Influence of Firm Size on the Relationship Between Credit Risk and Loan Performance of Deposit taking Saccos in Kenya

Abstract

Deposit-taking SACCO (DTS) sector in Kenya is exposed to many risks which present themselves from both the interior and outside ecology in which they operate. SACCO’s fiscal feasibility and longstanding sustainability are endangered by credit risk that poses a crucial test in spite of development in the segment. The investigation aimed at exploring the influence of firm size on the relationships amid credit risk and loan performance of deposit taking Saccos in Kenya. The investigation applied a mixed research design that constituted of descriptive research design and non-experimental design. The target populace was the 175 DTSs licensed by SASRA by December 2017. A census was carried out targeting all the deposit taking Saccos regulated by SASRA as at 2017. The data was obtained from audited financial statement submitted to SASRA for five years from 2013 to 2017. Financial ratios were computed using Excel to get the research variables. The secondary data obtained from SASRA was from 135 Saccos yielding a response rate of 77.143% response out of the targeted 175 Saccos. The fixed effect model was tested for a number of essential classical assumptions of homoscedasticity, autocorrelation, normality of the residuals and of cross-sectional independence and multicollinearity of the predictor before the model could be adopted. The assumptions of normality, homoscedasticity and cross-sectional independence were violated thus a generalized least squares (GLS) model was adopted which allowed for the violations. The model showed that credit risks significantly influence loan performance (Chi-square =14.86, p-value=0.001). The coefficients of capital adequacy and loan advance ratio in the model found to be significant at level 0.05 with p-values of 0.002 and 0.007 respectively which are both less than 0.05. The findings from the inferential analysis showed that capital adequacy had a significant relationship with loan performance (β= -0.240, p-value = 0.010). The study also found the loan advance ratio was also found to have a significant relationship with loan performance (β= 0.091, p-value = 0.000). The results showed that credit risks significantly influence loan performance. Further it was realized that capital adequacy had a significant relationship with loan performance. The study also found the loan advance ratio was also found to have a significant relationship with loan performance. The moderating variable, firm size was measured as the natural logarithm of the total assets and was also found to significantly affect loan performance but does not moderate the relationship between loan performance and credit risk. A conclusion was drawn from the study that capital adequacy significantly influences the loan performance of deposits taking Saccos in Kenya. The study also concluded that loan advance ratio (LAR) significantly influence the performance of loans. It was recommended that Deposit Taking Saccos should ensure that they retain high capital adequacy ratios in order to realize good performance of loans. It was also recommended that the SACCOs should establish an optimum loan advance ratio in order to realize better performance of loans.