The Relationship Between Size and Cost Efficiency of Saccos With Front Office Service Activity in Kenya

Abstract

Most studies in cost efficiency in the financial services sector have been dominated by commercial Banks with very few having been conducted on other financial services sectors. The objective of the study was to investigate the relationship between size and cost efficiency of SACCOs with Front Office Service Activity in Kenya, this being an important financial services sector that has not been researched on widely. The study used a descriptive and correlation research design. Multiple regression analysis was used to analyze the relationship between efficiency Ratio (ER) as the dependent variable used to measure efficiency, and five independent variables namely; total assets, capital adequacy, management quality, return on assets, and liquidity. Published financial statements from 2008 to 2012 from a random sample of 43 SACCOs from a population of 124 licensed as at 31st December 2012 were used. The findings were that ER has a negative correlation with total assets at -0.308, capital adequacy at -0.007, and return on assets at -0.643, but a positive relationship with both Management quality at 0.087 and liquidity at 0.012. Low ER signifies high efficiency and vice versa, thus all variables with a negative relationship with ER contribute to high efficiency. Further findings were that, the industry efficiency ratio is 0.8095, large SACCOs have a mean efficiency level of 0.7106, small sized at 0.8504 while the least efficient are medium sized at 0.874. The most cost efficient SACCO had a mean ER of 0.3739 and the least had a mean of 1.4743. Findings of the study were consistent with studies by; Rangan et al (1988), Limam (2001), Marsh et al (2003), Kirkpatrick et al (2002), Lyaga (2006) and Kising’u (2007) that large financial institutions are associated with higher efficiency than smaller ones. The study recommends that in the face of the new constitutional dispensation of devolution, large SACCOs should not be split into smaller units at county level since there exists a positive correlation between size and efficiency, small inefficient SACCOs should be merged and that there is great room for managers to improve cost efficiency given the big disparity between the most efficient SACCO, the least efficient and the industry average.