Alternative options help usher customers into the formal sector

Savings and credit cooperative societies (SACCOs) are a fast-growing segment within Kenya’s financial services system and are often a first choice for borrowers, particularly in the middle class. The cost of funds is cheaper and the application process is faster and less bureaucratic. Their popularity is one of the reasons why a dedicated regulator was recently created to oversee them. As a financial institution, SACCOs are similar to credit unions in the US.

Initially set up as a pool of capital for a group of workers, they typically pay members annual dividends. However, the business model is evolving. Membership in a specific SACCO is increasingly open to anyone, and they have become more visible as investment vehicles in areas such as real estate and transport. They are a large-scale owner and operator of matatus, the ubiquitous minibuses that are Kenya’s main source of public transport.

Growing Clout

Official records show 12,000 of these types of cooperatives in Kenya, though no more than 4000 are currently active, according to local press. With the rise of deposit-taking SACCOs came the need for regulation. The SACCO Societies Regulatory Authority (SASRA) was created in 2008. Its authority extends only to the deposit-taking SACCOs, which control 78% of the market by assets.

Total assets held by SACCOs rose 14% between year-ends 2012 and 2013, from KSh293.8bn ($3.3bn) to KSh335.4bn ($3.8bn), according to SASRA. Deposit-taking SACCOs in Kenya held roughly 77.9% of the industry’s total assets at year-end 2013. Among these, the ratio of non-performing loans fell from 7.34% in 2012 to 4.72% by December 2013, while returns on assets climbed from 2.02% to 2.27%. Total income among licensed deposit-taking SACCOs grew 17.15% between 2012 and 2013. The growth in retained earnings is a shift to hold on to more of the earnings as a means for developing the institution.

The five biggest SACCOs by assets in 2013 were Mwalimu National, with KSh24.5bn ($279.3m); Harambee, with KSh17.6bn ($200.6m); Stima, with KSh12.4bn ($141.4m); Afya, with KSh11.9bn ($135.7m); and Kenya Police, with KSh11.5bn ($131.1m). These have larger asset bases than about one-third of banks in the country.

Although there were 215 deposit-taking SACCOs at the end of 2013, a tightening of regulations saw this number drop the following year. SACCOs were given a June 2014 deadline to meet a number of licensing requirements set out by SASRA, and only 184 institutions were able to meet these targets.

Regulation

SASRA’s plan involves gradually increasing the degree of oversight of these lenders, with a view to reducing the number of smaller operators and increasing the feasibility of regulation and supervision across a large spectrum. Currently, a minimum core capital of KSh10m ($114,000) is required to obtain a licence.

A ruling passed in April 2014 will help SACCOs meet the new minimum capital requirement. SASRA will allow their stakes in several national firms to count towards core capital, including Co-operative Bank, CIC Insurance and the Kenya Union of Savings and Cooperatives (KUSCCO). Co-operative Bank is jointly owned by the SACCOs and used as a clearing house for transactions; CIC is the preferred insurer to cooperatives; and KUSCCO is the trade union and lobbying group for cooperatives.

There are other ways the SACCOs are helping to move activity from the informal economy into the formal, taxpaying one. Their ownership of matatus fleets, for example, has been used by the government to boost regulation of matatus and to aid in collecting taxes from people who work as drivers, money collectors or in other roles involving the minibuses. Pushing these operations into a more formal role also includes greater safety standards and more passenger rights, a move that sparked matatu strikes in April 2014 after the government resisted a request to push back the deadline for compliance.