Financial Soundness Indicators and Operational Sustainability of Deposit-Taking Savings and Credit Cooperatives (Saccos) in Kenya

Abstract

Deposit-taking SACCOs play a crucial role in the financial sector, especially in developing economies where access to traditional banking services is limited. The operational sustainability of SACCOs is essential not only for their members' financial well-being but also for the overall stability of the financial ecosystem. However, despite regulatory interventions aimed at strengthening financial position, many Sacco’s have indicated a declining performance as shown by decreasing returns ROA) in the last 6 years. Anchored on Agency Theory, Financial Intermediation Theory, and Pecking Order Theory, this study investigated the relationship between liquidity, capital adequacy, corporate governance, and operational sustainability in SACCOs. Using secondary data from SASRA annual reports and individual SACCO financial statements covering the period 2018-2023, a systematic review was conducted focusing on deposit-taking SACCOs in Kenya. The study also reviewed past studies undertaken in this area. The review highlighted that liquidity, measured by the current ratio, significantly contributes to the operational sustainability of SACCOs by enabling them to meet short-term financial demands. Capital adequacy, represented by the CAR, was found to be crucial for SACCOs in absorbing financial shocks and maintaining operations during periods of economic stress. Corporate Governance, specifically board independence, was identified as a key determinant in enhancing SACCOs' financial stability and operational efficiency. The study concludes that effective liquidity management, strong capital buffers, and robust corporate governance frameworks are essential for the long-term sustainability of SACCOs. From the findings, it is recommended that SACCOs adopt better liquidity management practices, strengthen their capital reserves, and improve governance structures to ensure their continued growth and ability to serve their members effectively.