FINANCIAL LEVERAGE AND FINANCIAL DISTRESS IN SAVINGS AND CREDIT COOPERATIVE ORGANIZATIONS IN KENYA

Abstract

The study sought to assess financial distress amongst Savings and Credit Cooperative Organizations in Kenya with an objective of determining whether they were prone to bankruptcy. The study utilized secondary data collected from individual deposit taking Cooperative Societies for a seven-year period: 2008-2014. A fixed effect model was used to assess whether the proportion of debt in the overall capital was a determinant of financial distress as modelled through Zmijeweski Z score. The findings indicate that on average the probability of a SACCO falling into financial distress lay between 0.330 to 0.448, a position that infer relative SACCO stability. It was also evident that financial leverage was a significant predictor of financial distress. In view of these findings, the study concluded that the proportion of debt in the capital structure of a SACCO is a significant indicator of financial distress. The study thus recommends a close monitoring of debt levels in the interest of securing members’ deposits.