Capital Adequacy Requirements and Capital Efficiency of Deposit-Taking SACCOs (DTSs)

Abstract

In recent years, more stringent regulations governing Savings and Credit Co- operatives (SACCOs) have been adopted. One such regulation is capping of capital adequacy requirements which compel Deposit-Taking SACCOs (DTSs) to maintain a minimum of Ksh. 10 million of members’ deposit as core capital to cushion against losses that may result from operational risks. A key objective of this regulation is to enhance resilience of SACCOs to these risks. And while regulators pursue resilience, this often comes at a cost to efficiency. We undertook a study to examine the impact of the capital adequacy requirement on the efficiency of SACCO operations. In the study, we investigated the relationship between capital adequacy requirements and capital efficiency of DTSs. Adopting a positivism research philosophy and a correlational research design; we employed regression analysis to determine the relationship between capital adequacy requirements and the capital efficiency of DTSs. We measured the level of capital efficiency of each SACCO using Data Envelopment Analysis (DEA). The study found DTSs capital efficiency to have a negative but not significant relationship with core capital. DTSs meeting the core capital of Ksh. 10M and more did not enjoy better efficiency compared to those not meeting the prescribed threshold despite not being significant. The findings imply that achieving compliance is negatively affecting the capital efficiency of DTSs. Imposing of strict regulations on DTSs hinders their ability to use inputs in optimal proportions to allocate their scarce resources resulting in lower returns. Furthermore, DTSs having a core capital of Ksh.10 Million and more have excess liquidity funds than they should hold. Holding of these idle funds may imply inefficient utilization of resources by the DTSs. We recommend that the regulator re-examine the capital adequacy requirements with the goal of establishing the most optimal levels that guarantees safety of members deposits and resilience of the SACCOs while optimizing on efficiency.