Comparative Analysis of Credit Institutions †MyAssignmenthelp.com

Question: Discuss about the Comparative Analysis of Credit Institutions. Answer: Introduction: A credit institution is an official chartered institution that receives deposits, provide savings and checking accounts, and provide loans among other services. This paper will research credit institutions in providing credit. Many people or firms take loans to finance their businesses to do major projects, credit institution has been to their rescue in providing them with this funds and paying later at a profit (Crouhy et al, 200). Before getting credit from the credit institutions, some documents must be filled, and collateral is taken to the bank. The amount of money, which can be loaned to the individual, depends on the value of the collateral When there is breach in contract by the borrower, the credit institution with the help of law has the right to take the collateral that is of the same value as the credit given and trade it to compensate for the loss. Credit institutions have been of great benefit to small businesses and the government since it contributes to the development of economy by funding entrepreneurs to start their own business (Mosley Hulme, 2006). Therefore, this paper will analyze credit institutions in the provision of credit. Provision of credit has widely been considered as one of the most important sources of finance for most people in the world at large. Greater populations in the country both in the rural and urban areas acquire credit from various credit institutions to facilitate their developmental activities (Muldrew, 2016). Loans help increase family income and therefore help the less fortune collect their capital funds and therefore enable them to invest in activities that generate employment With the growing population and an increasing lack of employment, more people acquire loans to fund their entrepreneurial projects. However, financial institutions such as commercial banks are reluctant when it comes to catering to the needs of small lenders as per their lending terms and conditions (Chaibi and Ftiti, 2015). There is a myth in financial institutions that it is almost impossible to loan the poor as they cannot present the required security or collateral and therefore considered as un-creditworthy In accordance with some survey (Leone and Porretta, 2014), most people are withdrawing from SACCOS, and this begs for the question, what is happening with the provision of credit in SACCOS now that was not earlier before. This is in line with the fact that in the recent past years, SACCOS were considered the best in the provision of credit Alongside formal financial institutions, Informal financial institutions have also embraced financial transactions relating to the provision of credit in many countries Knowledge acquired after informal finance indicates that most of the rural poor, a good example being women, in most get better access to the informal credit facilities as compared to the formal sources. This has also been proven as per the reports obtained from the surveys of credit the markets. This, in turn, leads to the question: Why have informal financial institutions succeeded even in circumstances where formal institutions have failed? Another credit institution that has grown over time is the category of microfinance institutions. One of their main features is that they do have a large number of clients regardless of the fact that their total asset base is so small as compared to the traditional financial institutions. They provide credit to the less fortunate who do not have or have little collateral and in most cases possess minimal business experience (Tang Guo, 2017). Another feature is that they hold loan portfolios that are poorly diversified since their target households tend to come from the same region and furthermore often practice similar activities. This situation makes the MFIs operate under information asymmetry among there borrowers and as subjects of high default risk. It is therefore evident that there is a huge disparity in the provision of credit between both the formal and informal institutions in general. This study will be aimed at analyzing these variations and their roles in access s and provision of credit to individuals. The findings of this study will reveal the shortcomings of the policy used by credit institutions thus important in policymaking. It will determine places that should be emphasized and corrected The study is also of significant value especially at the time when most people were considering taking loans from credit institutions but failed to understand the regulations. This mainly focused on the ordinary human beings who are speculating enjoying credit facilities. The study is also of assistance to the existing credit institutions. Since most of the institutions are competitors for the same market, they were able to gauge what competitive edge one institution had from the other. Business discipline and academic areas related to the research The research report is related to many disciplines like finance, business management, accounting, human resource, marketing among others. It is related to finance, accounting, actuarial, statistic and economics such that bank rates are used by the financial manager to calculate the probability of the company getting loss or gain if they borrow given amount (Siqueira et al, 2016). Sales and marketing people use the research topic to see the area of influence and to advise their clients. This chapter will help to review the existing literature based on credit institutions and provision of credit. It mainly focuses on the features of these institutions and how the differences affect the mentality of lenders, which in turn generates to how they are viewed regarding the provision of credit. This chapter also forms the basis for which a conceptual framework will be done later on. A lot of research work has tried to outline the various functions of credit institutions. Theoretical analysis majorly bases their arguments on the informal sector. According to Amaral and Quintin (2006), there are four major approaches used by informal institutions for providing credit. These approaches include lending to individuals, incorporated credit models, lending to community-based businesses and group-based minimalists credit systems. As per the minimalist approach, there is the provision of credit even without any form of support. The group-based approach tends to use already formed groups that are in existence or newly formed ones. The functionality of this approach is based on the principle that entrepreneurs view credit as one of the important things in putting a business. According to this approach, credit is offered to small groups that guarantee the loans provided to their members (Amaral and Quintin, 2006). The members need to make a weekly contribution to a joined account baring the name of the group. This account acts as a loan guarantee fund and as a saving account for every member. The members are allowed to receive another loan only after they have paid the first loan. This, therefore, ensures responsibility of the members. In the integrated model, there is a combination of credit with technical assistance and training (Amaral and Quintin, 2006). Individuals who require loans interact directly with the loan officers. Before any loan is granted, there have to be either one or two guarantors who will guarantee the loan. The funds used in training and offering technical assistance makes this approach expensive. Provision of financial services Provision of credit by financial institutions is normally viewed as one of the restrictions limiting their gain from borrowers. Most credit institutions, especially the formal financial institutions prohibit the problem of accessibility, which is displayed in the form of complicated application procedures, prearranged minimum loan amounts and restrictions put on credits obtained for specific purposes (Demirg-Kunt Singer, 2017). More problems occur on the side of borrowers who are smallholders and poor. The requirements such as collateral tend to stand in their way, which should be the case. As long as there are proper procedures for disbursement, proper supervision and repayment dates have been established; the poor will be able to obtain loans and repay them. Moreover putting high-interest rates on credits, helps discourage the influential non-targeted credit program. This clearly indicates the necessity to build up appropriate institutions that will conveniently provide the small-scale borrowers with loans (Coleman, 2016). Microfinance institutions, on the other hand, put in place more lenient policies on the provision of credit, which have been an added advantage to them. Microfinance institutions attempt to overcome problems of contract enforcement and imperfect information (Martinez-Sola et al., 2014). This is through the development of non-traditional mechanisms that are necessary for screening applicants, monitoring borrowers actions and the creation of incentives to repay. Traditionally, microfinance institutions have depended on donor funds, and subsidies as raising funds on the commercial basis have rendered difficult. Because of these irregularities, one wonders whether these institutions should be regulated (Demirg-Kunt Singer, 2017). Credit institutions have been characterized by their varying ways of providing credit to borrowers. The informal institutions mainly show the inability to satisfy the existing demand especially in the rural areas that is their main target. According to Straub (2005), the small size of resource controlled by the informal sector has been the main reason for its inability while the difficulty in administration of loan like risk of default, monitoring and screening and high cost of transaction has affected formal sector. Both formal and informal institutions exhibit certain similarities. These similarities relate to their mode of penalties. When the formal contract enforcement mechanism is missing, the informal and formal institution resort to borrowing practices that uses loan screening instead of monitoring that appears to propose more concern with contrary selection than moral hazard. The differences only appear in method employed by these institutions (Coleman, 2016). Formal institution uses project screening while the informal institution checks on the reputation of the borrower. They rely on history and character of the borrower. Informal institutions rarely undertake loan monitoring since they know borrowers as opposed to formal institutions, which are because of lack of facilities (Martinez-sola et al., 2014). Another difference that emerges in characteristics of credit institutions is that transaction costs are lower in informal institutions as compared to formal institutions. Most financial institutions serve as financial intermediaries. These financial institutions based on their primary sources of funds and how they use these funds. The institutions are depository institutions known as banks, investment intermediaries, and contractual savings institutions. The following explanation of the characteristics of each of these institutions has followed from the work. Linkages between formal and informal financial institutions Past literature has revealed that there are some linkages in credit institutions. These linkages mainly exist between the formal institutions and the informal institutions. The structure of formal credit institutions does not allow them to respond efficiently to the small farmers and individuals needs. This may be because of information asymmetry between the borrowers and the banks therefore hard for the bank to guarantee repayment. Furthermore, loans require security before it approved and granted (Islam, 2016). This, therefore, acts, as a limiting factor since small farmers and individuals may not be in a position to provide the required security, and in any case, they do it might not be in an acceptable form as required by formal financial institutions (Deville, 2015). Informal financial institutions are more open to short-term credit requirements as compared to the formal sector (Lane and McQuade, 2014). This, therefore, gives low-income individuals access to loans, which might be easily accessible in other institutions and sometimes at a lower cost. The linkages between these financial institutions in two ways; that is horizontal and vertical. Under horizontal view, the formal sector banks are allowed to be in direct competition with small-scale moneylenders in the provision of credit (Gough, 2017). On the other hand, vertical view allows formal lenders access the formal lending sources and be able to re-lend the borrowed funds. The literature review about past research has mainly focused on the differences portrayed by various credit institutions concerning their features and characteristics. This literature has also shown that credit institutions vary in their policies, for example, formal credit institutions mainly focus on loan screening and monitoring and place collateral as security while on the other hand informal credit institutions base their security on personal information about the loaner. Despite these variations, individuals still prefer certain institutions than others when securing loans and over the recent years, SACCOs have shown greater performance in the provision of credit. This study seeks to establish the added advantage some institutions have over others. Critical Analysis of a Text (e.g. what is my research question? why select this text? does the Critical Analysis of this text fit into my investigation with a wider focus? what is my constructive purpose in undertaking a Critical Analysis of this text?) My topic comparative analysis of credit institution in provision of credit and the research article has been able to answer the research questions like What variations were observed in provision of credit among credit institutions? How did those variations impact the performance of credit institutions and loaners at large? What criteria did credit institutions use while issuing credit to its customers. What type of literature is this? This is a research paper because it reports on steps and factors credit institutions consider before they issue out loans. It also tries to identify the linkage between formal and informal sectors in allocation of credit and finally the literature review shows the dependent and independent variables necessary for this research paper What sort of intellectual project for study is being undertaken? a) How clear is it which project the authors are undertaking? (e.g. knowledge-for-understanding, knowledge-for-critical evaluation, knowledge-for-action, instrumentalism, reflexive action?) b) How does the sort of project being undertaken affect the research questions addressed? (e.g. investigating what happens? what is wrong? how well does a particular policy or intervention work in practice?) What is being claimed? What are the main kinds of knowledge claim that the authors are making? (e.g. theoretical knowledge, research knowledge, practice knowledge?) How clear are the authors claims and overall argument? (e.g. stated in an abstract, introduction or conclusion? unclear?) With what degree of certainty do the authors make their claims? (e.g. do they indicate tentativeness? qualify their claims by acknowledging limitations of their evidence? acknowledge others counter-evidence? acknowledge that the situation may have changed since data collection?) How generalized are the authors claims to what range of phenomena are they claimed to apply? (e.g. the specific context from which the claims were derived? other similar contexts? a national system? a culture? universal? implicit? unspecified?) To what extent is there backing for claims? a) What, if any, range of sources is used to back the claims? (e.g. first hand experience? the authors own practice knowledge or research? literature about others practice knowledge or research? literature about reviews of practice knowledge or research? literature about others polemic?) If claims are at least partly based on the authors own research, how robust is the evidence? (e.g. is the range of sources adequate? are there methodological limitations or flaws in the methods employed? do they include cross-checking or triangulation of accounts? what is the sample size and is it large enough to support the claims being made? is there an adequately detailed account of data collection and analysis? is a summary given of all data reported?) How, if at all, could the authors have provided stronger backing for their claims? References Amaral, P.S. and Quintin, E., 2006. A competitive model of the informal sector. Journal of monetary Economics, 53(7), pp.1541-1553. Retrieved from: https://www.sciencedirect.com/science/article/pii/S0304393206000821 Straub, S., 2005. Informal sector: the credit market channel. Journal of Development Economics, 78(2), pp.299-321. Retrieved from: https://www.sciencedirect.com/science/article/pii/S0304387805000684 Chaibi, H. and Ftiti, Z., 2015. Credit risk determinants: Evidence from a cross-country study. Research in international business and finance, 33, pp.1-16. Retrieved from https://www.sciencedirect.com/science/article/pii/S0275531914000324 Coleman, W.D., 2016. Financial services, globalization and domestic policy change. Springer. Retrieved from: https://books.google.co.ke/books?hl=enlr=id=dhe_DAAAQBAJoi=fndpg=PR9dq=Coleman,+W.D.,+2016.+Financial+services,+globalization+and+domestic+policy+change.+Springer.ots=N8XbAJawvmsig=DWCGQZ1Qe5cql-WShpOrR-36ldAredir_esc=y#v=onepageqf=false Crouhy, M., Galai, D. and Mark, R., 2000. A comparative analysis of current credit risk models. Journal of Banking Finance, 24(1-2), pp.59-117. Retrieved from: https://www.sciencedirect.com/science/article/pii/S0378426699000539 Demirg-Kunt, A. and Singer, D., 2017. Financial inclusion and inclusive growth: a review of recent empirical evidence. Retrieved from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2958542 Deville, J., 2015. Lived economies of default: Consumer credit, debt collection and the capture of affect. Routledge. Available at: https://books.google.co.ke/books?hl=enlr=id=cDuhBgAAQBAJoi=fndpg=PP1dq=Deville,+J.,+2015.+Lived+economies+of+default:+Consumer+credit,+debt+collection+and+the+capture+of+affect.+Routledge.ots=E7jrWCd1Jssig=57GH2iNJpQU2oaeK2GPgyXahsFIredir_esc=y#v=onepageqf=false Gough, I. 2017. Globalization and national welfare regimes: The East Asian case. In Social Security in the Global Village (pp. 63-82). Routledge. Islam, T., 2016. Microcredit and poverty alleviation. Routledge. Lane, P.R. and McQuade, P., 2014. Domestic credit growth and international capital flows. The Scandinavian Journal of Economics, 116(1), pp.218-252. Retrieved from: https://onlinelibrary.wiley.com/doi/full/10.1111/sjoe.12038 Leone, P. and Porretta, P., 2014. Introduction. In Microcredit, Guarantee Funds in the Mediterranean (pp. 1-21). Palgrave Macmillan, London. 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