Effect of credit risk management on financial performance of deposit taking savings and credit cooperative societies in Kenya
Even though credit risk remains the largest risk facing most organizations, the practice of applying modern portfolio theory to credit risk has lagged (Margrabe, 2007). The study's objective was to determine the effect of credit risk management on financial performance of deposit taking Savings and Credit Co-operative Societies in Kenya. The researcher adopted a cross sectional survey research design in this study. The population for this study was therefore, all heads of credit risk management function in the 215 total number of deposit taking SACCOs that are under supervision by SASRA. The researcher utilized probability sampling using simple random sampling where every member of the population has an equal chance of being selected. The study's sample size (n) was thirty, which according to Mugenda & Mugenda (2003) n=30 is sufficient for such a study. Primary and secondary data was used for the study. Data analysis method was based on Pearson correlation analysis and a multiple regression model whereby the dependent variable was the financial performance of the SACCOs which was measured using Return on Equity (ROE) whereas the independent variables were the CAMEL components of Capital adequacy, Asset quality, Management efficiency, Earnings and Liquidity. Research findings indicated that the model had accounted for 62.3% of the variance in Return on Equity (ROE) of Kenyan SACCOs over the study's period, that is, 2010 - 2012. This finding indicates that 37.7% of Kenyan SACCOs financial performance was accounted for by other factors (variables) not tested in the study's model. Such factors could be related to the external business environment that the SACCOs operate in, especially the socio-economic factors that highly impact on the SACCOs customers (members) ability to save and borrow. Findings also indicated that there was sufficient evidence that the model is useful in explaining the financial performance (ROE) of Kenyan SACCOs as it was significant at 95% confidence level (p=0.002). Moreover, there was positive relationship between financial performance (ROE) and all the tested independent variables at 0.179,0.063,0.240,0.003 and 0.160 for Capital Adequacy, Asset Quality, Management Efficiency and Earnings Liquidity respectively. In line with the findings and conclusions of the study the following were recommended that on the effect of credit risk management on the financial performance of SACCOs in Kenya, management should carefully consider the Capital Adequacy, Asset Quality, Management Efficiency, Earnings and Liquidity as they all positively correlate with the Return on Equity of the SACCOs. Moreover, management of SACCOs in Kenya should ensure that adoption and implementation of sound credit risk management practices, that there is appropriate credit risk policy in place, that there is appropriate risk-return tradeoff policy, that there exists favorable internal business environment and that appropriate credit risk limits are set as they impact on the financial performance of the SACCOs. The government and other stakeholders should ensure that there is favorable external business environment for SACCOs in Kenya. Finally, with regard to the obstacles facing credit risk management by Kenyan SACCOs, management should overcome inadequate knowledge among the implementing staff/managers by providing the necessary knowledge through training and promotion of further studies in Risk Management-among their staff.