Effect of Liquidity Management on Financial Performance of Deposit Taking Saving and Credit Co-operative Society in Kenya

Abstract

This study focuses on effect of liquidity management on financial performance of deposit taking SACCOs in Kenya. It is undeniable fact that member’s loan demand is very high and incompatible compared with the availability of funds. This follows that SACCOs face a risks arising from liquidity shortage and this has been a major cause of failure of many financial cooperatives. In Kenya, SACCOs don’t have access to the lender of last resort, the Central Bank of Kenya. So in times of market difficulties and constrains they have nowhere to get the asset of cash. This makes them prone to the liquidity shortage, and no matter how small, can cause great damage to a savings institution. The specific objectives were to explore the effect of cash management to financial performance of deposit taking SACCOs in Kenya; to examine the effect of Loan Repayment on financial performance of deposit taking SACCOs in Kenya; to assess the effect of investment in non-core business on financial performance of the deposit taking SACCOs in Kenya; to establish effect of liquidity decisions on financial performance of deposit taking SACCOs in Kenya; to evaluate the effect of management competency on financial performance of deposit taking SACCOs in Kenya and to determine the moderating effect of SACCO regulation on financial performance of deposit taking SACCOs in Kenya. The target population was thirty licensed deposit taking SACCOs in Kenya, the sampling technique employed was simple random sampling and the sample size was 92 respondents. This study adopted a descriptive survey in soliciting information on effects of liquidity management on financial performance of deposit taking SACCOs in Kenya. Primary quantitative data was collected by use of self-administered structured questionnaires. The researcher also used secondary data derived from the audited financial statement of the SACCOs and the regulator (SASRA). The data collected was analyzed, with respect to the study objectives, using both descriptive and inferential statistics. The data was analyzed using descriptive statistics such as mode, median, mean, standard deviation. Research hypothesis was tested by use of F- test statistics, to determine relationship between variables, cross tabulation was undertaken with the help of SPSS and correlation was determined. Univariate and multiple regression analysis was employed to determine relationship between liquidity management and financial performance of SACCOs. Data was presented in tables, charts, figures and mathematical expressions. The results showed that even though SACCOS undertake strict cash flow forecast, there are external variables that can affect cash management which poses a greater risk in the operations of the institutions. Hence the need to critically review in-depth on the cash management factors both in the external environment and internal environment that can affect cash management in the institution and establish mitigation factors. High level of gross loan portfolio showed the great need of loan by members which confirms the key mandate of deposit taking SACCOS on the issuance of loan to its members. This reviewed that management has taken precaution measures on the management of the gross loans and they were pessimist on the dangers of having huge gross loan on their books. Members contribution played a key part in generating needed cash for the loans issues by the SACCO to their members, which indicate manageable levels of risk since external financial variable like inflation, macro-economic factors have less effect on the cash management of the institution hence the less effect on financial performance in the deposit taking SACCOS. The demand for cash by members in terms of loan request was very high resulting to inadequate surplus cash for diversified investments, also it could indicate lack of investment capacity across SACCOS hence less diversification on various option available in the market. SASRA need to devise an effective policy on guidance on dividend payment of the SACCOS since they seem to be paying more than the market rate which in the short run may look very lucrative but on the long run it will have a negative effect on the financial performance and stability of the SACCOS. Hence the need of the SACCO regulator to market and create awareness of its activities in the sector. This is critical since it will reduce the financial risk associated with investment in the SACCO sector and raise motivation to many more individuals to put their investment in the SACCO in the growing sector which will positively affect the sector and contribute towards growth and achievement of middle income economy as stipulated in vision 2030.The researcher found that there is need to introduce cash management controls in the SACCOs, there is need to better strengthen the role of SASRA and increase its awareness, there is need to introduce credit management policy and finally increase the monitoring role of the government through its regulator in the sector since the sector plays a critical role on the achievement of vision 2030 and improved economic development of the members.