Analyzing the Effect of Liquidity on Financial Stability: Evidence from Kenyan Deposit-Taking Savings and Credit Cooperative Societies
DOI:
https://doi.org/10.53819/81018102t4267Abstract
Non-performing loans have been on the rise among DT SACCOs in Kenya over the past five years as evidenced by the increase in percentage of NPLs to gross loans in SACCO regulatory authority report of 2020. Consequently, if this trend is allowed to continue then this sector’s contribution to financial intermediation through provision of financial services will be negatively affected. In view of the above this study sought to investigate the effect of firm characteristics and financial stability of deposit taking savings and credit cooperative societies in Kenya. In view of the above this study sought to assess the effect of liquidity on financial stability of deposit taking savings and credit and cooperative societies in Kenya. The study was anchored on agency theory. Positivist research philosophy was adopted in this study. The study adopted explanatory research design. The target population for the study comprised 160 DT SACCOs which were fully operational in the period. A census approach was used for the study. This study utilized quantitative secondary data which was obtained from the society’s financial statements and supervision reports from the savings and credit cooperatives regulatory authority. The study utilized annual panel data for the period of 2017 to 2021. Multicollinearity test, normality tests, autocorrelation test, homoscedasticity, stationarity test and model specification test were carried out prior to panel data analysis. Data was analyzed using descriptive statistics, Pearson’s correlation analysis and panel regression analysis. STATA software was used for the analysis. The findings showed that liquidity had a strong, positive effect on NPLs ratio (β = 0.410056, p=0.003<0.05). In view of the findings, the study recommends that DT SACCOs with high liquidity levels should consider implementing rigorous lending practices to ensure that loans are extended to creditworthy borrowers. Additionally, effective credit risk assessment and continuous monitoring of borrower repayment behavior are essential to minimize NPLs. DT SACCOs should focus on improving management efficiency by implementing cost-effective operational processes.
Keywords: Liquidity, Liquidity Ratio, Financial stability, Deposit-taking, Savings and Credit Cooperative Societies (SACCOs), Kenya.
References
Adebayo, R., & Okeke, U. (2022). Challenges and Opportunities in Achieving Financial Stability for SACCOs in Nigeria. Nigerian Economic Review, 31(1), 25-41.
Akims, M. A. & Jagongo, A. (2018). A Critical Review of Literature on Fundamental Risk Factors and Profitability of Commercial Banks in Nigeria. International Journal of Management and Commerce Innovations 6 (1), 140-143.
Akuku, S. O., Nyang’au, A., & Maobe, A. (2023). Effect of leverage on financial performance of deposit taking SACCOs in Kenya. International Academic Journal of Economics and Finance, 3(10), 100-117.
Allen, W. A., & Wood, G. (2006). Defining and achieving financial stability. Journal of financial stability, 2(2), 152-172. https://doi.org/10.1016/j.jfs.2005.10.001
Azhar, S. (2015). Impact of liquidity and management efficiency on profitability: An empirical study of selected power distribution utilities in India. Journal of Entrepreneurship, Business and Economics, 3(1), 31-49.
Bell, E., & Bryman, A. (2007). The ethics of management research: an exploratory content analysis. British journal of management, 18(1), 63-77. https://doi.org/10.1111/j.1467-8551.2006.00487.x
Boateng, K., & Mensah, S. (2022). Financial Stability of SACCOs in Ghana: An Empirical Analysis. Ghanaian Journal of Economics, 20(3), 83-97.
Cheang, S., Li, X., & Allen, C. (2020). Regulatory Frameworks and Financial Stability in Savings and Credit Co-operative Societies. Journal of Regulatory Compliance, 5(2), 200-213.
Choi, I. (2001). Unit root tests for panel data. Journal of international money and Finance, 20(2), 249-272. https://doi.org/10.1016/S0261-5606(00)00048-6
Cohen, D., & Crabtree, B. (2006). Qualitative research guidelines project.
Elsayed, A. H., Naifar, N., & Nasreen, S. (2023). Financial stability and monetary policy reaction: Evidence from the GCC countries. The Quarterly Review of Economics and Finance, 87, 396-405. https://doi.org/10.1016/j.qref.2022.03.003
Eton, M., Basheka, B. C., & Mwosi, F. (2020). Co-operative and saving societies (SACCOS) and poverty reduction in Lango and Kigezi sub-regions of Uganda: A comparative empirical study.
Fundi, N. E., & Wamugo, L. (2023). Effect of deposit risk on financial performance of deposit taking saccos in Nairobi City County, Kenya. International Academic Journal of Economics and Finance, 3(9), 453-462.
Hao, N. T. N., & Wong, W. K. (2021). Does Bank Liquidity Risk Lead to Bank's Operational Efficiency? A Study in Vietnam. Advances in Decision Sciences, 25(4), 1-43. https://doi.org/10.47654/v25y2021i4p46-88
Kagiri, B. (2023). Internal Audit Report Quality and Financial Statement Accuracy of Savings and Credit Cooperatives Societies in Kenya. African Journal of Commercial Studies, 3(1), 75-85. https://doi.org/10.59413/ajocs/v3.i1.5
Kerlinger, F. N., Lee, H. B., & Bhanthumnavin, D. (2000). Foundations of behavioral research: The most sustainable popular textbook by Kerlinger & Lee (2000). Journal of Social Development, 13, 131-144.
Keynes, J, M. (1936), The General Theory of Employment Interest and Money” Macmillan press.
Kinyenze, J. M. (2022). Factors Influencing Quality Of Financial Reporting Of Deposit Taking Saccos In Kenya (Doctoral dissertation, KCA University).
Lan, L., & Heracleous, L. (2010). Rethinking agency theory: the view from Law. Academy of Management Review, 35(2), 294-314. https://doi.org/10.5465/AMR.2010.48463335
Millan, E. N., Kamau, C. G., & Ibua, M. P. (2023). Effect of Mobile Banking Technology on Loan Performance of Deposit Taking Savings and Credit Cooperative Organisations in Mombasa County, Kenya. https://doi.org/10.13189/ujaf.2023.110301
Mostak, M., & Sushanta, M. (2015). Is financial inclusion good for SACCO stability. International evidence, University of London, UK.
Ndung’u, E. G., & Mutinda, J. (2022). Corporate growth strategies and financial performance of deposit-taking savings and credit co-operative societies in Nairobi City County, Kenya. International Academic Journal of Economics and Finance, 3 (8), 25, 46(2).
Nickerson, C. (2022). Interpretivism paradigm & research philosophy. Simply Sociology, 5.
Ongore, V. O., & Kusa, G. B. (2013). Determinants of financial performance of commercial banks in Kenya. International journal of economics and financial issues, 3(1), 237-252.
Otwoko, B. E. (2023). Interest Rate Drivers and Financial Performance of Deposit Taking Savings and Credit Co-operative Societies in Kenya (Doctoral dissertation, JKUAT-COHRED).
Panico, C. (2008). Durlauf, Steven N.; Blume, Lawrence E., eds. "The New Palgrave Dictionary of Economics". Palgrave Macmillan.
Sanghani, D. A. (2014). The effect of liquidity on the financial performance of non-financial companies listed at the Nairobi Securities Exchange (Doctoral dissertation).
Saunders, M., Lewis, P., & Thornhill, A. (2009). Research methods for business students. Pearson education.
Schindler, R. M. (2011). Pricing strategies: a marketing approach. Sage.
Taylor, L., & Taylor, L. (2009). Reconstructing macroeconomics: Structuralist proposals and critiques of the mainstream. Harvard University Press. https://doi.org/10.2307/j.ctv1q16rzr
Tran, T. T., Nguyen, Y. T., & Long, T. (2019). The determinants of liquidity risk of commercial banks in Vietnam. Banks and Bank Systems, 14(1), 94. https://doi.org/10.21511/bbs.14(1).2019.09
Walsh, C. E. (2010). Monetary theory and policy. MIT press.
Wangechi, S. W., & Irungu, A. M. (2023). Working Capital Management and Financial Performance of Deposit Taking Savings and Credit Cooperative Societies in Central Region, Kenya. Journal of Finance and Accounting, 3(1), 34-46.
Ward, C. (2021). Contradictions of Financial Capital Switching: Reading the Corporate Leverage Crisis through The Port of Liverpool's Whole Business Securitization. International Journal of Urban and Regional Research, 45(2), 249-265. https://doi.org/10.1111/1468-2427.12878
Were, M., & Wambua, J. (2014). What factors drive interest rate spread of commercial banks? Empirical evidence from Kenya. Review of development Finance, 4(2), 73-82. https://doi.org/10.1016/j.rdf.2014.05.005
World Council of Credit Unions. (2020). The Importance of Financial Stability in Savings and Credit Co-operative Societies for Community Development. WOCCU Report.