Credit Risk and Financial Sustainability of Deposit-Taking Savings and Credit Cooperative Societies in Nairobi City County, Kenya

Abstract

This study examined the relationship between credit risk and return on assets (ROA), used as an indicator of financial sustainability, among deposit-taking Savings and Credit Cooperative Societies (DT-SACCOs) headquartered in Nairobi City County, Kenya. The study covered 48 institutions observed annually over five years, from 2021 to 2025, yielding 240 firm-year observations. A longitudinal panel design was used, with credit risk measured by the non-performing loan (NPL) ratio. Financial and regulatory records were analysed in Stata 17 using descriptive statistics, trends, correlation, and pooled, fixed-effects and random-effects regression. Continuous variables were winsorized at the first and ninety-ninth percentiles. The reported mean NPL ratio was 7.11 per cent, above the 5 per cent prudential benchmark, and declined from 8.01 per cent in 2021 to 4.89 per cent in 2025. The Hausman test supported retaining random effects, χ²(1) = 0.01, p = .925. The final model, with institution-clustered standard errors, showed a positive but statistically insignificant association between NPL and ROA at the 5 per cent level (B = 0.2110, SE = 0.1115, p = .060). The null hypothesis was not rejected. The study contributes recent longitudinal evidence on the contemporaneous NPL–ROA relationship in Nairobi-based DT-SACCOs, rather than establishing a causal effect. The short panel, omitted controls and limitations in firm-level surplus measurement qualify the interpretation. Boards should continue to strengthen credit appraisal, arrears monitoring and recovery, since an insignificant current-year association does not establish that impaired loans are harmless.