Savings and Credit Co-operative Societies (SACCOs) are facing a critical identity crisis as a “diluted brand” threatens to undermine the sector’s Sh1 trillion foundation. According to a report by a Committee of Experts on the transformation of the system, the ease of registration and a lack of operational consistency have allowed entities with poor governance to enter the market, blurring the lines between professional financial institutions and loosely regulated entities.
The report warns that the term “SACCO” has become overly broad, encompassing everything from world-class financial institutions to transport co-operatives and unregulated groups. To fix this, experts are recommending a strategic shift: rebranding regulated SACCOs as “Credit Unions” to align with international standards and restore public confidence.
With over 7.4 million members and a 30% contribution to Kenya’s GDP, SACCOs are the backbone of the nation’s financial inclusion agenda. The three largest SACCOs in the country are now larger than several commercial banks regulated by the Central Bank of Kenya. However, this growth has come with significant “divergences” from global best practices.
The Committee highlighted that the current brand dilution makes it difficult for members to distinguish between institutions that are stable and those that are at risk. A rebrand to “Credit Unions,” the report suggests, would be a “necessary first step” to identify institutions that are part of the modernizing sector, granting them access to a Deposit Guarantee Fund (DGF), a Central Liquidity Fund, and shared services.
One of the most damning observations in the report is the trend of SACCOs borrowing funds to pay member dividends. This practice, used to project an image of profitability, was flagged as a primary reason for financial distress in many institutions.
“Globally, dividends are paid from retained earnings,” the report notes, urging an immediate review of this practice. “This is unsustainable and has been proven to be one of the main reasons SACCOs are in financial difficulties or failing.”
Insider Lending
The report also took aim at internal governance, specifically “insider lending” to board members and senior officials. This conflict of interest exposes SACCOs to massive reputational risk. To counter this, the Committee recommends a Mandatory Code of Corporate Governance and a shift away from “informal guarantees” toward risk-based lending and credit scoring.
The report suggests a rethink of board eligibility. Currently, many SACCOs require high levels of share capital to join the board, which the experts argue “concentrates power among wealthier members.” Instead, the report calls for a “fit and proper” criteria based on education, competency, and professional development.
In a move that may spark debate across the sector, the Committee recommended a review of the “locked-in” nature of member share capital. Currently, members often cannot access their share capital even during emergencies or retirement.
The report argues that heavy reliance on member shares to meet core capital requirements creates liquidity constraints. It suggests that Kenya must transition to a model where capital is built through retained earnings and reserves, rather than “contradicting the principle of voluntary participation” by trapping member funds.
