The presence of many Saccos struggling to comply with the Sacco Societies Regulatory Authority (SASRA) prudential guidelines and meet members’ expectations for loans, deposits, withdrawals, and interest returns has led to the Authority developing amalgamation and merger guidelines for the sub-sector.
SASRA also noted that many financially distressed Saccos continue to deteriorate despite being given time to turn things around. Thus, to prevent them from facing delicensing or liquidation, SASRA suggests that mergers could be the solution.
The new draft policy, which is based on research within the cooperative sector, proposes the establishment of a legal basis and defines criteria for amalgamation or mergers for regulated Saccos. It highlights the benefits of consolidation associated with economies of scale and efficiency, offering an alternative to resolve financial distress among Saccos.
The Sacco Societies Act (SSA) recognizes amalgamation, while the Cooperative Societies Act (CSA) provides the general procedure for voluntary mergers. The new policy prescribes involuntary mergers for financially distressed Saccos.
Rationale and Benefits of Mergers
Section 29 of CSA envisions mergers and lays out comprehensive procedures. In the contemporary and prospective business environment, mergers and amalgamations are seen as the way forward. During the Sacco Industry Annual Regulatory Policy Roundtable 2024, organized by SASRA, Sacco leaders and managers were educated on the amalgamation process, as well as the benefits and challenges. The key motivations for amalgamations include:
- Increased competition in the financial landscape.
- Efficiency in resource allocation and utilization.
- Improved regulatory compliance.
- An alternative resolution for financially distressed Saccos.
Key Considerations
When considering mergers or amalgamations, there are several key issues to take into account. Firstly, transitional committees play a crucial role, with the boards retaining oversight while the supervisory committee ensures quality assurance. Additionally, a joint technical committee with clear terms of reference should be appointed, reporting to the board before the commencement of proceedings.
In a more general sense, proposed mergers should carefully consider governance structure, human resources, regulatory compliance, and the selection of outsourced services.
Furthermore, members’ considerations are paramount. This includes ensuring access to financial information rights, voting rights, rights and obligations of dissenting members, and the manner and identification of their interests.
Financial considerations are also essential, involving the valuation of assets and liabilities, equities and shareholding, as well as applicable MIS (management information systems) and third-party obligations.
Valuation processes are important, especially in cases involving land, plant, and equipment. An independent government valuer should conduct land valuation, while plant and equipment should be evaluated by an independent accountant registered by the Authority using applicable accounting methods.
Business continuity is another critical aspect, encompassing cover and post-merger/amalgamation considerations such as data backup and disaster recovery, integration of members’ registers, and harmonization of financial services.
Lastly, member transfer details must be carefully considered, especially regarding share capital, savings deposits, loans, and guarantorship.
 Criteria for target acquisition
The authority is empowered to direct the merger or amalgamation of regulated Saccos based on specific criteria.
These include the capital structure, focusing on undercapitalized Saccos that have maintained a capital level below 50% of the prescribed core capital for more than three years.
Additionally, Saccos with a composite CAMEL rating of 3 or below for more than 5 years and those experiencing continued deterioration in financial performance despite supervisory or enforcement action are also subject to potential merger or amalgamation directives.
Furthermore, Saccos facing a continued decline in membership by more than 25% over a 3-year period and persistent claims of deposit refunds, as well as those with a large proportion of non-earning assets exceeding 30% for 3 consecutive years, are also within the purview of potential merger or amalgamation directives.
Features of Saccos with a Low Asset Base
- Undercapitalized hence struggle to meet capital adequacy requirements
- Have membership below 1000
- Backlog of loans
- Do not pay dividends or interest on members’ deposits
- Exhibit decline in membership driven by competition
- high staff turnover
- Face liquidity challenge
- Have been on a conditional license for a long time
The mergers procedure
To merge or join another organization, a Sacco must first submit a notice of its intention to the Authority for consideration. This notice should be accompanied by a board resolution, the reason for merging, financial status, and the potential acquirer. SASRA will then conduct an onsite inspection.
If a supervisory directive to merge is issued, it will be in place of revoking the Sacco’s license. If the Sacco does not obtain member approval, it should inform SASRA within 15 days.
For a voluntary merger, SASRA will review the findings and recommendations from the onsite inspection. If deemed suitable, SASRA will issue a letter of no objection and apply section 29 of the Co-operative Societies Act.
If an involuntary merger is taking place, the targeted Sacco must submit the proposed partner’s name, the merger plan, and the communication strategy to the Authority.
In case of an emergency merger, SASRA may issue a directive during financial distress as part of supervisory enforcement action. The Authority will consider factors such as field of membership, geographical location, key economic activities, and convenience when identifying the merger partner.
 Amalgamation/Merger Closure
The merged Saccos must prepare and submit a report stating that the planned merger was carried out well, including the transfer of assets and liabilities. The authority will revoke the license of the Sacco being merged and recommend to the Commissioner for Co-operative Development (CCD) that it be deregistered and dissolved. Any ongoing legal proceedings will stop due to the merger and be concluded in the same way by the merged regulated Sacco. Suppliers’ outstanding payments will continue to be honored until all obligations are settled.
Dissenting Members: Minority members who disagree with the majority decision on the merger should be allowed to leave after settling their claims. Fair treatment should be provided to the target Sacco members by establishing frameworks for payouts and ensuring the retention of their rights.
Rights of Appeal: Those dissatisfied with decisions made by SASRA can appeal to the Co-op Tribunal under section 67(s) of the SSA. Those aggrieved by regulated Saccos can appeal to the tribunal under section 76 of the CSA, while those unhappy with CCD’s decision can appeal to CS under section 29 of the CSA.
Key apex bodies such as KUSCCO, Co-op Bank, CIC, and Sacco Central play a facilitative and advisory role in amalgamating or merging their primary societies. It is envisaged that these apex bodies will play this significant role before, during, and after the amalgamation or merger process.
