DETERMINANTS OF CAPITAL ADEQUACY IN KENYA'S SACCOs

102 Pages·2017·1.13 MB·English

by  Carolyne M Njeri

DETERMINANTS OF CAPITAL ADEQUACY IN KENYA’S
SACCOs: A CASE STUDY OF DEPOSIT TAKING SACCOs IN
NAIROBI

BY

CAROLYNE M. NJERI

UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA

SUMMER 2017
DETERMINANTS OF CAPITAL ADEQUACY IN KENYA’S
SACCOs: A CASE STUDY OF DEPOSIT TAKING SACCOs IN
NAIROBI

BY

CAROLYNE M. NJERI

A Project Report Submitted to the School of Business in Partial
Fulfillment of the Requirement for Business Administration
(MBA)

UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA

SUMMER 2017
STUDENT’S DECLALATION

I the undersigned, declare that this is my original work and has not been submitted to any
college, institution or university other than United States International University in Nairobi
for academic credit.

Signed………………………………………………..Date……………………………………
Carolyne Muthoni Njeri (ID 645551)

This project report has been presented for examination with my approval as the appointed
supervisor.

Signed………………………………………………Date………………………………..
Dr. Amos Njuguna

Signed………………………………………………Date………………………………..

Dean, Chandaria School of Business

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COPY RIGHT
Copyright ©2017 Carolyne Muthoni Njeri

All rights reserved. No part of this project may be produced or transmitted in any form or by
any means, electronic, mechanical, including photocopying, recording or any information
storage without prior written permission from the author.

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ABSTRACT
The purpose of the study was to investigate the factors that affect capital adequacy in deposit
taking SACCOs in Kenya, a case study of Nairobi County. The study sought to address the
following research objectives: How does liquidity affect capital adequacy in deposit taking
SACCOs in Nairobi, How does risk affect capital adequacy in deposit taking SACCOs in
Nairobi and how does deposit mobilization affect capital adequacy in deposit taking
SACCOs in Nairobi.

A causal research design was applied to a population of 35 licensed deposit taking (FOSA)
SACCOs in Nairobi that were regulated by SASRA. This design is appropriate when the
researcher wishes to provide an accurate representation of situations and make inferences
about the target population. This study adopted a census sampling technique of 35 licensed
deposits taking SACCOs in Nairobi and used secondary data obtained from financial
statements. This study used descriptive and inferential statistics to establish the relationship
between the 3 independent variables and the dependent variables – Capital adequacy (core
capital to total assets) and Capital adequacy as a ratio of core capital to total deposits.
Regression and correlation analyses were used and based on the association between two or
more variables. The Statistical Package for Social Sciences (SPSS) and Excel were the
analysis tools used in this study.

The study found that under the liquidity measures cash position and reserve ratio had positive
association with core capital to total assets ratio, while capacity ratio and total deposit had a
negative effect or association. On the other hand cash position, capacity ratio and total
deposit had negative association with core capital to total deposits ratio except the reserve
ratio. All the liquidity ratios had a significant effect on core capital to total assets except cash
position indicator ratio .The effect of the liquidity ratios on capital adequacy measure (core
capital to total deposit) was found to be significant at the 95% level of confidence. Risk had a
positive association with both measures of capital adequacy, the effect of risk on both capital
adequacy measures was found to be significant at the 95% level of confidence. The study
found that deposit mobilisation had a positive effect or association with core capital to total
assets and negative association with core capital to total deposits. The effect of deposit
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mobilizations on both capital adequacy measures was not significant at the 95% level of
confidence.

Based on the findings, the study concluded that DTS need to maintain reasonable level of
liquidity so that the capital adequacy ratios are at par with the ratios recommended by
SASRA, a unit increase in risk would increase capital adequacy and that an increase in
deposit mobilization would increase capital adequacy under core capital to total asset ratio
while a similar increase would lower capital adequacy as core capital to total deposits.

The study recommends that managers of the SACCOs closely adhere to the requirements
provided by regulation by ensuring sufficient reserves to meet withdrawal and disbursement
demands. Further, DTS are encouraged to maintain sufficient capital that can reasonably
absorb loan losses so that the member’s savings are protected and the continuity of the Sacco
is assured. The recommended percentage by the bank is a minimum of 10%.
The study also recommends that a central depository facility be established to cushion DTS
from seasonal liquidity shortages. Finally, (FOSA) should expand their savings mobilization
efforts to increase the funds available to them, improve service provision to clients, and
increase their local market share by examining their existing operations to see how they can
better provide the key features that savers seek: safety, convenience, and returns.

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ACKNOWLEDGEMENT

First and foremost I thank God for the wisdom, strength and time he gave me to go through
this study.

I would like to express my gratitude to my supervisor Dr. Amos Njuguna for the critical
guidance he gave throughout the course of this study.

I appreciate my friends, for their continuous prayers and moral support.

Additionally I wish to convey my gratitude to my family whose help and enduring moral
support enabled me to finish this course.

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DEDICATION
I dedicate this work to my husband James and daughter Annaliz for their love and support.

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TABLE OF CONTENTS

STUDENT’S DECLALATION ..........................................................................................ii
COPY RIGHT ......................................................................................................................iii
ABSTRACT ..........................................................................................................................iv
ACKNOWLEDGEMENT ...................................................................................................vi
DEDICATION......................................................................................................................vii
TABLE OF CONTENTS ....................................................................................................viii
LIST OF TABLES ...............................................................................................................xi
LIST OF FIGURES .............................................................................................................xiii

CHAPTER ONE ..................................................................................................................1
1.0 INTRODUCTION..........................................................................................................1
1.1 Background to the study ..................................................................................................1
1.2 Statement of the problem .................................................................................................4
1.3 General Objective ............................................................................................................5
1.4 Specific Objectives ..........................................................................................................5
1.5 Importance of the study ...................................................................................................6
1.6 Scope of the study ............................................................................................................6
1.7 Definition of terms ...........................................................................................................7
1.8 Chapter summary .............................................................................................................8

CHAPTER TWO .................................................................................................................9
2.0 LITERATURE REVIEW .............................................................................................9
2.1 Introduction ......................................................................................................................9
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2.2 Effect of Liquidity on Capital Adequacy of DTS ............................................................9
2.3 The Effect of Risk on the Level of Capital Adequacy of deposit taking Sacco ..............15
2.4 Effect of deposit mobilization on capital adequacy in deposit taking SACCOs. ............21
2.5 Chapter Summary ............................................................................................................26

CHAPTER THREE .............................................................................................................28
3.0 RESEARCH METHODOLOGY .................................................................................28
3.1 Introduction ......................................................................................................................28
3.2 Research design ...............................................................................................................28
3.3 Population and sampling design ......................................................................................29
3.4 Data collection methods ...................................................................................................30
3.5 Research Procedures ........................................................................................................30
3.6 Data analysis methods......................................................................................................30
3.7 Chapter summary .............................................................................................................32

CHAPTER FOUR ................................................................................................................33
4.0 RESULTS AND FINDINGS .........................................................................................33
4.1 Introduction ......................................................................................................................33
4.2 General Information .........................................................................................................33
4.3 Effect of Liquidity on capital adequacy of deposit taking SACCOs ...............................39
4.4 Effect of Risk on Capital Adequacy of DTS in Nairobi ..................................................55
4.5 Effect of Deposit Mobilisation on Capital Adequacy of DTS in Nairobi........................59
4.6 Combined Effect of Liquidity, Risk and Deposit Mobilisation on Capital Adequacy of
DTS in Nairobi .......................................................................................................................63
4.7 Chapter Summary ............................................................................................................69

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