The Link between Capital Adequacy and Financial Stability: Evidence from Deposit Taking Savings and Credit Co-Operative Societies in Kenya

Abstract

In Kenya, financial stability of Deposit Taking (DT) Savings and Credit Cooperative Societies (SACCOs) as evident in non-performing loans of DT SACCOS has been an issue of concern over the past few years due to evidence indication fluctuating trends. Consequently, should this continue then this sector’s contribution to financial intermediation through provision of financial services will be negatively affected. Though DT SACCOs have sought to enhance their capital adequacy, its effect on enhancement of financial stability remains an issue for further empirical investigation. In view this, the study sought to investigate the effect of capital adequacy on financial stability of DT SACCOS in Kenya. The study was anchored on agency theory. Positivist research philosophy was adopted in this study. The study adopted explanatory research design. The target population for the study comprised 160 DT SACCOs which were fully operational in the period. A census approach was used for the study. This study utilized quantitative secondary data which was obtained from the society’s financial statements and supervision reports from the savings and credit cooperatives regulatory authority. The study utilized annual panel data for the period of 2017 to 2021. Multicollinearity test, normality tests, autocorrelation test, homoscedasticity, stationarity test and model specification test were carried out prior to panel data analysis. Data was analyzed using descriptive statistics, Pearson’s correlation analysis and panel regression analysis. STATA software was used for the analysis. Ethical standards and regulations were adhered to accordingly. The regression results revealed that capital adequacy had a significant negative effect on NPLs (β=-0.3249614, p-value=0.000<0.05). In view of the findings, the study recommends that regulatory authorities in Kenya should take a proactive response in establishing and enforcing robust capital adequacy standards for DT SACCOs. In addition, higher levels of capital adequacy and improved management efficiency are associated with reduced NPLs ratio among DT SACCOs in Kenya, hence improved financial stability. Keywords: Capital Adequacy, Financial Stability, Deposit Taking, Savings and Credit, Co-Operative Societies