EFFECT OF INVESTMENT DECISIONS ON FINANCIAL PERFORMANCE OF

DEPOSIT TAKING SAVINGS AND CREDIT COOPERATIVE SOCIETIES IN KENYA

BEATRICE K. MORWABE

A RESEARCH PROPOSALSUBMITTED TO THE DEPARTMENT OF FINANCE AND

ACCOUNTING IN PARTIAL FULFILLMENT OF MASTERS OF SCIENCE IN

FINANCE AS A REQUIREMENT IN SCHOOL OF BUSINESS AND ECONOMICS,

JKUAT.

2019

1
Declaration

This proposal is my original work and has never been submitted to any university for any

academic credit.

Beatrice K. Morwabe …………………………….. ……………….

SIGNATURE DATE

This proposal was submitted for examination with my authority as the university supervisor

Prof. Willy Muturi ………………………. ………………

SIGNATURE DATE

i
Acknowledgement

I thank the Almighty God for the unceasing blessings which He has bestowed upon me without

which it is impossible to accomplish anything, secondly, to my family for their moral and

financial support and encouragement. Finally I would like to thank my supervisor, Prof .Willy

Muturi who dedicated his time and effort on my work .He has inspired me to look at things

critically.

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TABLE OF CONTENTS

Declaration.................................................................................................................................................... i
Acknowledgement ....................................................................................................................................... ii
TABLE OF CONTENTS .......................................................................................................................... iii
List of Figures.............................................................................................................................................. v
Acronyms and Abbreviations ................................................................................................................... vi
Definition of Terms .................................................................................................................................... vi
Abstract..................................................................................................................................................... viii
CHAPTER ONE ......................................................................................................................................... 1
INTRODUCTION....................................................................................................................................... 1
1.1 Background of Study ........................................................................................................................ 1
1.1.1 Organization and Management of SACCOs in Kenya................................................................. 2
1.1.2 Performance Measures ................................................................................................................. 4
1.2 Statement of the Problem ................................................................................................................. 6
1.3 Objective of study ............................................................................................................................. 7
1.3.1 General objective of study ........................................................................................................... 7
1.3.2 Specific objectives of study ......................................................................................................... 7
1.4 Research Hypotheses ........................................................................................................................ 7
1.5 Justification of the Study .................................................................................................................. 8
CHAPTER TWO ........................................................................................................................................ 9
LITERATURE REVIEW .......................................................................................................................... 9
2.0 Introduction ....................................................................................................................................... 9
2.1 Theoretical Literature Review ......................................................................................................... 9
2.1.1 Keynesian Theory of Investment ................................................................................................. 9
2.1.2Tobias “Q” theory of investment ................................................................................................ 10
2.1.3 Odd Lot Theory of Investment................................................................................................... 10
2.1.4 Modern Financial Portfolio theory ............................................................................................. 11
2.2 Empirical Literature Review ......................................................................................................... 12
2.2.1 Investment Decisions in SACCOs ............................................................................................. 12

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 2.4 Summary of the Conceptual Framework ..................................................................................... 19
CHAPTER THREE .................................................................................................................................. 21
RESEARCH METHODOLOGY ............................................................................................................ 21
3.0 Introduction ..................................................................................................................................... 21
3.1 Research Design .............................................................................................................................. 21
3.2 Population of Study......................................................................................................................... 21
3.3 Data Collection ................................................................................................................................ 21
3.4 Data Analysis and Presentation ..................................................................................................... 22
3.4.1 Model Equations ........................................................................................................................ 22
REFERENCES .......................................................................................................................................... 24

iv
List of Figures

Figures Page

Figure NO: 2.1 Conceptual Framework…………………………………………….……14

v
Acronyms and Abbreviations

ANOVA Analysis of Variation

CBK Central Bank of Kenya

DT-SACCOS Deposit Taking Savings and Credit Cooperative Societies

FOSA Front Office Service Activities

IFRS International Financial Reporting Standards

MEC Marginal Efficiency of Capital

NIM Net interest Margin

ROA Return on Asset

ROI Return on Investment

SACCOS Savings and Credit Cooperative Societies

SASRA Sacco Society Regulatory Authority

SPSS Statistical Package for social sciences

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Definition of Terms

Security Market- This is where securities are bought and sold in the basis of demand and

supply. These securities include debentures stocks, shares or any marketable instrument

(Avadhani, 2009).

Fixed Deposit Accounts-This is an investment account that requires a fixed amount of money to

be invested for a fixed period at a fixed rate of interest. It provides investors higher interest rate

than the regular savings account (Avadhani, 2009).

Government Securities- These are securities used by the government to borrow money from the

public when its money falls short of public spending needs. In Kenya they include treasury bills

and bonds

Real Estate- This means the physical property such as land and anything immovable attached to

it

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Abstract

The research work will seek to investigate effect of investment decisions on financial

performance of Deposit taking savings and credit cooperative societies in Nairobi County, Kenya

for the period 2014-2018. This is due to the poor performance witnessed as a result of interest

rate cap and low investment Levels. This study will consider the following four objects; To

assess the effect of real estate investment on financial performance of DT-SACCOs within

Nairobi, to investigate the effects if investment in market securities on financial performance of

DT- SACCOs within Nairobi, to examine the effect if investment in government securities on

financial performance of DT-SACCOs within Nairobi and lastly to establish the effect in fixed

deposit account investment on financial performance of DT- SACCOs within Nairobi, ROA will

be used as a measure for financial performance. Descriptive research design for a time series

data will adopted on all 43 DT- SACCOs within Nairobi using a census technique. Secondary

data will be collected from the published financial statements prepared in accordance with the

International Financial Reporting Standards. Simple multivariate will be employed in data, Karl

Pearson correlation coefficient will be to determine correlation within variables .Results will be

generated by use of Statistical package for social sciences. Multiple regression model will be

used to test the relationship between independent variables and depended variable.

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 CHAPTER ONE

INTRODUCTION

1.1 Background of Study

The cooperative sector is an integral economic growth contributor as it intermediates between

depositors and borrowers. This sector also extends financial assistance to customers, mainly the

poor who are its target group (Karagu & Okibo, 2014). Towards this achievement, cooperatives

perform three main activities that include receipt of savings from members, issuance of credit to

help them better their living standards and advice to members on where and when to invest for

better utilization of the borrowed credit, which should be directed with respect to the progression

of the contemplated scheme (Mwakajumilo, 2011).

In Kenya, cooperatives have gone through two critical cycles, state control period and economic

liberalization era. State control period which elucidates the origin and growth of cooperatives

and it enhanced the government’s social economic policies, which were later interfered with state

politics. It is this interference that necessitated an economic liberalization of cooperates in the

1990s with the argument that the success of cooperatives relied on the market principles that

included effectiveness and efficiency, integrity, innovation and Focus on customers. Later, new

policies, which could enable self-controlled and democratically organized co-operatives, were

introduced (Wanyama, 2016).

Essentially, cooperatives were created to contain poverty, but ever since the government started

dominating in its management by coming up with legal provisions, its real intended purpose has

been assumed, the real targeted members have taken over the passive role. Ensuring genuine

membership and management by members can bring back the intended purpose of poverty
1
alleviation (Sizya, 2001). In addition, getting to the solution on how to improve members’ living

standards is important (Gunga, 2013). In ensuring the viability of cooperatives Stalebrink and

Sacco (2006) have championed the need to secure the principle of maintaining sufficient

liquidity levels to cater for current obligations and producing investment income equal to market

yields.

Members’ savings are the major source of funds in SACCOs which are used by SACCOs in

various investments such as loan to members, financial and liquid investments. While

undertaking all these investments managers should ensure safety and good returns for their

money (Mwangi, 2013). Mwakajumilo (2011) Investment decisions by experts are particularly

important since they add value to cooperatives credibility rating by the agencies, which play the

much needed intermediating role. Badertscher et al, (2013) observe that investment experts are

better positioned in advising customers on what to invest due to projects irreversible nature and

have suggested that an investment should be undertaken when the cost of postponing the project

is likely to be greater than its current value.

1.1.1 Organization of SACCOs in Kenya

A credit union is a members-owned cooperative and is both member-controlled and member-

championed. Credit union, prevalently referred to SACCOs in Kenya, main objective is to

provide credit to the members unlike commercial banks whose main objective is shareholders

returns; difference between the two is owner-customer relationship. For SACCOs, depositors are

the shareholders contrary to commercial banks where those with banks’ shares are the

shareholders (Mwangi, 2014).

The “democratic member control” principle creates a unique structure in SACCOs as owners and

members control it and this has always generated the agency problem (Munene & Makori, 2013).

2
Administratively, SACCOs are under the Ministry of Industrialization and Enterprise

Development, the current basis of Sacco’s formation and management is derived from the

guidelines in the Cooperative Societies Act of 2004 whose origin can be traced in the 1966

cooperative society cap 490 formerly Cap 287 of 1945 which were later amended in 1997 Act

No 12 where cooperatives were liberalized by sessional paper No 6 where the cooperatives had

to change their way of doing things to profit enterprises (Wanyama, 2016). Saccos are required

to operate under by laws set by the cooperatives and rules set by ministry (Gichungwa, 2009)

In Kenya, the SACCO subsector encompasses non-deposit taking SACCOs (Non DTs) registered

under the cooperative services act 490 and deposit taking licensed and supervised under Sacco

society Act 2008. (Gweyi & Karanja 2014). SASRA is mandated to look into the structure and

conduct of SACCOs. SACCOs especially those with front office service areas are virtually banks

by the nature of their services. Because SACCOs provide credit facilities, by law, they are

required to comply with prudential guidelines provided by Kenya’s’ Central Bank (CBK)

(Mwangi, 2015; Wambua, 2017). SACCOs are important in pulling and accessing credit at

prevailing interest rate(s) (Auka & Mwangi, 2013). Abadi et,al (2017) have argued that voluntary

savings is particularly important but is affected by a range factors that are not limited to age,

education level, marital status, number of dependents and period of membership in a given

SACCO. Other factors include social-responsibility, solidarity, self-responsibility, equity,

equality, openness, democracy accountability transparency and efficiency (Duncan et al., 2015)

while common challenges involve capital inadequacies and governance-related issues (Karanja,

& Munene, 2015).

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1.1.2 Performance Measures

Performance measures reflect the extent in which an activity has been accomplished by

maintaining quality. It is also a measure of how efficient the firm has employed its scarce

resources to come up with gains (Kiaritha, 2015). This measure shows if an institution has made

use of its assets efficiently to create revenue which enhances soundness of a firm. Some of the

financial measures include; net interest margin, return on equity and return on assets (Nyathira,

2012).

Profitability ratios are used to measure the profitability of organizations. They measure the

returns an institution makes during a certain financial period. These ratios are of great

importance to shareholders and even creditors. To creditors it serves as a measure of whether the

institution will honor the interest rate obligations and shareholders can tell how profitable the

resources they invested with them are. The three mentioned ratios are the best in measuring

profitability (Kabejeh & Nuaimat, 2012).

ROA measures the a company’s returns after taxes as a percentage of a company’s total asset.it

shows to what extent the company generated its profits by use of its assets. Great values indicate

positive returns on investment which shows efficient performance. This ratio indicates the

efficient use of assets to generate revenue (Heikal and Khaddafi,2014).

Net Income

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ROA= Total Value of Assets

ROE is used to postulate the company’s performance by computing the percentage of net income

to owners’ equity. It indicates how effective the management utilized the investors’ resources

(Griffin, 1997). Higher values of depict higher profits achieved by an organization. They indicate

how efficient the company has used investor’s capital to generate profits.

Net Income

ROE=

Total number of shareholders’ equity

NIM scales the discrepancy between that which the firms pay to their depositors and what the

theys gets from its creditors. Institutions charge slightly high interests rates to borrowers and

give lower rates to its depositors. It relative to interest bearing assets for the simple reason that

the funds are generated through borrowing and lending (Pasiounas, 2006). NIM indicates the

discrepancy in interest income earned on loan and interest cost spent on the borrowed assets.

High NIM indicates high gains; this may not be so health to an organization as this may imply

riskier lending which rewards high interest rates.

Interest Income - Interest Expenses

NIM =

Interest Bearing Assets

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1.2 Statement of the Problem

The enactment of interest rate capping into law however with the good intentions intended has

resulted to a chain of events in Kenya’s economy. The Kenya Bankers Association has at many

times voiced the worries on the impacts of the new laws set pertaining lending to its customers.

The set maximum of 14 percent which is 4 percent above the central l bank rate is argued that it

doesn’t serve well as the appropriate reward for the default risk of the borrowers. However no

change has been made and banks are operating under the set minimums. This has attracted

customers as the loans are cheaper in comparison to the previous years before interest rate

capping the law came to pass. Banks have responded by adding fees and other charges which

were not restricted to cover their cost (Kemboi, 2018). SACCOs were in a position to advance

loans charging a low interest rate in comparison to other financial providers and this immensely

attracted customers resulting to better gains (Kinyuira, 2014). The competition with banks was

intensified by interest capping where more customers opted for banks which had taken the

advantage of non -price competitive tools such as speedy and convenience in their services as a

way of enticing the SACCO members hence creating a low customer base for Saccos. To ensure

that they are financially stable, they have opted for some investments decisions (Muli & Musau

2016). However it’s not clear which of these investment decisions drive the SACCOs to achieve

the desired financial performance, research on the same has been scanty evoking the study.

Muli & Musau 2016 conducted a research on the impact posed on financial performance of

SACCOs in Kenya by the investment decisions; the study revealed that decisions on investment

caused effects on financial performance. Hussein (2017) looked at the performance of

commercial banks in Kenya in relations to investment decisions; an insignificant negative existed

6
between investment in treasury bills and bonds, properties and return on assets. This study will

seek to investigate effects of investment decisions on financial performance of DT-SACCOS.

1.3 Objective of study

1.3.1 General objective of study

The general objective of the study is to assess the effects of investment decisions on financial

performance of DT-SACCOs in Kenya

1.3.2 Specific objectives of study

1. To determine how investment in real estate affects financial performance of DT-SACCOs in

Kenya

2. To determine how investment in government bills and bonds affects financial

performance of DT-SACCOs s in Kenya

3. To determine how investment in fixed deposit account on financial performance of DT-

SACCOs in Kenya

4. To determine how investment in stock market affects financial performance of DT-SACCOs

in Kenya

1.4 Research Hypotheses

The following hypotheses will be used to carry out the study;

1. Ho: There is no significant effect on investment in real estate on financial performance of

DT-SACCOs in Kenya.

2. Ho: There is no significant effect on investment in government securities on financial

performance of DT-SACCOs in Kenya.

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 3. Ho: There is no significant effect on investment in fixed deposit account on financial

performance of DT-SACCOs in Kenya.

4. Ho: There is no significant effect on investment in stock market on financial performance

of DT-SACCOs s in Kenya.

1.5 Justification of the Study

To SACCOs’ management- It will equip the management with knowledge on better investment

opportunities that it can engage in for better performance. It will improve their decision making

to come up with investments with huge revenues.

To the Government – Sacco’s main objective is to intensify optional savings between members

on addition to credit provision at a lessor interest rate. This research will shed more light on

efficiency utilization of resources in these cooperatives, the government will get to know how

investments are of importance in economic development and hence enhance favorable

environment for Sacco’s operations.

To academic researchers and scholars – There are fairly little research on this field, this research

will shed provide researchers with knowledge on the similar field or a related field.

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 CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

The chapter delineates the theoretical literature review in line with theories on investment

decisions from different scholars. It extends to look at the empirical literature review and closes

up with a summary of the literature review. The chapter begins with 2.1 Theoretical literature 2.2

the empirical literature 2.3 conceptual framework and finally 2.4 Summary on the literature

review

2.1 Theoretical Literature Review

It contains theories on investment decisions concept, they include 2.2.1 Keynesian theory of

investment 2.2.2 Tobin’ Q theory of investment 2.2.3 Modern Portfolio theory 2.2.4 Odd-Lot

theory

2.1.1 Keynesian Theory of Investment

The Keynesian investment theory was developed by Maynard Keynes in 1936. It posits that

investment is driven by interest rate and Marginal efficiency of capital (MEC) (Arrow, 2017).

MEC is the discount rate which could make the present value from expected returns of a capital

asset equal to the price of supply. It is used in ranking projects from the most viable to the least.

The MEC rule is to accept projects on condition that MEC exceeds interest rate. Low interest

rates attract investments as firms can borrow at low rates since savings will only give low returns

(Fuller, 2013).

Firms have a target of maximizing returns; this is possible by considering suitable investments

due to their irreversible nature (Arrow, 2017).Marginal efficiency of capital decrease with the

level of investment; this is because most of the projects with great opportunities are given a first
9
hand at the earlier stages. The theory has been criticized in its consideration of supply price as an

ex-ante decision; this is untrue as it requires an investor to have knowledge on the other

investors’ intentions in the industry to be aware of the supply price (Chick, 2002) The theory will

be important in this theory guiding SACCOs on the best time to borrow and invest or when to

deposit their money and postpone their investment until its profitable.

2.1.2Tobin’s “Q” theory of investment

This theory was developed by Tobins in 1969; it posits that investment should be made only if

the average ‘Q’ is greater or equal to one, (Eklund, 2013). Average Q is the ratio between market

value of assets and its replacement value. At the equilibrium point Q is expected to be zero

suggesting that installation cost of capital is equal to the replacement value of capital. When the

market value surpasses that of the company’s assets Q becomes greater than one showing that

the assets are worth more than the price they paid for and this encourages investment thus firms

will issue there shares. If Q is less than one this discourages investment as the market value is

less that the unmeasured assets of the company indicating undervaluation of assets hence the

assets wont earn better returns (Yoshikawa, 1980).This theory is critiqued because of difficulties

in arriving at Q, is only the average Q that can be easily computed (Muli, 2016). The theory will

be of benefit in this research as it will be used in comparison of amount invested and the

SACCOs expected returns for investment purposes

2.1.3 Odd Lot Theory of Investment

Odd lot is the amount of security less the nominal unit; unlike round lots traded in multiple of

100 these stocks are below 100 shares of stock. They are thought to raise from traders with little

knowledge on the market movements hence the sale (O'Hara et al., 2012). The lot theory posits

10
that poor marketing timing by these odd lotters lenders their investment decisions poor. They

purchase stocks when their prices are almost at the higher end and make sales when the prices hit

almost the bottom of the market. It deals with buy and sale signals and due to market variation

it’s a dynamic analysis (Kewley & Stevenson, 1967). According to this theory, increased

purchases cause prices to go down. Conversely if a good selling activity comes on odd lotters

way together with high purchasing activity prices will respond positively (Kewley & Stevenson,

1969). This theory will be important in the this research as it geared towards determining the best

timing to purchase and sell securities to enhance better performance.

2.1.4 Modern Financial Portfolio theory

The theory was suggested by Harry Markowitz in 1959, it states that investor’s choice of

portfolio is geared towards maximization of returns for a given risk, he came up with a given set

of assets and the risk attached, standard deviation of expected return is the is the measure of

portfolio risk (Markowitz, 1991). Risk tolerance levels differ from one investor to the other and

this triggers different choice on set of assets to invest in (Cardozo, 1985).It is the return level that

motivates the investors on which risk to bear. Choice of different assets within the efficient

frontiers bearing different risks is a way of diversifying the risks involved. Contributions from

each portfolio are aggregated to come up with the total portfolio (Ball, 1969). Each asset

provides a certain expected future return depending on the risk involved (Gold, 1995). The mix

of assets depends on the managers’ risk accommodation; this affects their diversification which

results to non-interest income (Ross, 2009).

Wallen Buffet challenges this theory arguing that, great returns can be as a result of managerial

skills rather than the investment skills or a combination of both(Rani, 2012). Treasury bills are

less riskier, stocks are at least as riskier as bonds; real estate is riskier than the fixed deposit

11
account. This theory will shed light on the asset choice in minimization of investment risk; this

will enhance SACCOs better performance (Abreu & Mendes, 2010).

2.2 Empirical Literature Review

There are limited researches on effect of investment decisions on financial performance of DT-

SACCOs Kenya, most of them have leaned towards other areas in relation to financial

performance. Most scholars have based their research on determinants of financial performance

of SACCOS. This section will focus on empirical studies that have established how investment

decisions have affected financial performance.

2.2.1 Investment Decisions in SACCOs

Investors should be informed of the reward and risks associated with any kind of investment they

could wish to venture .The risk nature of different individuals contribute to the nature of project

chosen, high expected future returns are associated with greater risks and the opposite holds.

Before settling on any investment decision wide knowledge on the same can minimize losses. It

should take sufficient time to learn effective investment, alternatives if any, choice of the

investment and finally monitoring and managing them. Management should work towards value

maximization through undertaking appropriate investment through evaluation to get at a viable

investment, cooperatives with financial slack could invest in almost all viable opportunities and

those without could only take some up (Myers & Majluf, 1984).

Members’ savings is the major source of fund for SACCOs, the management should ensure safe

custody of the depositors’ money and meet the obligation of giving back to the depositors when

need and reward of interest rate for the use of their money in their operations. These funds are

used in undertaking investments such as extending loans, non-financial investments, financial

investments and liquid investment. While choosing on where to invest the embers funds

12
managers should consider liquidity safety and returns to be generated (Mwangi, 2013). Some of

the investment strategies include investment in government securities, investment in real estate,

investment in corporate bonds and purchase of shares in companies.

2.2.1.1 Investment in Government Securities

One way of acquiring extra revenue in SACCOs is through government lending where these

cooperatives purchase bills and bonds from the government, Treasury bills are loans extended to

the government for a period of one year or less that attracts an interest rate, treasury bonds are

equally issued by the government to raise money, they are long term investments over a year. It’s

a nice investment as it attracts passive income with no much effort (Korir, 2015). These

securities are located at the lowest risk spectrum because of the low credit risk or virtually zero

risk associated with them. The central bank of Kenya controls issuance of these securities to

ensure that they aren’t fragmented in the market (Nyawata, 2012). Purchase of bills and bonds as

a way of lending to the government has been considered an effective investment by SACCOs.

It’s imperative to get a deeper understanding on how this investment works and due to risk

involved diversification is a health way to go (Kipkorir et al., 2016). Treasury bills are offered at

a lower rate than the nominal rate this implies that investors benefit from the discount received.

These bills are not traded in the Nairobi securities exchange but can be used as collateral when

acquiring loans (Ngugi, 2007).

Rop (2016) investigated on the effect of investment diversification on financial performance of

commercial banks in Kenya. Expository research design was employed in the study to enable

give an explanation on the causal relationship between independent variables and dependent

variable. A total number of 40 commercial banks was used as study sample. Both secondary and

primary data was used in the study. Data collected was analyzed using explanatory and

13
inferential statistical. Inferential statistics were done through ANOVA and multiple regression

analysis. The study revealed that there was a significant relationship between government

securities, insurance investment, real estate investment, buying of shares had a significant

relationship financial performance of commercial banks in Kenya. The study advocated for

purchase of shares as the best investment followed by real estate investment, insurance

investment and lastly government securities.

2.2.1.2 Investment in Real Estate

Real estate investment decision has turned to be very crucial due to its ability to plough back

sufficient returns that can help SACCOs stand financial surges. These portfolios can be tangibles

such as machinery or real estates, intangibles such as good will. Most of the Sacco’s investments

have leaned toward real estate; this is due to its ability to give back appropriate returns.

Performance of SACCOs can be derived from its total assets; increased assets in the cooperatives

can translate to better decisions on the projects undertaken. Gains from the investments give

birth to institutional capital as a result of retained surpluses of SACCOs (Kipkorir et al., 2016).

Real assets are heterogeneous in nature, their prices vary as a result of locational convenience,

age and functional utility (Guo, 2010; Manganelli, 2015).

Investors should be concerned with the risks attached to this investment; they should review

gains and risks in connection to the portfolio choice .Expected return is in relation to the risks

levels, lower risks attract less returns. Well informed investors on the risk features of the real

estate of interest are in a good position to understand the risk nature of the investment. Risk

return tradeoff should be given an upper hand (Kim & Mattila, 2002).

Kipkorir et al. (2013) studied on influence of investment decisions on the financial performance

of registered of SACCOs in Baringo County. The study focused on influence of Front Office

14
Service Activities (FOSA), lending to SACCO members, investment in government securities

and investment in bonds on financial performance of the registered Sacco’s. A descriptive survey

design was used targeting 316 members from the 73 registers Sacco. Stratified sampling was in

coming up with a sample size of 177 correspondents. Questionnaires were used to collect data

and analyzed by both descriptive and inferential statistics. The study indicated that the above

factors had a perfect influence on performance of Sacco’s with FOSA taking lead followed by

lending to members than lending to the government and finally investment in real estate.

Odhiambo (2015) examined the effects of real estate finance on financial performance of listed

commercial banks in Kenya. Information from nine listed banks was collected for a period of 5

years, panel data analysis was used on the collected data. The results established that real estate

finance did not have a significant effect on financial performance of listed commercial banks in

Kenya. Some other factors such as market structure, cost of bank operations, foreign ownership

and size had a significant effect on bank performance. The study concluded that real estate

doesn’t affect financial performance of listed commercial banks.

2.2.1.3 Investment in the Market Securities

Companies issue shares to raise capital and purchase of those equities means you are entitled to a

say in that company, this gives a chance for part-ownership. Investors purchase these shares with

the hope of company thriving in its activities. Bonds are used as debt instrument whereas shares

derive the ownership. Companies issue shares in case of financial bulge. These companies are

required to take with them the shareholders interest at hand. The main goal should be striving to

achieve value maximization hence any project undertaken by the financial management is

expected to raise the market value of shares (Fama1978).

15
Al-Halalmeh & Sayah (2010) studied on the impact of foreign direct investment on share market

value in Ammanan exchange market. Primary data was collected by use of questionnaires. The

results indicated a significant effect t on the share market value .As per the outcome it was

concluded that foreign direct investment are imperative in share price in the exchange market,

2.2.1.4 Investment in the Fixed Deposit Account

Investment in common interest account is the most stable and risk free kind of investment. Being

safe they attract low interest rates hence low return. The only problem with this type of

investment is the fact that the cash deposited only yields low (Selin, 2016).

Mella (2016) studied on the effect of real estate investment on the financial performance of

pension funds in Kenya. A descriptive survey research design was used; all pension funds that

had been directed towards real estate investment were part of the study, making a sum of 48 by

Dec 2015.Multiple regression model was used in data analysis. The study revealed that real

estate investment had a positive significant effect on Return on equity. Offshore investments

positively influence pension funds’ performance as international investments increase the returns

although in a small percentage. Government securities and fixed income have a very strong

positive relationship with performance of pension funds this is due to their liquid nature hence

attracting low returns as a result of low risk attached to them and their susceptibility to inflation.

Equity had a negative influence on performance of pension funds as they are too risky and

performed poorly during the study period. The study recommended that most of the pension

funds should be directed towards real estate investment due to its high returns; they are less

volatile and offer stable cash flow and are best when it comes to diversification of the portfolio,

the study was however prone to some limitations such as; the value of property investment keeps

changing over the years hence a five year period might not reflect the effects of real estate

16
investment on financial performance for a longer period could be useful as will capture different

economic variations such as booms and depressions.

2.3 Conceptual Framework

A Conceptual Framework describes the relationship that exists between the variables. The study

attempts to distinguish the effects of investment decisions on financial performance, it shows the

relationship graphically or diagrammatically (Ariemba, 2016).

17
Independent Variables Dependent Variable

Real Estate investment

Amount of money invested in Real estate

Investment in Government Securities

Amount of money invested in government

securities

Financial performance

(ROA)
Investment in Fixed Deposit Account

Amount of money invested in fixed deposit

account

Investment in Market Securities

Amount of money invested in fixed deposit

account

Figure No: 2.1 Conceptual Framework

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2.4 Summary of the Conceptual Framework

The study looked at odd lot theory which indicates that sale of bonds by small traders can be as a

result of lack of information on the market trend resulting to low returns and this can be the best

time for the purchase in order to take advantage of the future when their prices will be high. It

should not be considered so all the time as these traders sell off the bonds due to future market

information. The second theory is the accelerator theory of investment which explains why

increase in national income usually results to a greater proportional increase in spending; an

increase in demand in consumer goods creates a greater demand for capital goods, this shows

that investment increases when output increase this means investment does not only depend on

income but also increase in sales. If investments is high but not increasing this means there is

zero investment, to increase investment output has to grow by an increasing rate. This theory will

help SACCOs learn of growth that will better their performance. The next theory is the financial

portfolio theory that shows how best firms invest in different assets within the frontier line, this

will help in spreading risk to minimize losses s during investment and the last theory looked at is

the agency cost theory which comes as result of agency and principle relationship which calls for

viable projects due to monitoring. All these theories have shed light on when to invest or how to

hedge risks but have not provided us with an explanation on specific investments and their

impacts on financial performance.

On the literature review only few studies have been conducted on the same (Kipkorir, 2013;

Karagu, 2014) Found that investment decisions had a significant influence on financial

performance of SACCOs. Nyambere, (2013) discovered that risk management had an influence

on SACCOs performance, adequate credit policy results could result to high performance.

19
Okwee (2011) found out that cooperative governance noncompliance with cooperate governance

contributed to poor performance of the SACCOs. There are few studies on this area hence

looking at the effects of investment decisions on the financial performance of SACCOs.

20
 CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

The chapter covers the overall methodology to be used in the research conduct. Its sections are in

this order 3.3 Research design 3.3 Study population target population 3.4 Sampling 3.5 Data

collection 3.6 Data analysis and presentation 3.7 Data validity and reliability.

3.1 Research Design

The research design is aimed at coming up with answers to the research questions, it entails laid

down strategies to arrive at the answers (Papa & Silva, 2016). Descriptive research design will

be employed in the study. Descriptive research describes the specific phenomena used in a

research and in this it will be used to describe real estate investment, investment in government

bonds and bills, investment in fixed account and investment in security market in relation to

financial performance. It will reveal the causes and effects of variables under study (Blessings,

1998).

3.2 Population of Study

A population is a group of items or individuals that possess similar characteristics, a target

population will comprise all the 43 registered SACCOs within Nairobi as per the SASRA report

(2019).

3.3 Data Collection

The study will review secondary data for a period of five years for each investment decision.

Data will be collected from the published financial reports of specific SACCOs prepared in

accordance with the International Financing Reporting Standards (IFRS).

21
3.4 Data Analysis and Presentation

Multivariate analysis will be adopted in analyzing data to help come up with the relationship
between decisions on investment and financial performance of SACCOs. Karl Pearson
Correlation coefficient will be adopted to indicate the strength of the relationship. The results
will be arrived at by use of statistical package for social sciences and multiple financial
performance is the dependent variable while investment decisions are the independent variables.

3.4.1 Model Equations

Multiple regression analysis will be used. Performance of SACCOs will be looked at with a close

monitor on the effects of the independent variable hence the regression model will take the form

below

Y=β0+ β1 X1 + β2 X2+ β3 X3 + β4 X4 + α

Where: Y “ROA” will be used as a measure of profitability

Β0 = Constant variable

X1=Investment in Real estate

X2 =Investment in government securities

X3= Investment in fixed deposit account

X4= investment in market securities

α= Error term

The assumptions of Multiple Regression include:

No Multicollinearity which will be tested using the Variance of Inflation Factor (VIF), using the

thumb rule if VIF is less than 4, no problem exists with multicolinearity. VIF greater than 10

implies a serious problem which can be solved by centering data. Scatter plots will be used to

check for homoscedasticity as the second assumption, the third assumption which is linearity will

22
be tested by use of the F test and finally Multivariate normality will be checked using the

Shapiro – Wilk test.

Analysis of Variation (ANOVA) and Z test will be used to show the significance of the

independent variables.

23
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Data Collection Sheet

Year Amount of money Amount of Amount of Amount of Amount of

invested in Real Estate money invested money money invested money

in Government invested in in Security invested in

bills and Bonds Fixed Market Return on

Deposit Assets

Account

2014

2015

2016

2017

2018

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31