Liquidity management risks, board independence and Financial performance of Tier-1 Savings and Credit Cooperatives (Saccos) In Kenya

Abstract

Savings and Credit Cooperatives (SACCOS) play a significant role in resource mobilization and serve as the foundation for entrepreneurial activities in developing countries like Kenya. Though studies suggest that liquidity management affects performance of credit cooperatives, extant literature shows mixed results. Thus, this study sought to examine whether board independence moderates the relationship between liquidity management risks and financial performance of Tier-1 Savings and Credit Cooperatives (SACCOs) in Kenya. Specifically, the study sought to establish the effect of cash to deposit ratio, deposit to total assets ratio, and loan to deposit ratio on the financial performance of Tier-1 SACCOs in Kenya. The study further examined the moderating effect of board independence on the relationship between: cash to deposit ratio, deposit to total asset ratio and loan to deposit ratio on financial performance among Tier-1 SACCOs in Kenya. The study was anchored on the liquidity preference and agency theories. The study adopted the longitudinal explanatory research design. The target population was 44 tier-1 SACCOs. However, after applying an inclusion/exclusion criterion the final sample comprised of 30 tier-1 SACCOs. The study used secondary data for the period between 2013 -2022 that was extracted from annual financial statements of 30 tier-1 SACCOs targeted by the study and SASRA annual reports. Data was analyzed through descriptive and inferential statistics. The study adopted the hierarchical regression models to test for moderation and the choice between the fixed effect and random effect was based on the results of Hausman test. Based on the regression results, the study found that cash to deposit ratio (β= 0.1466; ρ< 0.05), deposit to total asset ratio (β= 0.1405; ρ< 0.05) and loan to deposit ratio (β= 0.0238; ρ< 0.05) had a significant positive effect on financial performance of tier-1 Saccos with an R 2 of 44.92 percent. The study further found that board independence moderated the relationship between cash to deposit ratio (β= - 0.1968; ρ< 0.05), deposit to total assets (β= -0.3306; ρ< 0.05), loan to deposit ratio (β= -0.1108; ρ< 0.05) and financial performance of tier-1 Saccos with an R 2 of 48.37 percent. The study concluded that the liquidity management risks are key determinants of financial performance of tier-1 Saccos in Kenya and that board independence moderates that relationship. The study's conclusions have implications for managers and regulators. First, managers should set appropriate limits on liquidity management ratios as a way of improving financial performance. These limits should be based on a comprehensive assessment of the Saccos' risk profiles; financial health, and macroeconomic conditions. Secondly, the regulator should enhance board's oversight function. There is need for independent directors to be knowledgeable on SACCOs operations and financial management. The study recommends that future studies may consider the moderating role of other board attributes and SACCOs operating in different countries, which could provide a better understanding of the subject matter.