Abstract:
The purpose of the study was to examine the effect of macroeconomic variables on average financial performance of Deposit Taking Savings and Credit Cooperatives in Nairobi Kenya. The study sought to establish the effect of interest rate, inflation rate and money supply on the average financial performance of Deposit Taking SACCOs (DTSs) in Nairobi, Kenya. The study was based on the international Fisher effect theory, classical theory of inflation and Baumol-Tobin Approach to transaction demand for money. The study used a descriptive design. Target population was 35 DTS registered by SASRA to operate up to December 2017 in Kenya. The sample size for this study comprised of 15 DTS operating in Nairobi Kenya, which were licenced to operate FOSA by SASRA. These are the DTSs whose data was available for the period of study. Quarterly data was collected for 20 years (1997 – 2016). Analysis was conducted using the vector error correction time series model. The results show that there was no statistically significant relationship between return on assets and lagged values of either themselves or of other variables at the 5% level of significance. The effect of lagged values of money supply on return on assets was however significant at the 10% level. On money supply, there was a statistically significant relationship between this variable’s lagged values and itself (p value = 0.013). The lags of all other variables did not have a significant relationship with money supply. Pertaining the interest rates, it is evident that only the error correction term (p value = 0.000) impacted current interest rate significantly. Finally, Inflation rates had a statistically significant relationship with the error correction term (p value = 0.001), lagged values of itself (p value = 0.041), and lagged interest rates (p value = 0.017). Since the influence of money supply on returns on assets is significant at the 10% level, the conclusion is that the fluctuations in money supply have the highest prediction ability for variability in the financial performance of deposit taking SACCOs. It is therefore recommended that money supply targeting interventions should be incorporated in monetary policies of the Central Bank due to their ability to influence performance of financial services firms.