Drivers of financial stability in Deposit Taking Savings and Credit Societies in Nairobi County, Kenya

Abstract

Savings and Credit Cooperative Societies are instrumental in promoting financial inclusion and socio-economic development. Despite their essential role, many SACCOs in Kenya face significant challenges related to financial stability, which threaten their sustainability and effectiveness. The study sought to investigate the drivers of financial stability among deposit taking SACCOs in Nairobi County, Kenya. Specifically, the study reviewed the effect of firm characteristics, board characteristics and management quality on the financial stability of deposit taking SACCOs in Nairobi County, Kenya. The study was guided by the Resource-Based View theory and the contingency theory. This research adopted a positivism research philosophy as well as a descriptive research design. This research focused on collecting survey data from the 176 Deposit Taking SACCOs registered by SASRA and operating within Nairobi City County. This survey utilized quantitative data that was collected from the supervisory reports of the DTS institutions for the period 2010-2023. The collected study data was analysed using descriptive and inferential analysis. Findings were presented using figures and tables. Correlation tests showed that firm characteristics, in particular, firm age had a weak positive and insignificant relation on the financial stability of the DTS. On the other hand, firm size had a weak negative and insignificant effect on the stability of the Saccos. The second objective revealed board characteristics had a weak negative and insignificant association with stability of DTS. Correlation tests on the management quality further established a strong positive and significant relation with the stability of the DTS. Lastly, the research confirmed a weak negative and insignificant effect of non-performing loans ratio on the stability of the deposit taking Saccos. The overall results of the panel regression showed that 31.09% of the financial stability of DTS in Kenya are predicted by the management quality, board, non-performing loans, leverage and firm characteristics. This shows that the selected factors had a positive and significant effect on the financial stability of deposit taking SACCOs. The findings of the first objective indicated that there was a negative and significant effect of firm age on the financial stability of the deposit taking Saccos. The results further showed a negative and significant effect of firm size on financial stability of the deposit taking Saccos. The second objective results established that there was a positive and significant effect of board size on the financial stability of the deposit taking Saccos. Thirdly, the findings revealed that the management quality had a positive and significant effect on the financial stability of the deposit taking Saccos. The study also found a weak negative and insignificant effect of non-performing loans financial stability of the deposit taking Saccos. The study confirmed that leverage had a negative and significant effect on the financial stability of the deposit taking Saccos. The study was beneficial to policymakers, various stakeholders and other scholars. The study provides insights into the financial stability of SACCOs, aiding policymakers in refining regulatory frameworks to ensure the robustness and sustainability of the sector. The study also provides SACCO managers with a clear understanding of critical financial stability factors, risks and challenges, enabling them to implement best practices as well as robust risk management strategies to safeguard their institutions and improve operational efficiency. The study further adds to the existing body of literature on SACCOs, financial stability, and financial institutions, providing a foundation for future research. There were certain limitations that were encountered through the study. The analysis was restricted to Nairobi deposit-taking Saccos operating between 2010 and 2023; However, it is possible that certain Saccos were either not operating during this time or were just starting up, which could have led to the formation of unbalanced panels. Moreover, there may have been changes in SACCO regulations and financial policies during the study period which may have influenced the accuracy of the data. The study recommends that policymakers should strengthen regulatory oversight and enforce stricter compliance measures to enhance the financial stability of deposit-taking SACCOs. The study also recommends that institutions should focus on operational efficiency rather than just growth as well as prioritize capital adequacy through prudent financial management. Further research could also be conducted to explore additional factors beyond firm characteristics, board characteristics, and management quality which may provide further insights into SACCO financial stability.