Financial Distress Factors, Firm Size and Financial Performance of Deposit Taking Saccos In Kenya

Abstract

Savings and Credit Cooperative Societies (SACCOs) have increasingly employed various financial models to evaluate their financial performance. Nevertheless, recent studies indicate a rise in the number of SACCOs facing financial difficulties and a continued decline in performance. According to the 2022 report by the SACCO Societies Regulatory Authority (SASRA), 51% of SACCOs in Kenya were registered poor financial performance due to financial distress from 2018 to 2022. Many SACCOs have failed to identify the factors contributing to this financial distress, particularly the impact of liquidity, leverage, operational efficiency, asset quality, and capital sufficiency on their overall financial performance. This study aimed to investigate the relationships among these financial distress factors, firm size, and the financial performance of Deposit Taking SACCOs in Kenya. Specifically, it sought to analyze the relationships between liquidity, leverage, operational efficiency, asset quality, capital sufficiency, and financial performance, as well as to examine the moderating effect of firm size on these relationships. The study was grounded in four theories: Wrecker’s financial distress theory, Agency theory, Keynes' Liquidity Preference theory, and Economies of Scale theory. A correlation research design was employed, incorporating a longitudinal approach to assess the relationships among the variables. A census study was conducted on 176 Deposit Taking SACCOs registered with SASRA, focusing on five years of deposit records. Data were collected from audited financial reports, ensuring validity and reliability, and confirmatory factor analysis was utilized to enhance validity and identify latent variables. An overall Cronbach's alpha coefficient of 0.792 was obtained from a pilot study of commercial banks in Kericho, indicating reliability, as it exceeds the threshold of 0.7. Descriptive analysis included mean and standard deviation, while inferential analysis included multiple linear regression techniques and correlation analysis using STATA software version 15. The findings revealed that liquidity had no statistically significant relationship with the financial performance of Deposit Taking SACCOs (β1=0.015, p=0.499>0.05). In contrast, leverage exhibited a statistically significant positive relationship with financial performance (β2=0.315, p=0.000<0.05). Additionally, operational efficiency had a significant positive impact on financial performance (β3=0.492, p=0.000<0.05), while asset quality and capital sufficiency showed significant negative relationships (β4=- 1.118, p=0.000<0.05; β5=-0.393, p=0.000<0.05). Firm size also had a statistically significant moderating effect on the relationship between financial distress factors and financial performance (β6=-1.170, p=0.00<0.05). The study concluded that financial distress factors, including liquidity, leverage, operational efficiency, asset adequacy, and capital sufficiency, collectively influenced financial performance, although liquidity alone did not. The findings highlight the importance of increasing financial leverage, maintaining adequate liquidity, and focusing on operational efficiency, capital sufficiency, and asset quality to enhance financial performance. Additionally, firms should consider growth strategies to mitigate financial distress and achieve sustainable financial performance.