CHAPTER ONE INTRODUCTION
Savings and Credit Co-operative Societies (SACCOs) are started locally and have solid bases of small saving accounts constituting a stable and relatively low-cost source of funding and low administrative costs. More so, SACCOs are able to advance loans at interest rates lower than those charged by other financial providers. In addition, SACCOs have the ability and opportunity to reach clients in areas that are unattractive to banks such as rural or poor areas (Branch, 2005). This has made SACCOs more attractive to customers thus deeply entrenching themselves in the financial sectors of many countries (Munyiri, 2006). In fact, the core objective of SACCOs is to ensure members empowerment through mobilization of savings and disbursement of credit (Ofei, 2001). SACCOs have been efficient in achieving this objective. In Kenya, for instance, SACCOs have mobilized over Kshs.200 billion in savings (Co-operative Bank of Kenya, 2010).
Savings mobilization should be backed by adequate institutional capital which ensures permanency, provide cushion to absorb losses and impairment of members‟ savings (Evans, 2001). The institutional capital which comprises the core capital and less share capital is mainly accumulated from appropriation of the surpluses. Therefore, SACCOs should strive to maximize on the earnings to build the institutional capital
(Branch & Cifunentes, 2001; Ombado, 2010). This institutional capital ensures the permanence and growth of the SACCOs even in turbulent economic times (Evans, 2001). In fact, it helps the SACCOs to grow and, remain economically and financially viable (Gijselinckx & Devetere, 2007). Such growth is enhanced by effective financial practices.
Imperatively, each SACCO needs to generate income which is adequate to cover all its operational costs, enhance the institutional capital, dividends and rebates. In this regard, financial practice is based on sound financial stewardship, solid capital structure, and prudent funds allocation strategy (Maina, 2007). It is in this regard that there are financial management theories that explain the growth of wealth in terms of financial stewardship (governance), capital structure (sources of funds) and funds allocation strategy (capital allocation) (Zetche, 2007; Annas, 2003; Abdullah &Valentine 2009; (Flannery &Hankins, 2007; DeMarzoy, Fishmanz, Hex & Wang, 2010). These theories have pointed to the lack of strong financial stewardship, appropriate capital structure and prudent funds allocation strategy as leading to stagnation of growth of wealth.
Relevant theories on financial stewardship emphasize on value maximisation leading to growth of wealth. These theories include; the stakeholder theory which emphasises on corporate decisions (Sundaram & Inkpen, 2004), virtue ethical theory which encourages stewards to conduct themselves appropriately (Zetsche. 2007), agency
theory which suggests that the stewards should make financial decisions for maximisation of shareholders value (Daily, et al., 2003; Clarke, 2004), stewardship theory that requires the stewards to ensure maximisation of financial performance (Abdullah & Valentine 2009). Other theories include; transaction cost theory which stresses for highly qualified stewards for maximisation of wealth (Abdullah & Valentine 2009), finance theory which states that the stewards must act in a manner to maximise shareholders‟ wealth (Blair, 1995; Keasey, et al., 2004) taking into consideration agency costs (Jensen & Meckling, 1976), and myopic market model which states that the the stewards should make short term decisions to increase share value (Keasey,et al., 2004).
Financial stewardship being the routine financial decision-making of the SACCO, should embrace sound business practices. This should also revolve around the SACCOs‟ financial discipline with a profound influence on the success of all businesses conducted by the SACCOs (Mudibo, 2005). The major financial decisions involved in financial stewardship, for instance, include decisions on finance staff, loan management, asset management and product innovation (Horne, 2003, and Mudibo, 2005). The financial stewardship should be capable of working to increase SACCOs‟ wealth, sustain the SACCOs‟ value and satisfy the shareholders‟ demands. Further, the financial stewardship aspect is also responsible for updating accounts, ensuring correctness of accounts, advance planning and reporting to members.