Credit Risk Management Practice, Technological Innovation and Financial Performance of Deposit-Taking Saccos in Kenya.

Abstract

Effective credit risk management is crucial for minimizing the likelihood of default and maintaining financial stability in Savings and Credit Cooperative Societies (SACCOs). Although there have been attempts to regulate the situation, the overall proportion of loans that are not being repaid on time compared to the total loans given by Deposit-Taking SACCOs (DTSs) in Kenya has increased since 2013. At the same time, these SACCOs have not been meeting the requirements for having enough capital, as well as complying with the Sacco Societies Act of 2008 and SASRA regulations. A significant number of DTSs still face difficulties in fulfilling their immediate financial responsibilities, especially when it comes to distributing loans. The main aim of this study was to examine how credit risk management strategies and technological innovation impact the financial performance of Deposit-Taking SACCOs in Kenya. The study specifically examined the effects of credit scoring, credit rules, and credit risk monitoring techniques, with technology innovation acting as a moderating factor. The collection of primary data involved surveying 122 credit officers from 122 DTSs across Kenya, using a standardized questionnaire consisting of closed-ended questions. Secondary data was obtained from journals, books, audited yearly reports published by SASRA, government publications, and SACCO websites. To establish the reliability and validity of the instrument, a pilot test was conducted with 12 respondents from 12 DTSs, assessing content, expert, and face validity, with reliability determined using Cronbach's alpha. The data analysis was conducted using descriptive statistics, correlation analysis, and multiple regression, with the assistance of SPSS version 29 and Excel. Diagnostic tests, such as multicollinearity, normality, heteroskedasticity, and autocorrelation, were performed to verify the assumptions of the linear regression model. The study found that effective credit scoring and robust credit policies significantly enhance the financial performance of Deposit-Taking SACCOs in Kenya. Respondents indicated strong agreement on the importance of credit score assessments in understanding customer repayment tendencies, with a mean score of 4.28 (SD = 0.79). Additionally, a structured credit scoring system positively influenced loan approval processes (mean score: 4.14, SD = 0.77), while the collection credit score process was essential for monitoring borrower behavior (mean score: 4.06, SD = 0.80). The findings underscore that by leveraging effective credit assessment practices and clear credit policies, SACCOs can improve operational efficiencies, manage risks more effectively, and enhance financial outcomes.