INTERNAL CONTROL SYSTEMS AND CREDIT RISK OF REGISTERED DEPOSIT TAKING SACCOS IN WESTERN KENYA

Abstract

Kenya’s Sacco industry plays a major role in the economic development of the nation. Internal control systems in Saccos have been implemented as one of the key measures necessary for promoting a healthy business environment by mitigating risks that arise with credit creation. This study’s main objective was to determine the influence of internal control systems on the credit risk of deposit- taking Saccos in Western Kenya. The study was guided by agency theory, contingency theory and modern portfolio theory. The target population consisted of 212 respondents from the seven registered deposit-taking Saccos, who included the managers, accountants, auditors, and credit officers. A descriptive research design was adopted in this study. Simple random sampling was used to determine the sample size. Both primary and secondary data were used. Primary data was collected using questionnaires, while secondary data was obtained from audited financial statements of the Saccos using a secondary data collection sheet. Descriptive data included frequencies and percentages. Diagnostic tests comprised of: normality, autocorrelation, multicollinearity and heteroscedasticity. Inferential statistics consisted of correlation analysis, multiple regression analysis and ANOVA. The diagnostic tests conducted conformed to the linear regression requirements. The regression analysis results showed that control environment had a β of -0.089 with a p-value of 0.124, control activities had a coefficient of -0.191 with a p-value of 0.011, risk assessment had a β value of -0.225 and a p-value of 0.007, while monitoring had a β value of -0.217 and a p-value of 0.001. Control activities, Risk assessment and Monitoring had a significant negative relationship with credit risk, but the control environment had an insignificant relationship with credit risk. The independent variables of the study were negatively correlated to each other, with Control Activities having correlation coefficient of -0.517, Risk Assessment with -0.763 and Monitoring with -0.635. The regression model showed an R-squared of 0.612 while ANOVA had an F-statistic of 3.132 with a p-value of 0.007, which was greater than 0.005. It was recommended that Saccos review their policies and procedures regularly to meet the current market trends. Internal and external audits should be reviewed to check on variances and appropriate measures taken to deal with them. Credit monitoring should be done to ensure that loans are paid on time and that loans are issued to creditworthy individuals.

JEL: G21, G32, M42, M41, O16