Wananchi Opinion: Why member confidence is essential to Sacco stability

When we talk about financial inclusion in Kenya, one can not underscore the input of Savings and Credit Cooperative Societies (SACCOs).

For millions of Kenyans, SACCOs have been used for savings, borrowing and collective growth of wealth.

Unlike other financial institutions such as banks which are profit-driven institutions largely focused on shareholder returns and risk management, SACCOs on the other hand, are member-owned societies guided by cooperative principles such as, voluntary and open membership, democratic member control, economic participation, and mutual benefit.

This therefore means that the degree of trust, participation and openness in the management of the SACCOs determine their success.

Regulations by the Sacco Societies Regulatory Authority (SASRA) over the years have enhanced governance, accountability and financial discipline of Deposit-Taking SACCOs.

This has been achieved by incorporating important capital adequacy and liquidity requirements to ensure that the financial stability of SACCOs and their ability to protect members' funds.

SACCOs are required to strictly adhere to the regulatory standards prescribed.

Among other requirements, SACCOs must meet minimum levels of core capital against assets and deposits, institutional capital strength and liquidity.

In the event that a SACCO fails to meet the above, SASRA can impose restrictions and even suspend payment of dividends, interest on deposits, bonuses, and honoraria.

From a prudential perspective, this is to help SACCO members not to suffer financial loss, avoid decline in capital and prevent SACCOs from unsustainable payouts.

In theory this is an essential protection, particularly if SACCOs may be tempted to focus on short-term member satisfaction in order to secure cash now rather than making long-term profitability a high priority.

However, the cooperative spirit of SACCOs creates a special dynamic which sets them apart from other financial institutions. Being a member of a SACCO is at the member's discretion and will only continue if he or she feels it benefits them.

The benefits include: dividends, interest on deposits or access to loan facilities that are affordable.

If these benefits are denied and suspended because of non-compliance to the prescribed ratios by SASRA, the member may think it is a sign of the particular SACCOs weakness.

This makes it difficult to maintain levels of confidence that may cause members to reduce their savings contributions, withdrawal of deposits or panic mass membership withdrawal, and reluctance from potential new members to join.

A reduction in deposits by members leads to low liquidity, low liquidity reduces the SACCOs ability to issue loans.

Since interest from loans advanced to members is the primary income for most SACCOs, a reduction in lending rate directly affects profitability which in turn impacts the stability of the SACCO.

To some extent, it seems ironic that regulatory measures intended to strengthen SACCOs stability may, in some cases, contribute to financial strain if they trigger significant behavioural reactions among members.

Therefore, it is right to state that there is an antinomy between regulatory procedures and cooperative reality in this context.

While regulations which are prudential in nature focuses on financial ratios and institutional resilience, SACCOs on the other hand operate in a manner that member confident, participation and benefits derived from membership are equally important as financial metrics.

Voluntary and open membership is a core SACCO policy and not contractual or restrictive in nature, in other words members retain the freedom to withdraw or reduce savings when their expectations are not met.

This means that apart from financial statements figures, members’ perception, trust and confidence in the SACCOs play a pivotal role in the institutions as a going concern.

In all these, the ultimate solution is not to take away the whole regulatory framework as there is need for a well-established oversight in the SACCO sector to safeguard member savings and to ensure sustainability in the long run.

However, there is need for a holistic approach to realize an optimal grounds of oversight and regulations which incorporates both prudent management and pragmatic aspects of cooperatives society.

A mix of risk management- based approach that takes into account phased interventions, partial benefit payments to members during periods that key prudential ratios are not met and potential recovery measures are clearly outlined is ideal.

This enables members to feel sense of safety and continuity as opposed to total non-payment of benefits such as dividends and interest payout. This ensures cashflow stream in the affected SACCOs is not interrupted in the long run.

In conclusion, the effectiveness and sustainability of the SACCOs in Kenya is determined by striking a balance between effective regulation and cooperative principles that the societies are founded on.

Regulation can be very important in protecting funds of members and achieving financial stability, but equally important is maintaining member confidence, membership loyalty and sustained engagement.

Achieving this balance is the long-term goal of the existence of SACCOs, and one such balance that can produce an outcome where SACCOs are financially sound and proportionate to members' trust and backing.

It's crucial to understand that members are the backbone of any SACCO. They may not be seen on the balance sheets as an asset but they are the most important asset the institution has.

While a SACCO may be showing some positive financial data, if the members are not convinced of its leadership or direction, the future of a SACCO can be quickly put to the test. However, a SACCO can revive and survive even during economic downturns, if the members have faith in the SACCO and put in effort to save it from collapse.

The foregoing shows that there are limitations to financial ratios as a yardstick of a SACCO's health and viability.

SACCOs are not just financial institutions, but member-owned societies that are based on trust, participation, and shared wealth.

The combination of regulation and cooperation can make a significant difference to the success of SACCOs.

The goal of financial stability is not an objective in itself but more of a way to enhance and maintain the trust that is the foundation of all successful SACCOs.

Brian Dibogo is an accountant and Sacco administrator