Moderating Effect of Investment Decisions on Corporate Risk Management and Financial Performance of Deposit Taking Savings and Credit Cooperative Societies In Western Kenya

Abstract

Globally, the financial performance of Savings and Credit Cooperative Societies (SACCOs) has been improving steadily as shown by the increase in membership which is approximated at one billion, with the turnover from the world’s 300 top SACCOs amounting to $2.5 trillion as at December 2017. In Africa, SACCOs have had a significant role in transforming the continent through financial support of businesses. They play a fundamental role in Kenya’s financial sector by assisting members save money and offer credit facilities. However, statistics show that financial performance of DT-SACCOs is fluctuating as shown by non-performing loans which stood at 5.12%, 5.23% and 6.14% as at 2015, 2016 and 2017 respectively, with that of DT-SACCOs in Western Kenya averaging 6.2% for the five years. Previous studies linking corporate risk management to financial performance show mixed results indicating lack of an effective framework for enhancing financial performance in the DT-SACCOs. Existing literature on the impact of investment decisions on financial performance has mainly focuses on banks indicating that the effect on DT-SACCOs unexplored. Moreover, studies on the influence of investment decisions on the relationship between corporate risk management and financial performance have received little attention in the context of DT-SACCOs. The study sought to establish the relationship between corporate risk management, investment decisions and financial performance of DT-SACCOs in Western Kenya. Specifically, the study sought to; establish the effect of corporate risk management on financial Performance; assess the effect of investment decisions on financial performance; and to analyse the moderating effect of investment decisions on the relationship between corporate risk management and financial performance of DT-SACCOs in Western Kenya. Finance Distress theory, Portfolio theory, Agency theory and investment value theory guided the study. Correlational and descriptive research designs were adopted. The target population was 19 DT-SACCOs in Western Kenya and a census of 19 DT-SACCOs for the period 2013 to 2017 was selected, yielding 95 data points and a census approach was used to select interviewees. Secondary data from financial statements was used while key informants who were chairpersons of the DT-SACCOs provided primary data that was used for triangulation purposes. Unit root test showed the data stationary at levels. Expert opinion established content and construct validity. Hierarchical panel data regression was used to analyse data. The findings showed corporate risk management has a negative significant effect on financial performance (non-performing loan ratio (β = -0.4059, p = 0.0015), and cost income ratio (β = -0.0499, p = 0.0001), indicating a unit reduction in non-performing loan ratio improves financial performance by 40.59%, and a unit reduction in cost income ratio improves financial performance by 4.99%. Further, investment decisions had positive significant effect on financial performance (β = 0.2038, p = 0.0001) indicating that unit increase in investment decision leads to 20.38% increase in financial performance. The study revealed a significant moderating effect of investment decisions on the relationship between corporate risk management and financial performance (ΔR2 = .166, p < 0.05), indicating that incorporating investment decisions in corporate risk management improves financial performance by 16.6%. The study concludes that investment decisions are important when considered alongside corporate risk management, and recommends that DT-SACCOs in Western Kenya ought to invest in corporate risk management constructs of credit risk and operational risk management while incorporating investment decisions. The findings may be helpful to policy makers in SACCOs and Government in setting policies to govern the operations of DT-SACCOs in Kenya; shareholders in making investment decisions and academicians in forming a basis for future theory development in the fields of corporate risk management, Investment decisions and financial performance.