Liquidity and Financial Performance of Deposit Taking Savings and Credit Cooperative Societies in Kenya

Abstract

Purpose: This paper examined how liquidity affects financial performance of Kenyan domiciled DT-SACCOs

Materials and Methods: Secondary panel data was used to carry out the study by taking a census of all 175 licensed DT-SACCOs in Kenya between 2016 to 2023. Through inclusion-exclusion method of data collection, sample of 146 DT SACCOS were considered. The theoretical model was based on liquidity preference theory. The philosophy of the study was based on positivism, and explanatory research design informed the research. Analysis of data included descriptive statistics, correlation analysis, and pooled and panel regression analysis with hierarchical analysis and mediation analysis. Diagnostic tests, normality, multicollinearity, heteroscedasticity, autocorrelation, stationarity, model specification, tests were performed to ensure that the data and model assumptions were appropriate.

Findings: The study findings indicated liquidity had existence of a significant and positive association to financial performance of DT savings and credit cooperatives societies in Kenya. The DT-SACCO management should focus on policies which translate the organization to profit making hub. This empirical finding indicated the existence of a strong and positive association, which showed that DT SACCOs that had adequate liquid resources are in a better position to fulfill operation requirements and exploit opportunities to develop.

Implication to Theory, Practice and Policy: The results of the research are a valuable contribution in terms of theory, as they push the limits of the conceptual frameworks and practical application of various financial and management theories. On the liquidity preference theory, the positive effect of liquidity on the financial performance of the DT SACCOs supports the idea that liquidity preference by the institutions to hold liquid resources is not just a performance-reducing instrument but also a risk-avoidance strategy. The study contributes to the theory by empirically proving that sufficient liquidity can allow DT SACCOs to maintain operation commitments, as well as fund lending operations and exploit business opportunities in the market because of its dual effect of ensuring solvency and also contributing to the generation of income. This gives a more subtle interpretation of liquidity preference as a strategic tool and not only a defensive stance especially in regulated cooperative financial bodies.

The current developed model recommends utilize the available cash balances to invest in profitable ventures. SASRA should establish KPIs which fit the two tiers so as to be effectively in a position to assess their respective financial performance in a comparative manner. This study is of its kind in the policy and practice frontier of DT-SACCOs. The research findings gotten are useful to a wide spectrum of interested parties which include and not limited to investors, board of management, institutional regulators and government policy makers.

The causal effect correlation between financial distress, liquidity as a variable and financial performance provide an insight to DT-SACCO management to focus on policies which translate the organization to profit making hub rather than following old practices as indicated in some theories such as Keynes (1936) liquidity preference theory which justifies the threefold motives of a firm or individual holding cash balances, namely; cash precautionary motive, speculative motive, and transaction motive. Instead, the current developed model which incorporates management efficiency as an intervening variable aid the management to make use of the available cash balances to invest in profitable ventures. This is made possible by factoring the level of management efficiency.