Kenyan savers hit by stumbling Sacco sector

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.

• One of the most promising, Ekeza Sacco, is currently under investigation for fraudulent transfers of over $10m to its founder’s personal accounts and investments => hence this morning’s pandemonium

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.