Selected Firm Characteristics and Financial Intermediation Efficiency of Deposit Taking Saving and Credit Co-Operative Societies in Kenya

Abstract

There has been growing concerns over the financial soundness of SACCOs with a few having collapsed in the recent past. Empirical evidence indicates that there exists a strong association between efficiency and stability of financial institutions and that an efficient banking sector is better able to withstand negative shocks in case of financial crises. The study first sought to evaluate the financial intermediation efficiency of deposit taking SACCOs (DTSs) and subsequently determine the relationship between selected firm characteristics and financial intermediation efficiency. Specifically, the relationship between asset quality, income diversification, profitability & size and financial intermediation efficiency was assessed. A balanced panel data for 103 DTSs over the period 2011-2014 was collected and analyzed using a two staged methodology. In the first stage, efficiency scores were generated using data envelopment analysis (DEA). DEA Computer Program Version 2.1 was used to generate the efficiency scores. In the second stage, firm characteristics were regressed on the efficiency scores using fixed effects panel regression model. The bias corrected efficiency score were used instead of conventional DEA scores and incorporated into EViews version 8 for regression analysis. Fixed effect model with robust standard errors was used for analysis. The study revealed that asset quality had a direct relationship with intermediation efficiency. This implies that as the asset quality improves, efficiency of a DTS increases. Diversification was found to be hurting efficiency. More profitable DTSs were found to be more efficient indicating that profitability is efficiency enhancing. The results also revealed a positive relationship between size and efficiency. The study recommends that managers and policy makers should concentrate on how to improve the managerial efficiency and also increase the size of SACCOs. Policy framework should also be directed towards encouraging DTSs to consolidate their operations and limit their diversification into noninterest income.