Influence of leverage on financial performance of deposit-taking SACCOS in Kenya

Abstract

In today’s business environment, deposits taking SACCOs are now competing with commercial banks for customers. Deposits taking SACCOs have therefore resorted to borrowing from commercial banks to satisfy their member’s demand for loans. Member deposit as source of finance in Deposit taking SACCOs also attract interest which must compete with banks rates on deposit. The influence of leverage on financial performance of deposit taking SACCOs is therefore crucial in helping management make informed capital structure decisions. While past studies on capital structure in Deposit taking SACCOs in Kenyan have used correlation and regression analysis, no paper has considered long term debt, short term debt and total debt separately. The purpose of this study was to investigate influence of the different levels of leverage on the financial performance of deposit taking SACCOs in Kenya. The measure of financial performance were return on assets, return on equity and earnings per share. This study adopted a descriptive research design. Since the period of the study was four years from year 2011 to year 2014 our population was the 44 Deposit taking SACCOs licensed in 2011. The study used data limited to deposit taking SACCOs that were registered with Sacco Society Regulation Authority (SASRA) for the period of four years from year 2011 to year 2014. This study applied panel regression data analysis. The study concludes that debt financing influence the performance of SACCOs. The three levels of debt financing that is total debt, long term and short term debt has varying effect on financial performance of SACCOs. Total debt to assets ratio was seen to be positively linked to return on assets while long term debt had an inverse relationship with return on assets. Short term debt had insignificant relationship with the three measures of performance that is return on assets, return on equity and earnings per share. The study therefore recommends that based on these findings managers in SACCOs should focus more on short term debts to finance their operations rather than long term debts in order to give favorable financial results.