INTEREST RATE DRIVERS AND FINANCIAL PERFORMANCE OF DEPOSITS TAKING SAVINGS AND CREDIT CO-OPERATIVE SOCIETIES IN KENYA

Abstract

On average SACCOs experienced a decline in its financial performance during this period exhibited by the Sacco subsector return on assets reducing from 2.65% to 1.59% from 2020 to 2021, SACCO Report, 2021. This study aimed to examine interest rate drivers and the financial performance of deposit taking SACCOs in Kenya. The specific objectives were to establish the effect of inflation rate on financial performance of deposits taking SACCOS in Kenya, to determine the effect of liquidity risk on financial performance of deposits taking SACCOS in Kenya and to assess the effect of credit risk on financial performance of deposits taking. The study was anchored on John Maynard Keynes' "Monetary Theory," with additional support from Merton's “Credit Risk Model” and Irving Fisher’s “Quantity Theory of Money”. A descriptive research design and correlational research design was employed in this study. Stratified random sampling was applied on a population of 176 deposit taking SACCOs in Kenya. The study used secondary data which was obtained from audited annual financial reports and Sacco Society’s Regulatory Authority (SASRA) reports. The population was classified into 3 strata representing three tier sizes of DT-SACCOs in Kenya. This means each tier (stratum) is classified according to DT-SACCOs total assets’ base as per SASSRA report 2022, and is drawn from the tiers’ total DT-SACCO population proportionate to the total sample size of the 121 DT-SACCOs. Therefore, a total of 121 audited annual financial reports was sampled for a 7 years’ period from 2020 to 2022. The collected data was analyzed using descriptive and inferential statistics. Descriptive statistics included mean, standard deviations and percentages. Inferential statistics included Pearson correlation coefficient, and multiple regression analysis. The results were presented using table, charts, figures and models. The results revealed that independent variables used in the research were able to account for about 76.53% (R2=0.7653, P<0.05) of the variations that were noted in the financial performance of Deposit Taking SACCOs in Kenya. A unit increase in inflation rate leads to a 0.889 unit’s reduction in the financial performance (β1=-0.889, p<0.05). A unit increase in liquidity risk leads to a 0.143 units reduction in the financial performance (β2=-0.143, P<0.05), a unit increase in credit risks leads to 0.729 units decrease in the financial performance (β3=-0.729, P<0.05). The research recommended that Saccos should develop strategies such as real-time inflation monitoring, flexible interest rate structure and risk-based pricing to adjust their loan interest rates more readily in response to inflation changes. Saccos should conduct regular liquidity stress tests to assess their ability to withstand adverse liquidity shocks, especially in scenarios where interest rate fluctuations may exacerbate liquidity risk. Saccos should periodically review and adjust interest rates on loans to reflect changes in market rates and ensure adequate compensation for credit risk.