Effect Of Financial Risk On Financial Performance Of Deposit Taking Saccos In Nairobi County, Kenya

Abstract

With the continuous aggressive and dynamic competitive environment increment, companies are experiencing financial risk from a multi-dimensional problem. Failure to identify the financial risk will lead to poor performance of an enterprise. Financial risk usually emanates in the process of financial activities, accumulation, and amplification, which finally leads to financial crisis and the inherent collapse of a business enterprise where it ceases being a going concern. The general objective of this research was to determine the effect of financial risk on the financial performance of DT-SACCOs in Nairobi County, Kenya. Specifically, the study aimed at establishing the effect of liquidity risk, credit risk, operational risk, and market risk on the financial performance of DTSACCOs in Nairobi County, Kenya. The study was informed by three theories namely: loanable funds theory of interest, information asymmetry theory, and the shift ability theory. The study targeted all the DT-SACCOs in Nairobi County, Kenya, and adopted a descriptive survey design. The research utilized secondary data from annual reports of the SACCOs for five years and data was analyzed using STATA software Version 12. Descriptive and multiple linear regression analysis was conducted for the survey. Data presentation was done using tables and charts. The study established that financial risk has a significant effect on financial performance. Thus, financial risk can be utilized in predicting the financial performance of deposit-taking SACCOs in Nairobi County, Kenya. Other findings were that credit risk has a significant effect on the financial performance of deposit-taking SACCOs in Nairobi County, Kenya. Further findings were that liquidity risk has a positive but not a significant relationship with the financial performance of deposit taking SACCOs in Nairobi County, Kenya. Operational risk showed that it has a significant effect on the financial performance of deposit taking SACCOs in Nairobi County, Kenya, and market risk have an insignificant but a positive relationship with the financial performance of deposit taking SACCOs in Nairobi County, Kenya. Recommendations were made to the SACCOs regulator (SASSRA), SACCO practitioners, and consultants to mitigate financial risk in order to augment profitability in the SACCO sector. Further recommendations were made that little focus should be made on market risk and liquidity risks but much focus should be on operational and credit risks which should be mitigated so as to increase the financial performance of deposit taking SACCOs in Nairobi County, Kenya.