Effects of credit policy on the liquidity of deposit taking saccos in Nairobi county

Abstract

Liquidity is the ability of a financial institution or the ability of an organization to meet its financial obligation as they fall due. Liquidity is an important aspect in a company when achieving overall short and long terms financial objective while also maximizing the owner’s wealth and protecting them against the dynamics in the market. In SACCOs liquidity is important as lack of liquidity or liquid assets leads to bankruptcy as the institution will not be able cover for its cash demands as they fall due. Therefore managing liquidity is a top priority of deposit taking SACCOs. To manage liquidity effectively a good understanding of the factors affecting liquidity is critical. The current study wanted to find out the effect of credit policy on the liquidity alongside other factors such as the size, capital, collection policy and the duration of loans. To facilitate this, a research was done on deposit taking SACCOs operating within Nairobi. The data on the liquidity, size and policies was collected from 38 SACCOs for the period between 2011 and 2015 and analyzed using descriptive statistics and inferential statistics such as correlation and multiple linear regressions. The study found that credit policy, capital adequacy and the size (assets) significantly affect the liquidity of the SACCOs while duration of the loan and the collection policies had neither significant relationship nor effect on liquidity. To effectively maintain favorable levels of liquidity, it was recommended that financial institutions capitalize on review of credit policies and growth of their firms to increase their Capital and assets to efficiently maintain an appropriate level of liquidity. This would ensure that both short and long term financial obligations are adequately met and operations of the SACCOs run smoothly.