A reader emailed with a question. I thought to email him back with my two cents, but then later, after having a cup of tea and banana, I figured to turn his question into a story for this column. (A writer has to do what a writer has to.)
Also, if you folks have any more questions, I’m more than thrilled to answer them. I don’t want to turn this into a pulpit where I weld my Bible every week and spit scripture – think of it like a coffee house, instead, and you and I sit to chat about our money.
Anyway, Mark emailed saying:
Like you, I am an ACCA accountant and having read your latest article, I declare myself impressed. I am not a rich man but from time to time I have a spare Sh10, 000 here and there, which I currently know I just put to waste.
Your article mentioned investing in Saccos so my two questions are: Is this a safe investment or is there a chance that the SACCO will shut with my money in it? Tell me a bit more if you possibly can, just so I know how much risk I am taking and if the reward measures up. I work and live in London but hope to return home soon and would like to do that with a financial safety net if possible.
And I would have said…
Thank you so much for writing in, Mark. No, really, thanks. I’ve not had the immense pleasure of turning a reader’s email into a column idea. So this is pretty special.
Saccos are great for three things: you save, you invest and you borrow cheap.
Saving and investing
Your Sacco savings grow as you make contributions. You can make contributions at a frequency that works for you – I suggest putting in a little consistently every month.
Your savings, rather contributions, earns you dividends at the end of the year. And it’s not peanut dividends like those for the stock market, it’s relatively solid cash.
I may as well be open with you, now that we’re here: One of the Saccos I save with – let’s call it Sacco A – gives me about Sh56,000 for savings of Sh750,000. The other Sacco – Sacco B – gives me dividends of Sh8,000. I only started saving with them, I have in there about Sh100,000 and a short-term loan I’m servicing.
Loans have no impact on the dividends you’ll receive, or how your dividends are computed. Some people try to cheat the system by being dormant most of the year then making a lump-sum towards December. Saccos think ahead of you – the contributions you make earlier in the year, say in January, earn more in dividends than those made towards the end of the year.
There’s a computation the sacco uses. Here’s a sample from Kenya Police Sacco >> https://policesacco.com/dividend-calculator/
Being in the Sacco also means I, as a member, get first priority when the Sacco has property they’d like its members to invest in. Sacco A has a housing arm.
We’re usually invited to buy land on discounted member rate. Last year they did plenty of site visits to Nanyuki and Nyeri. I believe that the house me and my hubby, GB, will someday purchase, will be through this housing scheme.
One thing you need to be aware of in Saccos is something called share capital. Share capital, in the simplest terms, means the amount you put in to buy shares in the Sacco. It’s like a non-redeemable ticket into a club.
Most Saccos have a standard amount of share capital for all members – no member has more shares than the next. It’s deducted from your contributions. (Ideally, it should.)
Share capital also means that, should you decide to exit the Sacco, they’ll give you back your contributions but they’ll retain your share capital.
The share capital for Sacco A is Sh10,000. The one for Sacco B is Sh35,000.
It’s important you understand that the value of the share capital doesn’t directly translate to the financial health of the Sacco. Sacco A has as stronger balance sheet and more members than Sacco B.
Sacco A lends four times your contributions. Sacco B lends three times your contributions.
Sacco A doesn’t have front office services activities (FOSA), Sacco B does, meaning that it provides basic banking services to the members. I have a Co-operative Bank ATM card from Sacco B.
I’m not sure what it’s for exactly but I think they have the option for me to have a savings account with them.
FOSA also means I can deposit cash to the Sacco office. I can’t do this with Sacco A. Loans are also disbursed faster.
Last loan I took, I applied for it in the morning, with completed forms submitted before noon, and by 4p.m. that afternoon the money was in my M-PESA. Last I borrowed with Sacco A, my loan took 15 working days to be disbursed.
Savings and loans
Remember that once your cash goes into the Sacco, the only way to get access to it is either through a loan or if you exit the Sacco all together.
Sacco loans are relatively cheap. Donkey years back, I took a bank loan of Sh1.5million from StanChart bank. Repayment period of five years. I was repaying per month Sh52,000.
I later took a similar loan with Sacco B, for a repayment period of 48 months. I was paying per month Sh39,000.
I don’t know about Sacco B, but Sacco A says that if you borrow a certain amount, then you are required to save a respective amount every month. It’s for risk management, I believe.
So as I was settling this Sh39,000, I was mandated to contribute every month an additional Sh7,000.
The catch with borrowing from a Sacco is that, you should have been saving with them consistently for at least six months. Then you must find guarantors to cover the amount you want to borrow.
Let me illustrate: say you’ve saved Sh100,000, which means you can borrow three times. That’s Sh300,000. You’ll guarantee yourself that Sh100,000 in your savings, find guarantors to cover that difference of Sh200,000.
Getting these guarantors is sometimes a headache.
Members you guarantee
The other headache is guaranteeing someone who fails to make their monthly loan repayment. The Sacco will give the culprit three months before they start to recover their money.
And guess where they’ll turn for recoverability? Yes. Suddenly you’ll see your contributions dwindling by the month because they’re taking care of someone else’s loan.
This happened to me once. Sh76,000 for a colleague I’d guaranteed bludgeoned my savings two months in a row. You’ve never seen me more upset. Good news is, he later repaid his loan and the amounts were reversed.
Not many people I know have such luck with guarantees who don’t keep their word.
Can Saccos collapse with your money? Yes, they can. So can banks, chamas, businesses and other investments where you’ve tied your money.
My mum’s Sacco collapsed with their life savings. TNS, Teachers of Nairobi Sacco. Thankfully she has prime property in Syokimau to show for her investment with them. She didn't give up; she has since moved to saving in a Sacco with her church.
There is no foolproof way of telling whether a financial institution is sound – I mean, look what happened with Imperial Bank – but there’re indicators to peel your eyes for.
Indicators like liquidity levels for their loans, health of the financial statements, management controls, tone at the top, members’ concerns at AGM, dividend pay-outs, investment portfolio and your good old instinct.
I think I just may ask my mum to tell me more about the warning signs of their Sacco, what red flags she may recall before it collapsed.
I trust that answers your question, Mark. Let me know.
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