Credit Risk Management and Asset Quality of Tier One Deposit-Taking Saccos in Nairobi, Kenya

Abstract

Purpose: This study investigated the relationship between credit risk management and asset quality among Tier 1 deposit-taking SACCOs in Nairobi County, Kenya, with a primary focus on credit risk as a critical variable. Despite the vital role of these institutions in financial inclusion, many struggle with deteriorating asset quality and non-performing loan ratios that exceed regulatory thresholds.

Methodology: Using a descriptive research design and a census of 16 Tier 1 SACCOs over a seven-year period (2017–2023), the study analyzed secondary data from the SACCO Societies Regulatory Authority (SASRA). Credit risk was measured using the Loan-to-Value (LTV) Ratio, evaluating the potential for borrower default and the adequacy of collateral. The theoretical framework for this variable was anchored in Credit Risk Theory, which examines asset evolution and default probability. Inferential statistics, including Pearson correlation and fixed-effect panel regression, were employed to determine the impact of credit risk management on asset quality. Findings: The findings revealed a significant positive relationship between credit risk management and asset quality (r = 0.3323, p = 0.0003). Regression analysis indicated that credit risk management accounts for approximately 13.85% of the variation in asset quality within SACCOs over time, with a one-unit increase in risk management efforts leading to a 0.177-unit improvement in asset quality. Notably, among all credit management components, credit risk management was identified as having the strongest influence on the financial health of these institutions.

Unique Contribution to Theory, Policy and Practice: The study concluded that adopting robust credit risk frameworks, including stricter LTV limits and enhanced borrower default assessments, is essential for mitigating financial instability and ensuring the long-term sustainability of the SACCO sector.