Effect of Credit Risk Management Practices on Financial Performance of Deposit Taking Savings and Credit Cooperatives in Kenya

Abstract

Background: Globally, the financial performance of Savings and Credit Cooperative Societies (SACCOs) has been improving steadily as shown by the increase in membership which is approximated at one billion, with the turnover from the world's 300 top SACCOs amounting to $2.5 trillion as at December 2017. In Africa, SACCOs have had a significant role in transforming the continent through financial support of businesses. Similarly, SACCOs play a fundamental role in Kenya's financial sector by assisting members save money and advancing credit. However, statistics show that financial performance of Deposit Taking Savings and Credit Cooperative Societies (DT-SACCOs)in Kenya is fluctuating as shown by non-performing loans which stood at 5.12%, 5.23% and 6.14% as at 2015, 2016 and 2017 respectively, with that of 50% of DT-SACCOS in Western Kenya being even lower. Previous studies show mixed results in linking credit risk management to financial performance. Prior studies on credit risk management and financial performance focus on banks indicating that the effect of credit risk management on financial performance of DT-SACCOs has not been established. The purpose of the study was therefore to establish the effect of credit risk management on financial performance of DT-SACCOs in Western Kenya. Results: The findings show that credit risk management has a negative significant effect on financial performance (non-performing loan ratio (β =-0.4059, p = 0.0015)indicating that a reduction in non-performing loan ratio by a unit improves financial performance by 40.59%. Conclusion:The study concludes that corporate risk management is an important aspect in management of DT-SACCOs in Western Kenya and recommends that the SACCOs ought to invest in credit risk management if they seek to improve their financial performance.