Top-tier savings and cooperative societies (Saccos) may not withstand economic shocks in the short-term.

A recent report by the Sacco Societies Regulatory Authority (Sasra) highlights financial health trends in several of Kenya’s top-tier savings and cooperative societies. The report, which was released after an analysis of the 2023 financial year, shows that at least five prominent Saccos, including Mwalimu National Sacco and Safaricom Sacco, have failed to maintain the regulatory minimum capital levels, raising concerns about their ability to weather economic shocks in the near future.

The affected Saccos have seen their Institutional Capital to Total Assets (ICA) ratios drop below the required threshold, which reflects poorly on their financial stability. Sasra mandates that Saccos maintain an ICA ratio of at least 8%, a figure deemed critical for protecting Saccos against potential losses from market volatility and economic downturns. However, several top-tier Saccos have failed to meet this target, casting doubt on their financial sustainability.

Declining ICA Ratios and Their Impact

According to Sasra’s newly released annual report, Mwalimu National Sacco’s ICA ratio dropped significantly by 2.47 percentage points from 10.17% in 2022 to 7.7% in 2023. This decline was largely attributed to the Sacco’s decision to divest from the loss-making Spire Bank, which had been a financial burden. The sale of Spire Bank, while necessary to cut losses, led to a significant drop in Mwalimu National’s surplus capital.

Similarly, other major Saccos have experienced declining ICA ratios, which are essential for ensuring that the organisations maintain sufficient capital to absorb losses during periods of economic instability. The ICA ratios of Safaricom Sacco, Ukulima Sacco, Boresha Sacco, and Kimisitu Sacco have also fallen below the recommended levels. Safaricom Sacco’s ratio fell by 0.41 percentage points, while Ukulima and Boresha dropped by 0.56 and 2.44 percentage points, respectively. Kimisitu Sacco witnessed the largest decline among the five, with its ICA ratio falling by 2.94 percentage points.

These declines indicate that the affected Saccos might struggle to meet capital requirements in the face of external economic pressures, potentially putting member savings and investments at risk.

Sector-Wide Challenges

The financial health of these Saccos is not an isolated issue but part of a larger trend affecting the broader Sacco sector. Sasra’s report reveals that the number of Saccos with ICA ratios below the 8% threshold increased from 30 in 2022 to 35 in 2023. This marks a concerning rise in the number of financially vulnerable institutions.

The overall ICA ratio for Kenya’s 174 deposit-taking Saccos dropped from an average of 9.58% in 2022 to 9.11% in 2023. This reduction suggests that many Saccos are grappling with lower surplus capital stocks, which could limit their ability to respond to unforeseen financial disruptions.

Key Indicators of Financial Stability

While the decline in ICA ratios is alarming, other financial stability indicators remain within acceptable limits. Sasra reported that core capital to total assets ratio, core capital to total deposits ratio, and external borrowing to total assets ratio for Saccos are still within the recommended levels. This means that although some Saccos are struggling with their ICA ratios, their broader financial stability may still be intact. However, the declining ICA ratios highlight the need for more robust capital retention strategies to safeguard against future risks.

Why ICA Ratios Matter

The Institutional Capital to Total Assets (ICA) ratio is a critical measure of a Sacco’s financial health. It represents the proportion of an institution’s capital and reserves relative to its total assets, acting as a buffer against potential losses. Saccos with higher ICA ratios are generally considered to have stronger financial health, as they can better absorb losses during periods of economic downturn or other financial shocks.

A drop in the ICA ratio can result from several factors, including poor financial management, increased liabilities, or reductions in capital reserves. When Saccos fail to meet the required ICA ratio, it signals a potential vulnerability in their ability to manage future risks, leaving them exposed to financial instability.

Regulatory Response

Sasra, as the sector regulator, has called for urgent measures to address the declining ICA ratios in the Sacco sector. The regulator has recommended that Deposit-Taking Saccos (DT-Saccos) implement strategies not only to generate surpluses but also to retain a greater portion of these surpluses. By doing so, Saccos can strengthen their capital buffers, ensuring that they have sufficient reserves to weather economic shocks and continue serving their members effectively.

“This calls for measures by DT-Saccos to put in place strategies aimed at not just making surpluses, but retaining more from the surplus in order to cushion them from emergent economic shocks that may arise in the course of their operations,” said Sasra in its annual report.

Consequences of Non-Compliance

Saccos that fail to comply with the regulatory requirements may face increased scrutiny from the regulator, and in some cases, could be subject to penalties or restrictions. Non-compliance with ICA ratio requirements could also impact member confidence, leading to a reduction in deposits and further financial strain on the institution.

Moreover, failing to meet the required capital thresholds can hinder a Sacco’s ability to expand its operations, attract new members, or offer competitive financial products. In the long term, this could lead to reduced market share and diminished growth prospects for non-compliant Saccos.

The Role of Saccos in Kenya’s Economy

Saccos play a vital role in Kenya’s financial sector, especially in providing access to credit and financial services for underserved populations. With over 14 million members across the country, Saccos have become essential vehicles for savings and investments, particularly for individuals in the informal sector. According to recent data, the total assets of deposit-taking Saccos in Kenya surpassed KSh 1 trillion in 2023, underscoring their significance in the national economy.

However, the challenges facing top-tier Saccos, such as Mwalimu National and Safaricom Sacco, highlight the need for stronger regulatory oversight and more prudent financial management within the sector. As Saccos continue to grow in size and importance, ensuring their financial stability will be crucial for maintaining public confidence and safeguarding the savings of millions of Kenyans.

Moving Forward: Strengthening Sacco Resilience

To address the current challenges, Saccos need to adopt more proactive financial management practices. This includes improving capital retention strategies, diversifying income sources, and enhancing risk management frameworks. Additionally, Saccos should focus on member education and financial literacy to ensure that members are fully informed about the financial health of their institutions and the steps being taken to protect their investments.

Collaboration between Saccos and regulatory bodies like Sasra will also be critical in ensuring that the sector remains robust and resilient in the face of future economic challenges. By implementing the necessary reforms and strengthening their financial foundations, Saccos can continue to play a pivotal role in Kenya’s financial landscape, driving economic growth and supporting the financial well-being of their members.

Conclusion

The declining ICA ratios among top-tier Saccos such as Mwalimu National, Safaricom, Ukulima, and others are a cause for concern. While other financial indicators remain within acceptable levels, the drop in surplus capital highlights the need for urgent reforms within the sector. Strengthening capital retention strategies and improving financial management practices will be crucial for ensuring the long-term stability of these institutions.

As the Sacco sector continues to grow in size and importance, maintaining financial health and regulatory compliance will be essential for safeguarding the interests of members and supporting the broader Kenyan economy. Through collaboration with regulators and the implementation of sound financial practices, Saccos can overcome these challenges and continue to thrive in the future.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

16th September, 2024