Capital structure and the financial performance of deposit-taking savings and credit cooperative societies in Kenya
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Date
2018-06
Authors
Mwatu, Mue Daniel
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The Savings and Credit Cooperatives subsector is a key player in the provision of financial
services to Kenyans. Savings and Credit Cooperative Societies play an important role in
pooling of financial resources needed for investment and wealth creation. However, although
the Savings and Credit Cooperative Societies spur economic growth through mobilization of
domestic savings, it has been noted that several of them have been unable to fulfill their
mandate of providing loans and other financial services to members due to lack of adequate
funds. As a result, the Savings and Credit Cooperative Societies have been forced to seek
alternative forms of financing in order to meet the increasing demands for services from
members. In addition, the increasing globalization and liberalization of financial markets and
economies has led to an increase in the scope and depths of financing options that are
available to the Savings and Credit Cooperative Societies. These advancements have
significantly increased the options for optimal capital structure for Savings and Credit
Cooperative Societies. Capital structure refers to the mix of debt and equity of an
organization. The optimal mix of debt and equity is an important consideration for managers
given that it impacts the financial performance of the Savings and Credit Cooperative
Societies. This study sought to establish the effect of capital structure on the financial
performance of Deposit-taking Savings and Credit Cooperative Societies in Kenya. The
specific objectives of the study were to investigate the effect of the independent variables:
equity, leverage and liquidity on the dependent variable, financial performance. The
dependent variable was measured using return on assets. The study was anchored on the
Pecking-Order Theory. The study adopted the causal research design and used quarterly
quantitative secondary data for the 176 deposit-taking Savings and Credit Cooperative
Societies in Kenya for the period 2012-2016. The data was collected from the Sacco
Societies Regulatory Authority’s registry, comprising of audited financial statements and
quarterly reports submitted by the deposit-taking Savings and Credit Cooperative Societies.
The study established that debt has a negative and statistically significant effect on the
financial performance of Deposit-taking Savings and Credit Cooperative Societies in Kenya.
The effect of equity was found to be positive and statistically significant while the effect of
liquidity was found to be negative but statistically insignificant. The findings of the study
recommended that deposit-taking Savings and Credit Cooperative Societies should limit the
amount of debt in their capital structure, since high levels of debt reduces profitability. The
study also recommended that deposit-taking Savings and Credit Cooperative Societies should
aim at onboarding more members, in addition to mobilizing the existing members to increase
their share contributions as a way of raising capital. Further, the study recommends that
policy makers should consider reviewing downwards, the level of minimum liquidity
threshold required for deposit-taking Savings and Credit Cooperative Societies.
Description
A research project submitted to the school of business in fulfilment of the requirements for the award of the degree of masters of business administration (finance option), Kenyatta University. June 2018