ABSTRACT
SACCOs are essential financial intermediaries especially in the rural and far to reach areas by commercial banks. Poor financial performance, insolvency and general liquidity challenges have become common to SACCOs. Loans provide the most favourable investment option for financial entities due to the interest receivable. In carrying out this lending activities, they are exposed to credit risk and liquidity risk. The main source of credit risk is outstanding loans that might eventually not be paid back, liquidity risk arises from the inability of the SACCOs to repay their short term liabilities when and as they fall due. Since the SACCO members are essentially the owners, once a member qualifies for a loan it is deemed to be a right for them to receive the loan. Managers of SACCOs should therefore maintain the most effective and efficient levels of liquidity. This research had the objectives of finding out the relationship between liquidity risk, credit risk and financial performance of SACCOs and if there was a significant negative relationship between independent variables (liquidity risk and credit risk) and the dependent variable (financial performance). To measure these variables, non-performing loans ratio, current ratio and return on assets were used. From a target population of 73 top and medium tier DT-SACCOs as at 31st December 2015; only 63 DT-SACCOs that were registered in 2012 were selected and secondary data obtained for analysis. Collected data was analysed using computer packages. Regression analysis was used to understand the relationship between dependent and independent variables of the study. Further, the data was tested for multicollinearity where it was noticed that no multicollinearity relationship between independent variables existed. A regression equation of Y=6.60- 0.21X1 - 0.05X2 and a correlation coefficient ratio of 0.52. The hypotheses developed were tested where the results indicated that there was no significant negative relationship between credit risk and financial performance but there is significant negative relationship between liquidity risk and financial performance. From the research it was concluded that DT-SACCO managers have to strike a balance between the two types of risk to maximise returns and minimise the risk exposure of their institutions. It is recommended that SASRA should review the current liquidity levels to cushion DTSACCOs from cash outs and managers should resolve to external borrowing for short term purposes only.