Financial Risk and Shareholders Wealth of Deposit Taking Saccos in Nairobi City County

Abstract

Since 2010, DT-SACCOs in the country have struggled with poor financial performance due to financial risks and the inability to retain funds for capital growth, consequently failing to meet shareholder expectations for increased wealth. The general objective of this study was to investigate the effect of financial risk on the wealth of shareholders of DT-SACCO in Nairobi City County. The specific objectives of the study were to examine the effect of capital, credit, and liquidity risk on value of shareholders' wealth. The study also investigated the moderating influence of Sacco asset size. The study was anchored on four theories: stewardship theory, the buffer theory of capital adequacy, the shiftability theory of liquidity and the modern portfolio theory. The study opted for a positivist research philosophy over interpretivism and realism. This positivism approach facilitated a clear, empirical examination of causal relationships within a structured explanatory research design, targeting a specific population of 43 licensed DT-SACCOs. The diagnostic tests used comprise of normality, autocorrelation, homoscedasticity, stationarity, and multicollinearity. The data for this research was sourced from the Sacco Society Regulatory Authority and SACCOs reports covering 2011 to 2021. Analysis was conducted using Stata 16. Results of corelation reveal a positive association between capital risk and shareholders wealth, while credit risk was found to have a negative relationship with shareholders wealth. Liquidity risk had a negative relationship with the value of shareholders' wealth. In addition, the DT-SACCO size showed a positive association in relation to shareholders' wealth. Results of Panel regression analysis shows a positive and statistically significant association between capital risk and shareholders wealth of DT-SACCOs of Nairobi city county. The capital risk had a coefficient estimate of 1.1400 and its p-value is 0.00900. However, it can be noted that the credit risk did not significantly affect shareholder wealth. The results were indicated by a coefficient of -2.6600 and a p-value 0.6350 for this variable. Contrary, it was noted that liquidity risk affected shareholder wealth negatively by a coefficient of -5.7600 and p-value of 0. 0000. Firm size had a statistically significant moderating effect on the interaction between financial risk variables on shareholders wealth. The study recommended that SACCOs embrace effective capital risk management practices by adopting optimal riskreturn balance, diversifying sources of capital and developing strong monitoring mechanisms for risks. In addition, the study recommends for SACCOs to develop comprehensive liquidity risk management policies, closely monitor liquidity adequacy ratio, and cash flow projections and diversify funding sources.