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In: Business and Management

Submitted By paulmutisya
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1. O INTRODUCTION Loans are a dominant asset in most banks that generate largest share of operating income and represents banks greatest risk exposure. Overtime, increased competition among commercial banks, credit unions, finance companies and the investment banks have led to changes in lending policies and the loan portfolios. Extending loans to businesses and to individuals involves taking risks to earn high investment returns which are the loan interest rate, fee income and investment income from new deposits.
Interest rate risk arises from credit decisions made by the investors. Loan maturities, pricing and the form of principal repayment affect the timing and magnitude of a banks’ cash inflows. The wholesale banks emphasize on large business lending while the retail banks emphasize on lending to individuals. Loans offer the highest yield and consumer loans offer even higher yields (MacDonald & Koch, 2006).
In the banking sector, we have different categories of banks for instance; commercial banks like KCB, Barclays, or SACCO banks such as Co-operative Bank of Kenya. These banks offer different services like investment accounts, savings accounts and the loan account. Currently, most commercial banks are facing a declining trend in their loans department.
The principal profit making activity of commercial banks is making loans to its customers, in allocation of funds to loan portfolio. The primary objective of a bank is to earn income while serving the credit needs of its community. The bank management also must decide upon distribution of funds within the loan portfolio that is; funds will have to be assigned to installment loans, commercial loans, real estate loans among others (MacDonald 2006).

SACCOs first appeared in Germany in the 1870’s. The idea moved to North America in 1900 with European immigration. Canada, the…...

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