NEWS WIRE: Kenya: Bill Seeks to Block Money Transfers by Microfinance Institutions Known as Saccos (Savings and Credit Co-operative Societies)

Original article available here.

NAIROBI, June 20 – Savings and Credit Co-operative Societies, popularly known by millions of Kenyan workers as Saccos, will be barred from money transfer business if a new Bill under discussion in Parliament is passed.

The Bill also proposes to bar Saccos from wholesale and retail trade or investments in enterprise capital as a means of diversifying their revenue lines.

The front office services activity (FOSA), which facilitates money transfers, is one of the most popular and convenient services offered by Saccos that is in direct competition with commercial banks.

Besides transfers, Fosa’s compete directly with banks for deposits because Sacco members can process their salaries, emergency finance and utility bill payments through them.

The proposed law is expected to severely narrow the investment choices that the management of Saccos make and force them to concentrate more on the small self-help loans that they have proven expertise in.

Though most Saccos run legitimate businesses for the benefit of their members, which together with the savings and lending products provide the economic lifeblood for millions of workers in the formal and informal economy who have no access to banking services, the none-core sides of these societies have become a major breeding zone for pyramid schemes.

The none-core activities like running restaurants, bars, office blocks and matatu fleets have also become a costly distraction with poorly managed Saccos running into difficulties after tying their capital in long term investments such as real estate, leaving them with minimal funds to loan out.

Whichever way Parliament handles the Bill, it will have a ripple effect in the financial sector with a major beneficiary likely to be commercial banks and particularly the Co-operative Bank, which banks for Saccos.

Most Sacco societies bank with Co-operative and if the Bill is enacted without amendments, the bank will handle most of the money that passes through the Saccos thereby strengthening it. Saccos are neither supervised by CBK (Central Bank of Kenya) nor required to meet its liquidity ratios.

Though they are not as heavily regulated as commercial banks and even if their lending is mostly based on mutual trust (in the form of personal guarantees), they form a big part of the national payment and credit system that is loosely regulated.

According to Central Bank statistics, commercial banks at the beginning of 2008 were holding Sh682 billion for depositors and had lent out Sh400 billion. Around two million Kenyans, out of a total workforce of 15 million in the formal, informal and farming sectors hold bank accounts today. Over half of these customers are with Equity Bank and Co-op Bank.

Saccos on the other hand served seven million members with KES 210 billion (USD 3.2 billion) in deposits and advanced loans worth KES 150 billion (USD 2.3 billion) as last year, according to the latest data from the ministry of Cooperative development and marketing.

As matters stand, Saccos serve 17 percent of Kenyans and have grown at an average of 20 percent per year over the last five years.

Even as the government moves to stamp out pyramid scheme operators and poor investment strategies to protect the public, the new law could stifle the powers of the Saccos to benefits banks and other competitors directly. This could also help to bring cash and credit transaction, which have been happening in the informal sector under the watch of the banking regulator.

Analysts say if Parliament rejects the Bill, the Cooperative bank and other financial institutions that carry out money transfer business will be protected from direct competition from the Sacco societies.

“Outright barring of Saccos from operating money transfer business will limit the growth of Sacco societies and give advantage to banks” said Mr Carilus Ademba, the managing director of the Kenya Union of Savings and Credit Co-operatives (KUSCCO), the umbrella body of Sacco societies.

Last year, KUSCCO signed a partnership with World Council of Credit Unions (WOCCU), a global umbrella body of Sacco societies for a joint international Fund Transfer facility to enable local Sacco societies to start international money transfer operations. The international fund transfer enables consumers to access their money through some Sacco societies if the money is wired through Vigo money transfer scheme in the US.

Saccos had targeted money transfer transactions, which have been dominated by banks and international institutions like Western Union, as their growth drivers.

KUSCCO said yesterday that it would lobby MPs to amend the Bill. “Where the world is going now, nobody can restrict Sacco societies from the line of business they want to take,” said Mr Ademba.

The Sacco Societies Bill 2008 tabled in Parliament last week says Sacco societies will be prohibited from engaging in foreign exchange operations, wholesale and retail trade, underwriting and placing of securities. Most Sacco societies rely on retail or wholesale business to grow revenues that earn dividends to members.

The Bill is intended at regulating the sector, which had savings of up to KES 210 billion (USD 3.2 billion) as at the end of December 2007. “If Sacco societies are barred from carrying out money transfer businesses, the Cooperative Bank will be affected greatly since it banks for almost all Sacco societies in Kenya” said Mr Ademba, adding that he had informed the Co-operative Development minister, Joseph Nyagah, of the irregularities.

“We have drafted amendments and will be passing it to a parliamentary committee to pass it to the House. The minister for cooperative Development is supporting our amendments,” said Mr Ademba.

The Bill promises to bar Saccos from expanding membership by taking deposits from non-members, which could undercut membership at a time when the societies are struggling to keep their members. Kenya’s Saccos have opened up to membership outside their traditional bases in a bid to raise capital for funding new investments. Competition from banks and pyramid schemes has whittled down Saccos’ membership.

By Jim Onyango, Business Daily.

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