Interest rate Risk and Value of the Firm among Private Equity Firms in Frontier Markets: Insights from Deposits Taking Savings and Credit Cooperatives in Kenya

Abstract

Savings and credit cooperatives (SACCOs) form an integral part of the financial sector across the globe. However, in pursuit of their wealth creation goals, these cooperatives are exposed to numerous risks that threaten their performance and survival. One such risk is interest rate risk arising from variations in interest rates as a result of unpredictable movements in interest rates. This variation in interest rates may adversely affect the value of such institutions. In spite of the critical role played by deposit taking SACCOs and the relevance of interest rate risks management on their value, the relationship existing between the variables has not been given due attention by previous scholarship. Majority of scholars focus on commercial banks and others concentrating on other elements of financial risk such as credit risk, default risk, and exchange risk. The study therefore sought to establish the effect of interest rate risk on the value of the firm among deposit taking SACCOs in Kenya. The study was anchored on the Trade-off theory which opines that firm management must trade-off between the risk of bankruptcy and agency cost and the interest tax shield benefits associated with utilisation of debt in the capital structure. Positivism research philosophy was deployed with descriptive research design and causal research design being adopted. The target population for this study consisted of all the 164 deposit taking SACCOs licensed by Sacco Societies Regulatory Authority (SASRA) from which a sample size of 115 deposit taking SACCOs were selected using stratified sampling technique. The study exclusively utilized secondary data obtained from audited financial statements and Sacco offices using a data collection sheet. Descriptive statistics such as means, standard deviation, skewness and kurtosis were used. Inferential data analysis was conducted using Pearson correlation coefficient and panel regression model involving cross-sectional data. In testing the fitness of the model, the coefficient of determination R2 was used. F-statistic was also computed at 5% significance level to test whether there is any significant relationship between interest rate risk and SACCO value. The study concluded that interest rate risk has a significant effect on the value of the firm among deposit taking SACCOs in Kenya. The study therefore recommends that the management should seek to increase fixed rate assets so as to reduce fixed interest rate gap as well as variable rate assets to increase variable rate gap. This study was based on deposit taking SACCOs and therefore the findings may not be applicable in other forms of organisation such as among non-deposit taking SACCOs, commercial banks, and Microfinance institutions. The study thus suggests that other studies be conducted among non-deposit taking SACCOs, commercial banks, and Microfinance institutions to establish if the findings in this study would concur