Determinants of Financial Distress Facing Local Authorities in Service Delivery in Kenya

Abstract

The purpose of this research was to investigate the determinants of financial distress facing Local Authorities in service delivery in Kenya. Local Authorities are often unable to meet their financial obligations including payment of salaries. In order to meet their short term financial obligations they are forced to operate on overdrafts which attract high interest rates hence compounding their financial distress problem. The presence of financial distress in Local Authorities leads to poor service delivery and loss of valuable assets to creditors due to inability to service their debts.

The study population comprised of the 175 Local Authorities in Kenya. A descriptive research design was used to conduct the study. A sample of 20 Local Authorities was selected using a stratified random sampling technique. A questionnaire was used to collect data from both the Local Authorities officers and customers of Local Authorities. The data collected was analyzed using descriptive and inferential statistics. Qualitative responses were analyzed using content analysis.

Results indicated that the causes of financial distress include financial management practices, corporate governance practices, human resource management practices, information technology and government regulation. Financial management practices, human resource management practices, and corporate governance practices were found to have a negative and significant relationship with financial distress. This implies that an increase in the effectiveness of these variables leads to a decrease in financial distress in Local Authorities and vice versa. Government regulations were found to have a positive relationship with financial distress implying that ineffective government regulation leads to high levels of financial distress.

The study recommends that best practices in the area of financial management, human resource management, corporate governance and information technology need to be considered as measures of addressing financial distress of Local Authorities and that Government regulations on formation of parallel institutions should be critically reviewed as it may result to unintended consequences. The study recommendations may be critical to the successful financial management of the county governments.