A significant turning point in the regulation of savings and credit cooperative societies (Saccos) has been reached following the recent Commissioner for Cooperatives decision, which addresses long-standing issues with member protection and financial viability.
The stakes for effective management have never been higher, as the sector oversees an astounding Sh759.0 billion in loans among 357 regulated Saccos that serve 6.84 million members.
The timing of the commissioner’s intervention is crucial since several Saccos have been involved in dubious activities that jeopardise their long-term survival.
The habit of organisations taking out bank loans to pay dividends is worrisome since it is in direct opposition to good financial management practices and risks the cooperative movement’s stability.
The directive’s emphasis on prudential criteria and capital adequacy goes beyond simple bureaucratic inspection and is an important development in Sacco governance.
Standardised accounting procedures are introduced by the need to calculate surpluses in accordance with IFRS 9 and IFRS 16, which will improve comparability and transparency throughout the industry.
For members and regulators to make well-informed judgments regarding the performance and stability of Saccos, this standardisation is essential.
There are alarming differences in dividend distributions throughout the industry, according to data from 2023. While some Saccos have more cautious policies, others offer rates of more than 20 percent.
High payout rates can conceal underlying financial problems, even if they may seem alluring to members in the near term. The commissioner’s caution on “giving in to member pressure to offer irrational bonuses” tackles a fundamental governance challenge— the tension between member expectations and financial sustainability.
The four main requirements of the regulation offer a strong foundation for budgetary restraint.
First, accurate and consistent calculations of surpluses are guaranteed by the requirement to adhere to international financial reporting standards.
Second, institutional failure is prevented by the focus on capital adequacy and liquidity constraints.
Third, there is a correlation between member returns and operational performance because dividend distributions are prohibited when loan arrears or outstanding invoices exist.
Lastly, one of the riskiest activities in the industry is addressed by the prohibition on borrowing from outside sources to pay dividends.
These measures have economic ramifications that go beyond the Sacco industry. Saccos are important financial intermediaries that are essential to Kenya’s financial inclusion strategy.
The public trust in cooperative financial institutions and, consequently, the larger financial system depends on their stability. Therefore, the commissioner’s directive accomplishes both developmental and prudential goals.
The writer is a development and public policy specialist.
