Small and medium-sized Savings and Credit Cooperative Organizations (SACCOs) continue to face numerous challenges, new report shows. In response, the SACCO sub-sector advocates 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 supplemented 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. In 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:
Cybersecurity risks: The financial services sector has become very competitive due to constant technological changes. To remain competitive, regulated SACCOs have adopted digital financial service delivery channels and mobile banking services. To deliver these services effectively and efficiently, regulated SACCOs have partnered with or contracted third-party information technology system vendors, commonly referred to as integrators or FinTech companies. However, these FinTech companies pose significant cyber risks due to increased cyberattacks and data breaches, leading to financial losses for the SACCOs.
Concentration risk: The sector is highly concentrated, where 37 SACCOs, classified under tier 1 with total assets exceeding KSh 10 billion, account for 80% of the total assets in the regulated SACCO industry. This category of SACCOs has the financial and technical capability to manage risks better, market products, educate their members, and acquire appropriate technology and physical infrastructure to achieve business growth. However, vulnerabilities within these SACCOs can undermine public confidence in the movement, leading to withdrawals of deposits.
Safety measures: To protect SACCO member deposits from cyber risks, SASRA has issued a circular requiring SACCOs to conduct thorough vetting when procuring services from FinTech companies and to secure insurance against these risks. Vendors are also expected to form an association to practice self-regulation and organize a monthly forum for sharing experiences, trends, and strategies to mitigate risks.
Unregulated financial cooperatives: Currently, SASRA regulates only deposit-taking SACCOs and specified non-withdrawable deposit-taking SACCOs with deposit limits of KSh 100 million and above, leaving out those with deposits below KSh 100 million, as well as housing and investment cooperatives. This creates regulatory arbitrage opportunities and poses reputational risks for the industry. Unregulated financial cooperatives often have close business ties to regulated SACCOs, either through subsidiary arrangements or investments, risking members’ funds when these entities face financial distress.
Credit risks: In 2023, regulated SACCOs facilitated loans and advances totaling KSh 759.0 billion. The ratio of non-performing loans (NPLs) to gross loans decreased to 6.52%, down from 8.28% in 2022. However, some regulated SACCOs reported NPL ratios above the industry average due to their sectoral exposures.
Safety net measures: SASRA has advised SACCOs to adopt credit administration strategies, including effective debt collection practices, to reduce credit risk. SACCOs serving salaried members have been encouraged to designate Front Office (FOSA) as the salary pay point to minimize the risks associated with unremitted or delayed payments. Additionally, SASRA cautioned the public and regulated SACCOs to restrict their business activities to licensed and regulated entities. Regulated SACCOs have also been advised to limit their operations to core activities to ensure their safety and sustainability.
