The World Bank will next year finance a shift in the way Savings and Credit Societies are supervised to bring them in line with commercial banks, investment banks and insurance companies in terms of governance. The risk based supervision system rates a company’s strength on its obligations in the market at regular intervals and has been adopted by other financial regulators as a pro-active way of preventing loss of public funds when firms go under.
It is a shift from compliance based reporting where the stability of companies is assessed by whether they are within the operational guidelines set by the regulator. “Saccos are now controlling Sh180 billion in savings and Sh200 billion in asset base and they must be regulated to ensure the safety of this money,” said Sacco Societies Regulatory Authority (Sasra) chief executive officer Carilus Ademba.
He said the system will enable the regulator to know the liquidity of specific deposit taking Saccos, known by acronym Fosas, every week and know their capitalisation requirements every month. “The new system is similar to what has been used by the Central Bank for a long time and will allow instant access to this information. It is a paradigm shift and is part of efforts to improve financial sector regulation around the world,” said Mr Ademba.
The system uses a web-based software where Fosas will be required to upload specific details in intervals defined by Sasra regulations. This means that Fosas must be automated and use software that meets regulatory requirements of Sasra.
The regulator said it did not expect implementation of the new supervision model to be too costly to Fosas because most of them will only be required to do a systems upgrade rather than install new software all together.
“We have not recommended specific software to any Fosa as long as what they use conforms to our requirements. The web system that they will use will be universal,” said Peter Njuguna, head of Sacco Supervision at Sasra.
He said Sasra had opted for a web-based system instead of directly linking up to the Fosas because the web system is secure. Direct links can be hacked into and client data stolen or money diverted. A March study by the Kenya Financial Sector Deepening (FSD) programme evaluated six solutions that Saccos can use for full automation.
The evaluated firms included Craft Silicon whose solution for urban Saccos cost approximately Sh12.2 million, Amtech (Sh6.4 million), Fintech (Sh15.4 million) Fern, Neptune (Sh24-28 million) and Temenos (Sh44.9 million).
Prices for solutions for rural Saccos were relatively low. However, system pricing is based on case-by-case needs of Saccos. Earlier, Mr Ademba said that Fosas with weaker systems will bear the highest costs. “The technology in some Fosas is wanting. You can withdraw money from one branch yet the next branch may not know about it.” There are an estimated 230 Fosas out of an estimated 5,000 Saccos that offer only credit facilities. Kenya controls 70 per cent of total Sacco portfolio in Africa and is required by the World Council of Credit Unions (WOCCU) to be at the forefront of improving supervision of the sector to safeguard assets.
The supervision model used in Kenya is expected to be replicated in other African countries, said Mr Ademba.
The risk-based supervision is expected to facilitate integration of Saccos into the formal financial sector whose regulation is stringent. Banks will, for example, be more inclined to partner in agency banking with institutions that already undergo risk-based supervision.
It is also expected to improve confidence in the leadership and management of Saccos and encourage fair competition by eliminating unethical practices. It will also open Saccos to partner with the government in distribution of development funds like the Youth and Women development funds.