Financial Leverage and Financial Performance of Deposit Taking Savings and Credit Co-Operative Societies in Nairobi City County-Kenya

Abstract

Statistical evidence from SASRA annual supervisory reports indicate a declining number of Deposit taking SACCOs especially after the introduction of SASRA regulation of 2012 on capital. This study therefore seeks to investigate the effect of financial leverage on financial performance of Sacco’s in Kenya. The objectives of the study were to determine the effect of debt to capital ratio, debt to equity ratio, short term debt ratio and short term debt ratio on financial performance of Sacco’s in Kenya. Pecking Order, Theory Agency Cost Theory, Dynamic Trade off theory and Modigliani-Miller Theory – With Taxes theories are the theories the study is anchored on. The study employed purpose sampling technique of the 30 Sacco’s out of the 42 available Sacco’s in Nairobi City County. The study was carried out between years 2012 to 2018 where secondary data was collected and used for this study. Causal research design was employed to determine the effect of the financial leverage on financial performance. Panel regression model was employed for analysis. Whisman and McClelland two step model was used to aid in the moderation stage. Document review guide was used to extract information from the financial statements of the Sacco’s in Nairobi. Diagnostic test were carried out to meet the assumptions of the panel regression model. The study found out that debt to equity ratio had a statistically significant negative effect on financial performance, debt to capital ratio had a statistically significant negative effect on financial performance, long-term to total asset ratio had a statistically significant effect on financial performance, short-term to total asset had a statistically significant positive effect on financial performance while sasra regulation had a statistically significant negative effect on the relationship between a moderating effect on the relationship between financial leverage and financial performance of deposit taking Sacco’s in Nairobi County. The study concluded that debt to equity, debt to capital and short-term to total asset are associated with financial performance of Sacco’s. The study recommends that Sacco’s should consider debt restructuring when it comes to capital structure, client management with the sole objective of achieving the vision 2030.