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Research in Business & Social Science IJRBS VOL 8 NO 5 ISSN: 2147-4478 Available online at www.ssbfnet.com Journal homepage: https://www.ssbfnet.com/ojs/index.php/ijrbs
Effect of leverage and firm size on financial performance of deposit taking savings and credit cooperatives in Kenya Robert Shibutsea*, Elizabeth Kalundab, George Achokic a,b,c
Chandaria School of Business, United States International University, P.O. Box 14634 - 00800, Nairobi, Kenya
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ABSTRACT
Article history:
Critical to the success of financial institutions' performance is there Capital Structure. The study aimed to, investigate the effect of two capital structure determinants, leverage, and firm size on financial performance as measured by Return on Assets of Deposit Taking Savings and Credit Cooperative Societies in Kenya. The study was grounded on Tradeoff, Pecking order, and Mogdiliani and Miller capital structure theories. A positivist approach was adopted utilizing a mixed-method research design. The population of the research study was 174 Deposit Taking Savings and Credit Cooperative Societies from whom primary and secondary data was collected. A stratified and purposive sampling technique was employed. Descriptive statistics and a regression model were used to analyze the data. The results revealed that firm size had a significant and positive effect on financial performance, whereas Leverage, had a significant but negative effect on financial performance. The study recommends having in place an Assets and Liabilities committee in each Deposit Taking Savings and Credit Cooperative Society that would help manage the assets and liabilities of the institution, ensuring sound liquidity and cash flow management. Critical factors that contribute to a firm size such as increased membership, deposits mobilization amongst others need to be addressed.
Received 31 July 19 Received in revs. form 15 August 19 Accepted 16 August 19 Keywords: Capital Structure Financial Performance Leverage Firm Size JEL Classification: O15 P36
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Introduction A savings and credit cooperative society (SACCO) as per the International Cooperative Alliance is a financial organization formal in nature, owned, controlled, used, and democratically directed by members themselves to address the prevailing economic, social, and cultural needs (International Cooperative Alliance (ICA), 2016). Savings and Credit Cooperatives/Credit Unions represent one of the most important sources of financing in developing countries and in the last few years, have experienced tremendous growth all over the world (Labie & Périlleux, 2008). As at 2005, there were more than 42,000 SACCOs/Credit Union/Cooperative Financial Institution (CFI)/Mutual, serving about 92 countries with membership of over 157million, penetration of 6.65%, Savings of US$ 763 Billion, Loans of US$ 612 Billion, reserves of US$ 91 Billion and total assets of 894 Billion (World Council of Credit Unions (WOCCU),2005). As at 2015, the statistics have significantly shifted showing tremendous growth with more than 60,000 SACCO’s/Credit Union/ CFIs/ Mutual, serving about 109 countries with membership of over 223million, Penetration of 8.3%, Savings of US$ 1.5 Trillion, Loans of US$ 1.2 Trillion, reserves of US$ 185 Billion and total assets of 1.8 Trillion (WOCCU, 2015). Kenya's national development blueprint and the Vision 2030, identified SACCO societies key role in deepening financial access, mobilize savings for investments in enterprises, and personal development (Mohammed, 2013). As at December 2012, the total assets in the SACCO subsector stood at Kshs 293 billion, total membership was 3 million persons, total deposits stood at Kshs 213 billion, and loans to members was at Kshs 221 billion (Ademba, 2013).In the year ended 2017, these figures grew to total assets of Kshs 442 billion, loan to members Kshs 332 billion and membership over 3.5 million (Sacco Societies Regulatory Authority, 2017). The * Corresponding author.Tel: +254721598566 ORCID ID: 0000-0001-9311-4397 Peer review under responsibility of Bussecon International Academy. © 2019 Bussecon International. Hosting by SSBFNET- Center for Strategic Studies in Business & Finance. All rights reserved. https://doi.org/10.20525/ijrbs.v8i5.462
Shibutse et al., International Journal of Research in Business & Social Science 8(5)(2019) 182-193 commissioner of cooperatives registers and supervises Non-Deposit Taking SACCOs, while Deposit-Taking SACCOs (DTSACCOs) are licensed and regulated by SASRA after having been duly registered under the Cooperative Societies Act CAP 490 by the commissioner. According to Poulsen (2008), capital structure is the composition or construction of a firm’s liabilities. Taiwo (2012) noted that capital structure is a firm’s proportion of short-term and long-term debt and is principally a mix of debt and equity retained by an organization. Capital underpins cooperatives; members come t
