Determinants of Capital Structure and Financial Performance of Deposit Taking Savings and Credit Cooperative Societies in Kenya

Abstract

Capital structure is one of the fundamental aspects to the success of every institution, including Deposit-Taking Savings and Credit Cooperative Societies as it can, to a considerable extent, influence the realization of its objectives and goals. The general objective of the study was to, establish the effect of determinants of capital structure on the financial performance of Deposit-Taking Savings and Credit Cooperative Societies in Kenya. The specific objectives were, to determine the effect of individual determinants of capital structure namely; leverage, firm size, assets growth, liquidity, dividend payout and tangibility of assets, on the financial performance of Deposit-Taking Savings and Credit Cooperative Societies, to establish the combined effect of the determinants of capital structure on the financial performance of Deposit-Taking Savings and Credit Societies in Kenya and finally to assess the moderating effect of corporate governance on determinants of capital structure and the resultant effect on the financial performance of Deposit-Taking Savings and Credit Cooperative Societies in Kenya. The study was grounded on Tradeoff, Pecking order, Free cash flow, and Mogdiliani and Miller capital structure theories. The research philosophy was positivist, and the study utilized a mixed research design with primary and secondary data for the period 2013 to 2017. Mixed method research provides more comprehensive evidence for studying a research problem than either quantitative or qualitative research alone; hence, why its most suited for this study. The population of the research study was 174 Deposit Taking Savings and Credit Cooperative Societies. Stratified and purposive sampling technique was employed. Panel data analysis was used to achieve the research objectives. Both descriptive and inferential statistics were used to analyze the data. To predict the relationship between the independent variables, the moderator and financial performance of the Deposit-Taking Savings and Credit Cooperative Societies, a regression model was used. The study findings revealed that first leverage had a significant but negative effect on financial performance measured as Return on Assets. Secondly, the study findings further revealed that the determinants of capital structure namely; firm size, assets growth, liquidity, dividend pay-out, and tangibility of assets had a significant and positive effect on financial performance measured as Return on Assets.In addition the study findings revealed that the combined determinants of capital structure have a significant and positive effect on financial performance. Finally the study findings revealed that corporate governance had a significant moderating effect on determinants of capital structure hence influencing the financial performance of Deposit Taking Savings and Credit Cooperative Societies in Kenya. The study concluded first that the individual determinants of capital structure; leverage, firm size, asset growth, liquidity, dividend pay-out, and tangibility of assets play a significant role in the financial performance of Deposit Taking Savings and Credit Cooperative Societies. The study further concluded that the combined effect of the determinants of capital structure on financial performance was significant and positive hence should all be monitored with emphasis put on enhancing those with higher positive relationship. Finally the study concluded that corporate governance, an essential aspect of management also has a significant moderating effect on the determinants hence improved corporate governance would, all factors held constant, lead to an even more significant effect of the determinants of capital structure and consequently on financial performance. The study recommends having in place an Assets and Liabilities committee in each Deposit Taking Savings and Credit Cooperative Society that would help manage the assets and liabilities of the institution, ensuring sound liquidity and cash flow management. Having in place a robust dividend policy that addresses matters relating to dividends management is also crucial. Adequate policies relating to borrowing and utilization of the same is critical; there is also a need to address alternative sources of external funding in the event raising internal funds becomes a challenge. Critical factors that contribute to assets growth such as increased membership, deposits mobilization amongst others need to be addressed. Finally, best practices in terms of corporate governance is a critical factor in improved performance. The study recommends for further research; first use of other indicators to measure the determinants, second, other than corporate governance, what other moderating variable can affect the determinants, third the impact of the inclusion of non-withdrawable deposits when measuring liquidity and finally carrying out the study per tier classification and comparing and contrasting the results.