Why Saccos are the most preferred choice for borrowers
Savings and Credit Co-operative Societies (SACCOs) loans remain more attractive compared to facilities offered by commercial banks, microfinance institutions as well as other actors in the credit market.
This is due to the many comparative advantages that Sacco loans have, especially their more competitive interest rates and security.
“Unlike commercial banks that are purely profit-driven, Sacco members are also owners of the Society that seeks to assist them in improving their financial livelihoods. Interest rates charged on Sacco loans are fixed at the annual general meeting and are not subject to prevailing business and economic conditions, “said David Mategwa, Board Chairman of Kenya National Police DT Sacco.
He added that a Sacco member has more flexibility and can ask the Society to restructure the loan facility or offer a moratorium in cases of financial distress. This is a window that banks are not able to provide borrowers with unless given directives by the Central Bank.
“Those who take up loan products from their Saccos are also able to gain through dividend payments on their loans as well as interest paid on their deposits-benefits that accrue as the members continue to repay the loan, “said Mr Mategwa.
According to the Sacco Societies Regulatory Authority(SASRA) Annual Supervision Report, the average interest rates paid by regulated Saccos on member deposits in 2022 marginally increased to 6.92% in 2022 from 6.86% paid in 2021.
The Deposit Taking Sacco’s segment paid interest rates on their members’ savings at 7.11% in 2022. These returns on members’ savings were higher than the interest rates paid by commercial banks on savings, which averaged 3% during the year 2022.
Saccos have the dual comparative edge of paying interest on members’ savings while also applying these deposits as collateral against loans advanced to members.
In addition, Saccos pay their members a return on their share capital or dividends, earnings that banks do not offer customers who are usually not bank shareholders. In 2022, DT Saccos paid an average dividend rate of 10.47% in 2022 compared to a mean rate of 9.87% in 2021.
“Sacco loans have more friendly terms and conditions with no need for elaborate know-your-customer (KYC) appraisals since the members are well known to the lender. There is also a shorter loan processing time since the loan facility given to a member is based on one’s level of deposits and not collateral-based lending that the banks do,” said Richard Nyaanga, Ukulima Sacco CEO.
Saccos have also continued to record a lower Non-Performing loan portfolio at 8.40% in 2022, according to statistics from SASRA, compared to 13.80% for Commercial Banking Institutions and 31.78% for Microfinance Banks in the same period.
Notably, Sacco loans are funded by members’ savings and, to a small extent, external borrowing, unlike the case of commercial banks and microfinance firms, which rely solely on external borrowings.
“Unlike commercial banks that are purely profit-driven, Sacco members are also owners of the Society that seeks to assist them in improving their financial livelihoods. Interest rates charged on Sacco loans are fixed at the annual general meeting and are not subject to prevailing business and economic conditions.” – Mr Mategwa.
“Saccos have lower charges on their loans compared to what banks charge for their products. Sacco loans also have lower interest rates compared to banks. Sacco members who take up loans are able to recoup the cost of these loans through interest on deposits and share capital, which the Sacco pays at the end of the financial year in the form of dividends and interest on deposits or rebates, “said Stephen Oluoch, a retired Director at Taraji DT Sacco.
The commercial banking sectors’ total assets to the National GDP remained the most dominant within the financial sector space, accounting for over 48.90% of the national GDP in 2022, with the pensions and insurance industries following at 11.79% and 7.06%, respectively.
The contribution of the regulated Saccos, coming at 6.66%, is quite significant to the economy and cements the critical role that regulated Saccos play in national development. And since most of the regulated Saccos serve household economies, especially those in the lower echelons of the economic pyramid, co-operative leaders are urging the Government to do more to deepen their contribution further.
According to Wellington Otiende, a Mwalimu National Sacco Board Member, Sacco loans are preferred over bank loans because these facilities have fixed terms that do not change based on prevailing economic parameters.
“Banks are able to give customers unsecured facilities, and this exposes the institutions to high default rates or non-performing loans. This is compared to Sacco loans that are secured by guarantors, with borrowers able to do top-ups and renegotiate terms of the loan that are more flexible compared to those offered by banks,” said Mr Otiende.
“Sacco loans have more friendly terms and conditions with no need for elaborate know-your-customer (KYC) appraisals since the members are well known to the lender. There is also a shorter loan processing time since the loan facility given to a member is based on one’s level of deposits and not collateral-based lending that the banks do.” – Mr Nyaanga.
A look at the financial sector
Available data indicates that banks still have the largest balance sheet among all deposit-taking institutions, with a size worth Ksh 6.59 trillion in 2022. This is compared to Ksh 890.30 billion for DT Saccos, while the Microfinance Banks had a balance sheet worth Ksh 70.43 billion.
In addition, bank customer deposits totaled Ksh 4.8 trillion in 2022 compared to DT Saccos, whose members’ deposits stood at Ksh 620.45 billion, while those of Microfinance institutions stood at Ksh 46.49 billion in 2022.
Total loans disbursed by banks stood at Ksh 3,630.25 billion in 2022, followed by DT Saccos with Ksh 680.35 billion, while the Microfinance Banks gave out loans worth Ksh 39.33 billion in 2022.
The SASRA analysis shows that the balance sheet size of financial societies in 2022 accounted for 11.79% of the entire balance sheet of deposit-taking financial institutions in Kenya. This reflected a marginal increase from a proportion of 11.69% of the total assets of the deposit-taking financial institutions in 2021.
Commercial banks still have the largest share of the deposit-taking financial institutions’ balance sheet, with a proportion of 87.24% in 2022 but a slight decline from 87.28% in 2021.
The Microfinance banks accounted for the least amount and proportion of the total assets of the deposit-taking financial institutions in 2022 at 0.93%, a drop from a proportion of 1.07% reported in 2021.
On the deposits front, the financial societies’ market share stood at 11.43% in 2022 compared to commercial banks at 87.71%, while the microfinance banks had a market share of 0.86% of the deposits among the deposit-taking financial institutions.
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