Loan Portfolio Diversification and Liquidity Risk of Deposit-Taking Saccos in Kenya

Abstract

Savings and Credit Cooperatives (SACCOs) are essential providers of financial services to a significant portion of the population that remains underserved by banks and other financial institutions. However, SACCOs, particularly deposit-taking ones, face various challenges in their daily operations, including liquidity risk. This study aimed to investigate the influence of loan portfolio diversification on liquidity risk among deposit-taking SACCOs in Kenya. Secondary data collected from audited financial statements submitted to the SACCO Societies Regulatory Authority (SASRA) were analyzed using panel data analysis. The data spanned a period offive years from 2013 to 2017, covering multiple deposit-taking SACCOs. Regression and correlation analyses were conducted to test the relationship between the dependent and independent variables.The results revealed that loan portfolio diversification hada significant influence on the liquidity of deposit-taking SACCOs in Kenya. The findings suggest that SACCO Societies Regulatory Authority (SASRA) should develop guidelines to regulate loan advancement for personal use. Managing liquidity and resource levels while meeting the fiscal desires of members remains a significant challenge for cooperative financial institutions in Africa. In Kenya, SACCOs are mandated to keep 15% of their saving deposits and interim liabilities in liquid assets in compliance withliquidity risk practice. Funding liquidity is a significant indicator of fiscal stability in a SACCO as it shows its ability to meet financial commitments when due.Loan portfolio diversification, which involves minimizing risk by offering funds or products to a diverse group of individuals, is crucial in managing liquidity risk. Without proper management of loan products, SACCOs are likely to face liquidity problems during economic difficulties. Effective liquidity risk management ensures that SACCOs can maintain their liquidity and avoid insolvency.