Saccos target members for fresh capital

Kenyan workers who are members of deposit-taking Saccos may be forced to take home less profit from their savings in the coming months as the institutions build their capital levels to comply with new industry regulations.

The Saccos, also known as FOSAs, with an estimated membership of five million and assets worth Sh150 billion, are required to apply for a licence in the next 12 months and have a core capital of not less than Sh10 million in the next four years.

Industry statistics show that an estimated 60 Saccos are way below the required minimum capital levels –– and are expected to turn to the members for money needed to reach the threshold.

Contributing money for the capital build-up will force members to take a portion of their monthly take-home or forego annual dividends in the next four years in support of the initiative.

Nation Staff Sacco has, for example, asked its members to increase their share capital to Sh6,000 from the current Sh1,000 in the next five months beginning August.

“We have decided to start early enough to avoid a last minute rush as the new rules could see closure or merger of some Saccos if they do not innovate and cut operating costs to meet the threshold,” said Jacob Kimathi, the Nation Staff Sacco manager.

Co-operative Development and Marketing minister Joseph Nyaga, published the regulations this week targeting the 203 Saccos.

All Saccos are required to attain a minimum core capital of not less than 10 per cent of the total assets, and institutional capital of not less than eight per cent of the total assets by the fourth year signalling that even the big players with more capital than the law requires have some adjustments to do.

The push for retention of dividends or reduction of monthly take home comes at a time when official figures show that standards of living are on the decline for millions of employees whose salaries have failed to keep pace with the rising consumer prices.

Household incomes grew at the rate of 6.4 per cent in 2005, 7.5 in 2006 and 8.7 per cent in 2007 before peaking at 8.4 in 2008 but high inflation that averaged 9.2 per cent in 2009 eroded much of the gains.

The new regulations also require Saccos –– a favourite source of credit for most Kenyan workers –– to invest in new banking halls and install sophisticated security equipment, including armed personnel from the Administration Police and private security guards.

Industry officials say compliance with new legal regime could leave Saccos with less money for lending, and ultimately impact on their income.

The capital regulations are causing ripples even in big Saccos such as Harambee with a membership of 98,000 drawn from civil servants and officers from the disciplined forces.

“Compliance will come at a very high cost for both members and the institutions,” said Benson Ojiambo, the acting general manager at Harambee, noting that the society is not fully compliant.

“We are considering a cut in dividend payouts to bridge gaps in areas of capital adequacy,” said Mr Ojiambo.

Harambee returned Sh560.2 million profit for 2009 up from Sh514.8 million in 2008 or six per cent of the members’ deposits of Sh7.9 billion.

Saccos have been growing at the rate of 25 per cent per year for the last six years, according to data from the Cooperatives Development ministry.

Failure by Saccos to raise the minimum capital levels could lead to closure or forced mergers to comply with the requirements.

Under attack

Sacco Societies Regulatory Authority (SASRA), the regulator of the Saccos, says the changes should encourage prudent management of the institutions whose market has recently come under attack from commercial banks.

Yesterday, SASRA said it was preparing a circular to all Saccos countrywide, spelling out the requirements to ensure smooth implementation of the rules contained in the Sacco Societies Act, 2008.

“As part of licensing requirements each Sacco will provide us with a business plan including financial projections over the 3-4 years showing how they will meet the various financial standards including investment, liquidity, capital and asset quality, “ said Peter Njuguna, the Chief Supervisory Manager at SASRA.

The rules are meant to hammer in strict corporate benchmarks, including administrative sanctions such as prohibition of dividends, expansion, lending, investments or acquisition of property for financial mismanagement.

Sacco managers said it would be difficult for mergers to happen because most societies are formed by people of common interests such profession and employment.

“Merging Saccos would make it almost difficult for the new entity to operate due to obvious differences in the nature of membership,” said Mr Kimathi.

To ensure Saccos stay within their core business, investments in non-interest earning assets has been restricted to 10 per cent of total assets while investments in land and buildings are capped at five per cent, the same ceiling placed for loans to directors and staff.

While most Saccos can easily meet the minimum capital requirements, either by asking for more capital injections from members or withholding dividends, those with thin membership may have to merge or close shop.

“Since 2004, we have been pushing working on our capital base and have surpassed the new requirement,” said Peter Mbui, the operations Manager at Mhasibu Sacco whose membership mainly consists of accountants.

“Every member has had to raise a minimum monthly deposit of Sh1,000 to achieve this threshold,” he said adding the Sacco has a share capital of Sh145 million currently.

The rules also demand that investments acquired for expansion be disposed of after two years if they have not been put to any use except with approval from SASRA, which has been granted on-site inspection mandate similar to that exercised by the Central Bank’s supervision department.

Saccos will have to file monthly reports with the authority, indicating their adherence to prudent guidelines.

An just like in the banking sector Saccos will not be allowed to charge interest on a delinquent loan exceeding the Principal owed when the loan became delinquent.

Entry fee

Sacco managers said the ending Sacco’s low interest rate lending will deny them the competitive edge in the marketplace, making them vulnerable to competition from commercial banks’ recent foray into the low end of the market––a move that is set to accelerate with the advent of agency banking.

As Saccos face compliance, they are also likely to raise their entry fee or membership fee in a bid to boost their accounts.

“We are encouraging members to reinvest part of the dividends. In the last fiscal year, they reinvested 60 per cent of dividends. By reinvesting, we should be in a very strong position over the next six years,” said Mr Ken Odire, the treasurer of Maisha Bora Sacco in a previous interview.