Financial Soundness and Efficiency of Deposit Taking Savings and Credit Cooperative Societies in Kenya
Kimutai, Carolyne Jebiwott
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The deposits taking Savings and Credit Cooperative Societies (DTS) have continued to play a critical role in Kenya’s financial sector in terms of access, savings mobilization and wealth creation. According to the Kenya’s economic blueprint Vision 2030, is a key player to achieving the 10% annual economic growth target. Given the importance of the sector in economic growth, there has been considerable interest in their efficiency. In Kenya, DTS have been reported to have low efficiency, with the average efficiency being less than one against a general expectation of an efficiency level of one. There is limited empirical literature to explain the inefficiency of DTS in Kenya. In view of this, the study sought to establish the effect of financial soundness on efficiency. The specific objectives of the study were: to determine the effect of asset quality, capital adequacy, liquidity and earnings rating on efficiency of DTS. The study further sought to establish the moderating effect of size of DTS on the relationship between financial soundness and efficiency. The study was anchored on Buffer Capital Theory, Economic Efficiency Theory, Asymmetric Information Theory, Modern Portfolio Theory and Shiftability Theory of Liquidity. The study adopted positivist philosophy and explanatory research design. The target population comprised 110 DTS as per SASRA report for the year 2017.The study used secondary data that was collected from the audited financial statements for the period 2012-2016.Data was collected using a document review guide. Data Envelopment Analysis methodology was used to generate efficiency scores. Both descriptive analysis which included mean and standard deviation and inferential statistics which included panel Tobit regression was done and was aided by s tata version 11 Tests conducted include: normality, heteroskedasticity, multicollinearity, autocorrelation, stationarity and model specification tests. Issues relating to the ethical conduct of research were upheld, ensuring that permission was sought from relevant authorities before collecting data. The study findings were as follows: DTS have not achieved efficiency however, the efficiency level on average has increased over the study period. Further, the descriptive analysis indicates that the mean of capital adequacy and liquidity is above the required minimum by the regulator. The mean of asset quality is above the required maximum by the regulator. In addition, the correlation analysis indicates that asset quality, earning rating and liquidity have a weak negative relationship with efficiency while capital adequacy has a weak positive relationship with efficiency. Lastly, asset quality, capital adequacy and liquidity had a statistically significant effect on efficiency while earning rating had an insignificant effect on efficiency. Size of DTS was found to have a statistically significant moderating effect on the relationship between financial soundness and efficiency. The study concluded that: DTS are inefficient; increase in asset quality improves efficiency; holding more liquid assets decreases efficiency; the more stringent DTS regulations on capital adequacy the more efficient they are. The study contributes to: Finance Theory, methodology, and empirical literature. The study recommends that: DTS should adopt more robust ICT platforms which facilitates members’ access the core services; DTS should develop credit administration strategies that reduce the amount of non-performing loans; a merger policy for the DTS should be developed so as to encourage the smallest DTS to merge in order to increase their economies of scale hence resulting to improved efficiency. Limitations highlighted include: lack of enough empirical evidence in Kenya; lack of uniform classification of accounting items.