Credit risk, liquidity risk and financial performance of deposit taking saving and credit co-operative societies in Kenya
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Date
2018
Authors
Mwangi, Wachira Allan
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
SACCOs are essential financial intermediaries especially in the rural and far to reach
areas by commercial banks. Poor financial performance, insolvency and general liquidity
challenges have become common to SACCOs. Loans provide the most favourable
investment option for financial entities due to the interest receivable. In carrying out this
lending activities, they are exposed to credit risk and liquidity risk. The main source of
credit risk is outstanding loans that might eventually not be paid back, liquidity risk arises
from the inability of the SACCOs to repay their short term liabilities when and as they
fall due. Since the SACCO members are essentially the owners, once a member qualifies
for a loan it is deemed to be a right for them to receive the loan. Managers of SACCOs
should therefore maintain the most effective and efficient levels of liquidity. This
research had the objectives of finding out the relationship between liquidity risk, credit
risk and financial performance of SACCOs and if there was a significant negative
relationship between independent variables (liquidity risk and credit risk) and the
dependent variable (financial performance). To measure these variables, non-performing
loans ratio, current ratio and return on assets were used. From a target population of 73
top and medium tier DT-SACCOs as at 31st December 2015; only 63 DT-SACCOs that
were registered in 2012 were selected and secondary data obtained for analysis. Collected
data was analysed using computer packages. Regression analysis was used to understand
the relationship between dependent and independent variables of the study. Further, the
data was tested for multicollinearity where it was noticed that no multicollinearity
relationship between independent variables existed. A regression equation of Y=6.60-
0.21X1 - 0.05X2 and a correlation coefficient ratio of 0.52. The hypotheses developed
were tested where the results indicated that there was no significant negative relationship
between credit risk and financial performance but there is significant negative
relationship between liquidity risk and financial performance. From the research it was
concluded that DT-SACCO managers have to strike a balance between the two types of
risk to maximise returns and minimise the risk exposure of their institutions. It is
recommended that SASRA should review the current liquidity levels to cushion DTSACCOs
from cash outs and managers should resolve to external borrowing for short
term purposes only.
Description
A research submitted to the school of business in partial fulfillment for the award of the degree of master of business administration (finance option) of Kenyatta University. July 2018