ROLE OF COMMERCIAL BANK ON THE BUSINESS DEVELOPMENT, A CASE
STUDY OF DAHABSHIIL BANK, MOGADISHU-SOMALIA
BY
MOHAMED ABDULAHI YUSUF
VU-BBF-2101-0194
A RESEARCH REPORT SUBMITTED TO THE FACULTY OF BUSINESS AND
MANAGEMENT STUDIES I PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF BACHELORS
DEGREE IN BUSINESS ADMINISTRATION
(B&F) OF VICTORIA UNIVERSITY
JUNE, 2024
i
DECLARATION
I Mohamed Abdulahi Yusuf solemnly declare that the information presented in this research report
has never been submitted for a degree in this or any other institution of higher learning.
Signature: …………………………….…...
MOHAMED ABDULAHI YUSUF
VU-BBF-2101-0194
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Date…………/……………./…………….
APPROVAL
I certify that this Research report was compiled under my supervision and that it is now
ready for further examination.
Signature: ………………..……… Date…………………………
Mr. ELLY KWOROBA
(Supervisor)
DEDICATION
ii
This dissertation is dedicated to my parents for their tireless efforts both financial and moral
support during my education career.
ACKNOWLEDGEMENT
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I thank the Almighty Allah for the wisdom, strength and good health throughout my
studies. I also thank my supervisor for his tireless efforts while trying to put me on a right
track. I acknowledge his efforts while scrutinizing my work.
I thank my family members for the support they gave me both morally and financially.
Thanks to all respondents for participating in this study, without which it would not have
been fruitful.
I would also like to thank my friends, for encouraging me and the assistance you have
always rendered to me, without you, this research would have been a nightmare.
TABLE OF CONTENTS
iv
DECLARATION ................................................................................................................. i
APPROVAL ....................................................................................................................... ii
DEDICATION .................................................................................................................. iii
ACKNOWLEDGEMENT ................................................................................................. iv
TABLE OF CONTENTS .................................................................................................... v
LIST OF ACRONYMS .................................................................................................... xii
ABSTRACT ..................................................................................................................... 1
CHAPTER ONE ............................................................................................................... 1
INTRODUCTION............................................................................................................. 1
1.1 Background of the study ............................................................................................... 1
1.2 Problem Statement ........................................................................................................ 3
1.3 Purpose of the Study ..................................................................................................... 4
1.4 Objectives of the Study ................................................................................................. 4
1.5 Research Questions ....................................................................................................... 4
1.6 Hypothesis..................................................................................................................... 4
1.7.4 Time Scope ................................................................................................................ 5
1.8 Significance of the Study .............................................................................................. 5
1.9 Conceptual Framework ................................................................................................. 6
1.10 Operational Definition of Terms ................................................................................. 7
CHAPTER TWO .............................................................................................................. 8
LITERATURE REVIEW ................................................................................................ 8
2.0 Introduction ................................................................................................................... 8
2.1 Theoretical Review ....................................................................................................... 8
2.1.1 Asymmetric Information Theory ............................................................................... 8
2.2.2 Transactions Costs Theory ....................................................................................... 10
2.2 Empirical Studies ........................................................................................................ 12
2.2.1 Business Development ............................................................................................. 12
2.2.1.1 The Effect of Credit Appraisal on the Business Development ............................. 16
2.2.1.2 The Effect of Credit Risk Control on the Business Development ........................ 22
2.2.1.3 The Effect of Loan Collection Policy on the Business Development .................. 24
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2.2.2 Loan Portfolio .......................................................................................................... 24
2.2.2.1 Compliance with Regulatory Requirements ......................................................... 27
2.2.2.2 Loan Recovery ...................................................................................................... 29
2.2.3 Relationship between Loan Portfolio and Business Development .......................... 29
2.4 Research Gaps ............................................................................................................. 31
CHAPTER THREE ........................................................................................................ 32
METHODOLOGY ......................................................................................................... 32
3.0 Introduction ................................................................................................................. 32
3.1 Research Design.......................................................................................................... 32
3.2 Target Population .............................................................................................
32
3.3 Sample Size Determination and Sampling Techniques ......................................... 32
3.3.1 Sample Size Determination ............................................................................ 32
Table 3.4: Sample Size Determination and Sampling Techniques .............................. 33
3.4 Sampling Methods and Techniques ....................................................................33
3.5 Data Collection Sources ....................................................................................34
3.5.1 Primary Sources of Data ................................................................................ 34
3.5.2 Secondary Sources of Data ...........................................................................34
3.6 Data collection methods ................................................................................... 35
3.6.1 Surveys .................................................................................................................... 35
3.6.2 Document Review .................................................................................................... 35
3.7 Research Instruments .................................................................................................. 35
3.7.1 Questionnaires.......................................................................................................... 35
3.7.2 Document Review .................................................................................................... 36
3.8 Data Collection Procedures .............................................................................. 36
3.10 Measurement of validity and reliability ............................................................ 37
3.10.1 Validity ...................................................................................................... 37
3.10.2 Reliability of Instruments .............................................................................37
3.11 Data Processing, Analysis and Presentation .......................................................38
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3.12 Ethical Consideration ................................................................................................ 38
3.13 Anticipated Limitations of the Study ................................................................ 39
CHAPTER FOUR ...........................................................................................................
40
DATA PRESENTATION, INTERPRETATION AND ANALYSIS .........................40
4.1 Introduction ................................................................................................................. 40
4.2 Response Rate ............................................................................................................. 40
4.3 Demographic Characteristics of Respondents ............................................................ 40
4.3.1 Gender of the Respondents ...................................................................................... 41
4.3.2 Age of the respondents............................................................................................. 42
4.3.3 Education Level of Respondents ............................................................................. 43
4.4 Description of results about the specific objectives of the study ................................ 44
4.4.1 Effect of micro credit services on business development in Dahabshiil Bank ........ 44
Table 4.9: Coefficientsa ..................................................................................................... 52
4.4.2 Effect of micro savings services on business development in Dahabshiil Bank ..... 52
4.4.3 Effect of capacity building services on business development in Dahabshiil Bank 60
4.4 Multiple Regression analysis ...................................................................................... 68
CHAPTER FIVE .............................................................................................................. 70
FINDINGS, DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS ............. 70
5.1 Introduction ................................................................................................................. 70
5.2 Summary of findings................................................................................................... 70
5.3 Discussion of the findings ........................................................................................... 71
5.3.1 Effect of micro credit services on business development in Dahabshiil Bank ........ 71
5.3.2 Effect of micro savings services on business development in Dahabshiil Bank ..... 72
5.3.3 Objective three: To examine the effect of capacity building services on business
development in Dahabshiil Bank ...................................................................................... 73
5.4 Recommendations ...................................................................................................... 74
5.4.1 Effect of micro credit services on business development in Dahabshiil Bank ........ 74
5.4.2 Effect of micro savings services on business development in Dahabshiil Bank ..... 74
vii
5.4.3 Effect of capacity building services on business development in Dahabshiil Bank 74
5.5 Areas for further research ........................................................................................... 75
REFERENCES ................................................................................................................76
APPENDIX I: QUESTIONNAIRE .................................................................................. 83
APENDIX II: Krejcie and Morgan Table for determining a Sample Size from a given
Population ......................................................................................................................... 87
LIST OF TABLES
Table 4.1: Dahabshiil Bank loans are accessible by most of the women in Mogadishu
Somalia ............................................................................................................................. 44
Table 4.2: Dahabshiil Bank offers agricultural loans to women farmers in Mogadishu
Somalia ............................................................................................................................. 45
Table 4.3: Dahabshiil Bank loans have a long repayment period ..................................... 46
Table 4.4: Dahabshiil Bank loans are more reliable compared to other financial
institutions in Mogadishu Somalia.................................................................................... 47
Table 4.5: Loan clients always obtain the exact amount of loans they apply for from
Dahabshiil Bank ................................................................................................................ 48
Table 4.6: Dahabshiil Bank employees fully explain to clients about its credit services in
a language that both parties understand ............................................................................ 49
Table 4.7: Dahabshiil Bank tolerates loan clients for delays especially when they are
struck by some uncertainties (illness, robbery)................................................................. 50
Table 4.8: Results of a Pearson correlation analysis between micro credit services and
business development in Mogadishu Somalia .................................................................. 51
Table 4.9: Coefficientsa .....................................................................................................52
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Table 4.10: Dahabshiil Bank offers micro saving services to women in Mogadishu
Somalia ............................................................................................................................. 53
Table 4.11: Dahabshiil Bank savings services have helped me to meet my basic needs . 54
Table 4.12: I use my Dahabshiil Bank savings to raise school fees for my children ....... 55
Table 4.13: I also use my Dahabshiil Bank account to save money for my business ...... 56
Table 4.14: Dahabshiil Bank savings services mainly target the poor in our community 56
Table 4.15: Dahabshiil Bank offers savings incentives to its clients ................................ 57
Table 4.16: Dahabshiil Bank also offers group saving schemes to its clients .................. 58
Table 4.17: Results of a Pearson correlation analysis between micro savings services and
business development in Mogadishu Somalia .................................................................. 59
Table 4.18: Coefficientsa ...................................................................................................60
Table 4.19: Dahabshiil Bank always trains borrowers on how to use the loans acquired 61
Table 4.20: The capacity building programs always target the women in Mogadishu .... 61
Table 4.21: The capacity building programs are accessible by all women irrespective of
status or religion ................................................................................................................ 62
Table 4.22: The capacity building programs are relevant given the financial needs of
women in Mogadishu ........................................................................................................ 63
Table 4.23: The capacity building programs seek to enhance entrepreneurial abilities of
women in Mogadishu ........................................................................................................ 64
Table 4.24: The capacity building programs also seek to enhance financial management
skills among women in Mogadishu .................................................................................. 65
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Table 4.25: Results of a Pearson correlation analysis between capacity building services
and business development in Mogadishu Somalia ........................................................66
Table 4.26:……………………………………………………………………………67
Coefficientsa …………………………………………………………………………77
Table 4.27: Model Summary ............................................................................................ 68
LIST OF FIGURES
Figure 1: Conceptual Framework ....................................................................................... 6
Figure 2: Gender of the Respondents................................................................................ 41
Figure 3: Age of the respondents ...................................................................................... 42
LIST OF
ABBREVITION
AMFIU
:
Association of Micro Enterprise Finance Institutions of Uganda
ASCAs
:
Accumulating Savings and Credit Associations
BANSEFI
:
Banco del AhorroNacional y ServiciosFinancieros
FEM
:
‘Femmes Entrepreneuses en Méditerranée’)
MSE
:
Micro-Saving Expert
MFIs
:
micro finance institutions
MFO
:
Micro Finance Opportunities
NGOs
:
Non-Governmental Organizations
NABARD
:
National Bank for Agricultural and Rural Development
SMEs
:
small and medium size businesses
SSA
:
Sub Sahara Africa
UWFT
:
Uganda's Women Finance Trust
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WWB
:
Women’s World Banking
ABSTRACT
The study was set to establish the effect of microfinance services on business development
in Dahabshiil Bank. Objectively the study sought to establish how micro credit services,
micro savings services and capacity building services affect business development in
Dahabshiil Bank.
The researcher adopted a correlational research design to establish how each of the
different microfinance services relates with business development in Mogadishu Somalia.
A sample of 152 respondents was selected from study population of 250 persons. However,
the researcher managed to access 135 respondents which gave a response rate of 88%.
Respondents were selected using Purposive and simple random sampling techniques. Data
was collected by use of self-administered closed ended questionnaires.
Study findings were that a combination of all the three Micro finance services would
predict up to 65.5% variations in business development in Mogadishu Somalia based on
the sample and 64.7% based on the total population.
The researcher therefore based on these findings to reject all the three null hypotheses and
conclude that there is a statistically significant relationship between Capacity building
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services, Micro credit services and Micro savings services and business development in
Mogadishu Somalia.
It was also recommended that management of Dahabshiil Bank needs to start offering
savings incentives like interest on savings to its clients. Additionally, more efforts should
also be geared towards reinforcing capacity building programs offered by Dahabshiil Bank.
Among others, instead of using only its employees in implementing the programs,
Dahabshiil Bank may start involving the clients themselves, consultants and other
influential persons in Mogadishu. This is likely to promote ownership and continued
support of the program and at the same time develops a cadre of local experts who will
help create lasting innovation.
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CHAPTER ONE
INTRODUCTION
1.1 Background of the study
World over, credit has proved to be the most critical of all risks faced by banking
institutions. A study of bank failures in New England found that, of the 62 banks in
existence before 1984, which failed from 1989 to 1992 in 58 cases it was observed that
loans and advances were not being repaid in time (Caprio & Kilngbiel, 2020). Business
Development in our banking sector today has taken a different dimension from what it used
to be. The banking industry has adopted a lot of strategies in checking business
Development in order to stay in business. Though the banking industry over the years has
lost large amount of money as a result of the turning source of credit exposure and taken
interest rate position. Commercial banks world over are now being required in the market
because of their competence to provide transaction efficiency, market knowledge and
funding capability. To perform these roles, the banks act as the most important participants
in their transaction process of which they use their own balance sheet to make it easier and
making sure that their associated risk is absorbed (Besley, 2018).
In sub-Saharan Africa, the Central Bank of Nigeria established a credit act in 1990 which
empowered banks to render returns to the credit risk management system in respect to its
entire customers with aggregate outstanding debit balance of one million naira and above
(Funso, Kolapo & Kolade, 2020). This made Nigerian banks to universally embark on
upgrading their control system and risk management because this coincidental activity is
recognized as the industry physiological weakness to financial risk.
In Kenya, Gatuhu (2017) found that the biggest risk for financial institutions is lending
money and not getting it back. Hence, the issue of business Development has a profound
implication both at the micro and macro level. When credit is allocated poorly it raises
costs to successful borrowers, erodes the fund, and reduces banks flexibility in redirecting
towards alternative activities. Moreover, the more the credit, the higher is the risk
associated with it. The problem of loan default, which is resulted from poor business
Development, reduces the lending capacity of a bank. It also denies new applicants' access
1
to credit as the bank’s cash flow management problems augment in direct proportion to the
increasing default problem. In other words, it may disturb the normal inflow and outflow
of fund a bank has to keep staying in sustainable credit market. Adequately managing credit
in financial institutions (FIs) is critical for the survival and growth of the FIs. In the case
of banks, the issue of business Development is of even greater concern because of the
higher levels of perceived risks resulting from some of the characteristics of clients,
business conditions and economic environment in which they find themselves (Gatuhu,
2017).
In Somalia, the first commercial bank (Bank of Somalia) was started in 1922 during the
colonial rule of the Belgium. In 1960, another commercial bank (Commercial Bank of
Somalia) was established. However, for most of the post-independence period (1970s1980s), several commercial banks came into play (Abdifatah & Mohamud, 2020). With
financial liberalization in the late 1980s and early 1990s, Somalia’s financial sector became
more diversified with a series of commercial banks both foreign and local, with the latest
establishment being Kenya Commercial Bank and Cooperative Rural and Development
Bank both in 2020 (Bank of the Republic of Somalia, 2018). However, the country has no
stock market and no dynamic informal financial markets, implying that most financial
transactions are carried out through banks. Financial institutions are concentrated in
Mogadishu, the capital city, but the main banks have branches in a number of provinces.
Commercial banks implement very important functions in country‘s financial system and
whole economy, so to reduce the likelihood of financial instability, the National Bank of
the Republic of Somalia has introduced prudential regulation frameworks, making banking
one of the most heavily regulated industries. However the recent statistics of the Bank of
the Republic of Somalia (2018) revealed doubtful and nonperforming credits in loan
portfolios of commercial banks. It is against this background that this study investigated
the effect of commercial bank and business development among commercial banks in
Mogadishu, Somalia.
Business Development is defined by Hosna et al. (2018) as the executive responsibility of
determining customer’s credit ratings as part of the credit control function. According to
2
Myers and Brealey (2017), business Development are methods and strategies adopted by a
firm to ensure that they maintain an optimal level of credit and its effective management.
Brigham et l. (2020) defined business Development as the process of granting credit, the
terms it's granted on and recovering this credit when it's due. According to Gitman (2018),
business Development is a function performed within a company to improve and control
credit policies that will lead to increased revenues and lower risk including increasing
collections, reducing credit costs, extending more credit to creditworthy customers, and
developing competitive credit terms. In this study, business Development was
operationalized as credit appraisal, credit risk control, and collection Policy.
State ownership in the banking sector is low, representing only 3.6 percent of total capital
of commercial banks. However, the government still has substantial influence in the
banking sector through its public entities that own up to 31.6 percent of the capital of all
banks combined. The government is also a majority shareholder in two out of the three
most important banks (COMBSO and CBM). Hence, the government is still able to
influence the management of banks through the nomination of its representatives to the
board of directors. The government’s presence also has implications in the allocation of
credit, directly through borrowing by state entities and indirectly through political pressure
on bank management ((Nkurunziza et al. 2018).
1.2 Problem Statement
Business Development is one of the most important activities in any company and cannot
be overlooked by any economic enterprise engaged in credit irrespective of its business
nature. It is the process to ensure that customers will pay for the products delivered or the
services rendered. It is for this reason that several studies related to commercial bank and
the business Development have been done in neighboring countries such as Ethiopia,
Kenya, etc and they include among others: Kagoyire and Shukla (2016); Gichuki1 and
Kagiri (2018); Mulema (2020). These studies were done to check the business
Development using business Development. The commercial bank is profit seeking
business firm dealing in the money and the backbone of the business development, if the
commercial bank doesn’t exist the business development don’t exist. So that the
commercial bank is one of the most important positions in the modern the business
3
development in world. The commercial bank is significant in the business development.
Similar studies have been done in Somalia as well; however, the problem of noncompliance
with regulatory requirements and poor loan recovery is still evident among commercial
banks in Mogadishu (Nkurunziza, et al. 2018). It is against this background that this study
will investigate the role of commercial bank on the Business Development a case study of
Dahabshiil Bank Commercial Bank, Mogadishu-Somalia.
1.3 Purpose of the Study
The main purpose of this research was to determine the role of commercial bank and
business development of Dahabshiil Bank Commercial Bank, Mogadishu-Somalia.
1.4 Objectives of the Study
i.
To examine the effect of micro credit services on business development in
Dahabshiil Bank, Mogadishu Somalia ii. To examine the effect of micro savings
services on business development in
Dahabshiil Bank, Mogadishu Somalia iii. To examine the effect of capacity
building services on business development in Dahabshiil Bank, Mogadishu Somalia
1.5 Research Questions
i.
What are the effect of micro credit services on business development in Dahabshiil
Bank, Mogadishu Somalia?
ii.
What are the effect of micro savings services on business development in
Dahabshiil Bank, Mogadishu Somalia? iii. What are the effect of capacity building
services on business development in Dahabshiil Bank, Mogadishu Somalia?
1.6 Hypothesis
i.
H01: Micro credit services has no significant effect on the Business Development
of Dahabshiil Bank Commercial Bank, Mogadishu-Somalia.
ii.
H02: Micro savings services has no significant effect on the Business
iii.
Development of Dahabshiil Bank Commercial Bank, Mogadishu-Somalia.
H03: Capacity building services has no significant effect on the Business
4
Development of Dahabshiil Bank Commercial Bank, Mogadishu-Somalia.
1.7 Scope of the Study
1.7.1 Geographical Scope
This study was conducted in Dahabshiil Bank Commercial Bank, Mogadishu-Somalia.
This the capital and most populous city of Somalia. The city has served as an important
port connecting traders across the Indian Ocean for millennia, and has an estimated urban
population of 6,610,483. Mogadishu is located in the coastal Banadir region on the Indian
Ocean, which unlike other Somali regions, is considered a municipality rather than a
maamul goboleed (federal state).
1.7.2 Content Scope
This study was confined to business Development (independent variable) measured using
credit appraisal, credit risk control, and loan collection policy. Business Development
(dependent variable) was confined to compliance with regulatory requirements and
recovery of loans.
1.7.4 Time Scope
This study reviewed a period of 5 years to establish the trends in the commercial banks
visà-vis business Development among commercial banks in Mogadishu. The actual study
will take a period of 4 months, that is, from June, 2023 to September, 2023. This period
will help the researcher to write the proposal, do data collection and submit the final report.
1.8 Significance of the Study
The findings of this study were resourceful to the following groups.
Management of Commercial Banks: The findings of the study may help management in
identifying potential risks rising out of the banks prevailing lending rates and their impact
on loan portfolio development in order to strengthen its internal control system and design.
This may balance and contain overall loan portfolio risk by anticipating and controlling
exposure to various identified markets, customers and operational conditions.
5
Employees: The study findings may help employees to be in better position to adhere to
loan portfolio management policies and procedures to avoid fraud, defaults and job
negligence that result into incurring losses in the bank so as to improve development.
Customers: The findings may help customers of commercial banks to be more responsible
and comply with the agreements of borrowing by providing the authentic documents and
making payments as agreed to help the bank reduce losses that result from loan defaulters.
Academicians and professionals: The study findings may also be of practical significance
to both academicians and general practitioners by providing a better insight into the
understanding of the role business Development in mitigating credit risk to avoid losses in
commercial banks. The findings may also add to the pool of knowledge on the shelves of
university libraries and act as a ground for further research in the same areas.
1.9 Conceptual Framework
Independent Variables
Dependent Variable
Economic
development of
women
Women
•
empowerment
• Accumulation
of wealth
• Accessibility to
social services
Salaam Somali bank
microfinance services
• Micro credit
services
• Micro savings
services
• Capacity building
services
Intervening Variables
• Education level
• Cultural norms
• Political
environment
Figure 1: Conceptual Framework
Source: Developed by the researcher, 2023
This conceptual framework illustrates Dahabshiil Bank microfinance services (micro credit
services, micro savings services and capacity building services) that are expected to have
6
a direct effect on business development in Mogadishu Somalia. The researcher anticipates
that effective micro credit services, micro savings services and capacity building services
would lead to better business development in Mogadishu Somalia reflected in terms of
Women empowerment, Accumulation of wealth and Accessibility to social services. The
figure also shows that there are several intervening variables which may impede desirable
business development in Mogadishu Somalia even when Dahabshiil Bank microfinance
services (micro credit services, micro savings services and capacity building services) are
effective. Consequently, such variables including Education level, Cultural norms and
Political environment must be favorable and held constant for the anticipated relationship
between Dahabshiil Bank microfinance services and business development in Mogadishu
Somalia to prevail.
1.10 Operational Definition of Terms
Business Development: refers to methods and strategies adopted by a firm to ensure that
they maintain an optimal level of credit and its effective management.
Development: refers to the accomplishment of a given task measured against preset known
standards of accuracy, completeness, cost, and speed.
Loan Portfolio: refers to the total amount of money given out in different loan products,
to the different types of borrowers, this may be comprised of: salary loans, group
guaranteed loans, individual loans and corporate loans
Commercial Bank: refers to a bank which more specifically deals with deposit and loan
services provided to corporations or large/middle-sized business-as opposed to individual
members of the public/small business-retail banking, or merchant banks.
CHAPTER TWO
LITERATURE REVIEW
7
2.0 Introduction
This chapter reviews literature from different authors and scholars in accordance to the
research objectives. The chapter is further subdivided into theoretical review, conceptual
framework and review of related literature.
2.1 Theoretical Review
This study was guided by two theories: Asymmetric Information Theory and Transactions
Costs Theory.
2.1.1 Asymmetric Information Theory
Information asymmetry refers to a situation where business owners or manager know more
about the prospects for, and risks facing their business, than do lenders (PWHC, 2020)
cited in Eppy (2020). It describes a condition in which all parties involved in an undertaking
do not know relevant information. In a debt market, information asymmetry arises when a
borrower who takes a loan usually has better information about the potential risks and
returns associated with investment projects for which the funds are earmarked. The lender
on the other hand does not have sufficient information concerning the borrower (Edwards
and Turnbull, 2016).
Binks et al (1992) point out that perceived information asymmetry poses two problems for
the banks, moral hazard (monitoring entrepreneurial behavior) and adverse selection
(making errors in lending decisions). Banks will find it difficult to overcome these
problems because it is not economical to devote resources to appraisal and monitoring
where lending is for relatively small amounts. This is because data needed to screen credit
applications and to monitor borrowers are not freely available to banks.
Bankers face a situation of information asymmetry when assessing lending applications
(Binks and Ennew, 1996, 1997). The information required to assess the competence and
commitment of the entrepreneur, and the prospects of the business is either not available,
uneconomic to obtain or difficult to interpret. This creates two types of risks for the Banker
(Deakins, 2020). That is, the risk of adverse selection which occurs when banks lend to
8
businesses which subsequently fail (type II error), or when they do not lend to businesses
which go on to become" successful, or have the potential to do so (type I error) Altman
(1971).
According to Saxton and Ashley (2017), because of information asymmetry, lenders tend
to have a hard time differentiating between good credit risks and bad credit risks, and
demand a blanket premium over and above the existing rates as compensation for the risk
arising out of the inability to determine who indeed should be lent to. This causes the good
firms to stop borrowing from such a lender because the high rates have devalued their
strong credit history while the bad firms become very eager to borrow from such a lender
because they know for sure that judging by the strength of their cash-flows, they should be
charged an even higher interest rate. As a result, lenders end up with a loan portfolio
comprising almost entirely of bad credit risks.
Garmaise and Natividad (2015) hold the opinion that moral hazard occurs after the money
has been disbursed to the borrower and it arises out of the fact that the borrower may have
an incentive to breach the loan covenants by investing in ‘immoral projects’ which are
unacceptable in the eyes of the borrower because inasmuch as they have a high possibility
of gain to the borrower, they also have a high possibility of failure which will have the
most detrimental effect on the lender. Information asymmetry once again causes moral
hazard because of the lender’s lack of knowledge about the borrower’s activities. Moral
hazard also occurs as a result of high enforcement costs of the debt covenants. In this
instance, the lender simply decides that its not worth the effort to keep on chasing after
borrowers and have them invest the money in stipulated projects – giving them a freeway
to invest in high risk ventures
Aboody and Lev (2018) hold that though information asymmetry has detrimental effects
on a nation’s banking sector, however, it can be remedied through the follow strategies.
Data Sharing – Due to the secrecy which has continued to shroud our banking system, at
times there are red flags all over about serial defaulters but banks miss them simply because
they consider immaterial information about their customers as classified. Thus, a person
may become unable to repay a loan on a bad investment idea (which he won’t drop because
9
of his single mindedness) and get his property auctioned but walk over to a different bank
and secure financing for the same bad project, probably using a different product. If our
bank’s IT systems could get partially integrated, this is a problem which can be quite easily
eliminated.
Government Participation – Due to the vulnerability and corruption in our administration
systems, there has been instances of forgery of collateral documents such as title deeds.
There has been instances in which several title deeds have been issued on a single piece of
land, and I do not want to imagine what would happen if each and every one of those
holders would approach his bank for a loan with his title deed as collateral and default on
the same. Therefore computerization of land title is a necessity here.
Improved Loan Underwriting – In some commercial banks, loan underwriters are basically
data entry clerks. They simply key in information from an application form without paying
due attention to material facts which could be evident right on the application form.
Underwriting is the entry point of risk in any financial services firm and some risks could
be avoided if this initial process could be carried out meticulously. There is always an
essence of evaluating the proposed project’s cash generation potential, its strength,
weaknesses, opportunities and threats (SWOT) analysis and its history before acceptance.
2.2.2 Transactions Costs Theory
First developed by Schwartz (1974), this theory conjectures that suppliers may have an
advantage over traditional lenders in checking the real financial situation or the credit
worthiness of their clients. Suppliers also have a better ability to monitor and force
repayment of the credit. All these superiorities may give suppliers a cost advantage when
compared with financial institutions. Three sources of cost advantage were classified by
Petersen and Rajan (1997) as follows: information acquisition, controlling the buyer and
salvaging value from existing assets. The first source of cost advantage can be explained
by the fact that sellers can get information about buyers faster and at lower cost because it
is obtained in the normal course of business. That is, the frequency and the amount of the
buyer’s orders give suppliers an idea of the client’s situation; the buyer’s rejection of
discounts for early payment may serve to alert the supplier of a weakening in the
10
creditworthiness of the buyer, and sellers usually visit customers more often than financial
institutions do.
According to Douglass (2020), transaction cost theory tries to explain why companies exist,
and why companies expand or source out activities to the external environment. The
transaction cost theory supposes that companies try to minimize the costs of exchanging
resources with the environment, and that companies try to minimize the bureaucratic costs
of exchanges within the company. Companies are therefore weighing the costs of
exchanging resources with the environment, against the bureaucratic costs of performing
activities in-house.
According to Douma and Schreuder (2020), the theory sees institutions and market as
different possible forms of organizing and coordinating economic transactions. When
external transaction costs are higher than the company's internal bureaucratic costs, the
company will grow, because the company is able to perform its activities more cheaply,
than if the activities were performed in the market. However, if the bureaucratic costs for
coordinating the activity are higher than the external transaction costs, the company will
be downsized.
According to Ronald Coase (2018), every company will expand as long as the company's
activities can be performed cheaper within the company, than by e.g. outsourcing the
activities to external providers in the market. According to Williamson (2018), a
transaction cost occurs "when a good or a service is transferred across a technologically
separable interface". Therefore, transaction costs arise every time a product or service is
being transferred from one stage to another, where new sets of technological capabilities
are needed to make the product or service.
Aboody and Lev (2018) posit that the transaction costs related to the exchange of resources
with the external environment could be reflected by the following factors: environmental
uncertainty, opportunism, risks, bounded rationality, and core company assets. The factors
above will all potentially increase the external transaction costs, where it may become
rather expensive for a company to control these factors. Therefore, it may very well be
more economic to maintain the activity in-house, so that the company will not use resources
11
on e.g. contracts with suppliers, meetings, supervision etc. Therefore, if companies see the
environmental uncertainty as high, they might choose to not outsource or exchange
resources with the environment.
For example, if a company is thinking about outsourcing its production of a given product,
it may assess the costs related to such a transaction with the environment. If the company
sees it as difficult to formulate a contract that controls the uncertainties related to the
exchange, the company may regard it as too costly to outsource the production. This is
because the transaction costs of monitoring the exchange are perceived to be higher, than
the bureaucratic costs of performing the activity in-house. Managers must therefore weigh
the internal transaction costs against the external transaction costs, before the company
decides whether or not to keep some activity in-house, or to e.g. outsource the activity to
the environment.
2.2 Empirical Studies
2.2.1 Business Development
Business Development is one of the most important activities in any company and cannot
be overlooked by any economic enterprise engaged in credit irrespective of its business
nature. It is the process to ensure that customers will pay for the products delivered or the
services rendered. Myers and Brealey (2017) describe business Development as methods
and strategies adopted by a firm to ensure that they maintain an optimal level of credit and
its effective management. It is an aspect of financial management involving credit analysis,
credit rating, credit classification and credit reporting. Nelson (2020) views business
Development as simply the means by which an entity manages its credit sales. It is a
prerequisite for any entity dealing with credit transactions since it is impossible to have a
zero credit or default risk.
The higher the amount of accounts receivables and their age, the higher the finance costs
incurred to maintain them. If these receivables are not collectible on time and urgent cash
needs arise, a firm may result to borrowing and the opportunity cost is the interest expense
paid. Nzotta (2020) opined that business Development greatly influences the success or
failure of commercial banks and other financial institutions. This is because the failure of
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deposit banks is influenced to a large extent by the quality of credit decisions and thus the
quality of the risky assets. He further notes that, business Development provides a leading
indicator of the quality of deposit banks credit portfolio.
According to Inkumbi (2018), credit risk management helps credit expert to know when to
accept a credit applicant as to avoid destroying the banks reputation and making decision
in order to explore unavoidable credit risk which gives more profit. Controlling a risk
results in encouraging rewards that give internal audit more technical support service and
customized training in banks or financial institutions.
Kariuki (2015) assert that the key requirement for effective business Development is the
ability to intelligently and efficiently manage customer credit lines. In order to minimize
exposure to bad debt, over-reserving and bankruptcies, companies must have greater
insight into customer financial strength, credit score history and changing payment
patterns. Turyahebwa (2017) goes on to point out that business Development starts with
the sale and does not stop until the full and final payment has been received. It is as
important as part of the deal as closing the sale. In fact, a sale is technically not a sale until
the money has been collected. It follows that principles of goods lending shall be concerned
with ensuring, so far as possible that the borrower will be able to make scheduled payments
with interest in full and within the required time period otherwise, the profit from an interest
earned is reduced or even wiped out by the bad debt when the customer eventually defaults.
JoEtta (2020) posits that business Development is concerned primarily with managing
debtors and financing debts. The objectives of business Development can be stated as safe
guarding the companies’ investments in debtors and optimizing operational cash flows.
Policies and procedures must be applied for granting credit to customers, collecting
payment and limiting the risk of non-payments (JoEtta, 2020).
Business Development is an aspect of financial management involving credit analysis,
credit rating, credit classification and credit reporting. A proper business Development will
lower the capital that is locked with the debtors, and also reduces the possibility of getting
into bad debts (Gisemba, 2015). According to Ogilo (2020), unless a seller has built into
his selling price additional costs for late payment, or is successful in recovering those costs
13
by way of interest charged, then any overdue account will affect his profit. In some
competitive markets, companies can be tempted by the prospects of increased business if
additional credit is given, but unless it can be certain that additional profits from increased
sales will outweigh the increased costs of credit, or said costs can be recovered through
higher prices, then the practice is fraught with danger.
On the same note, Reilly and Brown (2020) explain that most companies can readily see
losses incurred by bad debts, customers going into liquidation, receivership or bankruptcy.
The writing-off of bad debt losses visibly reduces the Profit and Loss Account. The interest
cost of late payment is less visible and can go unnoticed as a cost effect. It is infrequently
measured separately because it is mixed in with the total bank charges for all activities.
The total bank interest is also reduced by the borrowing cost saved by paying bills late.
Credit managers can measure this interest cost separately for debtors, and the results can
be seen by many as startling because the cost of waiting for payment beyond terms is
usually ten times the cost of bad debt losses. Effective management of accounts receivables
involves designing and documenting a credit policy. Many entities face liquidity and
inadequate working capital problems due to lax credit standards and inappropriate credit
policies (Reilly & Brown, 2020).
Therefore, sound business Development is a prerequisite for a financial institution’s
stability and continuing profitability, while deteriorating credit quality is the most frequent
cause of poor financial development and condition. According to Gitman (2016), the
probability of bad debts increases as credit standards are relaxed. Firms must therefore
ensure that the management of receivables is efficient and effective. Such delays on
collecting cash from debtors as they fall due has serious financial problems, increased bad
debts and affects customer relations. If payment is made late, then profitability is eroded
and if payment is not made at all, then a total loss is incurred. On that basis, it is simply
good business to put business Development at the ‘front end’ by managing it strategically
(Gitman, 2016).
The Basel accords on business Development are recommendations on banking issued by
the Basel committee on banking. The main objective of the Basel accords is to create an
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international standard that banking regulators would use when creating regulations in their
own countries. These accords are about how much capital the bank should hold to cushion
itself against financial and operational risks that they face. The foundation of the Basel
accords I is the Cooke ratio. This ratio is defined as the amount of capital to risk weighted
assets which must be at least 8%.The risk weighted assets relates to the amount lend by the
bank multiplied by the risk weight. Basel I accords allows banks to use their own internal
models in measuring credit, hence making it easier for banks use (Basel I, 2020). This
simplicity however has opened windows to some unanticipated credit risk that are being
experienced globally today. Consequently, a new more risk sensitive capital- adequacy
framework was issued in 2020. Basel II accord made some improvements over the focus
on the three pillars of risk minimization. These are: minimum capital requirement that is
expected to determine the amount of capital requirements given the level of: credit risk,
market risk and operational risks that the banks are exposed to.
Pillar II is on supervisory review-It provides a framework for dealing with all other risks
that the bank may face. These includes: systematic risk, concentration risk, strategic risk
and reputation risk. Pillar III focuses on market discipline- designed to allow the financial
community have a better picture of the overall risk position of the bank by allowing
competitors to price and deal effectively (Basel II, 2020).
Although the new accord aims at boosting the safety of the banking system, It is feared by
many Central banks worldwide for it may target only internationally active banks with 20%
of the business from international operations and significant banks which are defined as
those whose market share in total assets of domestic banking exceed 1%. However Basel
II accord remains a challenge to the entire banking industry. Banks should be conceptually
and academically ready to adopt the new norms. This involves a paradigm shift in the direct
supervisory focus away to the implementation issue in many parts of the world. Much of
the Basel accords have been instrumental in providing some effective business
Development framework thereby avoiding some credit crises. It has become apparent that,
some risk measurements have to be strengthened so as to reduce high incidences of
nonperforming loans. These risks are: risk of corporate governance, special or uncalculated
15
risks caused by factors beyond the expectations of risk undertaking and overheads
(Somoye, 2015).
This study measured business Development using credit appraisal, credit risk control, and
collection policy. The following section provides details of the variables.
2.2.1.1 The Effect of Credit Appraisal on the Business Development
Credit Appraisal is the process by which a lender appraises the technical feasibility,
economic viability and bankability including creditworthiness of the prospective borrower
(Arnold, 2017). Credit appraisal process of a customer lies in assessing if that customer is
liable to repay the loan amount in the stipulated time, or not. Here bank has their own
methodology to determine if a borrower is creditworthy or not. It is determined in terms of
the norms and standards set by the banks. Being a very crucial step in the sanctioning of a
loan, the borrower needs to be very careful in planning his financing modes. However, the
borrower alone doesn’t have to do all the hard work. The banks need to be cautious, lest
they end up increasing their risk exposure. All banks employ their own unique objective,
subjective, financial and non-financial techniques to evaluate the creditworthiness of their
customers (Brigham et al. 2018).
While assessing a customer, the bank needs to know the following information: Incomes
of applicants and co-applicants, age of applicants, educational qualifications, profession,
experience, additional sources of income, past loan record, family history,
employer/business, security of tenure, tax history, assets of applicants and their financing
pattern, recurring liabilities, other present and future liabilities and investments (if any).
Out of these, the incomes of applicants are the most important criteria to understand and
calculate the credit worthiness of the applicants (Saunders, 2020). As stated earlier, the
actual norms decided by banks differ greatly. Each has certain norms within which the
customer needs to fit in to be eligible for a loan. Based on these parameters, the maximum
amount of loan that the bank can sanction and the customer is eligible for is worked out.
The broad tools to determine eligibility remain the same for all banks. We can tabulate all
the conditions under three parameters (Brigham et al. 2018).
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According to Abedi (2020), the first step in limiting credit risk involves screening clients
to ensure that they have the willingness and ability to repay a loan. Finance institutions
should use the 5Cs model of credit to evaluate a customer as a potential borrower. The 5Cs
help finance institutions to increase loan development, as they get to know their customers
better. These 5Cs are: character, capacity, collateral, capital and condition.
The 5Cs need to be included in the credit scoring model. The credit scoring model is a
classification procedure in which data collected from application forms for new or
extended credit line are used to assign credit applicants to “good” or “bad” credit risk
classes (Dorfman, 1997). Inkumbi (2018) notes that capital (equity contributions) and
collateral (the security required by lenders) as major stumbling blocks for entrepreneurs
trying to access capital. This is especially true for young entrepreneurs or entrepreneurs
with no money to invest as equity; or with no assets they can offer as security for a loan.
There are 7 Cs used in the credit appraisal model to enable banks achieve the “know your
customer” norms (KYC). This goes down in reducing the level of default risk banks are
subjected to in the business Development process. The 7Cs are: character, capacity,
collateral, contribution, conditions, control and common sense (MacDonald & Timith,
2016).
Character: This is the general impression made on the potential borrower based primarily
on past experience on the current lender or other lenders. A good deal of such information
comes from credit bureaus. Issues in line with the character of the borrowers have attracted
great attention to banks. Honesty and goodwill of the client are the most paramount factors
in a successful loan. Dishonest borrowers do not feel committed to repay the loan though
they are very determined to get the loan using any means at their disposal including
misrepresentation. Loan officers have to spread their time over many loan relationships;
they may not leave time to uncover the elaborate schemes of such individuals who are out
to defraud the bank (McGoven, 2018).
According to Hempel et al. (2016), the bank has a duty of protecting its interests and hence
it must protect itself from dishonest, incompetent or overly subjective borrowers through
investigating their credit background. Other sources of information that can be used in
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assessing the borrowers’ character are: records held by suppliers and past banking
relationship with the customers. Where the client promptly services principal and interest,
it is likely that the future loan balance will be adequately repaid. Where the client has been
late in servicing past debts, the reason should be sought. Where previous creditors have
experienced losses, the loan officer should almost out rightly reject the application
(Hempel, et al. 2016).
Capacity: This is measured using information related to income/stability in relation to loan
repayments. The bank will always be interested in knowing exactly how the customer
intends to repay the loan (MacDonald & Timith, 2016). Under this circumstance the banks
analysts accounting, legal and finance skills are crucial in determining the ability of the
borrower to repay the loan from the cash flows generated by the business. For a seasonal
working capital loans, cash flows are generated by means of orderly liquidation of built up
of inventories and receivables. For term loans, cash flows are generated from earnings and
noncash expenses such as depreciation and depletion charged against earnings. MacDonald
and Timith, (2016) argues that the analyst must determine the timing and sufficiency of the
cash flows and evaluate the risk of the cash flows falling short. Any other source of
repayment other than cash flows from the operations should be viewed with a lot of
suspicion or caution. The borrower may plan on a future injection of investor capital to
repay the loan, but where the firm fails to produce attractive profits, outsiders would
definitely withhold future investment in the firm. Where the borrower may be planning to
borrow funds from another bank to repay the loan, unless a formal commitment exists from
that bank, the source suffers the same limitation as that of planned equity injection. The
future sale of a fixed asset is not a reliable source of loan repayment. If the borrower is
unwilling or unable to sell the asset at the time of the loan, a future possibility of forced
sale of the asset to repay the loan is highly speculative (MacDonald & Timith, 2016).
Collateral: These are additional forms of security or guarantee that are provided by the
borrower to the bank. They represent those assets the borrower has pledged to the bank that
can be sold if he defaults and collection efforts have become futile. Though cash flows
from the business operation are deemed to be the main source of loan repayment, where
sufficient cash flows fail to materialize, the bank can mitigate loss if it has secured a
secondary source of repayment (collateral). Yeager (2018) explain that giving a lender
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collateral means that you pledge an asset you own, such as your home, to the lender with
an agreement that it will be the main repayment source in case you cannot repay the loan.
A guarantee on the other hand is just that; someone else signs a guarantee document
promising to repay the loan if the borrower fails. However, collections from guarantors
often require expensive litigation and results in bad blood between the bank, borrower and
guarantor. It should be noted that strong collateral should not generally overcome
deficiencies in either character or capacity. Banks avoid foreclosing on collateral because
foreclosure entails much time and expense. Collateral value should cover the loan amount
and the interest due, legal costs of foreclosure and interest during foreclosure proceedings
(Yeager, 2018).
Contribution: According to Abedi (2020), some customers expect their banker to provide
a substantial part of the capital required in a business, though the customer may be endowed
with the skills, drive, knowledge and an original idea, but with little cash. The customer
approaches the bank instead of colleagues or the market for the capital. Prospective
lenders/bankers expect the business before asking them to commit any funding, the more
of your own money you invest as a down payment or capital the more likely that you will
do all you can to maintain your payment obligation (Abedi, 2020). It is not definitely the
function of a modern bank to find the capital or invest in the clients business and usually
the major stake should be that of long-term lenders. An excessive stake in business implies
that the bank is accepting undue risk at the rates too fine to repay such a high risk.
Abedi (2020) argues that the liquidity position of any potential borrower demands that
close assessment and the greater the bank debt, actual or prospective, in relation to the
capital resources of the business the weaker inherently must be the financial position of the
borrower who employs a portion of the short term funds to buy fixed assets. As a general
rule, a banker will rarely lend more than the amount of the proprietor’s capital, but there
are exceptions to this tendency. For instance brokers dealing with marketable produce in
good demand may borrow several times more than their own capital on occasion from
banks against the security of the produce, with or without security/collateral support,
however, this should be treated as distinct exceptions to a general rule. Lack of capital in
business may be overcome from the banking stand point by the deposit of adequate
19
personal security by the proprietors. Instead of investing directly in their business, they
support the bank with their own private assets (Abedi, 2020).
Conditions: Some thoughts must be given to the nature and prospects of the business of the
borrower with particular reference to the prevailing economic conditions. The natural
optimism of every potential borrower has to be discounted and the real prospects of the
venture addressed in light of known conditions; allied to this enquiry is the desirability of
the advance. Here the field is limited to the possibility of success or otherwise of the
venture for which finance is sought from the bank (MacDonald & Timith, 2016). With the
experience or otherwise of the borrower, is the project likely to succeed? If it fails, the bank
is likely to fall back on its security to recover its advances and the lending will
fundamentally be misound. If it succeeds, will the development problems be overcome?
Would anyone contendly lend to a factor to market ice cream to Eskimos or woolen vests
to equatorial natives. Between the extremes there is much to be considered by the banker
in any proposal for accommodation required by a customer. It should be noted that there
are no tram lines demanding a prescribed course. It is only a question of considering the
business and its prospects in conjunction with all other factors and as it were a vote for or
against the proposal (MacDonald & Timith, 2016).
Control: While financial analysis of the loan applicant is important in capacity analysis
other factors also come in play. These include: the quality of management and the operating
effectiveness of the information systems used by the borrowers in managing (Thygerson,
2020). The management experience in the field and understanding of the business are key
factors considered in evaluation/appraisal of the credit. One of the reasons why banks
specialize in lending to certain industries is that they have developed the necessary
expertise to evaluate the quality of management in those industries. A key question in
lending is “How will the borrower repay”? In commercial lending, the loan applicant’s
business plan is a big part of the answer to this question. The business plan covers both the
use of the loan proceeds and the plans for repayment. This also provides evidence of how
well management understands and is able to control the business activities (Thygerson,
2020).
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Not all borrowers have good internal financial and operating systems. This can lead to
unexpected problems with meeting cash flow requirements. The lender and the investor
must be assured that the firms accounting system is effective, that the firm meets all the
regulatory and other legal requirements and that its management information systems are
adequate to manage effectively. Control aims at serving the dual purpose of increasing
sales revenue by extending credit to customers who are deemed a good credit risk and
minimizing risk of loss from bad debts by restricting or denying credit to customers who
are not a good credit risk. Effectiveness of credit control lies in procedure employed by
judging prospectus creditworthiness, rather than in procedures used in extracting owned
money (Yeager, 2018).
Common sense: Common sense is the natural ability to make good judgment and behave
in a practical and sensible way. This calls for prudence and reasonableness in analysis,
presentation and using data and all other data in relation to the business and processing
them into useful information. Common sense can also be perceived as the reasonableness
of the financial information provided to support the case for financing a project as an
indication of the ability of the project to generate sufficient cash flows to pay for itself
(Mutwiri, 2017).
The above factors should be considered jointly when any loan appraisal process is being
undertaken. A good report on each of these factors reduces the risk of defaults in loan
repayment. The use of the 7Cs model in credit appraisal enables banks to monitor their
level of exposure with respect to existing and potential customers hence reducing the
number of non-performing advances.
Owusu (2018) 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 credit decision. He also found out that the drafted credit policy documents of
the two banks lacked basic business Development essentials like credit delivery process,
credit portfolio mix, basis of pricing, management of problem loans among others to
adequately make them robust. In his recommendations he stated that credit amount should
be carefully assessed for identified projects in order to ensure adequate funding. This
21
situation provides the required financial resources to nurture projects to fruition, thus
forestalling diversion of funds to other purposes, which may not be economically viable.
2.2.1.2 The Effect of Credit Risk Control on the Business Development
Key credit controls include loan product design, credit committees, and delinquency
management (Churchill & Coster, 2001).
Loan product design: banks can mitigate a significant portion of default risk by designing
loan products that meet client needs. Loan product features include the loan size, interest
rate and fees, repayment schedule, collateral requirements and any other special terms.
Loan products should be designed to address the specific purpose for which the loan is
intended (Churchill & Coster, 2001).
Credit Committees: Establishing a committee of persons to make decisions regarding loans
is an essential control in reducing credit (and fraud) risk. If an individual has the power to
decide who will receive loans, which loans will be written off or rescheduled, and the
conditions of the loans, this power can easily be abused and covered up. While loan officers
can serve on the credit committee, at least one other individual with greater authority
should also be involved. The credit committee has the responsibility not only for approving
loans, but also for monitoring their progress and, should borrowers have repayment
problems, getting involved in delinquency management (Churchill & Coster, 2001).
Delinquency Management: To minimize such delinquency banks can use the following
delinquency management methods Institutional Culture: A critical delinquency
management method involves cultivating an institutional culture that embraces zero
tolerance of arrears and immediate follow up on all late payments. Banks can also remind
clients who have had recent delinquency problems that their repayment day is
approaching (Churchill & Coster, 2001).
Client Orientation: A logical first step toward developing a zero-tolerance institutional
culture is to communicate this concept to each new client before she receives a loan
(Churchill & Coster, 2001).
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Staff Incentives: Creating staff involvement in discouraging delinquency, through a staff
incentives system, can be effective. Delinquency Penalties: Clients should be penalized for
late payment. This could include delinquency fees pegged to the number of days late and
limiting access to repeat loans based on repayment development (Churchill & Coster,
2001).
Loan Rescheduling: Given the vulnerability of the target market, it is common for
borrowers to be willing but unable to repay. After carefully determining that this is indeed
the case it may be appropriate to reschedule a limited number of loans. Only done under
extreme circumstances, this may involve extending the loan term and/or reducing the
installment size (Churchill & Coster, 2001).
Soke and Yusoff (2018), in their study on credit risk control of selected financial
institutions in Malaysia, found that the majority of financial institutions and banks losses
stem from outright default due to inability of customers to meet obligations in relation to
lending, trading, settlement and other financial transactions. Credit risk emanates from a
bank’s dealing with individuals, corporate, financial institutions or sovereign entities. A
bad portfolio may attract liquidity as well as credit risk.
Achou and Tenguh (2018) also conducted research on bank development and credit risk
management and found that there is a significant relationship between financial institutions
development (in terms of profitability) and credit risk management (in terms of loan
development). Better credit risk management results in better development. Thus, it is of
crucial importance that financial institutions practice prudent credit risk management and
safeguarding the assets of the institutions and protect the investors’ interests.
Nagarajan (2020) in his study of risk management for microfinance institutions in
Mozambique found that risk management is a dynamic process that could ideally be
developed during normal times and tested at the wake of risk. It requires careful planning
and commitment on part of all stakeholders. It is encouraging to note that it is possible to
minimize risks related losses through diligent management of portfolio and cash-flow, by
building robust institutional infrastructure with skilled human resources and inculcating
client discipline, through effective coordination of stakeholders.
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2.2.1.3 The Effect of Loan Collection Policy on the Business Development
There are various policies that an organization should put in place to ensure that business
Development is done effectively, one of these policies is a collection policy which is
needed because all customers do not pay the firms bills in time. Some customers are slow
payers while some are non-payers. The collection effort should, therefore aim at
accelerating collections from slow payers and reducing bad debt losses (Kariuki, 2015).
Effective management of accounts receivables involves designing and documenting a
credit policy. Many entities face liquidity and inadequate working capital problems due to
lax credit standards and inappropriate credit policies. According to Pike and Neale (2020),
a sound credit policy is the blueprint for how the company communicates with and treats
its most valuable asset, the customers. Scheufler (2020) proposes that a credit policy creates
a common set of goals for the organization and recognizes the credit and collection
department as an important contributor to the organization’s strategies.
2.2.2 Loan Portfolio
According to the Financial Dictionary (n.d), portfolios are loans that have been made or
bought and are held for repayment. Loan portfolios are the major asset of banks, thrifts,
and other lending institutions. The value of a loan portfolio depends not only on the interest
rates earned on the loans, but also on the quality or likelihood that interest and principal
will be paid. The loan portfolio is typically the largest asset and the predominate source of
revenue. As such, it is one of the greatest sources of risk to a bank’s safety and soundness.
The level of interest risk attributed to the bank’s lending activities depends on the
composition of its loan portfolio and the degree to which the terms of its loans (e.g.
maturity, rate structure, and embedded options) expose the bank’s revenue stream to
changes in rates (Jasson, 2020).
Whether due to lax credit standards, poor portfolio risk management, or weakness in the
economy, loan portfolio problems have historically been the major cause of losses and
failures. Effective management of the loan portfolio and the credit function is fundamental
to commercial banks’ safety and soundness. Loan portfolio management (LPM) is the
process by which risks that are inherent in the credit process are managed and controlled.
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Because review of the LPM process is so important, it is a primary supervisory activity
(Chijoriga, 2020).
Assessing LPM involves evaluating the steps the management takes to identify and control
risk throughout the credit process. The assessment focuses on what management does to
identify issues before they become problems (Essendi, 2017). The identification and
management of risk among groups of loans may be at least as important as the risk inherent
in individual loans. For decades, good loan portfolio managers have concentrated most of
their effort on prudently approving loans and carefully monitoring loan development.
Although these activities continue to be mainstays of loan portfolio management, analysis
of past credit problems, such as those associated with oil and gas lending, agricultural
lending, and commercial real estate lending in the 1980s, has made it clear that portfolio
managers should do more. Traditional practices rely too much on trailing indicators of
credit quality such as delinquency, nonaccrual, and risk rating trends (Richardson, 2018).
Effective loan portfolio management begins with oversight of the risk in individual loans.
Prudent risk selection is vital to maintaining favorable loan quality (Essendi, 2017).
Therefore, the historical emphasis on controlling the quality of individual loan approvals
and managing the development of loans continues to be essential. But better technology
and information systems have opened the door to better management methods. A portfolio
manager can now obtain early indications of increasing risk by taking a more
comprehensive view of the loan portfolio (Gisemba, 2015). To manage their portfolios,
bankers must understand not only the risk posed by each credit but also how the risks of
individual loans and portfolios are interrelated. These interrelationships can multiply risk
many times beyond what it would be if the risks were not related. Until recently, few banks
used modern portfolio management concepts to control credit risk. Now, many banks view
the loan portfolio in its segments and as a whole and consider the relationships among
portfolio segments as well as among loans. These practices provide management with a
more complete picture of the bank’s credit risk profile and with more tools to analyze and
control the risk (Sinkey, 2018).
Specific measurable goals for the portfolio are established by loan portfolio objectives.
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They are an outgrowth of the credit culture and risk profile (Comptroller’s Hand Book,
2018). The board of directors must ensure that loans are made with the following three
basic objectives in mind: to grant loans on a sound and collectible basis; to invest the bank’s
funds profitably for the benefit of shareholders and the protection of depositors; and to
serve the legitimate credit of their communities. Banks require that senior management and
the board of directors develop medium- and long- term strategic plans to meet objectives
for the loan portfolio. These strategies should be consistent with the strategic direction and
risk tolerance of the institution. They should be developed with a clear understanding of
their risk/reward consequences. They should be reviewed periodically and modified as
appropriate (Comptroller’s Hand Book, 2018).
Loan portfolio development, on the other hand, refers to the rate of profitability or rate of
return of an investment in various loan products thus broadly, it looks at the number of
clients applying for loans, how much they are borrowing, timely payment of installments,
security pledged against the borrowed funds, rate of arrears recovery and the number of
loan products on the chain. The loan products may comprise of; Salary loans, Group
guaranteed loans, Individual loans and corporate loan (Puxty et al. 2020).
Since one of the main tasks of commercial banks is to offer loans and their main source of
risk is credit risk, that is, the uncertainty associated with borrowers’ repayment of these
loans. A non- performing loan (NPL) may be defined as a loan that has been unpaid for
ninety days or more (Greenidge & Grosvenor, 2015). Such loans unpaid affect the bank
loan portfolio development. For effective loan portfolio development banks should pay
attention to several factors when providing loans in order to curtail the level of impaired
loans (Khemraj & Pasha, n.d). Specifically, commercial banks need to consider the
international competitiveness of the domestic economy since this may impair the ability of
borrowers form the key export oriented sectors to repay their loans which in turn would
result in higher nonperforming loans. These lending institutions should also take the
development of the real economy into account when extending loans given the reality that
loan delinquencies are likely to be higher during periods of economic downturn. Finally,
banks should constantly review the interest rates on loans since loan delinquencies are
higher for banks which increase their real interest rates.
26
2.2.2.1 Compliance with Regulatory Requirements
Pyle (1997), in his study on bank risk management held that banks and similar financial
institutions need to meet forthcoming regulatory requirements for risk measurement and
capital. However, it is a serious error to think that meeting regulatory requirements is the
sole or even the most important reason for establishing a sound, scientific risk management
system. It was held, managers need reliable risk measures to direct capital to activities with
the best risk/reward ratios. They need estimate of the size of potential losses to stay within
limits imposed by readily available liquidity, by creditors, customers and regulators. They
need mechanisms to monitor positions and create incentives for prudent risk taking by
divisions and individuals.
According to the credit policy (2020) on restrictions and concentrations;
a)
Bank of the Republic of Somalia regulations stipulate that aggregate loans to a
single borrower or related group of the borrowers (as defined in the Financial Institutions
Act (FIA)) shall be limited to no more than 25% of the core capital. Whereas this
requirement remains, as an internal control mechanism to ensure that the commercial banks
penetrate the commercial/corporate sector cautiously, the maximum amount of loan for one
single individual borrower or group of related borrowers shall be limited to no more than
1 billion for new borrowers and 1.5 billion for recurrent borrowers with excellent
development. The board will consider raising the limit upon recommendation by
management from time to time.
b)
The bank shall comply with all regulations stipulated in the FIA 2020,
notwithstanding the above internal limits.
(i)
The bank shall not grant or promise to grant to a single person or to a group of
related persons any advance or credit accommodation which is more than 25% of its
capital.
(ii)
Notwithstanding the above however, the Bank may grant advance or credit facility
in excess of 25% but not more than 50% of its capital if the facility is self-liquidating, and
its maturity or expiry does exceed three years and is adequately secured by: Somalia
Government Securities to be pledged to the bank or Fixed Deposits held by the bank.
27
(iii)
In addition to but without derogation from sub sections (a-b) above, the bank shall
not have large exposures, which in aggregate exceed 80% of the total capital.
(iv)
Notwithstanding sub sections (a) and (b) above, the bank may grant to another
financial institution an advance or credit facility:- shall not exceed fifty percent of the
Bank’s total capital, shall not have a maturity exceeding one year, and shall immediately
be reported to the central bank.
(v)
Where the advance or credit facility by the bank to another financial institution
exceeds one year, it shall be secured in accordance with sub section (iii) above
(c) Advances or credit facilities to a single borrower shall mean all loans and credit
accommodation made by the bank to one or more persons with common interest. A
common interest shall be deemed to exist between persons for the purposes of this section
if:(i) The exposure to those persons constitutes a single exposure because of the fact that
one of them directly or indirectly exercises control over the others
(ii) Although the persons to whom the bank is exposed are different entities, they are so
interconnected that if on one of them experiences financial difficulties, another one or
all of them are likely to experience lack of liquidity
(iii) The persons are affiliates within the meaning of this sub section.
(iv) Those persons are related persons within the meaning of this subsection
(v) Those persons have common control
(vi) Those persons are associated within the meaning of this subsection
2.2.2.2 Loan Recovery
In finance, the term recovery refers to collection of amount due. The normally recovery
depends on the purpose, time and condition, business running process, etc. Normally loan
amount will be recovered on installment basis. The manager can fix installment period on
28
the basis of nature of their business. The credit policy (2020) puts forward the following
work out strategies; that each problem loan is different and no routine is universally
applicable. A problem loan can be resolved in any of the following ways:- provide a debt
restructuring/rescheduling program,
additional collateral/guarantees,
injection of
additional funds, liquidation of collateral, liquidation of other assets, calling on guarantors
to repay, arranging for joint venture partner and capital contribution, working with
management to define problems and potential solutions, arranging sale of operating
company to third party or replacing management.
Silikhe (2018) conducted a study on credit risk management in microfinance institutions in
Kenya and found out that despite the fact that MFI’s have put in place strict measures to
credit risk management, normal loan recovery was still a challenge to majority of the
institutions. This explains the reasons why most financial institutions are either not growing
or about to close down.
2.2.3 Relationship between Loan Portfolio and Business Development
Kagoyire and Shukla (2016) carried out a study on the effect of business Development on
development of Commercial Banks in Rwanda in Equity Bank Rwanda Ltd. The study
found that client appraisal, credit risk control and collection policy had effect on financial
development of Equity bank. The study established that there was strong relationship
between financial development of Equity bank and client appraisal, credit risk control and
collection policy. The study established that client appraisal, credit risk control and
collection policy significantly influenced financial development of Equity bank. Collection
policy was found to have a higher effect on financial development and that a stringent
policy was more effective in debt recovery than a lenient policy. The study recommended
that Equity bank should enhance their collection policy by adapting a more stringent policy
to a lenient policy for effective debt recovery.
Gichuki and Kagiri (2018) carried out a study to examine the factors that influence business
Development as a strategy in the development of SACCOs in Nairobi City County. The
study found out that restriction of loan guarantee creates friction among members. The
analysis of the data showed that most members suggested that SACCOs should open the
loan guarantee and include other collaterals to secure the loans. The study recommends
29
education to SACCO members to immediately address the business Development issues
by encouraging members to save regularly, borrow wisely for productive purposes and
repay their loans promptly. The study also recommended that credit policy should be
reviewed by SACCOs from time to time to reflect the economic trends due to the changing
world of business; hence efforts on business Development strategy would be enhanced.
Mulema (2020) in his study on credit policy and loan portfolio development in
Microfinance Institutions, found out a significant relationship (r = 0.951) between credit
policy and loan portfolio development. The study further indicated that credit policies if
not clearly designed could negatively impact on the development of micro finance
institutions. The study made the following recommendations: the organization should
improve on credit policies that are in place and train its employees on how to deal with the
credit policies set by the organization; the organization should always review the credit
controls to make sure that they are effective in increasing the loan development and the
organization should motivate employees to ensure adherence and implementation of credit
policies and term.
Uwuigbe et al. (2018) conducted a study to critically assess the effects of business
Development on banks’ development in Nigeria. In achieving the objectives identified in
this study, the audited corporate annual financial statement of listed banks covering the
period 2018-2020 were analyzed. More so, a sum total of ten (10) listed banks were
selected and analyzed for the study using the purposive sampling method. However, in
assessing the research postulations, the study adopted the use of both descriptive statistics
and econometric analysis using the panel linear regression methodology consisting of
periodic and cross sectional data in the estimation of the regression equation. Findings from
the study revealed that while ratio of non-performing loans and bad debt do have a
significant negative effect on the development of banks in Nigeria, on the other hand, the
relationship between secured and unsecured loan ratio and bank’s development was not
significant. Hence, the study recommended that banks management should put in place or
institute sound lending framework, adequate credit administration procedure and an
effective and efficient machinery to monitor lending function with established rules.
30
Gisemba (2015) conducted a study on the relationship between risk management practices
and financial development of Saccos in Kenya and found out that the Saccos adopted
various approaches in screening and analyzing risk before awarding credit to client to
minimize loan loss. This included establishing capacity, conditions, use of collateral,
borrower screening and use of risk analysis in attempt to reduce and manage credit risks.
He concluded that for Saccos to manage credit risks effectively they must minimize loan
defaulters, cash loss and ensure the organization performs better increasing the return on
assets.
Abiola and Olausi (2018) conducted a study to investigate the impact of credit risk
management on the development of commercial banks in Nigeria. Financial reports of
seven commercial banking firms were used to analyze for seven years (2020 – 2020). The
panel regression model was employed for the estimation of the model. In the model, Return
on Equity (ROE) and Return on Asset (ROA) were used as the development indicators
while Non-Performing Loans (NPL) and Capital Adequacy Ratio (CAR) as credit risk
management indicators. The findings revealed that credit risk management had a
significant impact on the profitability of commercial banks’ in Nigeria.
2.4 Research Gaps
Several studies related to commercial bank and the business Development have been done
in neighboring countries such as Ethiopia, Kenya, Uganda, Eritrea etc and they include
among others: Kagoyire and Shukla (2016); Gichuki1 and Kagiri (2018); Mulema (2020);
unfortunately none of such studies have been done in Somalia, this study was the first of
its kind to the researcher’s knowledge to close the above gap.
CHAPTER THREE
METHODOLOGY
3.0 Introduction
31
This chapter covers the research design, study population, sample size, sampling
techniques, data sources, data collection methods, research instruments, validity and
reliability, data collection procedure, ethical considerations and limitations of the study.
3.1 Research Design
The study adopted a mixed design method combining both quantitative and qualitative
approaches. Bergman (2015) points out that mixed methods research is eminently suited
for exploring variations in the construction of meaning of concepts in relation to how
respondents, for instance, make sense of their experiences or report on attitudes in
interviews or questionnaires, respectively. In addition, the study relied mostly on
quantitative approach where questionnaires were used, but also complemented and
supplemented by the qualitative approach where documentary reviews was conducted.
3.2 Target Population
The target population for this study included the entire employees of Dahabshiil Bank
which is one of the commercial banks registered and currently operating in Somalia.
Currently there are 29 employees in Dahabshiil Bank (HR, 2022). This implies that the
target population for this study was therefore taken from sixty employees working in
Dahabshiil Banks Mogadishu and with an estimated 190 clients. The study targeted 209
persons both employees and clients in the banks. This implied that a consciousness was
more applicable in this study.
3.3 Sample Size Determination and Sampling Techniques
3.3.1 Sample Size Determination
According to Oso & Onen (2008), a sample is part of the target (or accessible) population
that has been procedurally selected to represent it. The sample size of the study was 135
respondents of the target population. The sample size was determined using Krejcie and
Morgan (1970) table of determining sample sizes from a predetermined study population
(attached as appendix I).
32
Table 3.4: Sample Size Determination and Sampling Techniques
Category of respondents
Target population
Sample size
Sampling Techniques
Financial department staff
13
8
Simple random
Marketing department staff
10
8
Simple random
Supervisors
6
5
Purposive
Bank Customers
180
83
Simple random
Total
209
135
Source: Research, 2024
3.4 Sampling Methods and Techniques
Purposive, simple random and stratified random sampling research designs were used
basically to ensure that the sample is a true representative of the survey population.
Purposive Sampling Technique: This is a sampling technique where the elements in the
sample are selected from the population because they conform to a certain characteristic
that the researcher is looking for. This is based on the researcher’s judgment in as far as
the purpose for which the information is sought. The researcher used purposive research
design because it’s a more representative sampling technique of typical conditions in the
survey. The researcher employed purposive sampling technique when selecting the
participants from a variety of participants.
Stratified Random Sampling: This is a sampling method where the population is
classified into homogenous groups called strata. The researcher used stratified random
sampling when identifying and defining a sample of study from which the participants was
selected .The researcher therefore identified and defined the population ,determined the
sample size of the participants, identified the participants for which the researcher
guaranteed appropriate representation, classified them as members belonging to any of the
identified stratum, used a table of random numbers to randomly select an appropriate
number of participants from each of the stratum and a total from these strata was assembled
to form a sample of study. The researcher used stratified random sampling because: it
improves on the generalizability of the different categories of the respondents. The
33
respondents were then be categorized into homogenous groups comprising of; bank
supervisors, middle and junior staff and customers.
Simple random sampling: This is a sampling technique where each member of the
population has a known and an equal chance of being selected. The researcher used simple
random sampling technique when choosing the representatives to participate in the survey.
The researcher therefore identified and define a sample of study obtained purposively and
classified into strata, determined the number of participants in each and every stratum,
made a list of all the participants in each and every stratum, assigned consecutive numbers
ranging from zero onwards to the last participants in each and every stratum and then
selected an arbitrary number in the table of the random numbers from each and every
stratum.
3.5 Data Collection Sources
Primary and secondary sources of data were used.
3.5.1 Primary Sources of Data
These refer to sources of data where raw facts are collected for the first time. Primary data
were collected by use of questionnaires. Questionnaires were designed in five likerd scales
such respondents do not take long to fill the questionnaire. The researcher used primary
sources of data because they are accurate.
3.5.2 Secondary Sources of Data
These refer to sources of data that has been prepared and developed for some other purpose
but not to solve the problem at hand. Such sources can either be internal or external to the
organization under study. Secondary data were obtained from the reports of Central Bank
of Somalia and from commercial Banks, Somalia National Bureau of Statistics, and the
Banking survey manuals, from Dahabshiil bank documents, journals, magazines and other
literature written by different knowledgeable scholars.
3.6 Data collection methods
34
The study adopted two methods of data collection; survey questionnaires, and document
review.
3.6.1 Surveys
The study used survey method of data collection. The researcher prefered to use survey
method because it is good for gathering descriptive data, relatively easy to administer, cost
effective and time saving. This method was used to collect data on Dahabshill Commercial
Bank and Business Development using structured questionnaires.
3.6.2 Document Review
The document review method was used to obtain information related to the study from a
variety of written materials from scholars, and authors. Specifically, the researcher
reviewed the national bank of Somalia credit policies. This method was helpful to the
researcher to establish facts, current trends, relationships, critics, gaps, and how the study
would cover the gaps in addressing business Development and its effectiveness in ensuring
the business Development.
3.7 Research Instruments
This study used questionnaires and document review as its main research instruments.
3.7.1 Questionnaires
The researcher used structured questionnaires to collect data about business Development
and business Development using structured questionnaires. The researcher prefers to use
questionnaires because large amounts of information was collected from a large number of
people in a short period of time and in a relatively cost effective way.
A five Likert scale was used to assess the extent to which a respondent agrees or disagrees
with a statement of an attitude, belief or judgment. It requires the researcher to first identify
all sub-areas of the topic or variable being measured for questions to be asked for one to
agree or disagree with. The table 3.2 gives the interpretation of the mean values.
Table 3.2: Interpretation of the Mean Values
35
#
Mean Range
Response Mode
Interpretation
5
4.01-5.00
Strongly Agree
Very satisfactory
4
3.26-4.00
Agree
Satisfactory
3
2.51-3.25
Undecided
Fairly satisfactory
2
1.76-2.50
Disagree
Unsatisfactory
1
1.00-1.75
Strongly Disagree
Very Unsatisfactory
The questionnaire was structured into three sections; the first section captured information
regarding the demographic characteristics of the respondents; the second section captured
information about commercial bank which was measured using credit appraisal (5-items),
credit risk control (6-items), loan collection policy (5-items); the last section captured
Business Development measured using compliance with regulatory requirements (6items),
and loan recovery (5-items).
3.7.2 Document Review
This study used document review as a data collection instrument to review documents such
as Central Bank of Somalia credit policies, and publications of Dahabshiil commercial
banks so as to establish the Business Development. The study prefers this instrument
because it is relatively inexpensive, good source of background information, and is helpful
in bringing up issues not noted by other means.
3.8 Data Collection Procedures
After the proposal is approved by the supervisor, an introduction letter will be got from
Victoria University to facilitate the data collection in Dahabshiil bank. This was through
presenting authorization letter for data collection from Victoria University to the
Dahabshiil bank authority. Data were then collected by use of structured questionnaires
designed by the researcher. The questionnaires were distributed to the Dahabshiil bank
staff and to who qualified for the study. This technique was used because all the
respondents are assumed to be literate.
3.9 Study Variables
36
For this study, monetary policy variables (Central Bank Base Rate, Money Supply and cash
Reserves Ratio) and fiscal policy variables (taxation rates and government spending) are
the independent variables. The dependent variable is the financial performance of
commercial banks which was measured in terms of bank earnings ability, capital adequacy,
and asset quality and management efficiency. Lastly, bank size, total assets, inflation and
government policy was proposed to have a moderating influence on the relationship
between monetary & fiscal policies and financial performance.
3.10 Measurement of validity and reliability
3.10.1 Validity
Validity refers to the degree to which a study accurately reflects or assesses the specific
concept that the researcher is attempting to measure (Campbell & Stanley, 1966). Validity
is based on the adequacy with which the terms in an instrument measure the attributes of
the study. Content validity of the instrument was ensured through constructive criticism
from the supervisors and the colleagues in the business and management department who
have an extensive experience and expertise in questionnaires construction. The
questionnaires were revised and improved according to the advice and suggestions made.
3.10.2 Reliability of Instruments
Reliability is defined as the extent to which an experiment, test, or any measuring procedure
yields the same results on repeated trials (Mugenda & Mugenda, 1999). Pretest of the data
collection tools were conducted at the accounting department of Victoria University where
the questionnaires were administered to 7 clients. Pretest helped to make necessary
adjustments in the research instrument for easier understanding. The necessary instructions
in simplified accounting terms were used to ensure correct interpretations were made.
3.11 Data Processing, Analysis and Presentation
After retrieving back the questionnaire and collecting the required data, it was then
prepared for analysis by using Statistical Package for Social Scientists (SPSS, version 22.0)
software. In this process, the data were pass through these processes i.e. data editing which
involved checking the filled questionnaires for any omissions or mistakes; then data coding
which involved giving each item of the questionnaire or variable a code to be used when
37
imputing the data into the computer, and lastly data entry into the computer for analysis
(George & Mallery, 2017).
After processing the collected data, the researcher will analyze it. The analysis was
conducted in the following manner: The frequency and percentage distribution was used
to determine the profile of the respondents; descriptive statistics (mean and standard
deviations) was used to describe the responses in the dataset. That is, mean values
described the central tendency of the dataset while standard deviation was described the
dispersions of the datasets.
Linear regression analysis was estimated to achieve the objectives of the study. The
Hypotheses were tested using p-value at the 0.05 level of significance. If the p-value is less
than 0.05, it was considered significant, otherwise it is not significant. The decision rule
therefore is to reject the null hypothesis if the p-value is less than 0.05 and to accept
otherwise.
3.12 Ethical Consideration
After the proposal and the questionnaire have been approved by the supervisors, the
researcher sought approval from head of the department of the faculty of business and
management of Victoria University. This intended to introduce the researcher to the
concerned authorities at the bank of study basically to seek for permission to conduct
the survey and reduce on the non-response rate. Thereafter, the permission to conduct
the study was obtained from the management of Dahabshiil banks in Somalia.
In addition, to avoid violating the rights of the study participants, written informed
consent of the study participants were obtained by them signing or thumb printing on
the consent form. Respondents were informed that there would be no any experimental
procedure that would be done on their bodies; there were no physical or psychological
injury and discomfort on them anticipated as a result of the study and that the
information given was kept confidentially and privately and no one accessed it from
the researcher and the supervisors. Furthermore, the participants were informed of their
right to withdrawal from the study anytime they feel like with no consequences
38
attached. The questionnaire was coded instead of using names as identification and
hence confidentiality and privacy was assured throughout the study.
3.13 Anticipated Limitations of the Study
The study might be affected by a number of limitations despite the fact that necessary
efforts were made to minimize or avoid the possible shortcomings. The source of the data
for this study was based on the self-reporting of respondents, and this might provide some
limited validation of obtained information from the subjective source. However, this form
of biasness was minimized since respondents were well informed about the importance of
giving true and accurate responses; were assured of confidentiality of their responses.
The results might also not be applicable to other financial firms as the focus in this study
was on commercial banks. While it might offer important insights to other financial
institutions, such conclusions were approached with care given the variations in the way
commercial banks operate and the way other financial institutions operate. To improve this,
the researcher replicated this study to other financial institutions or to include them in the
study.
The time span for the data collected in this study was annual data for eight years. This was
not a very long period that can help provide robust results for applicability by the banks. A
longer period, of say 12 years, with lesser intervals, say quarterly, would have been
preferred to be able to conduct a panel analysis. A longer period would help reduce this
limitation.
CHAPTER FOUR
DATA PRESENTATION, INTERPRETATION AND ANALYSIS
4.1 Introduction
This chapter focuses on presentation, interpretation and analysis of the study findings.
Among the issues discussed is the response rate, demographic characteristics of
39
respondents, descriptive statistical analysis of the study objectives, Pearson correlation
analysis as well as multiple regression analysis of the study variables. The response rate
and a description of respondents’ background are presented first to give a picture of the
nature of respondents that participated in the study.
4.2 Response Rate
The researcher selected a sample of 135 respondents from a study population of 209
persons involving Dahabshiil Bank employees and women clients in Mogadishu Somalia.
A total of 135 questionnaires were distributed to all the selected respondents in the study
area. Out of the 135 questionnaires that were given out, 135 questionnaires were fully
completed and returned to the researcher in time. This represented 100% response rate.
This response rate was found to be highly appropriate for the study since Kothari (2004)
asserts that any response rate of 60% is adequate, while a response rate greater than 80%
is very good.
4.3 Demographic Characteristics of Respondents
Descriptive statistics such as frequencies and percentages relating to the demographic
characteristics of respondents are presented in this section. These include respondents’
gender, age and level of education.
4.3.1 Gender of the Respondents
Figure 2: Gender of the Respondents
40
The results for the gender distribution of respondents are presented in figure 4.1 below;
Source: Primary data (2024)
Respondents were asked to indicate their gender by placing a tick next to the relevant option
provided (male or female). The results presented in figure 4.1 above show that 20.74% of
the respondents were male and 79.26% were female. Dominance of female respondents
confirms what was stated by Luyirika (2010) that most of the micro finance services are
particularly targeted towards women. The author also stated that the women, being the
main actors in microfinance could be as a result of the fact that they are very sympathetic
to the welfare of their household members. Therefore they try as much as possible
to get involved in activities that would enable them earn income that could assist them
to buy the daily necessities as well as social services such as health, education and land
(Luyirika, 2010).
4.3.2 Age of the respondents
Figure 3: Age of the respondents
41
Respondents were requested to indicate their age groups. In this study, age of respondents
was categorized into four groups namely: 18 - 30, 31 – 45 and 46 years and above
.Results are presented in figure 4.2 below;
Source: Primary data (2024)
The findings in figure 4.2 show that respondents in the age bracket of 46 years and above
were the majority constituting over 57%. These were followed by those between 31 – 45
years who were over 36% and the minority (6.67%) were above between 18 30 years. This
indicates that a majority of the respondents were quite advanced in age. This agrees with
Luyirika (2010) who noted that most of the MFI services target people in advanced age
brackets. According to him, this could be attributed to the fact that this age group
has several responsibilities to undertake especially paying school fees and feeding the
family. Thus when the available funds are not enough, they resort to MFIs in order to fulfill
their obligations in the family.
4.3.3 Education Level of Respondents
Figure 4: Education Level of Respondents
This question was also posed in order to understand the educational background of
respondents under the study. The findings are presented in figure 4.3 below.
42
Source: Primary data (2024)
Figure 4.3 above indicates that 38.52% of the respondents had primary level education,
25.9% had ordinary level education, 16.30% had advanced level education, and 11.85%
had diploma level education, while 1.48% and 1.48% had degree and masters level
education. In general, the level of education of respondents was high. This is an indication
that most of the respondents had relevant academic qualifications to effectively carry out
their other duties. This suggests that MFI services mainly attract people of low education
levels. This is based on what was stated by Luyirika (2010) that people of lower level
education are attracted to microfinance services because they own no property, and require
small amounts of money to inject in their small businesses. This is also confirmed by
Meade (2001) who explains that the credit is targeted to the land less or asset less
borrowers, and the moderately to extremely poor.
4.4 Description of results about the specific objectives of the study
This section deals with results derived from respondents about the effect of microfinance
services on business development in Dahabshiil Bank, Mogadishu Somalia. Such results
are presented in the subsequent sub-sections following the specific objectives of the study.
4.4.1 Effect of micro credit services on business development in Dahabshiil Bank In
this objective, the researcher sought to establish whether micro credit services have any
significant effect on business development in Dahabshiil Bank. Respondents were asked
43
to indicate the extent to which they agreed to statements relating to micro credit services
provided by Dahabshiil Bank on a five-point Likert scale where 1 represented strongly
agree, 2 represented agree, 3 represented neutral, 4 represented disagree and 5 represented
strongly disagree. In the first item about this objective, the researcher sought to establish
whether Dahabshiil Bank loans are accessible by most of the women in Mogadishu
Somalia. Results are presented in table 4.1 below.
Table 4.1: Dahabshiil Bank loans are accessible by most of the women in
Mogadishu Somalia
Frequency
Valid Strongly agree
Percent Valid Percent
14
Agree 88
Disagree
31
Strongly disagree
2
Total 135
Cumulative
Percent
10.4
10.4
10.4
65.2
65.2
75.6
23.0
23.0
98.5
1.5
1.5
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.1 above, 14 (10.4%) of the respondents strongly agreed, 88 (65.2%) agreed, 31
(23.0%) disagreed and only 2 (1.5%) strongly disagreed in response to the statement that
“Dahabshiil Bank loans are accessible by most of the women in Mogadishu Somalia”.
Since most of the respondents agreed to this item, it indicates that indeed Dahabshiil Bank
loans are accessible by most of the women in Mogadishu Somalia.
The researcher also sought the opinions of respondents on whether Dahabshiil Bank offers
agricultural loans to women farmers in Mogadishu Somalia. Findings about this item are
presented in table 4.2 below;
44
Table 4.2: Dahabshiil Bank offers agricultural loans to women farmers in
Mogadishu Somalia
Cumulative
Frequency
Percent
Percent Valid Percent
Valid Strongly agree
11
Agree 87
8.1
8.1
8.1
64.4
64.4
72.6
Not sure
3
2.2
2.2
74.8
Disagree
23
17.0
17.0
91.9
8.1
8.1
100.0
100.0
100.0
Strongly disagree
11
Total 135
Source: Primary data (2024)
In table 4.2 above, 11 (8.1%) of the respondents strongly agreed, 87 (64.4%) agreed, 3
(2.2%) were not sure, 23 (17.0%) disagreed and 11 (8.1%) strongly disagreed in response
to the statement that “Dahabshiil Bank offers agricultural loans to women farmers in
Mogadishu Somalia”. Since most of the respondents agreed to this item, it indicates that
indeed Dahabshiil Bank offers agricultural loans to women farmers in Mogadishu Somalia.
The researcher further sought the opinions of respondents on whether Dahabshiil Bank
loans have a long repayment period. Findings about this item are presented in table 4.3
below;
Table 4.3: Dahabshiil Bank loans have a long repayment period
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
11
Agree 15
45
Percent
8.1
8.1
8.1
11.1
11.1
19.3
Not sure
2
1.5
1.5
20.7
Disagree
91
67.4
67.4
88.1
11.9
11.9
100.0
100.0
100.0
Strongly disagree
16
Total 135
Source: Primary data (2024)
In table 4.3 above, 11 (8.1%) of the respondents strongly agreed, 15 (11.1%) agreed, 2
(1.5%) were not sure, 91 (67.4%) disagreed and 16 (11.9%) strongly disagreed in response
to the statement that “Dahabshiil Bank loans have a long repayment period”. Since most
of the respondents disagreed to this item, it indicates that Dahabshiil Bank loans do not
have a long repayment period.
The researcher further sought the opinions of respondents on whether Dahabshiil Bank
loans are more reliable compared to other financial institutions in Mogadishu Somalia.
Findings about this item are presented in table 4.4 below;
Table 4.4: Dahabshiil Bank loans are more reliable compared to other financial
institutions in Mogadishu Somalia
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
10
Agree 9
Percent
7.4
7.4
7.4
6.7
6.7
14.1
Not sure
7
5.2
5.2
19.3
Disagree
73
54.1
54.1
73.3
26.7
26.7
100.0
100.0
100.0
Strongly disagree
36
Total 135
Source: Primary data (2024)
46
In table 4.4 above, 10 (7.4%) of the respondents strongly agreed, 9 (6.7%) agreed, 7 (5.2%)
were not sure, 73 (54.1%) disagreed and 36 (26.7%) strongly disagreed in response to the
statement that “Dahabshiil Bank loans are more reliable compared to other financial
institutions in Mogadishu Somalia”. Since most of the respondents disagreed to this item,
it indicates that Dahabshiil Bank loans are not more reliable compared to other financial
institutions in Mogadishu Somalia.
The researcher further sought the opinions of respondents on whether Loan clients always
obtain the exact amount of loans they apply for from Dahabshiil Bank. Findings about
this item are presented in table 4.5 below;
Table 4.5: Loan clients always obtain the exact amount of loans they apply
for from Dahabshiil Bank
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
4
Agree 17
Disagree
113
Strongly disagree
1
Total 135
Percent
3.0
3.0
3.0
12.6
12.6
15.6
83.7
83.7
99.3
.7
.7
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.5 above, 10 (7.4%) of the respondents strongly agreed, 9 (6.7%) agreed, 7 (5.2%)
were not sure, 73 (54.1%) disagreed and 36 (26.7%) strongly disagreed in response to the
statement that “Dahabshiil Bank loans are more reliable compared to other financial
institutions in Mogadishu Somalia”. Since most of the respondents disagreed to this item,
it indicates that Dahabshiil Bank loans are not more reliable compared to other financial
institutions in Mogadishu Somalia.
47
The researcher further sought the opinions of respondents on whether Dahabshiil Bank
employees fully explain to clients about its credit services in a language that both parties
understand. Findings about this item are presented in table 4.6 below;
Table 4.6: Dahabshiil Bank employees fully explain to clients about its credit
services in a language that both parties understand
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
8
Agree 93
Percent
5.9
5.9
5.9
68.9
68.9
74.8
Not sure
2
1.5
1.5
76.3
Disagree
28
20.7
20.7
97.0
3.0
3.0
100.0
100.0
100.0
Strongly disagree
4
Total 135
Source: Primary data (2024)
In table 4.6 above, 8 (5.9%) of the respondents strongly agreed, 93 (68.9%) agreed, 2
(1.5%) were not sure, 28 (20.7%) disagreed and 4 (3.0%) strongly disagreed in response to
the statement that “Dahabshiil Bank employees fully explain to clients about its credit
services in a language that both parties understand”. Since most of the respondents agreed
to this item, it indicates that indeed Dahabshiil Bank employees fully explain to clients
about its credit services in a language that both parties understand.
The researcher further sought the opinions of respondents on whether Dahabshiil Bank
tolerates loan clients for delays especially when they are struck by some uncertainties
(illness, robbery, etc). Findings about this item are presented in table 4.7 below;
Table 4.7: Dahabshiil Bank tolerates loan clients for delays especially when
they are struck by some uncertainties (illness, robbery)
48
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
31
Agree 65
Disagree
29
Strongly disagree
10
Total 135
Percent
23.0
23.0
23.0
48.1
48.1
71.1
21.5
21.5
92.6
7.4
7.4
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.7 above, 31 (23.0%) of the respondents strongly agreed, 65 (48.1%) agreed, 29
(21.5%) disagreed and 10 (7.4%) strongly disagreed in response to the statement that
“Dahabshiil Bank tolerates loan clients for delays especially when they are struck by some
uncertainties (illness, robbery, etc)”. Since most of the respondents agreed to this item, it
indicates that indeed Dahabshiil Bank tolerates loan clients for delays especially when they
are struck by some uncertainties (illness, robbery).
To test the study hypothesis and also find out whether micro credit services have any
significant effect on business development in Dahabshiil Bank, the researcher carried out
Pearson correlation analysis. In this case, the computed scores for micro credit services
were correlated with those of business development in Mogadishu Somalia. Results are
presented in table 4.8 below.
Table 4.8: Results of a Pearson correlation analysis between micro credit services and
business development in Mogadishu Somalia
Micro credit
services
49
Business development in
Mogadishu
.722**
MICRO CREDIT
Pearson
SERVICES
Correlation
1
Sig. (2-tailed)
.000
N
135
BUSINESS
Pearson
DEVELOPMENT IN
Correlation
MOGADISHU
Sig. (2-tailed)
135
1
.722** .000
N
135
135
**. Correlation is significant at the 0.01 level (2-tailed).
Table 4.8 shows that the value of the co-efficient (r) equals to .722 and sig value, p = 0.00.
The value of r being positive, it means that micro credit services have a statistically
significant and strong positive effect on business development in Mogadishu Somalia. The
sig. value for the correlation was equal to .000 which was less than the level of significance
(.05). Based on this, the researcher rejected the null hypothesis and upheld the alternative
and therefore concluded that there is a statistically significant positive relationship between
micro credit services and business development in Mogadishu Somalia. This also means
that increased micro credit services are likely to significantly improve business
development in Mogadishu Somalia.
The researcher also used coefficients (beta values) statistical technique to analyze the data.
This helped to determine the extent to which micro credit services affect business
development in Mogadishu Somalia. The results are summarized in Table 4.9 below.
Table 4.9: Coefficientsa
Unstandardized
Standardized
Coefficients Coefficients
50
Model
1
B
(Constant)
Std. Error
1.624
.155
.612
.051
Beta
t
Sig.
10.472
.000
12.050
.000
MICRO CREDIT
SERVICES
.722
a. Dependent Variable: BUSINESS DEVELOPMENT IN MOGADISHU
The study findings in table 4.9 above indicate that micro credit services had a beta value of
0.722. It can therefore be deduced from the result that at 100% increase in micro credit
services, business development in Mogadishu Somalia is likely to improve by 72.2%.
4.4.2 Effect of micro savings services on business development in Dahabshiil Bank In
this objective, the researcher sought to establish whether micro savings services have any
significant effect on business development in Dahabshiil Bank. Respondents were asked
to indicate the extent to which they agreed to statements relating to micro savings services
provided by Dahabshiil Bank on a five-point Likert scale where 1 represented strongly
agree, 2 represented agree, 3 represented neutral, 4 represented disagree and 5 represented
strongly disagree. In the first item about this objective, the researcher sought to establish
whether Dahabshiil Bank offers micro saving services to women in Mogadishu Somalia.
Results are presented in table 4.10 below.
Table 4.10: Dahabshiil Bank offers micro saving services to women in Mogadishu
Somalia
Cumulative
Frequency
Percent Valid Percent
Valid Agree 120
Disagree
10
Strongly disagree
5
Total 135
Source: Primary data (2024)
51
Percent
88.9
88.9
88.9
7.4
7.4
96.3
3.7
3.7
100.0
100.0
100.0
In table 4.10 above, 120 (88.9%) of the respondents agreed, 10 (7.4%) disagreed and only
5 (3.7%) strongly disagreed in response to the statement that “Dahabshiil Bank offers micro
saving services to women in Mogadishu Somalia”. Since most of the respondents agreed
to this item, it indicates that indeed Dahabshiil Bank offers micro saving services to women
in Mogadishu Somalia.
The researcher also sought the opinions of respondents on whether Dahabshiil Bank
savings services have helped them to meet their basic needs. Findings about this item are
presented in table 4.11 below;
Table 4.11: Dahabshiil Bank savings services have helped me to meet my
basic needs
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
16
Agree 99
Percent
11.9
11.9
11.9
73.3
73.3
85.2
Not sure
1
.7
.7
85.9
Disagree
12
8.9
8.9
94.8
5.2
5.2
100.0
100.0
100.0
Strongly disagree
7
Total 135
Source: Primary data (2024)
In table 4.11 above, 16 (11.9%) of the respondents strongly agreed, 99 (73.3%) agreed, 1
(0.7%) were not sure, 12 (8.9%) disagreed and 7 (5.2%) strongly disagreed in response to
the statement that “Dahabshiil Bank savings services have helped me to meet my basic
needs”. Since most of the respondents agreed to this item, it indicates that indeed
52
Dahabshiil Bank savings services have helped respondents in the study area to meet their
basic needs.
The researcher further sought the opinions of respondents on whether they use their
Dahabshiil Bank savings to raise school fees for their children. Findings about this item
are presented in table 4.12 below;
Table 4.12: I use my Dahabshiil Bank savings to raise school fees for my children
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
4
Agree 106
Disagree
23
Strongly disagree
2
Total 135
Percent
3.0
3.0
3.0
78.5
78.5
81.5
17.0
17.0
98.5
1.5
1.5
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.12 above, 4 (3.0%) of the respondents strongly agreed, 106 (78.5%) agreed, 23
(17.0%) disagreed and 2 (1.5%) strongly disagreed in response to the statement that “I use
my Dahabshiil Bank savings to raise school fees for my children”. Since most of the
respondents agreed to this item, it indicates that respondents in the study area indeed use
their Dahabshiil Bank savings to raise school fees for their children.
The researcher further sought the opinions of respondents on whether respondents in the
study area also use their Dahabshiil Bank account to save money for their business.
Findings about this item are presented in table 4.13 below;
Table 4.13: I also use my Dahabshiil Bank account to save money for my business
53
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
10
Agree 95
Disagree
23
Strongly disagree
7
Total 135
Percent
7.4
7.4
7.4
70.4
70.4
77.8
17.0
17.0
94.8
5.2
5.2
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.13 above, 10 (7.4%) of the respondents strongly agreed, 95 (70.4%) agreed, 23
(17.0%) disagreed and 7 (5.2%) strongly disagreed in response to the statement that “I also
use my Dahabshiil Bank account to save money for my business”. Since most of the
respondents agreed to this item, it indicates that indeed respondents in the study area use
Dahabshiil Bank account to save money for their businesses.
The researcher further sought the opinions of respondents on whether Dahabshiil Bank
savings services mainly target the poor in their community. Findings about this item are
presented in table 4.14 below;
Table 4.14: Dahabshiil Bank savings services mainly target the poor in our
community
Frequency Percent Valid Percent
Valid Strongly agree
5
Agree 108
Disagree
19
Strongly disagree
3
Total 135
Source: Primary data (2024)
54
Cumulative
Percent
3.7
3.7
3.7
80.0
80.0
83.7
14.1
14.1
97.8
2.2
2.2
100.0
100.0
100.0
In table 4.14 above, 5 (3.7%) of the respondents strongly agreed, 108 (80.0%) agreed, 19
(14.1%) disagreed and 3 (2.2%) strongly disagreed in response to the statement that
“Dahabshiil Bank savings services mainly target the poor in our community”. Since most
of the respondents agreed to this item, it indicates that indeed Dahabshiil Bank savings
services mainly target the poor in their community.
The researcher further sought the opinions of respondents on whether Dahabshiil Bank
offers savings incentives to its clients. Findings about this item are presented in table 4.15
below;
Table 4.15: Dahabshiil Bank offers savings incentives to its clients
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
10
Agree 16
Percent
7.4
7.4
7.4
11.9
11.9
19.3
Not sure
1
.7
.7
20.0
Disagree
82
60.7
60.7
80.7
19.3
19.3
100.0
100.0
100.0
Strongly disagree
26
Total 135
Source: Primary data (2024)
In table 4.15 above, 10 (7.4%) of the respondents strongly agreed, 16 (11.9%) agreed, 1
(0.7%) were not sure, 82 (60.7%) disagreed and 26 (19.3%) strongly disagreed in response
to the statement that “Dahabshiil Bank offers savings incentives to its clients”. Since most
55
of the respondents disagreed to this item, it indicates that Dahabshiil Bank does not offer
savings incentives to its clients.
The researcher further sought the opinions of respondents on whether Dahabshiil Bank also
offers group saving schemes to its clients. Findings about this item are presented in table
4.16 below;
Table 4.16: Dahabshiil Bank also offers group saving schemes to its clients
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
15
Agree 89
Disagree
27
Strongly disagree
4
Total 135
Percent
11.1
11.1
11.1
65.9
65.9
77.0
20.0
20.0
97.0
3.0
3.0
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.16 above, 15 (11.1%) of the respondents strongly agreed, 89 (65.9%) agreed, 27
(20.0%) disagreed and 4 (3.0%) strongly disagreed in response to the statement that
“Dahabshiil Bank also offers group saving schemes to its clients”. Since most of the
respondents agreed to this item, it indicates that indeed Dahabshiil Bank also offers group
saving schemes to its clients.
To test the study hypothesis and also find out whether micro savings services have any
significant effect on business development in Dahabshiil Bank, the researcher carried out
Pearson correlation analysis. In this case, the computed scores for micro savings services
were correlated with those of business development in Mogadishu Somalia. Results are
presented in table 4.17 below.
56
Table 4.17: Results of a Pearson correlation analysis between micro savings services
and business development in Mogadishu Somalia
MICRO SAVINGS
Pearson
SERVICES
Correlation
MICRO
BUSINESS
SAVINGS
DEVELOPMENT IN
SERVICES
MOGADISHU
.632**
1
Sig. (2-tailed)
.000
N
BUSINESS
135
Pearson
1
DEVELOPMENT IN Correlation
MOGADISHU
135
Sig. (2-tailed)
.632** .000
N
135
135
**. Correlation is significant at the 0.01 level (2-tailed).
Table 4.17 shows that the value of the co-efficient (r) equals to .632 and sig value, p = 0.00.
The value of r being positive, it means that micro savings services have a statistically
significant and strong positive effect on business development in Mogadishu Somalia. The
sig. value for the correlation was equal to .000 which was less than the level of significance
(.05). Based on this, the researcher rejected the null hypothesis and upheld the alternative
and therefore concluded that there is a statistically significant positive relationship between
micro savings services and business development in Mogadishu Somalia. This also means
that increased micro savings services are likely to significantly improve business
development in Mogadishu Somalia.
The researcher also used coefficients (beta values) statistical technique to analyze the data.
This helped to determine the extent to which micro savings services affect business
development in Mogadishu Somalia. The results are summarized in Table 4.18 below.
57
Table 4.18: Coefficientsa
Unstandardized
Standardized
Coefficients Coefficients
Model
1
B
(Constant)
Std. Error
1.650
.195
.716
.076
Beta
t
Sig.
8.451
.000
9.403
.000
Micro Savings
Services
.632
a. Dependent Variable: Business Development in Mogadishu
The study findings in table 4.18 above indicate that micro savings services had a beta value
of 0.632. It can therefore be deduced from the result that at 100% increase in micro savings
services, business development in Mogadishu Somalia is likely to improve by 63.2%.
4.4.3 Effect of capacity building services on business development in Dahabshiil
Bank
In this objective, the researcher sought to establish whether capacity building services have
any significant effect on business development in Dahabshiil Bank. Respondents were
asked to indicate the extent to which they agreed to statements relating to capacity building
services provided by Dahabshiil Bank on a five-point Likert scale where 1 represented
strongly agree, 2 represented agree, 3 represented neutral, 4 represented disagree and 5
represented strongly disagree. In the first item about this objective, the researcher sought
to establish whether Dahabshiil Bank always trains borrowers on how to use the loans
acquired. Results are presented in table 4.19 below.
Table 4.19: Dahabshiil Bank always trains borrowers on how to use the
loans acquired
Cumulative
Frequency
Percent Valid Percent
Valid Agree 113
83.7
58
83.7
Percent
83.7
Disagree
19
Strongly disagree
3
Total 135
14.1
14.1
97.8
2.2
2.2
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.19 above, 113 (83.7%) of the respondents agreed, 19 (14.1%) disagreed and only
3 (2.2%) strongly disagreed in response to the statement that “Dahabshiil Bank always
trains borrowers on how to use the loans acquired”. Since most of the respondents agreed
to this item, it indicates that indeed Dahabshiil Bank always trains borrowers on how to
use the loans acquired.
The researcher also sought the opinions of respondents on whether the capacity building
programs always target the women in Mogadishu. Findings about this item are presented
in table 4.20 below;
Table 4.20: The capacity building programs always target the women in Mogadishu
Frequency Percent Valid Percent
Valid Strongly agree
29
Agree 67
Disagree
25
Strongly disagree
14
Total 135
Cumulative
Percent
21.5
21.5
21.5
49.6
49.6
71.1
18.5
18.5
89.6
10.4
10.4
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.20 above, 29 (21.5%) of the respondents strongly agreed, 67 (49.6%) agreed, 25
(18.5%) disagreed and 14 (10.4%) strongly disagreed in response to the statement that “the
capacity building programs always target the women in Mogadishu”. Since most of the
respondents agreed to this item, it indicates that indeed the Dahabshiil Bank capacity
building programs always target the women in Mogadishu.
59
The researcher further sought the opinions of respondents on whether the capacity building
programs are accessible by all women irrespective of status or religion. Findings about this
item are presented in table 4.21 below;
Table 4.21: The capacity building programs are accessible by all women irrespective
of status or religion
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
19
Agree 92
Disagree
15
Strongly disagree
9
Total 135
Percent
14.1
14.1
14.1
68.1
68.1
82.2
11.1
11.1
93.3
6.7
6.7
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.21 above, 19 (14.1%) of the respondents strongly agreed, 92 (68.1%) agreed, 15
(11.1%) disagreed and 9 (6.7%) strongly disagreed in response to the statement that “the
capacity building programs are accessible by all women irrespective of status or religion”.
Since most of the respondents agreed to this item, it indicates that indeed Dahabshiil Bank
the capacity building programs are accessible by all women in Mogadishu irrespective of
status or religion.
The researcher further sought the opinions of respondents on whether the capacity building
programs are relevant given the financial needs of women in Mogadishu. Findings about
this item are presented in table 4.22 below;
60
Table 4.22: The capacity building programs are relevant given the financial
needs of women in Mogadishu
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
14
Agree 23
Disagree
83
Strongly disagree
15
Total 135
Percent
10.4
10.4
10.4
17.0
17.0
27.4
61.5
61.5
88.9
11.1
11.1
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.22 above, 14 (10.4%) of the respondents strongly agreed, 23 (17.0%) agreed, 83
(61.5%) disagreed and 15(11.1%) strongly disagreed in response to the statement that “the
capacity building programs are relevant given the financial needs of women in
Mogadishu”. Since most of the respondents disagreed to this item, it indicates that
Dahabshiil Bank capacity building programs are not relevant given the financial needs of
women in Mogadishu.
The researcher further sought the opinions of respondents on whether Dahabshiil Bank
capacity building programs seek to enhance entrepreneurial abilities of women in
Mogadishu. Findings about this item are presented in table 4.23 below;
Table 4.23: The capacity building programs seek to enhance entrepreneurial
abilities of women in Mogadishu
Cumulative
Frequency
Percent Valid Percent
61
Percent
Valid Strongly agree
13
Agree 13
Disagree
72
Strongly disagree
37
Total 135
9.6
9.6
9.6
9.6
9.6
19.3
53.3
53.3
72.6
27.4
27.4
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.23 above, 13 (9.6%) of the respondents strongly agreed, 13 (9.6%), 72 (53.3%)
disagreed and 37 (27.4%) strongly disagreed in response to the statement that “Dahabshiil
Bank capacity building programs seek to enhance entrepreneurial abilities of women in
Mogadishu”. Since most of the respondents disagreed to this item, it indicates that indeed
Dahabshiil Bank capacity building programs do not seek to enhance entrepreneurial
abilities of women in Mogadishu.
The researcher further sought the opinions of respondents on whether Dahabshiil Bank
capacity building programs also seek to enhance financial management skills among
women in Mogadishu. Findings about this item are presented in table 4.24 below;
Table 4.24: The capacity building programs also seek to enhance financial
management skills among women in Mogadishu
Cumulative
Frequency
Valid Strongly agree
Percent Valid Percent
8
Agree 18
62
Percent
5.9
5.9
5.9
13.3
13.3
19.3
Disagree
84
Strongly disagree
25
Total 135
62.2
62.2
81.5
18.5
18.5
100.0
100.0
100.0
Source: Primary data (2024)
In table 4.24 above, 8 (5.9%) of the respondents strongly agreed, 18 (13.3%) agreed, 84
(62.2%) disagreed and 25 (18.5%) strongly disagreed in response to the statement that
“Dahabshiil Bank capacity building programs also seek to enhance financial management
skills among women in Mogadishu”. Since most of the respondents disagreed to this item,
it indicates that Dahabshiil Bank capacity building programs do not seek to enhance
financial management skills among women in Mogadishu.
To test the study hypothesis and also find out whether capacity building services have any
significant effect on business development in Dahabshiil Bank, the researcher carried out
Pearson correlation analysis. In this case, the computed scores for capacity building
services were correlated with those of business development in Mogadishu Somalia.
Results are presented in table 4.25 below.
Table 4.25: Results of a Pearson correlation analysis between capacity building
services and business development in Mogadishu Somalia
Capacity Building Business Development in
Services
Capacity Building
Services
Mogadishu
.787**
Pearson
1
Correlation
Sig. (2-tailed)
.000
63
N
135
135
.787**
Business Development Pearson
1
In Mogadishu Correlation
Sig. (2-tailed)
.000
N
135
135
**. Correlation is significant at the 0.01 level (2-tailed).
Table 4.25 shows that the value of the co-efficient (r) equals to .787 and sig value, p = 0.00.
The value of r being positive, it means that capacity building services have a statistically
significant and strong positive effect on business development in Mogadishu Somalia. The
sig. value for the correlation was equal to .000 which was less than the level of significance
(.05). Based on this, the researcher rejected the null hypothesis and upheld the alternative
and therefore concluded that there is a statistically significant positive relationship between
capacity building services and business development in Mogadishu Somalia. This also
means that increased capacity building services are likely to significantly improve business
development in Mogadishu Somalia.
The researcher also used coefficients (beta values) statistical technique to analyze the data.
This helped to determine the extent to which capacity building services affect business
development in Mogadishu Somalia. The results are summarized in Table 4.26 below.
Table 4.26: Coefficientsa
Unstandardized
Standardized
Coefficients Coefficients
Model
1
B
(Constant)
Std. Error
1.886
Capacity Building
64
.110
Beta
t
17.125
Sig.
.000
.521
Services
.035
.787
14.722
.000
a. Dependent Variable: Business development in Mogadishu
The study findings in table 4.26 above indicate that capacity building services had a beta
value of 0.787. It can therefore be deduced from the result that at 100% increase in capacity
building services, business development in Mogadishu Somalia is likely to improve by
78.7%.
4.4 Multiple Regression analysis
Using a stepwise method, a multiple regression analysis was also carried out to establish
the most significant predictor variables to business development in Mogadishu Somalia
among the three micro finance services offered by Dahabshiil Bank. Table 4.27 presents
results of the model summary.
Table 4.27: Model Summary
Std. Error
Mod
el
1
2
3
R
Change Statistics
Adjusted of the R Square
R
R Square Estimate
Change
Square
F
Change
Sig. F
Change
df1
df2
.787a
.620
.617
.31847
.620
216.74
5
1
133
.000
.803b
.644
.639
.30925
.024
9.044
1
132
.003
.655
.647
.30565
.011
4.128
1
131
.044
.809c
a. Predictors: (Constant), Capacity Building Services
b. Predictors: (Constant), Capacity Building Services, Micro Credit Services
c. Predictors: (Constant), Capacity building services, Micro credit services, Micro savings
services
65
Results of the multiple regression analysis results presented in table 4.27 indicate that
Capacity building services is the most significant predictor variable to business
development in Mogadishu Somalia. Its relationship with business development in
Mogadishu Somalia is 0.787; its effect on the sample is 0.620 while its effect on the total
population is 0.617. This suggests that Capacity building services would predict up to
62.0% variations in business development in Mogadishu Somalia based on the sample and
61.7% based on the total population.
The table also shows that if Capacity building services is combined with Micro credit
services, then their relationship with business development in Mogadishu becomes 0.803;
their effect on the sample becomes 0.644 while their effect on the total population becomes
0.639. This suggests that a combination of these two variables would predict up to 64.4%
variations in business development in Mogadishu Somalia based on the sample and 63.9%
based on the total population.
The table further shows that if the three variables (Capacity building services, Micro credit
services and Micro savings services) are combined together, then their relationship with
business development in Mogadishu becomes 0.809; their effect on the sample becomes
0.655 while their effect on the total population becomes 0.647. This suggests that a
combination of all the three Micro finance services would predict up to 65.5% variations
in business development in Mogadishu Somalia based on the sample and 64.7% based on
the total population. The researcher also base on these findings to reject all the three null
hypotheses and conclude that there is a statistically significant relationship between
Capacity building services, Micro credit services and Micro savings services and business
development in Mogadishu Somalia.
66
CHAPTER FIVE
FINDINGS, DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
This chapter focuses on the summary of findings, discussion, conclusions and
recommendations. The discussion leads to varying conclusions and a number of
recommendations that are presented later. The conclusions look at the most significant
issues found out in the study while recommendations mainly focus on suggestions that may
strengthen the role of micro finance services on business development in Mogadishu
Somalia.
5.2 Summary of findings
The study was set to establish the effect of microfinance services on business development
in Dahabshiil Bank. Specifically, it sought to establish how micro credit services, micro
savings services and capacity building services affect business development in Dahabshiil
Bank. The researcher adopted a correlational research design to establish how each of the
different microfinance services relates with business development in Mogadishu Somalia.
A sample of 135 respondents was selected from study population of 209 persons.
Fortunately enough, the researcher managed to deal with all of them, that is to say 135
respondents which gave a response rate of 100%. Respondents were selected using
Purposive and simple random sampling techniques. Data was collected by use of
selfadministered closed ended questionnaires.
67
Study findings were presented using frequency tables and percentages. Pearson’s
correlations were used to establish the relationship between the different study variables.
Multiple regression analysis was also used to determine the most significant predictor
variable among the three microfinance services. Research findings based on the responses
received revealed that all the three microfinance services (micro credit services, micro
savings services and capacity building services) have a statistically significant positive
effect on business development in Mogadishu Somalia.
5.3 Discussion of the findings
A discussion of the study findings is presented in the subsequent sub sections based on the
three objectives that guided the study.
5.3.1 Effect of micro credit services on business development in Dahabshiil Bank
In this objective, the researcher sought to establish whether micro credit services have any
statistically significant effect on business development in Dahabshiil Bank. The study
findings revealed that micro credit services have a statistically significant positive effect
on business development in Mogadishu Somalia. This was based on the Pearson correlation
analysis as well as a multiple regression analysis which revealed a statistically significant
positive relationship between the two variables (r = 0.722, p < 0.05, n = 135).
These findings agree with works of previous researchers like Adugna and Heidhues (2000)
who noted that access to credit enables the rural poor households to enhance their
productive capacity with potential implications for increased household income and
employment opportunities. Dong, Lu and Featherstone (2010) also indicated that access
to credit is a necessity for improving farm profits and improving the living standards
of rural communities in developing countries. The writers found that by removing credit
constraints, the income of farmers would improve considerably. Moreover, in his study
Khandker (2006) observed that access to microfinance services contributes to poverty
reduction, especially for female participants, and to the overall poverty reduction at
the village level.
68
The study findings were also in agreement with Kireti and Sakwa (2014) who observed
that credit creates opportunities for self-employment rather than waiting for employment
to be created. It liberates both poor and women from the clutches of poverty. It brings the
poor into the income stream. Given the access to credit under an appropriate institutional
structure and arrangement, one can do whatever one does best and earn money for it. One
can overcome poverty. One can become the architect of one’s destiny and the agent of
change not only for one’s family but also for the society.
Hermes and Lensink (2011) also noted that access to finance has several potential benefits
that reduce poverty. These include (i) long lasting increases in income through higher
investments in income generating activities, and a more diversified livelihood; (ii) asset
accumulation and consumption smoothing; (iii) reduction of vulnerability to illness,
droughts, floods; (iv) empowerment of women through expansion of economic
opportunities and enhancement of social status; and, (v) finally, through spillover effects
that extend beyond the borrowers. The study findings also concur with Eneji et al. (2013)
who observed that rural dwellers need credit to a large extent to enable them invest in
different types of economic ventures.
5.3.2 Effect of micro savings services on business development in Dahabshiil Bank
In this objective, the researcher sought to establish whether micro savings services have
any statistically significant effect on business development in Dahabshiil Bank. The study
findings revealed that micro savings services have a statistically significant positive effect
on business development in Mogadishu Somalia. This was based on the Pearson correlation
analysis as well as a multiple regression analysis which revealed a statistically significant
positive relationship between the two variables (r = 0.632, p < 0.05, n = 135).
These findings agree with works of previous researchers like Hirschland (2005) who
agiatetd for MFI savings since they enable future investment, by giving access to lump
sums of money. These large sums of money can be used for investment opportunities, for
life cycle events, such as marriages, funerals or for emergencies (Hirschland, 2005).
Moreover, growing empirical evidence suggests that savings products can be valuable for
generating income and for reducing poverty (Dupas and Robinson, 2013). The study
findings also concur with Gibbons et al., (2000) who observed that MFI financial products
69
like loans and savings products must be designed especially to meet the needs of the
poorest. Morduch (2007) also argues that with savings, households can build up assets to
use as collateral, smooth seasonal consumption needs, self-insure against major shocks,
and self-finance investment.
The findings confirm the works of Luyirika (2010) who observed that clients who accessed
MFIs services were able to improve their socio-economic status through starting up
and or expanding investments and enterprises, paying school fees for their children,
purchase of household items like furniture, land and solar installation, building of
houses, confidence building, participation in leadership roles etc. Moreover, microfinance
has also been credited with improving other financial outcomes such as furniture or a
sewing machine, as well as non-financial outcomes such as health, food-security, nutrition,
education, women’s empowerment, housing, job creation, and social cohesion (Odell,
2010). Kofi et al., (2014) also observed that MFIs assist borrowers to use the savings or
income from their loans for investment in life-improving amenities such as housing,
education, food, and health which signifies actual reduction in poverty of such clients.
Moreover, Yunus (2004) argued that provision of microfinance services to the poor is
central to development in terms of providing the needed capital for investment which in
turn leads to an improvement in household income and welfare.
5.3.3 Objective three: To examine the effect of capacity building services on business
development in Dahabshiil Bank
In this objective, the researcher sought to establish whether capacity building services have
any statistically significant effect on business development in Dahabshiil Bank. The study
findings revealed that capacity building services have a statistically significant positive
effect on business development in Mogadishu Somalia. This was based on the Pearson
correlation analysis as well as a multiple regression analysis which revealed a statistically
significant positive relationship between the two variables (r = 0.787, p < 0.05, n = 135).
70
These findings agree with works of previous researchers like Akanji (2006) who stated that
training is a very important micro-finance factor for entrepreneurs as it would provide the
skills and experience needed for business. Moreover, According to Otieno (2013), the
outreach programs of microfinance banks in offering financial management training has a
significant influence on the growth of small businesses. For small business growth, offering
of training in financial management acts as the starting point to equip the potential business
people with financial management skills (Otieno, 2013). The author further stated that
micro-finance organizations have become viable financial options to many small scale
clients who seek small loans as well as advices on how to wisely utilize the loans borrowed.
Past studies also indicate that through microfinance, participating women increase their
income. This is attributed to access to microcredit which also comes with training on how
to manage small loans (Karuga, 2014).
5.4 Recommendations
Based on the findings of the study, it is suggested that Dahabshiil Bank management takes
on the following measures to enhance business development in Mogadishu Somalia. These
suggestions are also presented following the study objectives.
5.4.1 Effect of micro credit services on business development in Dahabshiil Bank
The study findings revealed that that there is a statistically significant positive relationship
between micro credit services and business development in Mogadishu Somalia. To further
strength this relationship, the researcher recommends that management of Dahabshiil Bank
ought to offer long repayment periods to borrowers as this is likely to increase the working
capital of the small businesses in the study area. Moreover, to enhance accessibility and
reliability of their credit services, Dahabshiil Bank management also needs to direct more
efforts into credit diversification and at the same time adopt a more equitable treatment of
all its credit customers.
5.4.2 Effect of micro savings services on business development in Dahabshiil Bank
The study findings revealed that that there is a statistically significant positive relationship
between micro savings services and business development in Mogadishu Somalia. To
71
further strength this relationship, the researcher recommends that management of
Dahabshiil Bank needs to start offering savings incentives like interest on savings to its
clients. This is likely to improve on the saving habits among women in Mogadishu
Somalia.
5.4.3 Effect of capacity building services on business development in Dahabshiil Bank
The study findings revealed that that there is a statistically significant positive relationship
between capacity building services and business development in Mogadishu Somalia.
Efforts should therefore be geared towards reinforcing capacity building programs offered
by Dahabshiil Bank. Among others, instead of using only its employees in implementing
the programs, Dahabshiil Bank may start involving the clients themselves, consultants and
other influential persons in Mogadishu. This is likely to promote ownership and continued
support of the program and at the same time develops a cadre of local experts who will
help create lasting innovation.
5.5 Areas for further research
Since this study was limited to micro finance services, the researcher suggests that further
investigations be made into other factors that affect business development in Mogadishu
Somalia apart from micro finance services. Secondly, since the study focused on only
Dahabshiil Bank, other researchers can carry out further studies in other financial
institutions in Somalia to increase generalizability of the findings.
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79
APPENDIX I: QUESTIONNAIRE
Dear respondent,
I Mohamed Abdulahi Yusuf, Vu-Bbf-2101-0194 am currently carrying out a study for the
purpose of writing a dissertation as a requirement for the award of Bachelor of Business
Administration of Victoria University. The topic of the study is “Role of Commercial Bank
on the Business Development, a case study of Dahabshiil Bank, Mogadishu-Somalia”. You
have been selected to participate in this study due to the importance of your information in
the study. The information you provide will only be used for the purpose of this study and
will be treated with utmost confidentiality. I kindly request you to answer the questions
fully and honestly. Thank you
SECTION A: Demographic Characteristics of Respondents
For the questions in this section, please answer by ticking the box representing the most
appropriate response for you.
1. Gender (Please Tick):
Male
Female
2. Age:
18—30
31---45
46 and above
80
3. Educational level (Please Specify):
Ordinary-Level
Advanced- Level
Diploma
Bachelor degree
Masters Degree
Other (Sepecify)__________________________________
SECTION B
In this section please tick in the box that corresponds to your opinion/view according to a
scale of 1 = Strongly Agree (SA), 2 = Agree (A), 3 = Not Sure (NS), 4 = Disagree (D), 5
= Strongly Disagree (SD)
No.
Statement
1
2
3
4
5
OBJECTIVE 1: Effect of micro credit services on business development in Dahabshiil Bank, Mogadishu
Somalia
1
Dahabshiil Bank loans are accessible by most of the women in
Mogadishu Somalia
2
Dahabshiil Bank offers agricultural loans to women farmers in
Mogadishu Somalia
3
Dahabshiil Bank loans have a long repayment period
4
Dahabshiil Bank loans are more reliable compared to other financial
institutions in Mogadishu Somalia
81
5
6
7
Loan clients always obtain the exact amount of loans they apply for
from
Dahabshiil Bank
Dahabshiil Bank employees fully explain to clients about its credit
services in a language that both parties understand
Dahabshiil Bank tolerates loan clients for delays especially when they are
struck by some uncertainties (illness, robbery, etc)
OBJECTIVE 2: Effect of micro savings services on business development in Dahabshiil Bank,
Mogadishu
Somalia
8
Dahabshiil Bank offers micro saving services to women in Mogadishu
Somalia
9
10
Dahabshiil Bank savings services have helped me to meet my basic
needs
I use my Dahabshiil Bank savings to raise school fees for my children
11
I also use my Dahabshiil Bank account to save money for my business
12
Dahabshiil Bank savings services mainly target the poor in our
community
13
Dahabshiil Bank offers savings incentives to its clients
14
Dahabshiil Bank also offers group saving schemes to its clients
OBJECTIVE 3: Effect of capacity building services on business development in Dahabshiil Bank,
Mogadishu Somalia
15
Dahabshiil Bank always trains borrowers on how to use the loans
acquired
16
The capacity building programs always target the women in Mogadishu
82
17
The capacity building programs are accessible by all women irrespective
of status or religion
18
The capacity building programs are relevant given the financial needs
of women in Mogadishu
19
The capacity building programs seek to enhance entrepreneurial abilities
of women in Mogadishu
20
The capacity building programs also seek to enhance financial
management skills among women in Mogadishu
DEPENDENT VARIABLE: Business Development in Mogadishu Somalia
21
There is a significant increase in house hold incomes among women in
Mogadishu Somalia
22
Women in Mogadishu Somalia have adequate access to education
services
23
Women in Mogadishu Somalia have adequate access to safe water
24
Women in Mogadishu Somalia have adequate access to health care
25
There is a general improvement in women’s standards of living in
Mogadishu Somalia
26
Women in Mogadishu Somalia have adequate access to communication
facilities
27
Women in Mogadishu Somalia have good housing facilities
28
There is adequate food security among women in Mogadishu Somalia
29
There is adequate empowerment of women in Mogadishu Somalia
83
30
There is general accumulation of wealth among women in Mogadishu
Somalia
Thank you for your time
APENDIX II: Krejcie and Morgan Table for determining a Sample Size from a
given Population
84
Source: Krejcie & Morgan (1970, as cited by Amin, 2005) Note.—N
is population size.
S is sample size
85