Savings and credit co-operatives (saccos) have come under increasing public scrutiny of late, mostly on charges of loss of member funds. Let’s first understand saccos; and to do that, we have to start with the co-operative movement.
Co-operatives are defined as autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically-controlled enterprise.
The evolution of forms of co-operatives has been primarily driven by the objects and purposes behind the incorporation. As a matter of practice over the years, several forms have emerged: marketing and/or consumer, production, housing, transport and savings and credit co-operative enterprises. In this instalment, I focus on the latter (saccos).
In Kenya, saccos are divided into two segments: deposit-taking and non-deposit taking. Both segments mobilise savings deposits from members, which are collateralised for purposes of advancing loans to members. Thus, both have components of member deposit(s) that are non-withdrawable (also referred to as back-office savings activities, or BOSA, in industry jargon).
However, deposit-taking saccos are allowed to offer withdrawable savings account (banking) services, through front office savings activities (FOSA).
Deposit-taking saccos are regulated by the Sacco Societies Regulatory Authority (SASRA), while the non-deposit taking segment falls under the purview of the Department of Co-operatives Development. This distinction is probably only unique to Kenya.
Globally, all saccos (or credit unions as they are referred to elsewhere) are deemed to be deposit-taking and are licensed and regulated as such. SASRA draws its powers from the Sacco Societies Act, 2008 and the accompanying regulations. On the back of the public scrutiny, I have spent some time studying the regulations and, in my assessment, the prudential framework requires some tightening.
Broadly, saccos are grappling with two identifiable constraints: (i) weak corporate governance and (ii) liquidity issues. However, sacco regulations are not very diligent in addressing these two issues.
For instance, on corporate governance, regulations ought to spell out mandatory board committees such as audit, credit and risk to oversee and provide accountability to critical functions and also to allow deeper focus in specific areas. For me, these are mandatory for any business that creates value from the liability side of its balance sheet.
Conflicts of interest
Additionally, a code of conduct ought to be outlined ostensibly to address such key issues as conflicts of interest. Second, saccos’ investments in stocks of other companies, whether financial or non-financial in nature, should be restricted (if not outlawed); for two reasons: it opens an avenue for peripheral engagement(s) which can potentially cannibalise member funds; in addition, it exposes a sacco to market risks, whose crystallisation it may not be able to douse.
On the liquidity front, there are other critical reforms required. First, I don’t think saccos should lend beyond deposits. For instance, industry loan-to-deposit ratio is in excess of 100 per cent, and this has the ability to create funding constraints especially in scenarios where loan delinquencies are elevated.
In the same vein, saccos’ investments in fixed assets, especially land and buildings, should also be restricted, and for the simple reason that fixed assets are illiquid.
Second, the current liquidity measurement regime for saccos is too simplistic and has the potential to overstate a sacco’s actual liquidity position. Instead, a framework incorporating the ability of a sacco to fully cover its financial liabilities as they fall due should be instituted.
Finally, a secured intersacco wholesale cash market, whether on an overnight basis or otherwise, can help redistribute liquidity across the system. Essentially, saccos should be able to lend to each other on a wholesale basis, and it is imperative that this initiative is incorporated in SASRA’s strategic plan(s).