BY SPECIAL CORRESPONDENT
Savings And Credit Co-operatives (Saccos) are global financial phenomena that play a key role in the financial sector of many economies globally. The financial sector is made up of commercial banks, non-bank financial institutions, mortgage companies, foreign exchange bureaus, development finance institutions, pension schemes, insurance companies, private equity firms, Saccos, among others. Saccos were invented in South Germany in 1846 at the time of agricultural crisis in Europe. Freidrich W. Reifeisen and Herman Schultze-Delitsche are considered as the founding fathers of the global Sacco movement.
It is well understood that Canada, United States, Australia and Ireland have the most established co-operative movements in the world. In some regions of Canada, U.S, Australia and Ireland, Saccos are much larger than commercial banks, which goes to show how Saccos have evolved into a formidable player in the financial sector of most economies in the world. According to the 2014 Statistical Report from the World Council of Credit Unions, there are more than 57,000 credit unions in 105 countries in 6 continents serving over 217 million people with savings and shares amounting to $1.5 trillion, loans amounting to $1.2 trillion, $181 billion in reserves and $1.8 trillion in assets. With over 217 million co-operators, one cannot underestimate the role and impact of the co-operative movement in the world.
World over, the co-operative movement is guided by the following core principles and values; voluntary and open membership, democratic member control, economic participation by members, autonomy and independence, education, training and information, cooperation among co-operatives and concern for the community. All these principles are meant to focus on member needs since co-operatives work for the sustainable development of communities through member friendly development initiatives. All over the world, Saccos get their strength from members. If members are weak, Saccos cannot be strong. Today, Saccos play a significant role in fighting poverty and creation of employment opportunities.
Kenya’s sub-sector is the largest in Africa with over 19,600 co-operative societies and over 14 million members representing 33% of the total population of the country. Of the 19,600 registered co-operative societies, 10,000 of these are Savings and Credit Co-operatives whose core business is to mobilize members to save and advance them low-interest rate credit based on their savings – usually three times their savings for normal loans charged at 1% interest rate per month. The rest are agricultural marketing, housing, handicraft and ranching co-operatives.
While Kenya has over 14 million co-operators, it is estimated that three quarters of the Kenyan population nearing 30 million depend on the activities of Saccos either directly or indirectly for a living. In fighting unemployment especially among the youths in Kenya, Saccos have played a key role in employing over 500,000 people directly. Saccos account for 80% of the total accumulated savings while Kenya’s sub-sector is the largest in Africa, accounting for 62, 65 and 63% of the continent’s savings, loan and assets respectively.
In the wake of the so-called “banking crisis” after three banks were placed under Receivership, Saccos have struggled to fill this void. They have failed to respond quickly to the needs of those customers who have lately been ambivalent on which direction to take to satisfy their financial needs.
The successful story of Kenya’s Sacco sub-sector has been told enough times, locally and internationally. Little or no effort has been directed towards making the co-operative movement a force to reckon with especially in a financial sector where banks continue to make supernormal profits. Just last year, banks were charging interest rates of between 25 to 35% on loans while Saccos were charging a quarter of that interest yet there was no significant interbank-sacco shift. You would expect the demand for loans in Saccos to grow exponentially but on the contrary, banks still remained unshaken in terms of mobilizing savings and advancing credit to their respective clients.
Saccos continued to perform dismally even during this ‘favourable’ period. Looking at the financial trends such as loan uptake and deposits mobilization during the interest rate spike period by commercial banks last year, it would be rational as always to imagine that consumers will demand low-priced credit from Saccos than banks. That was not the case and may be, it will never be the case.
Infact, evidence from financial statements of banks and Saccos performance for the 2015 financial year clearly shows spurious correlation. This is the reason why most economic analysts have come to a conclusion that unless drastic measures are taken to monitor and supervise Saccos effectively, signs are pointing to an imminent crisis that could lead to the collapse of many co-operative societies, one reason being the multiple weaknesses in the financial statements of Saccos that are too glaring to ignore. If you thought that the recent fall of the three banks was largely due to mismanagement, falsifying of books and insider borrowing then you just don’t know how deep these rot runs within Saccos.
Saccos Managements draw huge non-taxed allowances opaquely and the insider loans surpass the share deposits for the risky accounts (those held by management) leaving the Saccos heavily exposed financially. The fears are aggravated by the lack of effective supervision by the department of co-operatives at the Ministry of Industrialization and Enterprise Development, which regulates the Back Office Services Activity (BOSA) and the inertia at the Sacco Regulatory Authority (SASRA), which regulates the Front Office Services Activity (FOSA). Unless the government steps in sooner, rather than later, to reinforce its supreme regulatory role in the financial sector, the Saccos sub-sector will slowly but surely edge towards the cliff in readiness for a grand fall. The consequences are too dire to contemplate. Why?
One, because Saccos control over Sh500 billion in form of assets and savings in the economy and two, of the total savings mobilised by Saccos in Africa and loans advanced, the Kenyan economy contributes up to 62% of the savings and 65% of the total Sacco loans making it the most influential Sacco movement in Africa. Three, about 63% of the Kenyan population depends on the co-operative related activities, directly and/or indirectly, for their livelihoods. Four, the Sacco sub-sector has mobilized over Sh200 billion in savings, which is over 30% of our national savings. In terms of Gross Domestic Product (GDP), the Sacco sub-sector controls 30% of Kenya’s GDP. With Kenya’s GDP estimated at $70 billion, it implies that the sub-sector controls around $21 billion of the country’s GDP. Five, Kenya’s Saccos account for 70% of Africa’s Saccos pie leaving only 30% in the hands of the remaining 53 countries, this position must be safeguarded at all costs since it is a great source of pride to our nation’s financial sector and six, because Kenya sits in the group of 10 (G10) largest co-operative movements member countries in the world, a prestigious fete to our nation too.
So what really ails Saccos in Kenya?
The biggest of them all is the falsification of financial statements – ‘cooking of books of accounts’. It is disturbing that in this day and age where accountability, transparency and good governance is the hallmark of corporate governance, Saccos continue to window dress their books in what I would call a race to declare pleasant growth in profitability to their members. This declaration of non-existent profits is meant to hoodwink members that the Sacco is well managed and consequently promise them hefty returns inform of dividends and interest on their shares and deposits respectively. It is baffling to see qualified accountants serving in senior management of these Saccos hoodwinking members about this illusory growth. The greatest tragedy of all is that, Saccos engage in ‘overvaluation’ of their assets primarily land, building, office equipment, furniture and fittings in order to have a glossy balance sheet that can enable them access credit facilities from other financial institutions such as banks which paints a completely different picture of true ‘state of affairs’ of their books of accounts.
Another problem bedeviling Saccos is the issue of corrupt officers in the management of Saccos and at the regulatory level. The blatant looting in Saccos and the lack of teeth to bite by the regulatory authorities is a major challenge. Worse still, whistle blowers for such ills in the Saccos management are either sacked or ejected from the boards. So the language remains you either “join us or we throw you out”. Where a neutral arbiter from the regulatory bodies is brought to investigate, it remains investigation till infinity because their interests are well covered. Over the last couple of months, several Saccos have either collapsed, have been placed under statutory management or are limping due to liquidity problems or outright mismanagement by those entrusted to oversee their growth. There are also a number of Saccos under receivership and awaiting liquidation while others are under investigation. Interestingly, none of those individuals or committee members found culpable or implicated in the looting of members’ funds or running down the affected Saccos have been arraigned in court or even prosecuted.
Gender imbalance in the management ranks at both board and secretariat level has been a major impediment for the growth of Saccos. Women are known to be good leaders and managers who lead by example and through honest practices with an exception of few who sometimes connive with male colleagues to cover up for their weaknesses and ills within the Saccos. There is a great feeling that the absence of women in top leadership of Saccos – at both management and secretariat levels has left men to sit at the apex of most Saccos thereby opening a floodgate of theft of members’ hard-earned funds. More than half a decade since we ushered in a progressive Constitution, the rise of women within the top leadership of Saccos still remains a mirage. Forget the imagination that women need to be at the helm of Saccos, matters are made worse by the fact that there is neither debate nor discussion geared towards realizing the two third gender rule that is clearly spelt out in the Constitution. Even though research shows that companies with a high proportion of women board members score higher than their peers in financial performance, innovation and going concern, Saccos still remain rigid to this idea hence curtailing the real growth of their top and bottom lines.
Inadequate financing and lack of significant core capital compared to their peers in the financial sector has also been a great drawback in propelling Saccos to realize full growth potential. It is worth noting that out of the more than 10,000 registered Saccos, few have a balance sheet value of Sh1 billion and above. This certainly works against Saccos’ ability to create credit for their members. Most Saccos are grappling with liquidity problems by default or design. What this means is that Saccos are forced to borrow money at market rates from banks at high interest rates and lend the same to members at low interest rate, net effect is a loss since Saccos pay high rates on borrowed funds and earn less income on the money they lend out. Furthermore, most Saccos abuse their borrowing powers approved by members at the AGMs to engage in non-core business in clear contravention of the Co-operatives Act. The reason being that it is easier to collude with vendors of non-core business services such as land sellers to reap off Saccos’ funds.
Another gaping hole for siphoning Saccos’ funds is by acquisition of assets and procuring of services. Ministry officials are sometimes duped by Sacco management to convince members at the AGMs why upping borrowing powers is good for Saccos without proper briefing. Ironically, some Saccos actually borrow huge amounts of money for non-core business, fail to declare this information at the AGMs and eventually misappropriate or embezzle these funds.