The cost of running deposit-taking saccos is set to go up significantly when new regulations come into effect this month, threatening the low interest rates regime that has for decades given the co-operative movement an edge over commercial banks in the lending market.
The regulations covering 220 deposit taking Saccos, also known as FOSAs, with an estimated membership of five million and assets worth Sh150 billion, demands that societies converting from the non-deposit taking to the deposit-taking platform invest in new banking halls and install sophisticated security equipment, including armed security personnel from the Administration Police and private security guards.
The new rules contained in the Sacco Societies Act to be enforced by the Sacco Societies Regulatory Authority (SASRA) will take effect before the end of the month when the Attorney-General publishes them in the Kenya Gazette.
Saccos have a four-year grace period to fully comply.
To ensure Saccos stay within their core business, investments in non-interest earning assets is 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.
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.
Under the new legal regime, Saccos will have to file monthly reports with the authority, indicating their adherence to prudent guidelines.
The regulations have strict corporate benchmarks that include the authority’s administrative sanctions such as prohibition of dividends, expansion, lending, investments or acquisition of property among others when inspections reveal financial mismanagement.
Every Sacco is expected to develop a code of conduct whose violation will result in a fine not exceeding Sh100,000 or imprisonment not exceeding one year or both.
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.
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.
The development could trigger a wave of innovation in savings and lending products as both Saccos and commercial banks attack the same market, but with Saccos seeking to maintain their traditional comparative low interest rate edge.
Low operating costs have for years enabled Saccos to offer low interest rate loans, a factor that has been partly responsible for their exponential growth.
Saccos have been growing at the rate of 25 per cent per year for the last six years, according to data from the Ministry of Cooperatives Development and Marketing.
Early this year, for instance, when banks priced interest on loans at 18 per cent, Saccos charged interest at between 10-12 per cent locking out a substantial borrowing pool from the banks.
This is about to change as the Saccos adjust their operations to comply with new regulations such as the one requiring them to maintain minimum capital of Sh10 million or eight per cent of their total liquid assets.
Sacco managers told Business Daily that they will require members to increase their contributions to raise this amount.
Compliance with this rules means Saccos will be left with less money for lending, and ultimately leave a negative impact on their income.
“Saccos must now start thinking business not just the welfare of members,” said Peter Njuguna, the Chief Supervisory Manager at SASRA. Sacco managers said the challenge is to ensure they bring the cost of operations to a minimum within the four years.
Stima Sacco general manager James Mbui said innovation will drive competitiveness of Saccos because of direct competition from banks when regulations take effect.
“This change brings the professionalism required to make Saccos better financial institutions,” he said.
He said Saccos must innovate savings and lending products that will make their members put in more of their money into them, instead of taking that money to banks and other savings ventures.
Nation Staff Sacco manager, Jacob Kimathi, said competition from commercial banks and the financial requirements of the new regulations could see closure or merger of some Saccos if they do not innovate and cut operating costs.
“The rules are very expensive,” he said. “The era when Saccos provided good dividends may be coming to an end.”
After the rules are gazetted, rebates will no longer be earned on the basis of member savings but on the basis of shares of capital a member has paid for.
Dividends will also not be paid in cases where a Sacco has negative capital, as is the case with banks and listed companies.
Another of the new regulations requires Saccos to charge two per cent above interest rate on loans borrowed for on lending to members meaning that in situations where Saccos have to borrow money for onward lending, they will be under pressure to look for the money whose cost will not result in uncompetitive interest rates.
“This rule assumes that the two per cent margin will take care of all operation costs associated with that loan, which is highly unlikely,” said Mr Kimathi.
He said only very few Saccos in Kenya do not borrow and this will put pressure for Saccos that cannot negotiate attractive interest rates.
According to Mr Njuguna, Saccos will be required to invest in research and development of new products that can offer competition over those offered by the banks.
“They will still need to maintain low interest rates and they can do it,” he said.
One of the options seen as best for Saccos to remain competitive is to invest in information management system that will help reduce their costs of operations which is a major higher interest rates.
For the first time, all Saccos are required to be covered up to Sh100,000 net of any liabilities per depositor to ensure that even in case of collapse, the members will be compensated up to this amount.
The new development is similar to that of deposit protection fund for banks and trusts for life insurance policies.
SASRA will establish the Deposit Guarantee Fund and Saccos will be required to pay annual premium of Sh50,000 or 0.05 per cent of total savings and deposits, whichever is higher.
Analysts said deposit-taking Saccos are required to balance between giving their members high dividends and using part of their profits to improve the welfare of their employees who are now required to have higher financial management skills under the new regulation regime.
Going forward, it means the same factors that have been influencing the level of interest rate for banks are the same that will influence those for the Saccos.
A recent survey by the Monetary Policy Committee of the Central Bank found that the cost of funds, credit risk, administrative costs and Treasury bill rate remain the key determinants of interest rates for banks.
Other factors include competition, interest rate risk, economic growth, liquidity risk, inflation and country risk.
Some of the new regulations that will increase the cost of operations for Sacco include a requirement that Saccos appoint a chief executive officer who will be on a monthly salary unlike today when Saccos are managed by a mid-level manager overseen by elected officials.
The CEO, to be appointed by the board members will be required to have skills necessary for running financial institutions, most probably with post graduate education on financial issues.
Saccos are also required to have an internal auditor in addition to an external one, unlike today when most Saccos opt to retain an external auditor.
This will come at an additional cost.
The Saccos are also supposed to establish an information preservation policy that will involve copying critical information to a memory device and store in fireproof safe on daily basis and store weekly backups off-site.
This will mean outsourcing of archiving services to store off-site vital records such as titles for property, to securities and insurance policies