Asset Quality and Financial Performance of Deposit Taking Savings and Credit Cooperative Societies in Kenya

Peter Njuguna Wanjiru (), Dr. Ambrose Jagongo () and Dr. Bancy Muchira ()

American Journal of Finance, 2024, vol. 10, issue 3, 43 - 54

Abstract: Purpose: To investigate the effect of asset quality on the financial performance of Deposit Taking Savings and Credit Co-operatives in Kenya. Materials and Methods: The study considered a target population of 176 DT SACCOs operating in Kenya between 2018 and 2022. The study adopted the inclusion-exclusion criteria to come up with a sample that consisted of 159 DT SACCOs. Secondary quantitative data were collected from the financial reports using data extraction tools. The study inclined towards positivism philosophy and adopted explanatory research design. Data were analyzed using Stata, where both descriptive statistics and inferential analysis were conducted. Diagnostic tests carried out included the test of normality, heteroskedasticity, multicollinearity, autocorrelation, stationarity and the Hausman test. Analyses were conducted at 95% confidence interval. Findings: Descriptive statistics showed a high negative correlation coefficient (-89.21%) between asset quality and financial performance of DT SACCOs in Kenya. Inferential analysis showed that asset quality had a negative significant effect on the financial performance of DT SACCOs in Kenya. This implied that an increase in asset quality would result in a decrease in financial performance, holding all other predictors at constant. Implication to Theory, Practice and Policy: The study supported the asymmetric information theory because inadequate credit information from borrowers results in higher non-performing loans (NPLs). DT SACCOs should maintain an updated database of their member’s credit information. Subsequently, members credit score history from credit reference bureau (CRBs) should be availed and analyzed when giving loans to borrowers. This will ensure that there is adequate information at hand to assess members credit history and avoid asymmetric information. On the other hand, DT SACCOs should develop effective credit administration strategies in order to reduce the non-performing loans (NPLs). These include effective credit policies that aim at improving on their asset quality. Besides, the regulator should regularize on credit information sharing amongst the DT SACCOs and other financial institutions. DT SACCOs should be compelled to share both positive and credit negative credit information of their members to the Credit Reference Bureaus. Besides, the government should legislate on mechanisms to enforce employers who we reluctant to remit SACCO deductions in time.

Keywords: Asset Quality (G210); Financial Performance (M410); DT Savings; Credit Cooperative Societies (G210); Return Assets (M410); Non-Performing Loans (G210) (search for similar items in EconPapers)
Date: 2024
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