Credit Risk, Liquidity, and Lending Intensity: Evidence from Deposit-Taking SACCOs in Nandi County, Kenya

Abstract

Profitability is central to the sustainability of deposit-taking Savings and Credit Cooperative Societies (SACCOs), yet the relationship between loan default indicators and profitability may depend on liquidity conditions and the intensity with which mobilized deposits are transformed into loans. This study examined the relationship between non-performing loans, delinquent loans, liquidity, loan-to-deposit ratio and profitability among deposit-taking SACCOs in Nandi County, Kenya. The study used an explanatory design and census approach, drawing on secondary panel data for 11 licensed deposit-taking SACCOs over 2019–2024. Profitability was measured using return on assets (ROA). The analysis combined descriptive statistics, Pearson correlations, diagnostic tests, the Hausman specification test, and a fixed-effects panel model incorporating interaction terms. The analysis was based on 62 SACCO-year observations. Non-performing loans and delinquent loans were not significantly associated with ROA at the direct bivariate level (r = .059, p = .651 and r = .044, p = .735, respectively). Liquidity ratio was positively associated with ROA (r = .390, p = .002), as was loan-to-deposit ratio (r = .460, p < .001). The Hausman test supported fixed effects, χ²(4) = 13.87, p = .0076. The overall interaction model was statistically significant, F(6, 55) = 12.952, p < .001. Two interaction effects were significant: non-performing loans × loan-to-deposit ratio (F = 8.749, p = .005) and liquidity ratio × loan-to-deposit ratio (F = 5.364, p = .024). The findings indicate that the profitability of the SACCOs in the study was associated not simply with loan defaults in isolation, but with the interaction between credit quality, liquidity management and lending intensity. The results provide county-specific evidence for SACCO managers and regulators concerned with credit risk, liquidity and sustainable lending.

Keywords:       SACCOs; loan defaults; non-performing loans; delinquency; liquidity; loan-to-deposit ratio; profitability; return on assets.