Report highlights Saccos’ comeback: Better asset quality and profitability.
According to the Kenya Financial Stability Report of 2023, Savings and Credit Cooperatives (Saccos) have shown a remarkable recovery in 2022 after the reopening of the economy. The report highlights that the asset quality and profitability of Saccos have significantly improved, and their growth in gross loans and deposits has been a major contributing factor, despite the slow economic growth and high cost of living experienced by members.
Saccos also experienced elevated credit risk, with gross non-performing loans (NPLs) rising by 36.8 percent in 2022. This prompted a 43.4 percent increase in provisions for bad debts, leading to a negative impact on gross income, which moderated to 9.4 percent in 2022 compared to 14.2 percent in 2021.
Nevertheless, the Sacco industry has continued to build a strong capital base, both regulatory and institutional, which is critical for credit risk absorption.
As per the report, “all the capital ratios were above the regulatory minimum in December 2022, indicating sufficient capital buffers for credit-related shocks.”
In addition, the liquidity ratio increased to 73.3 percent in 2022 from 42.1 percent in 2021, indicating enhanced sector soundness to liquidity risks. Internally generated reserves grew to 63.4 percent, above the regulatory requirement of 50 percent, implying stable funding.
“The strong capital and liquidity buffers signify the sector’s ability to absorb ongoing and new risks, and also continue lending to their members.” Saccos’ external borrowings decreased to 3.2 percent in 2022.
The Sacco Societies Regulatory Authority (SASRA) has played a critical role in strengthening its supervision of the industry, ensuring that all 361 regulated Saccos adhere to prescribed standards. It has also spearheaded initiatives such as the Shared Services and Central Liquidity Facility to enhance efficiency in savings mobilization and credit to members, as well as the Deposit Guarantee Fund to deepen public confidence and trust in investing in Saccos.
Large deposit-taking Saccos dominate the sector, with the capacity to acquire and implement appropriate core banking software and have adequate liquidity and capital reserves for growth.
The report notes that employer-based Saccos are increasingly opening their common bond targeting broader membership scope, which comes with significant risks from poor credit administration, including collection practices.
Environmental risks such as climate change also expose Saccos, especially agro-based ones.
“In addition, the Saccos business model affects social and a poverty outcome in the society. As a result, there is need to incorporate environmental, social and governance (ESG) best practices in the Saccos business to reduce exposure to ESG risks. Therefore, sustainable Saccos business model should incorporate environmental and social impact of mobilising deposit and lending to the society,” the report states.
Tax laws, unclaimed financial assets, data protection, and anti-money laundering, among others, also negatively affect Saccos operations.
The report published by the Financial Sector Regulators, which include the Capital Markets Authority (CMA), Central Bank of Kenya (CBK), Insurance Regulatory Authority (IRA), Retirement Benefits Authority (RBA) and SASRA, projects that the country’s financial sector will remain stable and resilient. The sector has grown significantly by asset size, capital base, and profitability.
“The sector has sound and stable financial system supported by strong capital and liquidity buffers, and continuous improvement in systems and governance practices to enhance operational practices,” it states.
Banks face elevated credit risk as lending conditions tighten and interest rates rise further, according to the 2023 Banking Sector Credit Risk Stress Test Report.
The report further notes that Saccos are yet to recover from the COVID-19 pandemic fully and face a slowdown in economic activities and elevated credit risk.
In Kenya, there are 38 commercial banks, one mortgage finance company, and 14 deposit-taking microfinance banks (MFBs), all under the Central Bank’s regulatory ambit. Total net assets of banks grew by 9.4 percent to Ksh 6,589.8 billion, while gross loans and advances rose by 11.5 percent in 2022 compared to 2021.
