Capital Structure and Financial Stability of Deposit-Taking SACCOs in Kenya: The Moderating Role of SACCO Size

Abstract

This study examined how capital structure decisions influence financial stability of deposit taking SACCOs in Kenya and whether SACCO size moderates that relationship. The study adopted positivist philosophy, and was grounded on the pecking order theory and trade-off theory. The study used a longitudinal, explanatory design and secondary panel data for 79 DT-SACCOs obtained from SASRA and SACCO annual reports. Financial stability was measured by solvency risk (z-score) and credit risk (non-performing loan ratio); capital structure by the equity-to-asset, debt-to-equity and short-term debt-to-equity ratios respectively; and size by the natural logarithm of total assets. Following panel unit-root and Hausman tests, random-effects regressions were estimated on differenced series. Equity financing significantly improves solvency but has no significant independent effect on credit risk. Debt financing increases credit risk, while its baseline effect on solvency risk is weak. SACCO size is a significantly moderates the relationship between capital structure decisions and financial stability because of diversification and economies of scale. The interactions of Sacco size with EAR and STDER strengthen the solvency effects, and its interaction with DER significantly alters the credit risk effect. Therefore, adding the interaction terms raises the explanatory power of the model. The study provides evidence on how equity–debt mix affects solvency and credit risk in Saccos over a  decade; it separates equity, total leverage and short-term leverage rather than relying on a single capital structure ratio; and it tests whether SACCO size conditions these effects, a question that bears directly on SASRA’s tiered supervision.