Effect of Credit Risk Management on Efficiency of Deposit Taking Savings and Credit Cooperatives in Kenya
Abstract
For financial institutions, credit risk is a significant and expensive risk. The impact caused by this risk is significant when compared to other forms of risk in the financial sector because it can render the firm insolvent. To avoid this scenario, financial institutions have to consistently conduct credit risk management. The main aim of this study was to determine the effect of credit risk management on efficiency of deposit-taking SACCOs in Kenya. The independent variables for the research were delinquency rate, value at risk and distance to default. Liquidity and SACCO size were the control variables while the dependent variable was efficiency measured as the ratio of outputs to inputs. The study was guided by financial intermediation theory, information asymmetry theory and Merton default risk theory. Descriptive research design was utilized in this research. The 175 DT-SACCOs in Kenya as at December 2020 served as target population while the sample size was the 43 DT-SACCOs in Nairobi County. 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 0.2501 R square value implying that 25.01% of changes in Kenyan DT-SACCOs efficiency can be described by the five variables chosen for this research. The multivariate regression analysis further revealed that individually, both delinquency rate and value at risk have a negative effect on efficiency of DT-SACCOs as shown by (β=-0.052, p=0.021) and (β=-0.556, p=0.006) respectively. Distance to default displayed a positive but not statistically significant influence on efficiency (β=0.005, p=0.559). The control variables which were liquidity and firm size exhibited a positive and significant influence on efficiency as shown by (β=0.146, p=0.000) and (β=0.038, p=0.002) respectively. The study recommends that DT-SACCOs should implement effective measures of managing credit risk. Specifically, the DT-SACCOs should work at reducing their value at risk and delinquency rate as these two adversely affects efficiency. Future research ought to focus on other SACCOs in Kenya to corroborate or refute the conclusions of this research, according to the report.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1411]
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