The Effect of Asset Quality on the Financial Performance of Savings and Credit Cooperative Societies in Nairobi County

Abstract

The purpose of this paper was to assess the effect asset quality has on the financial performance of cooperative societies Nairobi County, Kenya. The study sort to identify the determinants of financial performance of the cooperative societies and further establish the nature and strength of the relationship between asset quality and financial performance of the societies. The study employed descriptive research design. Secondary data was collected from the regulator, the Sacco Societies Regulatory Authority‟s. Data was collected from the annual financial reports that are submitted to the regulator annually and also from the regulator‟s own annual supervision reports. Quantitative data was coded and entered into Statistical Packages for Social Scientists and analyzed using descriptive statistics, correlation analysis and ANOVA. Quantitative data is presented in tables while text is used to give explanations to these and qualitative data. From the analysis, the asset quality factor identified-the proportion of investment in an asset to total assets, had a fairly statistical significant effect on financial performance. This implies that asset quality is not an exclusive determinant of financial performance. Other determinants identified in the study include the asset base, liabilities, loan book, corporate governance, quality of staff and regulations. Based on the findings, a positive relationship between asset quality and financial performance was established. A small increase in asset quality could result to a higher financial performance due to reduction in provisions. Having found that cooperative invested more than 70 percent of their funds in loans and advances, the study recommends a strict determination of loan asset quality to reduce loan losses. Further research on the other factors influencing the performance would add great value to the performance of cooperatives and academic literature.