Turning Obstacles into Opportunities: A New SACCO Paradigm

Challenges and Solutions for SACCOs

Small and medium-sized Savings and Credit Cooperative Organizations (SACCOs) continue to face numerous challenges. As a result, the SACCO sub-sector is advocating for the establishment of SACCO Central, a secondary SACCO designed to provide a platform for shared services and a central liquidity facility through inter-SACCO borrowing. This initiative aims to strengthen small, regulated SACCO businesses, allowing them to achieve economies of scale and improve financial stability within the industry.

SACCO Central will also enhance risk management, keep pace with technological advancements, and provide access to national payment systems from a single entity. A total of 55 SACCOs have subscribed to SACCO Central’s initial capital contribution, which will be complemented by financial support from the government through the SAFER project. This initiative is industry-led, with the Sacco Societies Regulatory Authority (SASRA) coordinating the activities, as noted in the Kenya Financial Stability Report, 2023.

The report, published by the Financial Sector Regulators, highlights that regulated SACCOs, like other financial institutions, are exposed to various risks, including cybersecurity, credit, financial, market, and governance risks. As a response, SACCOs are developing and implementing strategies to mitigate these risks. During the review period, SASRA implemented several strategies to enhance the resilience and stability of the industry in light of emerging threats. These strategies included issuing circulars and guidelines, as well as capacity-building initiatives in collaboration with other government agencies.

Key risks within the industry, as outlined in the Kenya Financial Stability Report, 2023, include:

1. Cybersecurity risks: The financial services sector has become very competitive due to constant technological changes. To remain competitive, regulated SACCOs adopted digital financial service delivery channels and mobile banking services. To deliver these services effectively and efficiently, regulated SACCOs have partnered with and or contracted third-party information technology system vendors commonly referred to as integrators/FinTech. FinTech pose the highest cyber risks due to increased cyberattacks and data breaches leading to financial loss to the SACCOs.
2. Concentration risk: The sector is highly concentrated whereby 37 SACCOs whose total assets exceed KShs.10 billion and are classified under the tier 1 category account for 80% of the total assets in the regulated Sacco Industry. This category of regulated SACCOs has the financial and technical capability to better manage risks, market products, educate their members, and acquire appropriate technology and physical infrastructure to achieve business growth. However, vulnerabilities in this saccos can undermine confidence of the public in the SACCOs movement leading to withdrawal of deposit.

iii. Safety nets: To safeguard SACCO member deposits from cyber risks, SASRA issued a circular requiring Saccos to undertake thorough vetting when procuring services of FinTech and take insurance against the risks. Vendors are also expected to form an association to practice some level of self-regulation and organize a monthly regular forum for sharing experiences and trends of threats and devise strategies to mitigate the risks.

1. Un-Regulated Financial Cooperatives: The Authority currently regulates deposit-taking Saccos, specified non-withdrawable deposit-taking Saccos with deposit limits of Kshs.100million and above, leaving out those with deposits below KSh 100 million, Housing and Investment Cooperatives. This provides regulatory arbitrage opportunities which poses reputational risks in the industry. Unregulated financial cooperatives have close business associations with the regulated SACCOs either through subsidiary arrangements or investments, thus risking members’ funds when these entities are in financial distress.
2. Credit Risks: Regulated SACCOs had facilitated loans and advances amounting to KSh 759.0 billion in 2023. The NPLs to gross loans was 6.52 percent down from 8.28 percent in 2022. Some regulated SACCOs however had higher NPLs ratio above industry average, due to sectoral exposure.
3. Safety net: SASRA has asked SACCOs to adopt credit administration strategies including debt collection practices to reduce credit risk. Those serving salaried members have been advised to ensure choose Front Office (FOSA) as the salary pay point to reduce the risks of unremitted or delayed remittances. SASRA has also cautioned members of the public including regulated SACCOs to restrict their business to licensed and regulated entities. Additionally, regulated SACCOs have been restricted to limit their business to core activities to guarantee their safety and continued operations.