The study of financial performance has evolved over period of time with different scholars giving different definition and measures of financial performance. Some academicians measure performance by using the total market value of a firm or the sum between the market value of stocks and value of equity options [1], Other scholars consider market capitalization to be too limited in defining a firm’s performance and they prefer to include the value of the firm’s operational   assets [2],   while other scholars have adopted accounting based measurements to indicate firm’s performance. These accounting based measurements include return on assets (ROA), return on equity (ROE) and Tobin’s Q measures; [3-5]. Posits that access to financial services enables poor people to establish and manage their own small enterprises which create profits, increase working capital and generate employment opportunities [6]. According to King and Levine, [7], financial development is a good predictor of future growth.

In Siaya County, according to County Cooperative Performance Report [8], for the year 2018, Alego-Usonga Sub-County, there were a total of 12 registered Urban Sacco’s out of which only 2 were active while 9 remained dormant. The urban Sacco’s sector provided the bulk of active membership in the sub-county. The share/deposits mobilization was kshs.314, 671,497 up from kshs. 297, 974,483 the previous year depicting a 5.6% increase during the year. The turnover of the Urban Sacco societies increased to kshs.58, 407,115 up from kshs57, 915,736 the previous year this representing a 0.8% increase attributed to increased internal mobilization and utilization of own funds. The total turnover for the period however, decreased to kshs. 74,462,944 down from kshs. 79,190,746 recorded in the previous year this representing a 5.9% drop in turnover. The decrease is attributed to the continued poor performance in the dairy sector caused by most dairy farmers not patronizing their society, the drop in rice marketing, the continued closure of two societies i.e. Youth Bunge Sacco and Dominion Sacco which were major contributors to the turnover. It is against this background that the relationship between financing types and financial performance of these SACCOs came in handy to address the challenges facing the financial performance of the SACCO with specific focus to Siaya County-Kenya.

Statement of the Problem

The Financial sector regulators in their reports confirm that the Sacco industry has managed to build and sustain robust capital adequacy levels with adequate liquidity which have enabled them withstand shocks and vulnerabilities. Despite this assertion, the industry continued to maintain high cost to income ratios. SACCOs have been unable to successfully carry out their mandate due to lack of sufficient internal funds, high cost of debt, under capitalization and stringent capital adequacy requirements [9]. Due to the increase in demand of intermediate banking facilities, SACCOs began offering front office services similar to banks thus the rise of FOSAs taking deposits and giving credit to their members at competitive rates (Quasi Banking services). There has been an upward trend in the number of SACCOs opening their common bond. In Kenya, studies have been done on varied parameters affecting financial performance which include; [10,11], Hezron and Muturi, [12], investigated influence of regulation by SASRA on performance of SACCOS fund misappropriation, member withdrawals and the diversity of products offered to be the key factors. Hezron and Muturi, [12], Investigated effects of core capital and membership growth on performance of Deposit Taking SACCOs. The study concluded that capital requirements and membership growth positively affected financial performance. Otieno, [13], Examined factors influencing growth in SACCO wealth. However, none of the studies reviewed and looked in-depth on how the relationship between financing types employed by the SACCOs in relation to their performance, hence the need for this study to fill the gap.

Research Questions

• To what extent is retained earnings relate to financial performance of SACCOs in Siaya County

• How does members’ deposits relate to financial performance of SACCOs in Siaya County 

• What is the relationship between member share capital and financial performance of SACCOs in Siaya County

• Is there a Relationship between external borrowing and financial performance of SACCOs in Siaya County

Theoretical Framework

The study was majorly anchored in Net income theory which was the main theory of this research. Financing types and financial performance were related through various studies. This study was guided by Net Income (NI) theory of capital structure developed by David Durand in 1952. David Durand propounded the net income approach of capital structure in 1952 [14]. The theory suggests increasing value of the firm by decreasing the overall cost of capital which is measured in terms of Weighted Average Cost of Capital. This can be done by having a higher proportion of debt, which is a cheaper source of finance compared to equity finance. Weighted Average Cost of Capital (WACC) is the weighted average costs of equity and debts where the weights are the amount of capital raised from each source.

According to Net Income Approach, change in the financial leverage of a firm will lead to a corresponding change in the Weighted Average Cost of Capital (WACC) and also the value of the company. The Net Income Approach suggests that with the increase in leverage (proportion of debt), the WACC decreases and the value of firm increases. On the other hand, if there is a decrease in the leverage, the WACC increases and thereby the value of the firm decreases. For example, vis-à-vis equity-debt mix of 50:50, if the equity-debt mix changes to 20: 80, it would have a positive impact on the value of the business and thereby increase the value per share.

Net Income Approach makes certain assumptions which are as follows; the increase in debt will not affect the confidence levels of the investors; there are only two sources of finance; debt and equity. There are no sources of finance like Preference Share Capital and Retained Earning; All companies have uniform dividend payout ratio; it is 1.

This theory is addressing the relationship between financing types that is, which finance, from what source and the performance in terms of income generation of an organization. This theory was preferred because it directly relates financial planning with corresponding financial performance in terms of income generation. It has also been referred to by D.K.Y Abeywardhana, Department of Accountancy and University of Kelaniya, Sri Lanka. Therefore, in this study, financing types as explained in this theory relates to financial performance as the Net Income majorly depends on financing types. Management of Savings and credit cooperative societies ought to know the optimal capital structure when the WACC is at its minimum to take advantage of the gains associated with the increase in value. This means that there are advantages for cooperatives to embrace this theory and be levered to ensure shareholders returns is maximized [15].

Conceptual Framework

The study’s structure was conceived as a functional relationship between a set of four predictor financing type variables and financial performance as the dependent variable. The context of the study comprised the 150 SACCOs in Siaya County.

The study was based on the relationship between financing types and financial performance. The independent variables were the relating factors to the financial performance of SACCOs within the County. The independent variables were contextualized as relevant aspects of financing types while the dependent variable was contextualized as relevant performance measurement element of the study (Figure 1).

Knowledge Gaps

Gweyi, [16], the study only focused on leverage and ignored the element of equity [9]. The study only evaluated external financing and did not take in to consideration internal funds [17]. The study only evaluated cash flows (liquidity). Olenrewaju, [18], the study focused on small businesses in Nigeria. This study sought to investigate the relationship between financing types not decisions and financial performance of SACCOs. The study also focused on SMEs while this study focused on SACCOs. This study will have focused on SACCO sector and not cocoa processing firms [19]. The findings are from source of funding and is also limited to profitability rather than financial performance. This study sought to investigate the relationship between financing types and financial performance of SACCOs.

Figure 1: Conceptual Framework

Source: Researcher (2021)

Research Design

The study adopted the correlation research. This design helps to indicate the nature of the direction and movement in between the independent variable and dependent variable. This approach was suitable for this study as it indicated how a change in a particular variable (the independent variable) will be followed by a change of another variable (dependent variable) hence the researcher was able establish the relationship between financing types and Financial Performance of SACCOs in Siaya County.

Target Population

The researcher made use of panel data from financial statements for period of study from 2015 to 2019.There were 150 SACCOs registered by the department of Trade and Cooperatives in Siaya County as at 31st December 2019.

Description of Sample and Sampling Procedures

In this study, random sampling was used to derive the sample. According to Department of Trade and Cooperatives- Siaya County Government, the total number of registered Savings and Credit Cooperative Societies (SACCOs) in Siaya County totals 150. Out of which only 30 SACCOs were active and properly audited (County Cooperative Performance Report for the year 2019). The active SACCOs are arrived at by taking into consideration the definition of an active Saccos as defined by the regulations 2010 and relevant SACCO Societies ACT No. 14 of 2008 [20]. On this background the 30 SACCOs were chosen for convenience. However, at time of collecting the quantitative data, crucial data lacked in 9 SACCOs and thus the analysis in this study is based on these 21 SACCOs for period from 2015 to 2019.

Description of Data Collection

The secondary data was collected by use of Document analysis guide. The financial statements and reports were available at Siaya County Government registry. They comprised of audited financial statements and monthly reports submitted by the SACCOs. As Cooper, [21], explained, secondary data is a useful technique for evaluating historical or contemporary confidential public records, reports, government documents and opinions. The study focused on the period 2015 to 2019. This was the period when SACCOs had been audited and submitted all the reports.

Data Analysis Procedures and Presentation

Data in form of ratios was keyed into the document analysis guide and imported into a computer program Statistical Package for Social Sciences (SPSS) for analysis in order to provide sound basis for discussion and reporting of findings in a systematic, logical and summarized manner. The data obtained were analyzed by use of descriptive statistics including the mean, mode, variance and inferential statistics by use of correlation, ANOVA and regression analysis. The data collected were entered into an Excel spreadsheet for fast and accurate analysis. Correlation analysis was used in order to estimate the relationship between financing types and financial performance of SACCOs in Siaya County. Multiple regression equation was used to estimate the cause and effect of financing types on financial performance of SACCOs in Siaya County. Analysis of Variance (ANOVA) and R squared were also obtained. The study used the following multiple linear regression model.

Y = βo+β1X1 + β2X2 +β3X3 + β4X4+ e

1

Where:

• Y: Denoted Return on Assets.

• βs: Denoted the regression coefficients

• X1: Denoted retained earnings

• X2: Denoted members’ deposits

• X3: Denoted members share capital

• X4: Denoted external borrowing

• e: Denoted the error term

Correlation Analysis

The study carried out a Pearson correlation measures to examine the associations amongst the variables under review.

From the Table 1, return on assets has a negative relationship with retained earnings ratio measured by retained earnings divided by total assets (r = -0.218, p-value <0.05). The study noted that return on assets has a positive relationship with members’ deposits (r = 0.319, p-value<0.05). However, return on assets had a negative relationship with share capital (r = -0.283, p-value<0.05), likewise, return on assets had a negative relationship with external borrowing (r = -0.254, p-value<.05). The Pearson correlation coefficient above indicates the following relationships; financial performance had a positive relationship with members’ deposit ratio which is a key component of financing types, while other financing types, namely, retained earnings, share capital and external borrowing, had a negative relationship with financial performance measured by return on assets. This implies that the financing types determine the performance of SACCOS as measured by return on assets.

Table 1: Test for Correlation

*Correlation is significant at the 0.05 level (2-tailed), Source: Researcher 2021

Inferential Analysis

A multiple regression equation was computed using SPSS in order to establish the relationship between financing types and financial performance of SACCOs in Siaya County. The model was subjected to numerous tests in an attempt to ensure reliability. The R and R2 were computed in order to establish the goodness of fit of the model. The results of the tests are presented in Table 2.

Table 2: Model Summary

a: Predictors: (Constant), Retained Earnings, Members deposit, Share capital, External borrowing, Source: Researcher 2021

Regression analysis was used to find out if there is a relationship between financing types and financial performance of SACCOs in Siaya County by evaluating the contribution of financing types in explaining financial performance of SACCOs in Siaya County, when the other variables are controlled; the R square value was obtained in this case. The computed R as presented in Table 2 is 0.709. This value is referred to as the coefficient of correlation. It therefore means that the association between the predictors and the dependent variable is 70.9%. The computed R² is 0.503. This value represents the coefficient of determination which summarizes the level of variation in the dependent variable that is attributed to the explanatory variables. In this model, 50% of the variation in the financial performance of SACCOs in Siaya County is explained by the Financing Types (Retained Earnings, Members Deposits, Share Capital and External Borrowing). The remaining 50% variation is explained by factors not included in the model.

The implication of these finding is that financing types significantly contribute to financial performance of SACCOs. This study agrees with [19], who carried out Study on relationship between source of funds and profitability of SMEs in Nakuru and the result of the findings was that there exists relationship between source of finance and profitability.

Analysis of Variance (ANOVA) Test

Table 3 provides a summary of the results of the ANOVA test also referred to as the F–test. This test measures the significance of the multiple linear regressions. The null hypothesis for the F-test stated that the explanatory variables have no relationship with the dependent variable while the alternative hypothesis stated that the explanatory variables had relationship with the dependent variable.

Table 3: Anova Test

a: Dependent Variable: ROA, b: Predictors: (Constant), Retained Earnings, Members deposit, Share capital, External borrowing.

The Analysis of Variance (ANOVA) revealed that composite effect of the four variables (Retained Earnings, Members deposits, Share Capital and External Borrowing) on performance of SACCOS in Siaya County is significant as indicated by the p-values (0.019) i.e. less than 0.05 and F value (4.041).

Regression Analysis

Table 4 provides a summary of the multiple linear regression coefficient estimates including the intercepts and the significance levels. The regression analysis for the relationship between financing types and financial performance in Siaya County was tested.

Table 4: Coefficients

Dependent Variable: ROA

Regression Equation

ROA = α + βX1+ βX2 + βX3 + βX4 + Ɛt

Where

• ROA: Financial performance as measured by return on assets which is calculated by dividing net profit before tax by total assets; 

• α: Regression constant 

• β: Beta coefficients 

• X1: Retained Earnings

• X2: Members Deposits 

• X3: Share Capital

• X4: External Borrowing

• Ɛt: Error Term

The result show

 ROA = 0.008 + 6.700X1-1.565X2+2.612X3+7.234X4+ Ɛt

Hypothesis Testing

The following hypothesis guide this study

• H1: There is no significant relationship between retained earnings and financial performance of Sacco’s in Siaya County

• H2: There is no significant relationship between Members’ deposit and financial performance of SACCOs in Siaya County

• H3: There is no significant relationship between Members share capital and financial performance of SACCOs in Siaya County

• H4: There is no significant relationship External borrowing relates to financial performance of SACCOs in Siaya County

The p-values for all the four financing types as a ratio of total assets of the SACCOs are less than 0.05 implying that at 95% confidence level there is a significant relationship between financing types and performance of Sacco’s in Siaya County. On this background the researcher fails to reject the Null hypothesis and restates the following alternate hypothesis.

• H1: There is a significant relationship between retained earnings and financial performance of Sacco’s in Siaya County

• H2: There is a significant relationship between Members’ deposit and financial performance of SACCOs in Siaya County

• H3: There is a significant relationship between Members share capital and financial performance of SACCOs in Siaya County

• H4: There is a significant relationship External borrowing and financial performance of SACCOs in Siaya County

The most critical financing type is retained earnings, external borrowing, members share capital and members deposit in that order and hence management call to keenly look at the in that order.

Relationship Between Retained Earnings and Financial Performance

The study was to establish the extent of the relationship between retained earnings and financial performance of SACCOs in Siaya County The results presented in Table 1 indicate that retained earnings had a positive and statistically significant relationship with financial performance of SACCOs in Siaya County (6.7%, p = 0.007). This leads us to affirm that null hypothesis, according to which, there is relationship between retained earnings and financial performance of SACCOs in Siaya County was accepted. The results indicate that a 1% increase in the amount of retained earnings will result in 6.70% increase in financial performance (ROA). This finding is consistent with Kahuthu and Muturi and Kiweu, [22], who investigated influence of core capital on performance of SACCOs. The study conclusions on the basis of findings revealed that core capital and membership growth have positive impact on SACCO’s financial performance.

Relationship Between Members’ Deposit and Financial Performance

The study sought to investigate how the relationship between members’ deposits and financial performance of SACCOs in Siaya County was. The results presented in Table 4 indicate that members’ deposits had a negative and statistically significant relationship with financial performance of SACCOs in Siaya County (-1.565%, p 0.046). This leads us to affirm that null hypothesis, according to which, there is relationship between members’ deposits and financial performance of SACCOs in Siaya County, was accepted. The results indicate that a 1% increase in the amount of members’ deposit mobilized by SACCOs in Siaya County will result in 1.565% decline in financial performance (ROA). These findings are inconsistent with those of Munyiri and Wekesa [17], who established that there is a positive relationship between cash flows mostly generated from members’ contributions and profitability. These findings further confirm the conclusions put forward in the Pecking-Order theory that internal funds are less costly and thus help firms to generate more profits.

Relationship Between Members Share Capital and Financial Performance

The other aim of the study was to determine the relationship between share capital and financial performance of SACCOs in Siaya County. The results presented above suggest that share capital has a positive and statistically significant relationship with financial performance (ROA) (2.612%, p=0.038). This leads us to affirm that null hypothesis, according to which, there is relationship between share capital and financial performance of SACCOs in Siaya County, was accepted. The findings suggest that a 1% increase in the amount of share capital will result in a 2.612% increase in financial performance (ROA). This finding is in support of the result of Kahuthu and Muturi and Kiweu, [22], who investigated influence of core capital on performance of SACCOs. The study conclusions on the basis of findings revealed that core capital and membership growth have positive impact on SACCO’s financial performance.

Relationship Between External Borrowings and Financial Performance

The last was to establish the relationship between external borrowing and financial performance of SACCOs in Siaya County. From Table 4, external borrowing had a positive and statistically significant relationship with financial performance (ROA) ratio of SACCOs in Siaya County (7.234%, p = 0.032). This leads us to affirm that null hypothesis, according to which, there is relationship between external borrowing and financial performance of SACCOs in Siaya County, was accepted. These results are inconsistent with the findings of Iavorskyi [23], who established that debt has a negative effect on profitability. However, the results are consistent with the findings of Gweyi and Karanja [16], who found that the effect of leverage on financial performance although positive was weak. However, this study found that the relationship between external borrowing and SACCOs financial performance is strong.

The study established that retained earnings had a significant positive relationship with financial performance (ROA) of SACCOs in Siaya County. These findings are consistent with the pecking order theory which suggests that internal funds are cheaper and thus the profits raised from their use are higher. Based on these findings the study concluded that the retained earnings play an important role in SACCOs financial performance due to its significant positive relationship with the financial performance of SACCOs.

The findings of the study also indicated that members deposit had a significant negative relationship with financial performance (ROA) SACCOs in Siaya County. The study thus concluded that members deposit type of finance should be employed carefully only to the extent that is optimal to avoid its negative influence. Therefore, using it involved a lot of balancing act to take advantage of its benefit without jeopardizing financial performance (ROA) of SACCOs in Siaya County. Additionally, the study concluded that the change in percentage rate of members’ deposit was far much higher than the change in the percentage rate of ROA, thereby making it have a negative relationship with financial performance (ROA). These findings are inconsistent with those of Munyiri and Wekesa [17], who established that there is a positive relationship between cash flows mostly generated from members’ contributions and profitability

The study findings equally found that share capital had a significant positive relationship with financial performance (ROA) of SACCOs in Siaya County. These findings are equally consistent with the pecking order theory which suggests that internal funds are cheaper and thus the profits raised from their use are higher. Based on these findings the study concluded that the share capital is an important type of finance and impacts positively on SACCOs financial performance due to its significant positive relationship with the financial performance of SACCOs.

Lastly the study concluded that external borrowing had a significant positive relationship with financial performance (ROA) of SACCOs in Siaya County. These findings are inconsistent with the findings of Iavorskyi [23], who established that debt has a negative effect on profitability. However, the results are consistent with the findings of Gweyi and Karanja [16], who found that the effect of leverage on financial performance although positive was weak. However, this study found that the relationship between external borrowing and SACCOs financial performance is strong. These findings dispute the postulations of the Pecking Order Theory which suggests that more profitable firms borrow less because of the inverse relationship between debt and profitability.

In conclusion, the overall focus of the study was to establish the relationship between financing types and financial performance of SACCOs in Siaya County. Financing types consisted of retained earnings, members’ deposits, share capital and external borrowing and were measured using their respective ratios to total assets, while financial performance was measured using Return on assets (ROA) which was measured by surplus before tax divided by the total assets. The study found that retained earnings, members’ deposits, share capital and external borrowing had significant relationship with financial performance. The overall conclusion of the study is that there is significant relationship between financing types and financial performance of SACCOs in Siaya County.

Recommendations

First, given that the relationship between retained earnings, share capital and external borrowing and financial performance is positive and statistically significant, it therefore follows that SACCOs in Siaya County should seek ways of increasing the retention and external borrowing levels as a way of financing their investments. Members should equally be encouraged to boost their shareholding in the SACCOs as a way of availing more cash for financing Sacco’s investment, aimed at positively increasing the ROA. This study therefore recommends that SACCOs in Siaya County should aim at retaining more of the surplus, mobilizing more shares from members and using externally borrowed funds as a way of increasing ROA. Therefore, the relevant policies of the SACCOs should be revised to conform to these findings, especially retention policy, investment policy and savings policy.

Secondly, the relationship between member deposits and financial performance of SACCOs in Siaya County is significant. The level of members’ deposit held by SACCOs relates to the financial performance and by extension the viability of the SACCOs in Siaya County. Given the negative and significant association between members’ deposit and financial performance of the SACCOs in the County, the study recommends that members deposit type of finance should be employed carefully only to the extent that is optimal to avoid its negative influence and SACCOs in Siaya County should reduce their reliance on members’ deposit as a financing type and instead, focus more on other financing types. High members deposit levels ratio could outweigh its financial benefits Vis-à-vis ROA ratio, hence should be minimized.

Recommendations for Further Studies

The aim of the study was to determine the relationship between financing types and financial performance of SACCOs in Siaya County. The study variables included retained earnings, members’ deposits, share capital and external borrowing. However, there are other financing types that have relationship with financial performance of SACCOs such as statutory reserves, interest earned on loans and other investments, grants, subsidies and donations etc. In order to fully understand the relationship between financing types on financial performance of SACCOs in Siaya County, it is recommended that future studies should include more variables.

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