Relationship between Microeconomic Variables and Liquidity Risk among Saccos Regulated by Sacco Societies Regulatory Authority in Nairobi County

Abstract

Liquidity management practice is a function of internal controls put in place. Micro Finance Institutions internal controls system significantly affects its liquidity risk management practices. Basel I framework outlines on importance of internal controls in managing banks liquidity. The research aimed at establishing the relationship between microeconomic variables and liquidity risks among SACCOs registered by SASRA in Nairobi County. The study was anchored on liquidity preference theory, the trade-off theory of liquidity as well as the agency theory. The research made use of a descriptive study design. The population of the study was 35 SACCOs in Nairobi County registered by SASRA and that have been in operation during the period 2012 to 2016. The research used secondary information that was obtained from the published financial reports of the SACCOs for the five-year period commencing 2012 up to 2016. The secondary information was gathered by the use of data collection guide. Data was collected on absolute values of current assets, current liability, total assets, equity, total debt, total capital and non-interest expense. The collected data was therefore sorted, coded and analytically prearranged in a way that can facilitate the analysis through the use of the Statistical Package for Social Sciences (SPSS). Quantitative analysis was used through the descriptive statistics like measure of the central tendency so as to produce the appropriate mean, percentages, and median, mode and frequency counts where possible. A regression analysis was applied so as to determine the connection between microeconomic variables and liquidity risks. The coefficient of determination (R2) was utilized to calculate the degree to which the variation in interest rate spread is explained by the micro economic variables. Fstatistic was calculated at 95% confidence level to test whether there is any significant relationship between micro economic variables and liquidity risks among SACCOs registered by SASRA in Nairobi County. The study established that leverage is positively and significantly related to liquidity risk in among Saccos regulated by Sacco society’s regulatory authority in Nairobi County. The study established that managerial efficiency is positively and significantly related to liquidity risk in among Saccos regulated by Sacco society’s regulatory authority in Nairobi County. The study also established inflation and GDP as control variables are significantly related to liquidity risks. The study concluded that leverage had the greatest effect on liquidity risk followed by firm size then capitalization then managerial Efficiency then inflation while GDP had the least effect on liquidity risk. The study recommends that commercial banks focus on maintaining high level of liquidity and management efficiency to enhance their performance by cushioning themselves against operational risk and that Sacco’s management should ensure the availability of sufficient funds to meet future demands of providers and borrowers, at reasonable costs and that Saccos need to consider all pertinent issues before issuing dividends.