What would have happened if there was a panic withdraw of more than Sh766 billion held as savings by Saccos when Kenya announced the first case of COVID-19 in March?
This is the question industry leaders like George Ototo grappled with at the time. Today, not a whiff of that possibility exists. The matter was dealt with before it started.
Ototo is the Managing Director of Kenya Union of Savings and Credit Co-operatives (Kuscco), an association formed by Saccos to provide professional services, like risk management, and protect the interests of the industry.
Panic set in when it was announced the pandemic had reached Kenya. Some companies and jua kali businesses started scaling down operations. Some workers were laid off.
One of the low hanging options for 4.9 million members of deposit-taking Saccos was to withdraw their savings to boost household incomes in the face of a feared economic lockdown.
This meant that about Sh766 billion, the amount Saccos hold as savings, according to The National Treasury, was under threat.
If this had happened, Saccos would have run into a catastrophic loss of liquidity, leading to their collapse. The crisis would most probably have spread to the banking sector.
“To mitigate against this risk,” said Ototo, “we advised Saccos that in case there was a panic withdraw, they should advise members to borrow the equivalent of their savings.”
Under this arrangement, Saccos loan-book, categorized as assets, would grow by the equivalent of the amount of savings borrowed.
The Saccos would then be left to manage the huge loan book, a better option than managing panic withdraws. And when the economy is opened up, and loan servicing starts, interest income from borrowed savings would add to Saccos’ income.
Thankfully, there was never a panic withdraw by members.
The counter-strategy ensured continuity of an industry, worth about Sh1.2 trillion in savings and assets, which provides Kenyans with affordable credit and is central to the county’s savings culture.
Ototo is part of the transitioning leadership in the Sacco industry, infusing innovative ideas at a time that Saccos are building their financial muscle to meet the growing financing needs of Kenyans.
He is a member of the board of directors of the World Council of Credit Unions. In 2017, he received a national honour, Order of the Burning Spear (MBS) for his role in the development of Saccos and credit unions in Kenya.
He holds an MBA degree in Finance, Law (LLB), and a BA in Mathematics and Economics. He is also a Certified Public Accountant (CPA) and an International Credit Union Development Educator (I-CUDE).
Other measures taken to ensure the survival of Saccos
“We have told the Saccos to avoid long term credit rather opt for smaller short-term credit whose intermediation or frequency of transactions is high,” said Ototo in an interview.
“We discussed and agreed with the government to allow Saccos to issue dividend even in the absence of the mandatory annual general meetings because of social distancing. The money has also come in handy in enabling families to buy food,” he told FinancialDay.
Saccos that had internal loans, meaning had borrowed from other Saccos, were advised to renegotiate those loans.
The Saccos also agreed with the regulator, the SACCO Societies Regulatory Authority (Sasra) to reduce capital adequacy by 50% and liquidity requirements by 50%.
“In the meantime, we have advised Saccos to manage their money conscious of the current situation and go slow on long term projects.”
Ototo said the focus now is to prepare Saccos to operate in a COVID-19 endemic time because various studies have shown that this COVID-19 will never be fully eliminated.
“There will be no post-COVID-19 era. It will be with us. The question is; how do we adapt to COVID-19 times?”
He said once the economy starts to open up, the industry will make an assessment of the loses and announce new measures which will be cognizant of the fact that the risk of COVID-19 will continue to exist.
“COVID-19 was a Black Swan, unexpected. It has been devastating. We have to find new ways to adapt to it for the industry to survive,” said Ototo.
Taxation must be fair
Ototo, whose organization now has 14,000 mortgage accounts compared to 26,000 accounts held by commercial banks cautioned that taxation of Saccos must be fair relative to other financial institutions.
For instance, the government does not give relief to mortgages taken through Kuscco yet those taken through commercial banks and the National Housing Corporation are granted relief.
The withholding tax on interest derived from cooperative financial institutions is 10% compared to 5% charged on that of commercial banks, yet Saccos memberships include the majority of low-income Kenyans.
“In a country like the United States, Saccos are not taxed,” he said.
Kussco gives mortgages of Sh450,000 to Sh7.5 million payable up to 15 years. One needs to save with the institution for at least six months to qualify for a mortgage.
Well done Mr Ototo for giving viable direction to Saccos when they needed it most. Instilling good corporate governance in Saccos is part of what Kuscco stand for .KUDOS.
Give me his no. There is a sacco wasting us with our deposits
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