Effect of Interest Rate Volatility on Financial Performance of Deposit-taking Savings and Credit Cooperative Societies in Kenya

Abstract

Against the backdrop of Kenya's dynamic economic environment and the pivotal role of SACCOs in promoting financial inclusion and socioeconomic development, understanding the factors influencing SACCOs' financial performance is of paramount importance. This study aimed to determine the effect of interest rate volatility on financial performance of deposit-taking SACCOs in Kenya. The predictor variable was interest rate volatility given by standard deviation of average lending rate. The control variables were capital adequacy ratio, liquidity ratio and firm size. The response variable was financial performance given by ROA. The study was anchored on the maturity transformation theory and supported by liquidity preference theory and efficient market hypothesis. To achieve the study objective, secondary data extracted from annual financial reports of 176 licensed SACCOs in Kenya from 2018 to 2022 was analyzed using descriptive, correlation, and regression analyses. The regression model employed in the analysis included ROA as the dependent variable and interest rate volatility, capital adequacy, liquidity, and firm size as independent variables, controlling for potential confounding factors.Regression analysis indicates that interest rate volatility has a significant negative impact on ROA, with a regression coefficient of -0.113 (p < 0.05). Conversely, capital adequacy and firm size emerged as significant determinants of ROA, with positive regression coefficients of 0.152and 0.095 (p < 0.05) respectively. However, liquidity does not emerge as a significant