Effect of Credit Risk Management Practices on Financial Performance of Savings and Credit Cooperative Societies in Meru County, Kenya

Abstract

Savings and Credit Cooperative Societies (SACCOs) are central to Kenya's financial system through their contribution to savings mobilization, affordable credit provision, and expansion of financial inclusion. However, the increasing incidence of non-performing loans has continued to undermine their profitability, liquidity position, and long-term financial sustainability despite ongoing regulatory and supervisory reforms. Strengthening credit risk management has therefore become a strategic priority for enhancing loan portfolio quality and improving institutional performance. This study investigated the effect of credit risk management practices on the financial performance of Savings and Credit Cooperative Societies in Meru County, Kenya. The study was guided by Credit Risk Theory and employed a positivist research philosophy, quantitative research approach, and descriptive-correlational research design. The study targeted 186 management personnel from 50 SACCOs within Meru County, with all respondents included through a census approach. Primary data were collected using structured questionnaires whose validity and reliability were confirmed before the main data collection exercise. Data analysis involved descriptive statistics, Pearson Product Moment Correlation, and simple linear regression analysis. A total of 170 completed questionnaires were returned, representing a response rate of 91.4%. The results revealed a strong positive and statistically significant association between credit risk management practices and financial performance (r = 0.661, p < 0.05). Regression analysis further demonstrated that credit risk management practices significantly influenced financial performance (β = 0.661, p < 0.001), accounting for 43.7% of the observed variation in financial performance, leading to the rejection of the null hypothesis. The study concludes that strengthening borrower evaluation, credit appraisal procedures, loan monitoring, periodic portfolio reviews, and debt recovery processes substantially improves financial performance by reducing credit losses and maintaining healthier loan portfolios. The study recommends that SACCOs continuously strengthen their credit risk management frameworks, invest in staff training, adopt digital credit monitoring technologies, and regularly review lending policies to enhance financial sustainability and long-term institutional performance.