Influence of Capital Adequacy on the Loan Performance of Deposit Taking SACCOs in Kenya

Abstract

The financial viability and long-term sustainability of SACCOs is threatened by credit risk that poses a challenge despite growth in the sector. We explore the influence of capital adequacy on loan performance of deposit taking SACCOs in Kenya. Time series cross sectional unbalanced secondary panel data was analyzed from 175 deposit taking SACCOs licensed by SASRA as at December 2017. The data was obtained from audited financial statements submitted to SASRA over a five-year period (2013-2017). The unbalanced panel data was analyzed quantitatively using regression equations. The study adopted capital adequacy as the explanatory variable for the study and we applied both the long run (static) and short run (dynamic) panel models. The long run models assumed that previous period’s performance did not affect present period’s performance and therefore, no persistence (no lag dependent explanatory variables) in the model. The short run models assumed that immediate previous period performance will lag dependent explanatory variable, thus influenced present period’s performance. The Mann-Whitney U test was utilized in testing for robustness to see if the results of the empirical model would hold when subjected to a non-parametric test. Before the administration of multiple regression analysis a number of essential assumptions were checked so as to avoid type I and type II errors that occur during the interpretation stages of the model. These assumptions included testing for heteroscedasticity, autocorrelation, multivariate normality, multi-collinearity and linearity. Results show that capital adequacy significantly influence loan performance of deposit taking SACCOs in Kenya.