Factors influencing the financial performance of SACCOs in Kenya: a comparative analysis of regulated Deposit Taking SACCOs versus Non-Deposit Taking SACCOs

Abstract

Savings and Credit Cooperatives (SACCOs) are a vital component of Kenya’s financial system, fostering financial inclusion by extending credit and savings services to underserved populations. However, performance disparities between Deposit-Taking (DT) and Non-Deposit-Taking (NDT) SACCOs remain underexplored. While previous studies have predominantly focused on regulated DT SACCOs, limited comparative analysis exists on how selected financial ratios and operational strategies influenced financial performance across both categories. Anchored in Agency Theory and Asymmetric Information Theory, this study sought to fill that gap by examining key determinants of performance and strategic differences between DT and NDT SACCOs in Kenya. The study adopted a mixed-methods approach, combining quantitative analysis of panel data from 357 regulated SACCOs between 2020 and 2023 using a fixed effects model, with qualitative insights from thematic analysis of primary data collected from 43 SACCOs. Financial performance represented by return on assets (ROA) was assessed using ratios from financial indicators, capital adequacy, liquidity, efficiency, and asset quality. The study also incorporated management perspectives on operational strategies to contextualize quantitative findings. The findings revealed that DT SACCOs exhibited superior financial performance in terms of capital adequacy, liquidity, and profitability, largely due to stronger regulatory oversight and access to deposits. However, they also experienced operational inefficiencies attributed to high compliance and administrative costs. In contrast, NDT SACCOs, though limited in capital mobilization and external funding, benefited from leaner structures, greater cost-efficiency, and closer member engagement, particularly in managing credit risk and asset quality. These results affirm the relevance of Agency Theory, highlighting how regulatory governance enhances financial stability in DT SACCOs but can also introduce inefficiencies. At the same time, Asymmetric Information Theory explained how NDT SACCOs leverage trust-based lending and informal governance mechanisms to maintain stable operations despite resource constraints. The study contributes to literature in cooperative finance by offering empirical insights into the differential performance drivers of DT and NDT SACCOs and underscores the need for targeted policy reforms to enhance operational efficiency, financial sustainability, and regulatory responsiveness in Kenya’s SACCO sector.

Key Words: Deposit-Taking SACCOs, Non-Deposit-Taking SACCOs, Financial Performance, Capital Adequacy, Asset Quality, Efficiency, Liquidity, Operational Strategies