Loans are the largest source of credit risk to a financial institution .However, other sources of credit risk exist throughout the activities of a financial institution including in the banking book and the trading book, and both on and off the balance sheet. The goal of credit risk management is to maximize a SACCOs risk adjusted rate of return by maintaining credit risk exposure within acceptable parameters. SACCOs need to manage credit risk inherent to the entire portfolio as well as the risk in individual credits as transaction (Sinkey.1992).
Portfolio theory deals with the selection of portfolios that maximize expected returns consistent with the individual acceptable levels of risk. The theory provides a framework for specifying and measuring investment risk and to develop relationships between risk and expected returns. Its main basic assumption is that investors often want to maximize returns from their investments for a given level of risk. The full spectrum of investments must be considered because the returns from all these investments interact hence the relationship between the returns for assets in the portfolio is important (Reilly & Brown, 2011). The basic portfolio model was developed by Harry Markowitz in the 1950s and early 1960s. …show more content…
Markowitz is considered the father of modern portfolio theory since he originated the portfolio model that underlies modern portfolio theory. He derived the expected rate of return for a portfolio of assets and the expected risk measure. Markowitz established that under reasonable assumptions, the variance (or standard deviation) of the expected rate of return was a meaningful measure of portfolio risk. From his model, the expected rate of return of a portfolio is the weighted average of the expected return for the individual assets in the portfolio.
The Sacco industry is part of the cooperative sector in Kenya, which has impacted on lives of many disadvantaged Kenyans over the years. The sector may be categorized into financial and non-financial cooperatives. Non-financial cooperatives deal with the marketing of members’ produce and services such as dairy, livestock coffee, tea, handicrafts and many more similar cooperatives. On the other hand financial cooperatives comprise Saccos, housing and investment cooperatives.
1.2 Statement of the Problem Increasing profitability is a priority for all managers in financial institutions. For Sacco managers, credit risk management is equally very important. On the one hand Sacco managers need to reduce the risk of loan default because the institutions financial viability is weakened by the loss of principal and interest, yet on the other hand Sacco’s operate under objectives of maximizing benefits to members which include the social role of providing loans to help members achieve their standard of living goals. This social roles conflict with financial viability of Saccos' if managers become less stringent in the lending practices to assess and monitor the credit risk of member borrowers. This calls for the need to …show more content…
With the total population of Kenya at approximately 40 million, it is estimated that 63% of Kenya’s population participate directly or indirectly in co-operative based enterprises (CIC Kenya).A number of studies have provided the discipline with insights into the practice of credit management within corporate institutions. Owusu (2008) on credit practices in rural banks in Ghana found out that the appraisal of credit applications did not adequately assess the inherent credit risk to guide the taking of appropriate decisions. In his recommendations he stated that Credit amount should be carefully assessed for identified projects in order to ensure adequate
Portfolio theory deals with the selection of portfolios that maximize expected returns consistent with the individual acceptable levels of risk. The theory provides a framework for specifying and measuring investment risk and to develop relationships between risk and expected returns. Its main basic assumption is that investors often want to maximize returns from their investments for a given level of risk. The full spectrum of investments must be considered because the returns from all these investments interact hence the relationship between the returns for assets in the portfolio is important (Reilly & Brown, 2011). The basic portfolio model was developed by Harry Markowitz in the 1950s and early 1960s. …show more content…
Markowitz is considered the father of modern portfolio theory since he originated the portfolio model that underlies modern portfolio theory. He derived the expected rate of return for a portfolio of assets and the expected risk measure. Markowitz established that under reasonable assumptions, the variance (or standard deviation) of the expected rate of return was a meaningful measure of portfolio risk. From his model, the expected rate of return of a portfolio is the weighted average of the expected return for the individual assets in the portfolio.
The Sacco industry is part of the cooperative sector in Kenya, which has impacted on lives of many disadvantaged Kenyans over the years. The sector may be categorized into financial and non-financial cooperatives. Non-financial cooperatives deal with the marketing of members’ produce and services such as dairy, livestock coffee, tea, handicrafts and many more similar cooperatives. On the other hand financial cooperatives comprise Saccos, housing and investment cooperatives.
1.2 Statement of the Problem Increasing profitability is a priority for all managers in financial institutions. For Sacco managers, credit risk management is equally very important. On the one hand Sacco managers need to reduce the risk of loan default because the institutions financial viability is weakened by the loss of principal and interest, yet on the other hand Sacco’s operate under objectives of maximizing benefits to members which include the social role of providing loans to help members achieve their standard of living goals. This social roles conflict with financial viability of Saccos' if managers become less stringent in the lending practices to assess and monitor the credit risk of member borrowers. This calls for the need to …show more content…
With the total population of Kenya at approximately 40 million, it is estimated that 63% of Kenya’s population participate directly or indirectly in co-operative based enterprises (CIC Kenya).A number of studies have provided the discipline with insights into the practice of credit management within corporate institutions. Owusu (2008) on credit practices in rural banks in Ghana found out that the appraisal of credit applications did not adequately assess the inherent credit risk to guide the taking of appropriate decisions. In his recommendations he stated that Credit amount should be carefully assessed for identified projects in order to ensure adequate