Effectiveness of the Sacco Deposit Guarantee Fund

The stability of the financial industry globally depends on confidence bestowed upon it by consumers of its services. Such confidence stems from the fact that consumers believe that their hard-earned savings are not only accessible but secure. Kenya’s financial space has experienced its fair share of turbulence in the past decade. Before the current Governor of the Central Bank of Kenya assumed office, depositors, borrowers and investors in the banking sector had enjoyed a relatively peaceful and profitable season. Regrettably, secret dealings and unscrupulous practices that had created a ‘stable’ perception within the banking industry were unearthed and two banking corporations were on the red. Unfortunately, Imperial Bank of Kenya had to be put under receivership and later liquidated while Chase Bank managed to get a strategic investor at the nick of time thereby giving it a new lease of life and allowing its depositors to breath a sigh of relief.

As the banking sector was putting its house in order under the leadership of the new Central Bank Governor, the savings and credit cooperatives (SACCOs) capitalized on the radical changes that the banking sector was undergoing and positioned itself as safe havens for depositors and those seeking financing. The Sacco model attracted thousands and this triggered mushrooming of such institutions in both urban and rural areas. So far, 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 potential of these institutions to be key drivers of financial access and inclusion in Kenya and a role model in East Africa. Although the atmosphere surrounding savings and credit cooperatives has been exciting and optimistic, many organizations have found themselves on the regulator’s radar for wrong reasons. Cases of mismanagement, fraud, unethical behaviour and violation of regulations have marred the sector and led to the downfall of several saccos thereby sinking the hopes, investments and aspirations of members.

These heinous acts towards members contributions led the Government to implement two policies that gave birth to two critical institutions that would provide additional security to Sacco members. These institutions include the Sacco Society Fraud Investigation Unit (SSFIU) and Sacco Deposit Guarantee Fund. The Sacco Deposit Guarantee Fund is meant to compensate members who unfortunately lose their deposits following the collapse of a sacco. The fund mirrors the Kenya Deposit Insurance Corporation (KDIC) which underwrites bank deposit to the tune of KES 100,000 per account holder. This safety net is meant to provide some assurance to members that not all will be lost should an unfortunate occurrence happen and force a sacco to halt operations. Considering that an average sacco member has deposits worth KES 79,600, the fund clearly provides some form of relief although this may not sit well with depositors who hold substantially large amount of savings.

The Sacco Societies Act (Deposit Taking Sacco Business), section 81 (1) mandates all sacco’s to remit an annual premium of KES 50,000 or 0.05% of total savings and deposits whichever is higher to the fund. In addition, saccos that fail to comply with the directive risk losing their licenses and staff apprehended as highlighted in section 81 (5). The Act will require members to lodge their compensation claims with the Fund within 90 days from the time notice is given and mandates all saccos to sensitize their members on the existence and purpose of the fund. Although the Act has provided general procedures on how to seek compensation, it fails to address specific vital information which could lead to complications and lengthening of the settlement process. For instance, the Act does not state which documents a member should possess before initiating the claims process or reconsidering members compensation should the process delay and the value of their deposit eroded by inflation.

Drawing lessons from the Kenya Deposit Insurance Corporation (KDIC) is important if the Sacco Deposit Guarantee Fund is to live up to its expectation. Establishing appropriate, strong and reliable internal structures coupled with sector support and collaboration with relevant offices and institutions such as the Central Bank of Kenya and the Office of the Attorney General, will allow the fund to perform professionally and accordingly should a sacco experience financial distress and ultimately collapse. Sacco members and auditors have an obligation to review their saccos financial statements and inquire whether the institution has been remitting premiums as required by law.  As the fund seeks to deepen its roots within the industry, all relevant stakeholders need to support its purpose and prevent any interferences that might derail the fund from its mission, which is, to compensate the sacco member.   

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