Effect Of Capital Structure On The Liquidity Of Deposits Taking Saccos In Kenya

Abstract

The effects and the existence of an optimal capital structure has remained a matter of academic debate since the capital structure irrelevance proposition by Modigliani and Miller in 1958. According to the SASRA’s SACCOs annual supervision report of 2022, deposits taking SACCOs in Kenya hold over 700 billion Kenya shillings in assets. This study sought to determine the effect of capital structure on the liquidity of deposit taking SACCOs in Kenya. The study used a descriptive research design to collect panel data from the published financial statements of deposit taking SACCOs in Kenya in relation to capital structure, in particular the long-term debt, equity and members non-withdrawable deposits. The study found out 59% of variations of liquidity levels of deposits taking SACCOs in Kenya can be explained by the long-term debt, share capital and the members’ non-withdrawable deposits in their capital structure. The study established that capital structure component of DT SACCOs in Kenya, namely; long-term debt, share capital and non-withdrawable deposits have an influence on the SACCO liquidity position. The study established that long-term debt has a positive and a significant effect on the liquidity risk of deposits taking SACCOs in Kenya. An increase in long-term debt will positively affect the SACCO liquidity level with 3.175 units. The study found out both the share capital and the non-withdrawable deposits also have a positive and significant effect on the liquidity levels of deposits taking SACCOs in Kenya, share capital (β= 1.122, p value <0.05), non-withdrawable deposits with (β= 3.011, p value <0.05). The study recommends to policy makers to develop a strict liquidity prudential guidelines mechanism to safeguard and limit the liquidity risk exposure of DT SACCOs and the need of the SACCOs’ management to continuously evaluate the cost of source of funds against the interest revenue generated from loans to members as lending is the core business of DT SACCOs in Kenya so as to manage their liquidity risk exposure. Consequentially with the noted study limitations, a future study on the capital structure on liquidity of non-deposit takin SACCOs should be carried as well as a survey of all the licensed deposits taking SACCOs in Kenya using a well-structured questionnaire to capture the primary data from the SACCOs’ management in regard to effect of capital structure on liquidity management.