An investigation into the causes of nonperforming loans in financial cooperatives in Swaziland.

Abstract

ABSTRACT Several financial cooperatives in Swaziland are experiencing serious financial distress that is threatening their long-term sustainability. Recent reports indicated that about 59% of financial cooperatives either have negative reserves or under-capitalisation. Levels of nonperforming loans are estimated to be more than the international benchmark of 5%. The main purpose of the study, therefore, was to investigate the causes of nonperforming loans in financial cooperatives in Swaziland. Specific objectives were; to analyse the general trend and impact of nonperforming loans over the last six years; and to investigate the effect of loan product design, credit assessment, delinquency monitoring, debt recovery and credit governance practices on nonperforming loans. The study adopted an explanatory, quantitative, cross-sectional and correlational survey research design which embraced the positivism philosophical paradigm. The target population was 108 managers and credit supervisors from 54 licenced financial cooperatives in Swaziland. A census survey of the entire target population was carried. Primary data was collected through self-administered questionnaire from 85 respondents. Secondary data was collected from the Department of Cooperatives Development and the Financial Services Regulatory Authority. Descriptive and inferential statistics were used to analyse data the collected. The findings revealed that poor credit screening of borrowing members, poor monitoring of delinquent loans, poor credit collection processes and insufficient credit governance are the main drivers of nonperforming loans in financial cooperatives in Swaziland. The study also found that financial cooperatives do not use basic recovery strategies such as sending reminders, blacklisting, external debt collectors and litigation to recover delinquent loans. The study recommends that financial cooperatives should strengthen their credit appraisal, underwriting, monitoring and debt collection and recovery practices. In addition, financial cooperatives and regulators should develop a fitness and propriety system to ensure election of suitably qualified members into board of directors of financial cooperatives. Finally, the study recommends that further research should be conducted to assess the impact of nonperforming loans on the performance of financial cooperatives in Swaziland.