The Relationship Between Interactive Diversification and Financial Sustainability of Informal Financial Groups in Kirinyaga County, Kenya

Abstract

IFGs across the globe and especially in developing countries have struggled to maintain financial sustainability. This could be attributed to overreliance on single stream of income causing inadequate cash flow and liquidity problems. Under-diversification and adverse investment decisions further worsen the problem. Theoretically, income diversification enhances performance by decreasing volatility in uncertain economic conditions. The underlying assumption is that prudent diversification strategy eliminates risks. However, empirical evidence reveals conflicting findings on the relationship between diversification and performance suggesting that diversification alone is inadequate. This study evaluated the relationship between interactive diversification and financial sustainability of informal financial groups (IFGs) in Kirinyaga County, Kenya. The study targeted 60 non-rotating IFGs with 806 members registered with the County Department of Social Services Kirinyaga County. Primary data was collected using a questionnaire and responses corroborated with key informant interviews. The data was analyzed for descriptive and inferential statistics using STATA software. Specifically, descriptive statistics included measures of central tendency and dispersion while inferential statistics drew from correlation and multiple linear regressions. The study established an insignificant inverse relationship between diversification and financial sustainability. However, on interaction diversification had a significant relationship with financial sustainability. While the interaction with financial training had a significant positive effect (β= .0991, p= 0.000), interacting with fiscal management yielded a significant negative effect (β= -.0557, p= 0.000). In conclusion, financial sustainability is enhanced by the interactions between diversification & financial literacy training while strengthening the interactions between diversification & fiscal management through contingency planning, regular review of strategy, cash flow management, and appropriate budgetary allocations.