EFFECT OF CAPITAL ADEQUACY ON THE FINANCIAL PERFORMANCE OF SACCOS IN SAMBURU COUNTY
The study established the effect of capital adequacy on the financial performance of SACCOs in Samburu County, Kenya. There were 34 active Savings and Credit Co operative Societies. The study was guided by the Liquidity Preference Theory by Keynes in 1936 and Efficiency Structure Theory by Frantz Roger in 1988. The study adopted descriptive research survey design. Data was collected by use of questionnaires from a sample of 26 SACCO managers selected using purposive sampling technique. Data collected was analyzed for descriptive statistics (frequencies, means and percentages) and inferential statistics (Pearson correlation and regression analysis) with the aid of the SPSS software. The results were presented in the form of charts and tables. The study established that capital adequacy did not have a significant influence on the financial performance of SACCOs in Samburu County. Following this, the study recommended that the SACCO management should consider mobilizing additional capital so as to ensure that their SACCO has enough funds to service all the loans requested by members. INTRODUCTION A Savings and Credit Cooperative is a form of cooperative whose purpose is to pool the members savings and then provide them with credit facilities (UN HABITAT, 2010) Savings and Credit Cooperative Societies are formed with the general objective of promoting the economic interests and general welfare of its members. These are important institutions because they are capable of advancing loans at interest rates, lower than other financial institutions' charges. SACCOs play a pivotal role on the economies of the world. Globally, the industry has over one billion memberships and a workforce of over employed 250 million people. This is a sector that generates a turnover of 2.2 trillion US Dollars while providing infrastructure and services that the society needs to flourish. As at 2014, there were 57,000 Savings and Credit Co operative Societies (SACCOs) spread across 105 countries (World Cooperative Monitor, 2014) In 1844, Robert Owen established the first ever SACCO. Co operative activities have existed throughout history (Cobia, 2008) Man has been working with others since the early days to help kill large animals for survival and to achieve the goals they could not achieve if they worked independently. Cooperation has happened all over the world. Ancient records show that cooperative farming was practiced by the Babylonians and that the Chinese formed similar savings and loan associations to those currently in use. In North America, all joint efforts were needed to clear land in preparation for crop planting, threshing beans, and barn raisings. It is believed that the first organized cooperative enterprise was formed in 1752 in the United States, which is about a quarter of a century before the Declaration of Independence. According to ICA (2009) Rochdale Pioneers was the founder of the contemporary Cooperative Movement in Lancashire, England, to deliver cheap alternative to poor quality and adulterated food and provisions food, by the use of surplus so as to benefit the community. Subsequently, the co operative movement has succeeded spreading throughout the world and incorporating all parts of the economy. The principles that supported cooperatives ways of doing trade is still recognized today as the basis upon which all co operatives operate. In Africa, the SACCO idea sprung up in various parts of the continent in the early years of the 20th Century. In Ghana for instance, a Roman Catholic priest, Father John McNulty helped villagers to form a Savings and Credit Co operative in Jirapa town (Africa Confederation of Cooperative Savings and Credit Associations (ACCOSCA) (2014) Currently, the continent of Africa has membership of ISSN (Online) 2455 3662 EPRA International Journal of Multidisciplinary Research (IJMR) Peer Reviewed Journal Volume: 6 Issue: 1 January 2020 Journal DOI: 10.36713/epra2013 SJIF Impact Factor: 5.614||ISI Value: 1.188 2020 EPRA IJMR www.eprajournals.com Journal DOI URL: https:/doi.org/10.36713/epra2013 221 16 million, which is 8 percent of the whole world membership with a saving of 62% and loans of 65% being third after Asia and North America, which has 36 million and 102 million respectively (Barus, et al. 2017) Some of the services provided by SACCOs in Africa include normal loans, emergency loans, school fees loans and front office services for example; payment of salaries, salary advances, bank cheques, safe keeping of documents, and Automated Teller Machines (ATMs) support services (Ngaira, 2011) This therefore means that their financial performance is crucial as poor performance can lead to massive job losses. In today's society, cooperative financial institutions hold a considerable market share, with the IMF estimates that across all banking sector assets in developing countries, the market share of cooperative finance was equivalent to 24 percent in 2014 (Hesse Cihak, 2017) Previous research on cooperative finance during crisis indicates that they tended to fare better than investor owned savings and loans institutions, as they pursue more conservative investment policies (Chaddad Cook, 2014) For instance, analysis from the IMF indicates that cooperative banks in developed countries tend to be more stable than commercial banks, especially during financial crisis, as their investment patterns tend to be less speculative and returns are therefore less volatile (Hesse Cihak, 2017) Cooperatives were established in Kenya in 1908 and membership was limited to white colonial settlers. Lumbwa, now Kipkelion district, is where the first cooperative was created. In 1944, Africans were allowed to form and join cooperatives by colonial officers (Gamba Komo, 2012) A new Cooperative Societies Ordinance was enacted in 1945 that allowed African involvement in the cooperative movement. In 1946 a cooperative department was established and a cooperative registrar appointed. In 1950 most colonial civil servants began supporting and encouraging cooperative growth and by 1952 about 160 cooperatives were registered (Alila Obado, 1990) There were about 1000 cooperatives in 1963, which since then has grown rapidly in size. In recognition of SACCO's growing importance and complexity, a SACCO Societies' Act was passed in 2008 to pave the way for robust implementation of SACCO's prudential requirements through FOSAs. This gave rise to SACCO Regulatory Authority (SASRA) The body charged with the responsibility of regulating deposit taking SACCOs. According to Bwana and Mwakujonga (2013) depending on the membership profile different types of SACCOs exist and the items applied to the members vary accordingly. Essentially, there are three broad categories of SACCOs, such as SACCOs based on the population; SACCOs based on workers, and agricultural SACCOs. Today the co operative movement now contributes well over 45 per cent of Kenya's GDP and it is estimated that at least one out of every two Kenyans directly or indirectly derives his/her livelihood from the co operative movement. While the exact number of SACCOs operating in Kenya is not known, estimates range from almost 4,000 up to 5,000 (Financial Sector Deepening (FSD) 2014) Liquidity Management of Savings and Credit Co operative Societies Liquidity is the ability of a business entity to honour all cash payment commitments as they fall due (Kimathi, 2014) In financial terms, this is the ability to turn an organization's assets such as investments, accounts receivable, and inventory into cash (Lewis, 2017) An asset is therefore, said to be liquid if it can be easily bought or sold. The cash payment commitments can be met either by drawing from a stock of cash holdings, by using current cash inflows, by borrowing cash or by converting liquid assets into cash. Liquidity management entails intermediation between fund lenders and fund seekers by the financial institutions (Sacco Society Act, 2008) Liquidity management has twin dimensions that of credit creation and liquidity risk management. Negus (2011) defines liquidity management as a term which broadly describes the ability of a business to fulfil financial obligations through cash flow, financing activities and capital management. Managing liquidity can be difficult, as it is influenced by activities generating revenue and expenses, capital and dividend plans, and tax strategies. Past studies show that effective liquidity risk management helps ensure a SACCO's ability to meet cash flow obligations, which are uncertain as they are affected by external events and other agent's behaviour (Song'e, 2015) Liquidity risk management is of paramount importance because liquidity shortages can have system wide consequences in a single institution. Liquidity is essential in all SACCOs to meet customer withdrawals, compensate for balance sheet fluctuations, and provide funds for growth (Njeri, 2014) Given the sheer volume and severity of corporate failures in 2008 and 2009, liquidity management has become a regular agenda item at meetings of the board of directors and the audit committee. Liquidity management involves estimating liquidity requirements and meeting those needs in a cost effective way (Owino, 2011) An efficient liquidity management allows financial institutions to predict and schedule liquidity demands over different periods, and understand how funding requirements will change under different scenarios, including unfavorable conditions. SACCOs must maintain ISSN (Online) 2455 3662 EPRA International Journal of Multidisciplinary Research (IJMR) Peer Reviewed Journal Volume: 6 Issue: 1 January 2020 Journal DOI: 10.36713/epra2013 SJIF Impact Factor: 5.614||ISI Value: 1.188 2020 EPRA IJMR www.eprajournals.com Journal DOI URL: https:/doi.org/10.36713/epra2013 222 adequate levels of capital, liquid assets and future lines of borrowing to meet planned and c