Automation of SACCOs - FSD Kenya

for management information purposes. A full write-off is required upon the
following events:
An adverse court ruling disqualifying the SACCOs claim on a receivable.
A customer defaults on a loan that is not fully secured, the collateral
cannot be seized or the proceeds do not match the loan value.
When the SACCO has no contractual support for its claim.
The borrower is legally bankrupt.
Recovery efforts are abandoned.
Table 2: Provisioning rules for loan aging
Description Definition
Performing Loans which are well documented and
performing according to contractual terms.
Watch Loans whose principle instalment or
interest has remained un-paid for one
day to 30 days or where one instalment is
outstanding.
Substandard Loans not adequately protected by the
current repayment capacity and the
principle instalment or interest have
remained un-paid between 31 – 90 days
or where 2 – 3 instalments have remained
outstanding.
Doubtful Loans not adequately protected by the
current repayment capacity and the
principle instalment or interest have
remained un-paid between 91- 180 days
or where 4-6 instalments have remained
outstanding.
Loss Loans which are considered uncollectible
or of such little value that their continued
recognition as receivable assets is not
warranted, not adequately protected and
have remained un-paid for more than 180
days or where more than 6 instalments
have remained outstanding.
Loan-loss
provision
(%)
0
The system will also be instrumental to collateral management to prevent any
costly and inefficient manual records of the large range of low value items that
can be provided as collateral. Required functionality will include a register that
records relevant details about the collateral to ensure that it can be located,
that it is insured and the market value at no time fluctuates so that the SACCO
25
50
75
100
AUTOMATION OF SACCOS: ASSESSMENT OF POTENTIAL SOLUTIONS • 13
is unintentionally exposed to a credit risk. The latter can include establishing
a depreciation schedule or simply enforcing a asset class specific discount to
the collateral.
Finally the system needs to classify accounts based on customer activity and
produce separate statements for each. Categories can be active, dormant (no
activity in 60 days) and abandoned (no activity in 5 years).
3.4.2 Capital structure
We expect the regulations to include details about the required capital structure
of the SACCO. Capital will be specified to tiers corresponding to quality. The
regulations will also include reports on capital movements, trends and drivers
that will have an impact on capital. The purpose is to ensure that the SACCO at
all times has sufficient capital and provide time for any mitigating actions.
Capital
The regulations will set targets for the SACCO’s core capital to ensure that
they maintain a healthy level. The metrics are: total core capital in shillings
in proportion to total assets, total deposits and a ceiling for the maximum
level in percent that the loans issued to one member is allowed to represent.
The SACCO will also need to demonstrate a close understanding of how key
drivers relate to the capital accumulation. These drivers are: profitability, risk
exposure, asset quality and loan portfolio growth.
Additional relevant capital measures are the amount of external debt and
insider loans in proportion to total assets. The SACCO must also prevent any
excessive accumulation of seized assets on the balance sheet. These assets
should be sold within a certain time period or a provision needs to be made.
Shares and savings
It is imperative that the SACCO establishes sustainable principles to manage
and maintain the share capital. Dividends, being one key and contentious area
as members might have come to expect them, should essentially not exceed
the annual net surplus after that statutory reserve deductions have been
made.
The system should be able to distinguish between capital contributions made
by members that are classified as ‘shares’ or ‘non-withdrawable deposits’ as the
latter but not the former may be used as collateral. Each shareholder account
needs to be kept accurately and allow clearly calculating and reporting the
interest awarded deposits and the yield on shares. Based on this information
the system should provide member statements that provide the transactions
made and the current balance.
Financial investments and fixed assets
The SACCO is meant to be a savings and credit business. Investments made
by the SACCO should only occur to generate a return on excess cash in the