Developing a Working Framework for the Sacco Deposit Guarantee Fund

Over the years, the popularity of savings and credit societies in Kenya has seen close to 5.4 million people subscribe and deposit approximately KES 431 billion up from KES 380 billion between 2019 and 2020. In addition, the Sacco supervision annual report 2020, highlighted that gross loans grew from KES 419.55 billion to KES 474.77 billion. This positive trajectory signals the confidence and potential of these institutions to be key drivers of financial access and inclusion in Kenya. True to that word, the Sacco industry has contributed an average of 5.72% of total assets against GDP as at 2019. This places Kenya above other developed and developing African countries such as South Africa, Rwanda and Ghana whose Sacco’s total asset to GDP ratio stand at 0.01%, 3.02% and 0.44% respectively.

As growth of the Sacco industry gathers momentum, opportunities and risks are bound to shape the roles and perspective of all stakeholders within the industry. Notably, members are expected to keep an eye on the safety of their deposits and investments while Government strengthens its oversight obligations through policies. Initiatives meant to prevent the collapse of a Sacco and hold those responsible accountable have been enhanced by the formation of the Sacco Society Fraud Investigation Unit (SSFIU). However, although this might bring some sense of relief to affected members, the fact still holds that the probability of an affected member recovering a substantial amount if not all diminishes overtime and this erodes gains that have made by the industry. With this in mind, the Government opted to form a safety net for Sacco members that would compensate affected members of a collapsed Sacco up to KES 100,000 per account holder through the Sacco Deposit Guarantee Fund.

Operating Framework

When developing an appropriate framework for the establishment of the Sacco Deposit Guarantee Fund, it is important for all stakeholders to reflect, understand and analyze the learning curve of its brother fund, the Kenya Deposit Insurance Corporation (KDIC). Since its incorporation the Kenya Deposit Insurance Corporation has cemented its position in Kenya’s banking industry as a major support pillar by offering appropriate risk management solutions that protect bank deposits. Although the banking sector in Kenya has undergone radical transformation in the past decade, security of customer deposits is still central to many strategies hence the involvement of Kenya Deposit Insurance Corporation. The fund, which was established through enactment of the Kenya Deposit Insurance Act of 2021, has seen its contributions grow from KES 77.16 billion to KES 90.37 billion between 2016 and 2017 thereby strengthening its ability to compensate bank depositors should an institution be under financial distress and ultimately collapse. The fund’s ability to perform its mandate has been tested in the past decade when Imperial Bank Kenya Limited was put under receivership and finally liquidated. From such experiences, the Sacco Deposit Guarantee Fund can borrow notes to avoid pitfalls that KDIC faced and offer seamless services to its consumers.

The Sacco Societies Act has provided a strong foundation on how the Sacco deposit guarantee fund will be operational. However, more flesh needs to be included in the Act to cover specific scenarios that would delay affected members compensation or stall the entire process hence incapacitating the fund. The Act is silent on which documents a member should possess prior to lodging a claim. This gap creates a myriad of assumptions among members and institutions and could ultimately lengthen the compensation period. In addition, the Act does not state whether the fund will cater for inflationary costs brought about by prolonged and protracted cases that ultimately affect settlement. Moreover, a gap exists in how to handle existing assets that a Sacco has managed to accumulate since its inception. A potential memorandum of understanding with the asset recovery agency could facilitate transfer and sell of Saccos’ assets thereby reinforcing compensation efforts. The need to deepen sensitization efforts and awareness campaigns within the industry would allow stakeholders understand the mandate of the fund. Considering that most Saccos are rural based, the regulator ought to intensify its efforts in promoting the fund as a vital artery in the entire industry framework. The effectiveness of the fund will depend on the perception and commitment of all stakeholders. Potential collaborations with institutions such as the Central Bank of Kenya and Office of the Attorney General would solidify the fund’s structure and value proposition in the long term.

The establishment of the Sacco Deposit Guarantee Fund has come at an appropriate time as the financial sector in Kenya diversifies and spreads its antenna far and wide. Although the move is welcomed, emphasis on oversight of Saccos cannot be understated in order to prevent an excessive and aggressive risk appetite that would weaken a Sacco’s overall financial position. To this end, synergic efforts and accommodation of stakeholder interests could work in unison to utilize the potential of the fund and develop the Sacco industry. 

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