The Effect of Credit Policy on Financial Performance of Deposit Taking Savings and Credit Co-operative Societies in Nairobi County

Abstract

Efficient credit policy influences sharing of information among financial institutions about borrowers, stabilizes interest rates, reduces non-performing loans, increases deposits and increases credit extended to borrowers. In Kenya, credit management became widely adopted by regulated SACCOs to mitigate loan defaults and improve financial performance. This study sought to fill the existing knowledge gap by answering the question what is the effect of credit policy on financial performance of SASRA regulated SACCOs in Nairobi. The study adopted correlation research design. The study population consisted of all 40 SASRA Regulated SACCOs registered under the Societies Act in Nairobi, Kenya .The data was collected from regulated SACCOs financial books and financial reports of the societies. The correlations were used to determine whether the relationships between credit policies and financial performance are weak or strong. A multivariate regression model of financial performance versus credit policies was applied to examine the relationship between the variables.The study revealed that regulated SACCOs had adopted credit standards as a credit policy and credit term policy loan ratio in determination of how much a client would borrow. The study revealed that regulated SACCOs were also applying collection policy, considering non-performing loans and total loans, loan–loss provision coverage ratio and application of credit policy which increased Return on Assets (ROA) for the regulated SACCOs to a great extent. From the regression results, use of collection policy (Default Rate) led to significant increase in ROA of regulated SACCOs indicating that lowering non performing loans to total loans would significantly lead to increase in profitability. The study concluded that there existed a significant strong and positive correlation between credit Standards (BDC Ratio) and ROA as correlation co-efficient. The study concluded that the application of credit standards led to significant increase in financial performance, use of credit standards would improve return on assets of regulated SACCOs and that application of credit terms policy significantly increased ROA of regulated SACCOs hence decreasing loan to assets ratio significantly leading to increase in financial performance. For policy implications, the study recommends that regulated SACCOs should adopt and implement credit standards as it would result into significant increased in return on Assets to a great extent.