A LOAN MANAGEMENT SYSTEM FOR SACCOS

By

083218

An Information Systems Project Proposal Submitted to the Faculty of Information in partial

fulfilment of the requirements for the award of a Bachelor of Business Information Technology.

Bachelor of Business Information Technology

STRATHMORE UNIVERSITY
Declaration and Approval.

I, 083218, declare that this project has not been submitted to any other University for the award
of a Degree in a Bachelor of Business Information Technology.

Student Number:
Sign: ________________________ Date: ________________________

Supervisor’s Approval:

Sign: ________________________ Date: ________________________

 Abstract

A recent research by Ipsos group done in different regions of Kenya suggest a need for
money increases to sustain the financial needs of different individuals in the area such as the
need to support studies, basic needs and other needs. Many people have chosen to avail
loans from underground lending which offer as high as 20% interest rate which makes
borrowers sunk from their financial obligations. This research also shows that 70% of the
population opt for SACCOS to fulfil their financial incapacities. Institutions like Banks
cannot help individuals for their financial shortcomings in the long run because of their high
interest rates that they cannot afford. In this regard, the main gist is to develop a lending
application for SACCOS that offers a reasonable interest rate to cater the financial
shortcomings of the market to raise the living standards of people that come from low
income earning regions across the country. The application will enable customers to access
and apply loans from anywhere. Other features will include a notification system to alert
customers when their loan is due.

The lending application will be designed and developed according to the requirements using
object oriented methodologies. The technologies used to develop the application are open-
source. PHP is chosen as the main programming language. In addition, other highly
productive frameworks have been used to preserve its functionality and runs on ‘Apache
Tomcat’ application server.

This implementation of this application will lead to a reliable, fast, user appealing solution
and low interest loans robust enough to meet the requirements outlined above.
 Chapter 1 - Introduction
1.1 Background to the study

A loan is cash given to an individual or organization on the condition that it will be paid back
over a given period with premium or rather interest, which acts in as bonus for the utilization of
cash. There are different sorts of loans, for example, credits, fund, and home loans. Most loans
range from banks, credit unions, pawnbrokers, and investment funds organizations to trust
organizations. Many people have chosen to avail loans from underground lending which offer as
high as 20% interest rate which makes borrowers sunk from their financial obligations. Research
shows that 70% of the population opt for SACCOS to fulfil their financial incapacities.
Institutions like Banks cannot help individuals for their financial shortcomings in the long run
because of their high interest rates that they cannot afford.

Loan automation system is one that enables processing of loans from application to final
confirmation without the physical presence of both the applicant and the lending institution
(Christenson, 2009; WAUSAU, 2010). Albeit a few moneylenders have a specific sort of
innovation mixed into their loan handling process, there are observable inadequacies. The
objective of this project is, along these lines, to outline and make loan system application that
can catch the required advance information components just once, keep such data secure all
through the different steps involved before a loan is awarded to a client

Sufficient information was gathered by use of interviews and questionnaires. Individual meetings
were directed with the administrators of different SACCOS to survey the effect of the plan on the
loaning procedures. Furthermore, a review of previous articles on this research subject and
related issues (Claude, 2009; Croft, 2010; John, 2006; Srinivas, 2005; William, 2006; Wittman &
Roust, 2008) were also examined to help reveal clearly the areas of concern, and help create the
proposed lending application.

Loan Management System software would support a SACCOS client benefit from numerous
points of view, while making their operations more proficient and straightforward alongside
holding fast to the bunch of government commands and directions. It would diminish the waiting
time, enhance client benefit level, increment consistency, increment exactness, enhance work
process, accomplish consistence and combat fraud of a loan and low interest rates. The Loan
Management System Software being created will assist rather than replace the human decision
maker during the computation of relevant data, and integrating decisions made immediately.

1.1 Problem Description

As the need for money increases to sustain the financial needs of different individuals in the area
such as the need to support studies, basic needs. Many people have chosen to avail loans from
underground lending which offer as high as 20% interest rate which makes borrowers sunk from
their financial obligations. In other words, it cannot help individuals for their financial
shortcomings in the long run. in this regard, the main gist of this study is to establish a lending
application for SACCOS that offers a reasonable interest rate to cater the financial shortcomings
of the market.

1.2 Main Objective

The main objective this project is to improve the efficiency of loan management processes and
functions of the customers and provide a secure, reliable, platform independent and effective
online-based software solution for SACCOS.

1.3 Specific Objectives

i. To identify the key components of the Loan Management System specifically for
SACCOS.
ii. To design Loan Management System algorithms to perform arithmetic’s and calculate the
interest.
iii. Analyze the problems faced by other financial institutions.
iv. To develop a fully functional Loan Management System.
v. To test the system.

1.4 Justification

With the ever-growing need of bettering the life of the people from low income areas that have
been researched on in mind, a great challenge has been presented to the SACCOS when issuing
loans to this people. The lofty challenge this portends is that the loan officer is required to be
fully conversant with the diversity of possible calculation of interest rates, both in a timely and
accurate manner. Hence, an intern or an administrator who is not a specialist in the finance field
presented must refer to textbooks and various accounting tabulations before a concrete decision
can be made and conclusion reached as to whether to award a loan and at how much interest to
charge in case the experts are not around. Many people have chosen to avail loans from
underground lending which offer as high as 20% interest rate which makes borrowers sunk from
their financial obligations. This research also shows that 70% of the population opt for SACCOS
to fulfil their financial incapacities. This however can be painstaking, time consuming and the
overall cost implication in the long run. Hence, there is the need for a system which can assist the
loan officer to reach timely and accurate decisions, especially when a person needs an instant
emergency loan. A loan automation system is one that enables processing of loans from
application to final confirmation without the physical presence of both the applicant and the
lending institution (Christenson, 2009; WAUSAU, 2010)

Nevertheless, it will assist the administration of SACCOS predict on the future workload and
morbidity hence making the appropriate procurement and avail the necessary resources at the
right time.

1.5 Scope and Limitation

The proposed loan management system will enable people from low income areas to borrow
money. The system will also have a notification system to alert users when their loan is due.
Users will have a user login and password to access their accounts. As soon as they sign in to the
system they will be presented with a dashboard that has other functionalities mentioned earlier.

In the development of the system, a web based reputation approach will be taken to empower the
communities from low income areas.

The limitation of the system is, since it will be web based, internet access is expensive and not all
people from this communities can afford. Lastly, most people are not computer literate so it
might be a challenge for them as well.
 Chapter 2-Literature Review
2.1 Overview

Loan Management System is used to automate the back-office activities of a SACCO and offers
any type of loans. From an end-user perspective, the Loan Management System Project consists
of two functional elements: Security Module, Customer and Loan Transaction Module and a
Query Module. Today there is the need of finance in every aspect of life. As we know these days’
different bank and finance company coming up with new finance product every month with very
high interest rates. In such competitive environment, providing excellent loan services to the
customers is the major task.

2.2 Similar Solutions

Other similar software solutions have been studied to find other approaches to meet the
stakeholder’s requirements. Thus, understanding existing solutions will be an advantage to
make a better lending software solution. There are many Microfinance software’s created by
other different companies across the globe. The business processes of Microfinance Institutions
are much different to each other compared to the banks in Kenya. So, most of the business of
SACCO’s revolves around the software product they buy. Customization charges of such
products are so high that they cannot afford to do those changes. This system provides fully
customizable solution for SACCOS. It is providing all the necessary facilities to automate the
loan process while implementing security and authorization they need.

2.3 Current Components

The current business process of most SACCOS is divided into the following groups.

• Client Registration
When a client asks for a loan he/ she must fill an application provided by a SACCO. The paper
document contains the loan details, loan agreement, promissory notes, security. After this the
loan approval officer creates the clients a new file and keep the application manually.

• Application Approval
After the Customer has completed a loan application, the assigned officer does an appraisal for
the loan. After the appraisal, branch assistant manager visits the client to make sure everything
is in order. Then the loan application is forwarded to the loan manager for the approval. Each
approval authorities have given loan limits for approval. Depending on the loan amount the
approval authority might be vary.

• Loan Disbursement
After the loan approval officer approves the loan an approval loan agreement must be signed by
both parties. Then the client file will be updated and documents will hand over to the client.
Every customer who has granted a loan must create a savings account. The loan executive will
disburse the loan amount to client’s savings account.

• Installment Collection
The installments must be paid by the clients on or before due dates through their savings
accounts. Loan cards of clients will be updated by the loan approval officers into their records
manually.

• Facility Follow-up
The SACCOS keep a loan sheet which includes all the details about loan disbursed. It is
frequently updated manually according to the day-to-day activities. In case a customer doesn’t
pay the installments, the SACCO will post reminder notifications via letters. After two months
of arrears, the facility will be classified as nonperforming and treated accordingly.

2.4 Interest rates Algorithms

Since interest rates on micro-loans represent the major costs for the clients and at the same time
the main income for MFIs it is now worth taking a closer and systematic look at it.

Very often the seemingly high interest rates compared to normal commercial lending rates are the
strongest point of criticism for opponents of profitable. microfinance business. In 2006, the
average worldwide microfinance lending rate stood at 24.8 percent (CGAP, 2009, 7). But also
rates above 50 percent up to 80 percent and even 100 percent are not uncommon. In relation to
the amounts borrowed, they mostly reflect the high ‘all in’ costs rather than high profits of MFIs
(Sundaresan, 2008, 87).

As a rule, income to lenders and cost to borrowers can both be increased by charging additional
commissions and fees to the interest rates, but as competition among MFIs grows the pressure to
offer competitive and marketable interest rates increases as well. Furthermore, clients become
more knowledgeable in financial issues with the development of the microfinance industry and
might choose an institution with lower interest rates. The goal therefore is to reduce costs of
MFIs which allow interest rates to go down as well.

It is suggested that interest rates should generate revenue equal to or more than the cost per unit
of principal lent. Therefore, the interest rate that creates financial efficiency is:

r ≥ (i+α+p)

(1-p)

Here r is the interest rate charged per unit of principal, i is the cost of raising resources per unit of
principal, α is the expected cost of administering and supervising a loan per unit of principal lent
and p is the percentage of principal and interest payments due that cannot be recovered
(Khandker, and Khalily, 1995, 39).

A more precise formula for the proposed annualized effective yield (R)3 is:

Hence adapting this algorithm will ensure that the new system has low interest rates that will
attract customers.
 Chapter 3 -Methodology
3.1 Introduction

The Design phase transforms requirements to suitable implementation in selected design model
or technique. There are two approaches to the design phase, Structured and Object Oriented.
Object Oriented Design (OOD) is selected for this project, Because OOD has many advantages
against the structured approach. It will lead to a clear design with flexibility, scalability. Also, the
software can be reused and easily maintained. OOD will first identify various objects (real world
entities) occurred in the problem and then identify the relationships among those objects. OOD
aims to model the problem domain, the problem we want to solve by developing an object-
oriented system. Unified Model language (UML) is selected as the modeling language of the
system. UML is a collection of graphical symbols for expressing model of the system. UML
provides a very robust set of notations which grows from analysis to design.

3.2 Requirements
3.21 Functional Requirements

Functional requirement defines the function of a system component. These components added
up to build the module, and integrated modules complete a whole system. Usually functional
requirements are captured in use cases which is a part of Unified Modeling Language (UML).
 Figure 1:1: Actors of the System

Figure 1:1 shows the main actors of the M-Fin system. Following are the use cases of the actors.
Manager:
• Can approve or reject loan applications
• Can inquire loan facility details

Administrator:
• Loan
• Can maintain reference data.
• Can assign loan officers
• Can view transactions

Officer:
• Can do calculations
• Can follow up loan facilities
• Can login into the system
• Can create receipts

System Administrator:
• Can grant and revoke access to users
 Figure 1:2: System Boundry for Loan WorkFlow

 User Authentication & Authorization

All the officers of SACCOS should have a username and a password to login in to the system.
The system administrator should create new usernames and passwords for new users of the
system. They should have access to the relevant branches which are created in the system as
well. And the system administrator should grant the access rights to the programs of the system,
to each stakeholder type.

 Maintain Customer Database

For a microfinance institution, a client database is one of their most important assets. Client
database should include most of the details about client, their family details, occupation,
earnings, education and many more other important details. When a new client requests for a
loan his or her details should be feed in to the system for future use.

 Maintain Reference Data

When using software system, there are many reference data to be maintained. Such as branch
details, stakeholder types, loan types, approval groups, branch details, etc.

Officers should be assigned to maintain these data in the system. And must make sure any
modification to these data could be done by proper authorization level.

 Loan Calculation

SACCOS have different predefined loan schemes. For each loan scheme, there are maximum
and minimum loan amounts, loan period, and interest rates. In the event a customer asks for
different loan amount or different repayment period or interest rate, a loan approval officer can
change those parameters accordingly.

 Loan Approval

After creating the trial calculation, loan application must be created. All the relevant data to the
purpose of the loan is filled in the application. The approval groups are defined in according to
the loan amounts. A member of relevant approval group can approve or reject a loan with
responsibility.

 Print Loan Documents

There are mandatory documents listed for each approved loan. Loan Agreement, Promissory
Note, Guarantor Document are some of them. Relevant client and application data should be
filled automatically in the pre-printed document and should have a facility to print them.

 Loan Information

Information about approved loans should be viewed through a single interface. Repayment
schedule, Payment receipts details, performing non-performing status of the loan, and amount in
arrears, no of loans of a client are the critical MIS information.

 Day-End process

Day-end process should be run by system administrator after the loan processes are finished at
the branches. Day-end process should process the loan installments due on following day,
change performing /non-performing status of loan facilities on the given parameters.

3.3 Non-Functional Requirements

• Platform Independency
System will can work flawlessly irrespective of the operating system used in the user computer.
Since this is a web solution only need a web browser to run the system.

• Reliability

Reliability is the ability of a system to perform its intended functions under stated conditions. If
a financial system becomes not functional even for a single day, it might be a huge damage for
the organization. So, reliability is a crucial factor of the non-functional requirements.

• Usability

Usability means the ease of use. Simply it is the user-friendliness of the system. System
interfaces, processes and many other things user interact with should be designed and developed
to lean and understand by users easily. User interfaces should be less complicated and responses
should be given in a timely manner.

• Maintainability

Maintainability is the capability of a system that can be maintained. Maintenance will include
error correction, new developments, change environments, etc. The system should be
maintained with minimum effort and time.

3.4 Design

Systems design is the process of defining the architecture of the software solution to meet the
specified requirements. Object oriented methodologies are used in the system design and UML
notations are used to illustrate the designs. A best system design makes the software solution
more efficient.

3.5 Development Tools

There are many tools for system design such as ‘Smart Draw’,’ Rational Rose’, etc. Also, there
are plug-ins for many popular IDEs such as Eclipse and NetBeans. But some of them don’t
facilitate the required needs and some are using non-standard notations. ‘Enterprise Architect
7.0’ from Sparx Systems is used as the system design tool because it provides facilities to draw
all the diagrams which needed and it uses more standardized representation of UML notations.
Use-case diagrams, Entity relationship diagrams, Class diagrams, Activity diagrams and
Sequence diagrams which are drawn using this tool.

To develop the proposed system will be developed using the PHP Code Igniter Framework. Code
igniter is currently one of the best PHP framework and it supports the Model-View-Controller
pattern.[Skv15] It also has great documentation and a strong online presence.

When developing an enterprise scale application, third party tools are become more useful to
save the time and effort of the developers. Because of that reason many development tools have
been used to develop the system to make it a successful one.

 My Eclipse

My Eclipse is a commercially available Integrated Development Environment (IDE) for PHP

development. It is built upon famous Eclipse platform and integrates proprietary and open source
plug-ins to the development environment. It has support for PHP/XML visual designing, code
debugging, code auto generation, direct control and deployment of Apache Tomcat server, adding
Struts, hot deployment and many other features which have been very useful for development of
the project.

• MySQL GUI Tools

MySQL GUI tools are a free toolkit which consists of MySQL Administrator, MySQL Query
Browser, MySQL Migration Toolkit and MySQL System Tray Monitor. Using MySQL
Administrator databases can be created, deleted and maintained. It also provides backup and
restore facilities for MySQL server. Users can create tables, drop tables and view tables
structures of existing tables. Main function of MySQL Query Browser is executing SQL queries.
It is also used to view and modify data of tables. MySQL Migration Toolkit is used to migrate
existing databases from various vendors to MySQL databases. MySQL System Tray Monitor
monitors the status of the MySQL database service and provides options to start-up, shutdown or
configure the instance.

• Firebug

Firebug is a free and famous web development tool comes as an add-on to the Mozilla Firefox
web browser. It has a console and a network monitor with the support for the HTML, CSS and
JavaScript languages. Firebug is helpful for the developers because they can monitor HTTP
Requests and responds with the parameters and headers. Also, a developer can inspect HTML
elements through firebug add-on

3.6 Project Milestones/Schedule.

References
Bank System and Technology (2013). Automating Loan. Retrieved from
www.banktech.com/management.../automating...loan...for 2.

Christenson E., (2009). “Banks Now Turning Towards Loan Automation Technology – Banking
Frontiers Magazine” Retrieved from http://www. News events Loan Automation_2.pdf

Claude E., (2009). Financial Services Solutions- Extended Loan Automation. Retrieved from
http://www.4point.com/extended-loanautomation.
Christenson E., (2009). “Banks Now Turning Towards Loan Automation Technology – Banking

Croft S., (2010). Loan Processing, Lending, Workflow, Analytics, Decisioning Engine. Retrieved
from Cypress Software Systems.info.criflendingsolutions.com/Loan-Automation-Software

Frontiers Magazine” Retrieved from http://www. News events Loan Automation_2.pdf

Wittman, P.D., & Roust, T. (2 8) “Balances and Accounts of Online Banking Users: A study of
Two US Financial Institutions”. International Journal of Electronic Finance, 2(2), 197-210.

Skvorc, B. (2015, March 30). The Best PHP Framework for 2015: SitePoint Survey Results.
Retrieved from sitepoint: https://www.sitepoint.com/best-php-framework-2015-sitepoint-
survey-results/