improved performance  of  SACCOs  is  assumed  to  translate  into  improved  service  delivery  to members including affordable loans that hopefully should enhance the investment culture which is low in Kenya (Lawrence et al., 2009).
According to the Ministry of co-operative Development Report, the success or failure of
any business pivots as the quality of its management, which depends on accurate record
keeping; in fact sound management of a Sacco depends on accurate financial statements.
Production of timely financial statements and their analysis is essential. This is because
reliable records can point out problems before they become serious and can serve as a
motivational tool to deal with the problem as well. There are certain inherent weaknesses
that need to be addressed. Major weaknesses observed include weak accounting and
internal control systems, financially undisciplined in that, books and records for majority
of Sacco’s are out of balance and that financial statements are not always produced on a
monthly basis. Although Sacco’s have expanded their products and services; they have
not embraced risk based management and rely on antiquated systems, procedures and
methodologies to manage a fast expanding portfolio. The situation is ripe for fraud.
This study therefore, is to investigate the effect of regulation on enhancing investment in public transport saccos in Nairobi.
1.3.   Objectives of the study
The primary objective of the study is to find out the effect of regulations on enhancing investment in public transport Saccos in Nairobi County.
1.4. Value of the study
The  results  of  this  study  will  be  useful  to  the  following:  Ministry  of  Co-operative Development will be able to have detailed information on the financial operations of the co-operatives in the transport sector. The report will assist the carrying out its roles of; supervising of the said co-operatives, education to the member, committee members and the staff of the co-operatives in the sector, findings from this study could be used as well as for new policy development in the sector.
Kenya Union of Savings and Credit Co-operative (KUSCCO) will promote formation of Savings and Credit Co-operatives, promote education to members, staff and committee members of the co-operatives, act as a savings and credit co-operative for the individual co-operatives through its central finance programme. The union acts as a mouth piece (advocacy) for the savings and credit co-operative societies in the country especially on government policy on management of co-operatives and taxation. KUSCCO will draw information from the report on the co-operatives in the transport sector.
The Government, through (TLB) Transport Licensing Board and other government arms have been opposed to the existence of organized groups in the industry manning the vehicle terminus and stages. This included savings and credit co-operatives, which the minister  for  transport  repeatedly  included  them  with  cartels.In  some  occasions  the government has arrested transport co-operatives managers and stage clerks employed by the co-operatives to collect co-operative dues (shares, savings deposits, loans repayment and interests) from the vehicle route terminus.
This study will give information which will make the government and the transport
licensing board  has  a  deeper  understanding of  the  operations  of  the  co-operative  in
transport sector so as to come up with better policies to streamline the public transport
sub-sector. The report highlights the role the co-operatives are playing in financing the
owners of the vehicles and this will help the other financiers to understand the co-
operatives and the opportunities available. This will enable the financiers to understand
the co-operatives and also plan for provision of complementary financial services that are
not provided adequately by the co-operatives.The other players in the sector include
manufacturers,  supplies  of  spare  parts  such  as  batteries,  motor  accidents  insurance
provider, motor vehicle manufacturers and suppliers, body builders, tyres suppliers, fuel
and lubricant supplier’s e.t.c. They may use this study report to understand the workings
of the co-operatives and how they can use the co-operatives to reach the co-operators
members with the aim of expanding their markets for goods and services. They may also
be interested in knowing how the co-operatives can be useful in financing members to
buy their products.
2.1 Introduction
This chapter presents literature review on agency theory propositions and implications between the principals and the agents in the public transport sector
2.2. Theoretical Literature Review:
2.2.1. Agency Theory
According to  Abdullah  & Valentine  (2009),  agency theory explains  the  relationship
between the principals, such as members and agents. In this theory, members who are the
owners or principals of the SACCO, hires by electing the management board as their
agent (Alchian & Demsetz, 1972; Jensen & Meckling, 1976; Mitnick, 2006; Bruton et al.,
2000).   Principals (members) delegate the running of business to the management board
which in turn hire and delegate authority to the managers (Clarke, 2004). Indeed, Daily et
al. (2003) note that two factors can influence the prominence of agency theory. First, the
theory conceptually reduces the corporation to two participants of managers and the
owners. Second, agency theory suggests that employees or managers in SACCOs can be
self-interested.  Shareholders  expect  the  agents  to  act  and  make  decisions  in  the
principal’s interest. On the contrary, the agent may not necessarily make decisions in the
best interests of the principals (Padilla, 2002). In agency theory, the agent may succumb
to self-interest, opportunistic behavior and falling short of the agreement between the
interest of the principal and the agent’s pursuits. Although with such setbacks, agency
theory was introduced  basically as a separation of ownership and control  (Bhimani,
Indeed,  agency  theory  can  be  employed  to  explore  the  relationship  between  the
ownership and management structure. However, where there is a separation, the agency
model can be applied to align the goals of the management with that of the owners. The
model  of  an  employee  portrayed  in  the  agency  theory  is  more  of  a  self-interested,
individualistic and are bounded rationality where rewards and punishments seem to take
priority (Jensen  &  Meckling, 1976).  This  theory  prescribes  that  employees  must
constitute a good governance structure since they are held accountable in their tasks and
responsibilities. An explanatory power of agency theory is reduced if and when the
principal decides to divest to a new business. An agent must be motivated and monitored
to create wealth, portraying the agent as potentially fraudulent (Arthur & Busenitz, 2003).
2.2.2. Stewardship Theory
According to Davis et al. (1997), a steward protects and maximizes shareholders wealth
through  firm  performance,  because  by  so  doing,  the  steward’s  utility  functions  are
maximized. In this perspective, stewards are managers working to protect and make
profits for the shareholders. Therefore, stewardship theory emphasizes on the role of
management being as stewards, integrating their goals as part of the organization (Davis
et  al., 1997).  The  stewardship  perspective  suggests  that  stewards  are  satisfied  and
motivated when organizational success is attained. The theory recognizes the importance
of governance structures that empower the steward and offers maximum autonomy built
on trust (Donaldson & Davis, 1991). It stresses on the position of employee to act more
autonomously so that the shareholders’ returns are maximized. Indeed, this can minimize
the costs aimed at monitoring and controlling employee behaviour (Davis et al., 1997).
Daily et al. (2003) assert that in order to protect their reputations as decision makers in
organizations,  managers  are  inclined  to  operate  the  firm  to  maximize  financial
performance as well as shareholders’ profits. In this sense, it is believed that the firm’s
performance can directly impact perceptions of their individual performance.
2.2.3. Stakeholder Theory
Abdullah & Valentine (2009) indicate that a stakeholder can be defined as any group or
individual  who  can  affect  or  is  affected  by  the  achievement  of  the  organization’s
objectives. Stakeholder theorists suggest that managers have a network of relationships to
serve, which include the suppliers, employees and business partners. Sundaram & Inkpen
(2004)  contend that stakeholder theory attempts to address the group of stakeholder
deserving and requiring management’s attention. Donaldson & Preston (1995) suggest
that all groups participate in a business to obtain benefits. Nevertheless, Clarkson (1995)
concludes that the firm is a system, where there are stakeholders and the purpose of the organization is to create wealth for its stakeholders.
Freeman (1984) reveals that the network of relationships with many groups can affect decision making processes as stakeholder theory is concerned with the nature of these relationships in terms of both processes and outcomes for the firm and its stakeholders. Donaldson  &  Preston  (1995)  argue  that  this  theory  focuses  on  managerial  decision making and interests of all stakeholders have intrinsic value, and no sets of interests is assumed to dominate the others.
2.2.4. Political Theory
Abdullah  &  Valentine  (2009)  propose  that  political  theory  brings  the  approach  of
developing voting support from the  members.  Hence  having a political influence in
corporate  governance  may  direct  corporate  governance  within  the  SACCO.  Loss  of
capable African cooperative leaders and managers to the political arena worsens the
situation. Kabuga (2005) points that every person of questionable motives, integrity and
competencies  who  vie  for  SACCO  leadership  can  invade  the  sector.  In  that  way,
floodgates  for  nepotism,  corruption,  mismanagement  and  financial  indiscipline  are
opened. Enete (2008) observes that in Nigeria, many SACCOs have been formed through
government  directives  to  certain  categories  of  government  officials  to  form  a  given
number of SACCOs in their villages of origin. In some other cases, SACCOs spring up in
response to government promises of providing subsidized services to members. These
two categories could be referred to as “political SACCOs” which usually do not stand the
test of time.
2.2.5. Degeneration Thesis
According to Cornforth et al. (1988), market pressures tend, over the course of time, to
lead to SACCOs becoming similar to other kinds of enterprise, particularly capitalist
enterprise.  Market  pressures  make  themselves  felt  in  a  number  of  ways,  e.g.  price
competition  and  liquidity  of  investment.  Within  a  SACCO,  these  pressures  are
experienced as tensions of different kinds, e.g. over the extent to which surpluses should
be retained or distributed to members, over whether OMOV should be upheld but with a
restricted membership or modified but with an expanded membership i.e. to open the
common bond, or over whether strict equality of members should be maintained or an
element  of  hierarchy  allowed.  Attempts  to  resolve  such  tensions  can  lead  to
‘degeneration’ hence the  “degeneration thesis”. Degeneration springs from two main
sources:  weak  internal  democracy,  where  the  members  are  unable  to  hold  the
leadership/management to account or have too little stake in the SACCO to influence
decision-making  processes;  and  abandoning  the  principle  of  member  ownership  and
control (e.g. by allowing external investors to gain a foothold in the SACCO) (Cornforth
et al., 1988).
Meister (1974, 1984), contends that the process of degeneration has a life-cycle of four
distinct phases. The first phase is characterised by high idealism and commitment which
enables the SACCO to get off the ground. However, over time there are clashes “between
a  direct  democracy  jealous  of  its  prerogatives  and  an  economic  activity  still  badly
established”.  The  need  for  greater  efficiency leads  to  the  establishment  of  full-time
management. The second phase is a period of transition in which, if the SACCO survives,
further economic consolidation takes places and conventional principles of organisation
are increasingly adopted. These changes are not always accepted peacefully, and conflicts
continue between idealists and managers. In the third phase, SACCOs lose their radical
ideals and market values are accepted. As the SACCO develops, democracy becomes
restricted  to  the  management  board  and  the  gap  between  managers  and  members
increases. During the fourth phase members and the management board lose all effective
power as control is assumed by managers because of their superior expertise and ability
to control information.
2.2.6. Implications of the Agency Theory
Agency  theory  re-establishes  the  importance  of  incentives  and  self  interest  in
organizational thinking (Perrow, 1986). In agency theory, information is regarded as a
commodity: it has a cost and it can be purchased. This gives an important role to formal
information systems such as budgeting. The implication is that organizations can invest
in information system in order to control agent opportunism. A second contribution of the
agency theory is  its  risk  implications.  Organizations  are  assumed  to  have  uncertain
futures.  Environmental  effects  such  as  government  regulation,  emergence  of  new
competitors  and  technical  innovation  can  affect  outcomes.  Agency  theory  extends
organizational thinking by pushing the ramifications of outcomes, uncertainty to their
implications for creating risks. Uncertainty is viewed in terms of risk/ reward, tradeoffs,
not just in terms of inability to pre-plan. The implication is that outcome uncertainty
coupled  with  differences  in  willingness  to  accept  risk  showed  influence  contracts
between principal and agent. Overall, agency theory predicts that risk-neutral managers
are likely to choose the “make” option (behavior -based contract), whereas risk averse
executives are likely to choose “buy” (outcome based contract).
2.3. Empirical Literature
Alila and Obacio  (1990) state that the number of registered co-operatives has shown
tremendous growth. The growth rate registered co-operative societies in the transport
sub-sector has also been high. The driving force behind the fast growth in co-operative
societies has proved popular with virtually all income categories of borrowers including
women. The favorable terms and conditions of borrowing have meant much easier access
to credit obtained has been put to various uses of direct economic and social benefits to
the borrowers and their families. There is, therefore, an emerging key role of co-operative
societies  in  developments  specifically  in  terms  of  financial  intermediation.  The  co-
operatives also offer other services at lower cost. The co-operatives also offer savings &
banking facilities. The co-operatives give higher returns in form of dividends or rebates
on  funds  deposited  by  members.  Savings  and  credit  co-operatives  with  their  main
objectives as promoting thrift (saving) and using the amount saved to give credit to the
members in accordance with their savings. In savings and credit co-operative societies, a
co-operative member is entitled to three times the member’s savings as loan; with a few
exemptions. USAID/Kenya - Projects (1985) state that the amount of savings in savings
and credit co-operatives is about equal to the total individual savings in all banks and
non-banking financial institutions combined, the growth of savings in these co-operatives
is in excess 25% per year. In addition, members frequently borrow in order to invest in their home areas. The lending of savings and credit co-operatives represents a significant flow of funds into the rural areas.
Obuon (1988) carried out a study on the determinants of saving in Saccos in Kenya.The
objective of the study included:- to Identify determinants of Sacco’s savings deposits and
loans and why they vary across societies. to formulate, estimate and analyze savings,
deposits and loans functions for Saccos, to estimate and simulate total savings, deposits
and loan potentials of Saccos. suggest policies for enhancing savings mobilization, thus
improving Sacco sector performance in terms of deposits, turnover, membership and
The paper concludes that to increase corporate savings, the Saccos could increase their
assets and profits. There is need to increase corporate savings, share capital and attempt
to reduce loans outstanding among others in order to expand and diversify assets and
portfolio  respectively.  Ikiara (1986)  while  evaluating  the  Ministry  of  Co-operative
Development  Commissioners  circular  dated                   25/11/1985  criticized  the  investment
guidelines contained in the circular on the grounds that; They were too restrictive and
could affect other sectors of the economy where Co-operatives were investing before.
The investment in co-operative bank was against prudent portfolio management where an organization is required to diversify investment to cater for risks. Conservative and risk averse members were unlikely to approve any investment proposals put to them in the general meeting and the management committee was better able to make such decision. The guidelines would lead to excess liquidity in Saccos and would curtail the availability of this liquidity to the rest of the economy. He concluded that the investment guidelines would reduce overall volume of investment by co-operative societies and would lead to a major  shift  from  investments  in  the  form  of  physical  and  commercial  properly  to investment in the form of bank deposit.
Mutugu and Mwarania (1986) argues that Saccos are capable of developing a portfolio of investments that can achieve a desired rate of return for a given level of risk and desired maturity structure and to wipe out all diversifiable risks. These suggestions even though important cannot be fully relied on since the writers did not carry an empirical research to ascertain their allegations.
Cooperative  sector  remains  one  of  the  vibrant  economic  techniques  of  poverty
eradication, wealth & job creation, rural development and even financing of other small
and medium enterprises. Few studies have been conducted in this sector and a lot more
need to be done in order to address the major challenges including financial management
decisions that affect the overall financial performance in this important sector. Padoa et.
al., (1999) in their study of the regulated financial institutions argued that regulatory
arrangements have the object of significant change, and that such financial dynamics are
at the centre of attention at international avenues. They further said that a number of
countries such as the United States, United Kingdom, Australia and Japan are in fact
presently radically changing their regulatory systems to meet the needs of the modern
Akinwumi (2006), argued that cooperative sector provides the best alternative than all
other economic groupings and schemes, suggesting that they needed to formalize in line
with  cooperative  principles  so  that  long  after  project  interventions  they still  remain
sustained.  Invariably,  cooperative  society remains  the  better  alternative  to  economic
reconstruction of the government. Most of the Non-Cooperative Groups (NCGs) often die
in the midway without fulfilling the economic objectives for their establishment. He
pointed  out  that  as  much  as  it  is  desirable  for  cooperative  societies  to  help  in  the
development of a nation, there are problems and constraints that have militated against its
effective performance of its roles in nation building and that this has led to poor financial
performance,  declining  and  death  of  some  cooperatives.  The  other  critical  element
according to him was leadership. He said that if cooperative leaders are transparent,
dedicated and follow good financial management policies, then cooperative sector will
definitely succeed. He concluded by saying that a true leader does not cut corners, does not inflate contracts so as to receive kickbacks, does not have favorites among members and does not mismanage the resources.
Dempsey et. al., (2002) posited that cooperatives “destroy value” since few cooperatives have  changed  the  way  they  operate.  They  said  that  several  financial  ratios  for cooperatives (revenue growth, return on assets and operating margins) were calculated which indicated weak financial performance in the cooperative sector. Another financial performance measure,  “value created” was also analyzed; it was based on  “return on invested capital” this also reported a low financial performance in cooperative societies. In their conclusion, they realized that firms which were regulated performed better than cooperatives which were left unregulated.
Kaleshu (2008) identified lack of financial regulations as a major setback to the financial
performance  of  cooperatives  societies  saying  that  group  action  is  more  difficult  to
coordinate than individual action. He therefore  averred that with proper government
interventions SACCOs are likely to perform much better and with a lot of discipline.
Akinwumi (2006) affirmed that poor financial management decisions, bad governance and  leadership  problems  are  critical  elements  that  affect  efficiency  of  cooperative movement not only in Nigeria but also in the rest of African countries. He therefore suggested the need for total financial reengineering of cooperative movement to enable it to face the challenges of the changing world in order to perform the desired economic function. He said that good financial management decisions require a constant scanning of  the  financial  environment  in  order  to  determine  appropriate  strategic  financial regulations to be adopted towards achieving desirable objectives.
Ngumo (2006), in his study, “Cooperative Movement in Kenya”, noted that there has
been much progress in the development of SACCOs in the country in the recent years
compared  to  15  years  ago,  and  the  future  of  SACCOs  is  very  bright  despite  the
challenges. Some of the challenges, he pointed out were; mismanagement, slow adoption
of modern technology and failure to adhere to rules and regulations in the operations of the savings and credit societies.
In his recommendation, he said that there need to be immediate review of the cooperative law in line with the Cooperative Development Policy  (CDP) that would address the financial management regulations in the sector. He further recommended that there need to  be  further  research  on  financial  regulations  and  their  effects  on  the  management committees,  members  and  employees  of  the  sector  and  how  they  fit  the  prevailing financial environment.
3.1. Introduction
This chapter gives a detailed outline of how the study will be carried out. It will describe the  study area,  the  research  design,  the  target  population,  the  sample  and  sampling design, data collection and data analysis procedure.
3.2. Research Design
The research design that will be used in the study is descriptive research. This research describes the financial benefits that have accrued from the co-operative societies in the transport sector as a result of accessing credit and other services from various cooperative societies. The study thus describes how the variables outlined in the literature review interacts  with  the  changes  that  have  occurred  in  the  transport  sector  as  a  result  of accessing credit and other services from the various co-operative societies and analyse both the extent of implementation of the government’s financial regulations and the level of investment performance.
3.3. The Study Population
The  population  of  interest  in  this  study  consists  of                104  Saccos  (see  Appendix  iv)
operating in Nairobi   County according to the (R.O.K. 2013) Register of Co-operative Societies, Ministry of Industrialization and Enterprise Development.
3.4. Sampling Design and Sample Size
The study will be carried out in Nairobi County. The sample frame was obtained from Provincial Cooperative Officer’s office in Nairobi, which supervises all Cooperatives, registered and operating in Nairobi. The total numbers of Cooperatives studied were 95 societies randomly selected and form 91.3% of the total population. Stratified random sampling was used; Nairobi was divided into 8 divisions. A sample was selected from each division with transport cooperatives as shown below;
Table 3.1: Transport Co-operatives in Nairobi per Division
Divisions                     in       Nairobi    Total          Number          of    Number    of    Societies
County                                                 Transport Cooperatives         Samples
Central A                                                                                        24                                            23
Eastern                                                                                            14                                            13
Northern division                                                                            13                                            12
Industrial Area A                                                                              8                                              7
Industrial Area B                                                                              9                                              8
Western division                                                                             10                                              8
Southern                                                                                         12                                            11
Central B                                                                                        14                                            13
TOTAL                                                                                        104                                            95
Source: (R.O.K. 2013) Register of Cooperative Societies Ministry of Industrialization and Enterprise development.
3.5. Data Collection Methods
The collected data will be of two types, viz: primary and secondary data. Primary data will be collected by use of closed and open questionnaire that I will personally administer to the sampled respondents from all divisions. Secondary data will be collected from intake forms, loan application forms and reports from the cooperatives.
3.6. Data types and analysis
This  study  was  conducted  through  a  descriptive  research  design.  Simple  random
sampling  of   95 out of 104 Saccos. Both closed and open ended questionnaires were used
to collect primary data. Secondary data was obtained from periodicals and published
Sacco reports. Editing and sorting of data will be done with the help of SPSS computer
software. The data collected was analyzed using descriptive statistics such as the means
and  percentages  to  analyze  the  extent  of  government  regulations  and  the  level  of
investment of the Saccos. A five point lickert scale was used to measure the extent of the
implementations of financial regulations and the financial/ investment performance.
Financial regulations were measured by taking into account the level of which:-
1)  Approvals of audited accounts are received after the end of the financial year.
2)  Approval of the maximum borrowing powers by members.
3)  Not more than 25% of share capital can be invested.
4)  Approval of budget 3 months before next financial year.
5)  Approval of assets procurement and disposal by 2/3 members.
Investment Performance was measured by taking into account the level at which:
1)  Sacco has been promptly and efficiently disbursing loans to members.
2)  Sacco has consistently increased its investments.
3)  Sacco has consistently made enough surplus to give out as dividends.
4)  There has been consistent increase in membership.
4.1. Introduction
This chapter presents the study findings of the study. The findings have been analyzed,
discussed and interpreted under the following thematic areas; questionnaire return rate,
Demographic  characteristics  of  the  respondents,  owners  of  public  transport  vehicles,
turnovers, loans given, societies investments and computerization of the Saccos.
4.2. Questionnaire Return Rate
The respondents sampled were selected such that they were well spread across the entire Nairobi County so that the findings of the study can be generalized to all Saccos in the county. Out of the 95 targeted Saccos respondents, 87 responded which represents 91.6% of the targeted sample size. This was because some members of the Saccos who had been appointed to manage the Saccos in the first years of the Saccos could not be traced. Out of  the  6  targeted  key informants,  5  responded  which  represents  83%  response.  The questionnaire return rate is as shown in table 4.1
Table 4.1. Questionnaire Return Rate for the Saccos in Nairobi per Division.
Divisions                          in    Total               Percentage                Target   Sample     Achieved
Nairobi                                    Number  of                                       Size                         Respondent
Central A                                                 24                            23.0                            23                                                                 22
Eastern                                                     14                            13.5                            13                                                                 12
Northern Division                                    13                            12.5                            12                                                                 11
Industrial Area A                                       8                              7.7                              7                                                                   6
Industrial Area B                                       9                              8.7                              8                                                                   7
Western Division                                     10                              9.6                              8                                                                 7
Southern                                                  12                            11.5                            11                                                                 10
Central B                                                 14                            13.5                            13                                                                 12
104                                                                                           100                            95                                                                                                 87
4.3. Demographic Characteristics of the Respondents
The demographic information comprised of respondents gender, their age bracket and their education level. This is shown in table 4.2.
Table 4.2. Demographic characteristics of the Saccos Respondents.
Age                                                               Frequency                              Percentage
26-35                                                                        12                                          13.8
36-45                                                                        55                                          63.2
45 and above                                                                        20                                             23
Total                                                                        87                                           100
Gender                                                          Frequency                              Percentage
Male                                                                        75                                          86.2
Female                                                                        12                                          13.8
Total                                                                        87                                           100
Education Level                                                          Frequency                              Percentage
Primary                                                                        15                                            5.8
Secondary                                                                        15                                          17.2
College/ University                                                                        67                                          77.0
Total                                                                                              87                                           100
Out of 5 key informants, 4 were male representing 80% and 1 was female representing
Table 4.3. shows the key informant respondents gender distribution. Table 4.3. Key Informant Respondents Genders Distribution -
Gender                                                              Frequency                               Percentage
Male                                                                                                 4                                             80
Female                                                                                              1                                             20
Total                                                                                                5                                           100
The  age  distribution  of  the  sacco  respondents  was  in  three  age  brackets  with                  12
respondents being in the age bracket of 26 - 25 years representing 13.8%, 55 were in the age bracket of 36 - 45 years representing 63.2% while 20 respondents were in the age bracket of 45 years and above representing 23.0%.
This was an indication that many of the people involved in the Sacco management are in the bracket of 36 - 45 years which is the group at its peak productive capacity. This is in line with expectation as this is the group that is most active in the society. The gender distribution was such that, out of the  87 respondents from the sacco management,  75 were male representing 86.2% while 12 were female representing 13.8%.
The study findings indicated that  67 of the Sacco management had attained college/
university education representing 77%, 15 respondents had secondary school education
representing  17.2%,  5 respondents had attained primary level representing  5.8% with
about  94% of respondents having attained secondary level education and above, it is
indicative that those appointed to manage the Saccos have adequate basic education and
that there is a likelihood of appointment of well educated individuals to manage the
4.4. Membership
Table 4.4. Owners of Public transport vehicles in the routes
  1. Owners of public transport vehicles in the routes
Types of Owners                                   No. of Owners                           Percentage
Co-operative Members                                                               1828                                          96.5
Non Co-operative Members                                                           67                                            3.5
Total                                                                                          1895                                           100
The members of co-operatives were those that had paid registration fees and contributed shares (deposits) regularly to the society, the minimum shares contribution is 3,000 per month per member.
There were vehicle owners operating in the respective routes but were not members of the co-operative societies. Their vehicles paid management fees of an average of 100/= per day to the societies. They were not registered members of the co-operative, they could not save or contribute shares (deposits) and they could not therefore qualify to get co-operative loans or share dividends at the end of the year.
Only registered members of the co-operatives benefit from the co-operatives society loans. On the ground, the co-operative members had better and new vehicles than non members.
From the  45 societies interviewed, they had  1895 owners operating in the route with
96.5% of the registered members of the respective co-operative societies, 3.5% of them operated  in  the  designated  routes  but  were  not  members  of  the  co-operatives.  This indicated that the societies were beneficial to the vehicle owners. Majority of the nonmembers, owners of the matatus were actually new entrants to the routes and were in the process of joining the co-operatives.
4.5. Turnovers
Table 4.5. Turnover of Saving & Credit Activity
Turnover Shs (‘000)                                 No. of Societies                  Percentage
Below 1000                                                                                     40                           46
1000 < 2000                                                                                    25                           29
2000 < 3000                                                                                    10                        11.4
3000 < 4000                                                                                      6                          6.8
4000 < 5000                                                                                      3                          3.4
5000 and over                                                                                    3                          3.4
TOTAL                                                                                          87                         100
4.6. Table 4.6. Turnover per division of savings activity and other activities
Divisions in                        Number of        Turnover savings       Turnover              Total Turnover
Nairobi                               Societies             Activity (a)                  other activity        (a+b)
sampled                                                               (b)
Central A                                                 23                   21 Million            194 Million             215 Million
Eastern                                                     13                     4 Million             0.2 Million              4.2 Million
Northern                                                  12                  0.9 Million             0.1 Million                 1 Million
Industrial area A                                        7                                                                0                                                                   0
Industrial Area B                                       8                                                                0                                                                   0
Western                                                     8                  1.2 Million                             0              1.2 Million
Central B                                                 11                  0.4 Million             0.1 Million              1.5 Million
Southern                                                  13                  3.5 Million             0.6 Million             4.1. Million
Total                                                        87                   31 Million    195 Million per             226 Million
The total turnover of savings activities of the co-operative societies was Shs. 31 million: 50% of the co-operatives turnover was below Shs 1 Million. The reason being that they were newly registered. The older societies’ other activities turnover was 195 million per year,  99% of this turnover was from  3 societies, which had filling stations the three societies are in the central A Division.
Apart from the turnover from the filling station, other activities which contributed to the turnover are: Sale of tyres, batteries and insurance. The older co-operative societies’ turnover  was  impressive.  These  are  the  societies  with  additional  activities  and  their members have built confidence with the societies over time. The cooperatives with their own filling station, sell fuel to their members and the general public. They sell over 9000 litres fuel per per day.
4.6. Loans
Table 4.7. Loans Granted in one year (2004)
Purpose of the Loan                            Amount Shs (000)                  Percentage
Purchase of Vehicles                                                              188000                                        79.00
Purchase of Spare Parts                                                           21000                                        08.82
Emergency                                                                               25000                                        10.50
Others                                                                                        4000                                        01.68
Total                                                                                      238000                                           100
The loans granted amounted to 230 Million 2004; 245 vehicles were brought using the loans from the cooperatives. The emergency loans and loans indicated as others were for financing insurance of vehicles, purchase of spare parts and for domestic use of the cooperative members.
Table 4.8. Loans granted since inception of the societies
Purpose of the loan                              Amount Shs (000)                   Percentage
Purchase of Vehicles                                                            846000                                        82.46
Purchase of Spare Parts                                                        112000                                        10.92
Emergency                                                                              55000                                          5.36
Others                                                                                     13000                                          1.26
Total                                                                                   1026000                                      100.00
4.7. Investments
Table 4.9 Societies Investments
Investments                                         No. of Societies                      Amount of Investments
Land                                                                                             15                                27 Million
Buildings                                                                                      10                                23 Million
Equipment and Machinery                                                             8                                15 Million
Vehicle                                                                                           6                                18 Million
Others                                                                                             3                             10.5 Million
Total                                                                                            42                             93.5 Million
42 out of 87 societies had investments in terms of motor vehicles, machinery, buildings, lands, and other investments.
4.8. Computerization
Table 5.0. Hardware Status
With Computers                                        Without Computers                           Total
87                                                                                                      0                                            87
All the   societies are computerized at 100%
Table 5.1: Software Status
Those with customized                              Without Customized                           Total
programmes                                             Programmes
70                                                                                                     17                                           87
Societies with customized programs are 70 representing 80.5% while without customized programs are 17 repressenting 19.5%
4.9. Extent of Implementation of Investment regulations
The first objective was to establish the extent to which Sacco societies in the Transport
sector in Nairobi have implemented the government’s Investment regulations. To achieve this, the respondents were requested to rate on a five-point Likert Scale, the extent to which government Investment regulation have been implemented in their Saccos over the last 6 years. The results were as presented in table 5.2.
Table 5.2. Extent of Investment Regulations Implementation
Not  Little      Moderate  Large    V/large   ∑fi      ∑fiw                                                                   ∑fiw/∑fi
at all               Extent        extent    Extent       Extent
  1. Approval of Audited accounts 22          16             19             17           13         87     244      2.805
4 months after the end of the
financial year
  1. Approval of the maximum 4            9              13             34           27         87     332      3.816
borrowing powers by
  1. Not more than 25% of share 47          16             12             10            2          87     165      1.897
capital can be invested
  1. Approval of budget three 16          35             21             11            4          87     213      2.448
months before next financial
  1. Approval of assets 39          23             12             10            3          87     176      2.023
procurement and disposal by
2/3 majority
Mean of Extent of Financial regulations implementation                                                         2.5978
While responding to the extent to which the societies have adhered to the approval of
audited accounts 4 months after the end of the Investment year, 22 reported not at all, 16
said to a little extent, 19 reported moderate extent, 17 indicated to a large extent, while 13
recorded a very large extent, resulting in a weighted mean of 2.805 on the scale.
The weighted mean score suggests that the regulation has been moderately implemented.
This could be because quite a good number of SACCOs are not able to raise the required
audit fees in time to meet the registration deadline as required. Furthermore, it is from the
audited accounts that SACCOs are able to know whether to declare dividends or not. The
findings of this study concurred with the one conducted by Wambui (1993) on regulation
of auditors’ reports in investment decisions which revealed that most of the companies
whose books of accounts are audited annually tend to perform better than those who do
not  embrace  the  audit.  Concerning the  approval  of  maximum  borrowing powers  by
members,  a  weighted  mean  score  of  3.816  on  the  scale  was  posted.  It  is  therefore
expected that with this large extent of implementation of this regulation, SACCOs will
have a strong Investment stability since they will have fewer loans to service. It was also
found that in terms of implementation of the requirement that not more than 25% of the
share capital can be invested, gave weighted mean score of 1.897 indicating a little extent
of implementation of this regulation. This is expected to affect the efficiency in loan
disbursement and even the rate of dividends pay-out to members.
This concurred with a study by Oyoo (2002) who also found out that SACCOs societies
invest much of their capital in non-core businesses that do not bring enough returns to the
shareholders, hence weakening their  Investment stability. A weighted mean score of
2.448  was obtained in response to extent of implementation of the requirement that
budgets must be approved 3 months before the beginning of the next Investment year.
This  suggested  that  majority  of  the  respondents  admitted  that  the  regulation  has
moderately been implemented. This means that most of the expenditures are approved
and controlled by the members. This is likely to bring confidence among the members
resulting in the retention of the membership. The findings were in concurrence with a related study by Mong’are (1994) which noted that Investment performance of public enterprises improve so much in relation to the level of Investment control systems that are put in place, and that one of the Investment performance control instrument that the study found to be useful is the budget. Regarding the two thirds members’ approval of the procurement and disposal of society’s assets, the weighted mean score was  2.023, an indication  that  the  regulation  has  to  a  little  extent  been  implemented.  This  showed incompetency in tendering committees or a total lack of it. This is expected to affect the general Investment performance of SACCOs since the disposal and procurement of the society assets are likely to interfere with the capital of the society. This finding is in agreement with one by Ochola (2004) who found out that most of public institutions do not adhere to the requirement of the Public Procurement Act 2003 which lays down the procedures of acquiring and disposal of public assets.
4.9.1. Investment Performance
The second objective was to establish the level of investment performance of the Sacco
societies in Nairobi County. To achieve this, the respondents were requested to rate on a
five-point Likert Scale, the extent to which government Investment regulation have been
implemented in their Saccos over the last 6 years. The results were as presented in table
Table 5.3. Investment Performance
Questions                                  Not    Little      Moderate   Large     V/large   ∑fi    ∑fiw   ∑fiw/∑fi
at                                                         Extent   extent         Extent    Extent
  1. SACCO has
been   promptly                           40        26             15              5             1         87     162      1.861
and   efficiently
disbursing loans
to members
  1. SACCO has
consistently                           15        22             28             13            9         87     240     2.7586
increased its
  1. SACCO has
consistently                           37        26             10             12            2         87     177     2.0344
made enough
surplus to give
out as dividends
  1. There has been 42        28             16              1             0         87     150     1.7241
increase in
Mean of level of Investment/ financial performance                                                          2.1522
Concerning the performance of SACCOs in terms of disbursement of loans to members, a weighted  mean  score  of  2.0919  on  the  scale  was  registered.  This  means  that  the performance of the SACCOs in terms of efficient and prompt disbursement of loans is quite wanting .This could be because the majority of the SACCOs do not have adequate share deposit to give as loans whenever there is need.
The  results  of  this  study  concurred  with  the  one  by  Oyoo  (2002),  in  his  study  of
SACCOs’ Investment performance in Nairobi which revealed that most SACCOs were
inefficient in terms of loan disbursement. When asked about the consistent increase in
investments, a moderate extent of agreement to the level of performance with weighted
mean score 2.7586 on the scale was recorded. Responding to the consistency in dividend
pay-out, a weighted mean score of 2.0344 on the scale was recorded. Majority of the
respondents were of the view that SACCOs have not done enough to improve their
surpluses that can be  given out as dividends to the members. Again with the good
performance in investment, it is not clear why SACCOs cannot have enough surpluses to
give as dividends. Could it be that that the surpluses are used to service or offset the loans that the SACCOs are owing to other Investment institutions?
However,  a  study  by  Gachara  (1990)  in  SACCOs  in  Nairobi  found  out  that  most
societies  paid  low  interest  dividend  rate  mostly  due  to  heavy  indebtedness  and  he
suggested that SACCOs should not borrow funds from Investment institutions such as
banks  which  charge  high  interest  rates,  rather  they  should  source  funds  from  non-
Investment institutions such as Kenya  Union  of Savings  and Credit  Cooperative.  In
response to consistent increase in membership, a weighed mean score of 1.7241 on the
scale was recorded. This explained why 41.38% of the respondents admitted that the
membership of the SACCOs is decreasing, suggesting that most of the SACCOs have not
done enough to increase their membership. This could be because of inadequate dividend
pay-out and inefficiency in loan disbursement which were equally lowly rated by the
Furthermore, it could be due to low quality of services being offered by the SACCOs hence prompting members to withdraw their membership resulting to the decline. These findings were supported by the study done by Dempsey et al., (2002) who posited that cooperatives destroy value since few of them have changed the way they operate, hence resulting to a weak Investment performance in the sector
Summary of Findings, Conclusions and Recommendations
5.1. Introduction
This  chapter  presents  the  summary  of  the  study  findings,  conclusions  as  well  as recommendations and suggestions for further study.
5.2. Summary of Findings
All the co-operatives formed by the public transport owners operate as savings and credit co-operatives or multipurpose co-operative societies, the two types of societies has no difference apart from registration.
The cooperatives’ main objective is to mobilize savings among the members (owners) of the vehicles. So far the societies have been able to attain the objective. The savings are then utilized by the members as loans to finance their transport business.
Majority  of  the  public  transport  operators  who  operate  individuals  have  joined  the societies. The co-operatives are the major sources of finance to their transport business. Some co-operatives societies seem to be more successful than others. The success of any cooperative  depends  on  the  management  committee  and  the  qualification  of  their employees. Societies with more qualified staff and informed committee members on management of co-operative are more successful.
The cooperatives also offer other services to the member, some have filling stations,
other societies give credit to their members to buy tyres, batteries, insurance and spare
The loans taken by members have assisted them not on to buy more vehicles or improve the transport fleets but also to improve the quality of their lives and their families. For example in paying college fees, buying houses, lend and other instruments.
The societies’ major projects are lack of management skills to manage large funds saved
by members and management of the loans portfolio in order to minimize incidence of
loan default. Other problems faced by the societies are lack of clear policy guidelines for
the public transport sector by the government. Lack of clear policy guidelines by the
government has resulted in high mobility of owners from one route to another and high
exit and entry to the industry. The societies have therefore unstable membership base.
There is substantial potential for the co-operatives in these sectors to mobilize millions of
shillings as savings and loans. Taking advantage of these opportunities is not easy. Any
society wishing to take advantage of these opportunities will have to be able to put
together a good management committee and a core of qualified staff. Come up with
policies and strategies to improve their members’ of participation in the cooperatives.
Evidence  from  a  few  of  co-operative  societies  in  the  sector  indicates  that  the  co-
operatives that have good management policies reap substantial economic benefits.
5.3. Conclusions
The study aimed at assessing the effect of the government Investment regulations on
Investment performance in Sacco societies in Kenya, based on three objectives. The first
objective was to establish the extent to which SACCO societies in Nairobi County   have
implemented  the  government  Investment  regulations.  To  achieve  this,  the  study
considered;  timely  approval  of  audited  accounts,  members’  approval  of  maximum
borrowing powers, percentage investment of share capital, members’ approval of yearly
budgets and members’ approval of procurement and disposal of society’s assets.
The study established that the only regulation that is highly implemented by the SACCOs
is the approval of maximum borrowing powers with a mean of 3.82 out of the possible 5.
The results also showed that most of the societies do not implement the regulation on
procurement and disposal of assets contrary to the requirement of the Public Procurement
and Disposal Act of 2003. The second objective was to establish the level of Investment
performance of the SACCO societies in Nairobi County. To achieve this objective, the
study considered; efficiency and promptness in loan disbursement, consistent increase in
investments, consistent increase in surplus given out as dividends and consistent increase
in membership.
The study revealed that SACCOs’ had moderate performance in their investment level; however, this did not translate to an improvement in the general Investment performance. The  findings  also  revealed  that  membership  of  the  SACCO  societies  have  been decreasing. This might have been as a result of the management problems which were found to be highest among the societies under the study area, low dividend pay-out rate and inefficiency in loan disbursement.
The study established that the Investment performance of SACCO societies in Nairobi County  was  on  average  low  with  the  majority  of  the  respondents  describing  their performance to be deteriorating. The third objective of the study was to analyze the relationship  between  the  extent  to  which  SACCO  societies  have  implemented  the Investment regulations and their level of investment performance.
The government financial regulations which were meant to provide minimum operational and prudential standards; aimed at improving financial performance in SACCOs have been in operation for the past 6 years. On the basis of the findings, the study concluded that the government financial regulations to a little extent had an impact on the financial performance of SACCO societies in the study area.
The findings of the study revealed that SACCO societies’ financial performance is low;
therefore,  the  government  through  the  Ministry  of  Cooperative  Development  and
Marketing  should  provide  training  programs  in  financial  management  for  the
management committees of the SACCO societies to help them improve their financial
management in decision making. The findings also revealed that financial regulations
were implemented to a little extent possibly due to unawareness. Therefore, the Ministry of  Cooperatives  needs  to  sensitize  members  of  the  sector  on  the  existence  of  the regulations  since  lack  of  this  was  the  major  challenge  mentioned  by  most  of  the respondents.
The  management  of  the  SACCO  societies  should  have  copies  of  the  Cooperative Societies  Act  and  Rules  since  these  are  the  relevant  sources  where  the  financial regulations are found. The management committees and other officials of the cooperative societies should establish management support networks to enable them to obtain new ideas and useful information for the promotion of the sector. This will allow them to compete with other established financial institutions since this was found to be one of the major problems that the sector faces.
5.4. Recommendation
The Ministry of Co-operative Development should mobilize resources to educate the members and management committees of the societies. The societies should also set aside a budget for committee members, members and staff education. The Ministry of Transport, Ministry Co-operatives, Transport Licensing Board and the representatives of the  cooperatives  should  come  with  a  policy  guideline  on  formation,  operation  and management of the routes the co-operatives are designated to operate in. The government should recognize the financing role the cooperatives are playing in the transport sector and their contribution to the economy. The government should encourage formation of co-operatives in this sector in areas where they do not exist.
Branch & Baker (1998) indicate the following measures against the SACCO governance
problems such as having clear rules in the SACCO bylaws which would include:   Clarify
rules and have prudential regulations of decision making by defining the management
role  of  the  directors  and  management’s  responsibility for  technical  credit  decisions.
Because  many  SACCO  board  members  confuse  the  roles  of  decision  making  and
decision  monitoring,  SACCO  bylaws  need  to  establish  clearly the  roles  of  SACCO
members, boards of directors, and managers in order to clearly separate decision making
from management. These rules should limit the involvement of the management board in day-to-day operations, focusing it instead on policy and direction.
The  manager's  major  responsibilities  should  include  implementing  board-sanctioned policies and the budget, administering daily operations, reporting to the board, and hiring and  overseeing  staff.  If  these  functions  are  usurped  by  the  board,  the  agility  and efficiency of the SACCO may well suffer (Branch & Baker, 1998).   Establish clearly the fiduciary responsibility of the board and their responsibility for monitoring the decisions of  management,  as  well  as  penalties  for  failing  to  meet  these  responsibilities.  The management board is accountable to the general member assembly and membership for the operating results of the SACCO. Removal of board members should be specified in bylaws  for  failure  to  meet  their  responsibilities,  for  mismanagement,  or  for  legal improprieties (Branch & Baker, 1998).
Establish ethical codes of behavior and controls on insider loans to avoid conflicts of
interest. To hold office on the management board, a member should be free of any
relation with any of the SACCOs employees, should not have a contractual working
relationship  with  the  SACCO,  and  must  not  have  committed  any illegal  acts  or  be
delinquent in the payment of loans or any other obligations to the SACCO (Branch &
Baker, 1998).
Provide for staggered rotation of board members. There is always a need for experienced individuals on SACCO boards. However, a limit of two or three terms allows for the circulation of fresh ideas. It also avoids domination of the board by small groups for extensive periods of time. Establish criteria for who is qualified to assume a position as a director. Directors should have adequate preparation and business experience to provide policy direction and guidance to the SACCO (Branch & Baker, 1998).
Without  unduly  interfering  with  the  management  of  the  SACCO,  the  supervisory
committee  must  be  responsible  for  the  SACCOs  compliance  with  its  bylaws,  for
enforcement of internal controls, and for oversight of the board itself. The supervisory
committee should be held responsible for seeing that the board contracts and receives an annual  external  audit  and  for  ensuring  that  all  internal  controls  are  in  place  and functioning properly (Branch & Baker, 1998).
Credit decisions need to be made on technical risk analysis criteria by technical staff with
appropriate preparation. SACCO bylaws should not provide a detailed treatment of how
to do loan analysis; that should appear in the credit policies. However, the bylaws should
identify the body responsible for loan analysis. In small SACCOs, the volunteer credit
committee reviews and acts on loan applications. This group may have better information
about their fellow borrowing member’s risk than a formal institution’s credit officer ever
could.  As  SACCOs  grow  larger,  however,  the  credit  committee  members  cannot
personally know all of the loan applicants. It becomes impractical for these volunteers to
approve  all  loans  given  their  large  number,  and,  in  any  case,  they  do  not  possess
specialized  risk  analysis  skills.  Consequently,  as  SACCOs  grow,  volunteer  credit
committees should be disbanded or assume the role of randomly reviewing compliance of
loans with policy and procedures. The credit committees in many countries have usefully
evolved  from  an  elected  volunteer  committee  to  a  technical  committee  made  up  of
SACCO loan officers and employees with specialized skills. The manager approves small
loans,  and  the  technical  committee  approves  larger  loans  that  fall  within  the  size
parameters and policies approved by the management board. The management board then
considers loans to SACCO directors and staff (if allowed) and loans larger than those
approved by the technical credit committee (Branch & Baker, 1998).
Governance problems specific to the SACCO pose challenges not faced by many other
forms of organization. However, when a number of controls are brought to bear on the
problems  including;  well-defined  institutional  rules  of  governance,  internal  controls,
service adequacy, prudential management disciplines and external supervision. These
problems can be overcome to produce a stable and balanced financial intermediary.
5.5. Suggestions for Further Research
The effects of replacement of  14 seater public service transport vehicles with higher capacity vehicles to the transport Saccos. The effects of the changes in the bank interest rates on the co-operatives in the transport sector. In the daily Nation of 1-10-2013, it is said that   the government is in the process of introducing a new law to steer the matatu sector through the National Transport and Safety Authority. Problems associated with licensing  of  operators  of  public  transport  vehicles  as  co-operate  bodies  should  be considered for further research. The effect of changing the normal driving licenses with new smart driving licenses in the public transport sector should also be considered for further  research  The  impact  of  convergence  of  Sacco  sub  sector  into  a  financial cooperative system should be considered for further research.
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