The Effect of Core Capital on the Financial Performance of Deposit Taking Saccos in Nairobi County

Abstract

The purpose of the study was to investigate the effect of core capital ratio on the financial performance of deposit taking savings and credit cooperative societies in Nairobi County. The study sought to answer the question: What is the effect of core capital ratio on the performance of SACCOs? The study evaluated the requirements for SACCOs in Kenya as out lined by the SASRA as well as the requirements for SACCOs specified by central bank of Kenya. An analysis of strategies that these institutions have undertaken to adhere to capital adequacy regulations, as enforced by their respective regulatory bodies, has also been described. The design of the research was a descriptive study that sought to detail the effect of core capital adequacy on SACCOs. The population under study was the Front office Savings Activity, FOSA, operating SACCOs within Nairobi County whereby a sample of 40 SACCOs were selected randomly. Secondary data was used and the analysis was undertaken using SPSS software to determine any correlations and frequencies within the data. The study concluded that SACCOs performance are affected by core capital significantly from the regulations in various ways such as, managing credit risk, improved public confidence, providing a safety net for members’ deposits, provision of operating capital, increased lending capacity, providing a base for future growth, and preventing insolvency. SACCOs had faced various challenges in complying with capital adequacy regulations. These were reduced pay-out on members’ funds, recruitment of new members, restricted avenues for investment, and reduced lending capacity. The SACCOs had engaged in strategies to meet capital adequacy. Of these strategies, SACCOs found issuing new capital, increasing membership base, diversifying product base, adjusting dividend pay-out ratio, stricter. The study recommends that managers of the SACCOs closely adhere to the requirements provided by regulation so as to continue to reap the benefits discussed in this study. Further, the study recommended a review of their lending rates via cost pricing methods.