The effect of loan loss provisioning on profitability of deposit taking Sacco societies in Nairobi county

Abstract

Weaknesses in the Kenya banking system became apparent in the late 1980s and were manifest in the relatively controlled and fragmented financial system. According to Sacco Supervision Report (2011), the licensed Deposit Taking Saccos (DTS) non-performing loans (NPLs) which comprised watch, substandard, doubtful and loss loan accounts constituted 9.6% of the gross loan portfolio. This level of NPL is very high and underlines the need for the Sacco subsector to strictly enforce the credit policies to minimize the credit risk and thus loan loss provisions. The guarantee system that Saccos apply in lending to member should further cushion the Saccos exposure to bad loans. This study sought to fill the existing knowledge gap by answering the question; what are the effects of loan loss provisioning on profitability of Deposit taking Sacco’s in Nairobi County? This study was intended to establish the effect of loan loss provisions on DTS profitability. In order to achieve this objective, the study was designed to collect and analyse the relevant data from Saccos financial statements that were licensed by SASRA from 2010 in Nairobi County. In order to establish the effect of loan loss provisioning on licensed DTS profitability, secondary data was obtained from SASRA for period of four years from 2010 to 2013. Regression model on data from a sample of 45 DTS registered in Nairobi County was used to test the variables. The findings of the study confirmed that there exists a negative relationship between loan loss provision and profitability of deposit taking Saccos in Nairobi County. Upon examining other variables that have an impact on profitability of deposit taking Saccos, the following control variables depicted a positive relationship with profitability of deposit taking Saccos; size of the Saccos, Loan intensity and Quality of Management. The positive relationship between profitability of deposit taking Saccos and size of the Sacco shows that profitable Saccos are bid in size in terms of their asset base. Quality of management was found to have positive relationship with profitability of deposit taking Saccos. The reason may be that Saccos with skilled management team who are well remunerated are able to manage and reduce non-performing portfolio’s hence reducing loan loss provision which positively influence their performance. The positive relationship between profitability of deposit taking Saccos and loan intensity is an indication that increase in amount of loans leads to profitability of deposit taking Saccos, as the study found that a unit increase in loan intensity leads to unit increase in profit of deposit taking Saccos.