Effect of Financial Risk on Efficiency of Deposit Taking Savings and Credit Cooperatives in Nairobi County, Kenya

Abstract

Financial risk can lead to failure of SACCOs in their quest to realize expected level of efficiency. This is due to uncertainties that make it difficult to execute financial plans effectively. Equally the existence of possible defaults on credit commitments, volatile interest rates, liquidity problems and variations in foreign exchange rates negatively affect use of the available assets and hence efficiency. The main aim of this study was to determine the effect of financial risk on efficiency of deposit-taking SACCOs in Nairobi County, Kenya. The independent variables for the research were credit risk, and liquidity risk. Operating risk, capital adequacy and SACCO size were the control variables while the dependent variable was efficiency measured as the ratio of outputs to inputs. The study was guided by financial intermediation theory, information asymmetry theory and stakeholder theory. Descriptive research design was utilized in this research. The 43 DT-SACCOs in Nairobi County, Kenya as at December 2020 served as target population. The study collected secondary data for five years (2016-2020) on an annual basis from SASRA and individual DT-SACCOs annual reports. Descriptive, correlation as well as regression analysis were undertaken and outcomes offered in tables followed by pertinent interpretation and discussion. The research conclusions yielded a 0.703 R square value implying that 70.3% of changes in DT-SACCOs efficiency can be described by the five variables chosen for this research. The multivariate regression analysis further revealed that individually, both credit risk and liquidity risk have a negative effect on efficiency of DT-SACCOs as shown by (β=-229, p=0.014) and (β=-0.328, p=0.000) respectively. Operating risk displayed a positive but not statistically significant influence on efficiency (β=0.006, p=0.691). Capital adequacy and firm size exhibited a positive and significant influence on efficiency as shown by (β=0.179, p=0.017) and (β=0.777, p=0.000) respectively. The study recommends that DT-SACCOs should implement effective measures of managing financial risk. Specifically, the DT-SACCOs should work at reducing their liquidity risk and credit risk as these two adversely affects efficiency. Future research ought to focus on other SACCOs in Kenya to corroborate or refute the conclusions of this research.