Relationship Between Capital Adequacy Requirements and Capital Efficiency of Deposit-Taking Savings and Credit Co-operatives Societies in Kenya

Abstract

With the expansion of Kenya’s financial system over the last two decades, the Savings and Credit Co-operative (SACCO) sector has also developed significantly. Their continued growth and its impact on the financial sector growth and economic policies, has made the sector a major target for financial control. Their regulation by SASRA means that SACCOs have to adhere to the set standards for them to operate across the country. One such a regulation is the setting of capital adequacy requirements which compels deposit-taking SACCOs (DTSs) to maintain a minimum of Ksh. 10 million of members’ deposit as core capital to cushion against losses that might be experienced because of risks resulting from their operations. Consequently, by meeting the core capital of Ksh. 10 million and above results to excess idle funds which increases their liquidity. This means that these DTSs pursue a double bottom line in maintain certain liquidity levels and the same time required to generate more return for each shilling in capital availed to the firm. However, while it is prudent to mitigate against financial risk, the impact of this requirement on the efficiency of SACCO operations has not been investigated. As reflected by the presented theories and empirical literature there is inadequacy of research findings as to whether holding of these idle finds simultaneously with imposing capital adequacy requirements have an effect on the efficiency of DTSs. This study analyzed the relationship between capital adequacy requirements and efficiency of deposit-taking SACCOs in Kenya. Specifically, the study determined the efficiency of DTSs in Kenya; established the effect of capital adequacy requirements on capital efficiency of DTS; and, investigated the moderating influence of DTS size on capital adequacy requirements and capital efficiency of DTS in Kenya. Adopting a positivism research philosophy, the study involved a correlational research design. The target population included all the 174 registered deposit-taking SACCOs operating in Kenya and registered by SASRA by the end of 2018. Secondary data extracted from the audited financial statements of the 174 DTSs operating in Kenya for the period 2014-2018 were used for the study. Regression analysis was further utilized to determine the relationship between capital adequacy requirements and the capital efficiency of DTSs and to test the hypotheses. DEA model was used to examine the efficiency of each SACCO registered with SASRA for a period of five years from 2014-2018. The findings of the study revealed that the DTSs had a mean capital efficiency of 0.51. DTSs capital efficiency had a positive significant relationship with core capital, negative significant relationship with core capital to total assets, positive significant relationship with core capital to total deposits and positive significant relationship with institutional capital to total asset ratio. DTS size was found to significantly enhance the relationship between capital adequacy requirements and efficiency of DTSs. The study gives recommendations which include a review by the regulator to re-examine the capital adequacy requirements in the interest of establishing the most optimal levels that guarantee’s safety of member’s deposits while optimizing on efficiency; focus by the regulator on activities that improves the quality of inputs and outputs rather than only focusing on subjecting DTSs to stringent capital regulations and; DTSs should subject all DTSs to a common regulatory framework