Saccos, or Savings and Credit Cooperative Societies, have long been a cornerstone of financial inclusion in Kenya, offering a range of services to members.
However, while they can be a boon to many, it’s crucial to understand both their benefits and the potential risks.
Many saccos have faced a crisis of mismanagement, fraud and bad loans that is putting the sector on a path of instability.
Billions of shillings in member savings have been lost or are at risk as more cases of financially troubled Saccos come to light.
The primary reasons many saccos collapse include:
Financial Mismanagement
A significant number of Saccos have suffered from poor management practices.
This includes inadequate oversight and lack of proper financial controls, which have resulted in substantial losses.
For instance, the Mwalimu National Sacco lost over Sh2 billion due to a poorly executed acquisition of a bank without proper due diligence.
Fraud
Cases of fraud have been rampant, with officials misappropriating funds. Ekeza Sacco for example, faced massive losses of about Sh1 billion with significant amounts transferred to accounts linked to the founder and his companies, including Gakuyo Real Estate and Gakuyo Investors Club
Weak Governance
Many Saccos are plagued by weak governance structures, which allow for corruption and malpractice.
The State Department of Co-operatives has identified weak governance as a major challenge, prompting investigations into fraudulent activities within the sector.
Bad Loans
A high incidence of non-performing loans has contributed to the instability of many Saccos.
Poor loan recovery practices and over-reliance on external funding have left some Saccos unable to meet their financial obligations, leading to insolvency.
Market Dependency
Saccos often depend heavily on specific industries or employers, making them vulnerable to economic downturns.
For example, the collapse of the Mumias Sugar Company adversely affected the Nitunze Sacco, which relied on contributions from its members.
Lack of adequate regulation
Although the Sacco Societies Regulatory Authority (SASRA) exists to oversee the sector, many saccos operate without adequate regulatory oversight.
This has resulted in a lack of accountability and transparency, leading to financial irregularities and member losses.
Dormant Saccos
significant number of Saccos have been declared dormant or unknown, with 2,200 out of 7,300 Saccos failing to meet operational requirements.
This raises concerns about the viability of these institutions and the safety of members’ savings.
Inconsistent Financial Reporting
One of the most glaring signs of mismanagement in Saccos is irregularities in financial statements
If a Sacco frequently alters its financial reports or fails to provide transparent accounts, it may indicate underlying issues.
For instance, discrepancies in asset valuations, particularly inflated values of properties or equipment, can signal attempts to mislead members or regulators about the Sacco’s financial health.
High Levels of Non-Performing Loans
A significant ratio of non-performing loans (NPLs) can indicate poor lending practices or inadequate credit assessments.
Saccos that fail to recover loans or have a high default rate often face liquidity crises, jeopardising member savings.
For example, many Saccos have reported losses due to bad loans, which have been compounded by lax recovery measures.
Frequent Changes in Leadership
Instability in management can be a red flag. Frequent turnover of board members or management personnel may suggest internal conflicts, lack of direction, or even corruption.
This instability can undermine the Sacco’s operational integrity and erode member trust.
Increased Complaints from Members
A rise in member complaints regarding service delivery, loan processing delays, or access to funds can indicate deeper systemic issues.
If members express concerns about the Sacco’s operations or financial health, it is essential to take these warnings seriously.
Poor Internal Controls
Weak internal controls facilitate fraud and misappropriation of funds. Reports of insider fraud, such as unauthorised withdrawals or manipulation of accounts, highlight the need for robust governance structures.
The Sacco Societies Regulatory Authority (SASRA) has noted that many cases of fraud stem from inadequate internal controls, particularly in ICT and credit departments.
Declining Membership
A noticeable drop in membership can signal a lack of confidence in the Sacco.
If members are leaving or withdrawing their savings en masse, it may indicate dissatisfaction with management or concerns about the Sacco’s viability.
Delayed access to savings or loans
If a Sacco consistently delays loan approvals or disbursements, it may be facing liquidity issues.
Members should be wary if they notice that loan applications take longer than usual to process without clear explanations.
Unexplained Financial Losses
Regular announcements of financial losses without satisfactory explanations can be a cause for concern.
Members should seek clarity on the reasons behind these losses and how management plans to address them.
Lack of Communication from Management
Transparency is crucial in maintaining member trust. If management becomes less communicative or avoids addressing member concerns, it may indicate that they are hiding problems.
Regulatory Warnings
If a Sacco receives warnings or sanctions from regulatory bodies like SASRA, it is a significant red flag. Members should pay attention to such warnings, as they often reflect serious operational or financial issues.
Consistent Financial Irregularities
If a Sacco shows a pattern of financial mismanagement, such as repeated discrepancies in reports or ongoing losses, it may be time to consider withdrawing funds.
Increased Fraud Cases
A rise in reported fraud incidents, particularly involving internal staff, should prompt members to reevaluate their involvement with the Sacco.
The SASRA has reported substantial losses due to insider fraud, emphasising the need for caution.
Persistent Liquidity Issues
If members face ongoing difficulties in accessing their savings or loans, it could indicate that the Sacco is in financial distress. Members should not hesitate to withdraw their funds if they suspect that liquidity issues are systemic.
Management Changes
Frequent changes in leadership, especially if they lead to instability or lack of direction, can be a sign that the Sacco is not being managed effectively. Members should consider exiting if they lose confidence in the management team.
Regulatory Action
If a Sacco is placed under statutory management or faces severe regulatory scrutiny, it is a clear indication that the institution is in trouble.
Members should priorities their financial security and consider withdrawing their savings.
