Merge or perish, Sasra tells saccos

PHOTO | FILE Sacco Societies Regulatory Authority chief executive Carilus Ademba at a previous function.

What you need to know:

  • Sasra is giving options to the 65 saccos that are unlikely to meet the threshold
  • One of the options is merging with those that have complied
  • The other alternative is forming partnerships to enable them continue offering front office services

There are likely to be many mergers among savings and credit societies in the coming days as those that are financially weak seek to meet the new stringent capital requirements by the end of June 2014.

The Sacco Societies Regulatory Authority (Sasra) is giving three options to the 65 saccos that are unlikely to meet the threshold. One of the options is merging with those that have complied.

It is advising them to change their business models and consider coming together with the better performing and licensed saccos or close their front office services, but retain back-office services.

The other alternative is forming partnerships to enable them continue offering front office services.

“These are the inevitable options as regulatory demands and competition pile pressure on small financial institutions. The authority and ministry will fully support such business options in terms of regulatory and policy guidance to ensure smooth transition of mergers or closure of Fosa operations,” the Sasra chief executive officer, Mr Carilus Ademba, said.

Most of the saccos that have not complied are finding it difficult to raise their capital levels to Sh10 million as required due to their small membership, often less than 2,000, and financial problems carried over from past mismanagement.

Some started front office services without a clearly thought out business plan and competition from other saccos, commercial banks, and deposit-taking microfinance institutions have only exacerbated the situation.

There are also concerns that demand by sacco members for annual dividends are eroding the capital base of some of these entities, making them unable to comply with the new capital requirements.

According to the sacco supervision annual report for 2012 released by the regulator last week, 10 large saccos with assets of over Sh4 billion account for 49 per cent of total member deposits held by the 124 saccos by December 2012.

In the medium category, those that have between Sh1 billion and Sh4 billion, there are 41 saccos which command 40 per cent of the licensed sacco assets.

Most groups have assets of less than Sh1 billion, 73 of them representing 60 per cent of the deposit-talking saccos and control 13 per cent of the total assets.

Out of the total 215, about 132 sacco societies have been licensed, 18 have either been issued with letters of intention or inspected for licensing, while the other 65 do not satisfy the minimum licensing requirements.

Saccos are required to satisfy the minimum standards in respect of capital adequacy and diversification from non-core business activities.

Out of those registered, three-quarters or 99 have capital adequacy ratio of 8 per cent against the regulatory minimum of 10 per cent while a quarter or 33 have investments in non-core assets in excess of the regulatory maximum of 10 per cent.

These will be required by June 2014 to have fully complied with these requirements. They will either have to sell some of the non-core assets or raise their core capital to bring the non-core assets at below 10 per cent.

The report noted that the average ratio of non-performing loans to gross loans remains above 7 per cent which is undermining the earnings and liquidity of most saccos.