A legal vacuum and an outdated law has denied Savings and Credit Cooperative Societies(SACCOs)the opportunity of listing and raising cheaper capital from the Nairobi Securities Exchange. Compared to listed firms that can float a bond or commercial paper to raise cash, SACCOs rely purely on internal sources including doing share drives through selling more shares to members. The only other option is to go for more expensive loans from banks.
Experts urge for amendments to the Cooperatives Act and certain sections of the Capital Markets Authority (CMA) Act, to allow SACCOs to list.
The Nairobi Securities Exchange (NSE) has three listing boards, the Main Investment Market (MIM), Alternative Investment Market (AIM) and the Growth and Enterprise Market (GEMS).
While SACCOs can fit in the GEMs market owing to the little share capital of Ksh 40 million, the restrictive Cooperative Act has blocked many Saccos from listing on this counter.
Those firms which are listed at the MIM or AIM counters must have a minimum share capital of Ksh 100 million and Ksh 50 million respectively, a requirement that locks many Saccos from these counters.
Further, the CMA and SASRA are two completely different regulatory bodies that do not share any commonalities.
“The fact that the Cooperatives Act does not provide for transferability of shares owned by members, does not require full disclosures, quarterly financial statements or even regular audits makes SACCOs not eligible for listing at the exchange,” said an official from a leading investment and stock brokerage firm.
In an interview with Sacco Review at his office, the official said, “While SACCOs can list at the NSE; certain amendments must first be made to the Cooperatives Act for this to happen. The Cabinet Secretary for MSMEs and Cooperatives, can also give waivers to allow SACCOs to list.
Although the Ministry as well as the NSE have occasionally made it clear that they are pursuing the idea of establishing a separate counter for SACCOs, nothing much has been heard about this plan.
Little is also being heard from SASRA on the progress made in reviewing the restrictive SACCO Act to open more avenues, apart from providing broad guidelines with no clear incentives for SACCOs wishing to take the listing route.
Equally, a technical working group composed of various stakeholders including the Capital Markets Authority (CMA) and Sacco Societies Regulatory Authority (SASRA) has yet to disclose any progress made or even any timelines.
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The NSE is also said to have crafted a special team to specifically reach out to SACCOs through creation of awareness on the capital markets investments products and financial literacy programmes, in addition to laying the groundwork for the listing of SACCOs
“The endgame is that we want to have solutions, products and activities that are SACCO-centred and what will inform our biggest win as a nation and as an economy would be the day we are able to have SACCOs trading their shares in the open platform,” Jackson Kiminje, NSE’s business development leader in charge of retail, SACCOs and chamas.
Plans to establish a trading floor for SACCOs remains on paper
While the Ministry in close consultation with various stakeholders has been seeking ways to make the cooperative shares transferable and appreciate in value with the level of cooperative business, the eagerly awaited establishment of Cooperatives shares trading platform at the NSE, remains a plan on paper.
Listing of SACCOs will enable members to freely transfer their shares and get value. This will also attract other investors to the Cooperatives sector.
The inability to raise cash in the debt market using instruments like commercial paper or bonds has a lot to do with the way SACCOs are structured. For instance, it is difficult to list at the exchange when books of a SACCO are never closed, meaning it can recruit new members anytime.
For a trading platform at the NSE to be set up, a review of the SACCO Act must take place. A SACCO interested in listing at the NSE must change its Articles of Association and convert from a private members’ club to a public entity, before it can raise money from the public.
SACCO laws remains restrictive and need a review
SACCO by-laws restrict membership to only those who own shares. This means a SACCO cannot list at the NSE, a prospect that could open up its shares to be traded by non-members.
Unlike commercial banks or microfinance institutions, SACCOs are limited in how far they can expand their operations, beyond the boundaries set out in the SACCO Act.
CMA is required to issue guidelines to allow Saccos to issue commercial paper or bonds- instruments that are non-tradable. At present, the law is restrictive on who should deposit or borrow from a SACCO.
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The Sacco Act Cap 488 section 31(1) says that funds by a SACCO may be invested in securities, obligations and other debt instruments issued or guaranteed by the Government or any agency of the State.
These funds can also be invested in deposits, obligations or other accounts of deposit-taking institutions under the Banking Act.
The law also stipulates that a SACCO can put its money in shares, stocks, deposits in loans or any other obligations of any other SACCO. However, an investment made under this section shall not in aggregate, exceed such proportions of the total core capital and deposits of a SACCO or as the regulator may prescribe.
The Sacco Act also requires a deposit-taking Sacco society to maintain 15 per cent of its savings, deposits and short term liabilities in liquid assets. For purposes of this regulation, liquid assets include notes and coins, bank balances, treasury bills and bonds traded in the secondary market, deposits held by other SACCOs and any other liquid assets as the regulator may specify.
Section 15(1) of the Act prohibits a SACCO from engaging in foreign trade operations, trust operations, investing in enterprises beyond the prescribed limits and purchasing or otherwise acquiring any land except as may be necessary to expand the SACCO business beyond the prescribed limits. It also prohibits transacting business with non-members and any other business that the regulator may prescribe.
In the recent past, a number of SACCOs have made attempts to raise cash from non-members, including such players as Unaitas and Shilling Kwa Shilling by the Muranga County Government.
However, strict directives from the CMA and SASRA have prevented such initiatives from gaining traction. SASRA rules require SACCOs to raise capital from their members. Dealing with the general public contravenes the law.
Raising capital from the general public requires that SACCOs change their memorandum of understanding and then convert into public entities.
Coop Act cannot allow SACCOs to go into Mergers, Acquisitions or Consolidation
Despite push from the Sacco Societies Regulatory Authority(SASRA) for Smaller Savings and Credit Cooperative Societies to enter into voluntary mergers, amalgamations or consolidation deals, the subsector remains uninterested.
This is despite stiff competition in the financial sector as players compete for deposits deploying heavy capital expenditures in marketing, competitive pricing, digital financial products, and service provision.
Analysis shows that well established resourced financial institutions, which enjoy economies of scale, are able to survive in the long run.
SACCOs will be forced to take this route given the aggressive mergers and acquisition taking place in the commercial and microfinance banks- seen as main competitors of SACCOs in the mobilization of savings and credit provision business.
SASRA recommends that smaller SACCOs can amalgamate, merge, or consolidate with each other based on similarities of fields of membership or common bonds, so as to enjoy economies of scale and compete effectively, in the financial sector space.
In the absence of such consolidation and given the opening of common bonds (field of membership) by nearly all the financially endowed and larger SACCOs particularly the Government-based SACCOs, it is clear that the smaller SACCOs are feeling the heat of competition.
Larger SACCOs can meet the members’ demands at competitive prices, leaving smaller SACCOs at a disadvantaged position.
Despite being social enterprises in their nature and formation, SACCOs are principally economic businesses which will thrive and be sustainable to meet members’ obligations when they enjoy economies of scale.
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The statistical information contained in the SASRA report 2021 shows that there are too many small SACCOs in the subsector.
For instance, there were 49- Agriculture based SACCOs in the country in 2021, but which controlled less than 10% of the subsectors’ total assets and total deposits.
Equally. there were over 107-Private sector based SACCOs but whose total assets and total deposits portfolios is less than 13% of the subsectors’ total assets and total deposits.
A similar scenario obtains regarding the 88-Community based SACCOs which had a proportion of the subsector’s total assets and total deposits at about 11.84% and 12.86% respectively.
The analysis therefore shows that 67.59% of all SACCOs controlled a paltry 36% of the subsector’s total assets and deposits; while the remaining 32.41% of all SACCOs (being the 117- Government-based SACCOs controlled a whopping 64% of the subsector’s total assets and total deposits.
Other than Government-based SACCOs, it can be concluded that on average other clusters of SACCOs are relatively small in their respective asset sizes and deposits, and cognizant of the assets being the principal revenue stream for SACCOs.
The respective incomes and revenues generated by these SACCOs was on average quite low thus affecting their stability and sustainability.
Additionally, the commencement of prudential supervision of the NonWithdrawable DT-SACCOs in 2020 revealed that many Private sector based NWDT-SACCOs and Community-based NWDT-SACCOs actually draw their membership from the same fields of membership and common bonds.
For instance, it is not uncommon to find two or more SACCOs drawing membership from the same employer – company or similar faith and religious based organizations.
By Jackson Okoth
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