Capital structure and the financial performance of deposit-taking savings and credit cooperative societies in Kenya
Mwatu, Mue Daniel
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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.