Effect of tax incentives on financial performance of deposit taking Savings and Credit Cooperatives societies operating in Nairobi County, Kenya

Abstract

Savings and Credit Cooperatives (SACCOs) play a crucial role in providing financial services to rural and underserved communities, contributing to economic development and poverty alleviation. In the recent past, SACCOs in Kenya have experienced poor outcomes in their financial performance which has occasioned the collapse and eventual closure of some of these financial institutions with the deposits of their members. Recent reports from the SASRA highlight the underperformance of DT-SACCOs nationwide, with Nairobi County prominently affected. Understanding how tax incentives affect their financial performance is essential for promoting their sustainability and effectiveness in serving their members. The main objective of the study was to determine the effect of tax incentives on financial performance of deposit taking savings and credit cooperatives societies operating in Nairobi County, Kenya. Specific objectives were to determine the effect of investment allowance, accelerated depreciation and capital gain tax exemption on financial performance of DT-SACCOS in Nairobi County, Kenya. The research hypotheses were: H01: Investment allowance have no significant effect on the financial performance of DT-SACCOS in Nairobi County; H02: Accelerated depreciation has no significant effect on the financial performance of DT-SACCOS in Nairobi County and; H03: Capital gains tax exemption has no significant effect on the financial performance of DT-SACCOS in Nairobi County. The study was anchored on agency and Neo- classical Theories. This study utilized explanatory research design. The study used panel data collected from 12 selected DT-SACCOs out of a total 40 licensed entities in the region for the period of twelve years (2012-2023). The study used advanced estimation techniques, such as correlation and panel data regression model to estimate the relationship. The study's findings indicated that both investment allowance (β=-0.0477, P=0.000) and accelerated depreciation (β=-2.472, P=0.000) have significant negative impacts on the financial performance of DT-SACCOs in Nairobi County, as measured by Return on Assets (ROA), suggesting inefficiencies in capital allocation and the need for more strategic utilization of these tax incentives. While capital gain tax exemption showed a negative relationship with ROA (β=- 7.17816) , this effect was not statistically significant (P=0.208), implying minimal or inconclusive impact. To address these challenges, it is recommended that DT-SACCOs in Nairobi County can engage in comprehensive financial and tax planning, incorporating careful assessment and utilization of investment allowances and accelerated depreciation to optimize benefits without compromising long-term financial stability. Consulting with financial experts and regularly reviewing tax strategies are advised to adapt to evolving regulations and market conditions, alongside improving investment decisions and asset management practices to align with organizational goals and enhance overall financial performance. This study adds to the existing body of knowledge on the intersection of taxation, tax incentive such as investment allowance, accelerated depreciation, capital gains exemption and financial performance, offering empirical data and insights that could inform future research in the sector or similar cooperative financial institutions in other regions. To gain a richer understanding of how tax incentives affect DT-SACCOs, future research should explore a few key areas in more depth. For instance, studying how different types of tax incentives impact various segments within SACCOs could uncover specific effects that vary across the sector. It would also be useful to look at how broader economic factors, like inflation or interest rates, interact with these incentives and influence financial performance. Additionally, researching the long-term effects of tax incentives on SACCOs’ growth and operational efficiency, rather than just immediate financial metrics, could provide a fuller picture.