Since coming to office, the Ministry of Co-operatives and MSMEs Development Simon Chelugui has encouraged Saccos to end competition on highest dividend payout, but rather lower interest rates on loans.
He scrapped the trophy for highest dividends that Saccos used to receive during Ushirika Day celebrations and proposed an award for Saccos with lower interest on loans
The CS stressed that Saccos should strive to offer low-interest rates on loans to members instead of pushing for high dividends. Mr Chelugui said the competition for high dividends is how pyramid schemes operate.
“The predatory lending approach should be discouraged. There was an award, a trophy given to Saccos for high dividends but I want to see a Sacco that charges the lowest interest on loans to members because if we continue with this competition, you shall start going to borrow money to lend members and to make them happy,” said Chelugui.
The Ministry of Co-operatives and MSMEs Development has been pushing financial co-operatives to lower their lending rates to single digits to make their products and services affordable to members. This aims at eradicating poverty among those at the low end of the financial pyramid.
“We as the Ministry are pushing for a single-digit borrowing rate for all DT Saccos in Kenya. This is because Saccos continue to mediate between savings and investments,” said Mr Chelugui.
The Commissioner for Co-operatives Development, David Obonyo, has cautioned Sacco directors against giving in to members’ demands for high dividends and interest rates on deposits, even when a Sacco is running at a loss.
“The idea behind forming a savings and credit co-operative society is to enable members to save and access affordable credit facilities. We do not form Saccos to get dividends and interest on deposits. So, members of Saccos should desist from pushing their directors to pay higher dividends even when Sacco does not have any surpluses. We have cases of loss-making Saccos that are paying double-digit dividends and interest on deposits. As a result, most of these Saccos will not be able to give loans to members in the coming years, “said Obonyo.
He suggested that Saccos should aim to pay not more than 5% dividend on share capital and below 1% interest on deposits so that it can have more funds to lend out to members as loans, as this is the essence of forming a Sacco.
He wondered how Saccos, with expenses running at more than 40%, could still declare huge dividends and rebates.
“While expenses for profitable Sacco should be below 25%, we have cases of those Saccos with expenses of 40%, declaring huge dividends of up to 12%; the math does not make sense. Many Sacco Directors borrow to pay dividends at the expense of loan disbursements. Let us re-engineer the whole business processes and use technology to bring down business costs,” Obonyo told Sacco leaders. He was speaking during the 9th Annual Sacco Leaders Convention in Mombasa.
Commissioner Obonyo warned Sacco leaders at the convention that the Sacco sub-sector, comprised of more than 360 licensed players in the deposit-taking business, remains fiercely competitive.
“Saccos must, therefore, be more creative and innovative in designing new financial products and services that give them a comparative advantage over other players in the credit space, including banks,” said Obonyo.
Nyati Sacco, one of the highest dividend payers in the country, is considering reducing the rate of dividends on shares. The Sacco Chairman, Mr Charles Mbuvi, has stated that the high dividend rate is not sustainable since no Sacco investment has earned interest above 21%, which is the rate at which the Society has been paying dividends to its members.
“The regulator has advised the Sacco that the current dividend rate is unsustainable. The Sacco will review the rate of dividends payable in the future. We will advise on the rate in the next financial year in line with SASRA recommendations,” said Mr. Mbuvi.
SASRA Chairman Jack Raguma added, “Banks are happy to display that CBK regulates them. Saccos do not recognize SASRA in the same manner. We know that there are bad apples out there. You have a responsibility to get rid of these bad apples, and you have a role to play. We want to ensure that there is a partnership and tools to anchor the growth and stability of Saccos that can assist them in selling their financial products and growing.”
Available figures indicate that 176 DT Saccos have been licensed to undertake that business by SASRA and 183 Sacco licensed to undertake non-withdrawable deposit-taking business.
Statistics also show that the Sacco sub-sector commands a balance sheet size above a trillion with over 6.5 million members and headroom for further growth.
“Rated no 1 in Africa, SASRA has no choice but to work with KUSCCO to support the industry, formulate policy initiatives, and address any legal gaps,” said Ranguma.
