EFFECT OF FINANCIAL RISK MANAGEMENT TECHNIQUES ON FINANCIAL PERFORMANCE OF DEPOSIT TAKING SACCOS IN KENYA

Abstract

Financial performance is a vital aspect of the finance field, as it seeks to explain why organizations in similar environments achieve different results. In Kenya, cooperative societies play a key role in national development, contributing across various economic sectors. Despite notable progress by deposit-taking Savings and Credit Cooperative Organizations (SACCOs), their overall performance and sustainability remain subjects of ongoing debate. This study thus sought to assess the effect of financial risk management techniques on financial performance of deposit taking Savings and Credit Cooperative Organizations in Kenya. The specific objectives were to determine the effect of credit risk management techniques, liquidity risk management techniques, market risk management techniques and operational risk management techniques on financial performance of deposit taking Savings and Credit Cooperative Organizations in Kenya. The study was based on four theories namely, Modern Portfolio Theory, Credit Risk Theory, Liquidity Preference Theory, and Risk Management Theory. A descriptive survey design was adopted. The population of the study was the 175-deposit-taking Savings and Credit Cooperative Organizations in Kenya as of 31st December 2022. Due to relative population nature, sampling was not conducted and therefore the study was a census. The respondent was the risk manager of each deposit-taking Savings and Credit Cooperative Organizations. The study utilized primary data. The data was collected using a structured questionnaire. Data was analyzed using descriptive statistics such as the mean and standard deviation and inferential statistics which included correlation and regression analysis. Reliability tests were conducted on the variables each meeting the 0.7reliability threshold with validity tests being confirmed by the Bartlett’s test that confirmed validity of the variables being measured. The regression analysis revealed significant insights into the relationship between financial risk management techniques and the financial performance of deposit-taking Savings and Credit Cooperative Organizations in Kenya. Credit risk management techniques were found to have a positive impact on financial performance with a regression coefficient of β = 0.238 and a significant value of P <0.005. Additionally, liquidity risk management techniques were found to contribute positively to financial performance having a regression coefficient of β = 0.425 and a significant value of P <0.005. Market risk management techniques also played a crucial role, with strategies such as derivatives hedging and product diversification leading to enhanced financial performance with a regression coefficient of β = 0.231 and a significant value of P <0.005. Moreover, operational risk management techniques were identified as having a significant positive impact on financial performance with a regression coefficient of β = 0.695 and a significant value of P <0.005. In conclusion, the study provides compelling evidence of the importance of comprehensive risk management frameworks in driving the financial performance of deposit-taking Savings and Credit Cooperative Organizations in Kenya. By implementing effective risk management practices tailored to address credit, liquidity, market, and operational risks, Savings and Credit Cooperative Organizations can enhance their stability, profitability, and resilience in a dynamic operating environment. These findings have significant implications for policymakers, practitioners, and stakeholders in the Savings and Credit Cooperative Organizations sector, highlighting the need to prioritize investments in risk management capabilities to promote sustainable financial growth. The study recommends that Savings and Credit Cooperative Organizations should focus on enhancing their credit risk management frameworks. They also need to improve their liquidity risk management practices. Further, Savings and Credit Cooperative Organizations should focus on strengthening their market risk management frameworks to mitigate exposure to market risks.