Effect of Capital Adequacy on the Financial Performance of Deposit Taking Savings and Credit Societies in Meru County, Kenya

Abstract

Savings and Credit Cooperatives are financial institutions formed to enhance the economic well-being of their members by mobilising savings and granting loans. According to a report published by the World Cooperative Monitor by the year 2017, there were more than 1.2 billion persons globally who belonged to one of the 3 million co-operatives in the world. Kenya has one of the largest SACCO movements in the world with the members mobilising more than Kshs. 400billion in savings which are approximately 33% of the nationalsavings. Over the years the Savings and Credit Cooperatives have expanded significantly and have even started offering front offices services. As the significance of the cooperatives has grown so have the risks associated with their failure. Due to the risk posed by the possible failure of these cooperatives to the economy, the government through the SavingsandCooperatives Actof2008 and subsequent regulations have made an effort to regulate these cooperatives. The purpose of this research project was to investigatetheeffect of capital adequacy requirements on the financial performanceofdeposit-taking savingsandcredit cooperatives in Meru Count.y, Kenya. The study was anchored on the propositions put forward in the Anticipated Income Hypothesis, Capital Buffer Theory, and Moral Hazards Theory. The study used non-experimental research design. The studyusedsecondarydatacollected from the audited annual financialstatements of the 14deposit-taking savingsandcredit cooperatives in Meru County, Kenya. The study used panel data regressionanalysisto evaluate the effect of the dependent variables on the independent variables. The regression equation was estimated using STATA 14.0 software. The study established that the ratio of core capitaltototal assets had a negative and statistically significant effect on return on assets. The study determined that the ratio of core capital to total deposits had a negative but statisticallyinsignificanteffect on returnonassets. The study established that the ratio of institutional capital to total assets and size had a positiveand statistically significant effect on the returnonassets. Thestudy recommended that the statutory level of core capital required should be reduced as it was impairing the financial performanceof the firms.