Effects of Financial Soundness on the Profitability of Deposit Taking Saccos in Kenya

Abstract

In the realm of business, the pursuit of stability financially is paramount, as it signifies an enterprise's ability to fulfill its financial commitments. This financial soundness is, in turn, a direct result of prudent financial decision-making, which serves as a catalyst for organizational growth and the attainment of strategic goals. The core objective of this study was to delve into the intricate relationship between financial soundness and the profitability of deposit-taking Savings and Credit Cooperative Societies (SACCOS) operating in Kenya. To obtain data that would be both relevant and fitting for the study's objectives, a systematic random sampling approach was meticulously employed. This meticulous method led to the selection of 50 firms, carefully chosen by selecting every third element from the comprehensive list of Deposit-Taking SACCOS (DTS). This approach was dictated by the presence of 150 DTS entities in the year 2020, as reported by SASRA in 2021. Notably, this research predominantly relied on quantitative secondary data, a method chosen for its inherent advantages. These benefits include its capacity to facilitate comparative analyses, its ability to reduce resource requirements, its applicability in longitudinal studies, and its provision of data permanence over time. The outcomes of the regression analysis undertaken in this study have provided illuminating insights into the relationships between various financial factors and profitability. Regression coefficient for capital adequacy emerged as statistically significant and positively oriented (β = 0.027, p = 0.000 < 0.05). This signifies that an increase of one unit in capital adequacy is associated with a substantial 0.027-unit enhancement in the performance financially of Kenyan deposit-taking SACCOs. Additionally, analysis pointed out that the coefficient for liquidity was both statistically significant and positively inclined (β = 0.003, p = 0.020 < 0.05). In practical terms, this suggests that a one-unit increase in liquidity corresponds to a noteworthy 0.003-unit improvement in profitability. as a consequence, regression results demonstrated that the coefficient for management efficiency was statistically significant and positively oriented (β = 0.020, p = 0.047 < 0.05). This implies that a unitary augmentation in management efficiency leads to a significant 0.020-unit improvement in profitability. In light of that, analysis underscored the statistical significance and positive orientation of the coefficient for asset quality (β = 0.063, p = 0.000 < 0.05). Essentially, this indicates that a one-unit improvement in asset quality results in a substantial 0.063-unit enhancement in profitability. on the other side, regression analysis revealed that the coefficient for firm size was both statistically significant and positively inclined (β = 0.003, p = 0.028 < 0.05). This signifies that an improvement of one unit in firm size corresponds to a significant 0.003-unit improvement in profitability. whereas results pointed out that the coefficient for the lending rate was both statistically significant and positively oriented (β = 0.001, p = 0.048 < 0.05). In practical terms, this suggests that a one-unit increase in the lending rate results in a noteworthy 0.001-unit enhancement in profitability. In summary, this study highlights the intricate web of financial factors that impact the profitability of deposit-taking SACCOs. It underscores the paramount importance of financial soundness and prudent financial management in these cooperative societies. Additionally, the study emphasizes the need for ongoing research endeavors, specifically focusing on the infrastructural capabilities and performance financially of these entities. Such research can offer valuable insights for policymakers, practitioners, and stakeholders in the financial sector, ultimately contributing to the growth and sustainability of deposit-taking SACCOs.