And why it is a long-term process rather than an event
There has been a considerable amount of commentary in the press recently on the stability of the savings and credit cooperatives (SACCO) sector in Kenya based on a report released by the FSD network. Although the report was actually focused on a long-term review of the effectiveness of FSD Kenya’s work in the SACCO sector, not unsurprisingly the interest has been in the SACCOs themselves. Taken out of context these suggest disturbing findings. The report on which the articles have been based relied on an earlier analysis of deposit-taking SACCO regulation commissioned by FSD Kenya in 2014 from US based specialists, A2F Consulting. It is important to highlight that this analysis drew on 2013 data and cannot therefore be regarded as reflective of the current situation. Had the most severe risk scenarios suggested by the review been realised then we would have expect to have seen major failures in the sector. And we have not. No large SACCO has failed in the sector over the period. In the meantime action has been taken by the Sacco Societies Regulatory Authority (SASRA) against those failing to comply with the regulatory requirements. In the last two years, nine deposit-taking SACCOs have had their licences revoked, underlining SASRA’s commitment to fulfil its mandate to protect depositors.
There have long been debates over SACCOs in Kenya. Contested views on aspects of the core SACCO model used in Kenya lie behind the conclusions which attracted much of the recent attention. For instance, under the traditional model members have a virtually automatic right to a loan – a feature which many value. The concern is that where insufficient attention is given to the ability of borrowers to repay, the result will be high levels of default with obvious adverse impacts on the institution. Various counter-arguments have been made to this, from the existing use of guarantees from other members to recent efforts by many SACCOs to improve risk control. Perhaps the most compelling point made is that the model has proved resilient over a long period with most of the failures seen attributable to specific acts of malfeasance or mismanagement.
SACCOs form a vital part of Kenya’s financial system. While as a whole the sector is much smaller in absolute terms than the banks – accounting for an estimated approximately 10% of the assets in deposit-taking intermediaries – the significance is far greater. SACCOs provide services to three million Kenyans and frequently offer services which cannot be found elsewhere. In rural areas many farmers depend on their SACCOs for credit and payment services. As user-owned institutions or mutuals they provide an important alternative institutional form to banks. Global experience from the financial crisis of 2007/08 suggests that this diversity can contribute to resilience.
With the expansion of Kenya’s financial system over the last two decades the SACCOs sector has also developed significantly. With increased complexity and the sheer size of institutions, the risks have also necessarily changed. In a small SACCO it is reasonable to expect that individual members can look after their interests, overseeing the officers of the SACCO who manage their funds. Members share a ‘common bond’ reinforcing the cooperative principle. Unfortunately a small SACCO also has its vulnerabilities. The failure of even a small number of loans can be difficult to absorb before members lose confidence in it. Members usually face similar needs and often at the same time. It is difficult for a small institution to cope. The many people who have had to wait their turn for a loan from a SACCO are painfully familiar with this problem.
Greater scale and opening of the ‘common bond’ allows a more diverse membership which helps address the limitations of scale. Accepting withdrawable deposits – through so-called Front Office Service Activities (FOSA) – has allowed SACCOs to offer a wider range of services and diversify funding sources. But it comes at the cost of it becoming increasingly difficult for members to look after their own interests directly; to ensure that the management and boards of the SACCO are not taking undue risks or worse. Regulation seeks to address this problem. An independent, skilled regulator can oversee the activities of a large and complex financial institution much more efficiently than any individual member. Backed by statutory authority, the regulator can insist that management does not take excessive risks, maintains sufficient capital to absorb the inevitable peaks and troughs of business and adequate liquidity to meet its day-to-day obligations.
If the principle of regulation is straightforward enough, the practice is rather more difficult. As John Kay, a noted British economist has observed, we expect our regulators to have the “foresight of Nostradamus, the detective skills of Sherlock Holmes and the political insight of Machiavelli, as well as the patience of Job and the hide of a rhinoceros.” SASRA only came into being in 2010 following the passage of the SACCO Societies Act two years earlier. Since that time it has brought the deposit-taking SACCOs – accounting for an estimated four-fifths of the sector by assets – under formal prudential oversight for the first time. It is no easy task to introduce rules which change the way a whole sector does business. Inevitably there has been some resistance. In main part this may simply be because change is hard to accept and a belief that the old ways have served well enough. But inevitably it is because it exposes practices which some would prefer to remain hidden.
It would be facile to claim that there are no risks in the SACCO sector today and that we could expect that a new regulator would address all the potential challenges faced in an increasingly dynamic industry in a few short years. Regulatory actions will doubtless continue to be seen over the coming years as errant institutions are brought under regulatory control. Risk is pervasive in financial systems globally. The regulators of the world’s largest financial industries are constantly re-examining the ways in which they manage risk without simultaneously fettering the financial system to the point where it can no longer perform its vital economic function.
Regulation of SACCOs in Kenya is not an event but a long-term process. There is little doubt that further developments are needed. SASRA has itself already identified the requirement for stronger powers in various directions – notably to insist on tougher standards on governance. The more farsighted in the sector have seen that better regulation is far from a threat but rather provides the foundations from which a stronger, more sustainable sector will emerge relevant to the needs of Kenya into the long-term. Considerable progress has already been made even if there is much that remains to be done. But let us not confuse this need for sustained resolute action with an imminent crisis in the sector.