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Why proposal to turn saccos into banks is a bad idea

Wednesday April 25 2018

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The World Bank and the International Monetary Fund would like Kenya’s cooperative movement, formally known as savings and credit cooperatives (saccos), to be turned into banks, apparently to give competition to the banking sector as part of the solution to the law capping interest rates on loans, according to a report commissioned by the Central Bank of Kenya.

That sounds neat and clinical, as if it will improve the lives of ordinary Kenyans, except for the fact that, if adopted, the proposal would disrupt something that already works in a bid to cure a sector that has consistently exploited Kenyans and has for decades practised financial exclusion unabated.

According to a financial sector stability report from the CBK, Kenyans turned to saccos for financing once commercial banks claimed that the cap on interest rates did not cushion them enough to lend to Wanjiku. It means that the sacco movement is the ‘run-to’ place for financial inclusion and it must be allowed to remain so.


In the 1980s, the Bretton Woods institutions coerced the Kenyan government into structural adjustment programmes. These were conditions that they had to fulfil in order to access more credit from them. One of the major issues at hand was that the government needed to adopt a free-market economy by getting out of certain sectors as, according to the institutions, it was bad for competition and it created monopolies that exploited the public. So the government let go of public transport and the result was the cartel-operated matatu industry that no law seems to be able to tame.

The government also needed to stop controlling grains – read staple food – so that the market could correct itself in times of surplus or scarcity. The demand was to the National Cereals and Produce Board. The results, either directly or indirectly, are maize scandals in which Kenyans have to pay cut-throat prices for maize flour, before government intervention with imports creates overnight billionaires and the cycle is repeated every so often.

It is also the implementation of this programmes during the Narc government that seems to have dealt a blow to institutions of social protection such as healthcare, making Kenyans, as the saying goes, “only one illness away from poverty”. If our history is anything to go by, proposals from the Bretton Woods institutions harm the common Kenyan and noncompliance by the government does not deter continued extension of credit.


Suggesting that saccos will compete with banks is a direct appeal to the destructive greed in any industry driven by the lure of profits, while ignoring the spirit of the sacco movement, which is to enable member to access credit. Cooperatives provided financial inclusion, long before Equity Bank implemented the concept of ‘barefoot’ banking and well ahead of microfinance institutions. One of the saccos’ primary objectives still is to give affordable credit to their members. They still afford members interest rates of 12 per cent, much lower than the cap in law that currently stands at 14 per cent.

Profit maximisation is not one of their aims, even if it remains a possibility. Suggesting that they operate like banks means that profit becomes their primary objective and nothing stops them from getting out of control, as the banking sector did, warranting the review of the Banking Act. Cooperatives still want to enable members to increase their productivity and purchasing power while equitably distributing their surplus to members who are the first and primary beneficiaries of such profits.

There is also the issue of protecting the identity of the cooperative movement. It may not want to be one and the same with the banking industry. It might also have been prudent to make the major saccos part of the research sample before coming up with such recommendations. Unless, of course, their opinion is secondary to that of the BK and the Bretton Woods institutions.


There would be certain benefits if saccos operated like banks. They would gain financially from taking deposits from non-members, thereby making more credit available. They would also not need banks to clear their payments, which substantively increases the cost of doing business.

Growth of saccos into different sorts of financial institutions would also solve the additional disadvantage of members whose needs outgrow the movement and are forced to seek financing beyond what this benevolent lender can provide at any given time. Many times the frequency of borrowing for capital projects can surpass what a sacco can support.

It is because of these challenges that the Central Bank should use a bottoms-up approach if the intention is to help cooperatives grow, rather than interfering with Wanjiku’s financial lifeline. The Constitution also recommends public participation in the enactment and changing of laws and regulations. I cannot think of a better public to discuss this issue beyond saccos and their members.

Twitter: @muthonithangwa