Effects of an Acquisition on the Financial Performance of a Firm: Case of Mwalimu National Sacco and Spire Bank. by Mwadzoya

EFFECTS OF AN ACQUISITION ON THE FINANCIAL PERFORMANCE OF A FIRM: CASE OF MWALIMU NATIONAL SACCO AND SPIRE BANK.

BY MWADZOYA EUNICE MADZO

UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA

SUMMER 2020

EFFECTS OF AN ACQUISITION ON THE FINANCIAL PERFORMANCE OF A FIRM: CASE OF MWALIMU NATIONAL SACCO AND SPIRE BANK

BY MWADZOYA EUNICE MADZO

A Research Project Report Submitted to the School of Business in Commented [DA1]: Research Project Partial Fulfillment of the Requirement for the Degree of Masters Commented [M2R1]: Corrected. in Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA

SUMMER 2020

STUDENT’S DECLARATION

I, the undersigned, declare that this is my original work and has not been submitted to any other college, institution or university other than the United States International University in Nairobi for academic credit.

Signed: ______Date: ______

Mwadzoya E. Madzo (ID 629769)

This project has been presented for examination with my approval as the appointed supervisor.

Signed: ______Date: ______

Dr. George Achoki

Signed: ______Date: ______Commented [DA3]: Move this to the bottom Commented [M4R3]: Done Dean, Chandaria School of Business

This work is the product of the author; hence no part of this paper shall be reproduced or transmitted electronically, or mechanically including photocopying, reprinting or redesigning without the prior permission of the author.

iii

ABSTRACT The general objective of this study was to determine effects of the acquisitions of Spire Bank by Mwalimu National Sacco. The specific objectives were to determine the effect of Asset Management on Financial Performance; to determine the effect of Capital Adequacy on financial performance; and to determine the effect of liquidity on financial performance.

The study focused on an Acquisition of Spire Bank by Mwalimu National Sacco in 2015.The study adopted a descriptive research design in order to discover the associations or Commented [DA5]: Justify why you used descriptive research design relationships between or among selected variables within a population of study. The Commented [M6R5]: Done population of the study consisted of the financial institutions audited financial statements for the six years. The sample was selected using the purposive method which involves studying the two institutions where one was acquired in 2015. Secondary data, three years before and three years after the event was calculated from the two financial institutions audited financial statements, bank supervision annual reports published by Central Bank of Kenya, Sacco Society Regulatory Authority and the respective financial institutions’ websites. Data analysis method included descriptive statistic, correlation and regression analysis methods. Statistical Package for Social Sciences (SPSS) version 21 was used as the data analysis tool.

Findings on correlations between asset management and performance of Mwalimu National Sacco indicated a positive significant relationship between return on assets and performance r (7) = .0.883, p < 0.01. Regression results indicated that there was a significant effect on ROA: F = 301.4, p = 0.003. R2 value of 0.993 indicated that 99.3% of the variations in financial performance were explained by return on assets. A coefficient of 0 signified that there wasn’t a relationship between performance and return on assets. This means that changes in one variable were not correlated with changes in the second variable. This indicated that return on assets as a determinant of performance of Mwalimu National Sacco positively influenced acquisitions. The more institutions acquire assets, the better they perform.

Findings on Capital Adequacy as a result of the acquisition revealed a positive significant relationship between capital adequacy and performance, r = 0.449, 0.131, p<0.05. Results of the regression indicated a significance of F = 0.0, p = 0.0. An R2 of 1.0 indicated that 100 % of the variations in performance were explained by acquisition event.

Findings on Liquidity ratio used to measure the effect of acquisitions on financial stability of Mwalimu National Sacco showed that there was a significant negative correlation between deposits r =--0.159 and r= -0.146 respectively p<0.01

The study concluded that there was a significant relationship between performance and return on assets, there was a positive significant relationship between performance and capital adequacy but a negative relationship between liquidity and the financial stability of Mwalimu National Sacco after the acquisition of Spire Bank.

The study recommended that Mwalimu National Sacco work on improving its ratios for return on assets, capital adequacy, and liquidity. On return on assets, the study recommended reduction in operational cost by closing branches that are not bringing in income and getting rid of other assets that are generating losses. On capital adequacy, the study recommended increasing the retained earnings of the Sacco by opting to pay less dividends to its members in order to increase the amount of core capital and avoid other major investments that are likely to eat further into the capital. On liquidity, the study recommended an increase in the minimum contribution of the Sacco members, introduction of sound saving schemes, fixed loan limits, and invest wisely the excess funds in viable short-term investments. The study also recommended further studies to be carried out on the effect of acquisitions on financial performance of Mwalimu National Sacco and cover a longer period. The study can also include the financial performance of the acquired bank to see how the event affected its performance.

ACKNOWLEDGEMENTS I wish to thank God for his Grace and the gift of life and good health. Also, my grateful thanks go to those who have helped in the preparation of this study-notably, Dr. George Achoki, my supervisor, for his great guidance, and to my siblings for their great support and encouragements. Lastly, and most importantly, I would like to thank my parents (posthumously) for believing in me. Thank you.

DEDICATION This research project is dedicated to my future children.

vii

TABLE OF CONTENTS Commented [DA7]: STUDENT”S DECLARATION COPYRIGHJT ABSRACT ACKNOWLEDGEMENT STUDENT’S DECLARATION ...... ii DEIDACTION TABLE OF CONTENTS LIST OF TABLES COPYRIGHT ...... iii LIST OF FIGURES LIST OF ABBREVIATIONS ABSTRACT ...... iv Appendix 2 NACOST PERMIT

ACKNOWLEDGEMENTS ...... vi

DEDICATION...... vii

TABLE OF CONTENTS ...... viii

LIST OF ABBREVIATIONS ...... xi

LIST OF TABLES ...... xii

CHAPTER ONE ...... 1

1.0 INTRODUCTION...... 1

1.1 Background of the Study ...... 1

1.2 Statement of the Problem ...... 5

1.3 General Objective of the Study ...... 7

1.4 Specific Objectives of the study ...... 7

1.5 Significance of the Study ...... 7

1.6. Scope of the Study...... 8

1.7. Definition of Terms ...... 8

1.8 Chapter Summary ...... 9

CHAPTER TWO ...... 10

2.0 LITERATURE REVIEW ...... 10

2.1 Introduction ...... 10

2.2 Effect of Capital Adequacy on Financial performance ...... 10

2.3 Effects of Asset Management/Earning Ratings on Financial Performance ...... 12

2.4 Effect of Liquidity on Financial Performance...... 16 viii

2.5 Chapter Summary ...... 19

CHAPTER THREE ...... 20

3.0. RESEARCH METHODOLOGY ...... 20

3.1 Introduction ...... 20

3.2. Research Design ...... 20

3.3. Population and Sampling Design ...... 20

3.4. Data Collection Method ...... 22

3.5. Research Procedure ...... 22

3.6 Data Analysis Methods ...... 23

3.7 Chapter Summary ...... 24

CHAPTER FOUR ...... 25

4.0 RESULTS AND FINDINGS ...... 25

4.1 Introduction ...... 25

4.2 General Information ...... 25

4.3 Effect of Asset Management/Earning Ratings on the financial performance of a firm. 26

4.4. Effect of Capital Adequacy on the financial performance of Mwalimu National Sacco ...... 30

4.5 Effect of Liquidity on the financial performance of Mwalimu National Sacco...... 34

4.6. Chapter Summary ...... 39

CHAPTER FIVE ...... 40

5.0 DISCUSSIONS, CONCLUSIONS, AND RECOMMENDATIONS ...... 40

5.1 Introduction ...... 40

5.2 Summary ...... 40

5.3 Discussion ...... 41

5.4 Conclusion ...... 43

5.5 Recommendations ...... 45

REFERENCES ...... 47

APPENDICES ...... 53

Appendix I: Secondary Data Collection Template ...... 53

Effect of Capital Adequacy on financial performance of a firm...... 53

Effect Asset Management on financial performance of a firm...... 53

Effect of Liquidity on the financial performance of a firm ...... 53

Appendix II: NACOSTI Certificate ...... 54

LIST OF ABBREVIATIONS

CAR Capital Adequacy Ratio

CBK Central Bank of Kenya

ECB Equatorial Commercial Bank

IFLR International Financial Law Report

KPMG Lynell Peat Marwick Goerdeler

M&A Merger and Acquisition

ROA Return on Assets

ROE Return on Equity

SASRA Sacco Society Regulatory Authority

SPSS Statistical Package for Social Sciences

UK United Kingdom

UNICEM United Cement Company of Nigeria

US United States

CCA Core Capital

ECA Equity Capital

TCA Total Capital

CIR Cost Income Ratio

DE Debt of Equity

TRC Risk Weighted Capital

BS Bank Size

AG Asset Growth

AL Asset Liability

LIST OF TABLES Table 4.1 ROA and ROE ...... 25

Table 4.2 Descriptive Statistics on ROA ...... 26

Table 4.3 Correlation Results for ROA ...... 27

Table 4.4 Pre-Acquisition ANOVA results of ROA ...... 27

Table 4.5 Post-Acquisition ANOVA results of ROA ...... 29

Model Summary...... 29

Table4.6 Descriptive Statistics for Capital Adequacy ...... 30

Table 4.7 Correlation results of Capital Adequacy ...... 31

Table 4.8 Pre-Acquisition ANOVA results of Capital Adequacy ...... 32

Table 4.9 Post-Acquisition ANOVA results of Capital Adequacy...... 33

Table 4.10 Descriptive Statistics of Liquidity Ratio ...... 34

Table 4.11 Correlations of Liquidity Ratios ...... 35

Table 4.12 Pre-Acquisition ANOVA results ...... 36

Table 4.13 Post-Acquisition ANOVA results of CAR ...... 37

xii

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study In todays globalized economy, Mergers and Acquisitions (M&A) are increasingly being used world over for improving competitiveness of companies through gaining greater market share, broadening the portfolio to reduce business risk, for entering new markets and geographies, and capitalizing on economies of scale (kithithu, Cheluget, Keraro, and Mokamba, 2012). It has long been argued that synergies are key drivers of mergers and acquisitions (M&As), and that many M&As occur due to technology reasons (Bena and Li, 2014).

The number and size of mergers and acquisitions being completed continue to grow exponentially. Once a phenomenon seen primarily in the United States, mergers and acquisitions are now taking place in countries throughout the world. An acquisition is seen to have become one of the most important corporate-level strategies in the new millennium (Hitt, Harrison, and Ireland, 2001).

Arnold (2001) defined a merger as a combination of two business entities under common Commented [DA8]: Cite properly ownership and Acquisition as the purchase of one firm by another with the associated Commented [M9R8]: Done. implication of financial and managerial domination. There are scholars who use both terms interchangeably. M&A is likely to happen if the two firms have complementary resources. Many small firms are acquired by large one to provide the missing ingredients necessary for the firms’ success (Brealey and Myers, 1991). Mergers are often categorized as Horizontal, Vertical, or Conglomerate. Horizontal mergers involve the combination of two companies that engage in similar lines of activity with the main motive being achieving economies of scale. Vertical mergers occur when firms from different stages of the production chain amalgamate while a conglomerate merger is the combination of two firms which operate in unrelated business areas (Arnold, 2001). Arnold also explains that most firms would consider merging or acquiring other firms for reasons such as synergy, market power, economies of scale, internalization of transactions, entry to new markets and industries, tax advantages, 1

risk diversification, bargain buying, inefficient management, undervalued shares, and other managerial motives. The most common ways of financing mergers and acquisitions include cash and shares.

The first wave of M&A dates back in 1897 but it was from 1998 when major M&A happened with one of the banking giants, Citicorp and financial services Traveler's Group. The merge was estimated at approximately $77 billion in value. In a different industry-the oil industry, Exxon's acquired Mobil for an estimated $79 billion in the same year.

According to Warter and Warter (2014) companies, worldwide, are restructuring their operations through different types of consolidation strategies like M&A to face challenges posed by the new pattern of globalization. Cross-border M&A sharply increased over the last two decades and this is partly the result of financial liberalization policies, government policies and regional agreements. According to a report done by Deloitte on M&A trends 2018 in the United States, the environment for M&A had been muted in the previous years due to concerns like the economy, political and regulatory uncertainty, market volatility, and valuations. These concerns were however diminishing according to the new survey done in 2018. Corporate executives and private equity investors from the largest firms-with revenues and investments more than $1 billion-are considerably more confident than their smaller counterparts that there will an acceleration of M&A activity in 2018 both in the number of deals and size of those transactions. According to a research done by Zhu and Zhu (2016), in recent years, an increasing number of Chinese firms have been engaged in acquisitions both within and outside China. The Chinese market statistics analysis indicated that the number of complete M&A involving Chinese firms stood at 9473 but these reduced to 8096 in 2017 (Fung and Guan,2018). Among the significant deals in china include that of China Unicom which issued a limited number of its shares to its investors including China Life, Tencent Cinda, and Baidu Penghuan who hold collectively 35.1% shares. Other deals include that of Shenzhe Metro’s acquisition of approximately 15.31% of Vanke shares from China

Resources Co. Ltd.(International Financial Law Report [IFLR], 2018) indicated that UK Commented [DA10]: refer to handbook for citing market was resilient in 2017 with 3485 deals worth 325 billion dollars compared with 3016 Commented [M11R10]: Corrected. deals worth 36.9 euros in 2016. This shows a reduction in the number of deals but in increase

in the value of deals made. The technology, media, and telecommunications sector however remained one of the most active sectors for UK M&A in 2017. Increased competition in the global market has also prompted Indian companies to go for M&A as an important strategic choice. In other developing countries outside Africa such as India, entrepreneurs acquiring foreign enterprises were not so common until recently. Acquisition of foreign companies by the Indian businesses has been the latest trend in the Indian corporate sector (Bedi, 2016). According to Global Legal Insights, the number of M&A in Brazil showed a slight growth from 2016 to 2017 of 7.7%. Bedi, however, indicated that there has been a decreasing trend in the numbers and a fluctuating deal volume since 2013. Commented [DA12]: cite Commented [M13R12]: Corrected (African Development Bank Group[ADBG], 2012) conducted a study showing that M&A Commented [DA14]: refer to handbook for citing activities in emerging markets in Africa showed resilience and their slowdown was tempered Commented [M15R14]: corrected irrespective of the impact of the recession that was ongoing on M&A markets worldwide. The attractiveness of the African continent for M&A deals was mainly underpinned by the high economic growth and the buoyant energy, mining and utilities sectors. M&A deals on the continent totaled USD27 billion in 2011 down from USD44 billion in 2010. In 2011 deals in South Africa accounted for 57% of the overall activity in Africa with total value worth USD12.2 billion. There was however a drop in M&A transactions in South Africa in both volume and value of domestic and cross border deals. this is according to an analysis done Baker Mckenzie of Thomson Reuters. In 2015, Abu Dhabi based Al Noor Hospitals merged with South Africa based Mediclinic in a 11.4-billion-dollar deal. There was also a plan by South Africa’s Curro Holdings to merge private schools in the country. The deal collapsed after parents failed to support the whole idea due to racism issues. Still in 2015, Nigeria’s mobile phone firm Globacom created a deal to buy off Cote d’lvoire’s fourth largest operator comium in a 600-million-dollar deal. Another successful M&A deal in Nigeria happened in 2015 October between Nigeria Cement Holdings which bought 100% stake in United Cement Company of Nigeria (UNICEM) (Mutiso, 2016).

Gill, (2016) of Klynveld Peat Marwick Goerdeler (KPMG)’s Deal Advisory Unit states that In East Africa, the deal volume has been increasing since 2010. The 2010 the number of deals accounted to 51 rose to 54, 56, 68, and 99 deals in the successive years. These deals

came from different sectors such as communications, energy, mining, consumer goods, and finance. Uganda that came in second place after South Africa in the African countries had a total value of deals as much as USD3.1 billion. The value of M&A transactions announced in 2017 fell to $32.4 billion, down from $42.5 billion in 2016 and $64.9 billion in 2015—the highest recorded in the last decade, according to investment banking analysis by Thomson Reuters. Tanzania was able to sustain its economic growth levels in 2015 due to the occurrence of M&A activities. According to Kibuuka (2015), the political stability of the country and the country’s tax and investment incentive regime for potential investors were the key reasons for the growth in deals in Tanzania. Deals in Tanzania include that of Bank M of Tanzania acquiring a 51% stake in Oriental Commercial Bank in Kenya at an estimated price of 12.23 million dollars (Reuters, 2016).

Some of the trends in the M&A in the Kenyan market suggest that deal volumes in the financial services sector have shown high growth in recent years, whereas sectors such as manufacturing, tourism and healthcare have not seen significant deal activity. Noteworthy is the banking and insurance sectors in Kenya, which are likely to witness significant deal activity soon due to the revised regulatory capital requirements (Klynveld Peat Marwick Goerdele [KPMG], 2016). The financial services sector has witnessed the largest increase in deal activity, from a mere two deals in 2010 to 18 deals in 2013. In 2014, there were seven deals in the insurance sector only, for example, Swiss Re’s minority acquisition in Apollo Insurance. The largest transaction was Norfund’s minority acquisition in Equity Group. Other deals include that of Kenya Plum Holdings acquired an additional 23.34% shares in regional insurer Britam Holdings Ltd. Longhorn, a listed Kenya publishing firm also acquired 74% stake of share capital of Law Africa Publishing Ltd (Njau, 2016, para.1).

Mwalimu National SACCO established in 1974, is among the 166 SACCO societies which have been duly licensed to carry out deposits for the period ending 31st December 2018 as reported by Sacco Societies Regulatory Authority (SASRA). It is the largest African Sacco with a membership drawn from teachers all over Kenya. The Sacco has a total of 16 branches spread all over Kenya. The major role of Saccos has been to enable members’ access affordable financial services. This has empowered people and eventually improved their

social economic stand. Saccos in Kenya are regulated by Sacco Societies Regulatory Authority (SASRA). SASRA is a statutory state corporation established under the Sacco Societies Act (Cap 490B) of the Laws of Kenya (the Act) which came into full operation upon the gazettement of the Sacco Societies (Deposit-taking Sacco Business) Regulations, 2010 (the Regulations 2010) on 18th June 2010. The role of SASRA is to effectively regulate, supervise and develop the Sacco industry by promoting sound business practices to enhance stability, growth and access to financial services.

Equatorial Commercial Bank (ECB) commenced operations as a fully-fledged bank in 1995. The bank merged with Southern Credit Banking in June 2010. ECB was later in 2015 acquired by Mwalimu National Sacco which then led to a rebranded bank, Spire Bank. The Central Bank of Kenya annual report, 2017 indicates that as at December 31, 2017, the Kenyan banking sector comprised of the CBK, as the regulatory authority, 43 banking institutions (42 commercial banks and 1mortgage finance company). Out of the 43 banking institutions, Spire Bank is among the 40 privately owned banks while the Kenya Government had majority ownership in 3 institutions. Of the 40 privately owned banks, 25 were locally owned while 15 were foreign owned. Commercial banks in Kenya are governed by the CBK. One of the statutory objects of the CBK under the Central Bank Act (Cap 491) is the promotion of financial stability through maintenance of a well-functioning banking system. It fosters the liquidity, solvency and proper functioning of a market-based financial system through developing appropriate laws, regulations and guidelines that govern the players in the banking sector and they continuously review then to ensure that they remain relevant to the operating environment. The major roles of commercial banks include accepting deposits, transfer of money, lending services, foreign exchange services, customer investment services, financial advice and many others (Central Bank of Kenya [CBK], 2017). Commented [DA16]: Source????? Commented [M17R16]: Corrected. 1.2 Statement of the Problem The banking amendment bill was signed into law in 2015. According to the law, borrowers are to access credit from commercial banks at a maximum interest rate of 14%. According to a research done by Nairobi Business Monthly, Saccos had enjoyed huge interest rate disparity between what they used to charge and what the commercial banks had been 5

charging borrowers for far too long. While some banks were charging interests between 25%-30% on unsecured personal loans, saccos were lending to their members at an affordable rate of 12% for normal loans. This brought the difference in interest rates between Saccos and commercial banks to between 13% and 18%. As the new regime of interest rate caps set in, that interest rate gap narrowed down to 2%. This has seen banks pull a significant market share from the existing Saccos clientele. This therefore called for a transformational strategy in Saccos. A strategy that would put them at par with commercial banks or at least make them competitive with these banks. According to the SACCO Supervision Annual Report- 2017, the Sacco industry, especially the deposit-taking segment should expect stiff competition from other financial service providers, (Sacco society regulatory authority [SASRA], 2017) Mwalimu National Sacco’s acquisition of Spire Bank was among the major projects stipulated in the 2014-2018 Mwalimu Sacco Strategic Plan with the motive to boost their funding through deposits and not rely on the deposits from its members only. The Sacco wa also aiming at enjoying other banking services out of this deal. Initially the deal received a lot of scrutiny and backlash especially from financial service regulators and the government. Going by the profitability ratios, it was argued that the price tag attached to ECB was inflated as compared to the industry price; it was risky buying the bank because of different factors like the bank’s history on loss making and its suspected small clientele. It was also alleged that Sacco members had not given their consent on the purchase, and that due protocol to purchase the bank was never followed. Previous studies have mainly looked at the effects of M&A on similar financial institutions such as banks which have a common regulatory body. The main variables used include Return on Assets and Return on Equity. Kaol (2017) did a research on the effects of M&A on the financial performance of commercial banks in Kenya between 2008 and 2016. The variables used in this research were shareholders’ value, asset management and financial stability. The findings for this study showed a significant relationship between financial performance and return on assets, and no significance relationship between financial performance and return on equity, and financial performance and financial stability on institutions that had undergone M&A. These previous researches exclude other variables that

are of main concern arising from the stiff competition between Saccos and Banks after the introduction of capping in interest rates for all commercial banks. This study therefore attempts to fill this research gap by investigating the effect of Acquisition on the case of two firms with different regulatory bodies-Mwalimu National Sacco and Spire Bank.

1.3 General Objective of the Study The general objective of this study was to assess the financial effect of the acquisition of Spire Bank by Mwalimu National Sacco.

1.4 Specific Objectives of the study The specific objectives were. 1.4.1. To determine the effect of liquidity on the financial performance of Mwalimu National Sacco. 1.4.2. To determine the effect of Asset Management/Earning ratings on the Financial Performance of Mwalimu National Sacco 1.4.3. To determine the effect of capital adequacy on the financial performance of Mwalimu National Sacco.

1.5 Significance of the Study 1.5.1. Regulatory Bodies The study is important for regulation bodies like SASRA that authorized this deal to happen. This will enable such organizations make better informed decisions in future in regard to M&A.

1.5.2. Target Shareholders

This study is important to investors who would want to invest their money through Saccos especially ones that have undergone such strategic and financial decisions like M&A.

1.5.3. Employees

This study is important for employees of target firms for M&A. It shows how beneficial it is to them in terms of job security or job creation.

1.5.4. Scholars and Researchers

The study will also benefit scholars and researchers who wish to understand the relationship between mergers/acquisitions and the performance of Saccos.

1.6. Scope of the Study The population of the study consisted of Mwalimu National Saccos financial statements before and after acquiring Spire Bank Kenya. The financial statements provided information for different financial ratios required to assess the specific objectives under study. These ratios include core capital to total assets ratio, core capital to total deposit ratio, Return on Assets, liquidity ratio, external borrowing to total assets ratio, and total loans to total deposits ratio. The period covered was from 2013 to 2018. This period covered three years before the acquisition and three years after the acquisition. The study’s intention was to look at the financial performance of a Sacco after acquiring a bank and at the time of this research, the only acquisition that had happened was that of Mwalimu National Sacco and the then Equatorial Commercial Bank Now Spire Bank.

1.7. Definition of Terms 1.7.1. Mergers and Acquisitions (M&A)

Arnold (2001) defines a merger as a combination of two business entities under common ownership and Acquisition as the purchase of one firm by another with the associated implication of financial and managerial domination

1.7.2 Working Capital

Brealey and Myers (1991) define working capital as a “collection of short-term assets and liabilities” (p.724).

1.7.3 Capital Adequacy Ratio

This is a measure of how stable an organization is to accommodate reasonable amount of losses before becoming insolvent. It is used to protect depositors and promote the stability and efficiency of financial systems (Arnold, 2002).

1.8 Chapter Summary This chapter introduced the study on the effect of acquisitions on financial performance of Mwalimu National Sacco and Spire Bank. The background discussed global trends in the US, UK, and China and what is happening in Africa with countries such as South Africa and Nigeria discussed. In East Africa countries such as Uganda, Tanzania and Kenya have been the main areas on discussion regarding M&A. A summary of the Sacco and Banking industry in Kenya was also discussed. The competition between Saccos and Commercial Banks in Kenya was discussed to show the motive behind the acquisition between Mwalimu National Sacco and Spire Bank. The statement of the problem was explored with an aim of developing the general objective of the study. Specific research objectives on effects of acquisition on capital adequacy, asset management, and liquidity have been indicated. The significance and a scope of study of six years, three years before the acquisition and three years after the acquisition was indicated. Chapter two discusses literature review from different scholars related to M&A. Chapter three discusses the methodology used, while chapter four discusses the results and findings of the study. Finally, chapter five discusses the results, conclusions and recommendations of the study.

CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction This chapter presents a review of literature on the financial effects of an Acquisition. It presents a literature on effects of capital adequacy, and liquidity on the financial performance of Mwalimu National Sacco and Spire Bank Limited.

2.2 Effect of Capital Adequacy on Financial performance 2.2.1. Buffer Theory of Capital Adequacy

According to the Federal Reserve Act of December 23, 1913, all banking institutions are to make certain the available supply of money and credit to counter any financial crisis that may arise. This Act allows the establishment of the Federal Reserve Banks that would support the structure of credit in times of financial strain. Other financial banks could rely on the Federal Reserve banks for cash when faced with financial pressure as opposed to relying on loan contraction and selling of security. The national banks are expected to subscribe to the capital of their respective reserve bank and expected to keep a part of their reserve with their Federal Reserve Bank. The Federal Reserve bank would only lend to member banks.

According to the Central Bank of Kenya (CBK) Act, the authorized capital of a bank is five billion. The bank is also required to establish and maintain a fund designated as the General Reserve Fund to be transferred at the end of each financial year of at least 10% of the net annual profits of the bank.

To cushion member deposits and creditors against losses resulting from business risks, the amended Co-operative Societies Act (2004) states that every co-operative society which derives surplus from its transaction is expected to maintain a reserve fund. The Sacco Regulations of 2010 states that a Sacco Society shall at all times maintain a core capital of not less than 10 million shillings, a core capital of not less than 10% of total assets,

institutional capital of not less than 8% of total assets, and a core capital of not less than 8% of the total deposits.

2.2.3. Empirical review

Alamri and Almazari (2017) conducted a research on the effect of capital adequacy on profitability between two banks in Saudi Arabia-Samba and Sabb. They collected their data from secondary sources and used descriptive analysis in testing the hypothesis. The dependent variable used was Return on Assets (ROA). The independent variables included return on equity (ROE) core capital (CCA), equity capital (ECA), total capital (TCA), cost income ratio (CIR), debt to equity ratio (DE), risk weighted capital (TRC), bank size (BS), asset growth (AG), and asset liability ratio (AL).

The findings for Sabb Bank indicated a low positive correlation relationship between ROA and ROE and a high positive relationship between ROA and CCA, ECA, TCA, CIR, and DE but a low positive relationship between ROA and TRC, BS, AG, and AL.Samba Bank on the other hand showed a high positive correlation between ROA and ROE, a positive relationship between ROA and DE, a negative relationship between ROA and CCA, ECA, TCA, CIR, TRC, BS, AG, and AL. There was however a positive relationship between ROE and CIR and DE and a negative relationship with CCA, ECA, TCA, TRC, BS, AL, and AC.

Barus, Muturi, Kibati, and Koima (2017), conducted a study to establish the effect of capital adequacy on the financial performance of savings and credit societies in Kenya. The study employed an explanatory research design and used a sample size of 83 Saccos that were operational from 2011 to 2015. Using secondary data, they employed census methodology and multiple linear regression models to analyze this data using SPSS and STATA.

The regression results of this study showed a positive influence. It also indicated the magnitude by which capital adequacy influenced the financial performance of savings and credit societies. The study therefore concluded that capital adequacy influenced the financial performance of savings and credit societies in Kenya.

Ngui and Jagongo (2017), carried out a study on the financial effect of capital adequacy on deposit taking Saccos in Kenya between two periods; the period between 2007-2011 when SASRA requirements on capital adequacy had not been fully enforced as law and 2012-2016 when capital adequacy was fully in force. Using a population of 175 fully licensed Deposit Taking Saccos the research used a comparative research design. From the findings, it was concluded that capital adequacy influenced the financial performance of Deposit Taking Saccos in Kenya

2.3 Effects of Asset Management/Earning Ratings on Financial Performance This section looks at what share capital is and the relevant theories associated with it. With share capital also comes the maximization of shareholders equity which has also been covered in this section. Empirical studies suggest that M&A tend to improve share capital of the organizations. Rono (2014) results on M&A showed an enhanced performance leading to improved shareholders wealth. The study established that following the merger or the acquisition, the Returns on Assets, Earnings per share and Returns on equity both improved as the assets of the company improved after the mergers and acquisitions. Rono recommended that companies especially those undergoing difficult times should resort to M&A to increase their profitability leading to maximization of shareholders value. However, a research was done by Kariri (2004) on the effect of M&A on shareholders wealth of 43 commercial banks in Kenya within an 11-day event window surrounding the announcement of the M&A. The results showed that the banks did not create wealth for the shareholders for both the bidding entity and the combined entity since the share prices of the six sampled firms did not show a significant change within the study window period. Secondly, the findings showed that the shareholders‟ total cumulated return had not significantly changed due to announcement (or approval) of a takeover bid. The study concludes that past Kenyan bank M&As were not wealth creating projects for the shareholders of both the bidding entity and the combined entity. A research conducted by Mrak, Sokolic, and Vretenar (2017) on motives for M&A in small and medium sized enterprises.

Different organizations engage in M&A for different motives but Oladipupo and Okafor (2011) explain that increasing shareholders’ wealth is the fundamental purpose of mergers

and acquisitions. An on-line questionnaire was conducted among Croatian firms and Suggested motives for M&A on sample firms were presented in following categories: cost synergies, increase of production/services capacities, improving market position and gaining market power, technology transfer, knowledge transfer, financial stability gains and access to raw materials and intermediate goods. A vast majority of respondents claimed increase of market power and increase of capacities as their major reason for interest in future M&As, while cost synergies were among the less noticed ones. The least expressed motive is the access to raw materials and intermediate goods while the strongly emphasized motive was improving market position and gaining market share. M&A is responsible for the growth of stable company, survival of weaker company and profitable closure of Default Company. Companies are achieving greater financial and operational success with these deals with its aim being restructuring, efficiency improvement and cost reduction for a company (Dubey,2018).

2.3.1 Shareholder Equity and Financial Performance

According to Ekholm and Svensson (2009) state that value creation from M&A can be measured as changes in the stock price.

A research was done by Delaney and Wamuziri (2004) investigating the financial performance of UK construction companies, which have been involved in construction related mergers and acquisitions. The researchers examined the impact of merger announcements on acquiring firms' and target firms' stock performance in the UK construction industry. It also examines abnormal share returns throughout a period surrounding the announcement of both successful and unsuccessful acquisition and merger bids. The overall results indicated that related construction mergers create wealth for shareholders of the target firms. Another event study was done by Bongbee (2017) on the reaction of stock returns to acquisition news. Data of 51 observations of acquiring companies with publicly traded shares on the London Stock Exchange (FTSE100) was used over a period, from July 2012 to May 2013 The event of acquisition d appeared to be related significantly to the abnormal returns However an event study research done by Kariri (2004) on sampled commercial banks in Kenya does not show any

significant change in the share price after the announcement of M&A for the banks. Generally, the findings of most studies suggest that M&A lead to significant positive abnormal returns to shareholders of the target firm while resulting in negative abnormal returns to shareholders of the bidder firms (Bild and Guest, 2002). 2.3.2. Shareholder Wealth Maximization Theory

This approach asserts that it is the responsibility of managers (and those who oversee managers, such as boards of directors) to maximize returns to shareholders; consequently, unnecessary allocations of money, time or other resources to other stakeholders, such as employees, suppliers, or local communities, are discouraged (Jensen and Meckling, 1976). All this is with the motive of increasing financial performance of a firm. The assumption made in this model is that the market is efficient where prices of stock captures all new information available in the market and incorporates this information in the share prices of stocks (Jensen, 1978).

This theory has received a lot of support indicating that shareholders wealth maximization should be the key objective for the governance of profitable corporations that have an objective of increasing their financial performance (Diz, 2014). The theory has also received a fair share of criticism especially from the stakeholder point of view where Harrison, Freeman, and Abreu (2015) believe that stakeholders should be considered when it comes to wealth creation of a company and not just the shareholders. This is discussed in the stakeholder theory.

Fatemi, Ang, and Chua (2016) carried out a study on the evidence supporting shareholder wealth maximization in management-controlled firms. The purpose of the study was to empirically investigate the priority scheme of goals in large management-controlled firms. The objective was carried out within a financial management context. Results obtained indicated that large management-controlled firms had two important goals: shareholder wealth maximization and sales maximization goals with the former being the dominant goal.

A study was done by Oladipupo and Okafur (2015) focusing on who controls shareholders wealth maximization and how it affects firm’s performance in publicly quoted non-financial companies in Nigeria. The shareholders fund was the dependent variable while the 14

explanatory variables were firm size, retained earnings, and dividend payment. The data for this study was obtained from the Nigeria Stock Exchange. The findings of the study showed a tendency of ownership and management of the business to separate. This brought a conflict of interest between the management who focused on share maximization and the shareholders who were mostly interested in dividend payouts and returns in their investments. Also, the findings of this study showed that firm size and retained earnings were the major determinants of shareholders wealth maximization while dividend payout reduced the propensity of the shareholders wealth maximization. From this research it was concluded that the management of the organizations under the present study is in major control of shareholders wealth maximization objective and impact on the firm performance. Implication was that selecting high-quality management for the organizations would help in achieving shareholders wealth maximization objective in organizations.

A study was done by Ncube (2013) on shareholders’ wealth maximization effect on mergers and acquisitions. Ncube used a case study method of a merger between Abraxas Investments Holding and AST limited to form AST Group Limited. He was investigating any forms of gains accruing to the shareholders whether abnormal or otherwise as a result of this merger. The findings of this study showed that shareholders experienced some abnormal gains in the period leading to the merger as measured by the increase in share prices of the merger companies. In the post-merger period, the price of the AST Group Limited share declined signaling a drop-in value of shareholders wealth.

2.3.3 Advantages and Disadvantages of Shareholders Wealth Maximization Theory

There have been arguments that shareholder wealth maximization should not act as a binding rule for corporation and the managers running it especially when tough decisions have to be made by the managers. Koslowski, (2000) argues that shareholders value is a control principle and not a corporate purpose. Other researchers have argued that better stakeholder management results in both greater shareholder wealth and greater benefits for other stakeholders. This therefore means that it is possible that better relations with primary stakeholders such as employees, customers, supplier, and the community at large could increase shareholder wealth (Hillman and Keim, 2001).

2.4 Effect of Liquidity on Financial Performance. 2.4.1. Liquidity Management

Liquidity is the ability of a business entity to honor all cash payment commitments as they fall due (Kimathi, 2014) and empirical studies explain liquidity management as the means to ensure that an institution maintains enough cash and liquid assets to satisfy client demand for loans and savings withdrawals and to pay the institution’s expenses. Githaka, Maina, and Gachora did a research on effect of liquidity management on the liquidity of Saccos in Kirinyaga County, Kenya. The research concluded that Liquidity is considered as one of the serious concerns and challenge for the modern era SACCOs and that Saccos having good asset quality, strong earnings and enough capital may fail if they fail to maintain adequate liquidity. Brunnermeier and Pedersen (2009) studied market liquidity and funding liquidity. In their study they provided a model that links an asset’s market liquidity and traders’ funding liquidity. From this model they found out that liquidity management involves a daily analysis and detailed estimation of the size and timing of cash inflows and outflows over time to minimize the risk that savers will be unable to access their deposits in the moments they demand them. Kimathi (2014) focused on the effect of financing strategies on the liquidity of Saccos licensed by SASRA in Nairobi County. The population of the research included 34 Saccos licensed by SASRA. Using descriptive survey, a census of all 34 Saccos was carried out and collected secondary data from the financial statement of these Saccos. The four independent variables that were studied; leverage, members‟ savings, diversification, and macro-economic variables explain a substantial 68.7% of liquidity of SACCOS operating in Nairobi County as represented by Coefficient of determination. The study concludes that financial strategies positively and significantly influence the liquidity in SACCOS licensed by SASRA operating in Nairobi County.

A research was done by Tsi (2016) on managing liquidity risks in banks. It was carried out in Rural Investment Credit Bank (RIC) Bamenda, North West region Cameroon based on the observation that in most financial institutions in the stated region had trouble in managing their liquidity even though the institutions had adequate capital levels. Questionnaires were 16

issued to the staff of rural investment credit to investigate the factors that cause liquidity risk in that region and the strategies used to manage bank liquidity. It was discovered that out of all the causes of liquidity risk concentration of loans in a sector was the major cause of liquidity risk management the others being business and agriculture. It was recommended that the loans be spread to other sectors such as education, real estate, and agriculture so that if one sector is failing revenue from the loans in other sectors would compensate for the lost revenue in that sector.

The 2017 Sacco Supervision Annual Report indicated that on aggregate, Deposit Taking Saccos (DTS) maintained a comparatively higher liquidity in 2017 which stood at 54.1% from 49.9% recorded in the previous year. This is also in accordance to the regulations requiring Saccos to maintain a minimum of 15% of its savings and short-term liabilities in liquid assets.

In times of financial crisis this model does not stand as seen in a study done by Vossen and Ness (2010) on Bank liquidity management. It was discovered that during the financial crisis of 2007, interbank lending market experience a huge decline in activities. The crisis brought liquidity pressure in most if not all banks becoming hesitant to lend to other banks. The drying up of interbank lending again meant banks were unwilling to provide liquidity for fear of what it might mean for their own liquidity in the future.

2.4.2. Central Liquidity Facility (CFL) Model

A research done by Sacco Review magazine in 2017 indicated that the process of setting up a facility to allow Saccos lend to each other like banks was still underway but almost complete. The inter lending facility for Saccos came at a time when the sector was facing difficult choices following a move by banks to cut down their lending rates. Owing to the lack of a central finance facility, most deposit taking Saccos are faced with persistent illiquidity problems. The only option left is for these Saccos to borrow loans from banks which have proved to be very expensive. There have however been a huge number of critics for the CFL citing that the amount of cash flowing within deposit taking Saccos is dismal to warrant a fully-fledged inter-Sacco lending facility. SASRA is banking on the facility to arrest

temporary liquidity shocks and imbalances by having credit unions with excess cash lend those in need.

2.4.3. The Liabilities Management Theory

According to Prabhat (2014) the liability management theory provides other alternate liquidity norms and that financial institutions do not have to follow the traditional norms like maintaining liquid assets or liquid investments. The other alternatives proposed in this theory include certificate of deposits, borrowing from other banks, borrowing from the controlling bodies, and raising of capital funds. This theory was mainly developed to help banks deal with liquidity issues and it proposed that there is no need for banks to grant self- liquidating loans and keep liquid assets because they can borrow reserve money in the money market in case of need.

A bank can acquire reserves by creating additional liabilities against itself from different sources. These sources include the issuing of time certificates of deposit, borrowing from other commercial banks, borrowing from the central banks, raising of capital funds by issuing shares, and by ploughing back of profits.

Tung (2017) carried out an empirical analysis of Vietnamese commercial banks based on the adjustment of Interbank lending. The study was carried out from 2008 to 2015. The research found out that banks may create additional liabilities by borrowing from other banks having excess reserves. However, such borrowings are meant for a very short duration. It was also concluded that the interest rate of such borrowings depended upon the prevailing rate in the money market. Tung recommended that borrowings from other banks should only be done during normal economic conditions because when abnormalities set in the market, most banks or none is able to lend out to other banks.

2.4.4. The shiftability Theory of Liquidity

The Shiftability theory of liquidity was developed by Harold G, Moulton in 1915. Moulton asserted that if commercial banks hold credit instruments as a form of liquidity reserve that had an existing ready secondary market hence transferable without capital loss when the need

for liquidity arises. This would most likely protect banks from massive cash withdrawals from their customers which would lead to illiquidity problems. It is necessary to shift the illiquid assets to stronger institutions in exchange for more liquid assets. This power of shifting gives liquidity to the illiquid assets (Mitchell,1923).

Casu, Girardone, and Malyneux, (2006) criticized this theory by stating that the theory is always likely not to work especially during general crisis. In such times the effectiveness of secondary reserve assets as a source of liquidity vanishes due to lack of a market. Prochnow (1949) argues that If all banks attempted to shift any considerable portion of their assets in periods of depression, it would probably be impossible to find buyers and the cost of liquidity in the markets would be prohibitive. He adds that the theory does not readily apply to a bank's unsecured commercial loans, for these loans cannot be sold with facility in the market or transferred to another commercial bank.

A study done by Mitchell (1923) Banks tend to develop to meet the peculiar credit needs of the various economic interests and geographic regions and are not able to follow consistently and uniformly the policy of loaning merely for short time commercial purposes. It was also discovered that due to the desire to make profit has impelled banks to abandon some formerly followed operation and acquire new ones that include loaning on stocks and bonds and investing in securities. During certain phases of the business cycle, this wider scope of activities receives greater development. These activities tend to improve the liquid condition of the banks.

2.5 Chapter Summary

In this chapter, theories on how financial performance is affected by capital adequacy, Asset Management, and liquidity were discussed. A review of relevant literature was used to show different views and results in respect to the objectives of the study from related studies from different researchers. The next chapter three discusses the methodology used in this study, the data collection technique and the methods that were applied in analyzing the data.

CHAPTER THREE

3.0. RESEARCH METHODOLOGY

3.1 Introduction This chapter presents the research methodology. It discusses the research design, population, sampling design, data collection methods, research procedure, data analysis methods and the chapter summary.

3.2. Research Design A Research design is a blueprint for the collection, measurement, and analysis of data, based on the research questions of study (Sekaran and Bougie, 2013). The study adopts a descriptive (case study) research design which is focused on determining the relationship between financial performance and the acquisitions of Spire bank Ltd by Mwalimu National Sacco. A descriptive study is designed to collect data that describe the characteristics of persons, events, or situations and it is either quantitative or qualitative in nature (Sekaran and Bougie, 2013). An event study methodology was used to determine the effect of mergers and acquisitions on the performance of merged financial institutions. The study looked at the pre- merger period that is the period before the merger and the post-merger period, the period after the merger. The secondary data obtained from the audited financial statements, annual reports published by the regulatory bodies; The Central Bank of Kenya and Sacco Society Regulatory Authority, and the websites for Mwalimu National Sacco and Spire Bank Kenya.

3.3. Population and Sampling Design 3.3.1. Population

Population is the total number of all possible individuals relating to a particular topic which could be included in a study (Thomas, 2017). Mugenda O. and Mugenda A. (2013), state that a population is a group of individuals or objects with a common observable characteristic. The population of this study is comprised of two financial institutions that is Mwalimu National Sacco and Spire bank Kenya. The focus is on the acquisition that took place in 2015. 20

3.3.2. Sample Design

Sampling design can be defined as a procedure or plan drawn up before any data is collected to obtain a representative from a given population. It is also known as sampling plan or survey design (Saunders, Lewis and Thornhill, 2016). The sampling frame, sampling technique and sample size, all make up the sample design. Sampling is the process of selecting a sufficient number of the right elements from the population so that a study of the sample and an understanding of its properties or characteristics make possible for the researcher to generalize such features or components to the population elements (Bougie and Sekaran, 2013).

3.3.2.1 Sampling Frame

A sampling frame is a (physical) representation of all the elements in the population from which the sample is drawn (Bougie & Sekaran, 2013). The study’s sampling frame is the secondary data for Mwalimu National Sacco and Spire Bank Kenya for the period of 6 years.

3.3.2.2. Sampling Technique Sampling technique is the process used by a researcher to select a sample depending on the quality intended by the study (Barratt, 2009). The study adopts a purposive quantitative sampling method. Bougie & Sekaran (2013) define Purposive sampling as a type of sampling confined to specific type of people who can provide the information needed to carry out a study. This is the ideal type of nonprobability sampling for this study because the information required to address the research topic with the specific research objectives can only come from the two identified institutions’ six year audited financial statements; three years before the acquisition and three years after the acquisition. The criterion of this study is to look at the impact of Acquisition between two different financial bodies, in this case a Sacco and a Bank. Out of 9 acquisitions deals that have happened in Kenya since the year 2000, only one of these deals involved the acquisition of a bank by a Sacco, the rest were mainly between banks. By the use of judgement sampling, the acquisition of Spire Bank by Mwalimu National Sacco in this case fit the criteria and interest of this study.

3.3.2.3. Sample Size A sample size of 30% (and above) of any population is conventionally representative sample that enables generalization to the larger population (Mugenda & Mugenda, 2003). This study will use a period of 6 years from 2013 to 2018. This period was chosen as the sampling period because the acquisition of Spire Bank Kenya happened between 2013 and 2018.

Total number of M&A 42 Number of mergers 33 Number of Acquisitions 9 Acquisitions between banks 5 Acquisitions between banks and other 4 financial institutions Acquisitions between banks and Saccos 1

3.4. Data Collection Method The study used secondary data that is extracted from published financial reports for the period under study. Secondary data is collected by extracting audited financial statements for Mwalimu National Sacco and Spire Bank Kenya, the Saccos Annual Reports for the past six years. The financial statements provide information for different financial ratios required to assess the specific objectives under study. The dependent variable is Return on Assets and the independent variables include ratios on core capital to total asset, core capital to total deposits, liquid assets to savings deposits and short term liabilities, external borrowings to total assets, total loans to total deposits, and Return on equity. This information was downloaded from Mwalimu National Sacco’s Website, Spire Bank Website, Central Bank of Kenya Website and SASRA website.

3.5. Research Procedure This is a step-by-step sequence of activities or course of action (with definite start and end) that must be followed in the same order to correctly perform a task (Kombo & Tromp, 2011). The research study was conducted by first developing the research objectives, secondly by

identifying the sample data, and thirdly by analyzing the data and making recommendations on the study.

The general objective of the study was to determine the financial effects of the acquisition of Spire Bank by Mwalimu National Sacco. The study was guided by three specific objectives namely: to determine the effect of capital adequacy, asset manangement, and liquidity on the financial performance of both Mwalimu National Sacco and Spire Bank.

To come up with a sample, one needs to determine the purpose of the data collection and what type of information is necessary to collect to meet that purpose (Creswell, 2009). To help achieve this, the study considered data sources that were reliable, accessible, relevant, suitable, adequate and recent. The sample of this study was Mwalimu National Sacco and Spire Bank Kenya with their audited financial statements of 6 years. This period was chosen as the sampling period because of its relevancy as it is in 2015 that the acquisition of spire bank was done by Mwalimu National Sacco. Relevant permission will be obtained to conduct the study at the selected financial institutions.

3.6 Data Analysis Methods Secondary data, three years before and three years after the event was retrieved from audited financial statements, annual reports published by SASRA and Central Bank of Kenya and the websites for Mwalimu National Sacco and Spire Bank Kenya. From the financial statements, level of total assets and current assets, current liabilities, external borrowings, equity, net earnings, core capital, total deposits, and total loans was retrieved from the financial statements.

Profitability ratios such as Return on Assets (ROA), Return on Equity (ROE), Capital adequacy ratios such as core capital to total assets and core capital to total deposits, and liquidity ratios such as, liquid assets to saving deposits, external borrowings to total assets, and total loans to total deposits was obtained from the statements and annual reports of the two institutions under study. This data was analyzed using Statistical Package of Social Sciences (SPSS) and results shown in terms of frequency distribution and percentages. A regression and correlation model was applied to determine the effects of each variable with

respect to financial performance. Regression was used where one independent variable is hypothesized to affect one dependent variable (Sekaran and Bougie, 2013). The dependent variables were ROA and ROE while the independent variables were the capital adequacy ratios and liquidity ratios. These were used to answer the specific research objectives: to investigate the effects of an Acquisition on capital adequacy; to determine the effect of Asset Management on financial performance of an Acquisition ; to determine the effect of Liquidity on financial performance of the acquisition of Spire Bank by Mwalimu National Sacco.

3.7 Chapter Summary This chapter is a presentation of the research design used in the study. It describes the population, the sampling procedure and the data collection methods to be used in the study. The main instruments of research in the study are the audited financial statements from the sampled institutions. The collected data was then analyzed using Statistical Package for Social Sciences (SPSS) version 21 software. The analyzed data was used to obtain the descriptive, correlation and regression analysis to establish the effect of an acquisitions on financial performance of Mwalimu National Sacco and Spire Bank. The findings as well as results are presented in the next chapter.

CHAPTER FOUR

4.0 RESULTS AND FINDINGS

4.1 Introduction The general objective of this study was to determine the effects of an acquisition on the financial performance of Mwalimu National Sacco. This chapter discusses the findings of the data collected in chapter three for the institution under study. The chapter gives summary results, and then discusses results of each specific objective as follows: effect of Asset Management on the financial performance of Mwalimu National Sacco, Effect of Capital Adequacy on financial performance of Mwalimu National Sacco; and the effect of Liquidity on financial performance of Mwalimu National Sacco.

4.2 General Information This section contains the Return on Assets (ROA), and Return on Equity (ROE)

4.2.1 Mwalimu National Sacco Acquisition of Spire Bank Limited.

Table 4.1 ROA and ROE

Institution Measure 2012 2013 2014 2015 Mean 2016 2017 2018 Mean Mwalimu ROA 0.038 0.027 0.016 0.009 0.022 0.010 0.011 0.014 0.012 National ROE Sacco 0.263 0.171 0.082 0.049 0.141 0.060 0.070 0.095 0.075 Source: Data Findings

Mwalimu National Sacco acquired Spire Bank limited in 2015. Pre-merger ROA mean for Mwalimu National Sacco was 0.022, after the merger this dropped to a mean of 0.012. ROE mean for the Sacco before the merger was 0.141, after the merger the mean ROE was at 0.075 as shown on table 4.1.

4.3 Effect of Asset Management/Earning Ratings on the financial performance of a Commented [DA18]: next page firm. Commented [M19R18]: Corrected Return on assets before and after the acquisition period was used to measure how the Sacco under study was managing its assets. ROA was measured against the net income (performance) of the Sacco.

4.3.1. Descriptive statistics on Return on Assets

From the findings illustrated on table 4.9 there was a drop in the Mean (M) for return on assets from 0.0225 before the acquisition to 0.01167 after the acquisition. The Standard Deviation (SD) slightly fell from 0.0127 to 0.0021 after the acquisition.

Table 4.2 Descriptive Statistics on ROA

Mean (M) Standard Variance Skewness Kurtosis Deviation (V) (S) (K) (SD) Statistics Standard statistics statistics statistics statistics Error Pre- 0.0225 0.00636 0.0127 0.000 0.350 -1.622 Acquisition Post- 0.0117 0.0012 0.0021 0.000 1.293 1.225 Acquisition

4.3.2. Correlation Analysis Results of Return on Asset on financial performance

Results of the correlation analysis between performance and return on assets are illustrated in table 4.10. The results showed that there is a positive significant relationship between return on assets and performance r (7) = .0.883, p < 0.01.

Table 4.3 Correlation Results for ROA Commented [DA20]: don’t break the pages

Correlations Commented [M21R20]: Corrected PERFOMANC ROA E ROA Pearson Correlation 1 .883** Sig. (2-tailed) .008 N 7 7 PERFOMANCE Pearson Correlation .883** 1 Sig. (2-tailed) .008 N 7 7 **. Correlation is significant at the 0.01 level (2-tailed).

4.3.3. Regression analysis on the effect of ROA on financial performance

Table 4.4 Pre-Acquisition ANOVA results of ROA

Model Summary Adjusted R Std. Error of Model R R Square Square the Estimate 1 .997a .993 .990 22713467.5800 0 a. Predictors: (Constant), ROA

ANOVAa

Model Sum of Squares df Mean Square F Sig. 1 Regression 1554837960000 1 1554837960000 301.383 .003b 00000.000 00000.000 Residual 1031803219000 2 5159016096000

000.000 00.000 Total 1565155992000 3

00000.000 a. Dependent Variable: PERFOMANCE b. Predictors: (Constant), ROA

Coefficientsa Standardized Unstandardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) 124079823.500 25835652.660 4.803 .041 ROA 17904891690.0 1031365434.00 .997 17.360 .003 00 0 a. Dependent Variable: PERFOMANCE

The goodness of fit model on table 4.11 shows regression results of pre-acquisition ANOVA between performance and return on assets. There was a significant effect on ROA: F = 301.4, p = 0.003. R2 value of 0.993 indicated that 99.3% of the variations in financial performance are explained by return on assets. A coefficient of .997 signified that there was a strong relationship between performance and return on assets. This means that changes in one variable were correlated with changes in the second variable.

Table 4.5 Post-Acquisition ANOVA results of ROA

Model Summary

Adjusted R Std. Error of Model R R Square Square the Estimate 1 .996a .991 .982 18536308.7400 0 a. Predictors: (Constant), ROA

Model Sum of Squares df Mean Square F Sig. 1 Regression 379950499400 1 379950499400 110.581 .060b 00000.000 00000.000 Residual 343594741900 1 343594741900

000.000 000.000 Total 383386446800 2

00000.000 a. Dependent Variable: PERFOMANCE b. Predictors: (Constant), ROA

Coefficientsa Standardized Unstandardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) - 74234298.360 -4.180 .149

310288346.200 ROA 66212115380.0 6296471007.00 .996 10.516 .060 00 0 a. Dependent Variable: PERFOMANCE

Regression results of post-acquisition ANOVA indicated a significance of F = 110.6, p = 0.06. An R2 of 0.991 indicated that99.1% of the variations in performance are explained by return on assets after the acquisition event. The overall model is shown on table 4.12 29

4.4. Effect of Capital Adequacy on the financial performance of Mwalimu National Sacco 4.4.1. Descriptive Statistics

The variables used here are Core Capital to Total Assets and Core Capital to Total Deposits. Descriptive statistics were used to describe the pre-acquisition and post-acquisition values to determine if there were any changes and how this affected the performance of the Sacco that had undergone an acquisition. There was a fall in the mean values for both Core capital to total assets and core capital to total deposits from 0.1575 to 0.1467 and 0.22 to 0.21 respectively, before and after acquisition. The standard deviation fell from 0.01708 to 0.00577 and 0.03651 to 0.0100 for both variables, before and after the acquisition. There was not any change int the variance for Core Capital to Total Assets.

Table4.6 Descriptive Statistics for Capital Adequacy

Mean (M) Standard Variance Skewness Kurtosis Deviation (V) (S) (K) (SD) Statistics Standard statistics statistics statistics statistics Error Pre- 0.1575 0.00854 0.01708 0.000 0.753 0.343 Acquisition 0.22 0.01826 0.03651 0.001 0.000 -3.300

Post- 0.1467 0.00333 0.00577 0.00 -1.732 0.225 Acquisition 0.2100 0.00577 0.0100 0.00 0.00 1.225

4.4.2. Correlation Analysis Results of Capital Adequacy on financial performance

Table 4.14 below shows the results of the correlation analysis between performance and Capital Adequacy. The results show that there is a positive significant relationship between capital adequacy and performance, r = 0.449, 0.131, p<0.05.

Table 4.7 Correlation results of Capital Adequacy

Correlations core_capital_to core_capital_to ROA _total_assets _total_deposits ROA Pearson Correlation 1 -.345 -.628 Sig. (2-tailed) .449 .131 N 7 7 7 core_capital_to_total_asse Pearson Correlation -.345 1 .933** ts Sig. (2-tailed) .449 .002 N 7 7 7 core_capital_to_total_dep Pearson Correlation -.628 .933** 1 osits Sig. (2-tailed) .131 .002 N 7 7 7 **. Correlation is significant at the 0.01 level (2-tailed).

4.4.3. Regression analysis on the effect of Capital Adequacy on financial performance

Regression results of pre-acquisition ANOVA indicated that performance and capital adequacy had a significance F = 12.527, p= 0.283 and p=0.190 for Core capital to total Assets and Core Capital to Total Deposits, respectively. An R2 of 0.962 indicates that only 96.2% of the variations in performance are explained by capital adequacy. The overall model significance is presented in Table 4.15.

Table 4.8 Pre-Acquisition ANOVA results of Capital Adequacy

Model Summary Adjusted R Std. Error of Model R R Square Square the Estimate 1 .981a .962 .885 .004315 a. Predictors: (Constant), core_capital_to_total_deposits, core_capital_to_total_assets

ANOVAa Model Sum of Squares df Mean Square F Sig. 1 Regression .000 2 .000 12.527 .196b Residual .000 1 .000 Total .000 3 a. Dependent Variable: ROA b. Predictors: (Constant), core_capital_to_total_deposits, core_capital_to_total_assets

Coefficientsa Standardized Unstandardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) .025 .035 .719 .603 core_capital_to_total_asse 1.123 .535 1.508 2.099 .283 ts core_capital_to_total_dep -.815 .250 -2.342 -3.258 .190 osits a. Dependent Variable: ROA

Regression results of post-acquisition ANOVA indicated a significance of F = 0.0, p = 0.0. An R2 of 1.0 indicated that 100 % of the variations in performance were explained by acquisition event. The overall model is shown below on table 4.16. 32

Table 4.9 Post-Acquisition ANOVA results of Capital Adequacy

Model Summary Adjusted R Std. Error of Model R R Square Square the Estimate 1 1.000a 1.000 . . a. Predictors: (Constant), core_capital_to_total_deposits, core_capital_to_total_assets

ANOVAa Model Sum of Squares df Mean Square F Sig. 1 Regression .000 2 .000 . .b Residual .000 0 . Total .000 2 a. Dependent Variable: ROA b. Predictors: (Constant), core_capital_to_total_deposits, core_capital_to_total_assets

Coefficientsa Standardized Unstandardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) .062 .000 . . core_capital_to_total_asse -.200 .000 -.555 . . ts core_capital_to_total_dep -.100 .000 -.480 . . osits a. Dependent Variable: ROA

4.5 Effect of Liquidity on the financial performance of Mwalimu National Sacco 4.5.1. Descriptive statistics on Liquidity Ratio

The liquidity ratios covered are Liquid Assets to Saving Deposits and STLs, External Borrowing to Total Assets, and Total Loans to Total Deposits.

Table 4.10 Descriptive Statistics of Liquidity Ratio

Mean (M) Standard Variance Skewness Kurtosis Deviation (V) (S) (K) (SD) Statistics Standard statistics statistics statistics statistics Error Pre- 0.73775 0.215414 0.430827 0.002 -0.589 0.487 Acquisition 0.32500 0.0131498 0.0262996 0.001 1.443 2.235

8.6975 2.5699234 5.1398468 26.418 -1.996 3.988 Post- 0.0055 0.002581 0.004471 0.000 0.497 0 Acquisition 18.35333 18.2883 31.6763 10003.389 1.732 0

315.1933 314.2383 544.2768 29623.190 1.732 0 Source: Data findings

Findings illustrated on table 4.17 show that there was a rise in the mean values for external borrowings total assets and total loans to total deposits, that is from 0.325 to 18.353 and 8.6975 to 315.1933 respectively after the acquisition. The standard deviation also rose for these two variables from 0.0263 to 31.676 and 5.14 to 544.28 respectively, after the acquisition. The variance also rose for these two variables.

4.5.2. Correlation analysis results of Liquidity Ratios on financial performance

Results of the correlation analysis between performance and capital adequacy ratio are illustrated in table 4.18. The results showed that there was a significant negative correlation between liquidity and performance for external borrowings to total assets and total loans to total deposits r =--0.159 and r= -0.146 respectively p<0.01.

Table 4.11 Correlations of Liquidity Ratios

liquid_assets_t External_borro o_saving_depo wings_to_total Total_loans_to ROA sits_and_STLS _assets _total_deposits ROA Pearson Correlation 1 .628 -.159 -.146 Sig. (2-tailed) .131 .733 .754 N 7 7 7 7 liquid_assets_to_saving_de Pearson Correlation .628 1 -.367 -.353 posits_and_STLS Sig. (2-tailed) .131 .418 .437 N 7 7 7 7 External_borrowings_to_to Pearson Correlation -.159 -.367 1 1.000** tal_assets Sig. (2-tailed) .733 .418 .000 N 7 7 7 7 Total_loans_to_total_depo Pearson Correlation -.146 -.353 1.000** 1 sits Sig. (2-tailed) .754 .437 .000 N 7 7 7 7 **. Correlation is significant at the 0.01 level (2-tailed).

4.5.3. Regression analysis on the effect of liquidity on financial performance

Table 4.12 Pre-Acquisition ANOVA results

Model Summary Adjusted R Std. Error of Model R R Square Square the Estimate 1 1.000a 1.000 . . a. Predictors: (Constant), Total_loans_to_total_deposits, liquid_assets_to_saving_deposits_and_STLS, External_borrowings_to_total_assets

ANOVAa Model Sum of Squares df Mean Square F Sig. 1 Regression .000 3 .000 . .b Residual .000 0 . Total .000 3 a. Dependent Variable: ROA b. Predictors: (Constant), Total_loans_to_total_deposits, liquid_assets_to_saving_deposits_and_STLS, External_borrowings_to_total_assets

Coefficientsa Standardized Unstandardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) -.352 .000 . . liquid_assets_to_saving_d -1.982 .000 -6.715 . . eposits_and_STLS External_borrowings_to_t 5.090 .000 10.529 . . otal_assets Total_loans_to_total_depo .041 .000 16.527 . . sits a. Dependent Variable: ROA

Table 4.19 shows regression results of pre-acquisition ANOVA between performance and liquidity ratio. There was a significance of F = 0, p = 0 for all variables and an R2 of 1 which indicates that 100% of the variations in financial performance are explained by liquidity ratio. The overall model is shown below on table 4.19.

Table 4.13 Post-Acquisition ANOVA results of CAR

Model Summary Adjusted R Std. Error of Model R R Square Square the Estimate 1 1.000a 1.000 . . a. Predictors: (Constant), Total_loans_to_total_deposits, liquid_assets_to_saving_deposits_and_STLS

ANOVAa Model Sum of Squares df Mean Square F Sig. 1 Regression .000 2 .000 . .b Residual .000 0 . Total .000 2 a. Dependent Variable: ROA b.Predictors:(Constant),Total_loans_to_total_deposits, liquid_assets_to_saving_deposits_and_STLS

Coefficientsa Unstandardized Standardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) .011 .000 . . liquid_assets_to_saving -.112 .000 -.241 . . _deposits_and_STLS Total_loans_to_total_de 3.623E-6 .000 .947 . . posits a. Dependent Variable: ROA

Excluded Variablesa Collinearity Partial Statistics Model Beta In t Sig. Correlation Tolerance 1 External_borrowings_to_t .b . . . .000 otal_assets a. Dependent Variable: ROA b. Predictors in the Model:(Constant),Total_loans_to_total_deposits, liquid_assets_to_saving_deposits_and_STLS

Regression results of post-acquisition ANOVA indicated a significance of F = 0, p = 0. An R2 of 1 indicated that 100% of the variations in performance are explained by liquidity ratio after acquisition event. The overall model is shown on table 4.17.

4.6. Chapter Summary Return on assets in this study was used to measure the profitability of Mwalimu National Sacco after the acquisition event. The results showed that there was a positive significant relationship between return on assets and performance r (7) = .0.883, p < 0.01. Regression results indicated that there was a significant effect on ROA: F = 301.4, p = 0.003. R2 value of 0.993 indicated that 99.3% of the variations in financial performance are explained by return on assets. A coefficient of 0 signified that there wasn’t a relationship between performance and return on assets. This means that changes in one variable were not correlated with changes in the second variable. This indicated that return on assets as a determinant of performance of Mwalimu National Sacco positively influenced acquisitions. The more the acquisition institutions acquire assets, the better they perform.

Capital Adequacy was used to measure the effects of acquisitions on Financial performance of Mwalimu National Sacco. The findings revealed that there was a positive significant relationship between capital adequacy and performance, r = 0.449, 0.131, p<0.05. Results of the regression indicated a significance of F = 0.0, p = 0.0. An R2 of 1.0 indicates that 100 % of the variations in performance were explained by acquisition event.

Liquidity ratio was used to measure the effect of acquisitions on financial stability of Mwalimu National Sacco. The results showed that there was a significant negative correlation between liquidity and performance for external borrowings to total assets and total loans to total deposits r =--0.159 and r= -0.146 respectively p<0.01

CHAPTER FIVE

5.0 DISCUSSIONS, CONCLUSIONS, AND RECOMMENDATIONS

5.1 Introduction This chapter presents the summary of the study, discussion of the results and makes conclusions from the findings. Recommendations for improvement and further studies have also been discussed.

5.2 Summary The general objective of this study was to determine the financial effects of the acquisition of Spire Bank by Mwalimu National Sacco. The study was guided by the following specific objectives: to determine the effect of asset management/Earning ratings on the financial performance of Mwalimu National Sacco, to determine the effect of capital adequacy on the financial performance of Mwalimu National Sacco and to investigate effect of liquidity on the financial performance of Mwalimu National Sacco before and after acquiring Spire Bank Kenya. The study adopted a descriptive research design which focused on determining the relationship between cost of credit, share capital, and liquidity on the financial performance of Mwalimu National Sacco before and after the acquisition of Spire Bank Kenya. The population of the study consisted of audited financial statements for six years, before and after the acquisition. The sample was selected using the purposive method which involved studying the two institutions where one was acquired in 2015. Secondary data, three years before and three years after the event was retrieved from audited financial statements, annual reports published by SASRA website. An analysis of the data was performed through use of the Statistical Package for Social Sciences (SPSS) version 21 software. Descriptive, correlation and regression analysis methods were used to establish the effect of the acquisitions on financial performance of Mwalimu National Sacco.

Return on assets in this study was used to measure the profitability of Mwalimu National Sacco after the acquisition event. The results showed that there is a positive significant relationship between return on assets and performance r (7) = .0.883, p < 0.01. Regression results indicated that there was a significant effect on ROA: F = 301.4, p = 0.003. R2 value

of 0.993 indicated that 99.3% of the variations in financial performance are explained by return on assets. A coefficient of 0 signified that there wasn’t a relationship between performance and return on assets. This means that changes in one variable were not correlated with changes in the second variable. This indicated that return on assets as a determinant of performance of Mwalimu National Sacco positively influenced acquisitions. The more the acquisition institutions acquire assets, the better they perform.

Capital Adequacy was used to measure the effects of acquisitions on Financial performance of Mwalimu National Sacco. The findings revealed that there is a positive significant relationship between capital adequacy and performance, r = 0.449, 0.131, p<0.05. Results of the regression indicated a significance of F = 0.0, p = 0.0. An R2 of 1.0 indicates that 100 % of the variations in performance were explained by acquisition event.

5.3 Discussion 5.3.1. Effect of Asset Management/Earning Ratings on the Financial Performance of Mwalimu Sacco.

Descriptive results indicated a decrease in the mean values for ROA from 0.0225 before the acquisition of Spire Bank to 0.0117 after the acquisition of the bank. This signified that Mwalimu National Sacco did not earn any profits in relation to its overall resources after the acquisition. K’aol (2017) carried out a similar study on effect of Asset Management on the financial performance of banks that had undergone a merger or acquisition. Five out of ten of the banks under study had a decrease on return on assets after the merger or acquisition event. The descriptive results for this study however showed a slight increase in the mean values for return on assets from 1.3188 to 1.3758 after the event. In this case it showed that the banks were able to earn higher profits in relation to their overall resources after the merger and acquisition.

Results of the correlation analysis showed there was a positive significant relationship between return on assets and performance (r(7)=.883,p<0.01). This indicated that an increase in return on assets led to an increase in earning ratings and consequently an increase on financial performance. Regression results of the post-acquisition ANOVA indicated a P value of 0.06 which was above the significant level of 0.05. A coefficient is said to be statistically significant if its P-value is less than 0.05. An R2 of 0.991 indicated that 99.1% of variations in performance were explained by return on assets after the acquisition of Spire bank by Mwalimu National Sacco. The coefficient of return on assets showed that as financial performance increased, the return on assets also increased.

5.3.2 Effect of Capital Adequacy on the Financial Performance of Mwalimu National Sacco.

The descriptive statistics used indicated a fall in the mean values for core capital to total assets as well as core capital to total deposits from 0.1575 to 0.1467 and 0.22 to 0.21 respectively, before and after the acquisition. In the regression analysis, the P values for core capital to total assets and core capital to total deposits was 0.283 and 0.190 respectively which is higher than the significant level of 0.05. This confirms the fact that the acquisition was not significant on the financial performance of Mwalimu National Sacco. An R2 of 0.962 indicated that 96.2% of the variation in performance were explained by capital adequacy.

Similar study has resulted in contradicting results. A study done by Mugo (2017) showed that mergers and acquisitions influence capital adequacy ratio positively. From the findings, the study found that there was an increase in the t value for capital adequacy ratio from 19.064 to 21.764 which is an indication that there was notable increase in company financial leverage; this was also found to be statistically significant. Ndung’u (2010) presented a study with results showing increase in the t value for capital adequacy ratio from 19.064 to 21.764 which is an indication that there was notable increase in company financial leverage; this was also found to be statistically significant.

5.3.3. Effects of Liquidity on the financial performance of Mwalimu National Sacco

The descriptive statistics showed that after the acquisition there was a rise in the mean values for external borrowings to total assets and total loans to total deposits, that is from 0.325 to 18.353 and 8.6975 to 315.1933 respectively. After the event the standard deviation also rose for these two variables from 0.0263 to 31.676 and 5.14 to 544.28 respectively. The study also shows that there was an increase in variance for these two variables. The correlation results showed that there was a significant negative correlation between liquidity and performance for external borrowings to total assets and total loans to total deposits r =--0.159 and r= - 0.146 respectively p<0.01, this means that liquidity and return on assets were negatively related, increase in these ratios results to a decrease in the return of assets for Mwalimu National Sacco. The regression results for pre-acquisition ANOVA between performance and liquidity ratio show that there was a significance of F = 0, p = 0 for all variables and an R2 of 1 which indicates that 100% of the variations in financial performance are explained by liquidity ratio. Regression results of post-acquisition ANOVA indicated a significance of F = 0, p = 0. An R2 of 1 indicated that 100% of the variations in performance are explained by liquidity ratio after acquisition event.

Esokomi and Mutua (2018) carried out a study to find out the determinants of financial performance among Saccos in Kakamega county. The results showed that liquidity and return on equity were positively and significantly related (r=0.141, p=0.037). The regression results for this study indicated that liquidity and return on equity were positively and significantly related (β=0.530, p=0.000). This implied that an increase in the use of liquidity by one unit would result to an increase in return on equity by 0.530 units

5.4 Conclusion 5.4.1. Effect of Asset Management/Earning ratings on the financial performance of Mwalimu National Sacco.

Pre-Acquisition Correlation results showed a positive significant relationship between return on assets and performance r (7) = .0.883, p < 0.01. Pre-acquisition results for regression results showed there was a significant effect on ROA: F = 301.4, p = 0.003. R2 value of

0.993 indicated that 99.3% of the variations in financial performance are explained by return on assets. A coefficient of .997 signified that there was a strong relationship between performance and return on assets. This means that changes in one variable were correlated with changes in the second variable.

Regression results of post-acquisition indicated a significance of F = 110.6, p = 0.06. An R2 of 0.991 indicated that99.1% of the variations in performance are explained by return on assets after the acquisition event

5.4.2. Effect of Capital Adequacy on the financial performance of Mwalimu National Sacco.

The pre-acquisition correlation results showed a positive significant relationship between capital adequacy and performance, r= 0.449, 0.131, p<0.05. Regression results of pre- acquisition showed that performance and capital adequacy had a significance F = 12.527, p= 0.283 and p=0.190 for Core capital to total Assets and Core Capital to Total Deposits, respectively. An R2 of 0.962 indicates that only 96.2% of the variations in performance are explained by capital adequacy.

Regression results of post-acquisition indicated a significance of F = 0.0, p = 0.0. An R2 of 1.0 indicated that 100 % of the variations in performance were explained by the event.

5.4.3. Effect of Liquidity on the financial performance of Mwalimu National Sacco

The results showed that there was a significant negative correlation between liquidity and performance for external borrowings to total assets and total loans to total deposits r =--0.159 and r= -0.146 respectively p<0.01. Regression results of pre-acquisition indicated a significance of F = 0, p = 0 for all variables and an R2 of 1 which indicates that 100% of the variations in financial performance are explained by liquidity ratio.

5.5 Recommendations 5.5.1. Recommendations for improvement

5.5.1.1. Effect of Asset Management/Earning Ratings on the financial performance of Mwalimu National Sacco

Return on Assets is a ratio used to determine how much a company is making based on assets invested. A lower or negative return on assets indicates that a company is earning less from the assets invested in the company, the vice versa in true. In this case, Mwalimu Sacco acquisition of Spire Bank increased its assets but the net income after the event dropped leading to a decrease in return on assets. Management can work on reducing its operational cost by closing branches that are not bringing in income and getting rid of other assets that are generating losses.

5.5.1.2. Effect of Capital Adequacy on the Financial Performance of Mwalimu National Sacco

The heavy investment done on acquiring Spire Bank ate into the capital of Mwalimu National Sacco. To boost its capital again, management should work on increasing the retained earnings of the Sacco by opting to pay less dividends to its members in order to increase the amount of core capital and avoid other major investments that are likely to eat further into the capital.

5.5.1.3. Effect of Liquidity on the Financial Performance of Mwalimu National Sacco.

The liquidity of Mwalimu National Sacco increased after the acquisition. This shows that when companies come together there is a pool of funds, hence improving liquidity. However, for the management to ensure that the Sacco maintains adequate liquidity to carry out its activities, it can increase its minimum contribution of its members, introduce sound saving schemes, fix loan limits, and invest wisely the excess funds in viable short term investments.

5.5.2. Recommendations for further studies

Another study should be carried out on the effect of acquisitions on financial performance of Mwalimu National Sacco and cover a longer period. The study can also include the financial performance of the acquired bank to see how the event affected its performance.

REFERENCES Commented [DA22]: USE APA Commented [M23R22]: Corrected

Almazari, A. A., & Alamri, A. A. (2017). The effect of Capital Adequacy on Profitability: A comparative study between Saamba and Sabb Banks of Saudi Arabia. International Journal of Economics, Commerce, and Management. 5 (11), 86-102.

Anyanzwa, J. (2016, June 18). Merger and Acquisition in East Africa on the rise as firms seek capital, expansion. The East African. Retrieved from https://www.theeastafrican.co.ke/business/Mergers-and-acquisitions-in-East-Africa- on-the-rise/2560-3255530-11rn6t8/index.html

Arnold, G. (2002). Corporate Financial Management (2nd ed.). England: Pearson Education Limited.

Bena, J. & Li, K. (2014). Corporate Innovation and Mergers & Acquisitions. The Journal of Finance, 69(5), 1923-1960.

Bild, M. &Guest, P. (2002). “Do Takeovers Create Value? A Residual Income Approach on U.K Data, ESRC Centre for Business Research, University of Cambridge Working Paper No. 252

Brealey, R. A. & Myers, S. C. (1991). Principles of Corporate Finance (4th.ed.). New York: McGraw-Hill.

Brunnermeier, M. & Pedersen, L. H. (2009). Market Liquidity and Funding Liquidity. Review of Financial Studies, 22(6), 201-238.

Casu, B., Girardone, C., and Malyneux, P., (2006) Introduction to Banking, Harlow, England, Pearson Education Limited.

Central Bank of Kenya (2018). The Impact of Interest Rate Capping on the Kenyan Economy.

Central Bank of Kenya. (2017). Bank Supervision Annual Report. Retrieved from https://www.centralbank.go.ke/uploads/banking_sector_annual_reports/873911276 _2017 %20Annual%20Report.pdf 47

Delaney, F.T.& Wamuziri, S.C.(2004). The Impact of Mergers and Acquisitions on shareholder wealth in the UK Construction Industry. Journal of Engineering, Construction and Architectural Management, 11(1), 345-456.

Deloitte (2017). The State of the Deal: M&A Trends 2018. Deloitte Development LLC, PP. 1-2

Diz, H. (2014). Public-Private Partnership-a Contribution Paper. Interdisciplinary Studies.

Dubey, A.S. (2018). A Study on Mergers and Acquisitions – A Business Strategy for Value Creation. International Journal of Engineering Technology Science and Research,5 (1), 2394 – 3386.

Ekholm,D., & Svensson, P. (2009). Value Creation through Mergers and Acquisitions-A Study on the Swedish Market. Lund University-School of Economics and Management.

Elad, F. L., & Bongbee, N. S. (2017). Event Study on the Reaction of Stocks Returns to Acquisition News. Journal of International Finance and Banking, 4(1), 2374-2089.

Fatemi,, A., Ang, J.S., & Chua, J.(2016). Evidence Supporting Shareholder Wealth Maximization in Management Controlled Firms. Journal of Applied Economics, 15(1),49-60.

Freeman, R.E (2004). “A Stakeholder Theory of Modern Corporations”, Ethical Theory and Business, 7th edn.

Friedman, A.L. and Miles, S. (2006). “Stakeholders: Theory and Practice”, Oxford University Press.

Fung, W. and Guan, C. (2018). Overview of Mergers and Acquisitions in China. Mergers & Acquisitions 2018, China. Retrieved from https://www.globallegalinsights.com/practice-areas/mergers-and-acquisitions-laws- and-regulations/china.

Gill, S. (2016). Mergers and Acquisitions in Kenya. Retrieved from https://home.kpmg.com/ke/en/home/insights/2016/09/mergers-and-acquisitions-in- kenya.html

Githaka, J. M., Maina, K.E.,& Gachora, S.(2017). Effect Of Liquidity Management On Liquidity Of Savings And Credit Cooperative Societies In Kirinyaga County, Kenya. International Academic Journal of Economics and Finance, 2(3), 57-73.

Harrison,,J.S.,Freeman R. E., & Abreu, M. C.(2015). Stakeholder Theory as na Ethical Approach to Effective Management: Applying the theory to multiple contexts. Journal of Business Management, 17(55), 858-869.

Hillman, A. J., and G. D. Keim. 2001. Shareholder value, stakeholder management, and social issues: What’s the bottom line? Strategic Management Journal 22:125–139

Hitt, M. A., Harrison, J. S., & Ireland, R. D. (2001). Mergers and Acquisitions: A guide to creating value for stakeholders. New York: Oxford University Press.

Jay, S. (2018, April 3). 2018 M&A Report:UK. International Financial Review. Retrieved from http://www.iflr.com/Article/3798493/2018-M-A-Report-UK.html

Jensen, M. (1978). Some anomalous evidence regarding market efficiency.

Jensen, M. C. and Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3, 305-360.

Kariri,J. (2013). Effect of mergers and acquisitions on shareholders wealth of commercial banks in kenya. MBA-University of Nairobi.

Kenya Bankers Association. Total Cost of Credit. Retrieved from https://www.costofcredit.co.ke/

Kibuuka, P. (2015, June 10). Key Legal Issues for Mergers and Acquisitions. Daily News. Retrieved from https://www.dailynews.co.tz/news/key-legal-issues-for-mergers-and- acquisitions.aspx

Kimathi, P. M. (2014). The Effect of Financing Strategies on the Liquidity of Savings and Credit Co-operatives Societies Licensed by SACCO Societies Regulatory Authority operating in Nairobi County. Nairobi: University of Nairobi.

Kithitu, J., Cheluget, J., Keraro, V., & Mokamba, J. (2012). The Role of Mergers and Acquisitions on the Performance of Commercial Banks in Kenya. IJMBS, 2(4), 7-17

Koslowski, P. 2000. The limits of shareholder value. Journal of Business Ethics, 27(3), 137– 148

Mergers and Acquisitions in Africa (2012). African Development Bank Group. https://blogs.afdb.org/fr/blogs/afdb-championing-inclusive-growth-across- africa/post/mergers-and-acquisitions-in-africa-10163

Mitchel, W. F. (1923). The Institutional Basis for the shiftability theory of Bank Liquidity. The University Journal of Business, 1(3), 334-356.

Motari, S.O. (2013). To Determine Interest and Loan Default Rates among Commercial Banks in Kenya. MBA project for University of Nairobi.

Mwalimu National Savings and Credit Corporative Society Limited (2017), By Laws.

Mugenda, Olive, & Mugenda Abel (2013). Research methods: Quantitative and Qualitative approaches.

Mutiso, L. (2016, January 14). M&A Africa. Top 8 deals that took place in 2015. Moguldom. Retrieved from https://moguldom.com/109931/africas-top-10-mergers-and- acquisitions-deals-in-2015/

Muturi, W., Kibait, P., & Koima, J. (2017). Effect of Capital Adequacy on the Financial Performance of Savings and Credit Societies in Kenya. American Journal of Finance,1 (4), 1-12.

Ncube, S. (2003). Shareholder’s Wealth Maximization Effect of Mergers and Acquisitions. MBA project for University of Natal (Durban).

Ngui, A. M., & Jagongo, A. (2017). Capital Adequacy and Financial Performance of Deposit taking Savings and Credit Cooperative Societies in Kenya. International Journal of Social Science and Humanities Research. 5 (4), 596-604.

N.N. (2016,9,3). Saccos Must Re-Strategise to Remain Competitive in the Wake of Law Capping Bank Interest Rates. Nairobi Business Monthly. Retrieved from http://www.nairobibusinessmonthly.com

Oladipupo, A. O., & Okafor, C.O. (2012). Control of Shareholders’ Wealth Maximization in Nigeria. Journal of Business Systems, Governance, and Ethics, 6(1), 2411-2492.

Prabhat (2014) liquidity management

Prochnow, H.V.(1949). Bank Liquidity and the New Doctrine of Anticipated Income. The Journal of Finance, 4(4), 298-31.

Rono, F. C. (2014). The Effect Of Mergers And Acquisitions On Shareholder’s Value Of Commercial Banks In Kenya. MBA Project, University of Nairobi.

Sacco Review Magazine. InterSacco lending activity almost complete. Retrieved from http://saccoreview.co.ke/2017/02/28/inter-sacco-lending-facility-almost-complete/

Sacco Societies Regulatory Authority (2015). Guideline on Risk Management Practices for Deposit-taking Sacco Societies.

SACCO Societies Act, No. 14 of 2008

Sacco Supervision Report. (2017). An annual statutory report on the operations and performance of Deposit-Taking SACCO Societies (DT-SACCOs) in Kenya. Retrieved from https://www.sasra.go.ke/index.php/resources/publications/category/11-sacco- supervision-reports?download=117:sacco-supervision-annual-report-2017

Sekaran, U. & Bougie, R. (2013). Research Methods for Business. United Kingdom: John Wiley & Sons Ltd.

Tanzania’s Bank M blazed trail in Kenya with Oriental Bank buy (2016). Reuters. https://www.reuters.com/article/kenya-banks-ma/tanzanias-bank-m-blazes-trail-in- kenya-with-oriental-bank-buy-idUSL8N19821S

Thang’wa M. (2018, April 25). Why Proposal to turn Saccos into banks is a bad idea. The Daily Nation. Retrieved from https://www.nation.co.ke/oped/blogs/dot9/thangwa/2274536- 4523106-epa8am/index.html

Thomas, G. (2017). How to do your Research Project-A Guide for Students. London: Sage Publications Ltd.

Tsi, A.P. (2018). Managing Liquidity Risks in Banks-Case study Rural Investment Credit Bank Cameroon. Thesis of Central University of Applied Sciences.

Tung, H. T. (2017). Adjustment of interbank lending in pre- and post-regulation periods: Empirical analysis of Vietnamese commercial banks. Journal of International Studies, 10(3), 64-76. doi:10.14254/2071-8330.2017/10-3/5.

Vossen, B. V. & Ness, R. V. (2010). Bank Liquidity Management.

Vretenar, N., Sokolik, D., & Mrak, M. K., (2017) Motives for Mergers and Acquisitions in Small and Medium Sized Enterprises. DOI: 10.5593/sgemsocial2017/15/S05.08

Warter, I. & Warter, L. (2014). Latest Trends in Mergers and Acquisition Research. The New Pattern of Globalization. Research Gate,60(64) ,1-19

Windsor, D. (2015). Shareholder Wealth Maximization. New York: Spear Publishers.

APPENDICES

Appendix I: Secondary Data Collection Template Commented [DA24]: NACOSTI CERTIFICATE???

Effect of Capital Adequacy on financial performance of a firm. FINANCIAL Institution 2013 2014 2015 Acquisition 2016 2017 2018 RATIOS Core Capital

Core Capital/Total Assets Core Capital/Total Deposits

Effect Asset Management on financial performance of a firm.

FINANCIAL Institution 2013 2014 2015 Acquisition 2016 2017 2018 RATIOS ROE

ROA

Effect of Liquidity on the financial performance of a firm

FINANCIAL Institution 2013 2014 2015 Acquisition 2016 2017 2018 RATIOS Liquid assets/Saving Deposits & STLs External borrowings/Total Assets Total Loans/Total Deposits 53

Appendix II: NACOSTI Certificate