The Effect of Financial Risks on the Return on Investments for Deposit Taking Saccos in Kenya

Abstract

The Sacco Societies Regulatory Authority (SASRA) which is a statutory state corporation established under the Sacco Societies Act (Cap 490B) of the Kenyan law was set up and the guiding Regulations 2010 became operational from June 18th in 2010. The regulatory body from then standardized the operations by setting guidelines for operations and regulatory requirement that the DTSs must adhere to for their licenses to operate deposittaking services to be granted. The study focus was on the period post the regulatory body set up because is the period the DTSs operations were in harmony by being standardized by the guidelines and regulations put in place. Thus analysis of the financial reports was hence possible as the DTSs were subject to the same reporting standards. The objective of the study was to establish the effect of financial risk on the return on investment for DTSs in Kenya. The study sought to bridge the knowledge gap that exists on the area relating to financial risks and return on investment in Deposit Taking SACCOs since previous studies done on DTSs had not focused this particular subject. The study reviewed the studies that have been done on areas around and related to financial risks and return on investment around the world. A brief history of the SACCO sector in Kenya to the emergence of DTSs was discussed to help readers understand the background of the study. The study type conducted was a census focusing on DTSs in Kenya based on industry statistics. Secondary data was used for this study and data was analyzed using Statistical packages for social sciences software- SPSS 2.0. Descriptive data analysis was conducted using linear regression model to analyze data in this study. Financial analysis on the DTSs’ performance was carried out. The study focused on four independent variables whose effect on the dependent variable was predicted. The dependent variable in this study was return on investment using the measure of return on assets. The independent variables were financial risks, capital adequacy, management efficiency and asset quality. The results of the data analysis indicates that financial risks has significant effect on the return on investment for DTSs. The study shows that in addition to the financial risks, other determinants of return on investments have significant effect on return on investment which are capital adequacy, management efficiency and asset quality. The study indicated that the variables under study are correlated to one another. Financial risks is strongly presented as an important factor determining the return on investments for DTSs in Kenya. For the DTSs to achieve desired growth and maintain an increasing trend on return on investments, management should be proactive on implementation of financial risks management tactics and adoption of policies that strive to mitigate financial risks to be able to maintain the risks at the minimum levels possible. The expectation is that the findings of this research will assist in filling that knowledge gap and contribute to further research on unexplored aspects of performance and operations of DTSs as well as related financial institutions. The study recommends that SASRA regulatory body should intervene and set limits for the other key financial soundness indicators beyond the capital adequacy ratios which they have already implemented. The other key financial soundness indicators referred to here are asset quality, earnings& profitability and liquidity. Regulatory bodies should implement policies that safe guards use of members savings in DTSs against misuse by the management teams. The study also authorities should set limits of the level of investments in assets that are not explicitly classified into either financial investments orproperty plant and equipment which are blankly referred to as other assets should be, this being measured as other assets value expressed as a percentage of total assets value.