The effect of nonperforming loans on the financial performance of savings and credit co-operative societies in Nairobi county, Kenya

Abstract

Financial performance has received significant attention from scholars in the various areas of business and economics. It has also been the primary concern of business practitioners in all types of organizations since financial performance has implications to organization’s health and ultimately its survival. High performance reflects management effectiveness and efficiency in making use of company’s resources and this in turn contributes to the country’s economy at large. Some of the factors affecting financial performance include; nonperforming loans, size of the organization, leverage and management efficiency. The study made use of secondary data such as data on the levels of nonperforming loans, profitability of the SACCOs and provision for bad debts which was obtained from the annual financial statements of the SACCOs operating FOSAs within Nairobi County. Journals, books and other resource materials on nonperforming loans and financial performance were also used as well as review of related studies which was done to compare relevant information as regards the same. The study made use of regression analysis to establish the effect of nonperforming loans on the financial performance of SACCOs in Nairobi County. The study findings illustrates that there is a strong relationship between return on assets and independent variables (firm size, leverage & nonperforming loans ratio). From the determination coefficients, it can be denoted that there is a strong relationship between dependent and independent variables given a coefficient of determination value of 0.630. From the findings and conclusions, the study recommends that SACCOs should opt for equity financing instead of debt financing if it wants to improve on its leverage. This involves funding growth through retained earnings and issuing of shares. The study also recommends credit approval and monitoring procedures to be focused on the borrower's cash flow and ability to repay in an effort to improve the quality of the loan assets and mitigate future allowances for loan losses.Finally the study recommends that since most of the SACCOs lack the efficient risk management mechanism that will help eradicate or sieve out serial defaulters, they require referencing solution that will enable them submit and share data whilst processing their customers’ credit application. This will help prevent borrowers with unsatisfactory credit record from accessing further credit from other unsuspecting lending institutions.