Collateral Effectiveness and Credit Management for Selected Micro Financial Institutions in Mogadishu Somalia

ABSTRACT 

Many banks and financial dealers in Mogadishu have been experiencing low collection that has led to Increase the bad depts. many times credits remains unpaid either because customers are not able to pay them, they are just not willing to pay. The study Investigated the relationship between collateral effectiveness and credit management in selected MR’s in Mogadishu. The objective of the study include determining the collateral effectiveness being practiced by MEl’s in Somalia, to establish the degree of credit management encountered by MEl’s In Somalia and determining if there a significant relationship between two variables. The study was conducted through descriptive correlation research design, data was collected during July 2011 and planed duration was limited to six months, through structured questionnaire obtained information from 100 micro financial institution staff in Mogadishu. The data was analyzed by using SPSS and presented in tables. The study finds that most of the micro financial institutions in Mogadishu have mechanisms in place for ensuring collateral security and for mitigating credit risks. It further finds a significant positive relationship between collateral security, and credit risk management Therefore the study agreed that good credit management depends on the collateral effectiveness and how the company manages that collateral, according to the merton or structural approach. The study concludes that collateral security positively impacts on credit risk management The study recommends that if micro financial Institutions in Mogadishu are to mitigate credit risk, they should put more emphasis on collateral security.

TABLE OF CONTENTS

TITLE PAGE

DECLAR_A1ION II

APPROVAL

DEDICATION IV

ACKNOWLEDGEMENTS VI

TABLE OF CONTENTS VI

LIST OF TABLES x

LIST OF FIGURES XI

ABST~CT XIII

CHAPTER ONE: IlIflRQDU 1

Background of the Study 1

Statement of the Problem 4

Purpose of the Study 4

Objective of the Study s

Research Questions 6

1—lypotheses 7

Scope of the Study 7

Significance of the Study 8

CHAPTER TWO: LITERATURE REVIEW 12

Concept, Opinion, Ideas from authors experts .12

Collateral Concept

Importance of Collateral iii.

Co’lateral Ivianagement 15

what is used as a Collateral 16

• :Credit Risk Management 17

Trade Credit 19

Credit is a risk 22

.Types of risk 22

.Why does risk matter 24

•Credit risk 24

Sources of credit risk 27

Types of credit risk 28

tssesing Credit risk 30

Risk mitigation approach 31

Credit risk mitigation 31

Theor~Lical frame wo~k 3~—

CHAPTER THREE: METHODOLOGY 34

Research Design 34

Target Population ~, 35

Sample Size~36

Sampling Procedure 37

Research Instruments 38

Data Collection Procedure ~39

Validity and Reliability of Instruments “, 39

Data Analysis~~ 40

Ethical Consideration~ 42

Limitations 43

CHAPTER FOUR: DATA PRESENTATION, INTERPRETATOIN AND ANALYSIS44

Introduction ~44

Background Information of the Respondents~ “. 45

Research Question 1: What~, 53

Research Question 2: What~, 59

Research Question 3: What 59

CHAPTER FIVE: DISCUSION, CONCLUSIONS AND RECOMMENDATIONS 60

Introduction 61

Discussion 63

Conclusions 69

Suggestions for Further Research “, 72