AN ANALYSIS OF RISK MANAGEMENT STRATEGIES APPLIED BY POLICE CREDIT UNION FOR INVESTMENTS Contents

Contents

ABSTRACT 4

CHAPTER ONE 5

INTRODUCTION 5

1.1 Background of the study 6

1.2 Risk management 6

1.3 Credit Sacco’s in T&ampT 7

1.4 Credit management in Sacco’s 8

1.7 Portfolio management 10

1.8 Research problem 11

1.9 Objectives of the study 11

1.10 Research Value 12

CHAPTER TWO 13

LITERATURE REVIEW 13

2.0. Introduction 13

2.1 What is a risk? 13

2.2 What is Risk Management? 14

2.3 Types of risk 15

2.4 REVIEW OF THEORIES 16

2.4.1 Liquidity theory of credit 16

2.2.2 Portfolio theory 16

2.2.3 Tax theory of credit 17

2.2.4 Credit risk theory 17

2.3 Credit risk management practices 18

2.3.1 Loan portfolio 18

2.3.2 Credit risk 18

2.3.3 Delinquency management 18

2.4 Risk identification 19

2.5 Strategic risk management 19

2.6 Performance measurement 21

2.7 Empirical studies 22

Summary 23

CHAPTER THREE 24

METHODOLOGY 24

3.0 Introduction 24

3.1 Epistemology 24

3.2 Ontology of the research 25

3.3 Research Design 25

3.3.1 Quantitative Research 26

3.4 Sampling and Population 26

3.5 Instruments and Measurement 26

3.5.1 Quantitative and Qualitative Approaches 27

3.5.2 Quantitative data analysis 27

3.6 Data Collection techniques 28

3.6.1 Self-administered Interviews and Questionnaires 28

3.6.2 Design of the Survey 29

3.7 Ethical Considerations 29

3.8 Research Limitations 29

Summary 30

CHAPTER FOUR 30

DATA ANALYSIS AND INTERPPRETATION 30

4.0 Introduction 30

4.1 of statistics 31

4.1.3 Credit risk management 32

4.2 Estimated empirical model 36

Summary 37

CHAPTER FIVE 38

1.0 Introduction 38

of the findings 38

Conclusion 39

Recommendations 42

REFERENCE LIST 43

ABSTRACT

Provisionof credit facilities is the backbone of any economy and the corefunction of every savings and credit cooperative society. Creditmanagement role enhances efficient management and administration ofSacco loans in order to ensure equal distribution of funds andencourage liquidity and planning in the sector. Many researchers havecome up with different views on credit management however it stillremains an open sector that has not had a conclusion on its impactsand responsibilities in the society. The main purpose of thisresearch is to examine and analyze different risks and how they aremanaged by police credit Sacco’s. a (descriptive research) approachwas employed with a target population of 106 licensed Sacco’s froma sample population of 35 Sacco’s which were identified in Trinidadand Tobago (T&ampT).

Theresearch usesbothprimary and secondary sources of data from numerous reportsestablished by independent bodies in the country. The data collectedin the field was analyzed using a Observation views and regressionanalysis. The results depicted that formulation of credit policy islargely left in the hands of the members of the organization andregulation with moderate involvement of its employees and thedirectors (Holmes, 2002). The findings go further to point out thatCAMEL rating system plays a crucial role in the assessment of thesoundness of Sacco’s. It is on this premise that the Cabinetformulated a new approach in regulation of the credit societies inthe country. This new formulation was geared at establishing a sereneenvironment of operation for all the credit unions. Generally theresearch aimed at answering the question “CanRisk Management Strategies Help the Police Credit Union achieveprofitability even in the current economic and regulatory settings?”

CHAPTERONEINTRODUCTION

1.0 INTRODUCTION

RiskManagement in any business is not only about process used to mitigateand manage the undesired consequence of normal business operations,but also is a practice of balancing risk and profitability (Douglas2010). When credit unions have a comprehensive understanding of howto manage critical uncertainties affecting the day-to-day businessoperations, they are empowered to execute proper strategies toachieve their organizational goals particularly in a post-financialcrisis (Beccalli, Anolli &amp Giordani 2013). Risk management sincetime immemorial has been the focal point for credit unions however,the traditional approaches to risk management are not up to task tosignificantly counter the persistently emerging different categoriesof risks that financial institutions face (Joseph 2013).

CreditUnions (CU) in Trinidad and Tobago (T &amp T) are established asautonomous entities which have as their core business the promotionsof thrift and growth of credit in order to provide credit facilitiesto members in accordance with the Credit Union Act (CUA) under theregulatory authority of the Central Bank of T &amp T (CBTT). CUswith fiduciary responsibility for its members’ deposit have beenconstantly exposed to risks of insolvency, proliferation of bad debtsand an unpredictable internal economic environment. Recently theCentral Bank (CBTT) imposed greater regulatory regime to ensure thesoundness and security of the national CUS.

Itis expected that the risk management strategies identified will helpCredit Unions in Trinidad and Tobago to establish a niche in thewider economy where they can conduct their business of mainlysafeguarding their depositors’ interest, engaging in creditfacilities aimed at financially elevating their members andencouraging investment opportunities in accordance with theregulations of the Credit Union Act of T &amp T.

1.1 Backgroundof the study

T&ampT’sfinancial sector is dominated by commercial banks, insurance firms,pension funds and mortgages that have taken a larger percentage ofthe market and hold roots in the countries credit sector. It is theseground that largely meets the financial needs of the people bothinternal and external markets. These financial institutions do nothave a background in lending to the low income groups in the societythis means that they lack a track record of financing small startupsin the country. After realization of the kind of trouble the lowincome groups in the country experience in accessing the necessaryfinancial assistance to commercialize their businesses or startbusiness the government took an initiative in coming up with aframework that would aid the growth of Sacco’s in the economy(Alexander, 2013).

Suchinitiatives have made the country’s credit co-operatives grow muchfaster than they did in a decade ago (Tobago, 2014). This sector hasa higher probability of realizing more customers in the market andexpanding its growth initiatives. For instance, there exists apotential market of approximately 4 million clients with over $300million portfolio. The participation of Sacco’s goes beyond theframework of just sharing information. Evidence points out thatconsumer have multiple borrowing within Sacco’s as compared tothose who borrow from banks in the country. However, amidst all thesegrowth patterns it is paramount to note that there is also anincrease in the magnitude of risks these credit societies face interms of finance and economic risks. The higher the number of clientswithin a particular institution the higher the risks associated thelarge number (Alexander, 2013). This may be attributed to insolvencyrisks and defaulting in the sector due to the large number ofborrowers.

1.2 Riskmanagement

Riskmanagement concept has evolved over time and is commonly associatedwith the commercial world and more specifically the insurance sector.However, risk management connotes a conscious attempt on behalf of acredit union management to identify, measure and control of allexposures to loss which are pronounced by all activities in which acredit union indulges. Risk management expounds its meaning to a widespectrum of activities in the market it is not all about cushioningcredit unions from certain risks but it also encompasses managingcritical uncertainties affecting the day to day operations. A riskmanagement strategy is geared towards empowering management toachieve organizational goals and more particular in a post financialinstance (Alexander &amp Colgate, 2009).

Creditunions are established with an intention of offering financialassistance to the low income groups in the society. As opposed to thelarger institutions, credit unions face numerous challenges inrecovering their money from this specific group in the society. Henceit can be depicted that credit unions are exposed to higher risks asopposed to the large commercial intuitions in the country. CreditUnionsin Trinidad and Tobago areformed as autonomous entities geared towards promotion of growth ofcredit in order to provide more support to the low income earners inthe country (Alexander &amp Colgate, 2009). The Credit Union Act(CUA) depicts that all credit Sacco’s in the country have to beestablished as autonomous entities. Credit Unions in Tobago andTrinidad (T&ampT) have been exposed to numerous risks that includeinsolvency proliferation of bad debts and the unpredictable internaleconomic environment that constantly weigh them down. The centralbank in the country imposed a greater regulatory framework thatensures that there is a soundness and security check in the sector.The move undertaken by the government is skewed towards ensuring thatcredit unions are able to manage their risks effectively. Riskmanagement in credit unions was a matter that was not properlyregulated hence integration of the government policies of securitychecks is likely to cushion the Unions from the credit risks.

1.3 CreditSacco’s in T&ampT

Inthe year 2005, the cabinet sector came into a conclusion that thesupervision of the financial activities of all the credit unionsought to be integrated under the augers of the central bank of T&ampT.in a statement released by the cabinet secretary, the cabinet alsoagreed that the co-operative societies act chap 81:03 ought to beamended to remove the supervisory clause that allowed thecommissioner for cooperative development to oversee the financialactivities of all the credit unions in the country (Horcher, 2011).The changes came at the wake of immense losses portended by thecredit unions in the previous year all these losses were attached tothe high levels of risks associated to the sector. The central bankassumed the responsibility as per the passage of a credit union act.In the same period the central bank came up with a proposal thatcemented on the need for development of a credit union act andconducted consultations with both the industry and the public toensure that the proposals were in consistent with the valuesgoverning the co-operatives (Beccalli et al., 2013).

Thenew proposal inculcated all the international standards set by theworld council of credit unions (WOCCU) and the best practices ofjurisdictions with well-developed credit union sectors. In additionimportant considerations were given to ensure that the proposal wasconsistent with the cooperative principles which includevolunteerism, democracy, equality and participation, co-operation andeducation or training of all the members. However, in the midst ofall these changes, credit Sacco’s remain exposed to the samechallenges they faced in the country. Economic fluctuations andinsolvency risks remain as some of the top risks faced by theseSacco’s. Credit Unions in T&ampT have taken an initiative tooversee allowance of loans to guarantee support for business by theirmembers. This formulation is geared towards ensuring that membersgarner full support from their Sacco’s (Beccalli et al., 2013).

1.4 Creditmanagement in Sacco’s

Theprovision of credit can be assumed to be the core function of anysavings and credit co-operative society. Credit management functionfacilitates efficient management and administration of the Sacco loanportfolio in order to assume equal distribution of funds andencourage liquidity planning. In order to operate within the acceptedlimits, credit management should always be guided by clearly speltout policies and procedures and strategic plans as well as the Saccoregulatory act. Savings and credit co-operative has three majoroperational aspects that include savings, channeling external fundsand credit (Hubbard, 2009). The management committee of the Sacco isresponsible for the formulation, review and amendment of the loanpolicy.

Thesupervisory committee is also responsible for ensuring that the loanpolicy is adequately carried out and the fact that it attains itsobjectives and stipulated goals it was created to achieve. Thecommittee assumes the responsibility of determination of the policywhich is being carried out periodically and the sample of loansdenied or granted. The policy is a boost in the loaning process as itis expected to steer the establishment of fair loaning process,efficiency in credit disbursement and offer guidance to board memberswhenever they review loan request and retrieval (Benes &amp Kumhof,2011).

1.6 Creditrisk

CreditRisk is defined as the potential of a borrower to default or fail tomeet all the required obligations in accordance with the stipulatedagreements. Credit risk is the most expensive risk in the financialinstitutions and its effect is more significant as compared to otherforms of risks, this is because it directly affects the solvencylevels of a financial institution. Financial institutions haveexperienced numerous problems in the recent past, however among allthe problems the major risk facing the institutions in the sector islax credit standards for the borrowers and the counterparties, poorrisk management portfolio, lack of attention to change in theeconomic factors or other circumstances that may impair the creditstandings of the financial institutions (Benes &amp Kumhof, 2011).

Loanshave been established to be the largest source of credit risks to thefinancial institutions. However, other there is other sources ofcredit risks that exist throughout the activities of a financialinstitution that include the banking book and the trading book, andboth can be on or off the financial position statement. The main goalof credit risk management framework is to maximize a Sacco’s riskadjusted rate of return by offering and displaying a standard riskexposure within the accepted limit. Sacco’s should ensure to managetheir risks to the inherent portfolio as well as the risks inindividual credit as transactions (Etukuru, 2011). The ability tomanage risks will mean that Unions will stand in a better position tocompete with commercial banks and other bigger institutions in thesector. What weighs down on most of the Unions is their inability toreview risks. It is high time that Credit Union management take theseinstitutions to high levels whereby they can compete effectively inthe market, and embracing risk management techniques is that part ofthe technique of growth.

Successof a credit management program is reliant on the levels of riskmanagement in a given institution its policies, procedures andprofessionalism in governance. If there is a good risk managementprogram then it is probable to depict that a good management team isbehind the plan. A functional system depicts that leaders have comeup with policies and procedures that operate without any form ofinterruption (Bessis, 2011). Minimization of bad loans is animportant approach to all stakeholders. It will ensure that there isa better identification approach to all the potential credit risksrelated to the restructuring of the loans, underwriting process anddocumentation.

Itwill also help gathering information that may be required to monitorthe borrower’s relationships for any changes in risks with aninclusion of risks determining the appropriate level of monitoringand identification of information required by both the lender and theborrower. The third advantage is that it will help in the evaluationof necessary changes in credit management that requires actionincluding assessment of the internal and external factors andrecognizing and evaluation of the warning signals that may bereleased in the process (Hudson, 2014). The last advantage is that itwill assist in the selection of the appropriate means of tacklingrisks.

1.7 Portfoliomanagement

Theportfolio theory provides a framework within which there is aselection of portfolios that maximize the expected returns consistentwith individual acceptable risk levels. The framework specifies andmeasures investment risks and develops the relationship between risksand expected returns. The main assumption held in this theory is thatinvestors would want to maximize returns from their investments for agiven level of risk (Feldman, 2004). The full spectrum of investmentsmust be taken into consideration since the returns from all henceinvestments interact, making the kind of relationship between thereturns for the assets in the portfolio important. The basicportfolio model was developed by Harry Markowitz in 1950s he derivedthe expected rate of return for a portfolio of assets and theexpected risk of measure. In his theory he established that underreasonable assumptions, the variance of expected rate of return was ameaningful measure of portfolio risk. From the model the expectedrate of return is the weighted average of the expected return for theentire individual assets portfolio (Bennett, 2010).

1.8 Researchproblem

T&ampThas a long history in growth and development of the cooperativesocieties characterized by the continued growth of the number ofclients to the small financial institutions. 65% of the population inthe country participates either directly or indirectly inco-operative based enterprises. Studies reveal that the appraisal ofcredit applications does not provide adequately assess credit risksthat may accrue in the process of loan giving. There are thoseauthors who depict that credit amount ought to be the measuringyardstick for assessment of the identified projects in order toensure adequate funding. According to a report established in 2012,loans disbursed to members account for about 75% of the total assets.Loan quality has therefore been a challenge as average grossnon-performing loans (NPL) stood at 10% for the licensed Sacco’s inthe country (Boyd &amp Smith, 2012).

ThisNPL level is very high and points a finger at the need for Sacco’sto enforce credit policies to minimize the credit risks highindebtedness and weak capital base for these Sacco’s also adds upon the disadvantages (Hull, 2012). According to WOCCU, the financialdiscipline of providing loans losses has not been adequately coveredas part of Sacco development. Many Sacco’s relied on the check offsystem of automatic salary deductions for loan repayment for decades.It is this approach that has made many Sacco’s in the country toencompass low net institutional capital which is way below theaccepted limit (Ed Perkins, 2011).

1.9 Objectivesof the study

  • To identify major risks facing Police Credit Union of Trinidad and Tobago.

  • Develop a contextual framework on the strategies that the Police Credit Union of Trinidad and Tobago employs to mitigate investment risks

  • Analyze the aforementioned strategies based on quantitative approach and develop a plan whether the strategies have allowed the union to mitigate risks

  • To compare Police Credit Union Risk Limits to Industry Standards

  • To formulate the strategic plan for the implementations of the risk management policy and make necessary recommendations to enhance its strategies align to changing dynamics

1.10 Research Value

Thestudy is expected to a play an important role in the following ways:It will offer an important framework when it comes to academics as itwill furnish researchers with information in regard to the creditmanagement practices in Sacco’s in T&ampT. the findings will alsogo a long way in the stimulation of other researchers to venture intocredit cooperative societies. This will also contribute into thegeneral body of knowledge and will form a background for furtherresearch (Hunseler, 2013). The research will also be used by thecredit unions and management directors to provide an insight into thevarious approaches towards a credit management technique andportfolio management in the sector. Knowledge in credit managementtechniques will aid identification and control of plans toeffectively manage Sacco’s (ECU, 2012).

Thegovernment will also utilize the research in policy formulation inregard to the taxation principles and other regulatory requirementsof Sacco’s in the country. The policy maker will be in a positionto comprehend how to incorporate the sector effectively and ensurefull participation in the economy (Joseph, 2013). The significant ofthis study is that by having a comprehensive understanding on how tocontrol and manage uncertainty that affects the daily businessoperations the police credit unions will be empowered to carry outefficient strategies meant to attain organization goals especially inpost financial crisis. The research paper hopes to help the creditinstitution manage both the long term and short term risks and comeup with better credit lending operations and increase theirinvestment (Brau &amp Woller, 2004).

CHAPTERTWOLITERATUREREVIEW2.0. Introduction

Literaturereview denotes a text of scholarly paper that includes the currentknowledge encompassed with substantive findings as well as thetheoretical and methodological juxtaposition and contributions to aparticular topic. Literature review makes use of secondary sourcesand does not report new or original experimental work. The aim ofthis chapter is to address the current literature on risk managementstrategies applied by police credit union for investment that isrelevant to this study. Thus, it will concentrate on looking at howthe strategies have been effective in achieving profitability for theunion under the current regulatory and economic settings.

2.1 Whatis a risk?

Arisk can lead to a future economic loss risks are also regarded asunwanted occurrences that may occur in an uncertainty. Also, risk hassocietal implication that may lead to a negative overall impact to alarge group of people. For instance, a road accident can be termed asa risk hence the insurance coverage is necessary. The term risk isused with the likelihood of a known loss in everyday use. A risk isdescribed both qualitatively and qualitatively. For instance, in sometexts risk is described and analyzed as a situation that may lead toa negative consequence or loss if not mitigated early enough(Bouteille &amp Coogan-Pushner, 2012). Risk is proportional to theexpected loss caused by an event or its probability of occurrencewhen spelling out risk qualitatively. However, qualitative risk isassociated with some event that may be seen as undesirable insociety.

Itis imperative for organizations to be in a position of identifyingrisks and threats facing them. Moreover, the organizations ought toevaluate these risk and threats and apply a mitigation process aimedat reducing the risks. In this case comprehending the different formsof risks credit union faces is of significant value (Finlay, 2011).Credit unions are bestowed with the responsibility of safe guardingtheir member’s savings and in the process use this saving to investand generate profits. Investment risk is the possibility of lossmanifestation relative to the anticipated returns from the investmentBurke (2013) explains that an investment risk as a measure of themagnitude or uncertainty level of achieving the yields as per theinvestor’s prospects.

Asa result of these credit unions in particular the Trinidad and Tobagocredit union prefers to invest on less risky investment that do notyield high risks. Factors such as interest rates, inflation, taxes,market and exchanges determine the investment risks. Therefore,credit unions ought to take into account these factors whenstrategizing on how to manage risk. This is because it is almostimpossible to get rid of all risks in a market scenario, since eachoccasion calls for a different solution that is specific to the kindof problem at hand (Fischer, 2013). One approach that credit unionsmay adopt is the integration of new technologies to enable efficientdata management. Data management will play a key role in ensuringthat credit unions track their financials and easily monitor theiroverall performance in the market. By so doing they will be in aposition to manage any risks that may accrue.

2.2 Whatis Risk Management?

Riskmanagement is the future of quality management a risk can be lookedat in two dimensions as an opportunity or a danger. While addressingthe same issue of risk Petrus (2014) in his journal article ITRisk Management,says that the parameters for risk should involve defining theexternal and internal environment (Katwaroo-Ragbir, 2013). Byobserving these things the police credit union would be in a positionwhereby they are able to bring satisfaction to their customers,become reliable and secure from internal and external threats.Different author’s postulate that the Credit society’s documentdoes not take into consideration the size of the Credit Unioninvestment as amounts will differ as well as returns on theseinvestments (Butler,2012). Risk is a fact of life for financialinstitutions it is Mismanagement which blemishes trust and tarnishescompanies’ reputation. The literature also cites amongst thereasons for the failure of banking institutions as being due toinappropriate lending practices, poor risk management especiallycredit risk which may allow collateral to be used for multiple loansor a high concentration of loans in one sector (Ketterer et al.,2011).

2.3 Typesof risk

Longenecker(2013) agrees with Bennet (2010) but disagrees with Fischer (2013)who claims that investment comprises of business risk, liquidityrisk, market risk, reinvestment risk, interest rate risk, call risk,inflationary risk, taxability risk, and legislative risk. Longeneckerand Bennet assert that credit unions experience gaps in forms oflending or credit risk, which involves the risk that a borrower willevade or default on a credit by failing to make payments. In theirreport Boyd and Smith (2012) both asserted that credit unions facecredit risks even from their own members. According to this author,the members of the union may default to pay the loans given to themwhich are a form of risk or face concentration risk that wouldresults in large losses which would threaten the union existence(Knorr, 2004).

Lindsay(2009) describes the five steps that credit unions ought to followwhen addressing a potential risk: these are Asset identification,vulnerability and threat assessment, risk determination, riskreduction, prioritizing and strategizing on identified risk. Riskshould be classified into qualitative distinction in order to forcredit union to create a risk management system that is effective.Michael Stanley (2010) states that credit unions should take riskmanagement process as a continuous process. The system ought to bedesigned in manner that ensures they are more than risk identifiers.They should be able to quantify and predict the impact of risk inorder to give results whether risk is acceptable or unacceptable.Steve Culp (2012) in his Forbes article creditunion volatilityexplains why volatility and uncertainty in credit union might lastlonger than expected. He offers solution by saying a cost effectiverisk management should be used to prevent losses and increaseproductivity of the credit union. Davies (2014) explains thatstrategic risk management simply refers to concentrating on strategicassumptions, focusing on top risks that faces a company andprioritizing on business model.

Operationalrisk is one of the major threats to the police credit union, thisinfluences how operations are conducted. Lee and Kelly (2004) advisedthat management ought to come up with a mechanism that wouldinterlink with policies, procedures and processes to identify risks.The issue of obsolete technology is another cause of risk and barrierto effective operation (Ghosh, 2012). Lastly, market and liquidityrisk is another cause of alarm for the Trinidad and Tobago policecredit union. Nevertheless, critics such as Gosh (2012) stillbelieve a lot is yet to be done main reason that the management istoo dependent on external quarters and advice from outside ratherthan come up with a sound risk management system.

Insuch a case management ought to competently manage risk and put upmeasures to eliminate risk associated with liquidity and markets(Bouteille &amp Coogan-Pushner, 2012). Byron (2002) in his view saysthat the minimum regulatory framework requirement would be exceededif the assets of the credit union coupled with the approach ofliability management will show on the requisite risk associated withliquidity (Robert et al., 2012).

2.4 REVIEWOF THEORIES2.4.1 Liquiditytheory of credit

Thistheory was first suggested by Emery in 1984, it proposes that creditrationed firms use more trade credit than those with normal access tothe financial institutions. The central point of consideration forthis idea is that when a firm is financially constrained the offer oftrade credit can make up for the reduction of the credit offer fromthe financial institutions (Kodilinye, 2013). In accordance with thisview, those firms presenting good liability or better access tocapital markets can finance those that are credit rationed. Severalapproaches have tried to obtain the empirical evidence in order tosupport this assumption. For instance, Byron (2002) depicts smallfirms as a proxy for credit rationed firms, when there is a monetarycontraction small firms often react by increasing the amount oftrade credit accepted. Financially unconstrained firms are lesslikely to demand trade credit and more prone to offer it, a negativerelation between a buyer’s access to other sources of financing andtrade credit use is expected (Glen, 2008).

2.2.2 Portfoliotheory

Portfoliotheory of investment tires to maximize the expected rate of returnfor a given amount of portfolio risks which is equivalent to theminimization of the risk levels of expected return this is assumedby carefully choosing an appropriate various assets. Although thetheory is widely used in finance practice, the theory has been widelychallenged by fields such as behavioral economics (Lee&amp Lee, 2007).Portfolio theory was developed in 1950’s and applied throughout the1970’s when it was considered an important advance in mathematicalmodelling of finance. Since then, numerous other theoretical andpractical criticisms have been developed against it. This includesthe fact that financial returns do not follow a Gaussian distributionor indeed any symmetric distribution and those correlations betweenassets classes (Caouette et al., 2011).

2.2.3 Taxtheory of credit

Thedecision whether or not to accept a trade credit lies on the abilityto access the key resources of funds buyer should compare differentfinancing alternatives to find out which of the choices is the bestamong a list of them. In trade between a seller and a buyer a postpayment may be offered, but it may not be free, there is an implicitinterest rate which is included in the final price. Therefore, tofind the best source of financing the buyer should check out the realborrowing cost in relation to the sources of funds attributed(Goldberg &amp Palladini, 2010). Tax effect ought to be considers inorder to compare the cost of trade credit with the cost of otherfinancing alternatives.

Themain reason for this is that if the buyers and sellers are placed indifferent tax brackets, they have different borrowing costs, sincethe interests are tax deductible. The author’s hypothesis is thatfirms in a high tax bracket tend to offer more trade credit thanthose in low tax brackets, since those in higher brackets couldborrow more cheaply directly form a financial institution (Lee &ampKelly, 2004). Firms allocated to a given industry and placed in taxbracket below the industry averages cannot profit from offering traderelated credits. Hence, it is imperative to note that firms cannotuse and offer trade credit. Small financial institutions like Sacco’sfall into this category of firms that cannot employ bothmethodologies (Christoffersen, 2011)

2.2.4 Creditrisk theory

Althoughpeople have been facing numerous credit risks ever since early ages,credit risk has not been widely studied until recent 30 years. Meltonintroduced the credit risk theory which said that the default eventdrives from a firm’s asset evolution modeled by a diffusion processwith constant parameters (Lyndsay, 2009). Such models are commonlydefined as structural models and based on the variables that relateto a specific issue. An evolution that falls under this category isrepresented by a model of assets where the loss is conditional ondefault and is exogenously specific. In this state the default canhappen throughout the life of a corporate bond and not only inmaturity (Chance &amp Brooks, 2011).

2.3 Creditrisk management practices 2.3.1 Loanportfolio

Lyng(2005) asserts that loan portfolio connotes those loans that havebeen bought and are held for repayment. Loan portfolios are majorassets of Sacco’s and the lending institutions. The value of theloan portfolio depends not only on the interest rates earned but alsoon the loans but also on the likelihood that the interest andprinciple will be paid. Lending is the principal business activityfor most commercial banks, the loans portfolio is typically thelargest asset and the predominant safety soundness. Whether due tolax credit standards, poor portfolios risk management or weakness inthe economy that may result. Loan portfolios problems historicallyhave been the leading causes of loss and failures in financialinstitutions (Chance &amp Brooks, 2011).

2.3.2 Creditrisk

Whena Sacco grants a loan to its customers, it incurs the risks ofnonpayment. Credit risk management refers to the systems, proceduresand controls which a Sacco can put in place to ensure that there isefficient allocation of customer payments and minimize the risks ofnon-payment. Credit risk management forms a key part of a company’soverall risk management strategy. Weak credit risk management is aprimary cause of many business failures. Numerous small businesseshave neither the resources nor the expertise to operate a soundcredit management system (Chouthi, 2012).

2.3.3 Delinquencymanagement

Adelinquent loan is that which the full payment has not been receivedper the loan contract stipulations. For the purposes of managingdelinquent loans, Sacco’s ought to categorize loans and provide forbad debts on occasions when the loans should be described asdefaulted, performing, watch, substandard, doubtful and bad debtsthen a specific provision ought to be embraced to set for each of thecategory. Sacco’s are expected to submit returns on capitaldelinquency to the oversee committee each month, their inability todo that results in punishments that can include suspension ofinvestments or loans portfolios or property related fines (Chouthi,2012).

2.4 Riskidentification

Riskidentification is an important aspect for effective risk management,for Sacco’s to manage risks facing them effectively they ought toknow how identify the credit risks. The first step in riskidentification is identifying and prioritizing key risks which arereviewed and approved by management committee. There is also need todetermine the degree of risks the Sacco should tolerate and conductan assessment for each of the risks and their potential negativeimpact if not controlled. Finally, analyze the risk faced by theSacco in the areas of interest rates risk, liquidity, credit,operations and strategic risks. Sacco’s should establish frameworksthat will offer easy analysis and identification of risks in themarket (Guest, 2011). Such approaches will go a long way to offersolutions to a number of problems facing credit societies in thecountry.

2.5 Strategicrisk management

Accordingto Haimes (2005) strategic risk management is the strategy anorganization uses to respond to uncertainty and untappedopportunities. Moreover, it involves comprehending corporatestrategy, the risk involved in adopting the corporate strategy andexecuting it. The sources of risk may originate from within theorganization or outside the organization. Once the information aboutthese risks is gathered then a strategic risk mitigation which iseffective can be integrated.

Accordingto Bessis (2011), and Power (2009), strategic risk management as thedeliberate actions, uncertainties or untapped opportunities thatinfluence the strategy of an organization as well as its execution.Moreover, Saunders and Allen (2010) and Brau and Woller (2004) assertthat strategic risk management involves defining risk tolerance byconnecting it with outcomes and identifying the possible causes ofthe negative outcomes. In addition, Rose and Hudgins (2006) contendthat strategic risk management allows the understanding of theprobability of recurrence in these outcomes and the measures, whichone can use to mitigate the implications, reviewing them continuouslyand aligning bottom up management to enhance escalation process andtolerance.

Humanerror and the degree to which risk may be effectively managed may notbe entirely due to an individual’s failing, but may be the resultof a failure within the organization system, negatively influencingoperations and task performance of the individual / team (Alexander2013 Chance and Brooks 2012). In fact, Power (2009) and Drucker(2007) offer that one can use the financial theory, new institutionaleconomics, stakeholder theory, and the agency theory to provide acomprehensive dynamic on strategic risk management. Differentorganizations apply different types of strategic risk management.

Insome organizations, two or more management styles are employed butthe application of any kind of management style is dependent on thesituation at hand. Whichever the management style applied, it must bein line with an organizational culture. Three universal principlesapply for a good management style. First, transparency is vital forthe success of any leadership style. It is highly acceptable that 90percent of a leader’s activity revolves around execution while therest 10 percent involves strategy. Whether it is execution orstrategy implementation, communication plays a vital role indetermining the effectiveness of any adopted line of leadership(Collings &amp Mellah, 2009).

Agood investment manager while keeping an eye on the key successfactors of an organization recognizes the need to safe guardlong-term interests of the company. Good planning, well formulatedstrategies and effective application of short term strategies are allimportant in ensuring the future success of an organization.Similarly, the ability of a leader to safeguard the talent pool in anorganization is crucial in sustaining the future of an organization.In this context, a leader must be able to nurture the leadershipskills in the organization to ensure continuity. Successful companiesin the modern world have established different training program fortheir senior management as well as potential subordinates. This trendhas enabled the companies to keep a strong connection betweendifferent situational needs and available resources including thehuman capital (Copestake, 2007).

Instrumentalvalues in this regard refer to beliefs about the appropriatebehaviors for achieving set goals. Strategic risk management requiresone to adhere to strict values whether instrumental or end values.Included here are honesty, imagination, loyalty, logic and politenessamong others. Values can be described as beliefs regarding the typeof goals to be pursued. The relationship between a leader and his orher followers is highly dependent on these values (Pike &amp Neale,2006).

Strategicrisk management can either be participative, authoritative ordelegated. Participative risk management demands close relationshipbetween a manager and his team. In this regard, a manager worksalongside other employees in completing strategic tasks. Theorganization’s culture determines the effectiveness ofparticipative leadership (Petty et al., 2012). On the other hand,Risk management is one of the key areas that any organization orinstitution should evaluate often. The risk management involves a six–step process that should be followed to the letter namely, thecontext of the risk, the realization of the risk, the risk analysis,and the risk evaluation and priorities, strategies and action plan.Finally, it involves continuous monitoring and review to ensure thata repeat does not happen (Patel, 2005).

2.6 Performancemeasurement

Arisk management system is the sum total of all organization mechanismthat provides ground for planning employing, monitoring, appraising,and continually refining risk management process throughout thecredit union. In this case controls and systems refer to a set ofengagements intended to provide rational assurance regarding theattainment of purposes concerning the efficiency and effectiveness ofprocesses, dependability of financial reporting, and acquiescencewith all permissible and regulatory requirements (Power, 2009).Therefore, credit union should design, apply, document, and maintainrisk management structure with governance engagements and controlsand systems to allow the union to recognize, assess, quantify,observe, report, and manage investment and lending risks (PoliceCredit Union, 2014).

Whilewriting on the issue Burke (2013) and Lyng (2005) affirm that acredit union system should incorporate processes, policies, andcontrols that offer passable, continuous, and timely identification,evaluation, quantification, management, reporting, and monitoring ofrisks. In addition, the union should document its lending andinvestment risk acceptance statement, setting out the enumeratedlevel of risk that the union is willing to accept (Quinn &ampStrategy, 2009). Additionally, Copestake (2007) asserts thataligning the goals of a risk management with its risk acceptancestatement helps it to remain consistent in sound operations,financial strength, and strategic objectives. In this regards, a riskmanagement system should cover the risk management policies andprocesses, risk register, controls and systems, and reviews from theboard of directors (Regester &amp Larkin, 2008). In all guidelinesfor financial institutions, a credit union requires a policy, whichis very significant in laying out the direction that a union shouldexecute in managing risk. In fact, all employees must adhere to theguidelines laid down in a policy paper to ensure compliance andeffective management (Mohan &amp Zhang, 2014).

Aneffective policy is one, which is well understood and adhered to byall employees of a credit union. In this regards, a policy thatemployees do not understand cannot become an effective policy planfor any organization. In a study conducted by Ketterer etal.,(2011) reveals that credit unions in Trinidad and Tobago especiallyPolice Credit Union and Eastern Union have developed policies aimedat improving their risk management. However, Ogawa etal.,(2013) argues that most credit unions in Trinidad and Tobago havefailed to institute effective polices for the management of risk,which have resulted to gaps in lending and investing. The fivemethods used in managing risks include compliance, scenario andsensitivity analysis, third party oversight, board policy and soundrating system (Pamuk, 2000).

2.7 Empiricalstudies

Accordingto WOCCU financial discipline of provisioning for the loans has notbeen part of the Sacco development framework since Sacco’s havecontinuously relied on the check off system for decades (Nocco &ampStulz, 2006). This makes Sacco’s to end up having extremely low netinstitutional capital and fail to meet the WOCCU prudential standardexcellence of a minimum of 10% of the net institutional capital.Institutional capital is ranked the second form of defense afterloans for financial institutions which are related to delinquency anddefaults. Credit management in microfinance institutions in T&ampTdepicts that despite the fact the MFI strict measures to the creditrisk management, normal loan recovery is still a huge challenge, thisoffers an important explanation on why most financial institutionsare either not growing or about to close down (Nunnally, 2007).

Riskmanagement is not embedded in intuitional cultures in T&ampT and itsvalues are not shared by all employees. It is also notable to depictthat given the capacity, introduction of sophisticated systems andtechnical tools risk management does not work in Sacco’s hence theylack the capacity required for risk management. Majority of Sacco’sin T&ampT use credit management practices to mitigate or cushionthemselves from credit risk appraisal. It is also illustrated thatmajority of Sacco’s in the country rely on the discretion andability of portfolio managers for efficient and effective credit riskmanagement practices (Douglas, 2010).

Ina survey conducted to determine the efficiency and loan portfoliousage by microfinance institutions found out that most of themicrofinance institutions streamline their credit operations. It alsoillustrated that microfinance institutions ought to employ acombination of performance indicators such as profitability,operating efficiency and portfolio quality indicators to measure theoverall performance (Ogawa et al., 2013). Very low deposits and highdefault rates have plunged some of the financial institutions intoserious liquidity problems which have culminated into erosion ofpublic confidence. Further a combination of the poor lendingpractices and ineffective monitoring of credit facilities extended tothe customers is responsible for the contribution towards high loandelinquency (Drucker, 2007).

Thischapter has analyzed the important components that encompass riskmanagement in the society. The chapter commenced by defining a riskand how it associates to the topic under study. Burke (2013) explainsan investment risk as a measure of the magnitude or uncertainty levelof achieving the yields as per the investor’s prospects. As aresult of these credit unions in particular the Trinidad and Tobagocredit union prefers to invest on less risky investment that do notyield high risks. Risk is a fact of life for financial institutionsit is Mismanagement which blemishes trust and tarnishes companies’reputation. The literature also cites amongst the reasons for thefailure of banking institutions as being due to inappropriate lendingpractices, poor risk management especially credit risk which mayallow collateral to be used for multiple loans or a highconcentration of loans in one sector (Herrero,2003 De Juan, 2004 Bhatia, 2005).

CHAPTERTHREEMETHODOLOGY

Kuada(2011) asserts that a research methodology a process that is used tocollect information or data for the purpose of decision making. Aresearch methodology may encompass publication research, interviews,surveys and other research techniques additionally it may encompassboth the present and historical information. A research method is oneparticular way that can be used to verify or discover a set of data.Kuada (2011) goes further to depict that a research methodology issignificant in the sense that it is used to analysis a given positionheld in the society. On the other hand Yin (2009) says that if anunsuitable research method is used in a study it could render theresearch useless. It is these aspects from the two authors thatpicture the significance of a research methodology.

3.0 Introduction

Themethod applied in this research is a quantitative approach.Quantitative data provide the basis for comparisons and analysis ofthe data collected. The data obtained is from secondary sourceswithin the course of the study. Quantitative method gives numericalunderstanding and insights that other methods cannot provide.Secondary research was preferred in this study instead of primaryresearch methods because it is more reliable in conducting studies ofthis nature. Conducting research of this nature may require time forcollecting primary data from different regions (Creswell, 2014).Thus, analyzing already collected data and presented discoveries willtake less time and still make the research more reliable. Malhotra(2004) asserts that research is a thorough process that culminates awide spectrum of activities to be tested within a given environment.

3.1 Epistemology

Thisis described as a theory of knowledge more specifically in regard tothe methods, validity and scope of a given research. Epistemologydenotes an investigation of what distinguishes justified belief fromopinion. I explored the construct validity approach. The constructascertained valid identification of the initial concept, question,hypothesis, or notion. This construct was critical in making surethat the data gathered, as well as the approaches used in thegathering process were of high value to the research. The recordingand analysis of data were part of the rightful approach to attainingvalidity. Valuable strategies include the selection of preciseresearch variables and the utilization of a uniform method to testthe hypothesis, further ascertained validity (Hair, et al., 2007).

Asidentified in other works, external validity generalizes issues. Igeneralized the data to apply in other contexts. In this context,establishing a proper study design was vital in ensuring externalvalidity. The modern trends of globalization have challenged thechanges and its effects on emerging economies. The trends,therefore, make the application of results, obtained from one toanother, quite difficult (Drucker, 2007).

3.2 Ontologyof the research

Ontologyis a term that connotes a specification or a given conceptualizationin the study. This research is intended to answer numerous questionson the preparedness of police credit societies in mitigation of therisks that culminate their daily activities (McNeil et al., 2010).This study paper aims to analyze the risk management strategy that isapplied by the police credit union for investment in Trinidad andTobago. The paper will thus seek to answer the question whether inthe current regulatory and economic settings the risk managementstrategies can help police credit to attain profitability.

3.3 ResearchDesign

Todiscover or learn how the Police Credit Union manages risk forinvestment, the research favored an explanatory research design.Explanatory Research Design has a predisposition to focus principallyon the problem why? As such, the design examined tendencies as wellas associates performance or strategies of the organization underreview within a sector (Meyer &amp Gagné, 2008). To appraise thephenomenal development of T &amp T (Trinidad and Tobago) within theCredit Union Sector, more so, with concern to an incomparable andstrong risk management approach, the research practice integrated anExplanatory Research Design.

TheExplanatory design pursued clarifications as to whether the Union hasmanaged to develop strong risk management strategies and whetherother Unions have followed suit or they have dawdled behind (Duffie &ampSingleton, 2012). As such, experiential data assisted in underliningthe requisite for elucidations as to the investigation problem. Theresearch addressed the unpremeditated accounts for T &amp Testablishments’ efficiency in managing risk through spontaneousclarifications that will include uninterrupted, secondary, andcompound facets of the research problem. In addition, the researchhad a gradation of improbability so the evidences tended to validatethe deduction (Michael, 2010).

3.3.1 QuantitativeResearch

Quantitativeinvestigation, data gathering takes on several forms such asinterviews, cluster and discrete interviews and the examination ofthe existing literature. In this regards, the research identifiedethnography and case study as the major research approaches that itcultivated to study the risk management strategies employed (Hansen,2012). However, the huge chunk of the paper concentrated on surveys,questionnaires, and interviews to collect information.

3.4 Samplingand Population

Thepopulation consisted of all police savings and credit cooperativesocieties licensed in the country as at December 2012. The sampleperiod was the period 2013-2014. A sample of 35 police Sacco’s weretaken from the whole population that consisted of 33% of the entireSacco’s in T&ampT. this sample fairly represents the wholepopulation and is considered large enough to provide a general viewof the entire population and serve as a good basis for valid reliableconclusions. Additionally individual reviews were sought fromindividuals who were sought to cement on the findings of the researchand ensure that the research attained its established role.

3.5 Instrumentsand Measurement

Inthis study, to clarify the strategies that the Police Credit Unionused to manage risk within its investment platform, the researchutilized ordinal measures of research positioned at interludes tosidestep deliberate information. Additionally, the study anticipatedconforming to the social discipline Metaphysical Dogma that ispositivism (Hardy,2003).Positivism underlines a supposition that provides that researcherscan make interpretations on social tendencies to comprehend bindingknowledge that is consistent. As such, positivism delivers anargument that researchers ought to constrict research to observableissues only through human sanities.

3.5.1 Quantitativeand Qualitative Approaches

Thisstudy applied multiple methods both qualitative and quantitativeapproaches but took data gathering as two separate data arrangementsexamined characteristically over quantitative and qualitative methodsconsequently (Robson, 2011). Nevertheless, the quantitative approachprovided the predominant portion of the research using administrativeand self-administered interviews with the latter involving telephone,mailing, electronic mail, and internet platform while the former willuse surveys. The paper found the quantitative method very significantin this case since it can quantify information therefore, provideserious parts under evaluation (Miles &amp Huberman, 2008).

3.5.2 Quantitativedata analysis

Quantitativedata analyzed was based on Pearson correlation analysis and multipleregression models that took the form of

WhereY = Loans portfolio

X1,X2, X3, X4, and X5 = independent variables

X1=Capital adequacy

X2= Asset quality

X3= Management efficiency

X4= Earnings

X5= Liquidity

B0= Constant

B1,B2, B3, B4, B5 = regression coefficients or change included in Y byeach X value

C= error term

Thedependent variables were the loans portfolio of the Sacco’s whilethe independent variables were the components of the capitaladequacy, asset quality, management efficiency, earnings andliquidity. The loan portfolio was measured by Gross loans/ totalassets, capital adequacy was measured by the institutional capital/total assets, assets quality was measured by the magnitude ofnon-performing loans less provisions as a percentage of loans,management efficiency was measured through the policies, proceduresand risk monitoring systems of the Sacco, earnings on the other handwere measured in terms of return on assets and expressed as profitbefore interest on the deposits and tax as a percentage of totalassets, while the liquidity was measured in terms of the ration ofliquid assets to deposits and short term liabilities.

3.6 DataCollection techniques

Inthis study, questionnaires and interviews formed the design part ofthe paper in a determination to appeal an all-inclusive deductiontowards the risk management strategies. In this situation, theresearch applied the quantitative method as the manner of datagathering integrating surveys and self-directed interviews.

3.6.1 Self-administeredInterviews and Questionnaires

Theresearch used an assortment of the partakers’ responses (PoliceUnion employees) to form the foundation for the study. Self-directedmethod utilized telephones, electronic mail, internet platform, andmailing. Furthermore, the researcher sent letters to the partakersencompassing a return correspondence address and mailing charges(disposition to participate). This is the more usually favored mannerfor directing discussions as it permits the examination ofpainstaking involvements, so preceding past of the partakers. Infact, such a style allows the research to highlight new content thatmay complement the existing literature. Self-directed interviewsbeset towards risk management provided an extra benefit ininstituting as to how the union has managed to mitigate risk.

Moreover,the research identified a questionnaire as exceedingly designed tool,presenting the researcher with opinionated and structured responseswith respect to the participant’s assertiveness, performance, andaccurate information on a question. The surveys targeted employees ina determination to appreciate their involvements, consideration ofthe group`s culture and prospects on risk management. Thequestionnaire delivered serious valuation of the variables since thestudy will need partakers to answer problems that communicate thestand of the Union.

3.6.2 Designof the Survey

Thestrategy of the study was performed as the comprehensive summary ofthe whole learning as it defined the sequence and the technique toutilize to collect data particularly primary statistics (Yin, 2009).The study conducted the reviews by using quantitative method thus,help in calculating unbiased facts using autonomous and reliantvariables. Furthermore, the strategy of the review saw the parting ofdata from conception, there afterwards scrutinize, and highlightedthe dependability and cogency of the examinations (Williams, 2013).The study employed a quantitative technique to progress the premisesthat covered all the items that empirically studied the statisticsthrough Excel, especially using a simple regression. After thereviews, the study will investigate each variable carefully to definethe connection between the items and risk management strategies.

3.7 EthicalConsiderations

Thestudy encompassed numerous ethical deliberations to guarantee cogencyand submission to research philosophies throughout the whole study.Ethics expresses philosophies-defining specialized insights onvirtue, impartiality and decency (Wheelock &amp Wilson, 2011). Thisstudy practice underlined the fact that the researcher treatedmaterial given by partakers with discretion, reverence and with theirdirect accord to ensure adherence to ethical aspects of a research.The study informed all partakers on the complete resolve of theappraisal and retained collected data securely. As such, theresearch utilized random selection and provided write-ups toparticipants that requested for their participation or failure,thereof (Weiss, 2008).

3.8 ResearchLimitations

Someof the limitations I expect to get when carrying out the researchinclude:

  • Ensuring that the respondent stick to the topic when responding to open ended interviews.

  • Time factor is another limitation I expect the research to have. The study requires a substantial amount of time for it to be completed in time and successfully.

  • The research topic is wide and hence cannot be fully covered. Additionally, it demands for substantial amount of time to be fully and successfully to be completed time is a limited resource and hence it is likely to limit the research process.

  • Lastly the researcher is limited to Trinidad and Tobago thus the researcher will not be able to acquire a holistic perspective of Risk Management Strategies.

Summary

Quantitativeresearch methodology is a systematic empirical investigation ofobservable phenomena via, numerical data, mathematical andcomputational techniques. The objective of the approach is to developand employ mathematical models and theories pertaining to PoliceCredit Unions. The process measurement is central because it providesfundamental connection between Credit Unions and the empiricalobservation and mathematical expressions postulated above. In thisresearch it is expected numbers would yield an unbiased result thatcan be generalized to some larger population. Additionally, duringthe research ethical issues were observed in the administration ofthe questionnaires.

CHAPTERFOURDATAANALYSIS AND INTERPPRETATION

Thischapter gives a deeper analysis of the data collected during thestudy. It provides an interpretation of the data in a format that canbe used for decision making purposes.

4.0 Introduction

Themain purpose of this study is to establish the effects of credit riskmanagement on loans portfolio among police credit societies in T&ampT.the study used both primary and secondary data. The primary data wasobtained through a questionnaire from police credit societies in thecountry out of the 30 Sacco’s sampled for the research, 25 Sacco’sresponded by filling in questionnaires as expected. This is anindication that the study was able to attain the response rate of71.4% (McNabb, 2013). The study also employed secondary sources ofdata obtained from multiple sources across the region that includedcredit policy documents and financial statements. The data collectedwas finally subjected to analysis and the findings presented.

4.1 of statistics

Thestudy sought to obtain information on the respondents as well as theorganizations. The purpose of seeking the information was to enablethe researcher comprehend whether the respondents had the necessaryexperience to be able to provide the relevant and reliableinformation for the whole study.

4.1.1 Yearsof operation

Frequency

Percentage

Valid percentage

Cumulative percentage

1-20

20

80

80

96

21-40

4

16

16

16

Above 40

1

4

4

100

Total

25

100

100

Thestudy sought to answer the question on how long the police Sacco’shave been in the market. It is evident from the above data that 80%of the police credit societies have been in the market for aconsiderable time. This is an indication that most of the policecredit societies have been operational within a reasonable time andhas enough experience in credit risk management hence they can beable to provide relevant and reliable information for the research.

Designation

Frequency

Percentage

Valid percentage

Cumulative Percentage

Accountant

12

48

48

48

Credit manager

13

52

52

100

Total

25

100

100

Itwas established that about 52% of the respondents in picked from theSacco’s worked as credit managers with a respective Sacco. Theywere tasked with an obligation of lending as well as management ofthe loans to individual in most Sacco’s. The remaining 48% of therespondents worked as accountants who were also custodians of thedata in various transactions carried out by the Sacco’s.

4.1.2 Yearsof Service

Years

Frequency

Percent

Valid percent

Cumulative percent

1-5

12

48

48

48

6-10

13

52

52

100

Total

25

100

100

Thestudy correlated to establish the duration of each respondents in theworking environment and more specifically in the Sacco’s. Theresults confirm that 52% of the respondents have worked with thecurrent Sacco for duration of 6 to 10 years. This is a confirmationthat most of the respondents have been in this sector for a long timehence have more experience in credit risk management and loanportfolio management.

4.1.3 Creditrisk management

Thesought to depict the various approaches used by Sacco’s in creditrisk management in T&ampT. the respondents in this case wererequired to indicate how the credit risk policies are developed andmanaged with their credit society. The study also was expected todepict how organizations identified themselves to the various creditrisks. The research also sought to investigate from the respondentswhether their respective Sacco’s have a loan risk management policyin place. The findings from the study confirm that all the policecredit societies involved in the study have developed a loan riskmanagement policy that offers guidance to management for their loans.

N

Minimum

Maximum

Mean

Std. deviation

Involvement of members

25

1

4

2.24

1.128

Employees and staff

25

1

5

3.08

1.730

The director

25

1

5

3.56

1.685

The regulator

Valid N (list wise)

25

25

1

5

2.84

1.463

Theresearcher wanted to establish the extent to which police creditsocieties in T&ampT involve their stakeholders in decision makingprocess as a means to mitigate them from various forms of risks. Therespondents were required to gauge the four types of stakeholders byusing a scale of 1 to 5 where 1 represented a very great extent and5 no extent at all. The results in the table above confirm thatmembers and regulators are involved in the formulation of creditpolicy to a large extent. This is further supported by the meanresponse which is at 2.24 and 2.84 for each of the stakeholders.Employees and the directors are involved in moderate policydevelopment as indicated by the mean of 3.08 and 3.56 respectively.

4.1.4 CAMELrating system

N

Minimum

Maximum

Mean

Std. Deviation

Capital adequacy

25

1

5

1.80

1.472

Asset quality

25

1

5

2.12

1.364

Management quality

25

1

5

2.28

1.400

Earnings

25

1

5

1.80

1.472

Liquidity

25

1

5

1.96

1.428

Valid N (list wise)

25

Therespondents were required to indicate the extent to which they usedthe rating system to assess its soundness. The respondents wererequired to rate four types of stakeholders using the scale of 1 to 5where 1 represented very great extent and 5 no extent at all. Thefindings postulated in the table above reveal that three componentsof CAMEL capital adequacy, earnings and liquidity are used to a verylarge extent in assessing the soundness of the police creditsocieties. It was also clear that Asset quality and managementquality are used to a great extent.

4.1.5 Loanportfolio policies

N

Minimum

Maximum

Mean

Std. deviation

Existing credit policy

25

1

4

1.64

1.114

General state of economy

25

2

5

3.12

1.092

Trends of creditors

25

1

4

2.16

0.898

Overhead costs

25

1

5

2.28

1.400

Valid (List wise)

25

Thestudy also sought to investigate the factors that were considered bypolice credit societies in T&ampT to develop their portfoliopolicies. On a scale of 1 to 5 where I represented a very greatextent and 5 no extent at all, the findings also revealed that onlyone factor was considered to be a very great extent when developing acredit policy. This factor was found to be the existing credit policywhich had a mean of 1.64. It was further depicted that two otherfactors are considered to be of great extent when developing a creditpolicy. The two factors are: trends of the creditors and overheadcosts with a mean of 2.16 and 2.28 in that order. The general stateof the economy was depicted with the least extent or impact since ithad a mean of 3.12 an indication that most police credit societies inT&ampT consider the level of economy to be of moderate extent in thedevelopment of credit policies.

4.1.6 Capitaladequacy ratios

N

Minimum

Maximum

Mean

Std deviation

Core capital/ total assets min 10%

25

1

5

2.12

1.481

Core capital/ total deposits min 8%

25

1

5

2.28

1.514

Institutional capital/ total assets min8%

25

1

5

3.08

1.525

Valid N (list wise)

25

Theresearch was geared towards investigation whether the creditsocieties meet their various capital adequacy ratios. The researchdepicts that the credit societies meet two main adequacy ratios to agreat extent. These ratios are the core capital ratios and the corecapital ratios with a mean of 2.12 and 2.28 respectively. However,the findings reveal that the Sacco’s meet the institutional capitalto a moderate extent as can be confirmed from a mean of 3.08.

4.1.7 Riskidentification

N

Minimum

Maximum

Mean

Std. deviation

Executive management

25

1

5

2.64

1.705

Board of directors

25

1

5

1.96

1.428

Credit committee

25

1

5

2.44

1.828

Credit managers

25

1

5

2.12

1.481

Employees

25

1

4

2.32

0.945

Valid N (listwise)

25

Theresearch also took an important step in the determination of thepeople who are involved by the credit societies in the process ofrisk identification. The findings postulated that the board ofdirectors of the Sacco’s is involved to a very large extent in therisk identification process. This is evident from the mean of 1.96 inthe table above. The executive management credit committee, creditmanagers had the means of 2.64, 2.44, 2.12 and 2.32 in that order.This confirms that they are also involved in risk identificationprocess to a large extent.

Importanceof risk identification

N

Minimum

Maximum

Mean

Std. deviation

Establishment of risk management

25

1

5

1.96

1.428

Helps in risk assessment

25

1

5

1.96

1.428

Risk identification helps develop risk management strategy

25

1

5

2.16

1.344

Valid N (Listwise)

25

Fromthe findings it is evident that there are numerous reasons whyorganizations adopt risk identification frameworks in order to ensurerisk management is established throughout the economy. The two mainfactors on why risk identification processes are depicted above inthe table in accordance with their respective means.

4.2 Estimatedempirical model

Themain aim of this research was to analyze the risk managementstrategies applied by police credit societies in T&ampT. the studyadopted a multivariate regression methodology in establishing therelationship that exists between the different pinpointed variables.The dependent variables in this study were the loan portfolio whilethe independent variables culminated asset quality, managementefficiency, earnings and liquidity, and capital adequacy. The resultsfrom the regression analysis table are discussed in the subsequentsections. The interrelationship between the different variablesoffers an ideal explanation on the kind of strategies and challengesthat culminate credit societies in T&ampT and more specifically thepolice credit societies in the economy.

Modelcoefficient

Fromthe table above its paramount to note the differences that existbetween the different variables. For instance capital adequacy iscorrelated to encompass a positive coefficient of 13.356 managementis construed to encompass a positive coefficient of 24.387. Earningsalso have a positive coefficient of 17.621 and liquidity 24.387.However, asset quality has a negative coefficient of -896. Thefindings further indicate that if the independent variable in thelinear equation assumes a value zero, then the loan portfolioconstant will be 154.24. from the table of coefficients it ispossible to come up with a multivariate regression equation thatoffers an ideal explanation on credit risks management on loansallocation among police credit societies in T&ampT. hence theequation will take the form of Y= 154.24+ 13.356X1 -.896X2 + 24.387X3 + 17.621X4 + 33.241X5. Theequation explains the effects of risk management strategies in Tobagoand Trinidad.

Fromthe data above it is evident that there is a direct relationshipbetween Police Credit Union’s performance and risk managementstrategies. Effective risk management strategies tend to encouragethe Unions to lend more and in return gain in the long run. However,when risks are high and not well managed, the unions make losses inthe long run. Another aspect that pops up from the empirical datacollected is the role of management in risk mitigation. Managementtakes the front seat in ensuring that Unions do not suffer losses.However, in instances there is poor management and poor regulationsimposed, the Credit Unions tend to suffer in terms of monetary value.The next chapter tries to take a deeper approach in the analysis ofthe above data.

CHAPTERFIVE1.0Introduction

Thischapter discusses the findings as depicted in chapter four above andillustrates the purpose of the study towards answering the researchquestion. It is in this chapter that the research findings arecorrelated with the research topic and a conclusion provided. Furtherrecommendations are postulated on how to improve risk managementstrategies in Police credit Unions in T&ampT in line with thefindings of this research. The chapter is significant because itinforms the reader the end result of the study and how the questionwas answered. Further it depicts probable recommendations that mayoffer a solution to the problem in question.

of the findings

Thestudy depicted that all the police credit societies that participatedin the study had a loan risk management policy that was operational.This implies that all these credit societies had a clear and wellauthenticated guideline on how to approach and manage the loan risksthat they may encounter from time to time. It is also evident fromthe findings that the Sacco’s involve various stakeholders invarying degrees in the formulation of a credit policy. Thestakeholders who are involved in credit policy formulation aremembers of the organizations and the regulator on the other hand theemployees and the directors are involved in the credit formulationprocess only to a moderate extent. The study goes further to confirmthat the existing credit formulation process of the credit societiesforms the basis for developing a new credit policy that is used bythe credit societies (Manuj &amp Mentzer, 2008). Other factors thatare considered as revealed from the findings include the trends ofcreditors and overhead costs. The general state of the economy wasalso found to be of moderate significance in development of a creditpolicy (Mark Davis, 2014).

Itis also certain from the study that CAMEL rating system plays acrucial role in rating the soundness of the credit societies. Amongthe component of this system that was taken into consideration inrating the soundness of the organization are the capital adequacy,earnings and liquidity. Management and the asset quality were alsotaken into consideration and ascertained to be important as the firstthree components mentioned. On the parties that are involved in therisk identification process, the board of directors of the variousSacco’s was also found to play a critical role (Weele, 2005).

Thestudy also went further to depict that the main significance of riskidentification in the credit societies is to ensure that riskmanagement is practiced throughout the entire organization structureand it is bone thought effective risk management approach. Thefindings also indicated that most of the police credit societiesconduct a review of their loan portfolio, The study went further todemonstrate that capital adequacy, earnings, liquidity and managementquality have positive coefficients in relation to loan allocations.However, asset quality was depicted to have a negative coefficient.

Mostpolice credit societies in Tobago and Trinidad (T&ampT) have a riskmanagement policy in place. This policy acts as a crucial tool in theprovision of guidelines on how to manage the various risksorganizations encounter in their daily lending activities in themarket. Formulation of the credit policy is largely done by themembers of the respective organizations and the regulation with amoderate involvement of the employees and the directors (Vine, 2011).The existing credit policy of the police credit societies is theprimary document upon which the formulation of a new credit policy isused. People in charge of credit policy formulation also take intoaccount the trends of creditors and overhead costs in the processformulation. CAMEL rating plays a crucial role in the assessment ofthe soundness of the credit societies (Tokle &amp Tokle, 2013). Themain reason why risk identification is significant in creditsocieties is to enable them practice risk management in the entireorganization thus promote effective risk management practices.Capital adequacy, earnings, management quality and liquidity werefound to have a positive coefficient in relation to loan allocationstrategies while the asset quality was depicted to have a negativecoefficient (Venkatraman &amp Ramanujam, 2010).

Conclusion

Theresearch met all the stipulated objectives outlined in chapter one ofthis research paper. Some of the risks identified in credit unionsinclude business risk, liquidity risk, market risk, reinvestmentrisk, interest rate risk, call risk, inflationary risk, taxabilityrisk, and legislative risk. All these risks were found to have a bigimpact on the overall performance of Police Credit Unions in T&ampT.The study depicts that there is need to constantly review riskmanagement strategies in Credit Unions in T&ampT, it is becausethere is a constant change in the market in terms of technology, datamanagement systems, financial policies and government regulations. Currently Police Credit Unions in T&ampT have effectively met theindustrial standards set by the regulatory bodies in the region thisexplains the kind of problems faced by the institutions in offeringcredit (Tobago, 2014).

CreditUnions in Trinidad and Tobago will find the outcomes from thisresearch valuable to understand how they can manage riskseffectively. The research discovered how unions in the regionimplement risk management strategies. In addition, it used the PoliceCredit Union as the standard for understanding the effectiveness ofthe risk management strategies that the unions apply. As revealed inthe research, the Unions have not managed to apply some strategieseffectively thus, they need to integrate the existing strategieswith other identified strategies (Thomas, 2000).

Riskavoidance is defined as a risk management method that aims ateliminating sign of risk via hazard prevention, or termination ofactivities evaluated to involve any degree of risk. Unwarranted riskcan harshly influence the monetary situation of a credit unionnegatively (Tankov, 2003). High absorptions in parts undergoingserious financial distress could end in momentous losses beyond aunion’s net value. As such, it is the fiduciary accountability ofthe organization and administrators of credit unions to recognize,manage, screen, and regulate the threats that the unions experience(Stevenson &amp Hojati, 2007). Examiners from the unions usuallyreview the documentation of the original institution and itsconsistence in due diligence to make sure that the system areconsistent with the set standards of business practice. Managementsshould establish agreement with every board recognized-policyperimeter dealing with risks and associated variables. MohanandZhang (2014) revealthat most unions have established compliance and oversight policies,but have failed to execute such polices to the designed measures.

Thereexists several categories through which the Union assesses its CRRi.e. moderate, high, moderate, low or above average with thedirection of change usually assessed as stable, decreasing orincreasing for a specified time frame. This is highly dependent onthe credit unions circumstances, economic environment, and thebusiness (Wilson, 2013).Likeany other organization the credit unions develops a credit managementstrategy. Organizations spend many resources to ensure that thepotential risk is evaded. The initial stage in the management processis the development of the risk framework. The framework always givesthe idea of the specific areas where the risks are and may occur(Saunders &amp Allen, 2010).

Structuralchanges have recently occurred in the credit unions giving aprovision for a Compliance Officer, Internal Audit to CUs and RiskManagement Officer whose functions are designed to support the riskmanagement in all aspects of the Credit Union. In this regards, theunions need to have a thorough understanding on the issues thataffect their investment portfolio and how well they can manage suchissues or threats (Steve, 2012). The research has identified areas ofconcern, especially in regards to the Police Credit union of Trinidadand Tobago, which has tried to manage risks effectively but weaksystems and laws continue to hamper such management (Sang, 2010).

PoliceCredit Unions are no different from commercial banks in the countrywhen it comes to service delivery. The difference between these twoinstitutions accrues from their capital base, while credit unionsagglomerate small capital base, commercial base encompass hugecapital base. However, this should not be deterrence when it comes toservice delivery. In fact credit unions ought to offer the bestservices due to the small number of its clients as compared to thoseof banks. The problem with credit unions in T&ampT is their poorapproach of risk management. If these institutions adopt efficientrisk management strategies they stand in a better position to growfurther beyond their current position.

Performanceis directly proportional to governance strategies adopted by anorganization, if governance structures are poor then the output willbe poor. Governance agglomerates risk management techniques in thiscontext and the kind of approaches an organization undertakes inassessing its success or failure and trying to cushion its capital.It is paramount to note that T&ampT market structure is friendly atall levels as it allows organizations flourish as long as betterstrategies are adopted. However, the market portends some risks thatmust be mitigated for success to be achieved. It means that it isalmost impossible for credit unions in T&ampT to perform better inthe market if they do not integrate risk management strategies.

Recommendations

Creditunions should regularly complete portfolio-level situation andsensitivity examinations to calculate the influence of fluctuatingeconomic situations on asset worth, incomes, and net value. Thestudies should be multi-faceted to discover the consequence ofparticular and manifold simultaneous undesirable actions on thecollection. Finlay (2011) asserts that the complexity of situationand sensitivity studies should be dependable with the scope,intricacy, and risk features of the portfolio. In addition, creditunions should reflect on the vulnerability of selection sections withshared risk features to fluctuating market situations (Robson, 2011).

Theboard and administration of a union should have triggers and exploitstrategies in writing for any substantial risk zone (Rose &ampHudgins, 2006). If the union’s checking undertakings recognizeconcerns with a risk, the board must react consequently. Likewise, ifan auditor trusts there may be raised risk subjects existing in acredit union, and the administration has not appropriately computedand alleviated the risk, they must necessitate counteractive actionsof administration that comprise, but not restricted to

  • Mounting the appraisal of the risk situation for the specific sector(s)

  • Execution of raised situation and sensitivity studies

  • Intensifying the appraisal of presentation of existing pledgers or investors

  • Appraising development and boundaries for new occupational lines and/or

  • Appraising risk extenuation selections and timeframes for lessening of threat, if obligatory.

Itis the duty of the unions to identify and apply comprehensivestrategies that respond effectively to external threats and financialshocks. The use of the identified Risk Management Strategies hashelped the union to reduce its risk portfolio but great care isneeded to ensure sustainability.

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