CREDIT MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE OF DEPOSIT TAKING SAVINGS AND CREDIT COOPERATIVES IN KERICHO COUNTY, KENYA

CREDIT MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE OF DEPOSIT TAKING SAVINGS AND CREDIT COOPERATIVES IN KERICHO COUNTY, KENYA

ABSTRACT The study assessed Credit Management Practices and Financial performance of Deposit taking Sacco’s in Kericho County, Kenya. The researcher sought to establish the connection between financial performances of Sacco’s and credit policy, credit risk control, credit collection practices and credit recovery strategies. The target population was four deposit taking Sacco’s in Kericho County that are regulated by Sacco Societies Regulatory Authority. This was done against rising cases of nonperforming loans among the deposit taking Sacco’s which recorded a non performing ratio of 11.42 per cent in 2017, the ratio is above the recommended rate of 5 percent. Deposit taking Sacco’s have also experienced declining performances in terms of return on assets and return on equity with some such as Ekeza Sacco, Good life Sacco and metropolitan Sacco being blacklisted from offering banking services to the public. The indicators of financial performance were return on assets, return on equity and non-performing loans. The research was based on the anticipated income theory, asymmetric information theory and transaction cost theory. The study applied descriptive survey design on the target population. Census approach was used to conduct the study. The researcher used both primary and secondary data for the purposes of conducting research. Regression analysis was used to show the relationship between credit management practices and financial performance of Deposit Taking Sacco societies. Questionnaires were used to collect primary data which was analysed by descriptive and inferential statistics. Hypothesis testing was done at a significant level of 0.05. Diagnostic tests such as normality test, Multicollinearity, heteroscedasticity and autocorrelation test were conducted to ascertain the assumptions of linear regression. Secondary data was obtained from financial statements in order to conduct a cross sectional survey to reveal performance trends over the period. The study established that all credit management practices had a statistically significant and positive influence on financial performance of deposit taking Sacco’s in Kenya. The p-values of credit policy, credit risk control, credit collection practices and credit recovery strategies are 0.036, 0.047, 0.023, and 0.044 respectively. Credit collection practices were found to highly influence financial performance while credit recovery strategies influenced financial performance of deposit taking Sacco’s to a less extent. The study recommends that the managers of the Sacco should implement and apply credit management practices and policy to enhance their financial performance. The study also recommends that Sacco regulator should formulate policies and guidelines on credit management practices to improve financial performance. The study concludes that deposit taking Sacco’s should adopt and improve credit collection practices and credit recovery strategies since they are positively and significantly affect their financial performance. The study recommends that the government through regulatory body to create favourable policies geared towards the implementation of credit management practices in deposit taking Sacco’s. The study concludes that credit management practices is the main driver of financial performance of deposit taking Sacco’s in Kericho County, Kenya. 1 CHAPTER ONE:INTRODUCTION 1.1 Background of the Study Credit is a term which was derived from the Latin word credere which is an agreement based on trust, faith and belief between an individual or corporate and financial institutions. In the ancient time, banks in the United States issued credit on high interest rates to clients which discouraged borrowers and made credit unpopular. Credit concept became popular in the United States during the economic boom of 1885 associated with excess liquidity in banks and the urge to loan the excess cash (Ditcher, 2003). This concept was later recognised in Europe after the Second World War and later to Africa (Kiiru, 2004). In Kenya, financial services in form of loans were originally granted to few rich people and some big companies. Financial service Sector is an essential sector in the economic pillar for the development of vision 2030 in Kenya. According to the International monetary fund, financial service is a process of obtaining a financial good by either an individual or a company. In a broader perspective it refers to specific activities such as banking, investing and insurance. The financial service sector is considered to be the most influential sector in the modern economy (FSSR, 2019). The financial ecosystem in Kenya is driven by activity in five major subsector players from banking, Sacco’s, capital markets, insurance companies, and Pensions industry (SASRA, 2018). Co-operative enterprises have hallmarks that distinguish them from other traditional business enterprises. The d