Effect of Non-performing Loans on the Technical Efficiency of Deposit-taking Savings and Credit Societies in Kenya

Abstract

Savings and Credit Societies (SACCOs) in Kenya have faced a significant increase in non-performing loans (NPL), leading to various issues such as liquidity problems, unplanned high interest borrowing from banks, loss of trust among members, higher loan loss provisioning, reduced dividends and interest payouts, and board members losing elections. NPLs present significant challenges to the technical efficiency of deposit-taking SACCOs. These institutions heavily depend on loan repayments to uphold liquidity and financial stability. This study investigates the effect of non-performing loans (NPLs) on the technical efficiency of Deposit-Taking Savings and Credit Societies (DTSs) in Kenya, spanning the period from 2012 to 2023. Utilizing Data Envelopment Analysis (DEA) and panel data regression, the research analyses the level of technical efficiency of DTSs in Kenya and investigates the impact of NPL on the technical efficiency of DTSs in Kenya. From the random effects model, the findings reveal that NPLs do not significantly impact the technical efficiency of DTSs in Kenya. The research also establishes that gross loans and interest income are not significant predictors of technical efficiency within SACCOs. In contrast, non-interest expenses exhibit a significant negative relationship with efficiency. The research concludes that DTSs must prioritize controlling operational costs to improve efficiency and sustain their financial health. Based on these findings, the study offers policy recommendations, including the implementation of comprehensive efficiency strategies and the adoption of technology to streamline operations. The study also calls for further research to explore additional determinants of efficiency and to conduct comparative analyses with other financial institutions to deepen understanding of the dynamics at play in the SACCO sector.

Savings and Credit Societies (SACCOs) in Kenya have faced a significant increase in non-performing loans (NPL), leading to various issues such as liquidity problems, unplanned high interest borrowing from banks, loss of trust among members, higher loan loss provisioning, reduced dividends and interest payouts, and board members losing elections. NPLs present significant challenges to the technical efficiency of deposit-taking SACCOs. These institutions heavily depend on loan repayments to uphold liquidity and financial stability. This study investigates the effect of non-performing loans (NPLs) on the technical efficiency of Deposit-Taking Savings and Credit Societies (DTSs) in Kenya, spanning the period from 2012 to 2023. Utilizing Data Envelopment Analysis (DEA) and panel data regression, the research analyses the level of technical efficiency of DTSs in Kenya and investigates the impact of NPL on the technical efficiency of DTSs in Kenya. From the random effects model, the findings reveal that NPLs do not significantly impact the technical efficiency of DTSs in Kenya. The research also establishes that gross loans and interest income are not significant predictors of technical efficiency within SACCOs. In contrast, non-interest expenses exhibit a significant negative relationship with efficiency. The research concludes that DTSs must prioritize controlling operational costs to improve efficiency and sustain their financial health. Based on these findings, the study offers policy recommendations, including the implementation of comprehensive efficiency strategies and the adoption of technology to streamline operations. The study also calls for further research to explore additional determinants of efficiency and to conduct comparative analyses with other financial institutions to deepen understanding of the dynamics at play in the SACCO sector.