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

Abstract

Risk is a major factor among financial institutions. Financial institutions should make sure that their exposure to risks is lowered because they influence their main goal which is to lend credit and enable clients to save funds efficiently. Risk management practices determine the capacity a firm in realizing high efficiency which leads to superior performance and sustainability of a firm. The main aim of this study was to determine the effect of risk management practices on financial performance of DT-SACCOs in Kenya. The independent variables for the research were credit risk management, liquidity risk management, operating risk management and market risk management. Capital adequacy and firm size were the control variables while the dependent variable was financial performance measured as ROA. The study was guided by financial intermediation theory, liquidity preference theory and operational risk theory. Descriptive research design was utilized in this research. The 175 DT-SACCOs in Kenya as at December 2021 served as target population. The study collected secondary data for five years (2017-2021) 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 0.5304 R square value implying that 53.04% 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 the liquidity risk management plus credit risk management have an adverse influence towards ROA of DT-SACCOs as shown by (β=-0.1632, p=0.000) and (β=-0.1596, p=0.000) respectively. Operating risk and interest rate risk showed non statistical significance although positive effect on ROA. The control variables which were capital adequacy and entity size exhibited a notable positive ROA impact as shown by (β=0.6852, p=0.000) and (β=0.8561, 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 financial institutions in Kenya to corroborate or refute the conclusions of this research.