Automation of SACCOs - FSD Kenya

yield on member share capital. The uncomfortable truth is that as this is
being done by raising capital at the lowest possible cost, minimising the
redundant capital in the organisation and minimising the operating costs the
management is also taking risks that in the worst case can render the SACCO
insolvent and erase the member capital. The key risk areas are:
Credit risk - loans are issued to borrowers who fail to repay them or to
provide security that upon default covers the value of the outstanding
loan.
Liquidity risk - disbursements exceed deposits and the SACCO is unable
to raise external capital.
Operational risk - SACCO business practices fail and prevent the SACCO
from operating.
We expect the regulator to require clear policies on how the SACCO manages
this risk. This implies that the SACCO is able to pro-actively manage the risks
using management information and report on the SACCO’s exposure. It will
also be the case that certain operating practices are banned altogether and
that SACCO needs to implement internal controls to confirm that such policies
are followed. Example controls and principles are:
Membership is a strict loan eligibility criterion.
All investment documentation needs to be kept in a fire safe facility,
preferably off-site.
All information shall be backed up daily and stored in a fire safe facility.
On a weekly basis the data needs to be moved to an off-site facility.
The back-up process needs to be documented in a log.
In addition, to pro-actively manage risks, reports covering the areas below are
likely to be required.
Investment portfolio risk.
Credit risk.
Liquidity risk.
Deviation report for internal controls
3.4.6 reporting and audit
Accurate, consistent and timely financial statements make up the foundation
for the regulation as it will be impossible to confirm compliance or do any
meaningful analysis of the SACCO’s performance without this information. The
reports also need to be produced in a consistent way to allow comparison
AUTOMATION OF SACCOS: ASSESSMENT OF POTENTIAL SOLUTIONS • 15
across the industry and over time. Finally they need to be sufficiently detailed
to enable root-cause analysis with regards to credit management, capital
structure and liquidity as described above.
The SACCO will be required to have an audit function that independently
monitors how the management delivers against the plans agreed by the annual
general meeting. Reports will be required on what actions that audit function
has taken and also the effectiveness of the audit functions. The latter includes
analysing if the audit function manages to sample the correct transactions to
audit and if it increases compliance with policies and procedures.
The reporting requirements will include:
Financial statements produced according to IFRS and made available to
the authority by the 15th working day following the month’s, quarter’s
and year’s end. These reports should enable monitoring and analysis of
financial performance including production of specific ratios.
Deviation analysis including 1) current to previous period actual and 2)
budget to current actual for the month, quarter, first 6 and 9 months and
the year. These reports should support evaluation of plans and identify
mitigating actions.
Business plans with financial projections that go into further detail as
necessary to explain the business.
Solvency reports that provide measures of the SACCOs capitalisation
compared with minimum capital requirements. These reports should
enable monitoring and management of solvency to prevent involuntary
liquidation.
Loan delinquency reports including volume, growth, losses, recoveries,
provisions and ageing.
Insider loans.
Investment portfolio performance.
Audit reports detailing the transactions the audit function has reviewed
and what the outcome was.
3.4.7 other requirements
The SACCO needs to be proficient in ‘asset liability management’. At no time
should the SACCO offer credit products at an interest rate exceeding the
average cost of debt with less than the margin expected to sufficiently cover
operating costs and the required profit margin.