A Study on Financial Performance of Cooperative Societies in Nepal

Dr Gyanendra Prasad Paudel

pgyanendrapd@gmail.com

Abstracts

This article explores the financial performance of cooperative societies in Nepal, with a specific
focus on liquidity, leverage, and risk management. Employing a comprehensive methodology that
involves descriptive analysis, financial ratio analysis, correlation analysis, and regression analysis,
the study centers on cooperatives in Kathmandu. The sample, representing approximately 10% of
total cooperatives, is drawn from both primary and secondary data sources. The analysis covers
organizational structure, loan investment procedures, and credit risk management within
cooperative societies. Regression models reveal significant relationships between financial
performance indicators (such as return on assets, net profit margin, net interest margin, and return
on equity) and various factors. The study underscores the critical importance of managing leverage
and liquidity to enhance cooperative profitability. The utilization of both primary and secondary
data allows for a comprehensive examination of key aspects related to cooperative financial
performance, shedding light on effective strategies for optimizing leverage and liquidity within
these cooperative societies.

Key words: Financial performance, Leverage risk, Liquidity risk, and Investment risk.

Introduction

Cooperatives are independent, membership-driven organizations that operate under principles of

self-management and self-control. Their financial success hinges on the competence and
motivation of their human resources, effective management, and adherence to principles like the
rule of law, fairness, and transparency. Capacity building and strong relationships with members,
employees, suppliers, and communities further contribute to enhanced performance.

Cooperatives represent a unique blend of commercial enterprise and community organization,

functioning for the collective benefit of their users and members. Governed by the "one member,
one vote" principle, cooperatives are collectively owned and democratically managed. They
prioritize democratic, participatory, and transparent organizational structures and decision-making
processes, with self-help, mutual aid, individual responsibility, democracy, equality, and solidarity
as their core values. Members of cooperatives embrace moral values, including social
responsibility, honesty, ownership, and compassion, as they actively participate in fostering a
cooperative and socially responsible business environment.

The cooperative movement in Nepal has a robust historical foundation, driven by the noble aim of
enhancing the socio-economic well-being of marginalized rural communities. The country's rich
tradition of promoting cooperation is evident in various traditional practices such as Parm, Dhikuti,
Manka Khal, Dharma Bhakari, etc. The genesis of modern cooperatives in Nepal can be traced
back to 1957 when the Bakhanpur saving and credit cooperative committee was established in

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Chitwan. As of mid-March 2023, marking sixty-six years since its establishment, the cooperative
movement has demonstrated remarkable growth. The accumulated share capital reached an 94.15
billion rupees, with total deposits amounting to 478.03 billion rupees and the cooperatives
disbursed a total 426.35 billion rupees in loans to their members. This not only provided direct
employment to 93,771 individuals but also generated numerous indirect employment
opportunities. The scale of this movement is noteworthy, with 7,381,218 members actively
participating across 31,373 cooperative societies (Economic Survey, 2023). This expansion
underscores the cooperative sector's significant contribution to the economic landscape of Nepal,
playing a pivotal role in fostering financial inclusion and sustainable development.

The cooperative sector's tremendous growth occurred following the restoration of democracy in
1990, accompanied by the enactment of a new cooperative act in 1992 and the adoption of liberal
economic policies by the democratic Government of Nepal. The cooperative sector in Nepal plays
a pivotal role in expanding access to financial services, offering non-financial support, and
contributing to the socio-economic well-being of its members. Economic survey, 2023 revealed
that a significant portion of the population prefers saving and borrowing through cooperatives,
underscoring the need for a tailored rating tool to evaluate the performance of financial
cooperatives in Nepal.

Various rating tools are utilized to assess the financial health of cooperative institutions, including
PEARLS, CAMELS, etc. In Nepal, these tools are employed by some of the cooperative societies
only. However, a critical knowledge gap exists in selecting an appropriate performance assessment
tool for saving and credit cooperatives in Nepal, as the suitability and validity of these tools have
not been comprehensively discussed.

The performance of cooperative societies has improved due to factors like access to capital, risk-
sharing mechanisms, and strong community support. However, challenges such as adverse
selection problems, lack of transparency, and governance issues have emerged, necessitating
greater awareness, regulation, and ethical considerations in cooperative practices.

In a comprehensive exploration of financial performance, Uwaramutse et al. (2022) identified

pivotal factors, such as liquidity, leverage, the number of employees, total assets, and share capital
value, as significant contributors to the measured success in terms of Return on Assets (ROA) and
Return on Equity (ROE). Concurrently, Collins and Wanjan (2011) underscored the direct impact
of loan evaluation criteria on the performance of savings and credit cooperative societies.
Moreover, the assessment of overall profitability by cooperative managers and analysts, focusing
on ROE and ROA, serves as a common practice to designate high-performance saving and credit
cooperative societies. Beyond immediate financial indicators, the financial performance of a
cooperative societies as a nuanced reflection of both present decisions and enduring trends and
strategies. Delving into financial statements facilitates a comprehensive evaluation of the
cooperative's financial performance, enabling the identification of favorable or unfavorable trends.
In this context, this study aims to analyses the financial performance of Nepalese cooperative
societies by utilizing the tools such as descriptive analysis, financial ratio analysis, correlation, and
regression analysis.

Literature Review:

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In recent years, the cooperative sector in Nepal has gained increasing attention for its potential
contribution to financial inclusion and economic development. This surge in interest has led to an
in-depth exploration of the financial performance of cooperative societies in Nepal, focusing on
critical factors shaping their success.

The International Credit Union Regulators’ Network (ICURN) has emerged as a crucial advocate
for effective regulation and supervision within the cooperative sector. ICURN's principles
highlight the importance of a robust regulatory framework, defining specific Key Performance
Indicators (KPIs), allocating adequate human and financial resources, conducting regular
monitoring, and implementing corrective measures when necessary (WOCCU, 2011). This
framework serves as a foundational basis for ensuring sound governance and oversight.

Contributing to the understanding of cooperative financial performance, the United Nations

Capital Development Fund (UNCDF) identifies five key areas borrowed from the microfinance
sector: outreach, productivity, efficiency, self-sufficiency, and delinquency (UNCDF, 2003).
These areas provide a comprehensive evaluation framework for assessing how effectively
cooperative institutions serve their members and communities.

Ngui (2010) emphasizes that financial performance is a critical indicator of how effectively a firm
utilizes its assets to generate revenue from primary business activities. Measuring financial
performance aims to optimize the return on the capital invested in business operations.

Uno et al. (2023) find that internal audit, control activities, communication, and monitoring
significantly impact the performance of thrift and credit cooperatives. Their recommendations
highlight the importance of internal control in mitigating risks within the cooperative sector.

In the realm of performance evaluation, Tunji (2013) defines performance as the result of
organizational activities over a given period. Financial performance is measured using various
variables to determine how well an entity has achieved its financial objectives (Wainaina, 2011).

Chunilal P. D. (2014) underscores the pivotal role of financial analysis in comprehending the
strengths and weaknesses of cooperative entities. This analytical approach involves a thorough
examination of key financial statement figures and their interconnections, offering deeper insights
into a cooperative's financial position and performance. Chunilal provides practical strategies for
enhancing financial leverage within cooperatives, offering actionable guidance for cooperative
management seeking to optimize financial stability.

Addressing challenges presented by the COVID-19 pandemic, Juma M. L. and Maseko F. E.

(2022) propose tailored recommendations for savings and credit cooperative societies (SACCOS),
emphasizing online supervision, self-regulation, and off-site audits to manage the profound impact
of interest rates on SACCOS financial performance and mitigate loan defaults and member
dropouts.

To tackle financial challenges faced by cooperatives in Tanzania, Juma M. L. and Maseko F. E.

(2022) call for government intervention, particularly in terms of infrastructure support. They stress
sustained government backing for long-term cooperative industry development and advocate for

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further research into the economic consequences of the COVID-19 pandemic on cooperative
societies like SACCOS. However, challenges faced by cooperatives and SACCOS in Tanzania,
such as poor management, embezzlement, working capital deficits, suboptimal business practices,
and high loan delinquency rates (Maghimbi, 2010; Mwakajumulo, 2011), underscore the need for
effective governance and management practices within the cooperative sector to ensure
sustainability and continued contributions to economic growth.

Paudel's research in 2014 and 2023 reveals the remarkable potential of Nepalese cooperative
societies as robust microfinance institutions. Across diverse landscapes, these societies heavily
rely on member savings and equity for financial sustenance, with interest rates on loans emerging
as pivotal determinants of profitability. Paudel's findings highlight the efficiency of Nepalese
cooperative societies in operating with minimal administration costs, even in impoverished and
remote communities, where significant member savings are amassed. Noteworthy
recommendations include maintaining a strict separation between politics and the business affairs
of SACCOS and instituting comprehensive training programs in investment analysis, targeting
both management and members to enhance financial prudence.

Juma and Maseko (2022) emphasize the global oversight of SACCOS financial performance by
WOCCU, concluding that the impact of interest rates on SACCOS financial performance can vary
significantly. Successful SACCOS exhibit strong control over loan defaults, ensuring enhanced
financial stability and superior overall performance.

Paudel (2023) indicate that cooperative societies in Nepal are distributing dividends surpassing
their actual profits, raising concerns about transparency and potential mismanagement of member
deposits. Immediate measures are suggested to improve transparency within the cooperative
sector, protecting the integrity of financial operations and maintaining the trust and confidence of
cooperative members.

Upadhaya, Munir, & Blount (2014) point out that performance measurement is the process of
collecting, analyzing, and reporting information regarding the performance of individuals, groups,
organizations, systems, or components. Internal control, including internal audits, enhances the
reliability of financial performance, directly or indirectly, by increasing accountability among
information providers within an organization (Ejoh & Ejom, 2014).

A study by WOCCU (2008) revealed that SACCOS were facing severe liquidity problems, with
the majority unable to meet clients' demands for loans and withdrawal of savings. Common issues
affecting SACCOS in Malawi included inadequate capital, poor asset quality, poor governance,
poor profitability, poor liquidity, and noncompliance. The performance evaluation of savings and
credit cooperative societies (SACCOS) has been of considerable interest, playing a pivotal role in
determining their effectiveness and sustainability (Nyanjwa, 2008).

Mmari G. A. & Thinyane L. C. (2019) extend this evaluation by employing a comprehensive set
of measures, including the ratio of members' share of capital, loan delinquency, the ratio of fixed
assets to total assets, growth of loans, growth in the volume of savings, and growth of total assets.
The guidelines set by the World Council of Credit Unions (WOCCU) provide a comprehensive
overview of SACCOS performance.

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Estiasih S. P. (2021) introduces a novel perspective on performance assessment, categorizing
indicators based on strategic objectives from four distinct angles: the financial perspective,
customer perspective, internal business process perspective, and growth perspective. These
perspectives offer a holistic view of cooperative performance.

Bastian (2006) provides a broader understanding of performance indicators, categorizing them into
five key aspects: input, output, outcome, benefit, and impact. These indicators reflect the degree
of achievement of predetermined goals and objective.

Pagaddut J. G. (2023) offers a detailed breakdown of various financial ratios, indicating strengths
and weaknesses in the performance of Nepalese cooperatives. Deposit liabilities to total assets
ratio, external borrowings to total assets ratio, and net surplus to gross revenue ratio demonstrate
relative strength. However, the asset efficiency ratio and earnings per share ratio require
improvement.

Shamsuddin et al. (2018) suggest that while financial perspectives are vital, researchers should
also consider other dimensions influencing cooperative performance, such as location or regional
factors, innovation in product development, service or product quality, employee retention,
member satisfaction, and insights from previous research on successful business models.

Kadima A. et al (2023) found that prudent and effective credit risk management boosts net profit
margins, return on capital invested, and cash flow. Their insights highlight the significant role
credit risk management plays in determining microfinance effectiveness, enabling these
institutions to improve their financial performance.

Ngumo et al. (2017) undertook a study that unearthed crucial determinants influencing the
financial performance of microfinance banks in Kenya, establishing a direct relationship between
operational efficiency, capital adequacy, firm size, and the overall financial performance of these
institutions. Contrastingly, Ngumo et al. also revealed that liquidity risk and credit risk held no
discernible sway over the financial performance of microfinance banks in Kenya.

Delving into the broader landscape of banking performance determinants, Al-Tamimi (2010) and
Aburime (2005) categorized these factors into internal and external. Internal factors encapsulate
individual bank characteristics that directly impact performance, while external factors encompass
broader sector-wide or country-wide elements.

In a related study focusing on commercial banks, Ongore and Kusa (2013) shed light on the
significance of capital adequacy, asset quality, and management efficiency as critical determinants
of performance. The study concluded that factors within the purview of managerial control wielded
more significant influence on the financial performance of commercial banks in Kenya. However,
in the case of asset quality, the relationship was discernibly negative, signaling that poor asset
quality or a high ratio of non-performing loans to total assets correlates with diminished bank
performance.

In conclusion, this comprehensive literature review underscores the historical significance of

cooperative societies in Nepal's economic and social development. While serving as platforms for

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collective action, financial inclusion, and community enhancement, transparency challenges
persist, including issues such as financial data confidentiality, the absence of robust accountability
mechanisms, and limited member involvement in decision-making, necessitating critical attention
and improvement.

Methodology:

Population and Sampling:

In Kathmandu, as the capital city, people from all over the country reside and work. The diverse
demographics and economic disparities in this area provide the basis for sampling. For this study,
we consider the entire population of Nepal, with Kathmandu district chosen as the sample. It
represents a wide range of cooperatives. The sample size is approximately 10% of the total number
of cooperatives in Kathmandu. The study utilizes both primary and secondary data to address
research questions related to organizational structure, loan investment procedures, and credit risk
management.
Descriptive Analysis:
Descriptive analysis employs statistical tools such as distribution analysis, measures of central
tendency, and dispersion to provide simple summaries of the data. These techniques help in
simplifying a large dataset in a meaningful way.
Financial Ratio Analysis:
Financial ratios are mathematical comparisons of financial accounts that aid in understanding a
cooperative's performance. They are crucial for investors, creditors, and internal management to
assess how well a cooperative is doing and identify areas for improvement. The study analyzes
three categories of ratios.
Profitability Ratios:
Net Profit Margin (NPM): Measures the efficiency of converting operating revenues into profit.
Net Interest Margin (NIM): Indicates the difference between interest income generated and interest
paid out.
Return on Assets (ROA): Measures how effectively assets generate net income.
Return on Shareholders’ Equity (ROE): Reflects a firm's ability to generate profits from
shareholders' investments.
Risk Measurement Ratios:
Liquidity Ratio (LR): Assesses a cooperative's solvency and liquidity.
Capital Adequacy Ratio (CAR): Indicates long-term capital strength and credibility to protect
against risk.
Interest Spread (Spread): Measures profitability and risk
Non-Performing Loan Ratio (NPL): Measures the debt default rate of a cooperative
Efficiency Ratios:
Assets Utilization Ratio (AU): Calculates the revenue earned for every rupee of assets.
Credit to Deposit Ratio (CD): Measures the efficiency and risk of deposit utilization.

Correlation Analysis:
The correlation coefficient measures the linear relationship between variables. The study
calculates Pearson correlation statistics for both secondary data variables (e.g., deposit, revenue)
and regression variables (e.g., ROA, NPM) to assess the relationships between these factors.
Regression Analysis:

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Regression analysis is employed in this study to connections between dependent and independent
variables. The analysis utilizes multi-variable regression analysis with ordinary least square
estimates (OLS). The primary focus of this investigation is on understanding the relationship
between credit risk and financial performance, efficiency, and organizational factors. Four
regression models CAR, NPL, LR, and Spread are tested to assess financial performance.
In summary, the research methodology encompasses a range of analytical techniques to examine
cooperatives in Kathmandu, Nepal, and evaluate their financial performance and risk factors.
The financial performance model comprises four regression equations, as outlined below:
CAR= α+β1 ROA +β2 NPM +β3 NIM +β4 ROE+ ei ...................... (A1)
NPL = α+β1 ROA +β2 NPM +β3 NIM +β4 ROE+ ei ...................... (A2)
LR = α+β1 ROA +β2 NPM +β3 NIM +β4 ROE+ ei......................... (A3)
Spread = α+β1 ROA +β2 NPM +β3 NIM +β4 ROE+ ei....................(A4)

Analysis of data:

Below are the results of the multi-variable regression analysis, which involves pooling cross-
sectional and time series data to estimate the parameters of the regression line. The parameters α
and β are estimated to make inferences about the population regression line. The significance levels
of α and β indicate the predictive capacity of the outcome variable. The standard error of estimate,
denoted as e, represents the average variability from observed values around the fitted regression
line.

The F score and its significance level convey whether the applied model is sufficiently significant
overall in predicting the outcome variable. The coefficient of determination, R square, measures
the goodness of fit of the regression model (Gujarati et al., 2012). The estimated parameters and
scores of the regression models are as follow.

Risk versus financial performance model:

CAR= α+β1 ROA +β2 NPM +β3 NIM +β4 ROE+ ei ……………………..(A1)
CAR= 18.174+0.332ROA -0.035NPM +1.258NIM -0.094ROE±12.2

Further statistics are presented and interpreted as follows:

The R value of 0.525, derived from the model summary table, signifies the simple correlation,
indicating a moderate degree of correlation. The R2 value quantifies how much of the dependent
variable, CAR, can be elucidated by the independent variables related to financial performance,
such as ROE, NIM, ROA, NPM, etc., concerning leverage risk. In this instance, 27.6 percent can
be accounted for by ROE, NIM, ROA, NPM, while the remaining 72.4% (i.e., 1-27.6%) is
attributed to other factors.

The Adjusted R2 (i.e., adjusted R2 = 0.270 or 27.0%) is a refinement of the R-squared, penalizing
the inclusion of extraneous predictors in the multi-variable regression model. The Std. error of the
estimate, also known as the root mean, squared error or standard deviation around the regression
line, represents the standard deviation of the error term and is the square root of the mean square
for the residuals in the ANOVA table. The Std. error of the estimate for the regression model A1,

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at 12.2, indicates an average variability of ±12.2 from the observed value around the fitted
regression line.

Table 1
Model A1 summary
Model R R Square Adjusted R Square Std. Error of the Estimate
A1 0.525 0 .276 0. 270 12.2
Predictors: (Constant), ROE, NIM, ROA, NPM

The ANOVA table furnishes an F value of 50.694, and its significance is observed at 0 percent.
This signifies the rejection of hypothesis I, indicating that none of the independent variable’s ROE,
NIM, ROA, NPM is a useful predictor of the dependent variable, leverage risk. Consequently, this
suggests that managers should actively and significantly manage leverage risk to enhance the
profitability of cooperatives in Nepal.

Table 2
Model A1 ANOVA
Sum of
Model Squares df Mean Square F Sig.
A1 Regression 30247.206 4 7561.801 50.694 0.0
Residual 79505.203 533 149.165
Total 109752.408 537
Predictors: Constant, ROE, NIM, ROA, NPM; Dependent Variable: CAR
The regression model A1 line above is formed using the un-standardized coefficients from the B
section, with a constant coefficient of 18.174. The Std. Error represents the standard deviation of
coefficients from observed variables. The un-standardized coefficients (B) for the independent
variables ROA, NPM, NIM, ROE, and the Constant are 0.332, -0.035, 1.258, -0.094, and 18.174,
respectively. Larger beta values are associated with larger t-values and lower significance levels.
The coefficients for NIM and ROA variables are not significantly different from 0, as their t-scores
are greater than 0.05. This suggests that, overall, the coefficients of NIM and ROA are not
sufficiently significant in predicting the outcome variable. On the other hand, the coefficients for
NPM and ROE variables are significantly different from 0, as their t-scores are less than 0.05. This
indicates that, overall, the coefficients of NPM and ROE are significantly enough in predicting the
outcome variable.
Given that Equity (EA) is part of Total Assets (TA), and CAR is calculated by dividing permanent
capital by TA, and NIM is calculated by dividing net interest income by EA, CAR is significantly
influenced by NIM in a positive direction. This result aligns with Kosmidou et al. (2003).
Simultaneously, a higher CAR tends to exhibit less leverage effect in the capital structure, reducing
the ROE when derived from ROA. CAR is significantly influenced by ROE in a negative direction,
consistent with Büyükşalvarcı & Abdioğlu (2011) but inconsistent with Bateni et al. (2014).
Despite the reduction in the firm's return with a higher CAR, cooperatives must optimize the
tradeoff between CAR and ROE to maintain long-term solvency strength.
Table 3
Model A1 Coefficients

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 Un-standardized Standardized
Coefficients Coefficients
Std.
Model B Error Beta t Sig.
A1 Constant 18.174 0.718 25.324 0
ROA 0.332 0.374 0.047 0.886 0.376
NPM -0.035 0.028 -0.070 -1.237 0.217
NIM 1.258 0.090 0.520 13.928 0
ROE -0.094 0.029 -0.144 -3.301 0.001
Dependent Variable: CAR

NPL = α+β1 ROA +β2 NPM +β3 NIM +β4 ROE+ ei ……………………..(A2)
NPL = 11.76 +3.82ROA-0.83NPM-0.91NIM +0.28ROE±15.2

Further statistics are presented and interpreted as follows:

According to the model summary table, the R value is 0.305, representing the simple correlation
and indicating a moderate degree of correlation. The R2 value measures how much of the
dependent variable, NPL, can be elucidated by the independent variables related to financial
performance, such as ROE, NIM, ROA, NPM, in the context of credit default risk. In this scenario,
9.3% can be accounted for by ROE, NIM, ROA, NPM, while the remaining 90.07% (i.e., 1-9.3%)
is attributed to other factors.

The Adjusted R2 (adjusted R2 = 0.010 or 1%) is an adjustment of the R-squared that penalizes the
inclusion of extraneous predictors in the multi-variable regression model A2. The Std. error of the
estimate for the regression model A2 is 15.22, indicating an average variability of ±15.22 from the
observed value around the fitted regression line.

Table 4
Model A2 summary
R Adjusted R Std. Error of
Model R Square Square the Estimate
A2 0.305 0.093 0.010 15.22
Predictors: Constant, ROE, NIM, ROA, NPM

From ANOVA table, within the regression row, the significance level (Sig. column) for the F score
(i.e., F score = 1.13) is 0.36, which is greater than 0.05. This implies that, overall, the applied
model is not significantly effective in predicting the outcome variables. Consequently, null
hypothesis II is accepted, indicating that neither of the independent variables ROE, NIM, ROA,
NPM is a useful predictor of the dependent variable, debt default risk.

Table 5
Model A2 ANOVA
Sum of
Model Squares Df Mean Square F Sig.

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 A2 Regression 1044.878 4 261.22 1.13 0.36
Residual 10202.559 44 231.9
Total 11247.437 48
Predictors: Constant, ROE, NIM, ROA, NPM; Dependent Variable: NPL
The regression model A2 line above is constructed using the un-standardized coefficients from the
B section of the coefficients table, with a constant coefficient of 11.757. The coefficients for NIM,
NPM, ROE, and ROA variables are not significantly different from 0, as their t-scores are greater
than 0.05. This indicates that, overall, the coefficients of NIM, NPM, ROE, and ROA are not
sufficiently significant in predicting the outcome variable.
The strong degree of correlation and F score, coupled with the poor significance of individual
predicting variables to the dependent variable, can be attributed to the limited number of degrees
of freedom or the fewer observations of NPL variables.

Table 6
Model A2 coefficients
Un-standardized Standardized
Coefficients Coefficients
Std.
Model B Error Beta t Sig.
A2 Constant 11.757 3.803 3.092 0.01
ROA 3.823 6.556 0.311 0.583 0.56
NPM -0.831 1.115 -0.453 -0.746 0.46
NIM -0.906 0.477 -0.315 -1.901 0.06
ROE 0.278 0.591 0.174 0.471 0.64
Dependent Variable: NPL

LR = α+β1 ROA +β2 NPM +β3 NIM +β4 ROE+ ei ……………………..(A3)

LR = 17.742+ 0.82β1-0.123β2 + 0.467β3 + 0.043β4 ±13.48

Further statistics are presented and interpreted as follows:

Based on the model summary table, the R value is 0.256, representing the simple correlation and
indicating a small degree of correlation. The R2 value indicates how much of the dependent
variable, LR, can be explained by independent variables related to financial performance, such as
ROE, NIM, ROA, NPM, in the context of the risk of Nepalese cooperative societies. In this
scenario, 6.5% can be accounted for by ROE, NIM, ROA, NPM, while the remaining 93.5% (i.e.,
1-6.5%) is attributed to other factors.

The Adjusted R2 (adjusted R2 = 0.058 or 5.8%) is an adjustment of the R-squared that penalizes
the inclusion of extraneous predictors in the multi-variable regression model A3. The Std. error of
the estimate for the regression model A3 is 13.48, indicating an average variability of ±13.48 from
the observed value around the fitted regression line.

Table 7
Model A3 Summary
Model R R Square Adjusted R Square Std. Error of the Estimate

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 A3 0.256 0.065 0.058 13.48151
Predictors: (Constant), ROE, NIM, ROA, NPM

The ANOVA table reveals an F-statistic of 9.238 with a significant level of 0 percent. This
indicates that, overall, the applied model is significantly effective in predicting the outcome
variable, leading to the rejection of null hypothesis III. Therefore, either of the independent
variables ROE, NIM, ROA, NPM is a useful predictor of the dependent variable, liquidity risk.
This implies that managers should actively manage liquidity to a significant extent to enhance the
profitability of cooperatives in Nepal.

Table 8
Model A3 ANOVA
Sum of
Model Squares Df Mean Square F Sig.
A3 Regression 6715.718 4 1678.930 9.238 0.00
Residual 95964.549 528 181.751
Total 102680.267 532
Predictors: Constant, ROE, NIM, ROA, NPM; Dependent Variable: LR
The regression model A3 line above is derived from the un-standardized coefficients section of B
and a constant coefficient in the coefficients table. The standardized coefficients (Beta) for the
independent variables ROA, NPM, ROE, and NIM are 0.121, -0.257, 0.199, and 0.068,
respectively. These values are obtained when all dependent and independent variables are
standardized before running the regression line.
The coefficients for NIM, NPM, and ROA variables are significantly different from 0, as their t-
scores are 0.00, which is less than 0.05. This indicates that, overall, the coefficients of NIM, NPM,
and ROA are significantly significant in predicting the outcome variable. However, the coefficient
for the ROE variable is not significantly different from 0, as its t-score is greater than 0.05,
indicating that the coefficient of ROE is not significantly effective in predicting the outcome
variable.
Considering that a cooperative can increase its investment and earning assets by collecting higher
deposits, NIM and LR are calculated by dividing by EA and deposit, respectively. There is a
significant positive influence of NIM on LR. On the contrary, an increase in LR raises the
opportunity cost of liquid assets and reduces returns, leading to a significant negative influence of
NPM on LR. Therefore, cooperatives must seek an optimum point to balance the tradeoff between
LR and NPM. The causation on LR from NIM and ROA is inconsistent with the study conducted
by Kosmidou et al. (2003) in UK banks.
Table 9
Model A3 coefficients
Un-standardized Standardized
Coefficients Coefficients
Std.
Model B Error Beta t Sig.
A3 Constant 17.742 0.796 22.302 0
ROA 0.82 0.413 0.121 1.984 0.048

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 NPM -0.123 0.031 -0.257 -3.96 0
NIM 0.467 0.1 0.199 4.677 0
ROE 0.043 0.032 0.068 1.365 0.173
Dependent Variable: LR

Spread = α+β1 ROA +β2 NPM +β3 NIM +β4 ROE+ ei ……………………..(A4)
Spread = 0.718+ 0.055 ROA + 0.001NPM + 0.906NIM + 0.002ROE±3.57

Further statistics are presented and interpreted as follows:

Based on the model summary table, the R value is 0.834, representing the simple correlation and
indicating a strong degree of correlation. The R2 value gauges how much of the dependent
variable, spread, can be elucidated by independent variables related to financial performance, such
as ROE, NIM, ROA, NPM, in the context of investment risk. In this scenario, 69.6% can be
accounted for by ROE, NIM, ROA, NPM, while the remaining 30.4% (i.e., 1-69.6%) is attributed
to other factors.

The Adjusted R2 (adjusted R2 = 0.693 or 69.3%) is an adjustment of the R-squared that penalizes
the inclusion of extraneous predictors in the multi-variable regression model A4. The Std. error of
the estimate for the regression model A4 is 3.57, indicating an average variability of ±3.57 from
the observed value around the fitted regression line.

Table 10
Model A4 summary
Model R R Square Adjusted R Square Std. Error of the Estimate
A4 0.834 0.696 0.693 3.57215
Predictors: Constant, ROE, NIM, ROA, NPM
The ANOVA table presents an F value and its corresponding significance level. In the regression
row, the significance level (Sig. column) for the F score (i.e., F score = 304.543) is 0 percent,
indicating that null hypothesis IV is rejected. This implies that either of the independent variables
ROE, NIM, ROA, NPM is a useful predictor of the dependent variable, investment risk.
Consequently, managers should actively and significantly manage investment risk to enhance the
profitability of cooperatives in Nepal.
Table 11
Model A4 ANOVA
Sum of
Model Squares Df Mean Square F Sig.
A4 Regression 15544.204 4 3886.051 304.543 0.0
Residual 6801.216 533 12.760
Total 22345.420 537
Predictors: Constant, ROE, NIM, ROA, NPM; Dependent Variable: Spread
The regression model A4 line above is constructed using the un-standardized coefficients from the
coefficients table's B section, including the constant. The standardized coefficients (Beta) for the
independent variables ROA, NPM, ROE, NIM, and the constant are 0.017, 0.003, 0.83, 0.006, and

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0.718, respectively. These values are obtained when all dependent and independent variables are
standardized before running the regression line.
The coefficient for the NIM variable is significantly different from 0, as its t-score is 0.00, which
is less than 0.05. This indicates that, overall, the coefficient of NIM is significantly effective in
predicting the outcome variable. However, the coefficients for ROA, NPM, and ROE variables are
not significantly different from 0, as their t-scores are greater than 0.05. This suggests that, overall,
the coefficients of ROA, NPM, and ROE are not sufficiently significant in predicting the outcome
variable.
Since both spread and NIM are calculated using interest income, interest expenses, earning assets,
and paying liabilities, these variables are significantly dependent on each other in a positive
direction.
Table 12
Model A4 coefficients
Un-standardized Standardized
Coefficients Coefficients
Std.
Model B Error Beta t Sig.
A4 Constant 0.718 0.21 3.42 0.001
ROA 0.055 0.11 0.017 0.502 0.616
NPM 0.001 0.008 0.003 0.085 0.932
NIM 0.906 0.026 0.83 34.297 0
ROE 0.002 0.008 0.006 0.2 0.842
Dependent Variable: Spread
Findings:

Based on the above analysis, the following findings were drawn after a comprehensive
examination.

1. The regression model (A1) indicates that ROE and NPM significantly affect leverage risk
(CAR). Managers should actively manage leverage risk to enhance cooperative
profitability.
2. The regression model (A2) shows no significant impact of ROE, NIM, ROA, and NPM on
credit default risk (NPL). Null hypothesis II is accepted, suggesting limited predictive
capacity of these variables for debt default risk.
3. The regression model (A3) reveals a significant influence of NIM on liquidity risk (LR).
Managers should actively manage liquidity to enhance cooperative profitability.
4. The regression model (A4) indicates a significant impact of NIM on investment risk
(Spread). Managers should actively and significantly manage investment risk to enhance
cooperative profitability.

These revelations offer a detailed exploration of the relationships between various risk factors and
cooperative profitability, shedding light on the explanatory power and implications inherent in
each model, particularly in the context of leverage, debt default, liquidity, and investment risks.

Conclusions:

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This study sheds light on the intricate dynamics of the financial performance of cooperative
societies in Nepal. The study reveals that leverage risk is intricately linked to factors such as ROE
and NPM, whereas credit default risk demonstrates less predictability based on variables like ROE,
NIM, ROA, and NPM. The significant impact of NIM on liquidity risk underscores the imperative
of adept liquidity management for cooperative profitability. Moreover, the discernible influence
of NIM on investment risk emphasizes the necessity for proactive management to augment overall
profitability. In summation, these findings underscore the paramount importance of strategic
financial management in the cooperative sector. This study firmly concludes that the financial
performance of cooperative societies in Nepal is intricately influenced by a multitude of factors,
encompassing leverage risk, various independent variables, liquidity risk, and investment risk.

Recommendations:

Derived from the thorough analysis presented above, the following recommendations were
drawn.

1. Cooperative managers should focus on optimizing the tradeoff between leverage risk and
return on equity to maintain long-term solvency strength.
2. Further research is needed to explore additional factors influencing credit default risk in
cooperative societies.
3. Active management of liquidity is crucial for cooperative profitability, and managers
should carefully balance the tradeoff between liquidity and net profit margin.
4. Cooperatives should actively and significantly manage investment risk to enhance overall
profitability.
5. Continuous monitoring and adaptation of financial strategies are essential for cooperative
societies to navigate dynamic economic conditions effectively.

These recommendations are designed to steer cooperative societies in Nepal towards a more
informed and proactive stance in financial management, focusing on specific aspects such as
leverage, credit default, liquidity, and investment risks. Implementation of these measures is
anticipated to result in an enhanced financial performance for Nepalese cooperative societies.

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