The Effect of Liquidity on the Return on Investments for Saccos in Nairobi

Abstract

The coming into force of the SASRA regulations in Kenya changed the way deposit-taking Saccos managed their business. Capital adequacy requirements and liquidity thresholds were introduced. To meet these requirements, Saccos had to reduce on the interest rebates to their members while also retaining more to build on their institutional capital. This study’s main objective was to establish the effect that liquidity has on the investments in the deposit-taking Saccos in Nairobi. It also looked at how this liquidity was related to other variables such as capital adequacy and management efficiency. It also looked at whether capital adequacy and management efficiency had a role to play in the investments of these Saccos.The study applied a descriptive analysis approach usingregression analysis to analyse the data collected. A random sample from the population of SASRA licensed Saccos in Nairobi was taken and secondary financial data collected for the Saccos in this sample. A linear regression model of the returns on investments versus liquidity and capital adequacy was used to test the relationship between the variables.The study found that liquidity had a positive impact on the return on investments in the Saccos while capital adequacy had a negative influence on the returns. Given thispositive effect of liquidity on the returns in investment, the study recommends that the regulations regarding management of liquidity in the deposit-taking Saccos be reviewed to allow the Saccos diversify their investments in high earning portfolios such as listed companies. In addition the study recommends that a central depository fund for Saccos be set up to help Saccos have a cheaper avenue for short term borrowing to help address seasonal liquidity challenges. The study also recommends that the taxation laws regarding withholding tax in financial institutions be clearly expounded to protect the Saccos from double taxation when they put their funds in term deposits with banks.