The emergence of savings and credit cooperatives (SACCO) societies in Kenya is undoubtedly one of the major vehicles that have been used to drive economic progress and individual’s development. The history of SACCOs in Kenya dates back to 1908 when the first cooperative – a Dairy Cooperative, was established. Over a century later, there exist hundreds of SACCOs offering membership a wide variety of products. They have gained even more momentum in the later years due to their fair and stable interest rates relative to commercial lenders. SACCO products vary from one entity to another and may include emergency loans, development loans, education loans, motor vehicle purchase loans, children’s savings and holiday savings.
The basic principle governing SACCO operations is that members get access to credit facilities whose qualifiable maximum is usually calculated based on the individual’s total deposits or shares. In other words, the lower your deposits or shares, the lower the amount of credit you can access in the form of loans. While some SACCOs, especially the deposit taking ones (DT) allow self guarantorship tied to your deposit base or use of a separate collateral e.g. land title deed, others adopt the rather controversial third party guarantorship where a loan applicant must seek guarantee from fellow SACCO members in good standing. A default in servicing of the loan automatically implies the loanee’s guarantors would bear the risk burden. I have seen work relationships and friendships destroyed by this last model, so it is something to be very careful about before committing to become anyone’s guarantor. Better to be safe than sorry.
The primary function of a SACCO is to offer members alternative or easier access to credit. I say easier because those of us who have never held a long-term work contract know the persistent struggle that comes with trying to convince commercial banks your creditworthiness when you live off a contract that runs up to a year at best. SACCOs have always been our refuge in such cases.
To reap the maximum benefits off a SACCO or when deciding whether to join one or not, the determining factor should not be pegged so much on how much dividends it pays out every financial year – which is something to be keen on when looking for an appropriate money market fund for example. This is because while dividends earning is good, it is not the core business of a SACCO. It is rather a bonus that comes with patronizing of products by the membership. What this means is if you set out to join a SACCO with the sole intention of saving only but not borrowing, then you are not doing it justice and should probably choose another saving vehicle such as MMF. In short, there is no business case for a SACCO if members are saving but not borrowing from it or borrowing but not servicing loans (defaulters). That said, the true benefit of being part and parcel of this vehicle comes when you as a member learns to leverage the products it offers you in order to develop yourself sooner rather than later because a delayed investment might be a wasted opportunity.
I recently had a conversation with a friend who relents SACCOs and mentioned a preference to save until they have enough to invest. While this is not a bad idea – in any case nobody wants to live a life servicing loans. But more importantly, we all have different preferences which must be respected. My biggest concern, however, is usually how long would it take to save enough to make a significant investment? Probably a lifetime? We then have to ask ourselves whether it would it be worth it to wait until our sunset years to finally invest because we have finally saved enough? Not too wise a choice if you ask me. Imagine a world where investors waited to save enough. Think about it in terms of the impact on global economies. Imagine if governments waited to collect enough revenue off taxes to roll out major development projects. How long would it take to have sufficient funds and projects which can generate the kind of opportunities that would push a country’s GDP growth rate forward significantly?
With the common understanding of the primary or core business of SACCOs, I would like to share thoughts on the hottest topic heating airwaves in Kenya this Q1 in relation to SACCOs. This follows the scandal at KUSCCO, the umbrella union of SACCOs for whom a forensic audit by the Ministry of Cooperatives revealed gross mismanagement and financial irregularities that will now cost affected SACCOs and by extension their members provisioning for losses worth at least Kenyan shillings 1.8 billion in the FY ending December 2024. I recently attended an AGM in which the whole day arguably turned into the KUSCCO ordeal interrogation affair. Members wanted to understand what went wrong, why the management allowed it, who will be held responsible for the poor investment decision of taking their deposits to this now infamous umbrella body, whether there is any assurance that members’ funds will be recouped at some point and when exactly would that be. The mood in the room throughout the day was sombre – the last time I encountered such agitation was in 2018 at a different Society where then compliance to the newly introduced International Financial Reporting Standard (IFRS) 9 ‘took the blame for the losses recorded’ in the financial year ended 2017 – in fact no member took home any dividends. While the IFRS effect was out of control back then and probably more justifiable since it is an issue of global compliance, it is difficult to imagine how the recent KUSCCO fraud happened under the government watchdog and SACCOs regulator SASRA. We can only hope that this matter will be brought to book. In the meantime, thousands of Kenyans who opted to accumulate their savings via SACCOs with an expectation of ‘return on investment’ post AGMs in Q1 as is the norm annually, may now have to make peace with taking home fewer coins or nothing at all under worst case scenarios.
Having found myself on both sides of the boat – one where you literally earn nothing – and where you earn the maximum return possible in that financial year, I have learnt over the years to internalize what it means for me as an individual to be part and parcel of a ‘financial vehicle’. This means being clear on what my expectations are from the onset. In the case of SACCOs, I treat them for what they truly are – a means to gain access to credit which un-bankable individuals like me would otherwise not qualify for under traditional commercial banking system due to the erratic nature of our income.
With that clarity in mind, I will re-emphasize that earning dividends on deposits and shares in a SACCO is an additionality. On the flip side, reaping nothing should also not be a major cause of alarm if the SACCO fulfilled its primary functions to its membership effectively. This is not in any way to water down the genuine need to bring to book the culprits behind the scandalous mismanagement and gross embezzlement of billions of savings deposited by honest and hardworking Kenyans through their parent SACCOs. It is to say that even as we unite to demand for justice and accountability, let us not lose sight of the core objective for why SACCOs were originally established. They are not and should not be used as an investment vehicle as many people now perceive them to be.
As we keep an eye on how the KUSCCO scandal unfolds, I have little faith that much will be salvaged – if the current rampant national corruption status quo is anything to go by. However, we can use this circumstance to learn and have clarity when choosing financial vehicles in future. Some of the basic questions to keep at the back of your mind may include: Why am I tucking away this money? What do I hope to achieve as a result? Where should I put it in relation to the why and what? Who is the custodian? How can I spread the risk? When is best to spread it?
Lastly, is it important or useful to become a member of a SACCO? Yes, I think so – subscribe to at least one. And you don’t have to be making ‘a lot of money’ to be a viable member. Just like MMFs, there are several options to suit diverse financial or income bands. I believe with KES 500 bob or even less monthly; you can already start saving your way to facilitate access to development loan or other credit facilities. The trick is to find what works for you, it could be in terms of shared culture or mutual friends/colleagues – especially where subscribing to third party guarantorship schemes.
Until the next post, happy decision making on your savings and credit access options!
