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Why Sh1trn Kenya Saccos are a ticking time bomb - VIDEO

An increasing number of Kenyan Saccos are reeling under the weight of mismanagement, fraud and bad loans that have put the Sh1 trillion sector on a path of instability that if not reversed could have damaging contagion on the entire economy.

At stake are hundreds of billions of shillings of members’ savings that have either been lost or are at risk of being lost as more and more cases of financially troubled Savings and Credit Co-operative Societies (Saccos) come to the fore.

Just three Saccos; Mwalimu, Ekeza and Stima Investment Co-operative, are together estimated to have lost their members upwards of Sh3.6 billion through mismanagement or outright fraud by officials and boards.

With the situation seemingly getting out of hand, the State Department of Co-operatives has called in the Ethics and Anti-Corruption Commission (EACC) to help in investigating and prosecuting fraudulent officials to protect the savings of an estimated 14 million Kenyans who are Sacco members.

The Commissioner of Co-operatives, Mary Mungai, told the Business Daily that weak governance and outright fraud were the biggest challenge facing the co-operative movement.

The State Department of Co-operatives has formed a special unit, the Ethics Commission for Co-operative Societies (ECCOS), which is involved in tracking fraud in Saccos. Eccos has signed a memorandum of understanding with the EACC to curb fraud in Saccos.

“We want to bring all Saccos under a prudential framework, strengthen the reporting line and ensure sustainability of the sector is credible and guaranteed,” said Ms Mungai. Kenya’s co-operative movement is rated among the best in Africa with over 22,000 registered co-operative societies.

The Saccos employ more than 500,000 Kenyans directly and another 1.5 million indirectly, according to official records.

Sacco savings and deposits are estimated at over Sh732 billion, equivalent to about 30 percent of national savings. The movement had an asset base of over Sh1 trillion and a loan portfolio exceeding Sh700 billion as at the end of 2017.

The government formed the Saccos Sector Regulatory Authority (Sasra) to police deposit-taking co-operatives but this, according to Ms Mungai, has not deterred fraud and mismanagement. About 174 Saccos holding Sh305.3 billion deposits from 3.6 million members are under Sasra’s regulation.

Ms Mungai said her office is working with Sasra and the EACC to address challenges in the sector. Another emerging problem in the sector is the issue of fraudulent people setting up Saccos as personal businesses.

Co-operative societies are currently classified as private entities, which limits the Department of Co-operatives’ power to enforce compliance in governance, procurement and disposal of assets. Sasra chairman Sammy Ruto in the sector report for 2017 identified the need for a deposit insurance facility to spur confidence in the deposit-taking Saccos to compensate members in the event of failures of the institutions.

The Commissioner of Co-operatives last month stopped televangelist-turned-politician David Kariuki Ngare from selling hotels and land belonging to his real estate company to protect Ekeza Sacco members’ savings.

He had planned to dispose of the assets on February 14 through public auction. He had claimed that he would use the money to repay members their claims in excess of Sh1 billion. The televangelist is accused of running the Sacco single-handedly, more of like a personal business, hence putting members’ interests at risk. The Sacco is already under scrutiny by a team appointed by the Commissioner of Cooperatives in December.

Through a Gazette notice published on March 23, 2018, the commissioner cancelled the registration of the Sacco, saying it had failed to meet its objectives. The move prompted Ekeza to move to court.

Ekeza then argued that the move was in breach of rules of natural justice and motivated by malice, and that it jeopardised the business which had collected deposits from some 50,000 members.

But last May, both Ekeza and the commissioner reached an out-of-court deal and the suit was withdrawn.

The issue has now re-emerged on an even bigger scale.

It’s a scandal that has attracted the attention of other arms of government with the Interior Secretary saying action will be taken against the officials of Ekeza once investigations by the Director of Criminal Investigations are completed.

Other Saccos are also facing different forms of fraud. Stima Investment Co-operative Sacco is facing sanctions after a forensic audit revealed massive fraud at the society, which has exposed members to losses exceeding half-a-billion shillings.

The Commissioner of Co-operatives recently removed from office the entire board of Stima Investment Sacco.

Documents filed in court challenging the ouster of the officials reveal massive fraud at the institution.

The audit by financial consulting firm Deloitte reveals how Stima Investment lost money through multiple irregular land purchases across the country in which officials bought occupied land without conducting any due diligence or site visits, failed to settle transactions after putting down initial deposits and in other cases collected funds from members even before the preliminary purchase agreements were signed.

The audit revealed that the Sacco acquired properties valued at over half a billion but its facing losses ranging from contested ownership, lack of approvals from government authorities and failing to pay for outstanding amount after paying for initial deposits, leading to forfeiture of advance payments.

The Sacco is also accused of falsifying the audit report of 2017 financial report and is set to review it.

Ms Mungai says her office has seconded more officials to the work of looking at the Sacco reports to weed out the falsification of financial reports.

“We have sent back many financial reports,” she said without giving numbers, but adding that her office is working on modalities to blacklist the external auditors who conspire in falsifying the books.

Mwalimu National Sacco has accumulated losses of more than Sh2 billion from its 2015 acquisition of a majority stake in Equatorial Commercial Bank, in which business tycoon and founder Naushad Merali had a controlling interest.

The Sacco, owned by teachers, invested a total of Sh2.4 billion to take a 75 percent stake in the lender, which later rebranded to Spire Bank.

The buyout of the bank raised eyebrows when it became public, with various government agencies halting the deal but later approving it. It emerged that Mwalimu had agreed to make the acquisition without conducting due diligence on the bank.

The giant Harambee Sacco, Kenya’s third-largest deposit-taking savings society, last year reported Sh145 million loss.

Harambee last year was also hit with leadership wrangles with some suspended members moving to the Cooperative Tribunal accusing directors of planning to block their participation in board elections to challenge the incumbents. The nine suspended delegates sought a reversal of the suspension on grounds that it was meant to stop them from vying for elective posts at the annual general meeting. The society’s management, however, denied the allegations.

The government in 2018 revoked the licence of Moi University Sacco and placed it under liquidation.

Commissioner for co-operative development Mary Mungai cancelled the registration of the deposit-taking sacco and appointed two liquidators to take custody of the troubled sacco for a year.

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