Interest Rate Drivers and Financial Performance of Deposit Taking Savings and Credit Co-operative Societies in Kenya

Abstract

Deposit taking Savings and Credit Co-operative Societies in Kenya are important due to the role they play in financial intermediation. The deposit taking SACCOs pool members’ deposits and issue loans to them at predetermined rate of interest. Financial performance of deposit taking SACCOs is highly dependent upon interest income they receive from loans. Interest rate levied on borrowers for use of money has in the recent past become a very sensitive factor in the operation of lending institutions. Borrowed funds from banks and MFIs attract interest cost which fluctuates depending on prevailing economic factors in the country. This is unlike in deposit taking SACCOs where the interest rate has for a long time been adopted at favorable rate of 12% annually on loans issued to members. The interest rate drivers in the market affect the cost of funds to financial intermediaries like banks, MFIs and hence financial performance of DT- SACCOs. The objective of this study was on interest rate drivers and the financial performance of deposit taking SACCOs in Kenya. Due to the competitiveness among financial intermediaries and the influence the interest rate has on financial intermediation, this study specifically sought to establish how monetary policy, inflation, credit risk and liquidity risk influence financial performance of deposit taking SACCOs in Kenya. The study used a descriptive survey research design. Stratified random sampling technique was applied on a population of 528 top managers in 176 deposits taking SACCOs in Kenya. Secondary data was obtained from books, reputable journals, annual audited financial reports of deposit taking SACCOs, the government and semi-autonomous government agencies (SAGAs). Primary data was collected through self-administered semi-structured questionnaires. Descriptive and inferential statistics were used to analyze the data. The descriptive analytical statistical methods employed were frequency tables, mean, variances and standard deviations. The inferential statistical tools used were product moment correlation coefficient and multiple regression analysis. The regression results revealed that credit risk and liquidity risk had negative coefficients of -1.49 and -0.139 respectively while monetary policy and inflation had a positive coefficients of 1.09 and 0.09 respectively. At 5% significance level, the coefficients of inflation, credit risks and liquidity risk were significant with their p-values being less than the critical value of 0.05 while the coefficients of monetary policy was insignificant with their p-values greater than the critical value. The outputs before and after moderation revealed that deposit taking SACCO size moderated the relationship between interest rate drivers and the financial performance of deposit taking SACCOs. The mean of regression coefficients before moderation was -0.105 which increased after moderation to 0.512. Following the running of t-test, the p-value of t was established to be 0.045 which is below the critical value of 0.05 hence the study found that Sacco Size was a significant moderator of the relationship between interest rate drivers and financial performance of deposit taking SACCOs. The study recommends that deposit taking SACCOs policy makers to come up with effective strategies on credit and liquidity risk management to ensure the sustainability. Additionally, since deposit rates are usually lower than the lending rates in an environment where loan demand is high, deposit taking SACCOs should come up with strategies to minimize their operational costs as this reduces their profit margin.