Influence of Financial Risk on Financial Performance of Deposit Taking Savings and Credit Co-operatives in Kenya

Abstract

The overall performance of Deposit Taking Sacco in Kenya has been declining drastically as measured by ROE and interest margin to gross income. The Increase in Non- performing loans indicated elevated credit risk. The decline in liquidity poses liquidity risk. The interest spread has not been relatively stable from 2011 to 2016. Increase in Operating Expense to Total Assets Ratio poses operational risk for the DT Saccos. The purpose of this study was to assess the influence of financial risk on financial performance of deposit taking savings and credit co-operatives in Kenya. Specifically the study evaluated the influence of credit risk, liquidity risk, interest rate risk, operational risk and the moderating effect of firm size of the DT Sacco on financial performance of deposit taking savings and credit co-operatives in Kenya. This research is intended to fill the gap of inadequate information and understanding that exists in relation to financial risk and financial performance of deposit taking Saccos in Kenya. As reflected by the presented theoretical and empirical literature there is inadequacy of research findings on whether financial risk leads to the financial performance. The study adopted a descriptive research design. The target population for this study was 164 deposit taking Sacco societies licensed to undertake deposit-taking Sacco business in Kenya for the financial year ending December 2016. The study adopted census and considered all the DT Saccos for study. A balanced panel data for 135 deposit taking Sacco’s for six years from 2010 to 2015 which represented 82.32% success rate was collected and analyzed using STATA Version 13. Data was analyzed using both descriptive and inferential statistics. A General Least Squares (GLS) model was adopted to correct the violations of ordinary Least Squares and since The P value of the wald chi-square statistic was found to be less than 0.05 this implies that GLS model fitted was generally significant. The result indicates that four variables; credit risk, liquidity risk, interest rate risk and operational risk have a negative and significant influence on financial performance. Firm size has a moderating effect on the relationship between financial risk and financial performance of deposit taking Saccos in Kenya. The study gives recommendations which include setting up a clear credit policy that will not negatively affects profitability and also they need to know how credit policy affects the operation of their DT Saccos to ensure judicious utilization of deposits and maximization of profit; DT Saccos should manage liquidity risk by reinforcing its own resources since depositors could at any time and under unexpected reasons, withdraw their deposits to seek investment elsewhere with higher returns; DT Saccos in Kenya should ensure that they adopt and implement of sound operational risk management practices.