INTERNAL CONTROL SYSTEMS AND CREDIT RISK OF DEPOSIT TAKING SAVINGS AND CREDIT COOPERATIVE SOCIETIES IN WESTERN KENYA

Abstract

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. Despite implementing internal control systems, credit risk is still an issue in these SACCOs. This study’s key objective was to determine the effect of internal control systems on credit risk of deposit-taking SACCOs in Western Kenya. Specific objectives were; to assess the effect of control environment on credit risk of deposit-taking SACCOs in Western Kenya, to establish the effect of control activities on credit risk of deposit-taking SACCOs in Western Kenya, to evaluate the effect of risk assessment on credit risk of deposit taking SACCOs in Western Kenya and to examine the effect of monitoring on credit risk of deposit- taking SACCOs in Western Kenya. The study was guided by agency, contingency, and modern portfolio theories. The target population consisted of 212 respondents from the seven registered deposit-taking SACCOs. In this study, a descriptive research design was used. The sample size was obtained through simple random sampling. 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. Data were analyzed using Statistical Package for Social Sciences (SPSS). Statistics were generated using both descriptive and inferential methods. Descriptive data included; frequencies and percentages. Diagnostic tests comprised; normality, autocorrelation, multicollinearity, and heteroscedasticity. Inferential statistics contained correlation analysis, multiple regression analysis, and ANOVA. The diagnostic tests conducted conformed with the linear regression requirements. The independent variables of the study were negatively correlated, with Control Activities having a 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.The findings of the regression analysis revealed 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. 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 to deal with them. Credit monitoring should be done to guarantee that loans are repaid on time and issued to credit-worthy individuals.