Saccos have recently released their full year financial results, amid a storm over the potential losses running into billions from their exposure to fraud at their union Kuscco, and proposed changes to the Sacco Act of 2008.
The Business Daily spoke to Mwalimu National Sacco chief executive Kenneth Odhiambo about the health of the sector, and his Sacco’s new investment strategy after it shed the loss-making Spire Bank.
The Sacco Act of 2008 is being overhauled. What are your thoughts on the proposals in the review?
The Act was long overdue for overhaul. In terms of the policy proposals, which of course will be legislated, allow me to start with the trickiest one, the payments and settlement system access.
In the jurisdictions out of this country, including the US and Europe, you find saccos try to have that element of payment and settlement system. Going through an intermediary to do payments and settlements comes with bottlenecks, and it is also not cheap.
Having our own settlement system would, therefore, be a game-changer in this sector. I know banks may not accept it easily, seeing it as competition, but I see it as an opportunity to grow the sacco sector better. It is a discussion that has evolved for over 10 years.
On the Deposit Guarantee Fund, if we had that facility with us, then we would not be talking of course the way we’re talking now (about losses from Kuscco exposure) because we would have had an opportunity to co-guarantee the deposits.
There has, however, been a bit of resistance to introduce the fund, because it bears a cost element to saccos, which have to put in money.
But the long-term view is that it will give more confidence to the saccos system, assuring members that if push comes to shove, there is a second line of defence somewhere.
Lastly, the proposed shared services platform, is very critical. Not many saccos can afford some of these digital or automated platforms, and so they need to pool their resources together to put up the infrastructure that will give their members convenience and create confidence as well.
There has been debate about the provisioning timeframe for the Kuscco losses under IFRS 9. Has the industry done the right thing?
Mwalimu did not have deposits in Kuscco, other than equity shareholding.
That said, regulators must look at some of these issues with a long-term lens.
IFRS says that provisions be done at once, and that’s okay, but as the Sasra CEO noted, if you would have forced all the saccos to do a one-off provision, many would have gone to negative capital, then insolvency, then closure.
What signal would that have sent to the financial sector?
That would be a disaster, killing the whole sector instead of finding a solution that would sort out the problem over the long term.
The long and short of it is that yes we have IFRS, but to me, that is the best approach that Sasra would have taken, because otherwise you risk creating a serious crisis.
What is your investment strategy at in the near and medium term after getting Spire off your books?
It has been a long journey in terms of clearing the issue of Spire Bank, which we did two years ago. Currently, we are on the tail end of restructuring our subsidiaries, to optimise costs and enhance revenue at group level. We have had approval done by the regulator for this.
At our investment arm Mwalimu Asset Management—which has property everywhere—we want to move those properties and investments to a more liquid form, so that we can reroute those funds to our members.
We are also looking for collaborative initiatives. We, for instance, have had engagement with Visa to see how can they come in to ease in our payments system for our members, so that we can stop using banks as intermediaries.
We are also looking to partner with Microsoft in e-learning opportunities for schools. We can then ride on that initiative to capture more members because there will be a training element.
Still on the schools, there is an opportunity for trade finance, to step in when capitation has been delayed, as well as managing students pocket money, which can offer cheap deposits that you can use to lend as you also manage the funds.
Overall, we want to extend the businesses beyond the current scope of savings and lending.
What will be the structure of the asset management business, and are there other assets in its plan apart from property?
We are looking at asset management as a strategic business unit that will support the main institution, but in terms of structure it will be a subsidiary.
However, it will be anchored on the sacco as a holding company. Mwalimu National Holding has been a non-trading entity, we want to make it a trading one, so that it anchors these subsidiaries separately from the sacco.
We have also the Mwalimu National Sacco Insurers and Risk Brokers, which is already profitable, but it’s not as vibrant as we think it can be. We will also bring it under that holding company, so that it can also generate greater revenues.
We will also offload some ownership of some of these units to our members, so that they can also be part and parcel of the initiative as we make revenue out of it.
We’ve seen saccos lending more than their deposits, which has been flagged by Sasra as a risk. What’s your take on that situation?
Ideally, the lending or loan portfolio should be either equal to deposits if you have reserves, or below. But many times you find some saccos have gone beyond this balance, and of course there's that issue of external borrowing.
My position would be that saccos must ensure that there’s that level of safety in the sense that you stick towards the funds that you can mobilise.
So if you want to lend more, make sure that you mobilise as much as possible. But again, there are two levels of deposits. There are those ones which are long-term and those ones which are short-term like the ones that you have in quasi banking.
Because these are demand deposits, they can only be deployed on short-term lending like the mobile loans, which are paid quickly.
They can’t be on loans of two to three years. In asset-liability management, you endeavour to match short-term assets with short-term liabilities, long-term assets with long-term liabilities.
That’s why at regulatory and ministry level they are discouraging external borrowing because it’s not cheap, it’s not sustainable and can only be a short-term financing option for saccos.
But if we have a liquidity management framework which is also part of the proposed Act review, then saccos will be able to lend among themselves. It will be cheaper for saccos, compared to going out to borrow from banks, which portends potential danger in the future in terms of cost.
What's your take on the increase in Sacco dividends despite the need to provision for the Kuscco losses?
We have seen a general increase (in dividends) yet there are some who would have expected a bit more prudence. It however depends on each Sacco and how it perceives things.
For Mwalimu, we have had a very conservative approach if you look at our dividend trends. Going by what we went through, as I told the board, I don't see this rate going beyond 12 percent in the next three to four years, the reason being that as we seek to recover, the dividend is sticky.
Institutions have their ups and downs. When it goes down, you'll have more trouble explaining lower dividends to members, than when you have a systematic policy based on performance.
You can see some of the institutions are paying up to 20 percent. Looking at the private funds around, such as money market funds. I'm not sure there is a 20 percent return on any of them.
If the government's risk-free rate is around 13 percent now, where are you getting funds to pay 20 percent, unless you also decide to squeeze your members on the loans rate end?
Is that the essence of having a Sacco? Yes, we want to give back to members, but we don't want to pay cosmetic dividends. We want to give something that will be more sustainable, and we'll do it for longer.
