Impact of Prudential Regulation on Financial Performance of Deposit Taking Savings and Credit Cooperative Societies in Kenya

Abstract

Savings and Credit cooperatives commonly known as SACCOs‟ are financial organizations formed by members with the same common bond to mobilize savings and later grant loans to the willing members. Prior to 2008 regulatory reforms which became operational in 2011, there were no conscious efforts made to regulate the subsector prudently because the organizations were not thought to pose any significant risk to the country‟s financial system. However, the organizations expanded financially and even started banking like services which were called FOSA in attempt to increase efficiency in services delivery but instead led to illiquidity, capital inadequacy, poor credit management and low confidence among members. In 2008, the government and the SACCO stakeholders formulated and legislated SACCO Societies Act 2008 and subsidiary deposit taking SACCO regulations of 2010. The null hypotheses sought to examine if Core Capital requirement, liquidity levels, allowance for loan loss and members retention had any significant impact on the deposit taking SACCOs‟ financial incomes. The relevant literature was reviewed to ascertain the knowledge gap left by earlier scholars. The methodology of data collection was mining secondary data from Sasra data base and the analysis tool was the statistical package for social sciences (SPSS) which either led to acceptance or rejection of null hypothesis. The study used comparative design and a linear regression model to establish the impact of prudential requirements on the SACCO‟s financial Performance. The data and the perceptions of the SACCO industry professions were able to show low performance before legislation and higher performance after legislation. Further analysis, compared the Betas of various independent and dependent variables before the regulatory reforms and after. On comparison, all the betas showed that the independent variables, namely core capital, credit management, membership growth and liquidity were not strong predictors of financial performance but after the prudential regulations they all became strong predictors. Thus, the study recommends that SACCOs should abide by prudential regulations to enable them enjoy benefits of increased volume of business. To achieve and sustain increased volume of business, the SACCOs must be prepared to employcompetent professionals to manage the large deposit taking SACCOs‟ businesses. The benefits of both economies of scale and economies of scope would definitely trickle down to members in form of increased efficiency in service delivery and increased returns to members. The study further recommends research on ascertainment if other optimal capital structure exists for SACCOs and divided policies to balance between stability of the institution and the returns to members. The study conclusion on the basis of findings reveals that the prudential regulations have positive impact on SACCO‟s financial performance