High Bank Interest Rates Strangling Saccos

                                                       HABIL OLAKA-KBA CEO

The financial crisis that has been plaguing the country’s commercial financial institutions since last year is strangulating the more than Kshs. 500 billion Cooperative movement forcing operators in the sector either to go back on the drawing board or collapse.

A majority of the Savings and Credit Cooperative Societies (SACCOS) are being forced to review or totally overhaul their ways of conducting business, new products they have to offer their members, transforming from the traditional ways of conducting Sacco business, their lending and borrowing practices among a wide range of measures.

The financial crunch which is still keeping a stranglehold on the country’s commercial financial institutions, has over the months forced them to continuously raise their lending interests rates from as low as 16 to 18 per cent to gallop beyond 28 and 30 per cent.

The Kenya Bankers Association Chief (KBA) Executive Habil Olaka says: “As a matter of fact most commercial financial institutions have been forced to shelve their annual programmes to pay accumulated profits from their shareholders’ investments which they are now being forced to re-plough back into their businesses to shore up their operations as they discourage their major clients against taking credit until after the normalization or stabilization of the loan market interest rates.”

Mr. Olaka says that this state of affairs according to impeccable sources from the sector, affected all loans – the existing when the crunch struck most of which had been secured when the rates were between 16 to 18 per cent, therefore nearly or simply doubling the interests rates that were to be paid by the individuals and institutions which had borrowed the monies.

He says that therefore, it means new and old borrowers are expected to repay their loans with reigning market interest rates which means that if they gallop away to 40 per cent – that is what the borrowers will have to pay to their respectful lending financial institutions.

The Sacco Societies may have no option but to take this option of capitalizing their members’ dividends. This is a route that has already been adopted by Stima Sacco which embarked on it first through an aggressive advertisements campaign to convince their members.

This state of affairs has adversely hit the country’s cooperative movement, especially Saccos most of which had existing credit facilities with their traditional lending commercial banks like the Cooperative Bank of Kenya and the Kenya Commercial Bank (KCB) from which they have traditionally enjoyed preference soft lending rates.

KUSCCO Managing Director, George Ototo says that the worst scenario is the fact that as the commercial financial institutions tighten up their belts, their customers most of whom are members of the cooperative movement, particularly contributors to their respectful Sacco societies have mostly abandoned borrowing from the banks due to the prohibitive interest rates and move to their Saccos for credit.

“This has resulted in massive credit demand from the Saccos thus exerting extremely high pressure on their existing credit facilities for their members, whose financial supplies cannot meet the demand pressure – the worst of it all pay their members the annual dividends from their shares that are due this month,” says Mr. Ototo

He says this was worsened by the fact that a majority of the Saccos had before the commercial financial institutions credit interest rates started sky rocketing had secured loans from the banks for their members running into billions of shillings whose interest rates they must pay at the current rates as dictated by the market forces.

The Managing Director says that the worst scenario is the fact that most of the Saccos are forced to lend their members loans whose interest rates are stagnated at only 12 per cent reducing rates and at the same time service the high bank interest rates on existing loans as well as meet the highly increased demand for loans from them and pay their members dividends running into hundreds of millions by the end of this month.

That is not the end of the story on the Saccos woes, since they have to pay millions of shillings to the Saccos’ Regulatory Authority (SASRA) in annual licenses and a myriad of other charges to stay in business or forced out by the authority.

The KBA CEO said: “In short the Saccos are caught up not just between a rock and a hard surface, they are caught up between un-breakable steel and another un-breakable steel, a state of affairs from which they have to wiggle themselves out or perish – hence the need to go back to the drawing board.”

It is from this background that the former minister for cooperative development and marketing, Joseph Nyagah  made a proposal for Credit Co-operative Societies (Saccos) to review up their loan rates spells more trouble for borrowers, especially those who had been fleeing from commercial banks to other alternative avenues.

Nyagah was quoted as saying,"There is a lot of pressure on Saccos brought about by the prevailing high interest rates from banks. This is why we urge them to adjust rates upwards to safeguard their savings from being depleted." 

The Afya Sacco Chairman Vitalis Lukiri said: “Leaders and the Sacco societies must be focused and adjust to the current economic forces otherwise the Saccos will collapse. They are business concerns and not social entities. We cannot borrow and pay interest at nearly 40 per cent increasing rates and expect to pay these loans when we are loaning our members to pay interest at 12 per cent reducing rates.”

Mr. Lukiri says that the situation demands that the Saccos have to review their modes of operation if they have to remain relevant and sustainable as business entities on the market in the current financial market environment.”

“As leaders within Afya Sacco we are consulting widely with the movement leadership and members so that we can come up with the way forward that is acceptable to all of us, but we can’t afford to let the society to collapse,” he said.

Mr. Lukiri’s counterpart at Harambee Sacco Maclaud Malonza says the society leadership was critically looking at the emerging scenario in the movement and will take appropriate measures to counter the challenges.

“We must face reality of the fact that matters have drastically shifted in the general financial sector and as Micro financial institutions we cannot afford to live and operate in isolation in an environment where we are facing increasing competition even from commercial banks,” says Mr. Malonza.

The UN Sacco chairperson Mary Oyugi says the Sacco has moved into high gear to review the interest rates levied on members loans as well capitalization of their dividends since in the long run it will be of immense benefit to the members.

Ms. Oyugi says that with the rapid dynamic developments in the country’s financial sector some of which have been un-predictable, it was paramount that the Saccos have top swiftly shift gear and modes of operation including products to market to stay afloat.

“These developments are coming too fast and too many but we have to meet the challenges, because as we all know many financial institutions we have come up with many products and services that traditionally the preserve of the Saccos,” Says Mwalimu Sacco Chairman, Mrs. Teresa Mutegi.

 Mrs Mutegi says that stakeholders and members of the movement must also change their attitudes face reality and quickly adapt to the emerging changes to ensure that the Sacco movement in the country, which is leading in Africa does not collapse.

The SASRA regulations which technically came into force late 2010 demand that all deposit taking savings and credit societies in the country must have an accumulated core share capital of not less than shs. 10 million before applying for a license for consideration to operate.

They stipulate that the rule applies not only to the already existing Sacco societies on the market but as well as all those new ones that will be seeking entry into the market beginning June this year – a core share capital which must be maintained at all times of operations.

 The regulations also state that every registered society as of now as the new applicants will be required to pay shs. 50, 000 annually as an individual entity and shs. 20, 000 for every branch that the society operates or is planning to open in any part of the country.