- SASRA warns members against choosing Saccos based solely on attractive dividend payments.
- Financial stability and accountability remain critical considerations when evaluating a Sacco.
- Members are urged to look beyond annual returns when assessing the safety of their savings
The pursuit of high dividends should not be the only consideration when Kenyans choose, evaluate or continue saving with Savings and Credit Cooperative Organisations (SACCOs). Financial stability, liquidity, loan recovery, accountability and the ability to protect members’ deposits are equally important indicators of a Sacco’s performance.
The Sacco Societies Regulatory Authority (SASRA) has cautioned members against being overly attracted to Saccos advertising exceptionally high dividend payments, warning that excessive distribution of earnings could weaken their financial position and expose members to financial risks.
The warning comes at a time when Sacco members are increasingly interested in annual dividend declarations, with some institutions competing to announce attractive returns to retain existing members and attract new deposits.
Saccos are fundamentally different from ordinary commercial financial institutions because members are both customers and owners. Consequently, members have a responsibility to examine how their money is managed and whether their Saccos can sustain their operations without compromising their financial security.
Distributing too much money to members can deprive a Sacco of resources needed to strengthen its financial position, expand lending activities and prepare for unexpected financial challenges. When an institution distributes a substantial proportion of its earnings instead of retaining sufficient reserves, its ability to absorb financial losses may become weaker.
In some circumstances, a financially constrained Sacco may resort to external borrowing to support its activities. Such borrowing increases operational costs, potentially resulting in higher loan interest rates and additional charges for members. This creates a situation where members celebrate impressive dividends today but could face expensive loans and weaker financial services tomorrow.
The concern, therefore, is not that high dividends are necessarily bad, but whether the institution has generated sufficient sustainable earnings to justify the payments without weakening its financial foundation.
Beyond annual dividends, members should examine several financial, managerial, operational and governance indicators before deciding whether their Sacco is financially sound.
Capital adequacy is one of the most important indicators of a Sacco’s financial strength. Members should establish whether their institution has sufficient capital to support its operations and absorb unexpected losses. A Sacco with inadequate capital may struggle to withstand financial shocks, particularly when borrowers default or investments perform poorly.
Liquidity measures the ability of a Sacco to meet its immediate financial obligations. An institution may own expensive buildings, land and other investments but lack sufficient cash to honour members’ withdrawal requests. A strong liquidity position is essential because members depend on their savings during emergencies and other financial obligations.
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Lending is among the major activities of most Saccos. Consequently, the quality of their loan portfolios is a critical indicator of financial health. Members should pay particular attention to non-performing loans, loan recovery rates, provisions for bad debts and the concentration of lending among a few borrowers. A Sacco with a growing portfolio of unpaid loans may eventually struggle to meet its financial obligations and sustain its lending activities.
Members should also establish whether declared dividends are supported by genuine profits and sustainable investment returns. A Sacco should not distribute money simply to impress members or compete with rival institutions.
The quality of leadership determines how effectively a Sacco manages members’ money. Members should assess the integrity, competence and accountability of the board of directors, supervisory committee and management team. Poor governance can expose a Sacco to corruption, misappropriation of funds, conflicts of interest and financial mismanagement. Weak internal controls can allow financial irregularities to continue undetected, putting members’ deposits at risk.
Members should examine independently audited financial statements before approving annual accounts or supporting dividend proposals. An institution that repeatedly fails to address audit concerns may be exposing members to financial and operational risks.
Owning expensive buildings does not automatically mean that an institution is financially healthy. What matters is whether its assets generate sustainable income, retain their value and can provide financial support when necessary.
If operating expenses increase faster than income, the institution may eventually struggle to maintain competitive loan rates and sustainable dividends. Members should demand explanations for unusually high administrative expenditure.
Membership growth can indicate public confidence in a Sacco, but increasing membership numbers alone do not guarantee financial stability.
Members should compare loan interest rates across Saccos and examine the conditions attached to borrowing. Important considerations include repayment periods, processing fees, collateral requirements, guarantorship arrangements and penalties for late repayment.
In Kenya, SASRA regulates licensed deposit-taking Saccos and specified non-deposit-taking Sacco business. Members should verify the institution’s licensing or authorisation status and establish whether it meets applicable financial and operational requirements.
Annual General Meetings (AGMs) and Annual Delegates Meetings (ADMs) provide important opportunities for members to demand accountability from their boards and management teams. Instead of attending these meetings merely to receive dividend announcements, members should seek explanations about the institution’s financial position. They should ask how much money the Sacco holds in reserves, what its capital adequacy position is, whether it can meet withdrawal requests without difficulty, how much money is tied up in non-performing loans, whether it is borrowing externally and whether dividends are supported by genuine operating surpluses.
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Another important consideration is understanding the distinction between share capital, non-withdrawable deposits and withdrawable savings. Share capital represents ownership in the Sacco and is generally subject to different withdrawal conditions from ordinary savings. They should also avoid assuming that every Sacco enjoys identical regulatory protections or that all deposits are automatically guaranteed by the government.
Sacco membership should not be treated merely as an opportunity to earn annual dividends. A Sacco paying moderate dividends while maintaining strong reserves, recovering loans effectively, providing affordable credit and complying with regulatory requirements may offer greater long-term security than one distributing exceptionally high returns while weakening its financial position.
A high dividend may provide immediate financial gratification, but a financially stable institution is more valuable over the long term. The most important question members should ask is not simply how much their Sacco pays annually, but whether it can safeguard their savings, meet its obligations and continue serving them sustainably for many years.
By Hillary Muhalya
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