Assessing the Impact of Asset Quality on Financial Performance: A Study of Kenyan Deposit Taking SACCOs

Abstract

Saving and Credit Cooperative Societies (SACCOs) have consistently employed various financial models to evaluate their financial performance. Nonetheless, recent research indicates a rise in the number of Sacco Societies facing financial challenges. These challenges have hindered their performance. Despite this, Saving and Credit Cooperative Societies have not adequately identified the factors contributing to financial distress or the extent of their impact on financial performance. The main objective of this study therefore, was to assess the impact of asset quality on financial performance. This study was anchored on Wrecker’s financial distress theory. It employed a correlation research design where a census study was conducted on all deposit taking Saving and Credit Cooperative Societies registered with the Sacco Societies Regulatory Authority (SASRA). A data extraction sheet was used to collect panel data for all deposit taking Sacco Societies in Kenya for the period between 2018 and 2022. The study collected data from Audited Financial Reports which enhanced the validity and reliability of the data. Descriptive analysis and inferential analysis such as regression analysis and model specification tests was used to analyze data with the help of STATA software version 15. Using panel regression models, asset quality was regressed against financial performance. The results indicated that between 2018 to 2022 the asset quality ratio was in an increasing trend. The results also indicated that asset quality had a statistically negative significant impact on financial performance of deposit taking Sacco Societies (β1 =-1.118, 0.000<0.05). The study concluded that an increase in asset quality led to a significant reduction of financial performance and vice versa. The study recommended that saving and Credit Cooperative Societies should consider low level of asset quality to achieve higher financial performance.