Effect of Debt Financing on Financial Stability of Deposit Taking SACCOs in Kenya: The Moderating Role of SACCO Size

Abstract

The study examined the effect of debt financing on the financial stability of deposit taking SACCOs in Kenya and evaluated the moderating role of SACCO size in this relationship. Positivism philosophy, longitudinal and explanatory non–experimental research designs were used. Secondary panel data for 79 SASRA-licensed deposit taking SACCOs covering 2015–2024 were obtained from audited annual reports. Financial stability was measured by credit risk and solvency risk, while debt financing was captured through short-term, long-term and total debt to asset ratios and SACCO size by the natural log of total assets. Panel regression with interaction terms was estimated in STATA, with unit root and Hausman tests used to validate the models. Debt financing had a significant effect on financial stability. Total debt and short-term debt increased credit risk, whereas long-term debt reduced it. Total and short-term debt were positively associated with solvency. SACCO size significantly moderated the relationship: it strengthened the positive link between total debt and credit risk and the credit risk-reducing effect of long-term debt, and it weakened the solvency benefit of short-term debt. The study provides SACCO-specific evidence that the stability consequences of borrowing depend on the maturity of debt and on institutional size. It offers guidance to SACCO managers and boards on debt-maturity management and to SASRA on size-sensitive prudential supervision.