Impact of prudential regulatory framework on financial performance of deposit taking SACCOs in Kenya

Abstract

Regulation of the financial sector is critical aspect of consideration by the regulating authority. This is because the financial sector tremendously influences the performance of the entire economy. The study aims at determining the impact of a prudential regulatory framework on the financial performance of SACCOs in Kenya. The specific objectives in this case are; to determine the relationship between liquidity requirements and performance of deposit taking SACCOs in Kenya, to establish the relationship between capital requirements and performance of deposit taking SACCOs in Kenya, to investigate the relationship between loan provisioning requirements and performance of deposit taking SACCOs in Kenya, and to evaluate the relationship between minimum investment requirements and performance of deposit taking SACCOs in Kenya. The study reviewed literature under theoretical and empirical review. The theoretical review focused on portfolio theory, agency theory and stakeholder theory. The empirical review was done in line with the study objectives. The empirical review focused on past studies that have done in relation to the individual study variables. These reviews facilitated in creating an understanding of the available literature as well as in helping identify the existing research gap. The study adopted a descriptive survey design in addressing the research problem. The study was based in Kenya focusing on deposit taking SACCOs in the country. The population of the study was comprised of these deposit taking SACCOs in Kenya which are 181 in number. Since the study population was not significantly immense, all the elements in the population were used in the data collection exercise thus eliminating the need for sampling. The study used secondary data that was analyzed using quantitative data analysis techniques. The analyzed data was presented in figures, tables, and detailed discussions made. A regression model was also developed to test the relationship of the independent variable with the dependent variables. For the dependent variable return on investment was used to represent financial performance of deposit taking SACCOs in Kenya. On the other hand, prudential regulatory framework formed the independent variables which were specified as capital requirement, investment requirement, loan provisioning requirement, and liquidity requirement. An empirical analysis was thus done to determine how the four independent variables affected return on investment. Moreover, correlations and analysis of variance were done on the study variables and on the model as whole to determine the level of significance of each in the model. The study model was found to be significant in explaining the relationship between the independent variable and return on investment. The study found that the application of prudential regulatory requirement was even among all the SACCOs in Kenya. The study further found the implication of loan provisioning requirement was highest in influencing financial performance of SACCOs in Kenya. The four independent variables were found to have a positive relationship with return on investment. Liquidity were requirement was however found to have the least impact on financial performance on Deposit Taking SACCOs in Kenya holding the other variables constant. The study further recommended that SACCOs can re-evaluate their approach towards issuance of loans mainly because the level of non-performing loans was seen to be relatively higher that the prevailing levels on interest.