EFFECT OF FINANCIAL MANAGEMENT PRACTICES ON THE SUSTAINABILITY OF NON-GOVERNMENTAL ORGANIZATIONS IN NAIROBI COUNTY, KENYA

Abstract

The Non-Governmental organizations are major players in the economic developments and social wellbeing within the host countries. In Kenya, the NGOs contribution was highly recognized by the government. Despite the increase in funding for NGOs, concerns were raised on lack of sustainability and the effect that the drastic reduction would have on the quality of life on the affected communities. This study aimed at establishing the effect of financial management practices on the sustainability of Non- Governmental Organizations in Nairobi County. It examined the effect of budgetary practices, the effect of working capital management practices, the adoption of integrated financial management information systems and the effect of internal control practices on the sustainability of NGOs in Nairobi County. Further, the study examined the moderating effect of NGO regulations on the effect of financial management practices on the sustainability of NGOs in Nairobi County. The study was guided by the theory of the budgeting process, the resource-based view theory, the operating cycle theory, and the theory of economic regulation. It was anchored on a positivist paradigm philosophy. The study employed descriptive research design. A sample of 286 out of a target population of 1000 senior program managers and chief executive officers was obtained using stratified random sampling. A pilot study was conducted on 15 senior program managers and chief executive officers from NGOs within the Nairobi County who did not form part of the sample population. This allowed for the assessment of the reliability and content validity of the data collection instruments which were found to be satisfactory. Reliability was tested using the Cronbach coefficient. Primary data was collected from sampled officers using structured questionnaires, while secondary data was obtained from the audited financial statements of the NGOs and publications by the NGO coordination board. 172 questionnaires were found to be satisfactorily completed for analysis yielding a 60.14% response rate. The data collected was summarized and presented in tables and charts. Statistical Package for Social Scientists (SPSS) was used for data handling and analysis. The descriptive statistics included frequencies, percentages, means, modes and standard deviations. Inferential statistics included hypothesis testing using Chi Square test for independence to test whether the rating was dependent on the age of the NGOs, modelling using correlational and linear regression analysis and Analysis of Variance (ANOVA). For regression analysis, the normality of the response variable (NGO sustainability) data was confirmed using the Shapiro-Wilks test, while other diagnostic tests included Variance Inflation Factors (VIFs) and Pearson‟s Correlation analysis to assess collinearity, coefficients of determination, t and F statistics. The explanatory variables (financial management practices) were found to have pronounced multicollinearity, thus necessitating partial regression analysis to investigate the effects of financial management practices on NGO sustainability. In assessing sustainability of NGOs, the current ratio, the donor dependency level, and the survival ratio were computed. The study showed that budgetary practices have significant effects on NGO sustainability specifically, donor dependency level and survival rate. However, enhanced regulations by the NGO coordination board would result to a more decreased donor dependency level and a more increased survival rate. Working capital management practices have significant effects on the NGO sustainability specifically current ratio and survival rate. The NGO regulation raised the rate at which adoption of IFMIS influenced current and survival rate. Lastly, internal control practices were found to have significant effects on all indicators of NGO sustainability, current ratio, donor dependency level and survival rate. NGO regulation was found to reduce the rate at which improved internal control practices influence the indicators of NGO sustainability. The study recommended that NGOs in Nairobi County should improve the working capital management practices through improved grant receipt scheduling and liquidation of expenditure which leads to improved cashflows. Further,