World Council of Credit Unions, Inc.

SACCO CAP NEWS

NEWSLETTER OF WOCCU/FSD SACCO CAP PROJECT ISSUE 2, JANUARY 2008 Ndege Chai SACCO The SACCO was established and registered in 1978. Majority of the Societys employees are drawn from James Finlay in Kericho, Nairobi and Mombasa. The Society has also opened up to business people, schools and tea estates around Kericho, in Rift Valley province where the SACCO is located. Ndege Chai SACCO has won several awards for being the best run SACCO in Kenya. The society has 21 members of staff who so far have proven themselves capable of running the SACCO in a professional manner. As of December 2006, the society had 14,955 members. The FOSA currently serves 13,000 customers who do not necessarily have to be members in the back office. The SACCO has been able to mobilize withdrawable savings in the FOSA which the society uses for onlending both in the front and back office. The SACCO has successfully implemented a new computer system that is flexible and is integrated with the ATMs and SACCO members can access their FOSA accounts from the Automated Teller Machines (ATMs).

Five societies in pilot phase of SACCO Cap

ne year has gone by since SACCO Cap started in December 2006. During the second half of 2007, award recipient SACCOs were selected. The selection process was led by SACCO Fund after advertising for requests in the daily newspapers. 34 SACCOs responded. A panel comprising SACCO Fund and Ministry of Cooperatives Development and Marketing assessed the applications and shortlisted 11 SACCOs using criteria set forth by Financial Sector Deepening. SACCO Cap completed institutional analysis of the 11 SACCOs to provide the selection panel with objective data and information used in the final selection of the award winning SACCOs. In November, SACCO Fund officially informed the five SACCOs that they had been selected in the group of pilot SACCOs. Award winning SACCOs then signed grant agreements with FSD (Financial Sector Deepening) in the second and third weeks of December 2007. The five award-winning SACCOs are located in five different provinces of Kenya. Below is a short profile of the pilot SACCOs. Kilifi Teachers SACCO It was formed in 1972 to cater for the needs of primary school teachers in Kilifi district, Coast province. More recently, the society opened up its common bond and geographical boundaries to include the general communities in Kilifi and Malindi districts. The SACCO has developed microfinance products to provide more services to the community.

Stima SACCO The SACCO was started in 1974 in Nairobi and is among the top twenty largest SACCOs in Kenya in terms of total assets. From the audited accounts, the Societys assets stood at KSh 3 billion and KSh 2.6 billion in 2006 and 2005 respectively. The savings deposits rose to KSh 2.7 billion in 2006 from KSh 2.2 billion in 2005. The shares deposits rose The society serves a wide range of members and is trying to meet the needs of all marginally from KSh 6.8 millon in 2005 to KSh 7.2 million in 2006, underlining a small its members through its various products. Membership consists of the following change in membership from categories: salaried employees 6,767 to 6,886 over the same Membership Savings Deposits (KSh) Loans (KSh) Total Assets (KSh) from organisations which form SACCO period. the common bond, non salaried Kilifi 9,363 703,328,244 531,316,150 872,521,406 customers who are members of the The Societys membership FOSA and microfinance customers Mungania 6,769 96,622,603 135,652,112 286,124,656 is drawn from employees of who have joined the SACCO Kenya Power & Lightning through the recently introduced Ndege Chai 14,955 782,091,815 707,688,098 1,015,288,745 Company Limited, Kenya microfinance programme. Electricity Generating Company Stima 6,886 2,680,244,745 2,391,571,628 3,019,126,731 Limited, Electricity Regulatory The SACCO is also now offering ATM Authority, Kenya Electrical Sukari 17,009 494,447,381 539,030,088 633,676,229 services to its members. Trade and Allied Workers Union Key statistics as at December 2006 and the retired staff of the Mungania SACCO above organizations. Stima SACCO is one of the first SACCOs in the nation to offer ATM Mungania Tea Growers SACCO was registered in 1991 as a cooperative society catering services to its members. for the financial needs of tea farmers in Embu district, Eastern province. The operations of the SACCO are run by 34 staff members led by a General Manager. Board members are Sukari SACCO not involved in the loan appraisal process (other than business loans whose appraisal is The SACCO was started in 1973 by the employees of Mumias Sugar Company, in Mumias, entirely in the hands of the board) which is currently being done by staff. Board members Western province. However, with time the society has amended its bylaws to allow ratify loans after they have been disbursed. As a result, the loan approval process is faster membership from neighbouring institutions such as Mumias Outgrowers Company Ltd, and more efficient. transport companies, and St. Marys hospital. From inception to 1995, the SACCO was offering savings and credit services strictly to the members within this common bond. Since inception, Mungania SACCO has undergone a series of transformations which In 1996, the society opened its common bond to allow sugar cane outgrowers (sugar include: cane farmers) in the region to patronize some of the SACCOs services. In the same year, Introduction of FOSA services the society also opened a FOSA facility which offers banking services to its members. Opening up of four more branches one of which is in the neighbouring Mbeere Currently, the membership of Sukari stands at 17,009, 1,860 of whom are BOSA (back district, a non tea growing area office) members with voting rights. Introduction of new products including a microfinance product, advances and business loans One of the key objectives in the strategic plan is aggressive deposit mobilisation to Charging interest rates that mirror market rates instead of the traditional interest enable the society have affordable funds to lend to its members. The SACCO has recently rate of 12 percent per annum. implemented a new information system that will enable it become more efficient. The society does not have any loan backlog and loans are disbursed within one day in the FOSA.

Calendar of events
May 5-9: June 9-14 SACCO Cap Product Development and Strategic Marketing training Strathmore WOCCU African Management Institute (SWAMI) (www.woccu.org/events/swami) June 25-27: July 13-16: SACCO Cap Governance and Bylaws Best Practices WOCCU World Credit Union Conference in Hong Kong September 8-19: October 20-24: School of Applied Microfinance www.samtraining.org WOCCU Africa SACCO Technical Congress in Banjul, The Gambia

n August 2007, the Ministry of Cooperative Development and Marketing (ministry) made a major breakthrough by gazettment of the SACCO Societies Bill, 2007 for introduction to the National Assembly. This Bill was however not introduced as parliament was dissolved to pave way for the general elections. It will now have to be gazetted afresh. The Bill proposes to establish a new regulatory authority and provide a legal framework for the licensing, regulation and supervision of SACCOs. This is a development that we should all applaud as it will consolidate the gains made in the sector in terms of financial access while enhancing efficiency, effectiveness, competition and financial stability in the sub-sector. SACCOs, like other deposit taking institutions thrive on the trust and confidence of their members/customers. Thus, the prudential regulation and supervision in deposit-taking financial institutions, aim to promote safety and soundness in financial systems thereby maintain the integrity of the payment systems; protect the depositors (member/customer savings, not loans!) and, encourage efficiency, effectiveness and competition in the sector. The SACCO Societies Regulatory Bill recognizes SACCOs as financial institutions and sets standards and enforcement mechanisms to improve their financial condition and soundness, thereby protecting members deposits. In this article, we highlight the key instruments of prudential supervision in the Bill namely licensing, capital adequacy, liquidity, and asset quality and what will be expected of the SACCOs.

Strengthening SACCOs through supervision and prudential regulation

Bill for introduction into the National Assembly

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The Sacco Societies Bill, 2007..........................................................................2337

Licensing of SACCOs This is dealt with in Part III Section 23 of the Bill. The key licensing requirements for deposit-taking SACCO societies is capital adequacy and sound management practices. The applicants will be required to provide evidence that they meet the minimum capital requirements as prescribed in the second schedule of the Bill. It is imperative for the management of SACCOs to provide evidence that they fully understand the economic/business, operational and financial risks associated with deposit-taking businesses. The Board shall also be required to put in place an organisational structure with the technical capacity to prudently manage a deposit-taking business.

The SACCO Societies Regulatory Bill recognises SACCOs as financial institutions and sets standards and enforcement mechanisms to improve their financial condition and soundness, thereby protecting members deposits.

Authority. The Authority will issue minimum liquidity ratios and reserves that must be maintained at all times by the SACCOs. In Kenya, liquidity is a chronic problem in many SACCOs, even with the introduction of FOSA. For depositors, the second most important consideration after safety is accessibility to their savings. Thus, deposit-taking institutions ensure customers get their savings when they need them by maintaining minimum liquidity levels on a daily basis. Non-compliance with these requirements attracts high monetary penalties.

Capital adequacy Part IV of the Bill is on Governance of licensed SACCOs and prescribes minimum capital requirements (Section 30(1)) which the licensed societies must meet and maintain at all times. The capital adequacy requirements are not new to SACCOs, as rule 52(3b) of the Cooperative Societies Rules 2004 requires SACCOs operating FOSA to maintain a minimum capital adequacy (and reserves) at 10 percent of the total liabilities. However, under the proposed law, capital adequacy will be measured as a ratio of the SACCOs risk adjusted assets as well as the total deposits liabilities. This is the same criteria used in commercial banks. Capital adequacy is a key indicator of the financial stability of a financial institution enabling a SACCO to withstand losses from unforeseen problems. SACCOs will be required to maintain a core capital of not less than 10 percent of total risk weighted assets and eight percent of the total deposit liabilities. The capital funds should allow SACCOs to compete more effectively in the market by investing in new products, marketing activities, technology driven service solutions, maintain low cost on loans and offer competitive terms to employees. Many SACCOs cannot keep up with the competition from the commercial banks because they do not have the financial resources. Building capital reserves is critical to unlocking the potential of SACCOs. Liquidity requirements Section 31 (1) of the Bill requires a licensed society to maintain such minimum holding of liquid assets of its members deposits as may be prescribed by the

Asset quality requirements The major asset for SACCOs as financial institutions is the loans they grant their customers. In Section 34, the Bill addresses credit administration requirements, loan monitoring and loss provisioning. Societies will be required to formulate and document risk management systems for continuous monitoring of assets and make provisions that are adequate to protect deposits. Provisions for loan or investment losses are the first line of defence for unforeseen losses on loans and investment assets. Provision for doubtful loans is not new to SACCOs as this is stipulated in the Cooperative Societies Act. However, most societies lack loan management systems to track loans repayment and delinquency in their portfolios. The proposed law will require every society to have a system of monitoring the loans and the adequacy of provisions for loan losses monthly.

Periodic monitoring The proposed law recognises that monitoring of compliance with the prudential requirements is key to the soundness and stability of the SACCO sub-sector. The Bill proposes to establish the SACCO Societies Regulatory Authority to be responsible for licensing, regulation and supervision of the licensed SACCO societies. The Authority will require the licensed SACCOs to have accounting systems that are effective and efficient in generating requisite monitoring reports. The financial reporting will need to comply with the International Financial Reporting Standards and any prudential requirements issued by the Authority. An important development is the requirement for the external auditor to report on the SACCOs compliance with prudential standards, licensing conditions, solvency and any contravention of the proposed Act.

Best practices in SACCO management

Lets face IT

ver the last ten or so years, Management Information Systems in some Kenyan SACCOs have evolved from simple DOS based systems to state of the art systems. This can be attributed to the changes in technology, the entrance of foreign vendors into the local SACCO software market and the tremendous growth in the SACCO sector during the same period.

However, a large number of SACCOs in Kenya that computerised during this period did not get value for their money, and many of them continue to acquire substandard information systems to date. This is mainly as a result of software vendors selling systems that are not complete or fully tested and the lack of information on what to look out for in a system from the SACCOs end during the software selection process. A high quality management information system is a key component of any high performing SACCO. Information systems allow SACCOs to reduce the time spent on paperwork and effectively monitor both staff and customers. They help the cooperatives to quickly roll out and monitor new products and services. SACCOs that have adopted good information systems have seen a long-term saving in terms of operating costs, and the systems have also enabled SACCOs increase customer numbers and business easier to manage.

A teller at Kenya Bankers SACCO using technology to meet members needs

Savings products On deposit monitoring, a good system should permit the addition and modification of deposit types, maintain historical data on products and permit different account types (fixed deposits, savings, shares, checking accounts). It should be capable of advanced functionality such as ATMs, wire transfers and smart cards, and have tax withholding functionality.

business, as well as impact information. several sources or profit/cost centres in Administration addition to consolidated tracking of this Administration and support is another information. The system should be able area of importance that should be to perform cost/profitability analysis considered. The system should be able to perform an end of day process with built by product, branch/ region, client, etc; maintain a trial balance that permits back in recovery mechanisms. Backup mechanisms should be in place taking minimal valued transactions and reversals and track and apply overhead expenses. It would time. The system should keep track of current status and activity for both the also be desirable to have asset and liability management facilities, a payroll module, central processing and each user, and have archival facilities for off-loading old, fixed assets module and treasury functions as part of the system. The accounting unused data (to keep the database from growing exponentially). It should also module should meet government regulations and should be easy to modify to meet reside in a relational database such as Ms SQL or Oracle that are able to handle large changes or additions to government regulations. The system should also support databases. reporting requirements of the government and be ready for integration into the central bank or other clearing system when required. Security
Loan administration A good system should have the loans module integrated with accounting system, deposit monitoring, and/or customer information system. It should permit the addition and modification of loan products, hold historic data on products, and perform guarantor and collateral tracking. It should track delinquency, handle early, late, partial, and extra payments and have credit scoring capabilities. A good system should have adequate security features in place to maintain the integrity of the data it holds. Desirable features include a username and password system, a lockout feature for preventing unauthorized access, data encryption, comprehensive user logs and the employment of windows server security features in addition to the systems security features. For more information on SACCO software selection, visit http://www.woccu.org/ bestpractices/is

Client information A good SACCO system should be able to maintain client information with strong search capabilities, maintain customer information such as name, family information, age, gender, address (home and business), and type of business, as well as impact Some of the areas that should be considered by a SACCO when acquiring a information. Such a system tracks clients at different levels from individual to group management information system are highlighted below. to centre and so on; facilities to check customer behaviour - credit and deposit status and history, tracks non client information, especially guarantors; and has a Accounting possibility to define additional fields, such as A good SACCO system should have the national ID number, customer groups, savings, loans and other modules fully A good SACCO system should be able to etc. The system should also cater for integrated with the general ledger on expansion and institutional growth and maintain client information with strong search a realtime basis. The chart of accounts be able to support a large number of should also be complete, consistent, capabilities, maintain customer information terminals efficiently with reasonable flexible and user-defined. The system such as name, family information, age, gender, response times while handling a large should also provide for tracking of address (home and business), and type of number of accounts and transactions. cash flow, revenues and expenses by

SACCOs deepening outreach in rural areas

ACCOs in Kenya are gradually responding to the fast changes in the financial environment and adopting new approaches to the SACCO model. SACCO membership is based on common bonds and knowledge about the borrower. These mechanisms, SACCOs argue, have proven their ability to manage risk, enforce lending contracts and reduce the transaction costs of delivering credit. Until recently, SACCOs have been able to retain their membership and attract new members through natural affiliation, stemming from the common bond among members. With increased competition from other financial service providers and other factors such as retrenchment, SACCO membership is beginning to decline. As a result, SACCOs are being forced to come up with strategies and products to assist them cope with these challenges. Some of these strategies include extending to alternative markets from what they had predominantly served.

ungania Tea Growers SACCO started as a cooperative society catering for the financial needs of tea farmers in Embu district. In a bid to enhance service delivery, the society opened a FOSA to provide services like crop advance and microfinance products to its members.

Mungania targets Ishiara traders

ilifi Teachers SACCO has opened up and embraced the larger community by offering them microfinance products. The Society was originally formed to serve primary school teachers in the district but, as part of its social mission and need to diversify its membership, the Societys board decided to serve the wider community. The Society carried out a feasibility study and found great opportunity in extending small loans and receiving small savings from non-teachers. Kilifi is located along the Kenyan Coast where majority of the population live below one dollar a day.
Mr. Njeru in his shop in Ishiara market

Kilifi opens up to the community

In an effort to diversify its membership and outreach, Mungania Tea Growers SACCO opened a branch in Ishiara a non-tea growing area in Mbeere district. Ishiara is a semi-arid region that is seen as a business centre. Most of the banking institutions had left the area and there was only one savings institution present. Mungania seized the opportunity to provide financial services to area residents as majority of the people in the area are small-scale traders. With this in mind, the society decided to introduce a microfinance product as opposed to the standard products that were mainly introduced to cater for tea farmers. The opening of the branch was welcomed by the residents of Ishiara. Most of the traders did not have a place to keep their money and were often attacked by robbers at night. One of the people who was keen to open an account with the Society is Mr. Njeru, a wholesale trader in the market. His main attraction to the Society was easy accessibility and friendly service. He says the staff at Mungania often visit him at his shop to find out how his business is doing and offer any assistance if necessary as far as financial services are concerned. Though Mungania had introduced the micro-credit product, the main reason why Mr. Njeru joined the society is because he needed somewhere safe to keep his money. Initially he used to travel from Ishiara to Embu, 50km away, to deposit money at the bank. Since he could not travel every other day, he kept his money in the house. He says he did not find the other financial institution in the area friendly because their savings products had unattractive features such as heavy penalties for premature withdrawals, so he could not join it. Being a businessman, Mr. Njeru wanted to access his money when he needed it. Other than security for his money, the trader also found it difficult to do his cash flow management. This was because, without a proper and safe place to keep his money, he would often divert cash meant for business to other uses. He would, for example, lend it to friends and relatives. With the opening of Mungania SACCO in Ishiara, Mr. Njeru now has the option of taking loans on more affordable and convenient terms than his bank was providing. His aim of joining the Society is to save money. He is free to bank with Mungania at any time and get loans at favourable interest rates to boost his business. He celebrates the fact that he can also withdraw his money at any time and enjoys the service offered by the SACCO. Mr. Njerus problem now is that Mungania does not have a branch in Embu. When he goes to Embu to buy stock he is forced to carry cash all the way, something he finds cumbersome. His wish is to see the Society open a branch in Embu linked to the one in Ishiara so he can conveniently deposit and withdraw money for his business.

The SACCO has adopted the Grameen concept of group guaranteed lending programme which incorporates a forced savings element and an insurance cover against death of a borrower. This demonstrates the importance of developing new products which do not rely on the shared-based methodology. This product has been able to assist individuals who previously had no access to financial services. One of the people who has benefited from this product is Samini Karisa Masha. When the microfinance product was introduced, Karisa, a 30- year-old father of four seized the opportunity and formed the Amkeni self-help group with his friends. The group then joined Kilifi Teachers SACCO in the second half of 2006. Then, Samini was operating a small shop in Kilifi town. He took a loan of KSh10,000 in the last quarter of 2006 that was co-guaranteed by group members. He used Samini Karisa Masha with his Boda boda in Kilifi Town the money to restock his shop and bought a bicycle to carry stock from suppliers. The bicycle was also used as a boda boda (public transport )in the town. He later took another loan of KSh25,000 in early 2007 which he used to expand his kiosk/groceries business. He opened a separate business of selling water to stem the scarcity in the town. He took the third and fourth loans of KSh45,000 and KSh75,000 respectively and used the money to boost his business. He has now upgraded to a wholesale business selling unga (maize flour), paraffin and cereals. Karisa has bigger plans for his business. He would like to establish a nursery school whose structures he has already begun constructing. He proposes that the loan ceiling of KSh1 00,000 be raised to KSh200,000. All in all, he appreciates the speed with which his loans are processed at the Society.

Although the financial landscape in Kenya is becoming more competitive, there are still a number of people who remain unbanked. SACCOs especially those in the rural areas, have the opportunity to reach out to these people who do not have access to financial services. This is because they are present in these areas which other financial institutions may not have. SACCOs have to therefore look beyond the markets they are currently serving and come up with innovative products and services that will target people beyond their common bonds. WOCCU SACCO CAP KENYA Kenya Bankers SACCO Centre, 2nd Floor 3rd Ngong Avenue P.O. Box 19870-00202, Nairobi Kenya Tel: +254 (020) 272 5690/ 5890 Fax: +254 (020) 271 5890 Office Cell: +254 (020) 727 531 004/735 725 690 Email: SACCOcap@woccukenya.org Editorial, Design and Production Utafiti Limited P.O. Box 8501 - 00100 Nairobi Tel: 0733 769 423 Email: utafiti@wananchi.com