New tough rules to cut Sacco savers earnings in 2014

Kenyans, who have invested their savings in co-operatives, are poised to receive lower dividends this year as the societies retain earnings to comply with new capital requirements.

Industry insiders say the savings and credit co-operative societies (Saccos) must retain more than Sh6 billion to meet the capital adequacy ratios that were set four years ago and for which they were given a four-year grace period to comply with.

The deadline for the compliance is June next year and the Sacco Societies Regulatory Authority (Sasra) has said there will be no extension.

“They have to comply with the institutional capital requirement because it is anchored in law,” said Sasra chief executive officer Carilus Ademba.

The Saccos are now faced with the hard choice of reducing payouts to members who have been earning higher returns for their deposits. The savings institutions were not retaining any earnings before introduction of the new rules in 2010.

Institutional capital refers to the portion of core capital that cannot be claimed by an individual which constitutes retained earnings, reserves, grants and donations.

The institutional capital threshold is set at a minimum of eight per cent of total assets but as at the end of last year the industry average was five per cent.

A number of Saccos told the Business Daily that they were set to retain a significant fraction of this year’s surpluses in order to be compliant.

“Next year we want to retain a substantial amount to fully comply with the law and build a solid base,” said the chief executive of a mid-sized Sacco who cannot be named because of the sensitivity of the matter.

The Kenya Police Sacco was among the first to retain earnings taking Sh300 million last year that helped push its capital adequacy ratio to eight per cent from five per cent.

“In 2009 we were at negative two; we had to retain over Sh100 million each year without jeopardising dividend payout. We made good money last year and we retained over Sh300 million,” said Police Sacco CEO Solomon Atsiaya.

The Saccos have also been forced to source additional share capital from members to comply with core capital requirements set at 10 per cent of their total assets.

As at last year the industry average core capital was 8.6 per cent. Unlike in the banking sector where the core capital requirement is set at a flat figure of Sh1 billion the Sacco members’ input varies with the asset position each year.

Saccos have been forced to offer members incentives for raising the capital that cannot be withdrawn from the institution.

Police Sacco paid a dividend rate of 17 per cent for share capital compared to 9.5 per cent paid on deposits.

Nation Sacco paid a dividend of 18 per cent last year, helping it meet the individual members’ share capital level of two per cent of total assets. The high rate of return is meant to compensate for lack of capital gains and exits which other investment options enjoy.

To grow their share capital, Saccos have also been forced to cut their common bond so as to attract new members who also contribute to the share capital requirements. Some conducted members recruitment drives last year.

Last year the shareholder funds in Saccos grew by 16.7 per cent or Sh4.2 billion to Sh26.9 billion, faster than the assets which rose by 14.3 per cent to Sh201 billion.

Though the recruitment helped Saccos to raise their core capital it did not help them grow institutional capital which is proving to be the main headache.

Mr Ademba said 54 Saccos were yet to meet the Sh10 million minimum core capital requirement putting them at the risk of a shutdown upon expiry of the grace period. He said the 54 have an option of the members capitalising their dividends or merging.

“We understand the implication of closing some of the businesses which will affect more than 400,000 members. We are trying to see how we can help them but they must comply,” said Mr Ademba.

(READ: Sacco lending hits Sh180bn in 8 months on public confidence)

To run a front office service activity, a Sacco is required to have a basic capital of Sh10 million. Saccos have been lobbying through their representative bodies, Co-operative Alliance of Kenya and Kenya Union of Savings and Credit Co-operatives (Kuscco) to have the grace period extended beyond June next year.

“We will be seeking for an extension; we have been engaging the regulator but it has not borne fruit yet. We will have to come to an agreement as only a handful have complied,” said the chief executive of Kuscco, George Ototo.

An amendment can be made by the Cabinet secretary in charge of Industrialisation and Enterprise Development as they are spelt out in regulations.

The regulator said it was willing to ease the interpretation of some of the guidelines. It singled out land and buildings, non-core businesses from which Saccos are required to divest. He said these would be treated like in the banking sector where they are core assets.

Despite the pinch, Sacco executives supported the regulations noting that it would give them financial strength to introduce new products such as mortgage loans and investment in unquoted companies.

Improved liquidity ratios have helped Saccos cut their borrowing from commercial banks which ends up eating into their earnings.

Saccos borrow from the banks at prevailing market rates, presently 18 per cent, but have to lend to their members at the rate passed during the annual general meeting which is mostly 12 per cent.

Last year Saccos cut their external borrowing by Sh500 million, underlining improvement in the liquidity position. By end of last year, Saccos had loaned out Sh154 billion against savings of Sh146 billion, forcing them to seek external financing.

The regulations have forced the institutions to free cash from their investments such as land and buildings which were holding up huge sums, denying them cash to meet their members’ loan applications.