Not your average board meeting

Kenyan savers hit by stumbling Sacco sector

By Morris Kiruga, in Nairobi

Posted on March 18, 2019 15:54

Cooperatives offer an alternative to mainstream banks and microfinance institutions, taking savings and offering credit facilities to members. But when they unravel, it is millions of the poorest Kenyans who are hit worst.

Police, tear gas and roadblocks across the Kiambu Road in Nairobi greeted investors queuing to get their money back from a savings organisation known as a Sacco – a Savings and Credit Cooperative Organisation – on 18 March.

What is going on?

Kenya has one of the most vibrant cooperative sectors in Africa, with over 15,000 registered societies and unions, only a small number of which are registered deposit-taking societies.

But several ongoing fraud investigations involving Saccos have revived calls for more stringent prudential rules for such societies.

Saccos remain a big deal

The Sacco sector embraces more than 10 million savers and collectively controls savings of KSh501bn and an asset base of KSh694bn. It employs half a million people and, in 2017, contributed 5.72% of Kenya’s nominal GDP.

  • Saccos offer better returns on savings than mainstream banks, as well as greater access to credit.
  • The sector has been one of the most driven players in the real-estate market, filling a critical housing gap by funding land purchases and construction of residential houses. A survey by the Sacco Societies Regulatory Authority (SASRA), a regulatory body in charge of deposit-taking cooperatives, found that 36% of outstanding credit in 2016 was for land and housing.

And, importantly, they are helping to formalise the economy: A government directive in 2010 stating that all public transportation must be part of a Sacco or a management company also helped regulate Kenya’s chaotic transport sector. Credit financing to the transport sector is still relatively small compared to real-estate and trade.

But the looser prudential guidelines that make it such a useful bridge between the formal and informal sectors can cut both ways. Most of the sector is not properly regulated and investments are not properly vetted. In 2015, a leading cooperative, Mwalimu National Sacco, spent $20.4m for 75% of Equatorial Commercial Bank, a struggling tier III lender.

  • The investment’s book value is now worth just a fifth of that, with claims that the society did not do due diligence before making the purchase.
  • The society is now struggling to service a $5m loan from a commercial bank that it used to finance a housing project.
  • The rapid loss in value has dampened enthusiasm for other similar purchases, such as a planned $28m bid for government-owned Consolidated Bank by a 14-county economic bloc.

Last month, the entire board of a power-industry investment cooperative was ousted after an audit revealed losses of over KSh500m in suspected fraudulent dealings, bad investments and creative accounting.

  • Other than internal fraud, low cybersecurity measures have increased the number of cyber-related fraud losses involving such societies.
  • A 2018 survey released by Nairobi-based cybersecurity firm Serianu Ltd showed that 97% of such societies spend less than $10,000 a year on cybersecurity, and have severe skills shortages.

Bleak outlook?

With a lack of access to the national financial structures, and a doubling of tax on dividends in 2018, things are looking tough for Saccos – and those relying on them.

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