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How Sasra is keeping saccos fit to serve the credit market

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Sacco Societies Regulatory Authority (Sasra) CEO John Mwaka. FILE PHOTO | NMG

Kenya’s famed co-operatives sector appears to be growing in the middle of turbulence arising from failure to comply with some regulatory requirements.

For instance, a recent report by sector regulator said more than 100 deposit-taking savings and credit co-operative societies (saccos) did not meet the mandatory capital ratio requirement in 2016, raising questions over their fitness in the key credit market.

The Business Daily spoke to the Sacco Societies Regulatory Authority (Sasra) chief executive, John Mwaka, on the state of the industry and what the agency is doing to keep it in shape. Here are the excerpts:
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You recently released a report showing that more than 100 deposit-taking savings and credit co-operatives (Dt-saccos) did not meet the mandatory capital ratio requirement in 2016. Will you suspend and eventually withdraw licences of the defaulters?

The statement is not correct. The correct position is that there are four capital adequacy requirements to be met by Dt-saccos in accordance with the law. The emphasis is usually on core capital, capital to total assets ratio and capital to total deposits ratio.

The report showed that 168 Dt-saccos out of 175 were fully compliant with the core capital requirement of a minimum Sh10 million; 144 Dt-saccos out of 175 were fully compliant with the core capital to total assets requirement of 10 per cent and 169 Dt-saccos were fully compliant with core capital to total deposits requirement of eight per cent.

The conclusion in the report is that the Dt-saccos sector is financially stable and sound as required by law. The last ratio of institutional capital to total assets is the one that was not met by a majority of the Dt-saccos.

Regulatory definition of core capital includes institutional capital and as indicated above, less than 10 saccos were non-compliant with core capital to assets ratio. It is inaccurate to measure financial soundness of saccos based on institutional capital alone.

Technically, the only avenue available for saccos to build institutional capital is to retain surpluses. This explains the slow level of compliance with this ratio as loan assets are growing faster than the earnings.

The authority shall be engaging stakeholders on the continued relevance of this ratio. Dt-saccos remain stable and viable alternative source of credit financing to Kenyans; and their fitness cannot be questioned. 

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One of the sanctions prescribed in the Sasra Act is that saccos can be barred from declaring dividends or increasing staff salaries until they comply. Critics have said you have avoided such sensitive measures for negotiation. Are you abetting non-compliance?

Sasra does not abet non-compliance at all. All the annual financial statements of Dt-saccos are always considered and approved on a case-by-case basis, with specific comments and directives before they are presented to the members.

Sasra has always issued appropriate administrative directives to ensure the saccos maintain compliance. Prohibition from declaring dividends and restrictions in increase of salaries are some of the sanctions prescribed in law.

Sasra has several times utilised these sanctions, together with restrictions of payment of dividends or interest on deposits without fear or favour.

A February report by Financial Sector Development trust, a not-for-profit institution that conducts financial sector research, warned that most, if not all, Saccos are currently operating high-risk models that are prone to liquidity fluctuations, citing the rampant failure to monitor or report loan defaults that ultimately expose them to systemic risk of insolvency. What are you doing to address this?

That FSD Africa report was completely inaccurate. The author is certainly not conversant with sacco sector operations. On the issue of non-performing loans, the authority receives, analyses and reports performance on a quarterly basis. As shown in the 2016 report, the NPLs for the sector were just 5.23 per cent, which is commendable by any standards.

This ratio is on gross terms as the value of borrowers’ deposits held as collateral has not been adjusted as it is generally the practice in financial regulation. This provides another layer of protection from insolvency. On aggregate, sector liquidity stood at 49.5 per cent in 2015 against the minimum of 15 per cent, which is commendable.

READ: How unlicensed online saccos prey on savers

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. How are you addressing this?

Saccos only transact with their members. What this means is that under the sacco model, a person must become a member first, then save before they can access credit based on the savings.

Saccos do not recruit members today, and lend to them tomorrow. In fact, many sacco by-laws require a person to save for a minimum of six months before they qualify for any credit.

Consequently, a substantial amount of lending by saccos is always backed by the savings as collateral and thus the most secure way of advancement of credit. Secondly, credit advanced by saccos is always co-guaranteed by a minimum of three other members of the sacco.

These members must also be having sufficient savings to cover the amount lent to the principal borrower. This is the second level of assurance of credit repayment under the sacco model, making the risk of loan default very low. 

READ: Sasra boss John Mwaka confirmed for four-year term

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