The Link between Capital Adequacy and Financial Stability: Evidence from Deposit Taking Savings and Credit Co-Operative Societies in Kenya
DOI:
https://doi.org/10.53819/81018102t4268Abstract
In Kenya, financial stability of Deposit Taking (DT) Savings and Credit Cooperative Societies (SACCOs) as evident in non-performing loans of DT SACCOS has been an issue of concern over the past few years due to evidence indication fluctuating trends. Consequently, should this continue then this sector’s contribution to financial intermediation through provision of financial services will be negatively affected. Though DT SACCOs have sought to enhance their capital adequacy, its effect on enhancement of financial stability remains an issue for further empirical investigation. In view this, the study sought to investigate the effect of capital adequacy on financial stability of DT SACCOS 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. Ethical standards and regulations were adhered to accordingly. The regression results revealed that capital adequacy had a significant negative effect on NPLs (β=-0.3249614, p-value=0.000<0.05). In view of the findings, the study recommends that regulatory authorities in Kenya should take a proactive response in establishing and enforcing robust capital adequacy standards for DT SACCOs. In addition, higher levels of capital adequacy and improved management efficiency are associated with reduced NPLs ratio among DT SACCOs in Kenya, hence improved financial stability.
Keywords: Capital Adequacy, Financial Stability, Deposit Taking, Savings and Credit, Co-Operative Societies
References
Ahmed, F., & Yusof, Z. (2022). Assessing the Financial Stability of SACCOs in Malaysia. Malaysian Financial Review, 29(2), 78-91.
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
Amina, A. (2016). The Effect of Core capital on the financial performance of Deposit Taking Saccos in Nairobi County (Doctoral dissertation, University of Nairobi).
Asatiani, N., Basuki, A., & Setiawan, M. (2020). The Role of Financial Stability in Building Public Trust: A Study on Savings and Credit Co-operative Societies. Journal of Financial Stability, 48, 102-115.
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
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
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.
Jensen M, C, & Meckling W, H. (1976). Theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
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
Kimutai, C. J. (2019). Financial Soundness and Efficiency of Deposit Taking Savings And Credit Cooperative Societies In Kenya (Doctoral Dissertation, Kenyatta University). https://doi.org/10.30845/jbep.v6n4a5
Kiragu, D. N. (2014). The effect of Sacco societies regulatory authority’s regulations on financial performance of Saccos in Nairobi County (Doctoral dissertation, University of Nairobi).
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
Mushonga, M., Arun, T. G., & Marwa, N. W. (2019). The cooperative movement in South Africa: Can financial cooperatives become sustainable enterprises?. Strategic Change, 28(4), 259-271. https://doi.org/10.1002/jsc.2268
Mwangi, D. K., & Ombui, K. (2018). Factors Affecting Financial Performance of Deposit Taking Saccos in Nairobi County, Kenya. International Journal of Scientific and Research Publications (IJSRP), 8(10), 153-159. https://doi.org/10.29322/IJSRP.8.10.2018.p8220
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.
Opala, J. A. (2014). Effect of financial stability on the performance of deposit taking SACCOs in Nairobi County (Doctoral dissertation).
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).
Saunders, M., Lewis, P., & Thornhill, A. (2009). Research methods for business students. Pearson education.
Schindler, R. M. (2011). Pricing strategies: a marketing approach. Sage.
Smith, J., & Johnson, K. (2020). The Role of Capital Adequacy in SACCOs' Financial Stability. Journal of Cooperative Studies, 53(2), 25-40.
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
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.
