Financial sustainability of Islamic saving, credit cooperative society (SACCOS) in Tanzania

Abstract

In developing countries large population rely on Microfinance Institutions (MFIs) to have various financial services. Due to this, having MFIs that are financially sustainable enables them to improve society better such that to reduce poverty by serving the poor who in most cases do not qualify in standard banks. This is more important for Islamic Microfinance Institutions (IMFIs) that are non-exploitative to its members. As reported by various scholars such as Gebremichael and Gessesse (2016) that, most of the MFIs in developing countries lack financial sustainability. Generally, there are several studies on financial sustainability in IMFIs, however there has not been much discussion of same topic in Tanzania. Therefore, this study aims to examine the financial sustainability of Islamic Saving, Credit Cooperative Society (SACCOS) in the Tanzanian context. The study used institutional theory to explore, view and explain the financial sustainability of Islamic SACCOS. The study adopted a mixed mode research method. Data used in this study comes from annual financial reports of five years (2010-2014) of four SACCOS in Tanzania, whereby financial ratios were used to measure the financial sustainability. In addition to that, the interview was conducted with the management of these SACCOS to examine their perception of financial sustainability of SACCOS and factors affecting such sustainability. Quantitative data were analyzed using descriptive analysis, and a thematic study was conducted for data from the interview. The findings show a fluctuating trend for the financial ratios. In most of the years, Islamic SACCOSs did not meet the benchmark of 3% for Return on Asset (ROA) set by Accion, hence the Islamic SACCOS are not financially sustainable. Additionally, having responsible staff members, regular review of financial guidelines, education to members, cooperation between employees and management and staff training are found to be highly contributing factors towards SACCOS`s financial sustainability. Moreover, the findings show that depending on only charges on members as the source of income is the main factor that contributed much to the Islamic SACCOS not being financially sustainable. Apart from adding to the literature on the financial sustainability of MFIs, this study is expected to serve as an alert for Islamic SACCOS to work on the issue of them being financially unsustainable by addressing the factors that hinder their financial sustainability. Moreover, as for regulators such as Cooperative Audit and Supervision Corporation (COASCO) can use the result in this study while providing the consultancy and audit services to these SACCOSs. Such efforts will enable them to achieve the goal for their existence by reaching most of the poor people who depend on MFIs for financial services.