Effect of Financial Risk Management Practices on Financial Performance of Deposit Taking Savings and Credit Cooperatives in Nairobi County, Kenya

Abstract

Deposit taking-SACCOs play a role in financial intermediation. Despite this, some of them lack prudent financial risk management practices as evidenced by unremitted deductions by employer institutions or borrowers’ default and unskilled staff. This renders them susceptible to de-licensing for having financial vulnerabilities thereby, putting the 341 billion shillings’ member funds at risk. Even with the government's investment in a regulatory authority to ensure that DT-SACCOs follow regulations and are financially viable, this remains an issue. The main aim of this study was to determine the effect of financial risk management practices on ROA of deposit-taking SACCOs in Nairobi County, Kenya. The independent variables for the research were credit risk management, liquidity risk, liquidity risk management, operating risk management and interest rate risk management. Capital adequacy and SACCO size were the control variables while the dependent variable was financial performance measured as ROA. The study was guided by information asymmetry theory, shiftability theory and financial intermediation theory. Descriptive research design was utilized in this research. The 43 DT-SACCOs in Nairobi County, Kenya as at December 2020 served as target population. The study collected secondary data for five years (2016-2020) on an annual basis from SASRA and individual DT-SACCOs annual reports. Descriptive, correlation as well as regression analysis were undertaken and outcomes offered in tables followed by pertinent interpretation and discussion. The research conclusions yielded a 0.645 R square value implying that 64.5% of changes in DT-SACCOs ROA can be described by the six variables chosen for this research. The multivariate regression analysis further revealed that individually, both credit risk and liquidity risk have a negative effect on ROA of DT-SACCOs as shown by (β=-157, p=0.000) and (β=-0.160, p=0.000) respectively. Operating risk and interest rate risk displayed non-statistically significant influence on ROA. Capital adequacy and firm size exhibited a positive and significant influence on ROA as shown by (β=0.739, p=0.000) and (β=0.293, p=0.000) respectively. The study recommends that DT-SACCOs should implement effective measures of managing financial risk. Specifically, the DT-SACCOs should work at reducing their liquidity risk and credit risk as these two adversely affects ROA. Future research ought to focus on other SACCOs in Kenya to corroborate or refute the conclusions of this research.