Board Characteristics and Financial Distress of Deposit Taking Savings and Credit Cooperatives in Kenya

Abstract

Savings and Credit Cooperatives (SACCOs) have evolved over time from mobilizing savings and granting loans to become established entities that provide banking services to their customers. According SASRA, SACCOs have experienced financial distress and some of them have been shut down or issued with operating licenses to operate under stringent measures. This aimed at establishing influence of board characteristics in the financial distress suffered by Deposit Taking SACCOs in Nairobi County. The influence of related party transactions and intervening influence of firm revenue on this relationship was established as well as the control influence of external borrowing. The study is anchored on Stewardship theory with a view of managers as stewards of members’ funds, Agency Theory, Stakeholder theory, and Upper echelons theory. Longitudinal Descriptive research design was adopted on a sample size of 43 SACCOs from a population of 174 SACCOs licensed to operate in Kenya for the year 2019. Nairobi County was purposively chosen and a census was carried out on deposit taking SACCOs in the county. Secondary data was collected from SASRA using a data collection sheet and a panel data analysis performed using STATA software and findings were presented using tables. The study came to a conclusion that an association exists between board characteristics and financial distress of Deposit Taking SACCOs where board composition, board education and board tenure have statistically significant and negative influence on financial distress while RPTs and the size of the board statistically significant and positive impact on financial distress. Firm revenue does not significantly intervene the relationship between board characteristics and financial distress and external borrowing has no control influence on this relationship. The study made recommendations to this effect as follows: SACCOs need to have lean boards, Board composition should also be improved by including more women on boards, there should be more inclusion of members with high and relevant education credentials, and SACCOs should have term limits for their members. Related party transactions should be kept at a bare minimum since it is significant, when it is jointly considered with board characteristics. External borrowing may be relied upon to ease financial distress in SACCOs since it has no significant control influence on SACCO’s level of financial distress. The regulator may come up with a tool based on Altman’s Z score models to establish financial distress in SACCOs in order to offer timely advice to alleviate more distress and consequent bankruptcy which may lead to closure of SACCOs. Another research may be carried out to establish other factors causing financial distress and how to turn around the SACCOs already in distress.