Automation of SACCOs - FSD Kenya

10 • AUTOMATION OF SACCOS: ASSESSMENT OF POTENTIAL SOLUTIONS
Chapter 3
regulAtory FrAmeworK
3.1 AnTICIPATED rEGuLATIonS
The project team has analysed available material to understand the anticipated
regulatory framework that the SACCOs can expect to be subject to based on
the SACCO Societies Act 2008. The purpose is to understand how SACCOs
need to change their operations in the near future, in order to comply with
regulations, to be competitive and sustainable, and what role information
technology solutions will play in that process.
The project team considered the full range of regulatory requirements that can
be expected based on the Act, spanning across the SACCOs’ operating model
but focus in particular on capital structure, liquidity and credit management.
In addition to these areas, it also reviewed possible needs to build a reporting
and risk management capability and how the system is used to support the
SACCO governance model. The expectation is that the SACCO will utilise and be
the most dependent on an appropriate system.
Based on our analysis we have made a projection of a hypothetical regulatory
framework, in line with the draft SACCO society regulations which we used
in our discussion with the SACCOs. We used it as a benchmark to evaluate
their current proficiency, identify gaps in their current system’s capability, to
explain the reason and objective of the project as well as to understand how
the SACCO can progress towards compliance.
The understanding we have obtained is outlined below and is relevant in this
report as it is the basis for specific requirements and as a background to the
recommendations for strategic choices for automation and business process
improvement.
Any information with regards to specific regulatory requirements is the project
team’s assessment. The assessment is based on the SACCO Societies Act 2008
and regulation of similar industries in Kenya such as commercial banks and
microfinance as well as interviews with key stake holders involved in drafting
the SACCO society regulations. The information gathered is used in the absence
of gazetted SACCO regulations.
3.2 BACKGrounD
Our understanding of the act is that it will support the SACCO movement and
protect individual and institutional investors by building viable institutions. It
does this by enforcing regulations that constitute sound business practices; it
provides predictability through consistent adherence to these practices and
transparency through reporting. In the event of breach of the regulations it
provides a basis to take legal actions.
The Act specifically applies to “deposit taking SACCOs”. This limits the scope
to those that offer “front office savings activities”, where persons who do
not own shares in the SACCO can deposit money through savings accounts.
We understand the legislator’s intentions as focused on protecting the
persons who have deposited money with the SACCO but are not protected
by the mutual interest of the shareholders or a social bond. This leaves the
approximately 200 SACCOs with FOSA to choose between complying with
regulations in order to legally maintain the FOSA operations or to abandon
their FOSA business and focus on BOSA operations instead. The latter would
be worth considering if the cash flow from FOSA in proportion to the loan
portfolio is low and compliance with regulations would require a significant
investment in business process re-design and IT infrastructure. However,
based on the project teams observations at SACCOs this would most certainly
have two negative bi-effects: 1) the SACCOs reputation would be damaged
as the decision confirms in the view of the public and the members that the
SACCO does not and would struggle to comply with regulations and 2) the
SACCO would lose a significant competitive advantage as customers have
come to expect their financial services provider to offer credit and savings
products. The SACCOs would hardly be competitive relative to the banks and
only be attractive to their historic credit customers who cannot obtain credit
elsewhere.
This report will focus on the SACCOs who aim to comply with regulations.
Providing advice to this group is a primary concern as we draw the conclusion
that closing FOSA is not a realistic option for most SACCOs. Maintaining FOSA
also leaves SACCOs with the more complex model where advice is more critical.
We say this as in addition to protecting the deposit holders, the SACCOs with
external capital such as non-member deposits and interest bearing debt from
commercial creditors 4 face a much higher risk of insolvency. Theoretically,
a SACCO borrowing no external capital and only issuing a loan when fully
secured by guarantors’ share capital could not go bankrupt. Through credit
losses it could lose all of its capital but it would be solvent. When deposits and
external capital are introduced on the SACCO’s balance sheet this relationship is
broken unless all loans are fully secured using additional collateral to eliminate
the gap between the value of the share capital and the loan portfolio.
In conclusion this leaves the SACCO with a new operating model, different
from that of the traditional, and hence is it subject to the Act. To our opinion
significant value can be realised by reviewing how technology is used to
facilitate operations, if business processes are optimised to benefit from the
capacity provided by the technology and if they are aligned with the SACCO’s
strategy.
3.3 IMPACT on SACCoS
We expect the SACCO Societies Act 2008 to have a profound impact on the
SACCOs that seek a licence to operate with front office savings activities.
The WOCCU impact analysis5 highlights numerous challenges and our own
4 Mainly commercial banks, and in the case of the SACCOs most often Co-op Bank but also others.
5 “Impact analysis of the SACCO regulatory framework – Kenya SACCO sector, SACCO assessment
– proposed 2006 SACCO act” by Jesus R. Chavez