Effect Of Diversification Strategies On Financial Performance Of Deposit Taking Savings And Credit Cooperative Societies In Nairobi County, Kenya

Abstract

Theories, for example the modern portfolio theory, the agency theory and the resource based theory suggest that diversification has a close relation to the financial performance of the diversifying institution. The modern portfolio theory suggests that diversification improves returns while controlling risk. The agency theory confirms that performance and diversification have a relation which is dependent on the principal-agent relationship in the organization. The intent was to determine how diversification impacts performance of DT-SACCOs in Nairobi County. The population included 43 DT-SACCOs in the County. The predictor variables were diversification given by Herfindahl Hirschman Index (HHI), management efficiency given by the ratio of total revenue to total assets, age of a firm given by the number of years in existence, firm size by natural log of total assets and liquidity given by liquid assets to total assets. Financial performance was the response variable given by ROA. Secondary data for 5 years was obtained annually. A descriptive cross-sectional design and a regression model were used in analysis. SPSS version 23 was utilized for this function. An R-square value of 0.455 which meant that 45.5 percent changes in performance of DT-SACCOs in Nairobi result from the independent variables was found while 54.5 percent variations were the result of additional factors not considered. The independent variables had a substantial correlation with value(R=0.674). ANOVA showed that F statistic was substantial at 5% with a p=0.000, making the model appropriate. The findings also showed that diversification, liquidity and firm size had positive substantial values in the study. Management efficiency and age of the firm was insignificant to performance. The study recommends the need for DT-SACCOs in Nairobi County, Kenya and other SACCOs in general to diversify their revenue streams as this significantly influences their financial performance.