Abstract
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.
Highlights
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)
This study focused on selected capital structure determinants leverage and firm size and their effects on the financial performance of DT-SACCOs in Kenya giving the significance of each determinant and whether it has a positive or negative effect on performance
The rejection of the null hypothesis. This is critical for the DT-SACCOs given that the study indicated that financial leverage as an only determinant of capital structure influenced 39.9% of financial performance and a unit increase in financial leverage would result in 10.4% decrease in the financial performance of the institution
Summary
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).
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