Blow to Kenyan banks as Saccos close in on own money market

Monday February 08 2021

According to officials, the Sacco fund will be run and managed by Sasra with funding coming from both the Saccos and the government - edging out banks from the sector. PHOTO | FILE


Kenyan Savings and Credit Co-operative Societies (Saccos) are moving closer to the implementation of an inter-Sacco lending market and eventual integration into the National Payments and Clearing system in a development, leaving commercial banks staring at close to Ksh2.33 billion ($21.37 million) loss in interest income on loans granted to the co-operative sector.

The Sacco Societies Regulatory Authority (Sasra), working with a multi-agency team comprising the State Department of Co-operatives, the National Treasury, Central Bank of Kenya (CBK) and the Kenya Law Reform Commission (KLRC), has drafted the legal framework for the operationalisation of the Central Liquidity Fund (CLF) where Saccos can lend and borrow money from each other thereby severing ties with Commercial banks whose loans are considered ‘expensive.’

Under the new regime, Saccos will run their own inter-Sacco market where they can lend and borrow from each other at reasonable rates to offset their financial positions.

The draft legal framework is currently under review by the office of the Cabinet Secretary in charge of Agriculture, Livestock, Fisheries, and Co-operatives   and is expected to be submitted to Parliament by March as part of the Budget Policy Statements for the 2021/2022 fiscal year.

So far, 50 Saccos have shown interest in the initiative and are working with Sasra in making it a reality.

In 2019 President Uhuru Kenyatta issued a policy directive towards the establishment of a Central Liquidity Fund (CLF) for Saccos, with the ultimate objective of   integrating deposit taking (DT) Saccos into the National Payment System.


The latest is bound to put an end to commercial relationships involving Saccos and banks with the lenders losing third party businesses which they have often executed for a fee including issuing of cheque books, processing of personal cheques issued to Sacco members, trade finance services, treasury management services, Electronic funds transfer services and real time gross settlement (RTGS).

According to Sasra, Saccos are now moving away from external borrowing as a funding source for their assets largely due to the expensive loans and stringent conditions made by commercial banks.

In 2019, the Saccos’ cost of external borrowing stood at Ksh2.33 billion ($21.37 million), according to the authority’s annual supervision report (2019).

The external borrowing ratio which measures the level at which Saccos are   funding their assets from externally borrowed funds, declined to 3.88 percent from 4.11 percent indicating that deposit taking Saccos are generally moving away from external borrowing as a funding source for their assets, according to the report

A Sacco’s haven

“The Central Liquidity Fund creates a framework through which the Saccos can interact. For example, if Sacco ‘A’ has a cashflow problem it should be able to access funding from Sacco ‘B’. It just allows Saccos to team up and develop their capacity to serve their members. The current situation is that if your Sacco runs short of money the only place you can go is to a bank but now with the CLF you should be able to go and borrow money overnight or for two days from the fund and refund cheaper money than you can get from a commercial bank,” John Munuve, Sasra’s Chairman, told The EastAfrican in an interview last week.

According to Mr Munuve the fund will be run and managed by Sasra with funding coming from both the Saccos and the government.

“Once we create the fund our interest is to strengthen the sector. That fund will be regulated by us (Sasra) and so it can source money from anywhere,” he said.

The CLF would empower Saccos to issue their own cheques to their members unlike now when they are restricted to processing bankers’ cheques on behalf of banks on a revenue-sharing basis, which is heavily slanted in favour of banks.

CLF would also remove the need for Saccos to get lines of credit from commercial banks at high interest rates that cannot be supported by the regulated terms on which Saccos lend to their members.  

The move is part of efforts by the regulators to help Saccos manage cash constraints that have arisen following the introduction of new prudential guidelines for Deposit Taking Saccos (DTSs).

In 2016 regulator (Sasra) commissioned an American consultant firm, Dave Grace & Associates, to carry out a feasibility study on the operability of the CLF in the Kenyan market.