Kenya’s deposit-taking savings and credit co-operative societies (Saccos) have started reviewing interest rates downwards in response to competition from commercial banks following the capping of interest rates last month.

While this is good news for borrowers, it will result in a significant shrinking of margins, with members taking home lower dividends (returns on shares) and rebates (interest on savings).

The ability of the Saccos to drastically revise interest rates is however constrained by expensive credit lines they have already secured from commercial banks at high interest rates for on-lending to members.

At a meeting in Mombasa last week, experts advised that  Saccos were not covered by the Banking Amendment Act 2015. However, the ground is quickly shifting in favour of banks — which are able to offer unsecured lending at rates below those quoted by the Sacco banking wings, called Fosas.

Bank loans could also become more attractive to borrowers because, unlike Saccos, a lead time to save, usually six months, is not required.

The Saccos umbrella body, the Kenya Union of Savings and Credit Co-operatives (Kuscco), said the sector had agreed to adjust rates on products priced above 14 per cent in order to withstand intense competition from commercial banks.

“The law itself is not applicable to Saccos but we have to be cognisant of its ripple effects. We don’t want to see a situation where our members switch between Saccos and banks to access loan products,” said Kuscco chief executive George Ototo.

The Saccos have been advised to assess the impact of the new law on their businesses and respond appropriately.

“We came out of the meeting with the view that Saccos are not legally bound to review the rates but market forces dictate so,” said Jacob Kimathi, the chief executive of the Nation Sacco Society.

Mwalimu National Sacco, the largest Sacco in the country with 60,000 members, mostly teachers, and Ksh32.3 billion ($323 million) in assets will this week review its rates downwards by between nine and 25 percentage points.

“The changes (are) effective from October 1 for existing and new loans. All other terms remain the same,” John Ochieng, the chairman of the Sacco’s TSC Branch said in a notice to members seen by The EastAfrican.

The review will see the products priced at between 14.5 per cent and 18 per cent, down from between 16 per cent and 24 per cent. According to the Sacco Supervision Annual Report 2015, average lending rates for Saccos were 12 per cent on a straight line basis (seven per cent on a reducing balance basis) compared with 18.3 per cent for banks.

Saccos paid an average savings rate of 8.08 per cent to members compared with 1.58 per cent by banks. The Saccos also paid an average dividend of 5.04 per cent to members.

The report said the high interest rates charged by commercial banks and their volatility had affected Saccos, especially those that maintain huge credit lines with commercial banks to on-lend to their members.

“This is because, unlike the banking sector, where interest rates charged to customers are determined by individualised contractual agreements that allow easy variations, the Sacco sub-sector lending is normally premised on standardised and uniform policies or by-laws applicable to all the members, thereby making it very difficult to vary their lending rates with a variation in the interest rates,” the report said.

The law capping interest rates requires commercial banks to charge not more than four percentage points above the Central Bank Rate (CBR) and to pay customers a deposit rate of 70 per cent of the CBR, which is now at 10 per cent. This effectively squeezes the operating margin for banks from above 14 percentage points to seven percentage points.

To cover for the tight margins, banks are introducing higher processing and insurance charges and restricting the definition of savings to fixed term deposits. Saccos are also expected to follow this route while reducing the return on non-withdrawable deposits that act as security for member loans.