The recent turmoil affecting the Kenya Union of Savings and Credit Cooperatives (KUSCCO) has caused a significant upheaval in Kenya’s Sacco sector, revealing serious gaps in governance, regulatory oversight, and financial reporting. This scandal, which has put over 257 Saccos at risk of possible losses totaling more than Ksh 5.46 billion due to unauthorized withdrawals from February 2013 to April 2024, highlights the crucial importance of the International Financial Reporting Standard (IFRS) 9 for evaluating financial risks and provisioning.
Central to this crisis is Mhasibu Sacco, an organization of professionals mainly composed of accountants, facing potential losses surpassing Ksh 480 million. This piece provides a thorough analysis of the situation through the critical framework of IFRS 9, assessing its effects on Mhasibu Sacco and the wider professional and financial environment, especially considering the intervention by the Savings and Credit Regulatory Authority (SASRA).
IFRS 9: An In-Depth Look at Forward-Looking Credit Risk Evaluation
IFRS 9, the internationally acknowledged financial reporting standard for financial instruments, was established to correct the deficiencies of its predecessor, IAS 39, by adopting a more anticipatory approach to credit risk evaluation. The standard requires institutions to recognize expected credit losses (ECL) early on, ensuring that financial statements truthfully depict the actual economic condition regarding credit risk exposure.
The three critical elements of IFRS 9 relevant to the ongoing crisis are:
• Classification and Measurement: IFRS 9 requires the categorization of financial assets based on their business model and cash flow characteristics, which directly affects how losses are acknowledged. This detailed classification ensures a more accurate representation of the asset’s risk profile.
• Expected Credit Loss Model (ECL): Unlike the incurred loss model of IAS 39, IFRS 9’s ECL approach obligates institutions to proactively recognize impairments, even before actual defaults take place. This anticipatory methodology is intended to forecast potential losses and lessen their effects.
• Hedge Accounting: Although less significant within the Sacco sector, this aspect guarantees a solid alignment between risk management strategies and financial reporting, giving a clearer view of an institution’s hedging operations.
The core principle of IFRS 9, which emphasizes early recognition and provisioning for financial risks, should have acted as a strong defense against the KUSCCO crisis. However, the events that unfolded exhibit a striking failure in the effective implementation of this standard.
A Forensic Analysis of the KUSCCO Scandal: Uncovering the Layers of Mismanagement
The KUSCCO scandal revolves around the alleged mishandling of over Ksh 5.46 billion in Sacco deposits. Initially, KUSCCO was set up as an advocacy and training organization but gradually transitioned into a financial intermediary, amassing deposits from Saccos and lending to others. This evolution exposed the entity to a mix of vulnerabilities, including liquidity issues, weak risk management practices, and a significant lack of transparency.
Key financial risks that should have been thoroughly addressed under IFRS 9 include:
• Inadequate Credit Risk Assessment: Several Saccos entrusted funds to KUSCCO under the belief of its financial stability, failing to perform comprehensive due diligence. IFRS 9 requires a proactive approach, demanding regular evaluations of creditworthiness and potential default risks, which were evidently overlooked.
• Insufficient Provisioning for Expected Credit Losses: The staggering extent of financial exposure necessitated that Saccos recognize impairment provisions promptly. If Mhasibu Sacco had enforced rigorous IFRS 9 provisioning models, it could have spotted warning signs and adjusted its financial strategy accordingly.
• Poor Liquidity and Solvency Management: KUSCCO’s failure to fulfill withdrawal requests highlights significant mismanagement of deposits, possibly due to excessive lending or participation in high-risk financial activities without appropriate hedging. This inability to maintain sufficient liquidity reserves represents a serious violation of prudent financial management practices. These lapses in governance not only violate key principles of sound financial management but also reveal that the affected Saccos, including Mhasibu, have not fully adopted IFRS 9 in their financial decision-making strategies.
The Impact on Mhasibu Sacco: A Crisis of Professional Confidence and Financial Stability As a Sacco that primarily caters to accountants and financial professionals, Mhasibu’s substantial exposure to the KUSCCO scandal is particularly damaging. The financial community rightly anticipates a higher level of financial expertise, due diligence, and risk management from Mhasibu. Multiple critical consequences arise:
• Erosion of Member Trust: The cornerstone of any Sacco is the unwavering trust bestowed by its members. Mhasibu, being a Sacco for accountants, functions within a professional group that places a high value on financial prudence. The loss of KSh480 million, coupled with the absence of a clear risk mitigation strategy, raises serious concerns regarding governance and internal controls. This topic was prominently discussed during Mhasibu’s 36th Annual General Meeting on March 8, 2025, where members expressed their dissatisfaction regarding the board’s decision to invest such large sums in KUSCCO without a clearly defined risk assessment plan.
• Financial Health and Sustainability Risks: With a significant sum potentially lost, Mhasibu’s liquidity situation is compromised. This may lead to reduced member dividends, decreased loan issuance capacity, and a higher cost of borrowing, jeopardizing the Sacco’s long-term viability.
• Regulatory Scrutiny and Compliance Risks: Both SASRA and the Institute of Certified Public Accountants of Kenya (ICPAK) will likely examine Mhasibu’s compliance with IFRS 9 and various financial risk management regulations. A failure to demonstrate proactive strategies for risk mitigation could result in substantial reputational harm and possible sanctions.
• Lessons for the Professional Accounting Community: If a Sacco established and managed by finance professionals can become embroiled in such a scandal, it indicates a broader issue within Kenya’s financial sector, marked by complacency, excessive reliance on goodwill, and an inadequate integration of financial and good corporate governance standards.
SASRA’s Intervention: Balancing Systemic Stability and IFRS 9 Compliance Following the KUSCCO scandal, SASRA has recommended that the affected Saccos recognize the expected credit losses over a duration, rather than acknowledging the entire loss at once. Although this intervention appears to be reasonable, it raises important questions regarding compliance with IFRS 9.
• SASRA’s Rationale: SASRA’s primary concern is to avert a disastrous collapse of the Sacco financial system. Recognizing the full expected credit losses immediately could lead to capital adequacy problems, liquidity crises, and systemic risk.
• IFRS 9’s Mandate: IFRS 9 stipulates a forward-looking approach to credit loss recognition, necessitating institutions to acknowledge expected credit losses based on probabilities of default and loss given default, and to record those losses when anticipated.
• The Conflict: SASRA’s suggestion prioritizes systemic stability, while IFRS 9 focuses on transparent and precise financial reporting.
• A Balanced Approach: Saccos should fully disclose their exposure and the reasoning behind staggered impairment, establish effective risk management, and SASRA could permit a phased-in approach with stringent oversight.
A Masterstroke Path Forward: Rebuilding Through IFRS 9 and Sound Governance Despite the challenging situation, it offers a chance for Mhasibu Sacco and the entire Sacco sector to realign with the best practices in financial risk management. The following actions should be prioritized:
• Strengthening IFRS 9 Implementation: Mhasibu should improve its risk assessment models by utilizing more rigorous expected credit loss computations, considering macroeconomic factors and counterparty risks. Routine stress testing of financial exposure should be established.
• Diversification of Investment Strategies: Relying heavily on a single entity (KUSCCO) for deposit placements was a significant oversight. Mhasibu must expand its investments across a variety of financial instruments with diverse risk profiles.
• Enhanced Governance and Due Diligence: The Sacco must bolster its governance protocols and due diligence practices.The
Board and management should be held to higher fiduciary standards.
• Active Member Involvement:
Open communication is essential. Mhasibu should clearly share details about the losses, recovery strategies, and protective measures being taken.
• Legal and Regulatory Actions:
Mhasibu and other impacted Saccos should pursue legal options for recovering funds and collaborate with SASRA and ICPAK to advocate for enhanced regulatory frameworks.
Conclusion: The Intersection of Professional Duty and Financial Responsibility
The KUSCCO scandal serves as a pivotal moment for Kenya’s Sacco industry. IFRS 9 is vital for maintaining financial stability. Mhasibu Sacco now finds itself at a crucial juncture, necessitating a steadfast dedication to financial responsibility, compliance with IFRS 9, and a renewed emphasis on transparency and accountability.
By Andrew Osoro, CPA-K . CPA-K Andrew Osoro, is a Finance, Logistics, and Administrative Manager at School for Field Studies (SFS) Kenya.
