By Jackson Okoth
It is back to the drawing board for Board of Directors and top management of most Deposit-Taking Saccos as they scribble on their notebooks, punch away at their calculators and scratch their heads in coming up with new prices for financial products. This follows recent amendments to the Banking Act, limiting the level of interest rates that commercial banks can charge their customers for loan products as well as what to pay for customer deposits.
The signing into law the Banking Amendment Bill, 2015 continues to send shock waves across different segments of the financial market ranging from commercial banks, microfinance institutions and Savings and Credit Co-operative Societies (Saccos), especially those that offer Front Office Service Activity(FOSA), a quasi-banking facility.
“While appreciating the underlying sentiments about the need to lower the overall cost of credit, we continue to express concern on the adverse consequences of capping interest rates. These would include inefficiencies in the credit market, credit rationing, promotion of informal lending channels and undermining the effectivenessof monetary policy transmission,”said CBK in a statement. Already, a number of commercial banks have pulled down some of their products, including unsecured loans as well as credit given through mobile phone applications.
Saccos have not been spared either with several societies having temporarily stopped processing mortgage loans in the last few weeks.Sacco Review sought the views of top Sacco executives on howcapping of interest rates will impact on operations of Deposit- Taking Saccos.
“We cannot lend at rates higher than those offered by commercial banks and will therefore be forced to review our lending terms,” said Robert Shibutse, Mwalimu National Sacco CEO. Mwalimu National is considered the largest Sacco in terms of asset base and is also the majority owner of Equatorial Commercial Bank which has since rebranded to Spire Bank.
A number of Sacco industry players agree that societies will have to compete on pricing and efficiency and could be forced to cut their lending rates to remain in business. But significant challenges remain for the Sacco industry to compete on a level playing field with commercial banks, their closest rivals.
“The current Sacco Act is limited and does not give us the option of borrowing funds offshore. We do not have an inter-Sacco lending facility for those facing liquidity problems while those Saccos that may have excess liquidity have nowhere to take it,” said David Mategwa, Chairman of Kenya Police Sacco.
While Saccos have enough headroom to slash their lending rates further, to the lower floors of 1 per cent, this may not happen owing to the huge appetite by members for high dividend payouts and high interest on deposits.
“We have an edge over commercial banks owing to the fact that we pay dividends at the end of the year to members. Now with their profit margins under pressure, banks are also likely to shift their lending to the more ‘safer’ corporate clients. These leaves individuals with no option but to resort to Saccos and other alternatives and this is an advantage for us,” said Mr Mategwa.
“Boards of Deposit-Taking Saccos must decide on the rates they charge for FOSA products, currently at between 18 and 22 per cent. While Saccos still borrow from banks, perhaps it is time for them to seek internal sources of funds rather than rely on costly bank credit. Pressure to pay high dividends as well as more interest on member deposits is forcing Saccos to charge more for loans,” said J.K Mwangi- Deputy Commissioner for Co-operatives in charge of registrations.
It is still debatable whether Sacco loans are cheaper than those offered by commercial
banks. “Members are aware that Saccos offer loans that are much cheaper than those offered by commercial banks. The challenge facing many societies is that demand for loans is much higher than their ability to cope,” said Charles Ochieng Ngutu, Chairman, Taraji Sacco Limited-formerly Siaya Teachers Sacco.
Saccos are caught between a rock and a hard place. Either offer low interest loans or charge highly for credit in order to have enough surplus to offer fat dividend cheques. “We have to make a trade off between offering low interest loans and paying high dividends because capping of rates on bank loans provides us with both opportunities as well as challenges,” Kenya Union of Savings and Credit Co-operatives Limited (KUSCCO) Managing Director, George Ototo said. He admits that it will take a while before Saccos make a decision on whether or not to re-price the loan products.
“We must first do a stress test before re-pricing our loan products and this is the challenge that Boards of Directors must grapple with. We are not working in a vacuum and must therefore be alive to what is happening in the rest of the financial market,” said Mr Ototo.