CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The main purpose of every business is to maximize profits and grow the business. Such is the case with even financial institutions. These are organizations that process financial transactions such as loans, deposits and investments. These financial institutions could be banks (central banks, commercial banks, investment banks), microfinance institutions which can be categories one, two or three (e.g. credit unions, savings cooperatives etc), insurance companies, brokerage firms and many others.  Over the past few years, advancement in information technology has changed the way organizations operate and conduct their business (Al-Jabri, 2012). Technological advancement has brought about the evolution of m-banking and online banking in the banking industry which has revolutionized the manner in which banks conduct their business. This however, has led to transaction cost (bank charges) on their services offered.

Bank charges arise from six broad categories of services namely: saving accounts, current accounts, foreign exchange account charges, automatic teller machine transactions, mobile banking, internet banking and money remittances. The nature and trend of bank charges differs from one bank to another. In previous decades, banks have provided a variety of savings accounts, debit and credit card services, as well as loans and investment plans. Throughout the recent years, the banking industry has evolved in its scope responding to the changing nature of its environment. It has now transformed into the online banking era, where banks nowadays are exploring new methods of delivering their offered services to their customers (Ghaziri, 1998). Due to this, banks are able to serve their customers better without having to further expand their branch offices. With the advent of globalization, the banking sector has improved its services in response to the increase in competitive pressure and demand for economic growth this has led to different fee levied for each service they provide.

Almost every person deals with various financial institutions on a daily basis; whether it is depositing money, applying for loans or exchanging currencies. Financial institutions are the nucleus of these activities. All of these activities are geared towards the profit maximization objective. In a bit to achieve this objective, these institutions tend to charge their clients for the provision of these services. The price paid by consumers of these services provided for by financial institutions is termed a “charge” or a “Fee”. The fees or charges levied by financial institutions for their services are generally referred to as “Bank Charges”. The significance of the capital market, especially micro finance institutions as agents of intermediation cannot be over emphasized. As critical role-players in the economy, they mobilize deposits from surplus units and lend to deficit units. They attract deposits at lower cost and lend at a premium in order to advance their profit motives. In the process, they contribute to the development of the economy as they facilitate the national payment system, advance loans to major economic players who then use the funds for infrastructure development, for job creation and other economic activities that benefit the society at large. As business units, financial institutions are also expected to grow their profits consistently as the investors into these banks look for higher returns on their investments. A number of strategies have been employed all along but of late relationship banking and relationship marketing have become crucial for long term relationships (Charles, 2015).

There has however been growing pressure on profitability of financial institutions since the early 1990s as a result of competition and other pressures and while the process of profit maximization has been waned through stiff and intense competition from the other market forces, a complementary avenue was devised – bank charges. Bank charges or the term bank charge covers all charges and fees made by a bank to their customers. In common parlance, the term often relates to charges in respect of personal current accounts or cheque account. These charges may take many forms including but not limited to monthly charges for the provision of an account, charges for a specific transaction (other than overdraft limit excesses), interest in respect of overdrafts (whether authorized or unauthorized by the bank) and charges for exceeding authorized overdraft limits, or making payments (or attempting to make payments) where no authorized overdrafts exists (Mayer et al, 2000). Evidence suggests that the introduction of banks charges has led to financial institutions loosing patronage to and the immergence of non-banking sector financial institutions. This has put pressure on financial institutions to review their bank charges downwards as they are perceived as being steep by a number of constituencies.

Organizational performance comprises of the actual output or results of an organization as measured against its intended outputs (or goals and objectives).Richard et al. (2009), states that organizational performance encompasses three specific areas of a firm outcomes. These are financial performance (profits, return on assets, return on investment etc); product market performance (sales, market share etc.); and shareholder return (total shareholder return, economic value added, etc). In recent years, many organizations have attempted to manage organizational performance using the balanced scorecard methodology where performance is tracked and measured in multiple dimensions such as; financial performance(e.g. shareholder return), customer retention, social responsibility (e.g. corporate citizenship, community outreach) and employee stewardship. In a bit to achieve all of these, Banks and financial institutions such as microfinance institutions charge fees for their services they provide to the clients both personal and commercial. For example banks may charge customers account opening fees and in other cases they may charge service fees for carrying out certain transactions such as Account handling charges, commission on movements in current accounts, communication fees, and debit interest on customer’s overdrawn accounts, transfer order charges or penalties for loan default Mayers, (2000).

However all financial institutions must be transparent in the fees they charge to their clients hence they must have a copy of their service costs printed and put up in the banking hall for customers to read and understand them to avoid future conflicts. While competition is a natural regulator of bank charges, government authorities and other banking regulators such as the Banking Commission of Central African States (COBAC) stand by to receive complaints and concerns raised by bank clients about the fee charging practices by banks. While a majority of financial institution’s total revenue comes from interest on loans and overdraft, a big portion of it comes from bank fees or bank charges. Individually bank charges may be small but if combined will add up quite nicely. When the net interest margin for a bank is squeezed in a low interest rate environment, financial institutions tend to use bank fees as a measure of sustainability. In this regards therefore banks turn to impute high and exorbitant charges on their clients and most often which will not respect their service costing this has propted the researcher to study the effects of bank charges on the performance of unity cooperative society.

1.1 Statement of the Problem

The dormancy and delinquency ratios of UNICS Plc over the years are increasingly becoming a call for concern. Customers are consistently leaving their accounts become dormant while at the same time creating new ones in similar institutions. Statistics from the institutions database reveal that between 2015 and 2016, the dormancy rate was at 40 percent while delinquency was at over 60 percent. Barely four years after that is as at December 2020 the dormancy rate had risen to 55 percent while delinquency was at 79 to 80 percent. (Source: UNICS Plc Database)

These factors and many others have consequently played a negative effect on the performance of the institution as well as affected a growth in its total portfolio. Also management has come under serious criticism for not meeting up shareholder expectations in terms of providing a reward for their investments as well as from regulatory bodies such as the Banking commission of Central African States (COBAC) and the government for not maintaining acceptable dormancy and delinquency ratios. In order to curbed these and meet up with the demands and aspirations of the shareholders and these regulatory bodies, the management of UNICS Plc has in the past years employed very stringent measures. These include amongst others the revision of the loan policy from a constant interest rate to a reducing balance interest rate, employed specialized staff such as daily collectors who can meet the customers at the field and collect from them, instituting a performance evaluation scheme for staff on a quarter, semester and yearly bases and a motivation scheme based on the staff evaluations. These measures have all proven futile. This is what has prompted me to believe that the problem may be related to that of bank charges. As a result of this situation it is necessary for me to carry out a research on “The effects of bank charges on the performance of Unity Cooperative Society (UNICS Plc)”.

Based on the above problem, the following questions will be addressed;

1.2 Research Questions

1.2.1 Main Research Questions

What are the effects of bank charges (Account handling charges, interest on loans and overdraft, Loan processing charges and account opening charges) on the performance of Unity Cooperative Society?