Effect of Prudential Regulations on Financial Performance of Deposit Taking Savings and Credit Cooperatives in Kenya

Abstract

The general objective of the study was to establish the effect of prudential regulations on the financial performance of DTS in Kenya. The study was anchored on the modern portfolio theory and public interest theory. The study adopted a positivist philosophy and mixed research design with primary and secondary data for the period 2014-2020. The target population comprised 175 DTS. Primary data was collected through questionnaires by stratified random sampling on DT SACCOs Regulated by SASRA, and purposive sampling of CEOs of sampled DT SACCOs was used.

Diagnostic tests conducted included normality, heteroscedasticity, multicollinearity, autocorrelation, stationary and modern specification tests to verify data collected. Panel data analysis was used to achieve research objectives. Both descriptive and inferential statistics were used to analyze data. To assess the relationship between the independent variables, the moderator and financial performance of the DT-SACCO, a regression model was used. The analyzed data was presented in graphs, frequencies, charts, and tables which enabled interpretation, conclusions and recommendations. The study findings revealed that core capital ratio requirement had a significant and positive effect on the financial performance of DT-SACCOs in Kenya (β =0.218, t = 6.180, p < 0.05). Besides, the study found that financial investment ratio requirement had a significant and positive effect on the financial performance of deposit taking SACCOs in Kenya (β = 0.456, t = 6.180, p < 0.05).

Additionally, findings indicated that liquidity ratio requirement had a significant and negative effect on the financial performance of deposit taking SACCOs in Kenya (β = -0.109, t = 3.24, p < 0.05). The findings further determined that operating efficiency ratio requirement had a significant and positive effect on the financial performance of deposit taking SACCOs in Kenya (β = 0.098, t = 4.08, p < 0.05). Additionally, loan provisioning ratio requirement had a significant and negative effect on the financial performance of deposit taking SACCOs in Kenya (β = -0.502, t = -5.987, p < 0.05). Besides, findings indicated that SACCO size moderated the relationship between prudential regulations and the financial performance of DT-SACCOs (p < 0.05).

The study concluded that core capital ratio requirement was vital for the financial performance of DT-SACCOs in Kenya. Similarly, financial investment ratio requirement was instrumental towards the financial performance of deposit taking SACCOs in Kenya. The study also concluded that operating efficiency ratio requirement was vital for the financial performance of deposit taking SACCOs in Kenya. However, the study concludes that both liquidity requirement and loan provisioning ratio requirement were detrimental towards the financial performance of deposit taking SACCOs in Kenya. Further, the study concludes that size of the SACCO positively moderates the relationship between prudential regulations and the financial performance of DT SACCOs in Kenya.

Based on the study findings and conclusions, the study recommends to management of DT SACCOs to have an effective liquidity risk management strategy to reduce expenses, increase income, and avoid failure of the DT SACCOs due to credit risk, and maintain the viability of the DT SACCOs. Additionally, the study recommends to management of DT SACCOs that control activities must be used in the DT SACCOs to increase operational efficiency. This should include procedures like performing evaluations of performance operations and appropriate personnel authorizing and approving transactions. The study also recommends to leaders in DT SACCOs to adopt and execute effective strategies to minimize NPLs, by engaging in effective and detailed customer profiling. Lastly, management of DT SACCOs should provide their SACCO members with the finest possible customer service by educating them about investing and financial literacy.