Influence of Liquidity Management Regulatory Standards on the Financial Performance of Deposit Taking Saccos in Kenya

Savings and Credit Co-operative (SACCO) is a financial institution that is owned and controlled by its members and operated for the purposes of promoting thrift, providing credit at low interest rates and providing other financial services to its members. Over the years the SACCOs have expanded financially and even started banking like services which were called Front Office Service Activities (FOSA) in attempt to increase efficiency in service delivery but instead led to illiquidity, capital inadequacy, poor credit management and low confidence among members. The rapid growth and such failures in the SACCO Sub-sector created the need for SACCO Specific legislation hence the enactment of the SACCO Societies Act (2008) to specifically regulate and supervise their operations. The purpose of this study was to establish the effects of liquidity ratio on Financial Performance of Deposit Taking SACCOs (DTS) in Kenya. Relevant literature was reviewed to ascertain the knowledge gap left by previous scholars. The study targeted a total of the 175 DTS registered and operating in Kenya. Random sampling was used to select 30 DTS which formed the sample of this study which utilized Comparative research design. Secondary data was used and data analysis was done using both descriptive and inferential statistics with the aid of SPSS version 21. The study findings indicated that Liquidity ratio as recommended by SASRA had the highest effect on financial performance of DTS in Kenya in the period Post LMRS. The LMRS have a positive impact on the financial performance of deposit taking SACCOs in Kenya. The study recommends further research in other areas relating to risk management framework because DTS like any other financial institution are affected by multiple risk factors, and there is need to expound on other measures of performance. INTRODUCTION Background to the study According to the International Cooperative Alliance (ICA, 2007), a cooperative is an autonomous association of people brought together on their own volition with the aim of meeting their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. ICA identifies seven principles that ought to guide the formation, organization and activities of cooperatives, namely: (a) Voluntary and open membership (b) Democratic member control (c) Member economic participation, (d) Autonomy and independence, (e) Education, training and information, (f) Cooperation among Cooperatives (g) Concern for Community. Marvin (2006) further found that the said co-operative values and principles have withstood the test of time. According to Mudibo (2005), the importance of regulations is to hedge against the high risk attributed to imbalances in financial institutions balance sheets as they serve as prudential measures that mitigate the effects of economic crises on the stability of the financial institution system and subsequent accompanying macroeconomic results. Sound regulation means the institutions are able to achieve objective of giving cheap loans, as well as protecting member’s savings. Basically, there are three arguments for financial regulation. The first is that regulation is needed for prudential reasons, (Mudibo, 2005). The other argument is that financial regulation is needed to counter moral hazard problems created by the regulator themselves (Bhole, 2004). The final argument is that financial regulation is needed to protect small depositors (Kumar, 1997). Theories on financial regulation emphasize the fact that markets do not always operate in the best interests of customers, so intervention in the form of regulation is necessary to protect consumer and industry. The study is underpinned by the agency theory founded by (Mitnick, 2006) which suggests that the stewards or the agents should make financial decisions for maximization of shareholders’ value. The theory explains the relationship between the principals, such as members and agents. In this theory, members who are the owners or principals of the Sacco, hire by electing the management board as their agent (Mitnick, 2006). The Principals the delegate the running of business to the management board which in turn hires and delegates authority to the managers (Nagash, 2011). SACCOs regulation and performance relate in that the regulations are meant to set specific requirements on the 6 tools used to measure performance (PEARLS) leading to a direct relationship (FSD, 2009). SACCO Societies like any other financial institutions need regulations that guides them in their operation and take care of the general stake holders interests. Liquidity Management Regulatory Standards According to (WB, 2004), regulation is a supervision which subjects institutions to certain requirements, restrictions and guidelines with the aim of maintaining integrity of the financial system. In this case the institutions need to adhere to the guidelines and provisions that are issued from time to time from various regulators in daily conduct of their affairs. Prudential regulatory standards are provided to an institution to Ngunyu D. Mutinda et al | International Journal of Business Management and Economic Research(IJBMER), Vol 9(6),2018, 1510-1518 www.ijbmer. com 1510 ISSN:22296247