The Effect of Liquidity on the Financial Performance of Deposit-taking Saccos in Nairobi County, Kenya

Abstract

Corporate liquidity refers to a company's ability to overcame challenging business situations, when necessary, by having access to cash and close cash equivalents that could help it pay its obligations, particularly those that are short-term. Since preserving deposits is a financial institution's main responsibility, liquidity is crucial for the sustainability of any organization in this regard. In SACCOs, depositors undertake to save in the short-term and borrowers borrow in the long-term, thus exposing SACCOs to asset/liability mismatch. By being subjective in loan assessments and disbursement, these financial institutions have been aggravating this liability/asset mismatch. In this study, the financial performance of deposit-taking SACCOs in Nairobi County was evaluated in relation to the impact of liquidity. Profitability and efficiency were utilized in the study to gauge financial performance. Leverage, liquidity and credit management were among the independent study's variables. The sampled DT-SACCOs were 20 but data was accessible for 15 SACCOs. This study sourced secondary data from SACCOs Statistics database for the period 2017 to 2020. Results show that Liquidity has a positive and significant effect on DT- SACCO’s’ financial performance. The findings were positive and significant for both profitability and efficiency. Credit management had a negative but insignificant association with financial performance. The findings were negative and insignificant for profitability and efficiency. Leverage also had a negative and insignificant association with financial performance. The results for profitability and efficiency revealed negative and insignificant association. Operational efficiency had a positive and significant association with financial performance. The research opines that DT-SACCOs continue improving their liquidity to improve performance. In addition, regulators like SASRA should develop policies to help SACCO maintain their profitability, such as establishing minimum liquidity criteria. The results indicate that leverage is crucial to DT-SACCOs. Therefore, managers should minimize their use of debt finance. The study also recommends managers of SACCO’s to prioritize short-term debts over long-term debts when financing their activities to produce beneficial financial results. Further, SACCOs, must be meticulous and strict during the loan evaluation process. SACCO’s should think about providing training to successful loan applicants to guarantee that the money will be used as intended and result in some returns.