Kenya’s savings and credit co-operatives (saccos) are operating without effective accounting and control systems, putting billions of savers’ funds at risk, the Financial Sector Development Trust (FSD Kenya) has warned.
FSD in a new study, whose outcome has just been released, questions the Sacco Societies Regulatory Authority’s (Sasra) role in ensuring compliance with prudential guidelines in the key saccos sub-sector and protection of savers’ money.
FSD says most, if not all, saccos are currently operating high risk models that are prone to liquidity risks – citing the rampant failure to monitor or report loan defaults that ultimately expose them to systemic risk of insolvency.
“Most, if not all, saccos maintain a high risk operating model. The response of many to pressure for increased levels of capital assets has been a strategy of rapid expansion of membership that masks, and potentially exacerbates, continued liquidity risk. Whilst new members bring deposits, their incentive to join is to access loan funds, placing ever greater demands on sacco liquidity,” says FSD.
Systemic instability is fuelled by weak or non-existent oversight among Kenya’s saccos, FSD says, pointing to weak oversight in a sector that controls billions of shillings in savings.
FSD, a non-profit organisation that researches and offers financial services sector advisory, says that although most sacco managers are unwilling to reform, Sasra’s failure to effectively oversight the sector is holding back that change.
It claims the risk of default and unrecoverable loans is high as “sacco compliance remains superficial”.
Kenya has over 5,000 registered saccos with more than Sh501 billion in savings and an asset base of Sh694 billion.
An estimated 230 saccos offer front office services activities (Fosas) through 550 outlets, enabling them to compete effectively in the retail banking business and lend non-members.
Saccos are seen as better lenders because they are member-focused and largely dedicate all the resources to meeting the borrowing needs of members.
Despite the financial rot in the management of saccos, FSD says the incentive to change is unclear and most are trapped in poor management cycles because of failure by the sector regulator to crack the whip.
“The ability of Sasra to monitor and sanction non-compliant saccos would appear limited. As a consequence, Sasra relies heavily on data provided by saccos themselves when considering applications. Past experience suggests there remains considerable inaccuracy in the information available from many saccos,” FSD says.
The study reckons that despite their financial vulnerability, most saccos have been using whatever cash is available to pay out dividends even in the face of apparent insolvency, rather than invest in business improvements.
“Sacco compliance remains superficial. Whilst a significant number of saccos are converging to the compliance criteria, the regulatory framework introduced has not yet driven any real change in the sacco operating model or attitudes of sacco management. Sacco businesses and, therefore, their members remain at significant, if not greater, risk from default or unrecoverable loans,” it adds.
The need to stay afloat has seen many saccos recruit more members instead of adopting stringent systems of control to guide lending, making them a ticking time bomb.
“The need for greater liquidity has been met by increasing membership, not by overhauling often highly entrenched business practices. Few have invested significantly either in advisory services, staff recruitment and capacity, or upgraded protocol such as loan application assessment,” FSD says, adding that the push to grow membership has encouraged further loosening of protocol.
Acting Sasra CEO John Mwaka did not respond to queries on the report’s findings by the time of going to press.
The report, titled ‘‘A Technical Solution to a Political Economy Problem: FSD Kenya’s Intervention in the Sacco Sector,’’ highlights the need for urgent fiscal reform in the sector to forestall a crisis.
It comes amid efforts to clean up Kenya’s financial services sector and improve its stability.
The banking sector has in past couple of years faced deeper scrutiny to enhance compliance with prudential guidelines.
FSD estimates that from 2006 to 2013 the proportion of Kenyans using financial services rose from 60.7 per cent to 74.5 per cent and of those 13.9 million with access to financial services, 1.9 million used saccos.