Effective Administration of Credit in Co-Operative Enterprise

Effective Administration of Credit in Co-Operative Enterprise

Co-operative has been given a number of definitions But the definition, which is not in use, is that adopted by the international alliance (I.C.A.) as quoted in the review of international co-operatives (R.I.C). a co-operative is an autonomous association of persons united voluntarily to meet there common economic, social needs and cultural through a jointly owned and democratically controlled enterprise. This description of a co-operative is intended as a minimal statement. It is not intended ad divination of a perfect co-operative. The definition is broad in scope recognizing that members of different kinds of co-operatives will be involve differently and members must has some freedom to organize their affairs. It is hope that this definition will be useful in drafting legislation educating members, informing the public and preparing textbook. This definition emphasizes the following characteristic of co-operative

The co-operative is autonomous and it independent of government and private firm as possible.

1.  It an association of persons. This means that co-operative are free to define person in any legal way it chose to do so. Many primary co-operative around the world chose only to admit individual human being. Many other primary co-operative admit legal persons, which in many jurisdiction include companies extending to them it right as any other member.
2. The persons are united voluntarily. Membership in a co-operative should not be compulsory. Membership should be free within the purpose and resources of the co-operative to joins or to live
3. Members of a co-operative meet there common economic and social need emphasizes that co-operative are organize for the members. Member’s need may divers, they may be social as well as purely economic but whatever they are, they still remain the central for which the co-operative exist.
4.  The co-operative is jointly owned and is democratically controlled enterprise. This phrase emphasize that co-operatives genuinely distribute ownership members and they do so on a democratic basis. These two important characteristics are particularly important in differentiating co-operatives from other king of organization especially capital controlled firm or government owned organizations. The second part of the definition reads” co-operatives are join together locally, regionally, nationally, international, federationaly, alliance or other joint undertaking so that they can meet the members need most effectively” this part of definition informs and remind members, government official and the general public that co-operatives are not juts local institution. Also invariably, they are associated with other co-operative in joint endeavor. This is an important point when considering the co-operative legislation. The taxation of the co-operative and the possible future co-operative development.

This statement also means that local co-operatives have the responsibility to ensure that their members understand the nature and the importance of the wider relationship. It challenges the members to recognize\e the need to devote the same loyalty to the wider co-operative structure as they extend to their local co-operatives. These parts of definition specifically mention three characteristics in which the co-operatives work to together.

1. They are usually associated “ Locally, Regionally, Nationally, And Internationally”
2. The co-operatives are associated in federations, alliance and other joint undertaking. Historically when they have work together, co-operatives have preferred to form partly because federation are easily adapted to the system of democratically control. They have also recognized different kind of alliance and undertaking just initiation in the economic activity, educational programme, and government relations.
3. Co-operative work together so hat they can meet the members need most effectively. The phrase indicates that it is member’s need and not the need of the organization. The management or the elected leadership who should determine the nature of collaboration among co-operatives. Those needs should also be met “effectively” which implies efficiency and assumed good value source: I.C.A quoted in (R.I.C, 1994)

According to I10 quoted by Thimadu (1988:5) co-operatives means an association of persons who have voluntarily joined together to archive a common goal through a democratic controlled organization making equitable contributions to the capital required and accepting a fair share of the benefits and risk of the undertaking in which the members actively periapts. The definition also implies that equitable contribution should be a trademark of the co-operatives because there is the need for the members to contribute equally and avoid cheating so that is will answer the name co-operative.

Prof. Paul Lambert added that the co-operative society dose not only aim at furthering the interest of its members, it also aim at furthering there interest, but in only in so this is compatible with the general interest of the members of the co-operative should be protected.

CREDIT CO-OPERATIVES AND THEIR PROBLEMS

According to Helm (1968, 72 – 73) the rural credit society use to be formed at the village level comprising only a small membership to enable there secretary of the society and the committee to have an intimate knowledge of the applicant for loan in order to make a proper easement of the risk involved. Nowadays, the tendency is to orhanize newe credit co-operatives and amalgamates the existing ones and level comprising several villages location or a whole district. A further change has taking place in the last few decades with regard to liability. The original rainffeisan credit society was based on unlimited liability. Unlim9iited liability together with other rainffeison idea was adopted in many part of the world. Today the number of society based on unlimited liability is decline in the favour of limited liability. Growing reserves, share and capital has improved the borrowing power of the credit society and therefore has made the unlimited liability unnecessary. In many developing countries. The lack of proper land title or legal provision making impossible to seize land without he consent of the land owners has taking form unlimited liability. Its original importance as security for creditors and have therefore made it pointless. The basic functions of the rural co-operative credit organization have always been two fold.

1. To ensure adequate and timely supply of capital at a reasonable price E.I. the rate of interest and at a reasonable term for the benefit of the agricultural producers as a member of the society and to supervise and educate him on the use of the fund.
2. To mobilize rural savings
   

The problems of the credit co-operatives are as follows;

1. Poor leadership: many of the group have unqualified and dishonest leaders who ruins the group interest of molding them to operate on a higher highlights, consequently energies are dissipated on fighting ands other form of irregularities that weaklings the group and destroy togetherness, cohesion and oneness.
2. Poor loan repayment: some of the group has not meet the repayment schedule drawn up for them, consequently banks are discouraged from extending new credit line to them and the group collapse eventually.
3. Higher inflation rate and low saving rate: higher inflation arte of over 80% in 1993 fiscal year and low saving/deposit rate of between 14% and 18% dampened the group enthusiasm and propensity to save.
4. Distance form bank branches: some of the group is far from the bank and this mean higher transaction cost and inadequate monitoring of the members.
5. Difficult economic situation prevailing in the nation: this contributes a lot in the activity of most group and members and even discourage them form saving. Amount shared are usually use to meet the rising cost of pressing domestic need like accommodation, feeding, farm input, school fees, rent and other things. Source (Helm, 1968, 72 – 73)

SOURCE OF THE CO-OPERATIVE FINANCE

Finance can be said to capital in monetary form that is owned normally for capital purpose through the financial market or institution. But in common parlance, the term is almost applied to fund from any source used to undertake any kind of expenditure (Ihimodu – 1988:15)

Finance is the provision of money when or where required. Finance may be short term, medium term or long term.

According to Graham Borth and Evan (1992, 15 0 – 152), finance is the raising and using of fund by individual, co-operative enterprise, firms, and government organization for the running and management of a business undertaking. Without finance, no business can thrive, function or forge ahead. Co-operatives organizations are not exception to this. It is the adequate and steady flow of finance that lubricate wheel of modern business. (BOB-IGWE, 134 – 135)

Finance provides the bases for business planning, investment, divaricating and cash flower statement control, growth and expansion. BOB-IGWE mentioned that adequate funding of the co-operative enterprise is the pivot in which the growth and development of the co-operative revolves.

The major sources of fund for co-operatives are;

1. Internal source
2. External source

Internal source:

According to Ihimodu (1988, 45 – 47), internal source of fund include, share capital, deposit, entrance fees, reserve, revolving fund. But ONOH in his lecture noted on marketing CO-OPERATIVES (1998:45) said all the above source of money may be important at one time or the other, the main source of finance are share capital, reserves, deposit, saving, over draft, home and trade credit, suppliers.

A. Share capital:

Ihinodu (1988.44) said that share capital could be fully paid or partially paid. Each number is expected to by some minimum number of shares upon joining the society. Usually, the by-law will set a maximum to which a single member can buy. This is to prevent members controlling the society

Onoh (1998,32) said how much is fixed as the maximum capital depends mainly on two factors;

1. The capital need of the society
2. The amount which is likely within the reach of the members

He said that maximum share holding is always 20% of the total capital. The practice has several advantages, which Onoh listed as follows:

1. In the primary society, each member has only one vote no matter the value of each individual capital
2. Where the liability is multiply, once liability is increase in direct proportion with once share capital.
3. Members with more capital are not automatically accorded to special position
4. Co-operative share capital attract little dividend. A maximum of 10% is paid.
5. No share certificate are issued o co-operative share. Companies share certificate are of pride to the owner.
6. It is not transferable

B. Reserves

BOB-IGWE (1993, 136 – 137) defines reserve as one of the most reliable source of funding in co-operatives. Every registered co-operative shall pay one quarter of its net surplus to a fund to be called the reserve fund of that society.

Onoh is his lecture noted (1988, 36 – 37) listed the advantage of the reserve fund as follows;

1. Cheap: they are the cheapest of the finance, as they do not have to earn interest through its cost calculation. They are usually subjected to normal rate of interest
2. They increase credit worthiness
3. They give some independence to the management of the society
4. They help the society to be independent from the external source.

C. Deposit:

Onoh maintain that credit co-operative obviously accept deposit and saving are their as there main source of income and it is from this saving and deposit that the society is able to give out loans. He said that a society may begging a marketing society but may find itself compelled to give an avenue to members to save their income. He said this saving attract an interest of

7-½% after the net surplus is determine

(ENCL, rule, Sec, 48 (9)

D. Revolving fund:

Ihunodu describe the revolving fund as an arrangement with the members of the society that a proportion of the profit due to them is retained by the society at the end of the year or a levy is charged on each product unite delivered by members. He said this amount is credited to the members account and it is considered a loan to them by the society. He sees this source to be advantageous because it saves members from having the produce the cash, which they may not have in case the society required it. Also the fund give members some interest and finally it provides the co-operatives with and internal source of fund.

External source:

External financing is necessitated by the fact that it is very difficult for an organization to be completely sufficient in financing its operation. Bob Igwe (1993:138) said the external financing has indeed become part and parcel of modern day business especially as the business grows.

External source include:

a)     Co-operating financial apex

b)    Central bank and Nigeria agric and cooperative bank.

c)     Commercial and co-operative and financial institution.

Ihinodu in his book (1988:44 – 46) says that external source can be through these;

1. Government granted loans
2. Bank loans: co-operative and special co-operative mortgage bank, government specialist bank, and private commercial banks.

i.  Grants:

Ihinodu (1988:45) believe that government in many countries attempts to encourage co-operatives especially at the formative stage. This usually done by providing grants in cash and kind. The grant are bases I the provision of infrastructure like building, purchase of machine, and training of staff and provision for education for the co-operative.

ii. Loans:

There are two major ways by which the government can provide loan to the co-operative society. The fund may be released directly from the government purse. Secondary, government may assist the co-operative from getting loan from financial institution by providing guarantee for such loans. In many developing countries, the government has remained the most important financier of the co-operative society.

CO-OPERATIVE BANKS

The bank is an important source of fund to co-operative society. Most of the loan fro this source are short term in nature. This is because the source of fund to such bank does not allow them to lend on long term.

SPECIAL CO-OPERATIVE MORTGAGE BANK

In some countries according to Ihinodu, there are some bank that due lends to co-operative I medium and short-term basis. This bank derives their sources from sale of bonds, which cannot be cashed at short notice. And thus are more suitable for applicant, for example his reputation as a farmer, his diligence and his reliability but this should not be sufficient proof of his credit worthiness. Any decision reached must be recorded in the minute for evidence and if any loan is granted, the secretary should sign the loan contract with the applicant and arrange for the disbursement (helm, 1968, 73)

The process of credit administration is governed by the credit policy of the society. Most credit societies limit themselves usually to short term loan form 10 to 15 percent interest rate. The minimum and the maximum amount to be lent are fixed. The banking ordinance and the co-operative ordinance imposed certain limits in this respect.

1. In no case should a single credit be higher then the total amount os share, capital plus reserves, or 50% of the total loan granted, whichever figure is lower. Single loan exceeding 30 – 50% of capital owned should only be giving with a written consent of the auditory association, the co-operative department or a secondary banking institution

In some society, the by-laws further provides that any credit exceeding 10 to 20% of the capital owned rewires either a qualified majority or unanimous decision by the loan committee or even the consent of the general meeting. The processing of a loan application should not exceed two months. The process of credit administration starts with the loan application and ends with the recovery of the loan.Helm (1968:81)

THE LOAN COMMITTEE

Helm (1968, 73 – 74), maintained that in co-operative credit society, the task of assessing credit request from members as well as the later supervision of the loan or any other form of credit is vested in the executive committee of the society or several loan committee with the participation of secretary in a larger society, any senior staff embers concerned with credit business.

Also the committee will meet at regular intervals to review ten pending loan applications taking into account all the relevant fact as well as the personality of the applicants, i.e. his reputation as a farmer, his diligence and his reliability. The information that the applicant is good amn or of a good character should not be considered sufficient proof of his credit worthiness. It is the duty of the committee to turn down any applicant, which after due consideration leaves doubt about its feasibility.

Apart from considering the circumstances of the individual case, the committee has review application within the wider context of the society credit policy. Any decision reached should be recorded in the minute to give clear directive for further action to be taken by the secretary acting for the committee. If the loan committee decides to grant the loan, it will authorize the secretary to sign the loan contract with the applicant and arranged the disbursement in the agreed form. The ease the work of the committee. Society can authorize the secretary to grant petty loan at his own direction. At the initial stage of any credit society, this practice is not recommended although with increasing experience and integrity of the management, it could be usefully be introduced.

In some agricultural credit society there is the custom of establishing before hand a maximum credit limit for each of the member, which the loan committee will refuse to when the application comes up.

ASSESSMENT OF THE LOAN APPLICATION

According to Arnaldo (1985, 195), the higher level of leverage been used by the co-operatives includes in this study are causing the co-operative lenders to look more closely at the credit worthiness of the firm. The finding of this study lend strong support to the practice of more emphasis repayment of ability rather than the not worth position when making loan decision. This seems vital for succeed co-operative lending in view of the higher liquidity and solvency position at which the firm are now operating. The point is further supported by the negative relationship of leverage for profitability, which was, detested foe some type of firm. Accurate assessment of the firm ability to repay principle and interest will minimize the loan risk for both borrowers and the lender. In this respect the relationship of the level of management to profitability and other measures of success detected in this study emphasis the importance to under of properly evaluating management when determining the credit minutes of a particular cop-operatives.

TERM OF CREDIT

Helm (1968,82-83) says the society, i.e. the loan committee, has to establish the term under which credit should be granted referring to the rate of interest and other changes, the form in which credit is given and the way in which it is disbursed. The rate of interest charge on credit will depend on the type of credit, the risk involved, the cost of operating the society and on the general level of interest. The difference between the rate for long term and short-term loans, especially overdraft, can vary variably while the difference is about 1.5% or 2%. This is especially on society, which relies heavily on outside borrowing, or where the savings rate is fixed by government.  Agricultural regulatory usually takes the form of a loan given on a separate loan account with fixed maturity dates, or it can be made available by overdraft facilities or current account and allowing farmers to discount bill of exchange. The maximum limits for overdraft or discount credits have to be established in the way as an ordinary loan, taking into account, of course the overall liability of the farmers. The credit can be disbursed in cash or in kind. The latter wherever it is possible, is preferable as it removes from the members the temptation to misappropriate borrowed funds and consequently the risk to the society is considerably reduced.

 SUPERVISION OF CREDIT

Orji (1989,32) says credit supervision or review after a loan has been made is generally a more effective control. Sufficient investigation and credit analysis is normally performed at the inception of the loan. Deterioration, tend to develop after the loan is made. Charges in the economy, industry, management or other unanticipated circumstances may subsequently adversely affect the ability of the borrower to repay the bank debt. Thus, continued vigilance on the part of the loan officer is required so that detection of these of these condition can be make at early stage. If the account officer is not properly policing the relationship, serious problem may result. A review at some subsequent date after the loan has been made will tend to bring these weaknesses to light. Likewise deficiencies in documentation and collateral may more readily be uncovered if the loan is again objectively analyzed by an independent group at some predetermined time after it has been hooked. In addition, the review should include steps, which ensures that established loan policies are been adhered to, that proper credit files are maintained and collateral and documentation meet prescribed standards.

LOAN RECOVERY

Sometimes, when borrowers fail to repay loans, actions are taken to recover the debt. Helm (1968,86-87) pointed out that the recovery of a loan should start well before the due date by giving an early warning (demand notice) to the debtor of the approaching maturity. For this purpose, a special record of the expiry date of all loan granted should be kept in chronological order, preferably in the form of a calendar. Extension should be only if the member can provide a valid reason, etc, and if the society, if any agrees. The committee will have to consider if an extension of the credit would really benefit the application. If the due date has pass without repayment immediate, action is called for. It is customary to send out second demand notices on the next following weekday or to arrange a visit by the secretary or a committeeman to member and to notify the sureties, if any. The member should be given a short period (3 to 7 days) to settle his account and should be warned of the result of non-payment after this date. If this approach is also ineffective, the matter should be reported to the director of co-operatives. In the recovery of the loan, secretary and the loan committee should be guarded against fictitious repayment. Fictitious repayment must be suggested if the member has applied for a new loan shortly before the due date of the expiry one. Agene (1995:235) maintained that a lending officer must ensure that credit repayment schedules are religiously kept. He says that any default should be promptly investigated upon and reported to the appropriate level of authority.

 CREDIT CO-OPERATION IN ENUGU SOUTH LGA.

Here are some of the credit co-operated societies in Enugu south LGA of Enugu state.

1. Kinsmen productive co-operative society LTD.
2. Automobile Enugu co-operative society east central staff of Nigeria LTD.
3. Akpugo MCS LTD.
4. Thrift savings and investment society LTD
5. Izukamma Enugu woman co-operative society
6. Crowther Enugu diocesan co-operative credit union LTD
7. Umuementa united Enugu south investment co-operative society LTD
8. Ugwuaji friendship co-operative LTD Enugu
9. Goodwill multipurpose co-operative society LTD etc.

They operate on the same level as

 SAVINGS UTILIZATION

The rotates the saving among members and direct the investment

b. Administration of loan: loan administered is short, medium and long term and the investment charge on the loan is 10%

c. Security: the types of security that hey accept for the loan are only share, deposit and security. The purpose for which loan are giving are;

1. Agricultural venture
2. Manufacturing venture
3. Marketing trading

According to the source they encounter many problems in the loan administration; they are

Lack of saving: the member attitude toward saving is more indifferent than positive.

1. Loan default: the often do not pay back loan on time, some even do not pay at tall.
2. Illiteracy: most of the member is illiterate; they do not know how to make use of the bank loan. The lag between loan administration and disbarment is one month. They recover loan through the following methods;
3. Deducting form member deposit
4. By persuading the sureties either inform the sureties from time to time to inform the borrowers to pay back the loan.

All these are ways through which select societies in Enugu south L.G.A manager their credit c-operative

Source – annual report of credit co-operative in Enugu south L.G.A

FACTOR MILITATING AGAINST EFFICIENT CREDIT ADMINISTRATION

Anyanwu in bullion (Vol. 20 No. 3. 1996) write that militating against efficient credit administration include, inadequate professional staff, equity contribution and collateral requirement, unsound lending, short term lending tendency and long time loan between loan and application and approval and disbursement. Inadequate qualify pros ional staff: Anyanwu: write that for a time. Most Nigeria bank prefers giving short loan to traders and contracts, the business of which yield quick and higher return. Their recent attempt at making long-term loan to the productive sector has been very successful because the bank generally has inefficient professional staff that can identify project. Also they do not have adequate manpower to monitor project and to ensure that the implementation and operation are on cause. Equity contribution and collateral requirement: Anyanwu maintained that equity contribution, as a capital investment is required from a project promoter as a way of ensuring that he ha a finical stat in the business. This state make him take the business more serious as its failure will imply the lose of his own capital. Currently, this ranges between 26 – 30 percent of project cost. Many business promoters are not able to meet this requirement because of their poor financial standing. According to him, another problem is the requirement for collateral security, before granting credit, most credit institution asks for security. These securities are put at the disposal of the lending bank, which can seize them if the business promoters fail to repay the loan. The aim is to minimize the risk of lose of the fund. When this security is strictly enforced, there is a conflict between this banking prudence and government policy of supporting targets borrowers who cannot afford such securities. Unsound lending practice: he said that often, due regard is not giving to the evaluation feasibility or otherwise of the projects. He says project with higher prospect for survival, growth and profitability are often refuse assistance while some with doubt profitability are sponsor perhaps because their promoters are well known to very senior bank official or the sound judgment of appraising office have been compromise. Short term lending tendencies: he contended that experience has shown that banks in Nigeria engage mainly in short term lending appropriation than lone term credit. They arrange that since their liability is largely composed of short-term deposit. It will be a mismatch of portfolio to grant long-term loan as deposition could come without notice for withdrawals. .Long time lag between loan application and approval: Anyanu maintain that there is very, unfortunately a long time lag between the submission of a project proposal and the approval and long lag between approval and disbursement. He said that a lag have the effect of undermining profitable venture. The delay is attributed mainly to inability of promoters to mobilize the required equity contribution and provide collateral securities.

—-This article is not complete———–This article is not complete————

This article was extracted from a Project Research Work Topic

“EFFECTIVE ADMINISTRATION OF CREDIT IN CO-OPERATIVE ENTERPRISE

(A CASE STUDY OF SELECTED CO-OERATIVES IN ENUGU SOUTH L.G.A OF ENUGU STATE”

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Effective Administration of Credit in Co-Operative Enterprise