ICPAK WORKSHOP -MOMBASA REFORMS AND DEVELOPMENT IN THE SACCO SUBSECTOR.

1. ICPAK WORKSHOP -MOMBASAREFORMS AND DEVELOPMENT IN THE SACCO SUBSECTOR. SASRA 20th April, 2017

2. PRESENTATION OUTLINE • INTRODUCTION – BACKGROUND INFORMATION • EXPECTED REFORMS • CURRENT SITUATION • CHALLENGES. • Introduction – Titos Case Study. Seemed very Rich but he committed suicide when insurance refused to compensate him for burning his warehouse? The SACCO SOCIETIES REGULATORY AUTHORITY

3. Background information • After independence, all Cooperatives were guided by the cooperative societies Act of 1966 which had been introduced to parliament via a sessional paper of 1965. • Since the institutions were newly formed and weak, they needed very strong government control in managing of coop businesses. • Among the key controls were countersigning of cheques by government officers, strict controls in AGMs, periodical checking of cashbooks. • Preparation of accounts as per the standardized cooperative accounting was adopted. The key characteristics of cooperative accounting was activity based accounting. The SACCO SOCIETIES REGULATORY AUTHORITY

4. Background Cont….. • All revenue centres or income generating activities were identified as activities and all incomes and expenses attributed to the activity were charged to the respective Activity account. They would all later be transferred to the society general account as either surpluses or losses. • All the expenses which could not be attributed to a specific Activity would be charged to the society general account. • This account determines whether the coop had losses or surpluses during the year. However, Saccos were missing in the Coop frameworks and hence normal commercial accounting was adopted which had the following challenges:- The SACCO SOCIETIES REGULATORY AUTHORITY

5. Background cont…. • The quality of assets would not be ascertained especially loans to members – No provisioning for loan losses. • Declaring profits and paying dividends which have not been earned • High volume of non earning assets. • Low liquidity especially after loans disbursements in BOSA. • Low capital adequacy – Not enough funds to protect the creditors, depositors and expansion (MIS) – low computerization. • Incomplete book keeping and hurriedly preparation of books to fit into the AGM requirements. • Internal controls relied on audit queries(post mortem in nature) and administrative actions from District cooperative offices. The SACCO SOCIETIES REGULATORY AUTHORITY

6. Background cont…… • Non professional lobbying leading to the liberalization of the sector in 1997 (repealing of Coop Societies Act 1966) • Experience of liberalization and re – introduction of coop Societies Act in 2004. • Growth of the sub-sector and establishment of bank like activities called FOSA (Front offices savings activity) • Commissioning of study by WOCCU (world council of credit unions) which classified all saccos as insolvent (absolute use of PEARLS – capital adequacy,liquidity,non-earning assets as earlier mentioned. • Uproar by the sector – concern by the professionals and rejection of Sacco act in 2005 and re-introduction of Sacco Act in 2008 and attendant regulations in 2010. The SACCO SOCIETIES REGULATORY AUTHORITY

7. Current Situation • Reliance on other parameters other than Audit (post motem) for action like early warning signs. • Compliance with prudential guidelines • Reliance on third parties for information • Close scrutiny of documents submitted to Sasra for approval. • Opportunity and growth for Saccos to advance towards self governance. The SACCO SOCIETIES REGULATORY AUTHORITY

8. EARLY WARNING SIGNS Perennial liquidity challenge Excessive pressure for external funding, increasing member complaints (loan backlogs) Low capital accumulation Capital below 10% of total assets, low retained earnings, High expenditure/ High Non-earning assets Increasing delinquency rates PAR above 5%, lack of objective means to measure delinquency. The SACCO SOCIETIES REGULATORY AUTHORITY

9. EARLY WARNING SIGNS CONT’D Membership withdrawals • High number of applicants withdrawing from the Sacco • Increased member complaints High Staff turnover • Frequent exit of Senior managers / board with no clear reasons High level of fraud cases • Weak internal systems and accounting controls The SACCO SOCIETIES REGULATORY AUTHORITY

10. FINANCIAL STABILITY INDICATORS • SASRA’s core mandate is to prevent financial crisis in the Sacco sub-sector through supervision and regulation. • Evaluation of the monthly mandatory returns from the licensed Saccos is one of tools used; • CAMELS risk-based supervision model is used in assessing the potential risks. The SACCO SOCIETIES REGULATORY AUTHORITY

12. SAFETY NETS IN SACCO’S • Central Liquidity Facility Unlike commercial banks which have CBK as the lender of last resort, Saccos lack a Central Liquidity Facility. A consultant was appointed to study the current regulatory structure and recommend appropriate options. 2.Deposit Guarantee Fund (DGF) Though provided for under SSA Section 55, it has not been operationalized due to legal inadequacies and technical challenges. A consultant will be engaged to relook at the design and advise. The SACCO SOCIETIES REGULATORY AUTHORITY

13. RESOLUTION OPTIONS FOR SACCOS 1.Statutory Management Section 51 & Reg.73: give SASRA powers to issue an order placing the Society under statutory management on the following grounds: • Wilfully and continuously fails to comply with instructions issued by the Authority • Abandons its core business and does not operate in the members best interest • Incapable of copying with severe financial problems that need to be brought under control The SACCO SOCIETIES REGULATORY AUTHORITY

14. Has engaged in unsound financial practices resulting in massive erosion of capital or • If a petition is filed for winding up of the Sacco Society A Sacco Society’s financial soundness is deemed threatened if: • It is unable to meet its obligations to depositors & creditors • Its institutional capital is less than 2% of total assets and on a declining trend The SACCO SOCIETIES REGULATORY AUTHORITY

15. CHALLENGES • Lack of Central Liquidity Facility • Lack of DGF • Data integrity and quality of information- weak MIS • Inadequacies in the regulatory and legal framework: • Dealing with subsidiaries – sacco and company ? Integrated Supervision • Vetting of Directors and Senior Management staff • Lack of adequate Financial resources: • Capacity building and sufficient human capital • investment in MIS. The SACCO SOCIETIES REGULATORY AUTHORITY

16. Sacco Theory Continum • The Sacco development path is a continum with a start at independence to the current situation as summarized by the following Theories:- • Agency (shareholders Theory) – Probably during formation when Saccos interest is to satisfy members (mostly populist approach) • Stewardship Theory – Keeping the main objective in focus yields satisfaction (As long as you are giving loans all is well External borrowing not an issue). • Stakeholders Theory – Sacco is satisfying all the major stakeholders – some taking advantage • Degeneration Theory – Saccos Struggling to become like other institutions ie profitability and loosing focus on principles of coop. The SACCO SOCIETIES REGULATORY AUTHORITY

17. END THE SACCO SOCIETIES REGULATORY AUTHORITY